As
filed with the Securities and Exchange Commission on August 26,
2009
File No. 333-
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
F-4
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF 1933
China
Ceramics Co., Ltd.
(Exact
Name of Registrant as Specified in Its Charter)
|
British
Virgin Islands
|
6770
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
Craigmuir
Chambers
Road
Town
Tortola
British
Virgin Islands
(284)
494-2233
(Address,
Including Zip Code, and Telephone Number,
Including
Area Code, of Registrant’s Principal Executive Offices)
c/o
China Holdings Acquisition Corp.
1000
N. West Street, Suite 1200
Wilmington,
DE 19801
Telephone:
(302) 295-4832
Attn:
Paul K. Kelly
(Name,
Address, Including Zip Code, and Telephone Number,
Including
Area Code, of Agent for Service)
Copies
to:
Mitchell
S. Nussbaum, Esq.
Loeb
& Loeb LLP
345
Park Avenue
New
York, New York 10154
(212)
407-4159
Facsimile:
(212) 504-3013
Approximate date of commencement of
proposed sale of the securities to the public:
As soon as practicable
after (i) this Registration Statement becomes effective, (ii) all other
conditions to the merger of China Holdings Acquisition Corp., a Delaware
corporation (“CHAC”), into the Registrant, with the Registrant surviving and the
acquisition of Success Winner Limited (“Success Winner”), a British Virgin
Islands company, by the Registrant, and (iii) all other conditions to the share
purchase between CHAC, the Registrant, Success Winner, Jinjiang Hengda Ceramics
Co., Limited and the shareholder of Success Winner, pursuant to the Merger
and Stock Purchase Agreement attached as Annex A to the Proxy
Statement/Prospectus contained herein have been satisfied or, with respect to
the share purchase only, waived.
If the
securities being registered on this Form are being offered in connection with
the formation of a holding company and there is compliance with General
Instruction G, please check the following box.
o
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
Accelerated Filer
o
|
Accelerated
Filer
o
|
|
Non-Accelerated
Filer
o
(Do
not check if a smaller reporting company)
|
Smaller
Reporting Company
x
|
CALCULATION
OF REGISTRATION FEE
|
Title of Securities
|
Amount to be
Registered (3)
|
Proposed
Maximum
Offering
Price Per
Security
(1)
|
Proposed Maximum
Aggregate Offering Price
|
Amount of
Registration
Fee
|
|||||||||||||
|
Units,
each consisting of one Share, $0.001 par value, and one
warrant
|
12,800,000 |
Units
|
$ | 9.80 | $ | 125,440,000 | $ | 6,999.55 | |||||||||
|
Shares
included as part of the Units
|
12,800,000 |
Shares
|
— | — | — |
(2)
|
|||||||||||
|
Warrants
included as part of the Units
|
12,800,000 |
Warrants
|
— | — | — |
(2)
|
|||||||||||
|
Shares
underlying the Warrants included in the Units(4)
|
12,800,000 |
Shares
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$ | 7.50 | $ | 96,000,000 | $ | 5,356.80 | |||||||||
|
Shares
held in escrow by initial stockholders of China Holdings Acquisition
Corp.
|
1,600,000 |
Shares
|
$ | 9.62 | $ | 15,392,000 | $ | 858.87 | |||||||||
|
Warrants
issued to insiders (“Insider Warrants”)
|
2,750,000 |
Warrants
|
$ | 1.00 | $ | 2,750,000 | $ | 153.45 | |||||||||
|
Shares
underlying the Insider Warrants
(3)
|
2,750,000 |
Shares
|
— | — | — |
(2)
|
|||||||||||
|
Total
Fee
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— | $ | 13,368.67 | ||||||||||||||
|
(1)
|
Based
on the market price of the units, common stock and warrants of China
Holdings Acquisition Corp. on August 19, 2009 for the purpose of
calculating the registration fee pursuant to rule
457(f)(1).
|
|
(2)
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No
fee pursuant to Rule 457(i).
|
|
(3)
|
Pursuant
to Rule 416, there are also being registered such additional securities as
may be issued to prevent dilution resulting from stock splits, stock
dividends or similar transactions.
|
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(4)
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Such
shares are being offered on a continuous basis to the holders of the
related warrant following the redomestication described in the proxy
statement/prospectus included in this registration
statement.
|
The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
PROXY
STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS
OF
CHINA HOLDINGS ACQUISITION CORP.
AND
PROSPECTUS FOR SHARES, WARRANTS AND UNITS
OF
CHINA CERAMICS CO., LTD.
Proxy
Statement/Prospectus dated
,
2009
and first
mailed to stockholders and warrantholders on or about
,
2009
Dear
Stockholders and Warrantholders:
The
stockholders of China Holdings Acquisition Corp., or “CHAC,” a Delaware
corporation, are cordially invited to attend the special meeting of the
stockholders relating to the acquisition agreement dated as of August 19 2009,
or the “Acquisition Agreement,” by and among CHAC, China Ceramics Co., Ltd., a
company incorporated in the British Virgin Islands and a wholly-owned subsidiary
of CHAC, or “China Ceramics,” Success Winner Limited, a company incorporated in
the British Virgin Islands, or “Success Winner,” Jinjiang Hengda Ceramics Co.,
Limited, a company incorporated in the People’s Republic of China, or “Hengda,”
and the sole shareholder of Success Winner who as of the date hereof hold 100%
of the issued and outstanding shares of Success Winner and the other
related proposals. We refer to the shareholder of Success Winner and the other
entities listed on Schedule 3.2 of the Acquisition Agreement as the
post-acquisition shareholders. The issuance of shares of CHAC to the
post-acquisition shareholders is being consummated on a private placement basis,
pursuant to Section 4(2) of the Securities Act of 1933, as amended. The
aggregate value of the consideration to be paid by CHAC in the business
combination is approximately $55.4 million (based on 5,743,320 shares to be
issued to the post-acquisition shareholders at a market value of $9.64 per
share, the most recent closing price of CHAC’s common stock as of
August 19, 2009). The transactions contemplated under the Acquisition
Agreement, including the merger of CHAC into China Ceramics and the business
combination with Success Winner are referred to in this proxy
statement/prospectus as the Acquisition. CHAC will be reorganized into a British
Virgin Islands company by CHAC merging with China Ceramics prior to the
consummation of the business combination.
China
Holdings Acquisition Corp. is a blank check company formed on June 22, 2007 for
the purpose of acquiring, through a stock exchange, asset acquisition or other
similar business combination, or control, through contractual arrangements, an
operating business that has its primary operations located in the People’s
Republic of China. CHAC’s efforts in identifying a prospective target business
were not limited to a particular industry.
As of
June 30, 2009, there was approximately $125,278,000 in the Trust Account, or
approximately $9.79 per outstanding share issued in the initial public offering.
If the holders of 33.33% or more of the shares of CHAC’s common stock issued in
the initial public offering vote against the Acquisition and exercise their
conversion rights, CHAC will not complete the Acquisition. On
, 2009,
the record date for the special meeting of stockholders, the last sale price of
CHAC’s common stock was
$ .
Each
stockholder’s vote is very important. Whether or not you plan to attend the CHAC
special meeting in person, please submit your proxy card without delay.
Stockholders may revoke proxies at any time before they are voted at the
meeting. Voting by proxy will not prevent a stockholder from voting such
stockholder’s shares in person if such stockholder subsequently chooses to
attend the CHAC special meeting. The proxy statement/prospectus constitutes a
proxy statement of CHAC and a prospectus of China Ceramics for the ordinary
shares and warrants of China Ceramics, also referred to as “securities” of China
Ceramics, that will be issued to the security holders of CHAC.
We
encourage you to read this proxy statement/prospectus carefully. In particular,
you should review the matters discussed under the caption “RISK FACTORS”
beginning on page [ ].
CHAC’s
board of directors unanimously recommends that CHAC stockholders vote “FOR”
approval of each of the proposals.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of the securities to be issued in the Acquisition or
otherwise, or passed upon the adequacy or accuracy of this proxy
statement/prospectus. Any representation to the contrary is a criminal
offense.
|
Paul
K. Kelly
|
|
|
Chairman
of the Board of Directors of
|
|
|
China
Holdings Acquisition
Corp.
|
, 2009
HOW
TO OBTAIN ADDITIONAL INFORMATION
This
proxy statement/prospectus incorporates important business and financial
information about CHAC that is not included or delivered herewith. If you would
like to receive additional information or if you want additional copies of this
document, agreements contained in the appendices or any other documents filed by
CHAC with the Securities and Exchange Commission, such information is available
without charge upon written or oral request. Please contact the
following:
China
Holdings Acquisition Corp.
1000
N. West Street, Suite 1200
Wilmington,
DE 19801
Telephone:
(302) 295-4832
If you
would like to request documents, please do so no later than
, 2009 to receive them before CHAC’s special
meeting. Please be sure to include your complete name and address in your
request. Please see “Where You Can Find Additional Information” to find out
where you can find more information about CHAC and Success Winner. You should
rely only on the information contained in this proxy statement/prospectus in
deciding how to vote on the Acquisition. Neither CHAC nor Success Winner has
authorized anyone to give any information or to make any representations other
than those contained in this proxy statement/prospectus. Do not rely upon any
information or representations made outside of this proxy statement/prospectus.
The information contained in this proxy statement/prospectus may change after
the date of this proxy statement/ prospectus. Do not assume after the date of
this proxy statement/prospectus that the information contained in this proxy
statement/prospectus is still correct.
USE
OF CERTAIN TERMS
Unless
the context indicates otherwise, all references to “Success Winner” in this
proxy statement/prospectus refer to Success Winner Limited and its consolidated
subsidiaries, including Jinjiang Hengda Ceramics Co., Limited, or Hengda, and
Stand Best Creation Limited, or Stand Best. Unless the context indicates
otherwise, all references to “PRC” or “China” refer to the People’s Republic of
China. All references to “provincial-level regions” or “regions” include
provinces as well as autonomous regions and directly controlled municipalities
in China, which have an administrative status equal to provinces, including
Beijing.
All
references to “Renminbi,” “RMB” or “yuan” are to the legal currency of the
People’s Republic of China and all references to “U.S. dollars,” “dollars,” “$”
are to the legal currency of the United States. This proxy statement/prospectus
contains translations of Renminbi amounts into U.S. dollars at specified rates
solely for the convenience of the reader. Unless otherwise noted, all
translations from Renminbi to U.S. dollars were made at the noon buying rate in
The City of New York for cable transfers in Renminbi per U.S. dollar as
certified for customs purposes by the Federal Reserve Bank of New York, or the
noon buying rate, as of June 30, 2009, which was RMB6.8448 to $1.00. We make no
representation that the Renminbi or U.S. dollar amounts referred to in this
proxy statement/prospectus could have been or could be converted into U.S.
dollars or Renminbi, as the case may be, at any particular rate or at all. On
August 21, 2009, the cash buying rate announced by the People’s Bank of China
was RMB6.8314 to $1.00.
CHINA
HOLDINGS ACQUISITION CORP.
1000
N. West Street, Suite 1200
Wilmington,
DE 19801
Telephone:
(302) 295-4832
NOTICE
OF SPECIAL MEETING OF
CHINA
HOLDINGS ACQUISITION CORP. STOCKHOLDERS
To
Be Held on , 2009
To CHAC
Stockholders:
A special
meeting of stockholders of China Holdings Acquisition Corp., a Delaware
corporation, or CHAC, will be held at New
York, New York, on , 2009, at
a.m., for the following purposes:
|
1.
|
The
merger of CHAC with and into China Ceramics, its wholly-owned British
Virgin Islands subsidiary, or the “merger,” with China Ceramics surviving
the merger. The merger will change CHAC’s place of incorporation from
Delaware to the British Virgin Islands. We also refer to the merger as the
redomestication. This proposal is called the Redomestication Proposal and
consists of the merger of CHAC into China Ceramics. Holders of CHAC’s
common stock as of the record date are entitled to vote on the
Redomestication Proposal.
|
|
2.
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The
authorization for the China Ceramics board of directors to complete the
share purchase included in the Acquisition Agreement, or the “business
combination”, which will only take place if the Redomestication Proposal
is approved. This proposal is called the Business Combination Proposal.
Holders of CHAC’s common stock as of the record date are entitled to vote
on the Business Combination
Proposal.
|
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3.
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The
adjournment of the special meeting in the event CHAC does not receive the
requisite stockholder vote to approve the business combination. This
proposal is called the Adjournment
Proposal.
|
Each of
the Redomestication Proposal and the Business Combination Proposal are
conditioned upon the approval of the other. Therefore, both must be
approved by stockholders in order for the business combination to be
consummated.
As of
June 30, 2009, there were 16,000,000 shares of CHAC common stock with a par
value of $0.001 issued and outstanding and entitled to vote. Only CHAC
stockholders who hold shares of record as of the close of business on
, 2009 are entitled to vote at the special
meeting or any adjournment of the special meeting. This proxy statement is first
being mailed to stockholders on or about ______, 2009. Approval of the business
combination will require the affirmative vote of the holders of a majority of
the shares of CHAC common stock issued in the IPO present and entitled to vote
at the special meeting; provided, however, that if 33.33% or more of the shares
purchased in the IPO vote against approval of the business combination and
demand conversion then the Acquisition will not be completed. Abstaining from
voting will have the same effect as voting against the Business Combination and
failing to instruct your bank, brokerage firm or nominee to vote your shares
will have no effect on the outcome of the Business Combination Proposal but will
be counted for purposes of determining if a quorum is present, except that you
will not be able to convert your shares into a pro rata portion of the Trust
Account.
Abstaining
from voting and failing to instruct your bank, brokerage firm or nominee to vote
your shares will have the same effect as voting against the Redomestication
Proposal and no effect on the Adjournment Proposal.
CHAC
currently has authorized share capital of 41,000,000 shares consisting of
40,000,000 shares of common stock with a par value of $0.001 per share and
1,000,000 shares of preferred stock with a par value of $0.0001 per share. China
Ceramics currently is authorized to issue 51,000,000 shares of a
single class.
The
transactions contemplated under the Acquisition Agreement, including the
redomestication and the business combination, are referred to in this proxy
statement/prospectus as the Acquisition. Holders of CHAC’s common stock will be
entitled to appraisal rights under the Delaware corporate law in connection with
the merger.
Whether
or not you plan to attend the special meeting in person, please submit your
proxy card without delay. Voting by proxy will not prevent you from voting your
shares in person if you subsequently choose to attend the special meeting. If
you fail to return your proxy card, the effect will be that your shares will not
be counted for purposes of determining whether a quorum is present at the
special meeting. You may revoke a proxy at any time before it is voted at the
special meeting by executing and returning a proxy card dated later than the
previous one, by attending the special meeting in person and casting your vote
by ballot or by submitting a written revocation to CHAC at China Holdings
Acquisition Corp., 1000 N. West Street, Suite 1200, Wilmington, DE 19801, that
is received by us before we take the vote at the special meeting. If you hold
your shares through a bank or brokerage firm, you should follow the instructions
of your bank or brokerage firm regarding revocation of proxies.
CHAC’s
board of directors unanimously recommends that CHAC stockholders vote “FOR”
approval of each of the proposals.
|
By
order of the Board of Directors,
|
|
|
Paul
K. Kelly
|
|
|
Chairman
of the Board of Directors of
|
|
|
China
Holdings Acquisition
Corp.
|
_______________,
2009
CHINA
CERAMICS
CO.,
LTD.
|
QUESTIONS AND ANSWERS ABOUT THE CHAC SPECIAL
MEETING
|
1
|
|
SUMMARY
|
4
|
|
SUCCESS WINNER SUMMARY FINANCIAL
INFORMATION
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11
|
|
SELECTED UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION
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12
|
|
COMPARATIVE PER SHARE
INFORMATION
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13
|
|
MARKET PRICE INFORMATION
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15
|
|
RISK FACTORS
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16
|
|
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
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31
|
|
DIVIDEND POLICY
|
32
|
|
SPECIAL MEETING OF CHAC
STOCKHOLDERS
|
33
|
|
THE BUSINESS COMBINATION
PROPOSAL
|
39
|
|
THE ACQUISITION AGREEMENT
|
50
|
|
THE REDOMESTICATION
PROPOSAL
|
54
|
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THE ADJOURNMENT PROPOSAL
|
62
|
|
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND
OPERATING DATA OF SUCCESS WINNER
|
63
|
|
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS
|
64
|
|
THE CERAMICS INDUSTRY
|
75
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HENGDA’S BUSINESS
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76
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| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SUCCESS WINNER | 86 |
|
CHAC SELECTED FINANCIAL
INFORMATION
|
99
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF CHAC
|
100
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CHAC BUSINESS
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103
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DIRECTORS, EXECUTIVE OFFICERS, EXECUTIVE
COMPENSATION AND CORPORATE GOVERNANCE
|
105
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
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117
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CERTAIN TRANSACTIONS
|
121
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DESCRIPTION OF CHAC’S
SECURITIES
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123
|
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DESCRIPTION OF THE
COMBINED
COMPANY’S
|
125
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MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES
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128
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EXPERTS
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136
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LEGAL MATTERS
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136
|
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STOCKHOLDER PROPOSALS AND OTHER
MATTERS
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137
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|
ENFORCEABILITY OF CIVIL
LIABILITIES
|
137
|
|
WHERE YOU CAN FIND ADDITIONAL
INFORMATION
|
137
|
| INDEX TO FINANCIAL STATEMENTS | F-1 |
| ANNEX A - MERGER AND STOCK PURCHASE AGREEMENT | |
| ANNEX B - SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW | |
| ANNEX C - MEMORANDUM OF ASSOCIATION OF CHINA CERAMICS | |
| ANNEX D - ARTICLES OF ASSOCIATION OF CHINA CERAMICS |
QUESTIONS
AND ANSWERS ABOUT THE CHAC SPECIAL MEETING
|
Q:
|
What
is the purpose of this
document?
|
|
A:
|
This
document serves as CHAC’s proxy statement and as the prospectus of China
Ceramics. As a proxy statement, this document is being provided to CHAC
stockholders because the CHAC board of directors is soliciting their
proxies to vote to approve, at a special meeting of stockholders, the
Acquisition.
|
|
Q:
|
What
is being voted on?
|
|
A:
|
You
are being asked to vote on three
proposals:
|
|
|
·
|
The
redomestication of CHAC to the British Virgin Islands by means of the
merger, resulting in it becoming China Ceramics. This proposal is called
the Redomestication Proposal.
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|
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·
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The
proposed share purchase resulting in Success Winner becoming a subsidiary
of China Ceramics. This proposal is called the Business Combination
Proposal.
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·
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The
approval of any adjournment of the special meeting for the purpose of
soliciting additional proxies. This proposal is called the Adjournment
Proposal.
|
Each of the Redomestication Proposal and the Business Combination
Proposal are conditioned upon the approval of the other. Therefore, both must be
approved by stockholders in order for the business combination to be
consummated.
|
Q:
|
When
and where is the special meeting of CHAC
stockholders?
|
|
A:
|
The
special meeting of CHAC stockholders will take place at
, New York, New York on
, 2009, at
a.m.
|
|
Q:
|
Who
may vote at the special
meeting?
|
|
A:
|
Only
holders of record of shares of CHAC common stock as of the close of
business on , 2009 may
vote at the special meeting. As of June 30, 2009, there were 16,000,000
shares of CHAC common stock with a par value of $0.001 outstanding and
entitled to vote.
|
|
Q:
|
What
is the quorum requirement for the special
meeting?
|
|
A:
|
Stockholders
representing a majority of the CHAC common stock issued and outstanding as
of the record date and entitled to vote at the special meeting must be
present in person or represented by proxy in order to hold the special
meeting and conduct business. This is called a quorum. Shares of CHAC
common stock will be counted for purposes of determining if there is a
quorum if the stockholder (i) is present and entitled to vote at the
meeting, or (ii) has properly submitted a proxy card. In the absence of a
quorum, stockholders representing a majority of the votes present in
person or represented by proxy at such meeting, may adjourn the meeting
until a quorum is present.
|
|
Q:
|
What
vote is required to approve the Business Combination
Proposal?
|
|
A:
|
Approval
of the business combination will require the affirmative vote of the
holders of a majority of the shares of CHAC common stock issued in the IPO
present and entitled to vote at the special meeting; provided, however,
that if 33.33% or more of the shares purchased in the IPO vote against
approval of the Business Combination Proposal and demand conversion then
the Acquisition will not be completed. Abstentions and broker non-votes
will have the same effect as a vote against the approval of the Business
Combination Proposal, except that you will not be able to convert your
shares into a pro rata portion of the Trust
Account.
|
|
Q:
|
Do
I have conversion rights in connection with the
Acquisition?
|
|
A:
|
Yes.
In order to exercise conversion rights, a stockholder must vote against
the Business Combination Proposal and elect to exercise conversion rights
on the enclosed proxy card. If a stockholder votes against the Business
Combination Proposal but fails to properly exercise conversion rights,
such stockholder will not be entitled to have its shares converted to
cash. Any request for conversion, once made, may be withdrawn at any time
up to the date of the special meeting. The actual per share conversion
price will be equal to the amount in the Trust Account (which includes
$4,288,000 in deferred underwriting discounts and commissions) as of two
business days prior to the consummation of the proposed business
combination, inclusive of any interest, divided by the number of
outstanding shares sold in the IPO. For illustrative purposes, based on
funds in the Trust Account on June 30, 2009, the estimated per share
conversion price would have been $9.79. Please see “Special Meeting of
CHAC Stockholders — Conversion Rights” for the procedures to be
followed if you wish to convert your shares into
cash.
|
|
Q:
|
Has
the board of directors of CHAC recommended approval of the Business
Combination Proposal and the other
proposals?
|
|
A:
|
Yes.
CHAC’s board of directors has unanimously recommended to its stockholders
that they vote “FOR” the approval of the Business Combination Proposal,
Redomestication Proposal, and the other proposals at the special meeting.
After careful deliberation of the terms and conditions of these proposals,
CHAC’s board of directors has unanimously determined that the Acquisition
and related proposals are fair to, and in the best interests of, CHAC and
its stockholders. CHAC’s directors have interests in the Acquisition that
may be different from, or in addition to, your interests as a stockholder
of CHAC. For a description of such interests, please see “The Business
Combination Proposal — Interests of Certain Persons in the
Acquisition.”
|
|
Q:
|
How
can I vote?
|
|
A:
|
Please
vote your shares of CHAC common stock as soon as possible after carefully
reading and considering the information contained in this proxy
statement/prospectus. You may vote your shares prior to the special
meeting by signing and returning the enclosed proxy card. If you hold your
shares in “street name” (which means that you hold your shares through a
bank, brokerage firm or nominee), you must vote in accordance with the
instructions on the voting instruction card that your bank, brokerage firm
or nominee provides to you.
|
|
Q:
|
If
my shares are held in “street name” by my bank, brokerage firm or nominee,
will they automatically vote my shares for
me?
|
|
A:
|
No.
Your bank, brokerage firm or nominee cannot vote your shares without
instructions from you. You should instruct your bank, brokerage firm or
nominee how to vote your shares, following the instructions contained in
the voting instruction card that your bank, brokerage firm or nominee
provides to you.
|
|
Q:
|
What
if I abstain from voting or fail to instruct my bank, brokerage firm or
nominee?
|
|
A:
|
Abstaining
from voting will have the same effect as voting against the Business
Combination and failing to instruct your bank, brokerage firm or nominee
to vote your shares will have no effect on the outcome of the Business
Combination Proposal but will be counted for purposes of determining if a
quorum is present.
Abstaining
from voting and failing to instruct your bank, brokerage firm or nominee
to vote your shares will have the same effect as voting against the
Redomestication Proposal and no effect on the Adjournment
Proposal.
|
|
Q:
|
Can
I change my vote after I have mailed my proxy
card?
|
|
A:
|
Yes.
You may change your vote at any time before your proxy is voted at the
special meeting. You may revoke your proxy by executing and returning a
proxy card dated later than the previous one, or by attending the special
meeting in person and casting your vote by ballot or by submitting a
written revocation stating that you would like to revoke your proxy that
we receive prior to the special meeting. If you hold your shares through a
bank, brokerage firm or nominee, you should follow the instructions of
your bank, brokerage firm or nominee regarding the revocation of proxies.
You should send any notice of revocation or your completed new proxy card,
as the case may be, to:
|
China
Holdings Acquisition Corp.
1000
N. West Street, Suite 1200
Wilmington,
DE 19801
Telephone:
(302) 295-4832
|
Q:
|
Should
I send in my stock certificates
now?
|
|
A:
|
Yes.
CHAC shareholders who intend to have their shares converted, by electing
to have those shares converted to cash on the proxy card at the same time
they vote against the Business Combination Proposal, should send their
certificates prior to the special meeting. Please see “Special Meeting of
CHAC Stockholders — Conversion Rights” for the procedures to be
followed if you wish to convert your shares into
cash.
|
|
Q:
|
When
is the Acquisition expected to
occur?
|
|
A:
|
Assuming
the requisite stockholder approval is received, CHAC expects that the
Acquisition will occur no later than November 21,
2009.
|
|
Q:
|
May
I seek statutory appraisal rights or dissenter rights with respect to my
shares?
|
|
A:
|
Under
applicable Delaware corporate law, you have appraisal rights with respect
to your shares.
|
|
Q:
|
What
happens if the Acquisition is not
consummated?
|
|
A:
|
If
CHAC does not consummate the Acquisition by November 21, 2009 then
pursuant to Article Sixth of its amended and restated certificate of
incorporation, CHAC’s officers must take all actions necessary in
accordance with the Delaware General Corporation Law to dissolve and
liquidate CHAC as soon as reasonably practicable. Following
dissolution, CHAC will no longer exist as a corporation. In any
liquidation, the funds held in the Trust Account, plus any interest earned
thereon (net of taxes), together with any remaining out-of-trust net
assets will be distributed pro-rata to holders of shares of CHAC common
stock who acquired such shares of common stock in CHAC’s initial public
offering or in the aftermarket. If the Acquisition is not effected by
November 21, 2009, the warrants will expire worthless. The estimated
consideration that each share of CHAC common stock would be paid at
liquidation would be $9.79 per share, based on amounts on deposit in the
Trust Account as of June 30, 2009. The most recent closing price of CHAC’s
common stock on the NYSE Amex LLC, or NYSE Amex as of August 20, 2009 was
$9.64 per share. Holders of shares issued prior to CHAC’s initial public
offering have waived any right to any liquidation distribution with
respect to such shares.
|
|
Q:
|
What
happens to the funds deposited in the Trust Account following the
Acquisition?
|
|
A:
|
Following
the closing of the Acquisition, funds in the Trust Account will be
released to CHAC. CHAC stockholders exercising conversion rights will
receive their per share conversion price. The balance of the funds will be
utilized to fund the Acquisition.
|
|
Q:
|
Who
will manage China Ceramics after the
Acquisition?
|
|
A:
|
Effective
the closing date, the board of directors of China Ceramics will consist of
five members. The members will include Huang Jia Dong, Su Pei Zhi and
[ ]
of Success Winner, and Paul K. Kelly and Cheng Davis of CHAC, of whom
[ ],
Paul K. Kelly and Cheng Davis are independent non-executive
directors.
|
|
Q:
|
Which
accounting standard will China Ceramics prepare its financial statements
in accordance with after the
Acquisition?
|
|
A:
|
China
Ceramics intends to continue providing its investors with financial
statements prepared in accordance with International Financial Reporting
Standards, or IFRS, and the relevant securities
laws.
|
|
Q:
|
What
will I receive in the merger?
|
|
A:
|
CHAC
security holders will receive an equal number of shares of common stock of
China Ceramics in exchange for their CHAC common stock, and China Ceramics
will assume the outstanding CHAC warrants, the terms and conditions of
which will not change, except that on exercise, they will receive China
Ceramics common stock. However, as a result of the issuance of China
Ceramics shares in the stock purchase, the ownership interests of CHAC
stockholders will be diluted so that they will only own approximately
71.5% of China Ceramics. If the outstanding warrants are exercised, the
current CHAC stockholders will experience further dilution in their
ownership of the company.
|
|
Q:
|
How
will the merger be accomplished?
|
|
A:
|
CHAC
will merge into China Ceramics, CHAC’s wholly owned subsidiary that is
incorporated as a British Virgin Islands company. As a result of the
redomestication merger, each currently issued outstanding share of common
stock of CHAC will automatically convert into a share of common stock of
China Ceramics. This procedure will result in your becoming a stockholder
in China Ceramics instead of CHAC.
|
|
Q:
|
Will
the CHAC stockholders be taxed as a result of
the merger?
|
|
A:
|
Generally,
for U.S. federal income tax purposes, stockholders of CHAC should not
recognize gain or loss as a result of the merger. Stockholders are urged
to consult their own tax advisors on this
issue.
|
|
Q:
|
Will
CHAC be taxed on the merger?
|
|
A:
|
CHAC
should recognize gain (but not loss) for U.S. federal income tax purposes
as a result of the merger equal to the excess, if any, of the fair market
value of each of its assets over such asset’s adjusted tax basis at the
effective time of the merger. For this purpose, the valuation of CHAC’s
assets at the time of the merger may take into account a variety of
factors, including possibly the fair market value of CHAC’s shares
immediately prior to the merger. Since any such gain will be determined
based on the value of its assets at that time, the amount of such gain
(and any U.S. federal income tax liability to CHAC by reason of such gain)
cannot be determined at this time. Any U.S. federal income tax liability
incurred by CHAC as a result of such gain should become a liability of
China Ceramics by reason of the
merger.
|
SUMMARY
This
summary highlights selected information from this proxy statement/prospectus but
may not contain all of the information that may be important to you.
Accordingly, we encourage you to read carefully this entire proxy
statement/prospectus, including the Acquisition Agreement attached as Annex A.
Please read these documents carefully as they are the legal documents that
govern the Acquisition and your rights in the Acquisition. Unless the context
otherwise requires, references to “CHAC,” “we,” “us” or “our” in this proxy
statement/prospectus refers to China Holdings Acquisition Corp., including its
consolidated subsidiaries, before the consummation of the Acquisition and to
China Ceramics, including its consolidated subsidiaries, after the consummation
of the Acquisition.
The
Parties
CHAC
China
Holdings Acquisition Corp.
1000 N.
West Street, Suite 1200
Wilmington,
DE 19801
Telephone:
(302) 295-4832
China
Holdings Acquisition Corp. is a blank check company formed on June 22, 2007 for
the purpose of acquiring, through a stock exchange, asset acquisition or other
similar business combination, or control, through contractual arrangements, an
operating business that has its primary operations located in Asia, with a focus
on potential acquisition targets in the People’s Republic of China. CHAC’s
efforts in identifying a prospective target business were not limited to a
particular industry.
On
November 21, 2007, CHAC consummated its initial public offering, or IPO, of
12,800,000 units, including 800,000 subject to an over-allotment option, with
each unit consisting of one share of common stock and one warrant to purchase
one share of common stock at an exercise price of $7.50 per share. The units
were sold at an offering price of $10.00 per unit, generating total gross
proceeds of $128,000,000. Simultaneously with the consummation of the IPO, CHAC
consummated the private sale of 2,750,000 warrants at a price of $1.00 per
warrant, generating total proceeds of $2,750,000, to CHAC’s founders Paul K.
Kelly, James D. Dunning, Jr., Alan G. Hassenfeld, Gregory E. Smith, Xiao Feng
and Cheng Yan Davis and Soopakij (Chris) Chearavanant and Ruey Bin Kao, two of
CHAC’s special advisors. After deducting the underwriting discounts and
commissions and the offering expenses, the total net proceeds to CHAC from the
public offering and the private sale were approximately $125,363,000, of which
$125,278,000 was deposited into a Trust Account and the remaining became
available to be used to provide for business, legal and accounting due diligence
on prospective business combinations and continuing general and administrative
expenses. Included in the amount deposited into the Trust Account was $4,288,000
of underwriting discounts and commissions payable to the underwriters, the
payment of which was deferred unless and until CHAC completes a business
combination. In addition, CHAC is allowed to withdraw approximately $3,200,000
of after-tax income on the balance of the Trust Account from the Trust Account
for working capital, due diligence and general corporate purposes. Through June
30, 2009, CHAC has withdrawn $2,300,000 from the Trust Account for such
purposes. As of June 30, 2009, there was approximately $125,278,000 held in the
Trust Account.
The
shares of CHAC’s common stock, warrants and units are traded on the NYSE Amex,
under the symbols “HOL,” “HOL.WS” and “HOL.U,” respectively. Each of CHAC’s
units consists of one share of common stock and one warrant to purchase an
additional share of CHAC’s common stock for consideration of $7.50 per share.
CHAC’s units commenced trading on the NYSE Amex on November 21, 2007. CHAC’s
common stock and warrants commenced trading separately on December 17, 2007.
Following consummation of the business combination, CHAC will be reorganized
into a British Virgin Islands company, or “China Ceramics.” It is contemplated
that an application will be made for the China Ceramics securities to become
listed on the NYSE Amex or elsewhere at an appropriate time. The listing
application will be made only when China Ceramics has satisfied the relevant
listing requirements. Such listing will be unrelated to, and is not a condition
for or requirement of, the business combination or the Acquisition
Agreement.
Success
Winner and Hengda
Success
Winner Limited
P.O. Box
957
Offshore
Incorporations Centre, Road Town
Tortola,
British Virgin Islands
Success
Winner was incorporated as a company with limited liability under the laws of
the British Virgin Islands on May 29, 2009 as the holding company for its
business operations in China. Success Winner has one operating subsidiary in
China: Jinjiang Hengda Ceramics Co., Ltd, or Hengda. Success Winner holds an
indirect 100.0% interest in Hengda.
Hengda is
principally engaged in the manufacture and sale of ceramic tiles used for
exterior siding and for interior flooring and design in residential and
commercial buildings.
As of
June 30, 2009, Success Winner had an issued share capital of $1 consisting of 1
ordinary share. As of June 30, 2009, Success Winner
is authorized to issue 50,000 shares of a single
class.
The
Acquisition and the Acquisition Agreement
Redomestication
to the British Virgin Islands
CHAC will
complete a corporate reorganization that would result in holders of CHAC
securities holding securities in China Ceramics, a British Virgin Islands
company rather than in CHAC, a Delaware corporation. CHAC, the current Delaware
corporation, will effect a merger pursuant to Section 251 of the General
Corporation Law of the State of Delaware in which it will merge with and into
China Ceramics, its wholly-owned British Virgin Islands subsidiary, with China
Ceramics surviving the merger.
The
redomestication will result in all of CHAC’s issued and outstanding shares of
common stock immediately prior to the redomestication converting into shares of
China Ceramics, and all units, warrants and other rights to purchase CHAC’s
common stock immediately prior to the redomestication converting into
substantially equivalent securities of China Ceramics. If the shares of China
Ceramics do not continue to be quoted on the NYSE Amex, it is possible
that the shares will be listed and traded only on the OTC Bulletin Board. CHAC
will cease to exist and China Ceramics will be the surviving corporation. In
connection therewith, China Ceramics will assume all the property, rights,
privileges, agreements, powers and franchises, debts, liabilities, duties and
obligations of CHAC, including any and all agreements, covenants, duties and
obligations of CHAC set forth in the Acquisition Agreement.
Business
Combination with Success Winner; Acquisition Consideration
Immediately
following the redomestication, China Ceramics will acquire all of the issued and
outstanding ordinary shares of Success Winner held by Mr. Wong Kung Tok (the
“Seller”) in exchange for $10.00 and 5,743,320 shares of China Ceramics ordinary
shares. The issuance of shares of China Ceramics to the post-acquisition
shareholders is being consummated on a private placement basis, pursuant to
Section 4(2) of the Securities Act of 1933, as amended. In addition, 8,185,763
shares of the China Ceramics ordinary shares will be placed in escrow (the
“Contingent Shares”) and released to the Seller in the event certain earnings
and stock price thresholds are achieved. The aggregate value of the
consideration to be paid by China Ceramics in the business combination will be
approximately $55.4 million (based on 5,743,320 shares to be issued to the
post-acquisition shareholders at a market value of $9.64 per share, the most
recent closing price of CHAC’s common stock as of August 20,
2009). In connection with the closing of the transaction, the
CHAC founders will forfeit 1,600,000 of their founders’ shares to CHAC for
cancellation. After such shares are canceled, the CHAC founders will
own a total of 1,600,000 shares.
CHAC
currently has authorized share capital of 41,000,000 shares consisting of
40,000,000 shares of common stock with a par value of $0.001 per share and
1,000,000 shares of preferred stock with a par value of $0.0001 per share. China
Ceramics currently is authorized to issue 51,000,000 shares of a
single class.
After the
Acquisition assuming no conversions of shares into cash, CHAC’s current public
shareholders will own approximately 63.5% of China Ceramics, CHAC’s current
directors, officers and affiliates will own approximately 8.0% of China
Ceramics, and Seller will own approximately 28.5% of China
Ceramics.
Pursuant
to the Acquisition Agreement, the redomestication will not be consummated unless
the business combination is also approved. Similarly, the business combination
will not take place unless the redomestication is also approved. Upon
consummation of the business combination, China Ceramics will own 100% of the
issued and outstanding shares of Success Winner.
The
following diagrams illustrate the corporate structure of CHAC and Success Winner
immediately before and after the Acquisition:
Before
the Acquisition
After
the Acquisition
Conversion
Rights
Pursuant
to CHAC’s Certificate of Incorporation, a holder of shares of CHAC common stock
may, if the stockholder affirmatively votes against the business combination,
demand that CHAC convert such shares into cash. Demand may be made by checking
the box on the proxy card provided for that purpose and returning the proxy card
in accordance with the instructions provided, and, at the same time, ensuring
your bank or broker complies with the requirements identified elsewhere herein.
You will only be entitled to receive cash for these shares if you continue to
hold them through the closing of the business combination.
In
connection with tendering your shares for conversion into cash, you must elect
either to physically tender your stock certificates to CHAC’s transfer agent
prior to the special meeting or to deliver your shares to the transfer agent
electronically using The Depository Trust Company’s DWAC (Deposit/Withdrawal At
Custodian) System, which election would likely be determined based on the manner
in which you hold your shares. Traditionally, in order to perfect conversion
rights in connection with a blank check company’s business combination, a holder
could vote against a proposed business combination and check a box on the proxy
card indicating such holder was seeking to exercise such holder’s conversion
rights. After the business combination was approved, the company would contact
such stockholder to arrange for it to deliver its certificate to verify
ownership. As a result, the stockholder then had an “option window” after the
consummation of the business combination during which it could monitor the price
of the stock in the market. If the price rose above the conversion price, it
could sell its shares in the open market before actually delivering its shares
to the company for cancellation in consideration for the conversion price. Thus,
the conversion right, to which stockholders were aware they needed to commit
before the stockholder meeting, would become a “put” right surviving past the
consummation of the business combination until the converting holder delivered
its certificate. The requirement for physical or electronic delivery prior to
the special meeting ensures that a converting holder’s election to convert is
irrevocable once the business combination is approved. In furtherance of such
irrevocable election, stockholders electing to convert will not be able to
tender their shares at the special meeting.
Through
the DWAC system, this electronic delivery process can be accomplished by the
stockholder, whether or not it is a record holder or its shares are held in
“street name,” by contacting the transfer agent or its broker and requesting
delivery of its shares through the DWAC system. CHAC believes that approximately
80% of its shares are currently held in “street name.” Delivering shares
physically may take significantly longer. In order to obtain a physical stock
certificate, a stockholder’s broker and/or clearing broker, DTC, and CHAC’s
transfer agent will need to act together to facilitate this request. 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 the broker
would determine whether or not to pass this cost on to the converting holder. It
is CHAC’s understanding that stockholders should generally allot at least two
weeks to obtain physical certificates from the transfer agent. CHAC does not
have any control over this process or over the brokers or DTC, and it may take
longer than two weeks to obtain a physical stock certificate. Such stockholders
will have less time to make their investment decision than those stockholders
that do not elect to exercise their conversion rights. Stockholders who request
physical stock certificates and wish to convert may be unable to meet the
deadline for tendering their shares before exercising their conversion rights
and thus will be unable to convert their shares.
Certificates
that have not been tendered in accordance with these procedures by the day prior
to the special meeting will not be converted to cash. In the event that a
stockholder tenders its shares and decides prior to the special meeting that it
does not want to convert its shares, the stockholder may withdraw the tender. In
the event that a stockholder tenders shares and the business combination is not
completed, these shares will not be converted to cash and the physical
certificates representing these shares will be returned to the stockholder
promptly following the determination that the business combination will not be
consummated. CHAC anticipates that a stockholder who tenders shares for
conversion in connection with the vote to approve the business combination would
receive payment of the conversion price for such shares soon after the
completion of the business combination. CHAC will hold the certificates of
stockholders that elect to convert their shares into a pro rata portion of the
funds available in the Trust Account until such shares are converted to cash or
returned to such stockholders.
If
properly demanded, CHAC will convert each share of common stock into a
pro rata
portion of the funds
available in the Trust Account, calculated as of two business days prior to the
anticipated consummation of the business combination. As of the record date,
this would amount to approximately $9.79 per share. If you exercise your
conversion rights, you will be exchanging your shares of CHAC common stock for
cash and will no longer own the shares. You will be entitled to receive cash for
these shares only if you affirmatively vote against the business combination,
properly demand conversion, and tender your stock certificate to CHAC’s transfer
agent prior to your vote. However, if CHAC is unable to complete the business
combination within 18 months after consummation of CHAC’s IPO (or within
24 months after consummation of CHAC’s IPO if a letter of intent, agreement
in principle or a definitive agreement has been executed within 18 months
after the consummation of CHAC’s IPO, or if extended by a vote of CHAC’s
stockholders, within 36 months after the date of CHAC’s IPO), it will be
forced to liquidate and all holders of shares will receive a
pro rata
portion of the funds
available in the Trust Account at the time of the liquidation.
The
business combination will not be consummated if the holders of 33.33% or more of
the common stock sold in the IPO (4,266,239 shares or more) exercise their
conversion rights.
Recommendations
of the Boards of Directors and Reasons for the Acquisition
After
careful consideration of the terms and conditions of the Acquisition Agreement,
the board of directors of CHAC has determined that the redomestication, the
business combination and the transactions contemplated thereby are fair to and
in the best interests of CHAC and its stockholders. In reaching its decision
with respect to the Acquisition and the transactions contemplated thereby, the
board of directors of CHAC reviewed various industry and financial data and the
due diligence and evaluation materials provided by Success Winner. The board of
directors did not obtain a fairness opinion on which to base its assessment.
CHAC’s board of directors recommends that CHAC stockholders vote:
|
|
·
|
FOR
the Redomestication Proposal;
|
|
|
·
|
FOR
the Business Combination Proposal;
and
|
|
|
·
|
FOR
the Adjournment Proposal.
|
Interests
of Certain Persons in the Acquisition
When you
consider the recommendation of CHAC’s board of directors in favor of adoption of
the Business Combination Proposal and other proposals, you should keep in mind
that CHAC’s directors and officers have interests in the Acquisition that are
different from, or in addition to, your interests as a stockholder.
|
|
·
|
if
the proposed Acquisition is not completed by November 21, 2009 (or
November 21, 2010, if CHAC’s stockholder vote to extend the date the
business combination must be consummated), CHAC will be required to
liquidate. In such event, the 3,200,000 shares of common stock held by
CHAC officers, directors and affiliates, which were acquired prior to the
IPO for an aggregate purchase price of $28,750, will be worthless, as will
the 2,750,000 warrants that were acquired prior to the IPO for an
aggregate purchase price of $2,750,000. Such common stock and warrants had
an aggregate market value of approximately $31.8 million based on the
most recent closing price of $9.64 and $0.34, on the NYSE Amex as of
August 20, 2009 and August 19, 2009,
respectively;
|
|
|
·
|
in
connection with the IPO, each of Paul K. Kelly and James D. Dunning, Jr.
have agreed to indemnify CHAC for debts and obligations to vendors that
are owed money by CHAC, but only to the extent necessary to ensure that
certain liabilities do not reduce funds in the Trust Account. If the
business combination is consummated, Messrs. Kelly and Dunning will
not have to perform such obligations. As of June 30, 2009, CHAC
believes that the maximum amount of the indemnity obligation of
Messrs. Kelly and Dunning was approximately $100,000, which was
computed based on the amount payable to creditors, less amounts relating
to creditors for which CHAC has received a waiver of each such creditor’s
right to sue the Trust Account. Although CHAC does not currently have
sufficient funds outside of the Trust Account to pay these
obligations, CHAC believes that it may qualify for a U.S.
federal tax refund for the 2009 tax year
which
could be used to offset the claims of vendors
. However, if the
business combination is not consummated
and
CHAC does not receive a tax refund to cover the claims of all of its
vendors,
and vendors that have not signed waivers sue the Trust
Account and win their cases, the Trust Account could be reduced by the
amount of the claims and Messrs. Kelly and Dunning would be required
to fulfill their indemnification obligations and they may not be able to
satisfy their individual obligations to indemnify
CHAC;
|
|
|
·
|
warrants
to purchase CHAC common stock held by CHAC’s officers and directors are
exercisable only upon consummation of a business
combination;
|
|
|
·
|
all
rights specified in CHAC’s certificate of incorporation relating to the
right of officers and directors to be indemnified by CHAC, and of CHAC’s
officers and directors to be
exculpated;
|
|
|
·
|
from
monetary liability with respect to prior acts or omissions, will continue
after the business combination. If the business combination is not
approved and CHAC liquidates, CHAC will not be able to perform its
obligations to its officers and directors under those
provisions;
|
|
|
·
|
if
the business combination with Success Winner is completed, Paul Kelly and
Cheng Davis will serve as directors of China Ceramics and Success Winner
will designate three members to the Board of Directors of China Ceramics;
and
|
|
|
·
|
CHAC’s
financial, legal and other advisors have rendered services for which they
may not be paid if the business combination is not approved. Any recovery
of such fees and expenses by these vendors will be much more difficult in
the event the business combination is not approved while such recovery is
not expressly contingent on the outcome of the CHAC stockholder vote,
these vendors could be viewed as having an interest in the outcome of such
vote.
|
In
addition, the exercise of CHAC’s directors’ and officers’ discretion in agreeing
to changes or waivers in the terms of the transaction may result in a conflict
of interest when determining whether such changes or waivers are appropriate and
in our stockholders’ best interest.
Voting Securities
As of
June 30, 2009, there were 16,000,000 shares of CHAC common stock issued and
outstanding. Only CHAC stockholders who hold shares of record as of the close of
business on , 2009
are entitled to vote at the special meeting or any adjournment of the special
meeting. Approval of the business combination will require the affirmative vote
of the holders of a majority of the shares of CHAC common stock issued in the
IPO present and entitled to vote at the special meeting; provided, however, that
if 33.33% or more of the shares purchased in the IPO vote against approval of
the business combination and demand conversion then the Acquisition will not be
completed. Abstaining from voting will have the same effect as voting against
the Business Combination and failing to instruct your bank, brokerage firm or
nominee to vote your shares will have no effect on the outcome of the Business
Combination Proposal but will be counted for purposes of determining if a quorum
is present.
Abstaining
from voting and failing to instruct your bank, brokerage firm or nominee to vote
your shares will have the same effect as voting against the Redomestication
Proposal and no effect on the Adjournment Proposal.
Holders who abstain
or do not give a voting instruction to their brokers will not be able to convert
their shares into a pro rata portion of the Trust Account if the business
combination is approved. As of June 30, 2009, directors, executive officers and
affiliates of CHAC held 3,200,000 shares of common stock (or approximately 20%
of the outstanding shares of CHAC common stock).
Holders
of CHAC common stock will be entitled to appraisal rights under Delaware
corporate law in connection with the Acquisition. See “Special Meeting of CHAC
Stockholders — Appraisal Rights” below.
Certain
U.S. Federal Income Tax Consequences
The
merger should qualify as a nontaxable reorganization under applicable U.S.
federal income tax principles, and no gain or loss generally should be
recognized by CHAC stockholders or warrant holders for U.S. federal income tax
purposes as a result of their exchange of CHAC common stock or warrants for the
common stock or warrants of China Ceramics. CHAC, however, should recognize gain
(but not loss) for U.S. federal income tax purposes as a result of the merger
equal to the excess, if any, of the fair market value of each of its assets over
such asset’s adjusted tax basis at the effective time of the merger. For this
purpose, the valuation of CHAC’s assets at the time of the merger may take into
account a variety of factors, including possibly the fair market value of CHAC’s
shares immediately prior to the merger. Since any such gain will be determined
based on the value of its assets at that time, the amount of such gain (and any
U.S. federal income tax liability to CHAC by reason of such gain) cannot be
determined at this time. Any U.S. federal income tax liability incurred by CHAC
as a result of such gain should become a liability of China Ceramics by reason
of the merger.
China
Ceramics should not recognize any gain or loss for U.S. federal income tax
purposes as a result of the business combination, and certain “anti-inversion”
provisions in the Internal Revenue Code of 1986, as amended, or the “Code,” are
not expected to apply to treat China Ceramics as a domestic corporation after
the merger and business combination.
Stockholders
and warrant holders are urged to consult their own tax advisors on these tax
issues. See “Material U.S. Federal Income Tax Consequences” below for
further discussion of these tax consequences.
Anticipated
Accounting Treatment
The
Acquisition will be accounted for in accordance with U.S. generally accepted
accounting principles as a capital transaction in substance. Under this method
of accounting, CHAC will be treated as the “acquired” company for financial
reporting purposes. This determination was primarily based on Success Winner
comprising the ongoing operations of the combined entity, the senior management
and a majority of the board of directors of Success Winner will continue as the
senior management and majority of the board of directors of the combined company
and Success Winner shareholders retaining approximately 28.5% to 54.5%
of the voting interests in the combined company (excluding any escrowed
shares released upon certain earnings and stock price thresholds) . In
accordance with guidance applicable to these circumstances, the Acquisition will
be considered to be a capital transaction in substance. Accordingly, for
accounting purposes, the Acquisition will be treated as the equivalent of
Success Winner issuing stock and warrants for the net assets of CHAC,
accompanied by a recapitalization. The net assets of CHAC will be stated at fair
value, which is considered to approximate historical cost, with no goodwill or
other intangible assets recorded. Operations prior to the Acquisition will be
those of Success Winner and its subsidiaries.
Regulatory
Approvals
The
business combination and the other transactions contemplated by the Acquisition
Agreement are not subject to any additional federal or state regulatory
requirements or approvals, including the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, or “HSR Act,” except for filings with the State of
Delaware and the British Virgin Islands necessary to effectuate the transactions
contemplated by the redomestication and the Acquisition
Agreement.
SUCCESS
WINNER SUMMARY FINANCIAL INFORMATION
The
following summary consolidated financial data, other than pro forma financial
information, have been derived from the audited consolidated financial
statements of Success Winner as of December 31, 2007 and 2008 and for the
years ended December 31, 2006, 2007 and 2008 and the unaudited financial
statements of Success Winner as of June 30, 2009 and for the six months
ended June 30, 2008 and 2009, included elsewhere in this proxy
statement/prospectus. The consolidated financial statements are prepared and
presented in accordance with generally International Financial Reporting
Standards, or IFRS. The consolidated statement of operations and statement of
cash flow data for the years ended December 31, 2006, 2007 and 2008 and the six
months ended June 30, 2008 and 2009, and Success Winner’s consolidated
balance sheet data as of December 31, 2007 and 2008 and June 30, 2008
are included elsewhere in this proxy statement/prospectus. The results of
operations of Success Winner in any period may not necessarily be indicative of
the results that may be expected for any future period. See “Risk Factors”
included elsewhere in this proxy statement/prospectus. The summary consolidated
financial information for those periods and as of those dates should be read in
conjunction with those consolidated financial statements and the accompanying
notes and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations of Success Winner” included elsewhere in this proxy
statement/prospectus.
|
For
the year ended December 31,
|
For
the six months ended June 30,
|
|||||||||||||||||||||||||||
|
2006
|
2007
|
2008
|
2008
|
2008
|
2009
|
2009
|
||||||||||||||||||||||
|
RMB
|
RMB
|
RMB
|
$
|
RMB
|
RMB
|
$
|
||||||||||||||||||||||
|
(In
thousands except per share and operating data)
|
||||||||||||||||||||||||||||
|
Summary
statement of operation data:
|
||||||||||||||||||||||||||||
|
Revenues
|
495,820 | 649,970 | 776,570 | 111,473 | 376,833 | 399,729 | 58,375 | |||||||||||||||||||||
|
Gross
profit
|
149,551 | 208,030 | 243,240 | 34,937 | 125,029 | 125,829 | 18,389 | |||||||||||||||||||||
|
Operating
income
|
113,794 | 163,706 | 187,300 | 26,902 | 97,743 | 98,342 | 14,372 | |||||||||||||||||||||
|
Net
income
|
101,254 | 145,606 | 165,017 | 23,702 | 86,217 | 74,265 | 10,853 | |||||||||||||||||||||
|
Basic
net (loss)/income per share
|
n/a | n/a | n/a | n/a | n/a | n/a | n/a | |||||||||||||||||||||
|
Diluted
net (loss)/income per share
|
n/a | n/a | n/a | n/a | n/a | n/a | n/a | |||||||||||||||||||||
|
For
the year ended December 31,
|
For
the six months ended
June
30,
|
|||||||||||||||||||||||||||
|
|
2006
|
2007
|
2008
|
2008
|
2008
|
2009
|
2009
|
|||||||||||||||||||||
|
|
RMB
|
RMB
|
RMB
|
$
|
RMB
|
RMB
|
$
|
|||||||||||||||||||||
|
|
(In
thousands)
|
|||||||||||||||||||||||||||
|
Summary
statement of cash flow data:
|
||||||||||||||||||||||||||||
|
Net
cash provided by operating activities
|
103,245 | 107,262 | 155,230 | 22,300 | 23,277 | 41,914 | 6,130 | |||||||||||||||||||||
|
Net
cash provided by/(used in) investing activities
|
(3,574 | ) | (4,156 | ) | (6,625 | ) | (950 | ) | (5,357 | ) | (243 | ) | (35 | ) | ||||||||||||||
|
Net
cash provided by/(used in) financing activities
|
(91,980 | ) | (97,192 | ) | (115,506 | ) | (16,600 | ) | 1,815 | (30 | ) | (4 | ) | |||||||||||||||
|
As of December 31,
|
As of June 30,
|
|||||||||||||||||||
|
|
2007
|
2008
|
2008
|
2009
|
2009
|
|||||||||||||||
|
|
RMB
|
RMB
|
$
|
RMB
|
$
|
|||||||||||||||
|
|
(In
thousands)
|
|||||||||||||||||||
|
Summary
balance sheet data:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
18,507 | 51,606 | 7,560 | 93,247 | 13,623 | |||||||||||||||
|
Working
capital
(1)
|
149,934 | 181,111 | 26,540 | 264,806 | 38,687 | |||||||||||||||
|
Total
assets
|
440,289 | 454,720 | 66,640 | 521,829 | 76,237 | |||||||||||||||
|
Share
capital
|
58,980 | 0 | 0 | 0 | 0 | |||||||||||||||
|
Retained
(deficit)/earnings
|
142,402 | 164,965 | 21,935 | 239,230 | 32,788 | |||||||||||||||
|
Total
shareholders’ equity
|
230,872 | 253,451 | 37,150 | 329,615 | 48,155 | |||||||||||||||
|
(1)
|
Working
capital is calculated as current assets minus current
liabilities.
|
SELECTED
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The
Acquisition is expected to be accounted for as a reverse recapitalization if,
immediately following completion of the transaction, the shareholders of Success
Winner and investors in Success Winner immediately prior to the Acquisition have
effective control of CHAC through (1) their shareholder interest in the
combined entity and excluding the Escrowed Shares, (2) significant
representation on the Board of Directors (initially three out of five members),
with two other board members being independent, and (3) being named to all of
the senior executive positions. For accounting purposes, Success Winner will be
deemed to be the accounting acquirer in the transaction and, consequently, the
transaction will be treated as a recapitalization of Success Winner, i.e., a
capital transaction involving the issuance of stock by CHAC for the stock of
Success Winner. Accordingly, the combined assets, liabilities and results of
operations of Success Winner will become the historical financial statements of
CHAC at the closing of the transaction, and CHAC’s assets (primarily cash and
cash equivalents), liabilities and results of operations will be consolidated
with Success Winner beginning on the acquisition date. No step-up in basis or
intangible assets or goodwill will be recorded in this transaction. All direct
costs of the transaction will be charged to operations in the period that such
costs are incurred.
Actual
results could differ from the pro forma information presented and depend on
several variables, including, pursuant to provisions in the Acquisition
Agreement, the release to Success Winner’s current shareholders in the aggregate
amount of up to 8,185,763 ordinary shares from an escrow account for achieving
certain income thresholds (as defined in the Acquisition Agreement) in each of
the three years ending December 31, 2009 through December 31, 2011, and two
stock price thresholds (as defined in the Acquisition Agreement) prior to April
30, 2012. Such Escrowed Shares will be recorded as an adjustment to the
accounting acquiree’s basis in the reverse recapitalization at par value, and
will be included in the calculations of earnings per share from that
date.
The
following unaudited pro forma condensed combined financial information has been
prepared assuming that the Acquisition (including the Redomestication) had
occurred (i) at the beginning of the pro forma statements of operations for the
six months ended June 30, 2009 and for the year ended December 31, 2008 and (ii)
at June 30, 2009 for the pro forma balance sheet. The unaudited pro forma
condensed combined financial information presents three possible scenarios for
the approval of the Acquisition by CHAC’s stockholders, as follows:
Assuming No Redemption of Shares:
This presentation assumes that no stockholders exercise their redemption
rights; and
Assuming 33.33% Public Stock
Redemption:
This presentation assumes the holders of 4,266,239 shares of
CHAC’s outstanding common stock (33.33%) exercise their redemption
rights.
Assuming 75% Public Stock
Redemption/Repurchase:
This presentation assumes that holders of 75% of
CHAC’s oustanding common stock either: (i) exercise their redemption rights or
(ii) enter into agreements for their shares to be repurchased immediately after
the closing.
The
unaudited pro forma condensed combined financial information is provided for
illustrative purposes only. The historical financial information in the
unaudited pro forma condensed combined balance sheet has been adjusted to give
effect to pro forma events that are directly attributable to the Acquisition and
are factually supportable. The historical financial information in the unaudited
pro forma condensed combined statements of operations has been adjusted to give
effect to pro form events that are directly attributable to the Acquisition, are
factually supportable, and are expected to have a continuing impact on the
combined results.
The
unaudited pro forma balance sheet data reflects the acquisition of Success
Winner as further discussed in the “Summary” section of this proxy
statement/prospectus. The historical balance sheet of CHAC at June 30, 2009 used
in the preparation of the unaudited pro forma financial information has been
derived from the audited balance sheet of CHAC at June 30, 2009.
For more
detailed financial information, see “Unaudited Pro Forma Consolidated
Financial Information”.
|
(In thousands of US Dollars, except per shares
amount)
|
Pro Forma Combined
Companies (with No
Stock Redemption)
|
Pro Forma Combined
Companies (with
33.33% Public Stock
Redemption)
|
Pro Forma Combined
Companies (with 75%
Public Stock
Redemption/Repurchase)
|
|||||||||
|
Income
Statement data:
|
||||||||||||
|
For
the year ended December 31, 2008
|
||||||||||||
|
Revenues
|
$ | 111,473 | $ | 111,473 | $ | 111,473 | ||||||
|
Gross
Profit
|
34,937 | 34,937 | 34,937 | |||||||||
|
Income
from operations
|
26,065 | 26,065 | 26,065 | |||||||||
|
Net
income
|
20,228 | 19,268 | 18,067 | |||||||||
|
Net
earnings per shares:
|
||||||||||||
|
Basic
|
$ | 1.00 | $ | 1.21 | $ | 1.71 | ||||||
|
Diluted
|
$ | 0.85 | $ | 0.99 | $ | 1.27 | ||||||
|
For
the six months ended June 30, 2009
|
||||||||||||
|
Revenues
|
$ | 58,375 | $ | 58,375 | $ | 58,375 | ||||||
|
Gross
Profit
|
18,389 | 18,389 | 18,389 | |||||||||
|
Income
from operations
|
14,093 | 14,093 | 14,093 | |||||||||
|
Net
income
|
7,247 | 7,164 | 7,060 | |||||||||
|
Net
earnings per shares:
|
||||||||||||
|
Basic
|
$ | 0.36 | $ | 0.45 | $ | 0.67 | ||||||
|
Diluted
|
$ | 0.30 | $ | 0.30 | $ | 0.50 | ||||||
|
Balance
Sheet data:
|
||||||||||||
|
Cash
and cash equivalents
|
$ | 90,450 | $ | 48,696 | $ | 11,494 | ||||||
|
Working
capital
|
116,008 | 74,254 | 22,052 | |||||||||
|
Total
assets
|
193,852 | 152,098 | 114,896 | |||||||||
|
Current
liabilities
|
28,118 | 28,118 | 43,118 | |||||||||
|
Total
shareholders’ equity
|
165,734 | 123,980 | 71,778 | |||||||||
COMPARATIVE
PER SHARE INFORMATION
The
following table sets forth selected historical per share information of Success
Winner and CHAC and unaudited pro forma combined per share ownership information
of Success Winner and CHAC after giving effect to the Acquisition Agreement in
which CHAC will issue 5,743,320 shares of common stock to all post-acquisition
shareholders in exchange for 100% equity interest in Success Winner. The
stock purchase transaction will be accounted for as a recapitalization of
Success Winner.
You
should read this information in conjunction with the selected historical
financial information, included elsewhere in this proxy statement/prospectus,
and the historical financial statements of Success Winner and CHAC and related
notes that are included elsewhere in this proxy statement/prospectus. The
unaudited Success Winner and CHAC pro forma combined per share information is
derived from, and should be read in conjunction with, the Unaudited Pro Forma
Combined Financial Information and related notes included elsewhere in this
proxy statement/prospectus. The historical per share information was derived
from the audited financial statements of Success Winner as of, and for, the
years ended December 31, 2006, December 31, 2007 and December 31, 2008 and from
the unaudited financial statements of Success Winner as of and for the six
months ended June 30, 2009.
The
unaudited pro forma combined per share information does not purport to represent
what the actual results of operations of Success Winner and CHAC would have been
had the companies been combined or to project the Success Winner and CHAC
results of operations that may be achieved after the stock
purchase.
|
Number of shares of common stock assumed
to be issued in stock purchase:
|
Success
Winner
|
CHAC
(1)
|
Combined
Company
(2)
|
|||||||||
|
Assuming
no stock redemption
|
5,743,320 | 14,400,000 | 20,143,000 | |||||||||
| 28.5 | % | 71.5 | % | 100.0 | % | |||||||
|
Assuming
33.33% public stock redemption
|
5.743,320 | 10,133,761 | 15,876,651 | |||||||||
| 36.2 | % | 63.8 | % | 100.0 | % | |||||||
|
Assuming
75% public stock redemption/repurchase
|
5,743,320 | 4,800,000 | 10,543,000 | |||||||||
| 54.5 | % | 45.5 | % | 100.0 | % | |||||||
|
Net
income (loss) per share – historical:
|
||||||||||||
|
Year
ended December 31, 2008 – basic
|
n/a | |||||||||||
|
Year
ended December 31, 2007 – basic
|
n/a | |||||||||||
|
Year
ended December 31, 2006 – basic
|
n/a | |||||||||||
|
Year
ended December 31, 2008 – diluted
|
n/a | |||||||||||
|
Year
ended December 31, 2007 – diluted
|
n/a | |||||||||||
|
Year
ended December 31, 2006 – diluted
|
n/a | |||||||||||
|
Six
months ended June 30, 2009, basic
|
n/a | |||||||||||
|
Six
months ended June 30, 2009, diluted
|
n/a | |||||||||||
|
Net
income per share – pro forma – basic:
|
||||||||||||
|
Year
ended December 31, 2008:
|
||||||||||||
|
No
stock redemption assumption
|
$ | 1.00 | ||||||||||
|
33.33%
Public stock redemption assumption
|
$ | 1.21 | ||||||||||
|
75%
Public stock redemption/repurchase assumption
|
$ | 1.71 | ||||||||||
|
Six
months ended June 30, 2009
|
||||||||||||
|
No
stock redemption assumption
|
$ | 0.36 | ||||||||||
|
33.33%
Public stock redemption assumption
|
$ | 0.45 | ||||||||||
|
75%
Public stock redemption assumption
|
$ | 0.67 | ||||||||||
|
Net
income per share – pro forma – diluted
|
||||||||||||
|
Year
ended December 31, 2008:
|
||||||||||||
|
No
stock redemption assumption
|
$ | 0.85 | ||||||||||
|
33.33%
Public stock redemption assumption
|
$ | 0.99 | ||||||||||
|
75%
Public stock redemption/repurchase assumption
|
$ | 1.27 | ||||||||||
|
Six
months ended June 30, 2009
|
||||||||||||
|
No
stock redemption assumption
|
$ | 0.30 | ||||||||||
|
33.33%
Public stock redemption assumption
|
$ | 0.37 | ||||||||||
|
75%
Public stock redemption assumption
|
$ | 0.50 | ||||||||||
|
Book
value per share June 30, 2009, historical
|
$ | n/a | ||||||||||
|
Book
value per common share December 31, 2008, historical
|
$ | n/a | ||||||||||
|
Book
value per share June 30, 2009, historical
|
$ | 5.08 | ||||||||||
|
Pro
forma – with no stock redemption – basic
|
$ | 8.23 | ||||||||||
|
Pro
forma – with 33.33% public stock redemption
– basic
|
$ | 7.81 | ||||||||||
|
Pro
forma – with 75% public stock redemption
|
$ | 6.81 | ||||||||||
Notes:
|
(1)
|
Historical
per share amounts for CHAC were determined based upon the shares
outstanding as of the periods
presented.
|
|
(2)
|
The
combined pro forma per share amounts for CHAC and Success Winner were
determined based upon the number of shares to be issued under the three
different levels of approval.
|
|
(3)
|
Redeemable
shares are not included in computation of historical book value per share
for Success Winner.
|
MARKET
PRICE INFORMATION
The
shares of CHAC’s common stock, warrants and units are traded on NYSE Amex, under
the symbols “HOL,” “HOL.WS” and “HOL.U,” respectively. Each of CHAC’s units
consists of one share of common stock and one warrant to purchase an additional
share of CHAC’s common stock. CHAC’s units commenced to trade on NYSE Amex on
November 16, 2007. CHAC’s common stock and warrants commenced to trade
separately from its units on December 17, 2007.
The
following tables set forth, for the calendar quarter indicated, the quarterly
high and low sale prices for CHAC’s units, common stock and warrants,
respectively, as reported on the NYSE Amex.
|
Units
|
Common Stock
|
Warrants
|
||||||||||||||||||||||
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
|||||||||||||||||||
|
2009
|
||||||||||||||||||||||||
|
Second
Quarter
|
$ | 9.65 | $ | 9.20 | $ | 9.58 | $ | 9.29 | $ | 0.14 | $ | 0.03 | ||||||||||||
|
First
Quarter
|
$ | 9.50 | $ | 8.21 | $ | 9.34 | $ | 8.83 | $ | 0.19 | $ | 0.02 | ||||||||||||
|
2008
|
||||||||||||||||||||||||
|
Fourth
Quarter
|
$ | 8.96 | $ | 6.00 | $ | 9.00 | $ | 8.20 | $ | 0.29 | $ | 0.01 | ||||||||||||
|
Third
Quarter
|
$ | 11.65 | $ | 9.40 | $ | 9.40 | $ | 9.00 | $ | 0.78 | $ | 0.18 | ||||||||||||
|
Second
Quarter
|
$ | 10.00 | $ | 9.24 | $ | 9.15 | $ | 8.86 | $ | 1.00 | $ | 0.35 | ||||||||||||
|
First
Quarter
|
$ | 9.85 | $ | 9.17 | $ | 9.10 | $ | 8.85 | $ | 0.95 | $ | 0.45 | ||||||||||||
|
2007
|
||||||||||||||||||||||||
|
Fourth
Quarter
|
$ | 9.95 | $ | 9.75 | $ | 9.00 | $ | 8.77 | $ | 0.92 | $ | 0.84 | ||||||||||||
Success Winner’s shares are not publicly
traded.
RISK
FACTORS
You
should consider carefully the following risk factors, as well as the other
information set forth in this proxy statement/prospectus, before making a
decision on the Acquisition.
Risk
Factors Relating to Hengda’s Business
Hengda
is reliant on its major customers.
Hengda’s
major customers, namely Foshan City Jundian Ceramics Co., Ltd, Xiamen Tongying
Trading Co., Ltd., Liaoning Yatong Logistics Co., Ltd. and Beijing Zhihe
Construction Industry Trading Co., Ltd. accounted for an aggregate of 36.60%,
30.61% and 27.27% of its sales in fiscal years 2006, 2007 and 2008. In general,
Hengda has cooperative agreements with its major customers. These agreements are
general in nature and do not impose legal obligations on its customers to
purchase from it and do not specify sales volume or price. There is no assurance
that Hengda will continue to retain these customers or that they will continue
to purchase its products at their current levels in the future. Hengda is
exposed to credit risks of its customers. If there is any reduction
or cancellation of purchase orders by these customers, or a termination of
relationship with these customers, Hengda’s revenues will be negatively
impacted.
Hengda
is exposed to the credit risks of its customers
Hengda’s
financial position and profitability is dependent on the creditworthiness of its
customers. Hengda is exposed to the credit risks of its customers and this risk
increases the larger the orders are. Hengda usually offer its customers credit
terms ranging from 90 to 120 days. Although there has not been any material
collection problem for trade receivables or bad debts in the last three fiscal
years, there is no assurance that Hengda will not encounter doubtful or bad
debts in the future. Should Hengda experience any unexpected delay or difficulty
in collections from its customers, its cash flows and financial results may be
adversely affected.
Hengda’s
major customers such as Foshan City Jundian Ceramics Co., Ltd, Xiamen Tongying
Trading Co., Ltd., Liaoning Yatong Logistics Co., Ltd. and Beijing Zhihe
Construction Industry Trading Co., Ltd. accounted for an aggregate of 36.60%,
30.61% and 27.27% of its total revenue in fiscal years 2006, 2007 and 2008
respectively. Hengda is particularly exposed to the credit risks of these
customers, as defaults in payment by its major customers would have a
significant impact on its cash flows and financial results.
Hengda
is dependent on the property and construction sector in the PRC and may
experience a decline in business if the demand for construction materials
decreases.
Hengda’s
businesses are closely related to the property and construction industries in
the PRC. Hengda’s products are sold to end users of its downstream
industries, the property and construction industry. If the property
and construction industry falls into a recession in the future, the demand for
construction materials, such as ceramic tiles, may consequently decrease and
have a significant adverse effect on Hengda’s business.
If
Hengda’s suppliers are unable to fulfill its orders for raw materials,
Hengda may lose business.
Hengda’s
suppliers are all located in the PRC. Its purchase of raw materials is based on
expected production
levels,
after taking into consideration, amongst other factors, forecast and actual
orders from its customers. To ensure that Hengda is able to deliver quality
products at competitive prices, Hengda need to secure sufficient quantities of
raw materials at acceptable prices and quality on a timely basis. Typically,
Hengda does not enter into any long-term supply agreements with its suppliers.
As such, there is no assurance that these suppliers will continue to supply
Hengda in the future. In the event Hengda’s suppliers are unable to fulfill its
orders or meet its requirements, Hengda may not be able to find timely
replacements at acceptable prices and quality, and this will in turn adversely
affect the fulfillment of its customers’ orders. Consequently, Hengda’s
reputation may be negatively affected, leading to a loss of business and
affecting its ability to attract new businesses.
Increases
in the price of raw materials will negatively impact Hengda’s
profitability.
In fiscal
years 2006, 2007 and 2008, Hengda’s cost of raw materials, which consist of clay
(comprising mainly of kaolin, flint and feldspar) and coal used to heat its
kilns, accounted for 45.1%, 46.6% and 44.3% of its total cost of sales
respectively. The price of clay and coal may fluctuate due to factors such as
global demand and supply conditions for such raw materials and changes in global
economic conditions. Any shortages or interruptions in the supply of clay or
coal will result in an increase in its cost of production, thus increasing its
cost of sales. If Hengda is not able to pass on such an increase to its
customers or is unable to find alternative sources of clay or coal or
appropriate substitute raw materials at comparable prices, it will have an
adverse effect on Hengda’s operations and financial performance.
Hengda
is dependent on its management team and any loss of Hengda’s key management
personnel without timely and suitable replacements may reduce its revenues and
profits.
Hengda
attributes its success to the experience, leadership and contributions of its
management team and is therefore dependent to a large extent on its ability to
retain its key management personnel, in particular its executive directors who
are responsible for formulating and implementing growth, corporate development
and overall business strategies. Hengda’s business is also dependent on its
executive officers who are responsible for implementing its business plans and
driving growth. Please refer to “Directors, Executive Officers, Executive
Compensation and Corporate Governance” in this Proxy for more information. The
demand for such experienced personnel is intense and the search for personnel
with the relevant skills set can be time consuming. The loss of Hengda’s key
management personnel without timely and suitable replacements may
reduce its revenue and profits.
Failure
to compete successfully with its competitors and new entrants to the ceramics
industry in the PRC may result in Hengda losing market share.
Hengda
operates in a competitive industry. Given the growth potential of its industry,
there is no assurance that Hengda will not face competition from its existing
competitors and new entrants. Hengda competes with a variety of companies, some
of which have advantages that include; longer operating history, larger
clientele base, superior products, better access to capital, personnel and
technology, or are better entrenched. Hengda’s competitors may be able to
respond more quickly to new and emerging technologies and changes in customer
requirements or succeed in developing products that are more effective or less
costly than Hengda’s products. Any increase in competition could have a negative
impact on Hengda’s pricing (thus eroding its profit margins) and reduce its
market share. If Hengda is unable to compete effectively with its existing and
future competitors and does not adapt quickly to changing market conditions, it
may lose market share.
Hengda
has not purchased product liability insurance and any product liability claims
must be paid by Hengda.
Accidents
may arise as a result of defects in Hengda’s products. If there are any defects
in the products designed and/or manufactured by Hengda, Hengda may face claims
from its customers or third parties for the damages suffered as a result of such
defects. Hengda has not purchased insurance coverage for product liability or
third party liability and is therefore not covered or compensated by insurance
in respect of losses, damages, claims and liabilities arising from or in
connection with product liability or third party liability.
Hengda’s
production facilities may be affected by power shortages which could result in a
loss of business.
Hengda’s
production facilities consume substantial amounts of electrical power, which is
the principal source of energy for its manufacturing operations. Although Hengda
has a back-up generator, it may experience occasional temporary power shortages
disrupting production due to power rationing activities conducted by the
authorities, thunderstorms or other natural events beyond its control.
Accordingly, these production disruptions could result in a loss of
business.
Hengda’s
research and development efforts may not result in marketable
products.
Hengda’s
R&D team develops products which Hengda has identified as having good
potential in the market.
There
is no assurance that Hengda will not experience delays in future product
developments. There is also no assurance that the products which Hengda is
currently developing or may develop in the future will be successful or that
Hengda will be able to market these new products to its customers successfully.
If its new products are unable to gain the acceptance of its customers or
potential customers, Hengda will not be able to generate future sales from its
investment in R&D.
Hengda
may not be able to ensure the successful implementation of its future plans and
strategies, resulting in reduced financial performance.
Hengda
intends to expand its production capacity, expand its market presence and
explore opportunities in strategic investments or alliances and acquisitions.
These initiatives involve various risks including, but not limited to, the
investment costs in setting up new production facilities, offices and sales
offices and working capital requirements. There is no assurance that any future
plan can be successfully implemented as the successful execution could depend on
several factors, some of which are not within its control. Failure to
successfully implement Hengda’s future plans or to effectively manage cost, may
lead to a material adverse change in its operating environment or affect its
ability to respond to market or industry changes, resulting in reduced financial
performance.
Hengda
may lose revenue if its intellectual property rights are not protected and
counterfeit HD brand products are sold in the market.
Hengda
believes its intellectual property rights are important to its success and
competitive position. A portion of its products are manufactured and marketed
under its “HD” label. Hengda has filed its “HD” label as a trademark in the PRC.
Hengda cannot assure you that there will not be any unauthorized usage or misuse
of its trademarks or that its intellectual property rights will be adequately
protected as it may be difficult and costly to monitor any infringements of its
intellectual property rights in the PRC. If Hengda cannot adequately protect its
intellectual property, it may lose revenue.
In
addition, Hengda believes the branding of its products and the brand equity in
its “HD” trademark is critical to its expansion effort and the continued success
of its business. Its efforts to build its brand may be undermined by the sale of
counterfeit goods. The counterfeiting of its products may increase if its
products become more popular.
In order
to preserve and enforce its intellectual property rights, Hengda may have to
resort to litigation against the infringing or counterfeiting parties. Such
litigation could result in substantial costs and diversion of management
resources which may have an effect on its financial performance.
Hengda
may inadvertently infringe third-party intellectual property rights, which could
negatively impact its business and financial results.
Hengda is
not aware of, nor has Hengda received any claims from third parties for, any
violations or infringements of intellectual property rights of third parties by
it. Nevertheless, there can be no assurance that as Hengda develops new product
designs and production methods, Hengda would not inadvertently infringe the
intellectual property rights of others or others would not assert infringement
claims against Hengda or claim that Hengda has infringed their intellectual
property rights. Claims against Hengda, even if untrue or baseless, could result
in significant costs, legal or otherwise, cause product shipment delays, require
it to develop non-infringing products, enter into licensing agreements or may be
a distraction to its management. Licensing agreements, if required, may not be
available on terms acceptable to Hengda or at all. In the event of a successful
claim of intellectual property rights infringement against Hengda and its
failure or inability to develop non-infringing products or to license the
infringed intellectual property rights in a timely or cost-effective basis, its
business and/or financial results will be negatively impacted.
Hengda
may become subject to foreign exchange risk
Hengda
currently do not have any foreign exchange exposure as its sales and purchases
are predominantly denominated in RMB. However, in the future, a proportion of
its sales may be denominated in other currencies as Hengda expands into overseas
markets. In such circumstances, Hengda may be subject to foreign
currency fluctuations in the future.
Hengda’s
manufacturing activities are dependent upon availability of skilled and
unskilled labor, a deficiency of which could result in a reduction in
profits.
Hengda’s
manufacturing activities are relatively labor intensive and dependent on
availability of skilled and unskilled labor in large numbers. Large labor
intensive operations call for good monitoring and maintenance of cordial
relations. Non-availability of labor and/or any disputes between the labor and
the management may result in a reduction in profits. Further, Hengda relies on
contractors who engage on-site laborers for performance of many of its unskilled
operations. The scarcity or unavailability of Contract laborers may affect
Hengda’s operations and financial performance.
Hengda
faces increasing labor costs and other costs of production in the PRC, which
could materially adversely affect its profitability.
The
ceramic tile manufacturing industry is labor intensive. Labor costs in China
have been increasing in recent years and Hengda’s labor costs in the PRC could
continue to increase in the future. If labor costs in the PRC continue to
increase, Hengda’s production costs will likely increase which may in turn
affect the selling prices of Hengda’s products. Hengda may not
be able to pass on these increased costs to consumers by increasing the selling
prices of its products in light of competitive pressure in the markets where it
operates. In such circumstances, its profit margin may decrease.
Compliance
with Foreign Corrupt Practices Act could subject us to penalties and other
adverse consequences.
The
post-acquisition company will be subject to the United States Foreign Corrupt
Practices Act, which generally prohibits United States public companies from
engaging in bribery of or other prohibited payments to foreign officials to
obtain or retain business. While Hengda will take precautions to educate their
employees of the Foreign Corrupt Practices Act, there can be no assurance that
Hengda or the employees or agents of its subsidiaries will not engage in such
conduct, for which Hengda might be held responsible. Hengda could suffer
penalties that may have a material adverse effect on its business, financial
condition and results of operations.
Risk
Factors Relating to Operations In China
Hengda
is dependent on political, economic, regulatory and social conditions in the
PRC
Approximately
95% of Hengda’s revenue in the last three fiscal years were derived from the PRC
market and anticipates that the PRC market will continue to be the major source
of revenue for the foreseeable future. Accordingly, any significant slowdown in
the PRC economy or decline in demand for its products from its customers in the
PRC will have an adverse effect on its business and financial performance.
Furthermore, as Hengda’s operations and production facilities located in the PRC
any unfavorable changes in the social and/or political conditions may also
adversely affect its business and operations.
While the
current policy of the PRC government seems to be one of imposing economic reform
policies to encourage foreign investments and greater economic decentralization,
there is no assurance that such a policy will continue to prevail in the future.
There is no assurance that Hengda’s operations will not be adversely affected
should there be any policy changes.
Hengda
is subject to risks related to the laws and regulations of the PRC and the
interpretation and implementation thereof
Hengda’s
business and operations, as well as those of its customers and suppliers in the
PRC are subject to the laws and regulations promulgated by the PRC government.
The PRC government is still in the process of developing a comprehensive set of
laws and regulations in the course of the PRC’s transformation from a centrally
planned economy to a more free market oriented economy. As the legal system in
the PRC is still in flux, laws and regulations or their interpretation may be
subject to change. Furthermore, any change in the political and economic policy
of the PRC government may also result in similar changes in the laws and
regulations or the interpretation thereof. Such changes may adversely affect
Hengda’s operations and business in the PRC.
The PRC
legal system is a codified legal system comprising written laws, regulations,
circulars, administrative directives, and internal guidelines as well as
judicial interpretations. Decided cases do not form part of the legal structure
of the PRC and thus have no binding effect. As such, the administration of PRC
laws and regulations may be subject to a certain degree of discretion by the
authorities. This has resulted in the outcome of dispute resolutions not having
the level of consistency or predictability as in other countries with more
developed legal systems. Due to such inconsistency and unpredictability, if
Hengda should be involved in any legal dispute in the PRC, Hengda may experience
difficulties in obtaining legal redress or in enforcing its legal
rights.
From time
to time, changes in law and regulations or the implementation thereof may also
require Hengda to obtain additional approvals and licenses from the PRC
authorities for carrying out its operations in the PRC which would incur
additional expenses in order to comply with such requirements and in turn affect
its financial performance with the increase in its business costs. Furthermore,
there can be no assurance that approvals or licenses will be granted to Hengda
promptly or at all. If Hengda experiences delays in obtaining or are unable to
obtain such required approvals or licenses, its operations and business in the
PRC, and hence its overall financial performance will be adversely
affected.
Hengda’s business activities are
subject to certain PRC laws and regulations
As its
production and operations are carried out in the PRC, Hengda is subject to
certain PRC laws and regulations. In addition, being a wholly foreign-owned
enterprise, Hengda is required to comply with certain laws and regulations.
Pursuant to PRC laws and regulations, the breach or non-compliance with such
laws and regulations may result in the PRC authorities suspending, withdrawing
or terminating its business license, causing Hengda to cease production of all
or certain of its products, and this would materially and adversely affect its
business and financial performance.
The
corporate affairs of Hengda in the PRC are governed by its articles of
association and the corporate and foreign investment laws and regulations of the
PRC. The principles of the PRC laws relating to matters such as the fiduciary
duties of directors and other corporate governance matters and foreign
investment laws in the PRC are relatively new. Hence, the enforcement of
investors or shareholders’ rights under the articles of association of a PRC
company and the interpretation of the relevant laws relating to corporate
governance matters remain largely untested in the PRC.
PRC
foreign exchange control may limit its ability to utilize its profits
effectively and affect its ability to receive dividends and other payments from
its PRC subsidiary
Hengda is
a foreign investment enterprise (“FIE”) and is subject to the rules and
regulations in the PRC on currency conversion. In the PRC, SAFE regulates the
conversion of the RMB into foreign currencies. Currently, FIEs are required to
apply to SAFE for “Foreign Exchange Registration Certificates for Foreign
Investment Enterprise”. With such registration certifications (which need to be
renewed annually), FIEs are allowed to open foreign currency accounts including
the “current account” and “capital account”. Currently, conversion of currency
within the scope of the “current account” (e.g. remittance of foreign currencies
for payment of dividends, etc.) can be effected without requiring the approval
of SAFE. However, conversion of currency in the “capital account” (e.g. for
capital items such as direct investments, loans, securities, etc.) still
requires the approval of SAFE.
On 21
October 2005, SAFE promulgated the “Notice on Issues concerning Foreign Exchange
Management in Financing by PRC Residents by Overseas Special Purpose Vehicle and
Return Investments” (the “No. 75 Notice”). The No. 75 Notice came into effect on
November 1, 2005 and requires the following matters, among others, to be
complied with: Every PRC domestic resident who establishes or controls an
overseas special purpose vehicle (“SPV”) must apply to the local bureau of SAFE
for an “overseas investment foreign exchange registration”.
Every PRC
domestic resident of an SPV who has completed the “overseas investment foreign
exchange registration” (the “Registrant”) must make an application to the local
bureau of SAFE to amend their registration particulars upon (i) the injection of
any PRC domestic assets or the equity interests of any PRC domestic company
owned by the PRC domestic resident into the SPV, and (ii) the implementation of
any overseas equity fund-raising by the SPV following an injection of PRC
domestic assets or the equity interests of a PRC domestic company; every
Registrant must apply to the local bureau of SAFE for change of registration
particulars or recordation within 30 days after the occurrence of any capital
increase or reduction, changes in shareholdings or share swap, merger, long-term
investment in equities or debentures, guarantee of foreign indebtedness and
other major capital changes not involving “return investment”, undertaken by an
SPV; and every Registrant must repatriate, within 180 days, dividends or profits
which he receives from an SPV and/or income derived from changes in the
shareholding of an SPV.
There can
be no assurance that SAFE will not continue to issue new rules and regulations
and/or further interpretations of the New Notice that will strengthen the
foreign exchange control. As its operating subsidiary is located in the PRC and
a significant portion of Hengda’s sales are denominated mainly in RMB, the
ability of Hengda to pay dividends or make other distributions may be restricted
by PRC foreign exchange control restrictions. There can be no assurance that the
relevant regulations will not be amended to its detriment and that the ability
of Hengda to distribute dividends will not be adversely affected.
Introduction
of new laws or changes to existing laws by the PRC government may adversely
affect its business
The PRC
legal system is based on the PRC Constitution and is made up of written laws,
regulations, circulars and directives. With the PRC’s entry into the WTO, the
PRC government is in the process of developing its legal system so as to
encourage foreign investments and to meet the needs of investors. As the PRC
economy is developing at a generally faster rate than its legal system, some
degree of uncertainty exists in connection with whether and how existing laws
and regulations will apply to certain events or circumstances. Some of the laws
and regulations, and the interpretation, implementation and enforcement thereof,
are still at the experimental stage and therefore subject to policy changes.
This in turn, may have an adverse impact on Hengda’s sales and profitability.
There is no assurance that the introduction of new laws or regulations, changes
to existing laws and regulations and the interpretation or application thereof
or the delays in obtaining approvals from the relevant PRC authorities will not
have an adverse impact on Hengda’s business or prospects.
In
particular, on August 8, 2006, the Ministry of Commerce (the “MOC”), the China
Securities Regulatory Commission (the “CSRC”), the State-owned Assets
Supervision and Administration Commission, the State Administration of Taxation,
the State Administration of Industry and Commerce and the State Administration
of Foreign Exchange promulgated the “Rules on the Mergers and Acquisition of
Domestic Enterprises by Foreign Investors’ (the “M&A Rules”) which came into
effect on September 8, 2006. Foreign investors should comply with the M&A
rules when they purchase shareholding equities of a domestic non-foreign-funded
enterprise or subscribe to the increased capital of a domestic company, and thus
changing the nature of the domestic company into a foreign investment
enterprise. The M&A Rules stipulate, inter alia, (i) that the acquisition of
a PRC non-foreign-funded enterprise by an affiliated foreign enterprise
established or controlled by PRC entities or individuals must be approved by MOC
(the “MOC Approval”); (ii) that the incorporation of a special purpose vehicles
(the “SPV”), which is directly or indirectly controlled by PRC entities or
individuals for the purpose of an overseas listing of the equity interest of a
PRC non-foreign-funded enterprise, must be subject to the MOC Approval; (iii)
that the acquisition of a PRC non-foreign-funded enterprise by SPV shall be
subject to the MOC Approval; and (iv) the offshore listing of an SPV shall be
subject to the prior approval from CSRC (the “CSRC Approval”).
Hills
& Co., legal counsel to Hengda on PRC law, are of the opinion that as Hengda
was incorporated as FIE and the Company does not fall within the scope of being
classified as SPV directly or indirectly established or controlled by PRC
entities or individuals, the M&A Rules does not apply to the business
combination, and Hengda will not be required to obtain the approval from MOC,
the approval from CSRC and/or any other approvals from PRC government
authorities as stipulated by the M&A Rules. There is
however no assurance that the PRC authorities will not issue further directives,
regulations, clarifications or implementation rules, which may require Hengda to
obtain further approvals with respect to the business combination.
Environmental,
health and safety laws could impose material liabilities on Hengda and could
require Hengda to incur material capital and operational costs.
Hengda is
subject to environmental, health and safety laws and regulations in the PRC that
impose controls on its air, water and waste discharges, on its storage,
handling, use, discharge and disposal of chemicals, and on exposure of its
employees to hazardous substances. These laws and regulations could require
Hengda to incur costs to maintain compliance and could impose liability to
remedy the effects of hazardous substance contamination. Although Hengda does
not believe that it has violated any of such laws and regulations and therefore
has not incurred any significant liabilities under these laws and regulations in
the past, the environmental laws and regulations are constantly evolving and
becoming stricter in the PRC. The adoption of new laws or regulations or its
failure to comply with these laws or regulations in the future could cause us to
incur material liabilities and require us to incur additional expenses, curtail
its operations and restrict its ability to expand.
Risk
Factors Relating to CHAC
CHAC
will be forced to liquidate if we cannot consummate a business combination. In
the event of a liquidation, our public stockholders will receive less than
$10.00 per share and our warrants will expire worthless.
If we are
unable to complete a business combination by November 21, 2009 and are forced to
liquidate our assets, the per-share liquidation distribution will be less than
$10.00 because of the expenses of the IPO, our general and administrative
expenses and the costs of seeking potential business combination candidates.
Furthermore, there will be no distribution with respect to our outstanding
warrants which will expire worthless if we liquidate as a result of our failure
to complete a business combination.
You
must tender your CHAC shares in order to validly seek conversion at the special
meeting
In
connection with tendering your shares for conversion, you must elect either to
physically tender your stock certificates to CHAC’s transfer agent prior to the
special meeting or to deliver your shares to the transfer agent electronically
using The Depository Trust Company’s DWAC (Deposit/Withdrawal At Custodian)
System, which election would likely be determined based on the manner in which
you hold your shares. The requirement for physical or electronic delivery prior
to the special meeting ensures that a converting holder’s election to convert is
irrevocable once the Business Combination is approved. In furtherance of such
irrevocable election, stockholders electing to convert will not be able to
tender their shares at the special meeting. Any failure to observe these
procedures will result in your loss of conversion rights in connection with the
vote on the Business Combination.
Our
stockholders may be held liable for claims by third parties against us to the
extent of distributions received by them.
Our
amended and restated certificate of incorporation provides that we will continue
in existence only until November 21, 2009 (unless extended for another year if
approved by a vote of our stockholders). If we have not completed a business
combination by such date and amended this provision in connection thereto,
pursuant to the Delaware General Corporation Law, our corporate existence will
cease except for the purposes of winding up our affairs and liquidating. Under
Sections 280 through 282 of the Delaware General Corporation Law, stockholders
may be held liable for claims by third parties against a corporation to the
extent of distributions received by them in a dissolution. If the corporation
complies with certain procedures set forth in Section 280 of the Delaware
General Corporation Law intended to ensure that it makes reasonable provision
for all claims against it, including a 60-day notice period during which any
third-party claims can be brought against the corporation, a 90-day period
during which the corporation may reject any claims brought, and an additional
150-day waiting period before any liquidating distributions are made to
stockholders, any liability of stockholders with respect to a liquidating
distribution is limited to the lesser of such stockholder’s pro rata share of
the claim or the amount distributed to the stockholder, and any liability of the
stockholder would be barred after the third anniversary of the dissolution.
However, it is our intention to make liquidating distributions to our
stockholders as soon as reasonably possible after November 21, 2009 (unless
extended for another year if approved by a vote of our stockholders) and,
therefore, we do not intend to comply with those procedures. Because we will not
be complying with those procedures, we are required, pursuant to Section 281 of
the Delaware General Corporation Law, to adopt a plan that will provide for our
payment, based on facts known to us at such time, of (i) all existing claims,
(ii) all pending claims and (iii) all claims that may be potentially brought
against us within the subsequent 10 years. Accordingly, we would be required to
provide for any creditors known to us at that time or those that we believe
could be potentially brought against us within the subsequent 10 years prior to
distributing the funds held in the trust to stockholders. We cannot assure you
that we will properly assess all claims that may be potentially brought against
us. As such, our stockholders could potentially be liable for any claims to the
extent of distributions received by them (but no more) and any liability of our
stockholders may extend well beyond the third anniversary of such date.
Accordingly, we cannot assure you that third parties will not seek to recover
from our stockholders amounts owed to them by us.
If we are
forced to file a bankruptcy case or an involuntary bankruptcy case is filed
against us which is not dismissed, any distributions received by stockholders
could be viewed under applicable debtor/creditor and/or bankruptcy laws as
either a “preferential transfer” or a “fraudulent conveyance.” As a result, a
bankruptcy court could seek to recover all amounts received by our stockholders.
Furthermore, because we intend to distribute the proceeds held in the Trust
Account to our public stockholders promptly after November 21, 2009 (unless
extended for another year if approved by a vote of our stockholders), this may
be viewed or interpreted as giving preference to our public stockholders over
any potential creditors with respect to access to or distributions from our
assets. Furthermore, our board may be viewed as having breached their fiduciary
duties to our creditors and/or may have acted in bad faith, and thereby exposing
itself and our company to claims of punitive damages, by paying public
stockholders from the Trust Account prior to addressing the claims of creditors.
We cannot assure you that claims will not be brought against us for these
reasons.
An
investor will only be able to exercise a warrant if the issuance of common stock
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.
Our
warrants will become exercisable if the business combination is completed,
provided, however, that no warrants held by public stockholders will be
exercisable and we will not be obligated to issue shares of common stock unless
the common stock 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. CHAC is only required to use its best efforts to
register the warrants. Because the exemptions from qualification in certain
states for resales of warrants and for issuances of common stock 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 common stock 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 either become listed on a national
securities exchange, which would provide an exemption from registration in every
state, or we would register the warrants in every state (or seek another
exemption from registration in such states). Accordingly, we believe holders in
every state will be able to exercise their warrants as long as our prospectus
relating to the common stock 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 common
stock issuable upon such exercise is not qualified or exempt from qualification
in the jurisdictions in which the holders of the warrants
reside.
All
of our officers and directors own shares of our common stock and warrants which
will not participate in liquidation distributions and therefore they may have a
conflict of interest in determining whether the business combination is
appropriate.
All of
our officers and directors own an aggregate 3,084,920 shares of our common stock
that were issued prior to the IPO and purchased an aggregate of 2,651,000
insider warrants upon consummation of the IPO. Such individuals have waived
their right to receive distributions with respect to those shares upon our
liquidation if we are unable to consummate a business combination. Based on a
market price of $9.64 per share on August 20, 2009 and $0.34 per warrant on
August 19, 2009, the value of these shares was approximately $29,739,000 and the
value of these warrants was approximately $901,000. The shares acquired prior to
the IPO, as well as the insider warrants, and any warrants purchased by our
officers or directors in the 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 Success Winner as a suitable target business may
result in a conflict of interest when determining whether the terms, conditions
and timing of the business combination are appropriate and in our stockholders’
best interest.
We
will not obtain an opinion from an unaffiliated third party as to the fair
market value of the target business with which we complete a business
combination or that the price we are paying for the business is fair to our
stockholders from a financial point of view.
We are
not required to obtain an opinion from an unaffiliated third party that the
target business we select has a fair market value in excess of at least 80% of
our net assets. We are also not required to obtain an opinion from such an
unaffiliated third party indicating that the price we are paying is fair to our
stockholders from a financial point of view unless the target is affiliated with
our officers, directors, special advisors, existing stockholders or their
affiliates. We do not expect to obtain any such opinion in connection with the
business combination. Our stockholders, therefore, will be relying on the
judgment of our board of directors, whose collective experience in business
evaluations for blank check companies, like ours, is not
significant.
If
our initial stockholders exercise their registration rights with respect to
their initial shares, it may have an adverse effect on the market price of our
common stock and the existence of these rights may make it more difficult to
effect a business combination.
Our
initial stockholders 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. If our initial stockholders
exercise their registration rights with respect to all of their initial shares,
then there will be an additional 1,600,000 shares of common stock (or 8% of the
outstanding common stock) eligible for trading in the public market. The
presence of these additional shares of common stock trading in the public market
may have an adverse effect on the market price of our common stock. In addition,
the existence of these rights may make it more difficult to effectuate a
business combination or increase the cost of completing a business combination
with the target business, as the stockholders 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 common stock.
If
the Acquisition’s benefits do not meet the expectations of financial or industry
analysts, the market price of CHAC’s common stock may decline.
The
market price of CHAC’s common stock may decline as a result of the acquisition
if:
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CHAC
does not achieve the perceived benefits of the acquisition as rapidly as,
or to the extent anticipated by, financial or industry analysts;
or
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the
effect of the acquisition on our financial statements is not consistent
with the expectations of financial or industry
analysts.
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Accordingly,
investors may experience a loss as a result of a decreasing stock
price.
CHAC’s
directors may have certain conflicts in determining to recommend the acquisition
of Hengda, since certain of their interests, and certain interests of their
affiliates and associates, are different from, or in addition to, your interests
as a stockholder.
CHAC’s
management and directors have interests in and arising from the acquisition of
Hengda that are different from, or in addition to, your interests as a
stockholder, which could result in a real or perceived conflict of interest.
These interests include the fact that certain of the shares of common stock
owned by CHAC’s management and directors, or their affiliates and associates,
would become worthless if the Acquisition Proposal is not approved and CHAC
otherwise fails to consummate a business combination prior to its liquidation
date and that CHAC’s chairman of the board is entitled to receive additional
shares of common stock if CHAC consummates a business combination prior to its
liquidation date.
Risk
Factors Relating to the Acquisition
China
Ceramics and Success Winner are incorporated in the British Virgin Islands and
the operating subsidiary of Success Winner is incorporated in China. These
jurisdictions may not afford similar investor protection as afforded by
jurisdictions in the United States.
China
Ceramics’ and Success Winner’s corporate affairs are governed by their
respective memoranda and articles of association and by the BVI Business
Companies Act and the common law of the British Virgin Islands. In
addition, Hengda is incorporated in China and governed by the laws of the
People’s Republic of China. Investor rights protection and the rights and
fiduciary responsibilities of officers and directors under the laws of British
Virgin Islands and the People’s Republic of China may not be as well established
as the rights and fiduciary responsibilities of directors under statutes or
judicial precedent in existence in certain United States jurisdictions.
Therefore, China Ceramics’ shareholders may have more difficulty in protecting
their interests in the face of actions by the management, directors or
controlling shareholders than would shareholders of a corporation incorporated
in a United States jurisdiction.
Because
China Ceramics and Success Winner are incorporated under the laws of the British
Virgin Islands and their management members are located in China, it may be
difficult to serve China Ceramics, Success Winner or their management members
with legal process or enforce judgments against them, their directors or their
management.
China
Ceramics and Success Winner are incorporated under the laws of the British
Virgin Islands with substantially all of their assets located outside of the
United States. Their principal executive offices will be located outside the
United States and all of their directors and officers will reside outside the
United States. As a result, it may be difficult or impossible for you to bring
an action against China Ceramics, Success Winner, their directors or their
management in the United States if you believe that your rights have been
infringed under securities laws or otherwise. Even if you are successful in
bringing an action of this kind, the laws of the British Virgin Islands and of
other jurisdictions may prevent or restrict you from enforcing a judgment
against China Ceramics’ or Success Winner’s assets or their directors and
officers.
China
Ceramics is unlikely to pay cash dividends in the foreseeable
future.
China
Ceramics currently intend to retain any future earnings for use in the operation
and expansion of its business. China Ceramics does not expect to pay cash
dividends in the foreseeable future but will review this policy as circumstances
dictate. Should we decide in the future to do so, as a holding company, China
Ceramics’ ability to pay dividends and meet other obligations depends upon the
receipt of dividends or other payments from its operating subsidiaries. In
addition, its operating subsidiaries, particularly those in the PRC, from time
to time, may be subject to restrictions on its ability to make distributions to
it, including as a result of restrictions on the conversion of local currency
into U.S. dollars or other hard currency and other regulatory
restrictions.
CHAC
and Success Winner have incurred and expect to incur significant costs
associated with the Acquisition. Whether or not the Acquisition is completed,
the incurrence of these costs will reduce the amount of cash available to be
used for other corporate purposes by China Ceramics if the Acquisition is
completed or by CHAC if the Acquisition is not completed.
CHAC and
Success Winner expect to incur significant costs associated with the
Acquisition. Whether or not the Acquisition is completed, CHAC expects to incur
approximately $600,000 in expenses. These expenses will reduce the amount of
cash available to be used for other corporate purposes by China Ceramics if the
Acquisition is completed or by CHAC if the Acquisition is not
completed.
If
any funds held in CHAC’s trust account are used to purchase shares of CHAC from
holders who would have otherwise voted against the transaction,
CHAC’s shareholders who purchased shares in CHAC’s initial public
offering may be entitled to rescission rights.
CHAC’s
initial public offering prospectus did not disclose that funds in the trust
account might be used to purchase shares from holders thereof who have indicated
their intention to vote against the acquisition and convert their shares into
cash. Consequently, such use of the funds in the trust account might be grounds
for a holder of CHAC’s public stock who purchased such shares in CHAC’s initial
public offering, to seek rescission of the purchase of the units the holder
acquired in the IPO. A successful claimant for damages under federal or state
law could be awarded an amount to compensate for the decrease in value of the
shares caused by the alleged violation, together with interest, while retaining
the shares.
CHAC
may waive one or more of the conditions to the Acquisition without resoliciting
stockholder approval for the Acquisition.
CHAC may
agree to waive, in whole or in part, some of the conditions to its obligations
to complete the Acquisition, to the extent permitted by applicable laws. The
board of directors of CHAC will evaluate the materiality of any waiver to
determine whether amendment of this proxy statement/prospectus and
resolicitation of proxies is warranted. In some instances, if the board of
directors of CHAC determines that a waiver is not sufficiently material to
warrant resolicitation of stockholders, CHAC has the discretion to complete the
Acquisition without seeking further stockholder approval. For example, it is a
condition to CHAC’s obligations to close the Acquisition that there be no
restraining order, injunction or other order restricting Success Winner’s
conduct of its business, however, if the board of directors of CHAC determines
that any such order or injunction is not material to the business of Success
Winner, then such the board may elect to waive that condition and close the
Acquisition.
There
will be a substantial number of China Ceramics’ ordinary shares available for
sale in the future that may adversely affect the market price of China Ceramics’
ordinary shares.
CHAC
currently has authorized share capital of 41,000,000 shares consisting of
40,000,000 shares of common stock with a par value of $0.001 per share and
1,000,000 shares of preferred stock with a par value of $0.0001 per share. China
Ceramics currently is authorized to issue 51,000,000 shares of a single
class.
The
shares to be issued in the business combination to the post-acquisition
shareholders will be subject to lock-up as set forth in the Acquisition
Agreement and cannot be sold for twelve months (or in certain cases, six months)
from the date of the Acquisition. Assuming that all shareholders of Success
Winner participate in the business combination so as to receive shares of China
Ceramics after the expiration of the lock-up period, there will then be an
additional 5,743,320 shares that are eligible for trading in the public market.
Further, China Ceramics has agreed in the Acquisition Agreement to place in
escrow an additional 8,185,763 shares, which shall be release if certain
performance targets are met. The availability of such a significant number of
securities for trading in the public market may have an adverse effect on the
market price of China Ceramics’ shares.
China
Ceramics’ working capital will be reduced if CHAC stockholders exercise their
right to convert their shares into cash. This would reduce cash reserves after
the Acquisition.
Pursuant
to CHAC’s certificate of incorporation, holders of shares issued in CHAC’s
initial public offering may vote against the business combination and demand
that CHAC convert their shares into cash. CHAC will not consummate the business
combination if holders of 33.33% or more shares of common stock issued in CHAC’s
initial public offering exercise these conversion rights. To the extent the
business combination is consummated and holders have demanded to so convert
their shares, there will be a corresponding reduction in the amount of funds
available to the combined company following the Acquisition. As of June 30,
2009, assuming the Acquisition Agreement is adopted, the maximum amount of funds
that could be disbursed to CHAC’s stockholders upon the exercise of their
conversion rights is approximately $40.4 million, or approximately 33.33% of the
funds then held in the Trust Account. Any payment upon exercise of conversion
rights will reduce cash reserves after the Acquisition.
There
is a risk that China Ceramics could be treated as a U.S. domestic corporation
for U.S. federal income tax purposes after the merger and business combination,
which could result in significantly greater U.S. federal income tax liability to
China Ceramics.
Section
7874(b) of the Code generally provides that a corporation organized outside the
United States that acquires, directly or indirectly, pursuant to a plan or
series of related transactions substantially all of the assets of a corporation
organized in the United States will be treated as a domestic corporation for
U.S. federal income tax purposes if shareholders of the acquired corporation, by
reason of owning shares of the acquired corporation, own at least 80% (of either
the voting power or the value) of the stock of the acquiring corporation after
the acquisition. Under temporary regulations recently promulgated under Section
7874, a warrant holder of either the acquired corporation or the acquiring
corporation generally is treated for this purpose as owning stock of the
acquired corporation or the acquiring corporation, as the case may be, with a
value equal to the excess of the value of the shares underlying the warrant over
the exercise price of the warrant. If Section 7874(b) were to apply to the
merger, then, among other things, China Ceramics, as the surviving entity, would
be subject to U.S. federal income tax on its worldwide taxable income following
the merger and business combination as if China Ceramics were a domestic
corporation.
Although
we do not expect that Section 7874(b) will apply to treat China Ceramics as a
domestic corporation for U.S. federal income tax purposes, due to the absence of
full guidance on how the rules of Section 7874(b) will apply to the transactions
contemplated by the merger and business combination, this result is not entirely
free from doubt. As a result, stockholders and warrant holders are urged to
consult their own tax advisors on this issue. See the discussion in the section
entitled “Material U.S. Federal Income Tax Consequences — Tax Consequences of
the Merger — Tax Consequences to CHAC and China Ceramics.” The balance of this
discussion assumes that China Ceramics will be treated as a foreign corporation
for U.S. federal income tax purposes.
CHAC
should recognize gain (but not loss) for U.S. federal income tax purposes as a
result of the merger, which would result in increased U.S. federal income tax
liability to CHAC.
As a
result of the merger, CHAC should recognize gain (but not loss) for U.S. federal
income tax purposes equal to the excess, if any, of the fair market value of
each of its assets over such asset’s adjusted tax basis at the effective time of
the merger. For this purpose, the valuation of CHAC’s assets at the time of
merger may take into account a variety of factors, including possibly the fair
market value of CHAC’s shares immediately prior to the merger. Since any such
gain will be determined based on the value of its assets at that time, the
amount of such gain (and any U.S. federal income tax liability to CHAC by reason
of such gain) cannot be determined at this time. Any U.S. federal income tax
liability incurred by CHAC as a result of such gain should become a liability of
China Ceramics by reason of the merger. Stockholders and warrant holders are
urged to consult their own tax advisors on this tax issue and other tax issues
in connection with the merger. See the discussion in the section entitled
“Material U.S. Federal Income Tax Consequences — Tax Consequences of the Merger
— Tax Consequences to CHAC and China Ceramics.”
There
is a risk that China Ceramics will be classified as a passive foreign investment
company, or “PFIC,” which could result in adverse U.S. federal income tax
consequences to U.S. holders of ordinary shares or warrants of China
Ceramics.
In
general, China Ceramics will be treated as a PFIC for any taxable year of China
Ceramics in which either (1) at least 75% of its gross income (including the
gross income of certain 25% or more-owned corporate subsidiaries) is passive
income or (2) at least 50% of the average value of its assets (including the
assets of certain 25% or more-owned corporate subsidiaries) produce, or are held
for the production of, passive income. Passive income generally includes
dividends, interest, rents, royalties, and gains from the disposition of passive
assets. If China Ceramics is determined to be a PFIC for any taxable year (or
portion thereof) of China Ceramics that is included in the holding period of a
U.S. Holder for China Ceramics’ ordinary shares or warrants, the U.S. holder may
be subject to increased U.S. federal income tax liability and may be subject to
additional reporting requirements. Based on the expected composition of the
assets and income of China Ceramics and its subsidiaries after the merger and
business combination, we do not anticipate that China Ceramics will be treated
as a PFIC following the merger and business combination. The actual PFIC status
of China Ceramics for its current taxable year or any subsequent taxable year,
however, will not be determinable until after the end of such taxable year.
Accordingly, there can be no assurance with respect to the status of China
Ceramics as a PFIC for its current taxable year or any future taxable year. U.S.
holders of CHAC’s stock and warrants are urged to consult their own tax advisors
regarding the possible application of the PFIC rules. See the discussion in the
section entitled “Material U.S. Federal Income Tax Consequences — Tax
Consequences to U.S. Holders of Ordinary Shares and Warrants of China Ceramics —
Passive Foreign Investment Company Rules.”
Under
PRC Enterprise Income Tax Law, or “EIT Law”, China Ceramics, Success Winner and
Stand Best each may be classified as a “resident enterprise” of the PRC. Such
classification could result in unfavorable tax consequences to China Ceramics,
Success Winner, Stand Best and China Ceramics’ non-PRC security
holders.
Under the
EIT Law, an enterprise established outside of China with “de facto management
bodies” within China is considered a “resident enterprise,” meaning that it can
be treated in a manner similar to a Chinese enterprise for enterprise income tax
purposes, although the dividends paid to one resident enterprise from another
may qualify as “tax-exempt income.” The implementing rules of the EIT Law define
de facto management as “substantial and overall management and control over the
production and operations, personnel, accounting, and properties” of the
enterprise. Under a notice recently published by the State Administration of
Taxation, an overseas incorporated enterprise, whose main controlling investor
is a PRC enterprise or a PRC enterprise group, will be recognized as a PRC
resident enterprise if it satisfies all of the following conditions: (i) the
senior management responsible for daily production/business operations is
primarily located in the PRC, and the location(s) where such senior management
execute their responsibilities are primarily in the PRC; (ii) strategic
financial and personnel decisions are made or approved by organizations or
personnel located in the PRC; (iii) major properties, accounting ledgers,
company seals and minutes of board meetings and shareholder meetings, etc., are
maintained in the PRC; and (iv) 50% or more of the board members with voting
rights or senior management habitually reside in the PRC. However, even under
this new notice, it is still unclear whether PRC tax authorities would require
China Ceramics, Success Winner and/or Stand Best to be treated as a PRC resident
enterprise.
If the
PRC tax authorities determine that China Ceramics, Success Winner and/or Stand
Best is a “resident enterprise” for PRC enterprise income tax purposes, a number
of unfavorable PRC tax consequences could follow. First, China Ceramics may be
subject to enterprise income tax at a rate of 25% on China Ceramics’, Success
Winner’s and/or Stand Best’s worldwide taxable income, as well as PRC enterprise
income tax reporting obligations. Second, although under the EIT Law and its
implementing rules, dividends paid to China Ceramics from Hengda through Success
Winner and Stand Best (assuming China Ceramics, Success Winner and Stand Best
are each treated as a “resident enterprise” under EIT Law) may qualify as
“tax-exempt income,” China Ceramics cannot guarantee that such dividends will
not be subject to withholding tax generally at a rate of 10% (or, if the Double
Tax Avoidance Agreement between Hong Kong and Mainland China is applicable, 5%).
Finally, the new “resident enterprise” classification could result in a
situation in which a 10% PRC tax is imposed on dividends China Ceramics pays to
its non-PRC security holders that are not deemed as PRC tax “resident
enterprises” and gains derived by them from transferring China Ceramics
securities, if such income is considered PRC-sourced income by the relevant PRC
tax authorities.
It is
unclear how the relevant governmental authorities will interpret and implement
the laws and regulations pertaining to offshore and cross-border taxes. Given
this uncertainty, there is a risk that China Ceramics, Success Winner, Stand
Best and/or non-PRC security holders of China Ceramics could be subject to
unfavorable tax treatment.
If any
such PRC taxes apply, a non-PRC security holder may be entitled to a reduced
rate of PRC taxes under an applicable income tax treaty and/or a foreign tax
credit against such security holder’s domestic income tax liability (subject to
applicable conditions and limitations). You should consult with your own tax
advisors regarding the applicability of any taxes, the effects of any applicable
income tax treaties, and any available foreign tax credits.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
proxy statement/prospectus contains forward-looking statements. Forward-looking
statements provide our current expectations or forecasts of future events.
Forward-looking statements include statements about our expectations, beliefs,
plans, objectives, intentions, assumptions and other statements that are not
historical facts. Words or phrases such as “anticipate,” “believe,” “continue,”
“estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,”
“predict,” “project,” “will” or similar words or phrases, or the negatives of
those words or phrases, may identify forward-looking statements, but the absence
of these words does not necessarily mean that a statement is not
forward-looking. Examples of forward-looking statements in this proxy
statement/prospectus include, but are not limited to, statements regarding our
disclosure concerning Success Winner’s operations, cash flows, financial
position, dividend policy and likelihood of success of Success Winner’s
expansion plans.
Forward-looking
statements appear in a number of places in this proxy statement/prospectus
including, without limitation, in the sections entitled “Dividend Policy,”
“Management’s Discussion and Analysis of Financial Conditions and Results of
Operations of Success Winner,” and “Hengda’s Business” The risks and
uncertainties include, but are not limited to:
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future
operating or financial results;
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changes
in government policies and regulations in China which affect the ceramics
industry;
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the
ability of Hengda to expand its
operations;
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future
payments of dividends and the availability of cash for payment of
dividends;
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Success
Winner’s expectations relating to dividend payments and forecasts of its
ability to make such payments;
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future
acquisitions, business strategy and expected capital
spending;
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assumptions
regarding interest rates and
inflation;
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fluctuations
in general economic and business conditions in
China;
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CHAC’s
financial condition and liquidity, including its ability to obtain
additional financing in the future (from warrant exercises or outside
financial institutions) to fund capital expenditures, acquisitions and
other general corporate activities;
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estimated
future capital expenditures needed to preserve China Ceramics’ capital
base;
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ability
of CHAC to effect future acquisitions and to meet target returns;
and
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other
factors discussed in “Risk
Factors.”
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Forward-looking
statements are subject to known and unknown risks and uncertainties and are
based on potentially inaccurate assumptions that could cause actual results to
differ materially from those expected or implied by the forward-looking
statements. Our actual results could differ materially from those anticipated in
forward-looking statements for many reasons, including the factors described in
“Risk Factors” in this proxy statement/prospectus. Accordingly, you should not
rely on these forward-looking statements, which speak only as of the date of
this proxy statement/prospectus. We undertake no obligation to publicly revise
any forward-looking statement to reflect circumstances or events after the date
of this proxy statement/prospectus or to reflect the occurrence of unanticipated
events. You should, however, review the factors and risks we describe in the
reports we will file from time to time with the Securities and Exchange
Commission after the date of this proxy statement/prospectus.
DIVIDEND
POLICY
Based on
the assumptions and the other matters set forth below and subject to the matters
set forth under “Risk Factors,” after consummation of the Acquisition, China
Ceramics intends to retain cash flows for reinvestment in its business. Retained
cash flows may be used to fund the growth of Success Winner’s current business,
make debt repayments and for other purposes, as determined by China Ceramics’
management and board of directors. China Ceramics’ dividend policy reflects its
judgment that by reinvesting cash flows in its business, it will be able to
provide value to its shareholders by enhancing its long-term dividend paying
capacity. China Ceramics’ objectives are to increase distributable cash flow per
share through the growth of Success Winner’s current business. China Ceramics
cannot assure you that it will be successful in achieving these
objectives.
There is
no assurance that China Ceramics will be able to distribute or pay dividends in
the future. The declaration and payment of any dividend is usually decided by
shareholders, with directors having the ability to pay interim dividends out of
profits and will depend on, among other things, its earnings, financial
condition and anticipated cash requirements and availability, restrictions under
the laws of the People’s Republic of China regarding dividend distributions to
shareholders, reserves established by its board of directors, increased or
unanticipated expenses, a change in its dividend policy, additional borrowings
or future issuances of securities and other factors, many of which will be
beyond its control. Further, its ability to pay dividends may be limited by the
amount of cash it can generate from operations following the payment of fees and
expenses and the establishment of any reserves as well as additional factors
unrelated to its profitability.
The laws
of the People’s Republic of China, the laws to which the operating subsidiaries
of Success Winner in China are subject, impose certain restrictions on dividend
distribution. See “Risk Factors — Risk Factors Relating to the
Acquisition — China Ceramics cannot assure you that it will pay any
dividends and China Ceramics’ dividend policy is subject to change at the
discretion of its board of directors.”
SPECIAL
MEETING OF CHAC STOCKHOLDERS
General
We are
furnishing this proxy statement/prospectus to the CHAC stockholders as part of
the solicitation of proxies by our board of directors for use at the special
meeting of CHAC stockholders to be held on
, 2009, and at any adjournment
or postponement thereof. This proxy statement/prospectus is first being
furnished to our stockholders on or about
, 2009 in connection with the
vote on the Acquisition Agreement and the Adjournment Proposal. This document
provides you with the information you need to know to be able to vote or
instruct your vote to be cast at the special meeting.
Date,
Time and Place
The
special meeting of stockholders will be held at
New York, New York, on
, 2009, at
a.m.
Purpose
of the CHAC Special Meeting
At the
special meeting, we are asking holders of CHAC common stock to approve the
following proposals:
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The
merger of CHAC with and into China Ceramics, its wholly-owned British
Virgin Islands subsidiary, with China Ceramics surviving the merger. The
merger will change CHAC’s place of incorporation from Delaware to the
British Virgin Islands. We also refer to the merger as the
‘redomestication”. This proposal is called the Redomestication Proposal
and consists of the merger of CHAC into China Ceramics. Holders of CHAC’s
common stock as of the record date are entitled to vote on the
Redomestication Proposal.
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2.
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The
authorization for the China Ceramics board of directors to complete the
share purchase included in the Acquisition Agreement, or the “business
combination”, which will only take place if the Redomestication Proposal
is approved. This proposal is called the Business Combination Proposal.
Holders of CHAC’s common stock as of the record date are entitled to vote
on the Business Combination
Proposal.
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3.
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The
adjournment of the special meeting in the event CHAC does not receive the
requisite stockholder vote to approve the business combination. This
proposal is called the Adjournment
Proposal.
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Each of
the Redomestication Proposal and the Business Combination Proposal are
conditioned upon the approval of the other. Therefore, both must be
approved by stockholders in order for the business combination to be
consummated.
Recommendation
of CHAC Board of Directors
Our board
of directors:
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has
determined that each of the Business Combination Proposal, the
Redomestication Proposal and the other proposals is fair to, and in the
best interests of, CHAC and its
stockholders;
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has
approved the Business Combination Proposal, the Redomestication Proposal,
and the other proposals; and
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recommends
that CHAC’s common stockholders vote “FOR” each of the Business
Combination Proposal, Redomestication Proposal, and the Adjournment
Proposal.
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Record
Date; Who is Entitled to Vote
We have
fixed the close of business on ,
2009, as the “record date” for determining those CHAC stockholders entitled to
notice of and to vote at the special meeting. As of the close of business on
, 2009, there were 16,000,000
shares of our common stock outstanding and entitled to vote. Each holder of
common stock is entitled to one vote per share on each proposal on which such
shares are entitled to vote at the special meeting. Holders of warrants are not
entitled to vote at the special meeting.
As of
June 30, 2009, CHAC’s initial stockholders, either directly or beneficially,
owned and were entitled to vote 3,200,000 shares, or approximately 20% of CHAC’s
outstanding common stock. With respect to the Acquisition, CHAC’s initial
stockholders have agreed to vote their respective shares of common stock
acquired by them prior to the initial public offering vote in accordance with
the majority of the votes cast by the holders of the shares issued in CHAC’s
initial public offering with respect to the Business Combination Proposal and
related proposals. CHAC’s initial stockholders have also agreed that they will
vote any shares they purchase in the open market in or after the initial public
offering in favor of each of the Business Combination Proposal, Redomestication
Proposal, and the other proposals. They have indicated that they intend to vote
their shares “FOR” each of the other proposals although there is no agreement in
place with respect to these proposals.
Quorum
Stockholders
representing a majority of the common stock issued and outstanding and entitled
to vote at the special meeting, present in person or represented by proxy, will
constitute a quorum. In the absence of a quorum, stockholders representing a
majority of the votes present in person or represented by proxy at such meeting,
may adjourn the meeting until a quorum is present.
Abstentions
and Broker Non-Votes
Proxies
that are marked “abstain” and proxies relating to “street name” shares that are
returned to us but marked by brokers as “not voted” will be treated as shares
present for purposes of determining the presence of a quorum on all matters. The
latter will not be treated as shares entitled to vote on the matter as to which
authority to vote is withheld by the broker. If you do not give the broker
voting instructions, under the rules of the NYSE Amex, your broker may not vote
your shares on each of the Business Combination Proposal, Redomestication
Proposal, and the Adjournment Proposal. Since a stockholder must affirmatively
vote against adoption of the Business Combination Proposal to have conversion
rights, individuals who fail to vote or who abstain from voting on the Business
Combination Proposal may not exercise their conversion rights. Record holders
whose shares are voted against adoption of the Business Combination Proposal and
beneficial holders of shares held in “street name” that are voted against the
adoption of the Business Combination Proposal may exercise their conversion
rights. Please see the information set forth in “Special Meeting of CHAC
Stockholders — Conversion Rights.”
Vote
of Our Stockholders Required
The
adoption of the business combination will require the affirmative vote of the
holders of a majority of the shares of CHAC common stock issued in the IPO
present and entitled to vote at the special meeting;
provided, however
, that if
33.33% or more of the shares purchased in the IPO vote against the business
combination and demand conversion then the business combination will not be
completed. Abstaining from voting will have the same effect as voting against
the Business Combination and failing to instruct your bank, brokerage firm or
nominee to vote your shares will have no effect on the outcome of the Business
Combination Proposal but will be counted for purposes of determining if a quorum
is present, except that you will not be able to convert your shares into a
pro rata
portion of the Trust
Account.
Abstaining
from voting and failing to instruct your bank, brokerage firm or nominee to vote
your shares will have the same effect as voting against the Redomestication
Proposal and no effect on the adjournment proposal.
Voting
Your Shares
Each
share of CHAC common stock that you own in your name entitles you to one vote
for each proposal on which such shares are entitled to vote at the special
meeting. Your proxy card shows the number of shares of our common stock that you
own.
There are
two ways to ensure that your shares of CHAC common stock are voted at the
special meeting:
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You
can cause your shares to be voted by signing and returning the enclosed
proxy card. If you submit your proxy card, your “proxy,” whose name is
listed on the proxy card, will vote your shares as you instruct on the
proxy card. If you sign and return the proxy card but do not give
instructions on how to vote your shares, your shares will be voted, as
recommended by our board, “FOR” the adoption of the Acquisition Agreement
and the Adjournment Proposal. Votes received after a matter has been voted
upon at the special meeting will not be
counted.
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You
can attend the special meeting and vote in person. We will give you a
ballot when you arrive. However, if your shares are held in the name of
your broker, bank or another nominee, you must get a proxy from the
broker, bank or other nominee. That is the only way we can be sure that
the broker, bank or nominee has not already voted your
shares.
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IF
YOU RETURN YOUR PROXY CARD WITHOUT AN INDICATION OF HOW YOU WISH TO VOTE, YOUR
SHARES WILL BE VOTED IN FAVOR OF THE ACQUISITION AGREEMENT (AS WELL AS THE OTHER
PROPOSALS) AND YOU WILL NOT BE ELIGIBLE TO HAVE YOUR SHARES CONVERTED INTO A PRO
RATA PORTION OF THE TRUST ACCOUNT IN WHICH A SUBSTANTIAL PORTION OF THE NET
PROCEEDS OF CHAC’S INITIAL PUBLIC OFFERING ARE HELD. YOU MUST AFFIRMATIVELY VOTE
AGAINST THE BUSINESS COMBINATION AND DEMAND THAT CHAC CONVERT YOUR SHARES INTO
CASH NO LATER THAN THE CLOSE OF THE VOTE ON THE BUSINESS COMBINATION TO EXERCISE
YOUR CONVERSION RIGHTS. IN ORDER TO CONVERT YOUR SHARES, YOU MUST CONTINUE TO
HOLD YOUR SHARES THROUGH THE CLOSING DATE OF THE ACQUISITION AND TENDER YOUR
PHYSICAL STOCK CERTIFICATE TO OUR STOCK TRANSFER AGENT PRIOR TO THE VOTE ON THE
ACQUISITION. IF THE ACQUISITION IS NOT COMPLETED, THEN THESE SHARES WILL NOT BE
CONVERTED INTO CASH. IF YOU HOLD THE SHARES IN STREET NAME, YOU WILL NEED TO
ELECTRONICALLY TRANSFER YOUR SHARES TO THE DTC ACCOUNT OF CONTINENTAL STOCK
TRANSFER & TRUST COMPANY, OUR TRANSFER AGENT, PRIOR TO THE VOTE ON THE
ACQUISITION.
Revoking
Your Proxy
If you
give a proxy, you may revoke it at any time before it is exercised by doing any
one of the following:
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you
may send another proxy card with a later
date;
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you
may notify our corporate secretary in writing before the special meeting
that you have revoked your proxy;
or
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you
may attend the special meeting, revoke your proxy, and vote in person, as
indicated above.
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Who
Can Answer Your Questions About Voting Your Shares?
If you
have any questions about how to vote or direct a vote in respect of your shares
of our common stock, you may call
[ ],
our proxy solicitor, at
[ ]
or CHAC at (302)-295-4832.
No
Additional Matters May Be Presented at the Special Meeting
This
special meeting has been called only to consider the adoption of the Acquisition
Agreement, the Redomestication and the Adjournment Proposal. Under our bylaws,
other than procedural matters incident to the conduct of the special meeting, no
other matters may be considered at the special meeting if they are not included
in the notice of the special meeting.
Conversion
Rights
Pursuant
to CHAC’s Certificate of Incorporation, a holder of shares of CHAC common stock
may, if the stockholder affirmatively votes against the business combination,
demand that CHAC convert such shares into cash. Demand may be made by checking
the box on the proxy card provided for that purpose and returning the proxy card
in accordance with the instructions provided, and, at the same time, ensuring
your bank or broker complies with the requirements identified elsewhere herein.
You will only be entitled to receive cash for these shares if you continue to
hold them through the closing of the business combination.
In
connection with tendering your shares for conversion into cash, you must elect
either to physically tender your stock certificates to CHAC’s transfer agent
prior to the special meeting or to deliver your shares to the transfer agent
electronically using The Depository Trust Company’s DWAC (Deposit/Withdrawal At
Custodian) System, which election would likely be determined based on the manner
in which you hold your shares. Traditionally, in order to perfect conversion
rights in connection with a blank check company’s business combination, a holder
could vote against a proposed business combination and check a box on the proxy
card indicating such holder was seeking to exercise such holder’s conversion
rights. After the business combination was approved, the company would contact
such stockholder to arrange for it to deliver its certificate to verify
ownership. As a result, the stockholder then had an “option window” after the
consummation of the business combination during which it could monitor the price
of the stock in the market. If the price rose above the conversion price, it
could sell its shares in the open market before actually delivering its shares
to the company for cancellation in consideration for the conversion price. Thus,
the conversion right, to which stockholders were aware they needed to commit
before the stockholder meeting, would become a “put” right surviving past the
consummation of the business combination until the converting holder delivered
its certificate. The requirement for physical or electronic delivery prior to
the special meeting ensures that a converting holder’s election to convert is
irrevocable once the business combination is approved. In furtherance of such
irrevocable election, stockholders electing to convert will not be able to
tender their shares at the special meeting.
Through
the DWAC system, this electronic delivery process can be accomplished by the
stockholder, whether or not it is a record holder or its shares are held in
“street name,” by contacting the transfer agent or its broker and requesting
delivery of its shares through the DWAC system. CHAC believes that approximately
80% of its shares are currently held in “street name.” Delivering shares
physically may take significantly longer. In order to obtain a physical stock
certificate, a stockholder’s broker and/or clearing broker, DTC, and CHAC’s
transfer agent will need to act together to facilitate this request. 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 the broker
would determine whether or not to pass this cost on to the converting holder. It
is CHAC’s understanding that stockholders should generally allot at least two
weeks to obtain physical certificates from the transfer agent. CHAC does not
have any control over this process or over the brokers or DTC, and it may take
longer than two weeks to obtain a physical stock certificate. Such stockholders
will have less time to make their investment decision than those stockholders
that do not elect to exercise their conversion rights. Stockholders who request
physical stock certificates and wish to convert may be unable to meet the
deadline for tendering their shares before exercising their conversion rights
and thus will be unable to convert their shares.
Certificates
that have not been tendered in accordance with these procedures by the day prior
to the special meeting will not be converted to cash. In the event that a
stockholder tenders its shares and decides prior to the special meeting that it
does not want to convert its shares, the stockholder may withdraw the tender. In
the event that a stockholder tenders shares and the business combination is not
completed, these shares will not be converted to cash and the physical
certificates representing these shares will be returned to the stockholder
promptly following the determination that the business combination will not be
consummated. CHAC anticipates that a stockholder who tenders shares for
conversion in connection with the vote to approve the business combination would
receive payment of the conversion price for such shares soon after the
completion of the business combination. CHAC will hold the certificates of
stockholders that elect to convert their shares into a pro rata portion of the
funds available in the Trust Account until such shares are converted to cash or
returned to such stockholders.
If
properly demanded, CHAC will convert each share of common stock into a
pro rata
portion of the funds
available in the Trust Account, calculated as of two business days prior to the
anticipated consummation of the business combination. As of the record date,
this would amount to approximately $9.79 per share. If you exercise your
conversion rights, you will be exchanging your shares of CHAC common stock for
cash and will no longer own the shares. You will be entitled to receive cash for
these shares only if you affirmatively vote against the business combination,
properly demand conversion, and tender your stock certificate to CHAC’s transfer
agent prior to your vote. If the business combination is not completed, these
shares will not be converted into cash. However, if CHAC is unable to complete
the business combination by November 21, 2009 (unless extended for another year
if approved by a vote of our stockholders), it will be forced to liquidate and
all holders of shares will receive a
pro rata
portion of the funds
available in the Trust Account at the time of the liquidation.
The
business combination will not be consummated if the holders of 33.33% or more of
the common stock (4,626,399 shares or more) exercise their conversion
rights.
Appraisal
Rights
Under
Delaware corporate law, the redomestication merger of CHAC with China Ceramics
causes the stockholders of CHAC to have appraisal rights. This right is separate
from the conversion rights of the holders of shares of CHAC common stock issued
in the initial public offering. However, because the exercise of the appraisal
rights and the conversion rights both require a tender of the holder’s shares to
CHAC, only one right may be elected in respect of the shares. If the
redomestication merger is consummated, CHAC stockholders who choose not to vote
in favor of the redomestication merger will have the right to elect an appraisal
of the fair market value of their shares of CHAC common stock, and to receive
the fair market value of such shares in lieu of the consideration contemplated
by the redomestication merger and the merger agreement, in accordance with the
provisions of Section 262 of the Delaware General Corporation Law. Unlike
conversion rights in which the stockholder will receive a pro rata portion of
the trust account as of the record date, stockholders who elect to exercise
their appraisal rights will receive a value for their shares that is determined
by an appraisal made by the Delaware Court of Chancery. Failure to properly
exercise appraisal rights before the special meeting will result in loss of
these rights. Exercise of appraisal rights will not affect any warrants held by
that stockholder. See “The Redomestication Merger - Appraisal Rights” for more
information about appraisal rights.
Proxies
and Proxy Solicitation Costs
We are
soliciting proxies on behalf of our board of directors. This solicitation is
being made by mail but also may be made by telephone or in person. We and our
directors, officers and employees may also solicit proxies in person, by
telephone or by other electronic means. Any solicitation made and information
provided in such a solicitation will be consistent with the written proxy
statement and proxy card.
[ ], a proxy solicitation
firm that we have engaged to assist us in soliciting proxies, will be paid its
customary fee of approximately
$[ ] and out-of-pocket expenses.
Such fee will be paid with non-Trust Account funds.
We will
ask banks, brokers and other institutions, nominees and fiduciaries to forward
its proxy materials to their principals and to obtain their authority to execute
proxies and voting instructions. We will reimburse them for their reasonable
expenses.
If you
send in your completed proxy card, you may still vote your shares in person if
you revoke your proxy before it is exercised at the special
meeting.
CHAC
Initial Stockholders
On July
16, 2007, our Chief Executive Officer, Paul K. Kelly and our President, James D.
Dunning, Jr. purchased 2,875,000 of our shares for an aggregate purchase price
of $28,750. Effective November 15, 2007, our board of directors authorized a
stock dividend of 0.2 shares of common stock for each outstanding share of
common stock, effectively lowering the purchase price to approximately $0.008
per share and increasing each stockholder’s holdings by 20% and the number of
common shares issued to 3,450,000 (including up to 250,000 shares that were
forfeited upon exercise of the underwriters’ over-allotment option). As a result
of an increase in the size of the offering on November 15, 2007, the November
15, 2007 stock dividend was effectuated in order to maintain our founders’ and
special advisors’ ownership at a percentage of the number of shares to be
outstanding after this offering. This increase in offering size also resulted in
an increase in the amount of after-tax interest we may withdraw from the trust
account of $3,200,000 (net of the partial exercise of the underwriters’
over-allotment option).
Subsequent
to the issuance date, the foregoing persons transferred a portion of their
shares to our other current stockholders at a price per share equal to $0.01 per
share.
On
November 5, 2007, Paul K. Kelly, James D. Dunning, Jr., Alan G. Hassenfeld,
Gregory E. Smith, Xiao Feng, Cheng Yan Davis, Soopakij (Chris) Chearavanont and
Ruey Bin Kao agreed to purchase, for an aggregate purchase price of $2.75
million private placement warrants to purchase 2,750,000 share of common stock
at a price of $1.00 per warrant. Paul K. Kelly and James D, Dunning, Jr. each
purchased 941,875 warrants, Alan G. Hassenfeld purchased 495,000 warrants,
Gregory E. Smith purchased 123,750 warrants, Cheng Yan Davis purchased 99,000
warrants and Xiao Feng, Soopakij (Chris) Chearavanont and Ruey Bin Kao each
purchased 49,500 warrants.
Pursuant
to a registration rights agreement between us and our founders and special
advisors, our founders and special advisors will be entitled to certain
registration rights. Specifically, (i) the private placement warrants and the
underlying shares of common stock, are entitled to certain registration rights
commencing 90 days after the consummation of a business combination; and (ii)
the existing stockholders’ common stock are entitled to certain registration
rights six months after the consummation of a business combination. We are only
required to use our best efforts to cause a registration statement relating to
the resale of such securities to be declared effective and, once effective, only
to use our best efforts to maintain the effectiveness of the registration
statement. The holders of warrants do not have the rights or privileges of
holders of our common stock or any voting rights until such holders exercise
their respective warrants and receive shares of common stock. Permitted
transferees that receive any of the above described securities from our founders
will, under certain circumstances, be entitled to the registration rights
described herein. We will bear the expenses incurred in connection with the
filing of any such registration statements.
THE
BUSINESS COMBINATION PROPOSAL
The
discussion in this proxy statement/prospectus of the Acquisition and the
principal terms of the Acquisition Agreement among CHAC, China Ceramics, Success
Winner, Hengda and the Seller, is subject to, and is qualified in its entirety
by reference to, the Acquisition Agreement. The full text of the Acquisition
Agreement is attached hereto as Annex A, which is incorporated by reference
herein.
General
Description of the Business Combination
Redomestication
to the British Virgin Islands
CHAC will
complete a corporate reorganization that would result in holders of CHAC
securities holding securities in China Ceramics, a British Virgin Islands
company rather than in CHAC, a Delaware corporation. CHAC, the current Delaware
corporation, will effect a merger pursuant to Section 251 of the General
Corporation Law of the State of Delaware in which it will merge with and into
China Ceramics, its wholly-owned British Virgin Islands subsidiary, with China
Ceramics surviving the merger.
The
redomestication will result in all of CHAC’s issued and outstanding shares of
common stock immediately prior to the redomestication converting into shares of
China Ceramics, and all units, warrants and other rights to purchase CHAC’s
common stock immediately prior to the redomestication converting into
substantially equivalent securities of China Ceramics. If the shares of China
Ceramics do not continue to be quoted on the NYSE Amex after the merger it
is possible that the shares will be listed and traded only on the OTC Bulletin
Board. CHAC will cease to exist and China Ceramics will be the surviving
company. In connection therewith, China Ceramics will assume all the property,
rights, privileges, agreements, powers and franchises, debts, liabilities,
duties and obligations of CHAC, including any and all agreements, covenants,
duties and obligations of CHAC set forth in the Acquisition
Agreement.
Business
Combination with Success Winner; Acquisition Consideration
Immediately
following the redomestication, China Ceramics will acquire all of the issued and
outstanding ordinary shares of Success Winner held by Mr. Wong Kung Tok (the
“Seller”) in exchange for $10.00 and 5,743,320 shares of China
Ceramics ordinary shares. The issuance of shares of China Ceramics to the
post-acquisition shareholders is being consummated on a private placement basis
pursuant to Section 4(2) of the Securities Act of 1933, as amended. In addition,
8,185,763 shares of the China Ceramics ordinary shares will be placed in escrow
(the “Contingent Shares”) and released to the Seller in the event certain
earnings and stock price thresholds are achieved. The aggregate value
of the consideration to be paid by China Ceramics in the business combination
will be approximately $55.4 million (based on 5,743,320 shares to be issued
to the post-acquisition shareholders at a market value of $9.64 per share, the
most recent closing price of CHAC’s common stock as of August 20,
2009). In connection with the closing of the transaction, the CHAC
founders will forfeit 1,600,000 of their founders’ shares to CHAC for
cancellation. After such shares are canceled, the CHAC founders will
own a total of 1,600,000 shares.
CHAC
currently has authorized share capital of 41,000,000 shares consisting of
40,000,000 shares of common stock with a par value of $0.001 per share and
1,000,000 shares of preferred stock with a par value of $0.0001 per share. China
Ceramics currently is authorized to issue 51,000,000 shares of a single
class.
After the
Acquisition assuming no conversions of shares into cash and no contingent shares
are issued, CHAC’s current public shareholders will own approximately 63.5% of
China Ceramics, CHAC’s current directors, officers and affiliates will own
approximately 8.0% of China Ceramics, and Seller will own approximately 28.5% of
China Ceramics.
Pursuant
to the Acquisition Agreement, the redomestication will not be consummated unless
the business combination is also approved. Similarly, the business combination
will not take place unless the redomestication is also approved. Upon
consummation of the business combination, China Ceramics will own 100% of the
issued and outstanding shares of Success Winner.
Background
China
Holdings Acquisition Corp. is a blank check company formed under the laws of
Delaware on June 22, 2007. The Company was formed for the purpose of
acquiring, or acquiring control of, one or more operating businesses having
their primary operations in Asia through a merger, capital stock exchange, stock
purchase, asset acquisition or other similar business combination or contractual
arrangements. China Holdings completed an initial public offering on
November 21, 2007 of 12,000,000 units at $10.00 per unit, each unit consisting
of one share of common stock and a warrant to purchase one share of common stock
at $7.50. The underwriters for China Holding’s public offering
subsequently exercised the over-allotment option with respect to the
offering. Concurrent with the initial public offering, 2,750,000
warrants were sold at $1.00 per warrant in a private placement to certain
affiliates of China Holdings. The offerings yielded gross proceeds to
China Holdings of approximately $125,363,000. Of these net proceeds,
$125,278,000 was placed in a trust account. In accordance with China
Holdings’ Certificate of Incorporation, the trust account will be released
either upon the consummation of a business combination or upon the liquidation
of China Holdings. China Holdings must liquidate unless a business
combination is consummated by November 21, 2009. As of June 30, 2009,
approximately $125,278,000 was held in deposit in the trust
account.
Promptly
after China Holding’s IPO, the officers and directors of CHAC commenced the
process of locating potential targets. The Board of CHAC established a list of
criteria for screening potential targets, including but not limited
to:
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principal
portion of operations located in mainland
China;
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business
sector with favorable profitability and growth
outlook;
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the
competitive position of the target within the sector to be among the
leaders or with unique competitive
advantages;
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business
model with long-term
sustainability;
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strong
historical financial track record demonstrating the growth of the target’s
business as well as profitability of its business
model;
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having
a fair market value of at least 80% of the SPAC’s net assets at the time
of the business combination;
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strong
management capable of leading the target after the business
combination;
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strategic
strength in a particular sector and the capability to consolidate in China
and/or internationally;
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existing
distribution arrangements and potential for expansion;
and
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intellectual
property or other protections for products or
formulas.
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The CHAC
team reached out to a large number of business contacts that it believed might
refer potential targets to CHAC, including individuals known to the CHAC team as
knowledgeable about deals in the marketplace, financial advisory firms that
specialized in deal flow sourcing or advising companies in fund raising or
financial transactions, senior business executives, professional investment
managers and private equity investment funds.
China
Holdings received leads and reviewed a total of more than 30 potential business
combination candidates. These candidates were engaged in a wide range of
industry sectors including manufacturing, real estate, service industries and
healthcare. Most of these reviews were done on a preliminary basis, and did not
progress towards a substantive discussion of terms of a potential transaction
with CHAC. Depending on the candidate involved, these companies were deemed
unsuitable as a business combination target with CHAC for various reasons,
including but not limited to, the target not meeting CHAC’s criteria as
described above or lack of interest on the part of the candidate to pursue
further discussions with CHAC.
Bright
World
Bright
World Precision Machinery Limited (“Bright World”) manufactures and supplies
stamping and complementary machines, and metal parts in the People’s Republic of
China. Bright World is listed on the Singapore Exchange Securities
Trading Limited under the ticker symbol “B49” with the majority of its shares
held by World Sharehold Limited (“World Share”) which, in turn, is controlled by
Mr. Wang Wei Yao, the non-executive Chairman of Bright World. CHAC
was introduced to Mr. Wang by Mr. Xiao Feng, a Director of CHAC who resides in
China.
During
January 2008, two Directors of CHAC, Mr. Paul K. Kelly and Ms. Cheng Yan Davis
travelled to China to meet with Mr. Wang Wei Yao of Bright World, a company
listed on the Singapore Exchange Securities Trading Limited, where preliminary
discussions of a transaction took place. Discussions continued during
the first quarter of 2008 with Mr. Kelly, Ms. Davis and Mr. Mark L Wilson, a
consultant to CHAC, travelling to China during March 2008 to engage in detailed
discussions with Mr. Wang, Mr. Shao Jian Jun (the Chief Executive Officer of
Bright World) and the Bright World senior management
team. Negotiations, structuring discussions and due diligence
continued during the second quarter of 2008 as CHAC determined that the optimal
structure was to make a cash tender offer for Bright World in Singapore with a
related undertaking agreement with World Share. On July 20, 2008,
CHAC entered into a definitive undertaking agreement with World Share, the
majority Stockholder of Bright World, Mr. Wang and Mr. Shao. CHAC
subsequently issued a press release and filed a Current Report on Form 8-K on
July 21, 2008 which described the proposed transaction and included both the
press release and investor presentation materials as exhibits.
During
the next several weeks, Mr. Kelly, Mr. Wilson and Mr. James D. Dunning, Jr (a
Director of CHAC) met with representatives of CHAC’s underwriters,
analysts and several investors to answer questions and to receive market
feedback concerning the proposed transaction against the backdrop of the (then)
emerging global financial crisis. In August 2008, Mr. Kelly,
Ms. Davis and Mr. Wilson travelled to China and met with Mr. Xiao, Mr. Wang, Mr.
Shao and the Bright World team to discuss modifications to the transaction based
upon market feedback and the (then) emerging global financial and economic
crisis. Discussions continued during the third quarter and into
October with a draft amended undertaking agreement being presented to the
SIC. On October 24, 2008, CHAC amended the undertaking agreement with
World Share, Mr. Wang and Mr. Shao. CHAC also issued a press release
and filed a Current Report on Form 8-K on October 24, 2008 which described the
amended proposed transaction and included both the press release and revised
investor presentation materials as exhibits.
During
the following months, CHAC received market feedback from its underwriters,
investors and analysts as the global financial and economic crisis deepened with
its attendant effects on the capital markets, specifically the equity
markets. In January 2009, Mr. Kelly, Ms. Davis and Mr. Wilson
travelled to China and met with Mr. Wang, Mr. Shao and the Bright World team to
discuss modifications to the proposed transaction based upon the updated market
feedback, the global financial and economic crisis and Bright World’s operating
prospects in that environment. The parties could not agree upon a
proposed transaction modification and continued to discuss the matter during the
first quarter of 2009.
On April
3, 2009, CHAC issued a press release and filed a Current Report on Form 8-K
which announced CHAC’s withdrawal of its voluntary cash offer for Bright
World.
On April
29, 2009, CHAC terminated the undertaking agreement with World Share, Mr. Wang
and Mr. Shao effective as of April 3, 2009 as reported as a subsequent event in
CHAC’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2009.
After the
termination of the proposed acquisition of Bright World, CHAC reached out to a
number of business contacts that it believed might refer potential targets to
CHAC and re-reviewed previous companies that had been proposed to
CHAC. At the beginning of April 2009, Mr. Kelly and Ms. Davis visited
China. During this trip they met with the CFO of a China-based
biopharmaceutical company that had been referred to them as a potential
acquisition target for CHAC. Upon their return to the United States,
the CFO of the biopharmaceutical company sent overview material and financial
data to CHAC. Based on the financial data provided, CHAC performed a
preliminary valuation analysis and determined a valuation range and structure
that CHAC thought would be interesting to its shareholders. Upon
discussing the potential valuation and structure with the CFO of the
biopharmaceutical company, it became clear that the target’s expectations were
materially different from CHAC’s proposal and it was mutually decided that there
was not a basis to continue the discussions. During the period of these
discussions, CHAC also received overview material from an accounting firm
regarding a company that owns and operates retail shopping malls in
China. It was decided that this target did not meet CHAC’s criteria
so discussions were not pursued.
Current
Target: Jinjiang Hengda Ceramics
During
late April 2009, Mr. Kelly was contacted via telephone by a China-based advisory
firm whose client was a leading manufacturer of exterior ceramic tiles that was
interested in discussing a potential acquisition by CHAC. After a
high level discussion regarding the company’s historical business and prospects,
confirmation of its status as a wholly-owned foreign enterprise in
China and ability to meet CHAC’s timetable, Mr. Kelly decided that this new
opportunity, Jinjiang Hengda Ceramics Co. Ltd. (“Hengda”), seemed to fit CHAC’s
criteria. The advisory firm then forwarded to CHAC overview material
that included both historical and projected financial data. CHAC
reviewed the material and performed some preliminary valuation
analysis. In early May 2009, CHAC proposed to Hengda preliminary
terms under which CHAC would be willing proceed with further due diligence and
acquisition discussions. Hengda then asked CHAC to prepare and send a
Letter of Intent (“LOI”). During the next week, the two parties
negotiated the LOI which outlined, among other terms, an all share transaction
that included shares on closing and an earn-out incentive structure that would
be agreed upon after further due diligence. On May 8, 2009, CHAC had
a telephonic Board meeting during which the Board discussed the acquisition of
Hengda and approved CHAC’s signing of the LOI. The LOI was
subsequently signed between CHAC and Hengda on May 11, 2009 as disclosed as a
subsequent event in CHAC’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2009.
Hengda
then sent additional due diligence material to CHAC that included audited
financials for 2005 to 2007.
In order
to be as efficient and cost-effective as possible, CHAC indicated to Hengda that
they would not meet in person for formal due diligence until financial terms had
been agreed between the two parties. Over the following four weeks,
CHAC spent an extensive amount of time reviewing the due diligence material and
negotiating a consideration structure with Hengda and its advisors.
In
mid-May, CHAC was approached by an investment banker from the New York office of
a China focused advisory firm. The investment banker was aware of a
China-based manufacturer of building fixtures that was potentially interested in
being acquired by CHAC. CHAC agreed to review material on the company
that included audited financial statements, financial projections and other
materials. Based on the information provided, CHAC proposed, via
email to the target, preliminary financial terms under which CHAC would be
willing to have further discussions. CHAC then had a telephone call
with two of the board members of the target to discuss the financial terms as
well as some due diligence questions regarding the target. It was
quickly determined that the target had higher valuation expectations than CHAC
though would be of interest to its shareholders and was looking for
significantly more capital than CHAC thought it could provide. The
discussions were mutually terminated.
On or
about June 12, 2009, Hengda and CHAC agreed to the financial terms of the
potential acquisition. On June 16, 2009, Byron Sproule, a Managing
Director of Mr. Kelly’s investment banking business, Knox & Co., visited the
company on behalf of CHAC and held due diligence meetings with Hengda’s
management and toured the corporate offices and manufacturing facility in
Jinjiang, Fujian Province. In attendance from Hengda were the
company’s Chairman, Mr. Huang Jia Dong, the Chief Financial Officer, Mr. Hen Man
Edmund, the Manufacturing Vice-General Manager, Mr. Li Shun Qing, the Sales
Vice-General Manager, Mr. Su Pei Zhi, and Hengda’s advisors. During
the meeting CHAC and Hengda discussed extensively the company’s business
including, among others; customers, business strategy, competitive advantages
and ability to meet financial targets. CHAC also discussed
extensively the new production facility in Gaoan.
On June
17, 2009 Mr. Kelly and Ms. Davis met with Huang Jia Dong in Beijing to further
discuss the transaction and Hengda’s business and outlook. The
parties also discussed a preliminary acquisition timetable.
On June
19, 2009, Mr. Sproule had a call with Hengda’s auditor partner at Grant Thornton
(Singapore) to confirm the status of the 2008 audit and discuss Hengda’s
internal control systems.
The CHAC
team returned to the United States and concluded that there was a potential
transformational opportunity in this company and decided to pursue the
acquisition. CHAC’s management then decided to commence drafting a
detailed LOI that reflected the discussions that took place in
China. At this point, Loeb & Loeb was engaged to begin drafting
the LOI. CHAC’s Board met on June 28, 2009 to receive an update on
the Hengda transaction; the potential structure, investment merits, due
diligence review, and discuss next steps. The Board agreed with management’s
plan to formalize the acquisition discussion through a detailed LOI with
Hengda. For the next two weeks CHAC and Hengda negotiated a LOI which
was signed on July 10, 2009.
Based on
the LOI, Loeb & Loeb prepared a Stock Purchase Agreement (“SPA”) which was
sent to Hengda and its advisors on July 15, 2009. Over the next three
weeks extensive legal and business due diligence was performed; multiple
conference calls were held, documents were received from Hengda and reviewed and
a draft legal opinion was received from Hengda’s PRC based legal counsel, Hills
& Co. During this period, CHAC and Hengda continued to finalize the SPA,
Voting Agreements, Lock-Up Agreements and Escrow Agreements. Since Hengda had
only entered into a Letter of Intent regarding the purchase of the Gaoan
facility, it was agreed that signing a definitive acquisition agreement would be
a closing condition to CHAC’s acquisition of Hengda.
On August
3, 2009 CHAC held a telephonic Board meeting attended by all members of the
Board and at which the proposed transaction was reviewed; topics included,
transaction details, investment merits, Hengda’s recent and projected financial
performance, China’s construction industry outlook and valuation
metrics. The Board unanimously approved the acquisition of Hengda and
authorized management to sign the SPA pending receipt of signed 2008 and March
2009 financial statements.
On August
6, 2009 CHAC received signed audited 2008 and March 2009 financial
statements. Accordingly, the Merger and Stock Purchase Agreement was
signed effective in August 2009. CHAC also issued a press
release and filed a Current Report on Form 8-K on August 7, 2009 which described
the proposed transaction and included both the press release and investor
presentation materials as exhibits.
On August
11, 2009 CHAC representatives completed customer due diligence with a number of
Hengda’s customers to verify specific details including, among others; the
history of the business relationship, satisfaction levels with Hengda’s product
quality and customer service and the likelihood of expanding the relationship in
the future.
CHAC
Board’s Reasons for the Approval of the Acquisition of Hengda
The CHAC
Board concluded that the acquisition of Hengda and the related transactions are
in the best interests of CHAC’s stockholders and that the consideration to be
paid in the acquisition of Hengda and the related transactions is fair to
CHAC.
CHAC’s
Board considered a wide variety of factors in connection with its evaluation of
the transaction. In light of the complexity of those factors, CHAC’s Board did
not consider it practicable to, nor did it attempt to, quantify or otherwise
assign relative weights to the specific factors it considered in reaching its
decision. In addition, individual members of CHAC’s Board may have given
different weight to different factors. CHAC’s Board considered various industry
and financial data, Hengda’s operation information and financial data supplied
by Hengda’s management, certain forward looking assumptions and projections of
the industry, market and Hengda’s business, and certain valuation metrics were
compiled in order to determine that the consideration to be paid in the
acquisition of Hengda and the related transactions is fair, from a financial
perspective, to CHAC and in the best interests of CHAC and its
stockholders.
Favorable
Factors
In
considering the transaction, the CHAC Board gave considerable weight to the
following favorable factors:
Hengda
is well-positioned to capture significant growth opportunities in
China
Hengda is
a leading Chinese construction materials company that manufacturers ceramic
tiles for exterior siding and interior flooring and design in residential and
commercial buildings. Hengda presents an attractive platform for growth as it is
expected to benefit from the urbanization of China as well as Central &
Provincial governmental policies to develop affordable housing in
China. In addition, the new facility in Gaoan will provide Hengda
with additional production capacity to capture additional market demand and
drive revenue growth.
Hengda’s
steady stream of cash flow is expected to continue as the construction materials
industry in China continues to grow
Hengda
has an established and loyal customer base due to its commitment to superior
quality, research and development and innovative products. As
the construction material market continues to grow and demand for exterior
siding increases, Hengda is well positioned to continue its strong cash flow
generation and capitalize on the rapid growth of the construction materials
market in the PRC. Growth of the construction material market in the
PRC is driven by three trends; population growth, population urbanization and an
increasing standard of living.
The
terms of the SPA and other transaction agreements
The terms
of the SPA, including the closing conditions, covenants and termination
provisions are customary and reasonable from CHAC’s perspective. The CHAC Board
placed importance on the SPA including customary and reasonable terms and
conditions as it believed that such terms and conditions would protect CHAC’s
interests in the transaction and enhance the likelihood of closing.
Specifically, the CHAC Board believes that the earn-out structure provides
protection to the public shareholders in the event that Hengda fails to achieve
its Net Income growth targets.
Potential
Negative Factors
In
addition to the positive factors, the CHAC Board also considered the following
potential negative factors:
|
|
·
|
The
possibility that, in the future, changes in the political, economic and/or
legal environment in China could have an adverse impact on Hengda’s
business;
|
|
|
·
|
The
possibility that changes in the construction materials industry and new
technologies could render Hengda’s products uncompetitive or obsolete;
and
|
|
|
·
|
The
possibility that Hengda may not be able to manage its expected growth and
enlarged business which could adversely affect its
business.
|
Other
Considerations
During
the meeting of August 3, 2009 the Board of CHAC reviewed a company comparable
analysis and discussed the 80% test to determine whether the acquisition of
Hengda is fair and in the best interest of CHAC and its stockholders as well as,
meeting CHAC’s net asset requirement.
Public
Company Analysis
Since a
publicly traded company that produces exterior ceramic tiles
exclusively does not exist, CHAC’s management considered a wide range of
publicly traded comparable companies involved in the construction materials
industry. An analysis of publicly traded comparable companies is not
purely mathematical; rather, it involves complex consideration and judgments
regarding differences in financial and operating characteristics of the
comparable companies and other factors that could affect the public trading of
the comparable companies. CHAC examined the trading performance of a wide range
of U.S., European, Australian and Chinese listed companies that could serve as
comparable companies and prepared a list of 2009 and 2010 comparative
price/earnings ratios as of July 29, 2009 which is reproduced
below.
The mean
and median implied price/earnings multiple for 2009 for U.S., European and
Australian publicly listed comparable companies was 20.5x and 21.0x,
respectively. The mean and median implied price/earnings ratio for
2010 for U.S., European and Australian publicly listed comparable companies was
estimated to be 19.8x and 19.1x, respectively.
|
Company
Name
|
Exchange
|
Price
as of
(29-Jul-09)
|
Market
Capitalization
($mm)
|
P/E
Fully
Diluted
2009
(1)
|
P/E
Fully
Diluted
2010
(2)
|
|||||||||||||
|
United
States Listed
|
||||||||||||||||||
|
Masco
Corp.
|
NYSE
|
$ | 9.19 | $ | 3,302 |
n.m.
|
31.7 | x | ||||||||||
|
Armstrong
World Industries, Inc.
|
NYSE
|
$ | 21 | $ | 1,205 | 26.2 | x | 19.1 | x | |||||||||
|
Owens
Corning
|
NYSE
|
$ | 17.16 | $ | 2,195 | 47.4 | x | 20.7 | x | |||||||||
|
Gibraltar
Industries, Inc.
|
Nasdaq
|
$ | 7.14 | $ | 215 |
n.m.
|
13.2 | x | ||||||||||
|
Trex
Co. Inc.
|
NYSE
|
$ | 15.25 | $ | 235 |
n.m.
|
31.8 | x | ||||||||||
|
Mohawk
Industries Inc.
|
NYSE
|
$ | 46.76 | $ | 3,201 | 50.3 | x | 23.9 | x | |||||||||
|
Beacon
Roofing Supply Inc.
|
Nasdaq
|
$ | 16.51 | $ | 756 | 15.9 | x | 15.2 | x | |||||||||
|
Europe
Listed
|
||||||||||||||||||
|
Saint
Gobain
|
NYX
|
$ | 37.38 | $ | 19,171 | 13.2 | x | 11.1 | x | |||||||||
|
Wienerberger
Baustoffindustrie AG
|
WBAG
|
$ | 16.08 | $ | 1,332 |
n.m.
|
43.0 | x | ||||||||||
|
Uralita
SA
|
MCE
|
$ | 5.82 | $ | 1,127 | 15.0 | x | 15.6 | x | |||||||||
|
Australia
Listed
|
||||||||||||||||||
|
Boral
Ltd.
|
ASX
|
$ | 3.87 | $ | 2,293 | 26.0 | x | 20.2 | x | |||||||||
|
James
Hardie Industries NV
|
ASX
|
$ | 3.91 | $ | 1,373 | 15.0 | x | 15.6 | x | |||||||||
|
Median
(3)
|
21.0 | x | 19.1 | x | ||||||||||||||
|
Mean
(3)
|
20.5 | x | 19.8 | x | ||||||||||||||
Source:
CapitalIQ, Thomson One, Wall St. Equity Research
Note:
Calendarized to December year end.
|
|
1.
|
Represents
the ratio of stock price to the estimated earnings of
2009
|
|
|
2.
|
Represents
the ratio of stock price to the estimated earnings of
2010
|
|
|
3.
|
Excludes
P/E multiples greater than 40x
|
The mean
and median implied price/earnings ratio for 2009 for China publicly listed
comparable companies was 39.4x and 32.8x, respectively. The mean and
median implied price earnings multiple for 2010 for China publicly listed
comparable companies was estimated to be 30.4x and 24.2x,
respectively.
|
Company Name
|
Exchange
|
Price
as of
|
Market
Capitalization
($mm)
|
P/E Fully
Diluted
2009
(1)
|
P/E Fully
Diluted
2010
(2)
|
|||||||||||||
|
China
Listed
|
0.0 | x | 0.0 | x | ||||||||||||||
|
Shanghai
Cimic Tile Co., Ltd.
|
SZSE
|
$ | 1.17 | $ | 446 | 72.9 | x | 57.3 | x | |||||||||
|
Beijing
New Building Materials Public Ltd. Co
|
SZSE
|
$ | 2.18 | $ | 1,255 | 33.1 | x | 24.8 | x | |||||||||
|
Wuhu
Conch Profiles And Science Co., Ltd.
|
SZSE
|
$ | 1.48 | $ | 533 | 19.1 | x | 16.0 | x | |||||||||
|
Guangzhou
Seagull Kitchen and Bath Products Co., Ltd.
|
SZSE
|
$ | 1.38 | $ | 322 | 32.6 | x | 23.6 | x | |||||||||
|
Median
|
32.8 | x | 24.2 | x | ||||||||||||||
|
Mean
|
39.4 | x | 30.4 | x | ||||||||||||||
Source:
CapitalIQ, Thomson One, Wall St. Equity Research
Note:
Calendarized to December year end.
|
|
1.
|
Represents
the ratio of stock price to the estimated earnings of
2009
|
|
|
2.
|
Represents
the ratio of stock price to the estimated earnings of
2010
|
The Board
compared the publicly traded comparable companies implied multiples to the table
below showing the proforma equity value of a combined CHAC and Hengda assuming
two scenarios; 1) redemption of 33.3% of the Common Shares into cash, and 2) a
redemption of 33.3% of the Common Shares into cash and a 41.7% repurchase of
Common Shares by CHAC. Both scenarios assume the issuance of the Earn-Out shares
to the Seller.
|
Assumes
33.3% Redemption
|
Assumes
33.3% Redemption
and
a 41.7% Repurchase
|
|||||||||||||||
|
After
2011 Audit Cycle
|
Excludes
Warrant
|
No
Warrant
Purchase
|
Excludes
Warrant
|
No
Warrant
Purchase
|
||||||||||||
|
CHAC
Shares in Current Circulation
|
12,800,000 | 12,800,000 | 12,800,000 | 12,800,000 | ||||||||||||
|
Assumed
Redemption
|
(4,266,239 | ) | (4,266,239 | ) | (9,600,000 | ) | (9,600,000 | ) | ||||||||
|
Founder
Shares
|
1,600,000 | 1,600,000 | 1,600,000 | 1,600,000 | ||||||||||||
|
Net
Shares from warrants/options
|
0 | 3,637,334 | 0 | 3,637,334 | ||||||||||||
|
Sellers'
shares released at Closing
|
5,743,320 | 5,743,320 | 5,743,320 | 5,743,320 | ||||||||||||
|
Earn-Out
Shares
(1)
|
5,185,783 | 5,185,783 | 5,185,783 | 5,185,783 | ||||||||||||
|
Total
Shares in Circulation
|
21,062,864 | 24,700,198 | 15,729,103 | 19,366,437 | ||||||||||||
|
Pro
Forma equity Value (based on shares in circulation and a share price of
$9.79 per share)
|
$ | 206,205,439 | $ | 241,814,938 | $ | 153,987,918 | $ | 189,597,418 | ||||||||
|
2011
Earnings Target
|
$ | 43,538,248 | $ | 43,538,248 | $ | 43,538,248 | $ | 43,538,248 | ||||||||
|
Implied
Price/Earnings multiple for 2011 Earnings
|
4.7 | x | 5.6 | x | 3.5 | x | 4.4 | x | ||||||||
(1) Excludes
Stock Price Share Incentive Earn-outs
Since the
price/earnings multiples under both scenarios for Hengda were less than the
public company comparables, the CHAC Board determined that the transaction was
fair to its stockholders from a financial point of view.
80%
Test Analysis
It is a
requirement that any business acquired by CHAC have a fair market value equal to
at least 80% of its net assets at the time of acquisition, which include the
amount in the Trust Account. CHAC’s net asset value is approximately $125.3mm as
of June 30, 2009. This net asset value multiplied by the 80% hurdle results in a
required target valuation of approximately $100.3 million.
The Board
believes that Hengda’s value will exceed 80% of CHAC’s net assets at closing
based on the financial analysis of Hengda generally used to approve the
transaction, including a public company analysis. If a 5.0x
price/earnings ratio were used to value Hengda based on its 2008 net earnings of
$23.7 million, a ratio which is below the low-end of the range in the analysis
from the immediately preceding section, Hengda’s implied value would be $118.5
million, greater than the $100.3 million required to satisfy the 80%
test. The CHAC Board believes that because of the financial skills
and background of several of its members, it was qualified to make an analysis
itself and conclude that the acquisition of Hengda met the 80% asset test
requirement without recourse to a fairness opinion from an independent
source.
By
conducting this analysis internally (as opposed to obtaining a third party
determination of the satisfaction of the 80% test and the fairness of the
transaction to the CHAC stockholders), the CHAC Board may have assumed
additional potential liability in the event of a challenge to the Board’s
actions. Under Delaware law, a director is fully protected in relying in good
faith upon the opinions, reports or statements presented by a person as to
matters the director reasonably believes are within such person’s professional
or expert competence and who has been selected by reasonable care. Without that
protection afforded by a third party determination, directors could have
additional liability (and CHAC could be required to provide indemnification to
the directors) if the decision to acquire Hengda was determined to be in
violation of the Board’s fiduciary duties and not covered by the limitations on
director liability contained in CHAC’s certificate of
incorporation.
Recommendation
of CHAC’s Board
After
careful consideration, CHAC’s Board determined that the acquisition of Hengda is
fair to and in the best interests of CHAC and its stockholders. On the basis of
the foregoing, CHAC’s Board has approved and declared advisable the acquisition
of Hengda and recommends that you vote or give instructions to vote “FOR” each
of the Business Combination Proposal, Redomestication Proposal, and the other
proposals.
The
board of directors recommends a vote “FOR” each of the Business Combination
Proposal,
Redomestication
Proposal, and the other proposals
Actions
that May be Taken to Secure Approval of CHAC’s Stockholders
In order
to ensure that that the Acquisition is approved, CHAC, Hengda and their
respective affiliates may enter into transactions to purchase common shares of
CHAC from shareholders who have indicated their intention to vote against the
acquisition and seek conversion of their shares. In addition, CHAC, Hengda and
their respective affiliates may also purchase warrants from warrant holders.
Such purchases could result in all or substantially all of CHAC trust fund being
expended to pay for such purchases post transaction, which would result in
Hengda not receiving any working capital from the trust account. No
transactions have been entered into, but may include:
|
|
·
|
Purchases
by CHAC, Hengda or their respective affiliates of shares or warrants of
CHAC;
|
|
|
·
|
Agreements
with third parties to purchase shares or warrants that may then be resold
to the combined company subsequent to the acquisition using funds that
were previously in the trust
account;
|
|
|
·
|
Agreements
with third parties pursuant to which CHAC, Hengda or their respective
affiliates would borrow funds to make purchases of common shares or
warrants of CHAC. The combined company would repay such borrowings using
funds that were previously in the trust account;
and
|
|
|
·
|
The
granting of securities to third party purchasers of common shares or
warrants of CHAC as an inducement for such third parties to purchase such
securities.
|
Any CHAC
shares purchased by CHAC or its affiliates would increase the likelihood that
the transaction would be approved.
In the
event that it appeared that the acquisition would not be consummated at the
special meeting of CHAC’s shareholders, such meeting could be postponed
(assuming that the postponement proposal was approved by the shareholders and
such postponement was not CHAC’s termination date) to enter into arrangements
similar to the foregoing.
In the
event that any purchases of CHAC’s common stock or warrants are made by CHAC,
Hengda or affiliates of either of them after the mailing of this proxy statement
to shareholders but prior to the special meeting, CHAC will file a Current
Report on Form 8-K relating to such purchases within four business days of such
purchases or otherwise prior to the special meeting.
CHAC will
file a Current Report on Form 8-K with respect to any arrangements entered into
by CHAC, Hengda or their respective affiliates which is intended to increase the
likelihood that the arrangement and related proposals are approved by CHAC’s
shareholders. Any CHAC shares purchased by CHAC will not be considered
outstanding for purposes of the special meeting and will therefore not be
permitted to vote at the meeting. In the event that public shares are purchased
by CHAC, such shares would no longer be deemed to be outstanding for purposes of
determining the vote required for the approval of any of the proposals presented
at the special meeting. Therefore, this would reduce (i) the number of public
shares outstanding and entitled to vote on each matter, (ii) the number of
shares required to be voted in favor of each proposal. Conversely, if CHAC’s
directors and officers purchased such shares, those shares would still be
considered to be outstanding and could be voted in favor of such proposals,
reducing the number of shares required to be voted in favor of such proposals by
a number of shares equal to those purchased. Neither CHAC nor its officers or
directors purchasing shares would affect the number of shares that could be
converted by CHAC with the acquisition still being permitted to be
consummated.
CHAC’s
initial shareholders have agreed to vote the ordinary shares of CHAC owned by
them prior to CHAC’s initial public offering in accordance with the majority of
the votes cast by holders of shares sold in CHAC’s initial public
offering. The initial shareholders are not under any obligation to
CHAC with respect to voting any shares acquired by them in CHAC’s initial public
offering or in the aftermarket, and accordingly may vote any such shares in
favor of the proposed acquisition (as they have indicated they intend to
do). This would have the effect of reducing the number of other
public shareholders of CHAC that would have to vote in favor of the proposed
acquisition. The initial shareholders have agreed not to
demand redemption rights with respect to any of their initial shares (nor
will they seek appraisal rights with respect to such shares if appraisal rights
would be available to them).
Interests
of Certain Persons in the Acquisition
When you
consider the recommendation of the CHAC board of directors, you should keep in
mind that CHAC’s executive officers and members of CHAC’s board of directors
have interests that may be different from, or in addition to, your interests as
a stockholder. These interests include, among other things:
|
|
·
|
if
the proposed Acquisition is not completed by November 21, 2009 (or
November 21, 2010, if CHAC’s stockholder vote to extend the date the
business combination must be consummated), CHAC will be required to
liquidate. In such event, the 3,200,000 shares of common stock held by
CHAC officers, directors and affiliates, which were acquired prior to the
IPO for an aggregate purchase price of $28,750, will be worthless, as will
the 2,750,000 warrants that were acquired prior to the IPO for an
aggregate purchase price of $2,750,000. Such common stock and warrants had
an aggregate market value of approximately $31.8 million based on the
most recent closing price of $9.64 and $0.34, on the NYSE Amex as of
August 20, 2009 and August 19, 2009,
respectively;
|
|
|
·
|
in
connection with the IPO, each of Paul K. Kelly and James D. Dunning, Jr.
have agreed to indemnify CHAC for debts and obligations to vendors that
are owed money by CHAC, but only to the extent necessary to ensure that
certain liabilities do not reduce funds in the Trust Account. If the
business combination is consummated, Messrs. Kelly and Dunning will
not have to perform such obligations. As of June 30, 2009, CHAC
believes that the maximum amount of the indemnity obligation of
Messrs. Kelly and Dunning was approximately $100,000, which was
computed based on the amount payable to creditors, less amounts relating
to creditors for which CHAC has received a waiver of each such creditor’s
right to sue the Trust Account. Although CHAC does not currently have
sufficient funds outside of the Trust Account to pay these
obligations, CHAC believes that it may qualify for a U.S.
federal tax refund for the 2009 tax year which could be used to
offset the claims of vendors. However, if the business combination is not
consummated and CHAC does not receive a tax refund to cover the claims of
all of its vendors, and vendors that have not signed waivers sue the Trust
Account and win their cases, the Trust Account could be reduced by the
amount of the claims and Messrs. Kelly and Dunning would be required
to fulfill their indemnification obligations and they may not be able to
satisfy their individual obligations to indemnify
CHAC;
|
|
|
·
|
warrants
to purchase CHAC common stock held by CHAC’s officers and directors are
exercisable only upon consummation of a business
combination;
|
|
|
·
|
all
rights specified in CHAC’s certificate of incorporation relating to the
right of officers and directors to be indemnified by CHAC, and of CHAC’s
officers and directors to be
exculpated;
|
|
|
·
|
from
monetary liability with respect to prior acts or omissions, will continue
after the business combination. If the business combination is not
approved and CHAC liquidates, CHAC will not be able to perform its
obligations to its officers and directors under those
provisions;
|
|
|
·
|
if
the business combination with Success Winner is completed, Paul Kelly and
Cheng Davis will serve as directors of China Ceramics and Success Winner
will designate three members to the Board of Directors of China Ceramics;
and
|
|
|
·
|
CHAC’s
financial, legal and other advisors have rendered services for which they
may not be paid if the business combination is not approved. Any recovery
of such fees and expenses by these vendors will be much more difficult in
the event the business combination is not approved while such recovery is
not expressly contingent on the outcome of the CHAC stockholder vote,
these vendors could be viewed as having an interest in the outcome of such
vote.
|
In
addition, the exercise of CHAC’s directors’ and officers’ discretion in agreeing
to changes or waivers in the terms of the transaction may result in a conflict
of interest when determining whether such changes or waivers are appropriate and
in our stockholders’ best interest.
Anticipated
Accounting Treatment
The
Acquisition will be accounted for in accordance with U.S. generally accepted
accounting principles as a capital transaction in substance. Under this method
of accounting, CHAC will be treated as the “acquired” company for financial
reporting purposes. This determination was primarily based on Success Winner
comprising the ongoing operations of the combined entity, the senior management
and a majority of the board of directors of Success Winner will continue as the
senior management and majority of the board of directors of the combined company
and Success Winner shareholders retaining approximately 28.5% to 54.5% of the
voting interests in the combined company (excluding any escrowed shares released
upon certain earnings and stock price thresholds). In accordance with guidance
applicable to these circumstances, the Acquisition will be considered to be a
capital transaction in substance. Accordingly, for accounting purposes, the
Acquisition will be treated as the equivalent of Success Winner issuing stock
and warrants for the net assets of CHAC, accompanied by a recapitalization. The
net assets of CHAC will be stated at fair value, which is considered to
approximate historical cost, with no goodwill or other intangible assets
recorded. Operations prior to the Acquisition will be those of Success
Winner.
Regulatory
Approvals
CHAC and
Success Winner do not expect that the Acquisition will be subject to any state
or federal regulatory requirements other than filings under applicable
securities laws and the effectiveness of the registration statement of which
this proxy statement/prospectus is part, and the filing of certain Acquisition
documents with, and the issuance of a certificate of incorporation on conversion
by the Secretary of State of the State of Delaware. CHAC and Success Winner
intend to comply with all such requirements. No filings will have to be made
with the Registrar of Corporate Affairs of the British Virgin Islands in
connection with the Business Combination.
THE
ACQUISITION AGREEMENT
The
following is a summary of the material provisions of the Acquisition Agreement,
a copy of which is attached as Annex A to this proxy statement/prospectus. You
are encouraged to read the Acquisition Agreement in its entirety for a more
complete description of the terms and conditions of the
Acquisition.
Redomestication
to the British Virgin Islands
CHAC will
complete a corporate reorganization that would result in holders of CHAC
securities holding securities in China Ceramics, a British Virgin Islands
company rather than in CHAC, a Delaware corporation. CHAC, the current Delaware
corporation, will effect a merger pursuant to Section 251 of the General
Corporation Law of the State of Delaware in which it will merge with and into
China Ceramics, its wholly-owned British Virgin Islands subsidiary, with China
Ceramics surviving the merger.
The
redomestication will result in all of CHAC’s issued and outstanding shares of
common stock immediately prior to the redomestication converting into shares of
China Ceramics, and all units, warrants and other rights to purchase CHAC’s
common stock immediately prior to the redomestication being exchanged for
substantially equivalent securities of China Ceramics. If the shares of China
Ceramics do not continue to be quoted on the NYSE Amex, it is possible that
the shares will be listed and traded only on the OTC Bulletin Board. CHAC
will cease to exist and China Ceramics will be the surviving corporation. In
connection therewith, China Ceramics will assume all the property, rights,
privileges, agreements, powers and franchises, debts, liabilities, duties and
obligations of CHAC, including any and all agreements, covenants, duties and
obligations of CHAC set forth in the Acquisition Agreement.
Business
Combination with Success Winner; Acquisition Consideration
Immediately
following the redomestication, China Ceramics will acquire all of the issued and
outstanding shares of Success Winner held by Mr. Wong Kung Tok (the “Seller”) in
exchange for $10.00 and 5,743,320 shares of China Ceramics ordinary shares. The
issuance of shares of China Ceramics to the post-acquisition shareholders is
being consummated on a private placement basis pursuant to Section 4(2) of the
Securities Act of 1933, as amended. In addition, 8,185,763 shares of the China
Ceramics ordinary shares will be placed in escrow (the “Contingent Shares”) and
released to the Seller in the event certain earnings and stock price thresholds
are achieved, as specified in the table below. Of the Contingent
Shares, up to 5,185,763 Contingent Shares will be released based on achieving
growth in either Net Income Before Tax or Net Income After Tax, depending on the
year, following the completion of an audit in accordance with International
Financial Reporting Standards (IFRS). Additionally, 3,000,000 Contingent Shares
will be released if CHAC shares close at or above certain share price targets
for any twenty trading days within a thirty trading day period prior to
April 30, 2012.
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Incentive Range
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Financial
Metric in the Fiscal Year
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Min
|
Max
|
Implied
Growth
(1)
|
Shares Released per
$ of Growth |
Maximum Shares
Released
|
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2009
Net Income
Before
Tax
|
$ | 28.0 | $ | 31.7 | 13.2 | % | 0.3284 | 1,214,127 | ||||||||||||
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2010
Net Income After Tax
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$ | 23.8 | $ | 31.4 | 32.0 | % | 0.2359 | 1,794,800 | ||||||||||||
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2011
Net Income After Tax
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$ | 31.4 | $ | 43.5 | 38.7 | % | 0.1790 | 2,176,836 | ||||||||||||
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Stock
price targets by April 30, 2012
|
Price of $20
Price
of $25
|
2,000,000
1,000,000 |
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(1)
|
Implied
year over year growth of Max Benchmark after
tax
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For
example, Hengda will receive 0.3284 CHAC shares for every dollar of 2009 Net
Income Before Tax above $28.0 million up to a maximum of 1,214,127 CHAC shares
which occurs at a 2009 Net Income Before Tax of $31.7 million.
The
aggregate value of the consideration to be paid by China Ceramics in the
business combination will be approximately $55.4 million (based on
5,743,320 shares to be issued to the post-acquisition shareholders at a market
value of $9.64 per share, the most recent closing price of CHAC’s common stock
as of August 20, 2009). In connection with the closing of the
transaction, the CHAC founders will forfeit 1,600,000 of their founders’ shares
to CHAC for cancellation. After such shares are canceled, the CHAC
founders will own a total of 1,600,000 shares.
CHAC
currently has authorized share capital of 41,000,000 shares consisting of
40,000,000 shares of common stock with a par value of $0.001 per share and
1,000,000 shares of preferred stock with a par value of $0.0001 per share. China
Ceramics currently is authorized to issue of 51,000,000 shares of a single
class.
After the
Acquisition assuming no conversion of shares into cash and no contingent shares
are issued, CHAC’s current public shareholders will own approximately 63.5% of
China Ceramics, CHAC’s current directors, officers and affiliates will own
approximately 8.0% of China Ceramics, Seller will own approximately 28.5% of
China Ceramics.
Pursuant
to the Acquisition Agreement, the redomestication will not be consummated unless
the business combination is also approved. Similarly, the business combination
will not take place unless the redomestication is also approved. Upon
consummation of the business combination, China Ceramics will own 100% of the
issued and outstanding shares of Success Winner.
Representations
and Warranties
In the
Acquisition Agreement, the Seller makes certain representations and warranties
(with certain exceptions) relating to, among other things: (a) title to shares;
(b) authorization, execution, delivery and enforceability of the Acquisition
Agreement and other transaction documents; (c) absence of conflicts; (d)
required consents and approvals; (f) absence of litigation; and (g) transfer
restrictions.
In the
Acquisition Agreement, Success Winner, Hengda and the Seller (the “Warrantors”)
make certain representations and warranties (with certain exceptions) relating
to, among other things: (a) capital structure; (b) proper corporate organization
and similar corporate matters; (c) authorization, execution, delivery and
enforceability of the Acquisition Agreement and other transaction documents; (d)
absence of conflicts; (e) required consents and approvals; (f) financial
information and absence of undisclosed liabilities; (g) absence of certain
changes or events; (h) absence of litigation; (i) licenses and permits; (j)
title to properties; (k) ownership of intellectual property; (l) taxes; (m)
employment matters; (n) material contracts; (o) compliance with laws, including
those relating to the PRC, foreign corrupt practices and money laundering; (p)
broker’s and finder’s fee; and (q) environmental matters.
In the
Acquisition Agreement, CHAC and China Ceramics make certain representations and
warranties (with certain exceptions) relating to, among other things: (a)
capital structure; (b) proper corporate organization and similar corporate
matters; (c) authorization, execution, delivery and enforceability of the
Acquisition Agreement and other transaction documents; (d) absence of conflicts;
(e) required consents and approvals; (f) SEC filings; (g) absence of certain
changes or events; (h) financial information and absence of undisclosed
liabilities; (i) absence of litigation; and (j) compliance with laws, including
money laundering laws.
Conduct
Prior to Closing; Covenants
The
Warrantors have agreed to continue to operate Hengda’s business in the ordinary
course prior to the closing (with certain exceptions) and not to take certain
specified actions without the prior written consent of the other
party.
The
Acquisition Agreement also contains covenants of Hengda, Success Winner and the
Seller, including covenants providing for:
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·
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Hengda
and Success Winner providing access to its books and records to CHAC, and
providing information relating to Hengda’s business as CHAC, its counsel
and other representatives may
request;
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·
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Hengda,
Success Winner, Seller, CHAC and China Ceramics agree not to, directly or
indirectly, solicit, encourage or enter into any negotiation or
arrangement with any party. Other than the other parties to the Agreement
concerning the sale of all of any part of Hengda’s business or the capital
stock or other securities of Success Winner or any of its subsidiaries
that takes the form of a sale of stock or assets, merger, consolidation or
any joint venture or partnership;
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China
Ceramics giving the Seller piggy-back registration rights relating to the
shares of China Ceramics ordinary shares issued in connection with the
acquisition.
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Seller
and each of the other persons receiving stock consideration in connection
with the acquisition will each enter into a lock-up agreement pursuant to
which the shares of China Ceramics ordinary shares will be locked-up for a
period of twelve months, except with respect to 655,000 shares of China
Ceramics ordinary shares, which will be locked-up for a period of six
months.
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Conditions
to Closing
Consummation
of the Acquisition Agreement is conditioned on (a) no law or court order
prohibiting or limiting consummation of the acquisition or materially limiting
China Ceramics’ right to control Hengda; (b) holders of a majority of CHAC’s
common stock approving the business combination in accordance with its Articles
of Incorporation, with holders of less than 33.33% of CHAC’s public shares of
common stock voting against the acquisition and properly exercising their rights
to convert such public shares of common stock to cash; (c) the absence of any
proceeding pending or threatened to enjoin or otherwise restrict the
acquisition.
Warrantors’
Conditions to Closing
The
obligations of Hengda, Success Winner and Seller to consummate the transactions
contemplated by the Agreement, in addition to the conditions described above,
are conditioned upon the representations and warranties of CHAC and China
Ceramics being true on and as of the closing date of the Acquisition Agreement,
and CHAC and China Ceramics complying with all required covenants in the
Acquisition Agreement.
CHAC’s
and Purchaser’s Conditions to Closing
The
obligations of CHAC to consummate the transactions contemplated by the
Agreement, in addition to the conditions described above in the first paragraph
of this section, are conditioned upon each of the following, among other
things:
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·
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the
representations and warranties of the Warrantors shall be true on and as
of the closing date of the Acquisition Agreement, and each of the
Warrantors has complied with all required covenants in the Acquisition
Agreement;
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·
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China
Holdings shall have received legal opinions from counsel to
Hengda;
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·
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receipt
by the Warrantors of certain third party
consents;
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·
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there
not being any material adverse change with respect to Hengda;
and
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·
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Hengda
has entered into a definitive purchase agreement for the Gaoan production
facility.
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If
permitted under applicable law, either CHAC or China Ceramics on the one hand or
Hengda, Seller or Success Winner on the other hand may waive any inaccuracies in
the representations and warranties made to such party in the Acquisition
Agreement and may waive compliance with any agreements or conditions for the
benefit of itself or such party contained in the Acquisition
Agreement.
Termination
The
Acquisition Agreement may be terminated and/or abandoned at any time prior to
the closing, whether before or after approval of the proposals being presented
to CHAC’s stockholders, by:
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·
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either
CHAC or any Warrantor, if the closing has not occurred by November 21,
2009;
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·
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Any
Warrantor, if there has been a breach by CHAC or China Ceramics of any
covenant, representations or warranties contained in the Agreement, and in
any event if such breach is subject to cure and CHAC has not cured such
breach within five days after written notice of intent to terminate from
any Warrantor; or
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·
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CHAC
or China Ceramics, if there has been a breach by any of the Warrantors of
any covenant, representations or warranties contained in the Agreement,
and in any event if such breach is subject to cure and Warrantors have not
cured such breach within five days after written notice of intent to
terminate from CHAC or China
Ceramics.
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Effect
of Termination
In the
event of termination and abandonment by either CHAC or the Warrantors, except as
set forth below, all further obligations of the parties shall terminate, no
party shall have any right against the other party, and each party shall bear
its own costs and expenses.
Indemnification
The
Warrantors have agreed, jointly and severally, to indemnify CHAC from any
damages arising from: (a) any breach of any representation, warranty or covenant
made by the Warrantors or (b) the failure to pay any third party claims for the
period of time prior to the acquisition. CHAC and China Ceramics have agreed to
indemnify the Seller from any damages arising from (a) any breach of any
representation, warranty or covenant made by CHAC or China Ceramics and (b)
actions or inactions of the China Ceramics with regard to the business of Hengda
occurring after the closing date of the acquisition. The
indemnification obligations are subject to a $100,000 basket and are capped at
$5,740,000.
The
foregoing summary of the Acquisition Agreement does not purport to be complete
and is qualified in its entirety by reference to the actual agreement, which is
filed as Annex A hereto.
Voting
Agreement
As a
condition to the closing of the Acquisition, CHAC, China Ceramics, Hengda, the
Seller and certain shareholders of CHAC will enter into a Voting Agreement to
set forth their agreements and understandings with respect to how shares of
CHAC’s common stock held by them will be voted on in connection with, and
following, the transactions contemplated by the Acquisition
Agreement. The parties will agree to vote their shares of CHAC common
stock as necessary to ensure that the size of the Board of Directors of China
Ceramics after the consummation of the Acquisition will be five members until
April 30, 2012. The parties will also agree to vote their shares of
CHAC common stock to ensure the election of two members of the Board of
Directors of China Ceramics designated by CHAC, who shall initially be Paul
Kelly and Cheng Davis, and three members designated by the Seller, of which one
designee shall qualify as an independent director pursuant to the rules of any
stock exchange on which China Ceramics may be listed.
THE
REDOMESTICATION PROPOSAL
General
CHAC is
redomesticating in the British Virgin Islands and in that process changing its
name and corporate documents and establishing a new board of directors. The
redomestication merger is a condition to consummation of the business
combination.
We
believe that the redomestication in the British Virgin Islands (BVI) will give
the continuing company more flexibility and simplicity in various corporate
transactions. We also believe that being redomesticated in the BVI will
facilitate and reduce the costs of any further reorganization of Hengda and
permit the creation and acquisition of additional companies in China as the
business of Hengda expands. We believe that the redomestication will reduce
taxes and other costs of doing business by China Ceramics in the future because
its operations will be in China after the acquisition. The BVI has adopted a BVI
Business Companies Act that allows for flexible and creative corporate
structures for international businesses. Further, BVI business companies are
wholly exempt from BVI tax on their income. As part of the redomestication,
CHAC’s corporate name will be that of the surviving company, “China Ceramics
Co., Ltd.”
Redomestication
in the BVI will entail some risks for CHAC stockholders. Upon completion of the
stock purchase transaction, holders of CHAC stock will represent a minority of
the issued and outstanding shares of China Ceramics.
The laws
of the British Virgin Islands relating to the protection of the interests of
minority shareholders differ in some respects from those established under
statutes or judicial precedent in existence in the United
States. British Virgin Island law protecting the interests of
minority shareholders may not be as protective in all circumstances as the law
protecting minority shareholders in some U.S. jurisdictions. In addition, the
circumstances in which a shareholder of a British Virgin Islands company may sue
the company in derivative actions, and the procedures and defenses that may be
available to the company, may result in the rights of shareholders of a British
Virgin Islands company being more limited than those of shareholders of a
company domiciled in the United States.
Similarly, the fiduciary
obligations of the China Ceramics directors under British Virgin Islands law are
not as clearly established as they would be under the statutes or judicial
precedent in some jurisdictions in the United States, and British Virgin Islands
companies may not have standing to initiate a shareholder derivative action in a
federal court of the United States. These risks are discussed in greater detail
in the “Risk Factors” section under the heading “Risks Related to
Acquisition.”
The full
texts of the Memorandum and Articles of Association of China Ceramics are set
forth as Annex C and D to this proxy statement/prospectus. A discussion of
these documents and the comparison of rights is set forth below.
Adoption
of the Redomestication Merger
The board
of directors has approved the redomestication plan and redomestication merger
and recommends that the stockholders of CHAC approve it.
The
affirmative vote of the holders of a majority of the shares outstanding of CHAC
is required for approval of the redomestication plan and redomestication merger.
Abstentions and broker non-votes will have the effect of a vote against the
proposal.
The
redomestication plan will not be implemented if the acquisition agreement is not
approved or the stock purchase is not consummated. The stock purchase will not
be consummated if CHAC does not redomesticate in the BVI.
The board
of directors unanimously recommends a vote “FOR” the approval of the
redomestication plan and redomestication merger.
Redomestication
Merger
The
redomestication will be achieved by the merger of CHAC, a Delaware corporation,
with and into China Ceramics, a BVI company, which is wholly owned by CHAC at
this time, with China Ceramics being the surviving entity. The Memorandum of
Association and the Articles of Association, the equivalent of a certificate of
incorporation and bylaws of a United States company, of the surviving company
will be those of China Ceramics, written in compliance with BVI law. The
effectiveness of the redomestication and the merger is conditioned upon the
filing by both CHAC and China Ceramics of a certificate of merger with the State
of Delaware and articles of merger with the BVI. Upon the filing of these
documents, CHAC will cease its corporate existence in the State of
Delaware.
At the
time of the merger, one new share of China Ceramics will be issued for each
outstanding share of common stock of CHAC held by our stockholders on the
effective date for the redomestication. Each share of China Ceramics that is
owned by CHAC will be canceled and resume the status of authorized and unissued
China Ceramics shares. The CHAC shares no longer will be eligible to trade on
NYSE Amex. The shares of China Ceramics will be eligible to trade in their place
beginning on or about the effective date of the redomestication under a new
CUSIP number and trading symbol. The symbol will be determined with the approval
of NYSE Amex if that is where the shares will trade upon consummation of the
stock purchase.
No
fractional shares of China Ceramics ordinary shares will be issued in connection
with the redomestication merger, and no certificates or scrip for any such
fractional shares shall be issued. Any shareholder of CHAC who would
otherwise be entitled to receive a fraction of a share of China Ceramics
ordinary shares (after aggregating all fractional shares of China Ceramics’
ordinary shares issuable to such holder) shall, in lieu of such fraction of a
share, be paid in cash the dollar amount (rounded to the nearest whole cent),
without interest, determined by multiplying such fraction by the closing bid
price of a China Ceramics ordinary share on the public trading market on which
the China Ceramics ordinary shares may be trading at the effective time of the
redomestication merger.
Your
percentage ownership of CHAC will not be affected by the redomestication. As
part of the stock purchase transaction, however, there will be the issuance of
additional shares of common stock as partial consideration for the acquisition
of Hengda. As part of the redomestication, the outstanding warrants of CHAC will
automatically be converted into outstanding warrants of China Ceramics on the
same terms as currently issued. In addition, China Ceramics will assume all
other outstanding obligations of CHAC and succeed to those benefits enjoyed by
CHAC. The business of CHAC, upon the redomestication and the acquisition of
Hengda will become that of Hengda.
You do
not need to replace the current stock certificate of CHAC after the
redomestication merger.
Do not
destroy your current stock certificates issued by CHAC
. The issued and
outstanding stock certificates of CHAC will represent the rights that our
stockholders will have in China Ceramics. Stockholders, however, may submit
their stock certificates to our transfer agent, Continental Stock Transfer and
Trust Company, 17 Battery Place, New York, New York 10004 (212-509-4000) for new
certificates, subject to normal requirements as to proper endorsement, signature
guarantee, if required, and payment of applicable taxes.
If you
have lost your certificate, you can contact our transfer agent to have a new
certificate issue. You may be requested to post a bond or other security to
reimburse us for any damages or costs if the lost certificate is later delivered
for sale or transfer.
Management
of China Ceramics
The
directors of China Ceramics will be five persons. These will be Huang Jia Dong,
Su Pei Zhi, [ ], Paul
K. Kelly and Cheng Davis and they will be appointed at the consummation of the
stock purchase. Mr. Huang Jia Dong will be the chairman and Mr. Li Shun Qing
will be the chief executive officer. See “Directors and Executive Officers after
the Business Combination.”
Conversion
Rights
Any
stockholder of CHAC holding shares of common stock issued in CHAC’s initial
public offering who votes against the redomestication merger may, at the same
time, demand that CHAC convert his or her shares into a pro rata portion of the
trust account as of the record date. If the stockholder makes that demand and
the redomestication merger is consummated, CHAC will convert these shares into a
pro rata portion of funds held in the trust account plus interest, as of the
record date.
The
closing price of CHAC’s common stock on _______, 2009 (the record date) was
$[ ] and the per-share, pro-rata cash
held in the trust account on that date was approximately $9.79. Prior to
exercising conversion rights, CHAC stockholders should verify the market price
of CHAC’s common stock as they may receive higher proceeds from the sale of
their common stock in the public market than from exercising their conversion
rights, if the market price per share is higher than the conversion
price.
If the
holders of 4,266,239 or more shares of common stock issued in CHAC’s initial
public offering (an amount equal to 33.33% or more of these shares), vote
against the stock purchase and demand conversion of their shares, CHAC will not
be able to consummate the stock purchase.
If you
exercise your conversion rights, then you will be exchanging your shares of CHAC
common stock for cash and will no longer own these shares. You will be entitled
to receive cash for these shares only if you continue to hold these shares
through the effective time of the stock purchase and then tender your stock
certificate to the combined company.
Appraisal
Rights
Under
Delaware corporate law, holders of CHAC common stock who comply with the
applicable requirements of Delaware law will have the right to receive an
appraised value of their shares in connection with the redomestication merger.
(Appraisal rights are different than the conversion rights, which are discussed
under the heading “The CHAC Special Meeting - Conversion Rights.”)
Delaware
law entitles the holders of record of shares of CHAC common stock who follow the
procedures specified in Section 262 of the Delaware corporate law to have their
shares appraised by the Delaware Court of Chancery and to receive the “fair
value” (as determined by the court) of such shares as of the effective time of
the redomestication merger, instead of the consideration that the holder would
otherwise receive in the redomestication merger. In order to exercise appraisal
rights, a stockholder must demand and perfect those rights in accordance with
Section 262 of the Delaware corporate law. The following is a summary of Section
262 of the Delaware corporate law. A copy of Section 262 of the Delaware
corporate law is attached hereto as Annex B. CHAC stockholders should carefully
review Section 262 of the Delaware corporate law as well as information
discussed below to evaluate their rights to appraisal.
If a
holder of CHAC common stock elects to exercise the right to an appraisal under
Section 262 of the Delaware corporate law, such stockholder must:
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file
with CHAC at its main office in Wilmington, Delaware, a written demand for
appraisal of the shares of CHAC common stock held (which demand must
identify the stockholder and expressly request an appraisal) before the
vote is taken on the redomestication merger at the special meeting;
and
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continuously
hold such shares through the effective time of the redomestication
merger.
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All
written demands for appraisal should:
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be
addressed to Paul K. Kelly, Chief Executive Officer, China Holdings
Acquisition Corporation, 1000 N. West Suite, Suite 1200, Wilmington, DE
19801,
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be
sent to ensure receipt before the vote is taken on the redomestication
merger at the special meeting,
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be
executed by, or on behalf of, the holder of record,
and
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reasonably
inform CHAC of the identity of the stockholder and that the stockholder is
thereby demanding appraisal of the stockholder’s
shares.
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Within 10
days after the effective time of the redomestication merger, China Ceramics (the
surviving company of the redomestication merger) will give written notice of the
effective time to each holder of CHAC common stock who has satisfied the
requirements of Section 262 of the Delaware corporate law by timely filing a
proper demand for appraisal. Within 120 days after the effective time, either
China Ceramics or any stockholder demanding appraisal rights may file a petition
with the court demanding a determination of the fair value of the shares of CHAC
common stock of all dissenting stockholders. Any stockholder demanding appraisal
rights who desires the court to make the determination of fair value should file
the petition on a timely basis, unless the stockholder receives notice that such
a petition has been filed by China Ceramics or another stockholder.
If a
petition for appraisal is timely filed, the court will determine which
stockholders are entitled to appraisal rights and thereafter will determine the
fair value of the shares of CHAC common stock held by those stockholders. The
court's valuation will exclude any element of value arising from the
accomplishment or expectation of the redomestication merger (and the concurrent
acquisition of Success Winner), but may include a fair rate of interest, if any,
to be paid on the amount determined to be fair value. In determining fair value,
the court shall take into account all relevant factors. The court may determine
the fair value to be more than, less than or equal to the consideration that a
stockholder would otherwise be entitled to receive either in the redomestication
merger or pursuant to the conversion rights (which entitle the holder to a pro
rata portion of the funds in the CHAC trust account). If a petition for
appraisal is not timely filed, then the right to an appraisal shall cease. The
court will determine the costs of the appraisal proceeding and the court will
assess those costs against the parties as the court determines to be equitable
under the circumstances. Upon application of a stockholder, the court may order
all or a portion of the expenses incurred by any stockholder in connection with
the appraisal proceeding (including, without limitation, reasonable attorneys’
fees and the fees and expenses of experts) to be charged pro rata against the
value of all shares entitled to appraisal. Because the reimbursement of these
costs is discretionary and because the appraised value of the shares may be low
(given that the court is entitled to exclude any elements of value arising from
the accomplishment or expectation of the redomestication merger and the
concurrent acquisition of Success Winner), stockholders demanding appraisal
rights may not receive amounts for their shares that would be sufficient to
cover their costs of the appraisal process.
After the
effective time of the redomestication merger, no stockholder who has exercised
appraisal rights shall have any rights of a CHAC stockholder with respect to
such holder’s shares for any purpose, except to receive payment to which CHAC
stockholders of record as of a date prior to the effective time are entitled, if
any. If a stockholder entitled to appraisal rights delivers to China Ceramics a
written withdrawal of the demand for an appraisal within 60 days after the
effective time of the redomestication merger (or thereafter with the written
approval of China Ceramics) or if no petition for appraisal is filed within 120
days after the effective time, then the right of such stockholder to an
appraisal will cease and such stockholder will be entitled to receive only the
shares of common stock of China Ceramics as provided in the redomestication
merger.
Differences
in Stockholder Rights
Upon the
completion of the redomestication, the Memorandum and Articles of Association of
China Ceramics will become the governing documents of the surviving company. The
corporate statutes of Delaware and the British Virgin Islands are similar, and
flexibility available under British Virgin Islands law has enabled us to
adopt a Memorandum of Association and Articles of Association that will
provide stockholders with rights that do not vary in any material respect from
those they enjoyed under CHAC’s certificate. Some of the differences between
Delaware and British Virgin Islands corporation law include the
following:
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Amendment
to the Certificate of Incorporation/Memorandum of Association
. Under Delaware law, with very
limited exceptions, a vote of the stockholders is required to amend the
certificate of incorporation. Under British Virgin Islands law, the board
of directors can have broad authority to amend the Memorandum of
Association (the equivalent of the certificate of incorporation), except
with respect to certain rights of the shareholders. The China Ceramics
Memorandum prohibits the board of directors from amending it
in relation to those
rights.
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•
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Submission
of Matters to the Annual Meeting
. Delaware allows a considerable
amount of latitude in establishing notice requirements for stockholder
inclusion of matters on the agenda of an annual meeting. British Virgin
Islands law also provides a considerable amount of latitude. For example,
CHAC’s notice requirements for inclusion of a matter on the agenda of an
annual meeting provide that such notice be submitted not less than 60 days
prior to the meeting, while the China Ceramics Articles of Association
require submission not less than 30 days prior to the
meeting.
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•
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Alternate
Directors
. British
Virgin Islands law allows a director to appoint an alternate who has the
authority to vote in place of the appointed director at a meeting of
directors. This delegation of a director’s responsibilities is not
permitted under Delaware
law.
|
|
•
|
Written
Consent of Directors
. Under Delaware law, directors
may act by written consent only on the basis of a unanimous vote. In the
British Virgin Islands, directors’ consents need only a majority of
directors signing to take effect. The China Ceramics Articles of
Association provides only for unanimous written consents of
directors.
|
|
•
|
Sale
of Assets
. Under
Delaware law, a stockholder vote is required to approve the sale of assets
only when all or substantially all assets are being sold. In the British
Virgin Islands, shareholder approval is required when more than 50% (by
value) of the company’s assets are being sold outside of the company's
usual course of business.
|
|
•
|
Removal
of Directors
. Under
British Virgin Islands law, the other directors may remove a sitting board
member, but only stockholders may remove a director under Delaware
law.
|
The one
material change in the Memorandum of Association and Articles of Association
compared with CHAC’s certificate of incorporation is an increase in the
authorized stock. CHAC had 41 million shares of authorized common stock, which
was sufficient to cover all of its anticipated needs prior to the stock
purchase. However, China Ceramics will have 51,000,000 million shares
authorized.
To the
extent that there are any other differences, the China Ceramics provisions are
either more protective of stockholder rights or they are matters of form only.
Among the provisions of British Virgin Islands law or the China Ceramics
Memorandum and Articles of Association that are more protective of shareholders
than those of Delaware are the following:
Sale of Assets
. China
Ceramics shareholder approval is required for the sale of more than 50% (by
value) of the company’s assets outside of the company's usual course of
business, while CHAC is required to obtain stockholder approval for the sale of
all or substantially all of its assets.
Inclusion of Matters for
Consideration at the Annual Meeting
. CHAC’s bylaws specified that
stockholders submit matters for action at the annual meeting not less than 60
days prior to the annual meeting, but China Ceramics’ documents require
submission only 30 days prior to the meeting.
Removal of Directors
.
A sitting board member may be removed by the stockholders under CHAC’s bylaws
only for cause, whereas China Ceramics’ Articles of Association permit the
shareholders to remove a director without cause upon the affirmative vote of a
majority of the shares entitled to vote.
Indemnification
of Officers and Directors
A
director, officer or agent of a company formed under the laws of the British
Virgin Islands is obligated to act honestly and in good faith and exercise care,
diligence and skill of a reasonably prudent person acting in comparable
circumstances. The Memorandum and Articles of China Ceramics do not relieve
directors, officers or agents from personal liability arising from the
management of the business of the company. Notwithstanding the foregoing,
Section 132 of the BVI Business Companies Act permits indemnification of
directors, officers and agents against all expenses, including legal fees and
judgments, fines and settlements, in respect of actions related to their
employment. The stock purchase agreement provides indemnification in respect of
the representations, warranties and covenants of the parties, some of which may
relate to the securities laws of the United States. There are no agreements that
relieve directors, officer or agents from personal liability. China Ceramics is
permitted and intends to obtain director and officer insurance.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933, as
amended, may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, China Ceramics and CHAC have
been informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy, as expressed in the Securities Act of
1933, as amended, and is, therefore, unenforceable.
Defenses
Against Hostile Takeovers
While the
following discussion summarizes the reasons for, and the operation and effects
of, the principal provisions of China Ceramics’ Memorandum and Articles of
Association that management has identified as potentially having an
anti-takeover effect, it is not intended to be a complete description of all
potential anti-takeover effects, and it is qualified by reference to the full
texts of China Ceramics’ Memorandum and Articles of Association.
In
general, the anti-takeover provisions of China Ceramics’ Memorandum and Articles
of Association are designed to minimize susceptibility to sudden acquisitions of
control that have not been negotiated with and approved by China Ceramics’ board
of directors. As a result, these provisions may tend to make it more difficult
to remove the incumbent members of the board of directors. The provisions would
not prohibit an acquisition of control of China Ceramics or a tender offer for
all of China Ceramics’ shares. The provisions are designed to discourage any
tender offer or other attempt to gain control of China Ceramics in a transaction
that is not approved by the board of directors, by making it more difficult for
a person or group to obtain control of China Ceramics in a short time and then
impose its will on the remaining shareholders. However, to the extent there
provisions successfully discourage the acquisition of control of China Ceramics
or tender offers for all or part of China Ceramics’ shares without approval of
the board of directors, they may have the effect of preventing an acquisition or
tender offer which might be viewed by stockholders to be in their best
interests.
Tender
offers or other non-open market acquisitions of shares will generally be made at
prices above the prevailing market price of China Ceramics’ shares. In addition,
acquisitions of shares by persons attempting to acquire control through market
purchases may cause the market price of the shares to reach levels that are
higher than would otherwise be the case. Anti-takeover provisions may discourage
such purchases, particularly those of less than all of China Ceramics’ shares,
and may thereby deprive stockholders of an opportunity to sell their stock at a
temporarily higher price. These provisions may therefore decrease the likelihood
that a tender offer will be made, and, if made, will be successful. As a result,
the provisions may adversely affect those stockholders who would desire to
participate in a tender offer. These provisions may also serve to insulate
incumbent management from change and to discourage not only sudden or hostile
takeover attempts, but also any attempts to acquire control that are not
approved by the board of directors, whether or not stockholders deem such
transactions to be in their best interest.
Stockholder Meetings
. British
Virgin Island law provides that shareholder meetings shall be convened by the
board of directors at any time or upon the written request of shareholders
holding more than 30% of the votes of the issued and outstanding voting shares
of the company. China Ceramics’ Articles of Association provide that annual
shareholder meetings for the election of directors may be called only by the
directors.
Number of Directors and Filling
Vacancies on the Board of Directors
. British Virgin Islands law requires
that the board of directors of a company consist of one or more directors and
that the number of directors shall be set by the company’s Articles of
Association, with a minimum of one director. China Ceramics’ Articles of
Association provide that the number of directors shall be not less than one,
subject to any subsequent amendment to change the number of directors. The power
to determine the number of directors is vested in the board of directors and the
shareholders. The power to fill vacancies, whether occurring by reason of an
increase in the number of directors or by resignation, is vested primarily in
the shareholders. Directors may be removed by the shareholders only for
cause or without cause on a vote of the members representing a majority of the
shares entitled to vote.
Election of Directors
. Under
British Virgin Islands law, there is no cumulative voting by stockholders for
the election of the directors. The absence of cumulative voting rights
effectively means that the holders of a majority of the stock voted at a
stockholders meeting may, if they so choose, elect all directors of China
Ceramics who are up for election, thus precluding a small group of stockholders
from controlling the election of one or more representatives to the board of
directors.
Advance Notice Requirements for
Nomination of Directors and Presentation of New Business at Meetings of
Stockholders; Action by Written Consent
. The China Ceramics Articles of
Association will provide for advance notice requirements for stockholder
proposals and nominations for director. Generally, to be timely, notice must be
delivered to the secretary of China Ceramics at its principal executive offices
not fewer than 10 days nor more than 60 days prior to the first anniversary date
of the annual meeting for the preceding year. Special meetings may be called by
China Ceramics’ board of directors or by stockholders comprising a
majority of the combined voting power of the holders of the then issued and
outstanding shares entitled to vote. These provisions make it more procedurally
difficult for a shareholder to place a proposal or nomination on the meeting
agenda or to take action without a meeting, and therefore may reduce the
likelihood that a shareholder will seek to take independent action to replace
directors or seek a shareholder vote with respect to other matters that are not
supported by management.
Rights
of Minority Shareholders
Under the
statutory law of the British Virgin Islands, the principal protection of
minority shareholders is that shareholders may bring an action to enforce the
constituent documents of the company, the Memorandum and Articles of
Association. Shareholders are entitled to have the affairs of the company
conducted in accordance with the general law and the Memorandum and Articles.
The company is obliged to hold an annual general meeting and provide for the
election of directors.
In
addition, the BVI Business Companies Act provides that a shareholder may bring
an action against the company for a breach of a duty owed by the company to him
in his capacity as a shareholder or if he considers that the affairs of the
company are being, have been or are likely to be conducted in a manner which is
unfairly prejudicial to him.
There are
common law rights for the protection of shareholders that may be invoked,
largely dependent on English company law, since the common law of the British
Virgin Islands for business companies is limited. Under the general rule
pursuant to English company law known as the rule in
Foss v. Harbottle
, a court
will generally refuse to interfere with the management of a company at the
insistence of a minority of its shareholders who express dissatisfaction with
the conduct of the company’s affairs by the majority or the board of directors.
However, every shareholder is entitled to have the affairs of the company
conducted properly according to law and the constituent documents of the
corporation. As such, if those who control the company have persistently
disregarded the requirements of company law or the provisions of the company’s
memorandum or articles of association, then the courts will grant relief.
Generally, the areas in which the courts will intervene are the following: (i)
an act complained of which is outside the scope of the authorized business or is
illegal or not capable of ratification by the majority, (ii) acts that
constitute fraud on the minority where the wrongdoers control the company, (iii)
acts that infringe on the personal rights of the shareholders, such as the right
to vote, and (iv) where the company has not complied with provisions requiring
approval of a special or extraordinary majority of shareholders.
Under the
law of Delaware, the rights of minority shareholders are similar to that which
will be applicable to the shareholders of China Ceramics. The principal
difference, as discussed elsewhere will be the methodology and the forum for
bringing such an action. It is also generally the case that the Delaware courts
can exercise a wide latitude in interpretation and wide discretion in fashioning
remedies as they think fits the circumstances for the regulation of the company.
Under English precepts of the law of minority shareholders, there is generally a
more restricted approach to the enforcement of the rights through the
interpretation of the law, articles and memorandum.
Transfer
of China Ceramics Securities Upon Death of Holder
Because
China Ceramics is a BVI company, the transfer of the securities of China
Ceramics, including the shares and warrants, for estate administration purposes
will be governed by BVI law. This may require that the estate of a decedent
security holder of China Ceramics seek to probate or transfer under letters of
administration for the estate issued by a court in the BVI.
THE
ADJOURNMENT PROPOSAL
In the
event there are not sufficient votes for, or otherwise in connection with, the
adoption of the Acquisition Agreement and the transactions contemplated thereby,
the CHAC board of directors may adjourn the special meeting to a later date, or
dates, if necessary, to permit further solicitation of proxies. In no event will
CHAC seek adjournment which would result in soliciting of proxies, having a
stockholder vote, or otherwise consummating a business combination after
November __, 2009.
The
board of directors recommends a vote “FOR” adoption of the Adjournment
Proposal.
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA OF SUCCESS
WINNER
The
following summary consolidated financial data, other than pro forma financial
information, have been derived from the audited consolidated financial
statements of Success Winner as of December 31, 2007 and 2008 and for the
years ended December 31, 2006, 2007 and 2008 and the unaudited financial
statements of Success Winner as of June 30, 2009 and for the six months
ended June 30, 2008 and 2009, included elsewhere in this proxy
statement/prospectus. The consolidated financial statements are prepared and
presented in accordance with generally International Financial Reporting
Standards, or IFRS. The consolidated statement of operations and statement of
cash flow data for the years ended December 31, 2006, 2007 and 2008 and the six
months ended June 30, 2008 and 2009, and Success Winner’s consolidated
balance sheet data as of December 31, 2007 and 2008 and June 30, 2008
are included elsewhere in this proxy statement/prospectus. The results of
operations of Success Winner in any period may not necessarily be indicative of
the results that may be expected for any future period. See “Risk Factors”
included elsewhere in this proxy statement/prospectus. The summary consolidated
financial information for those periods and as of those dates should be read in
conjunction with those consolidated financial statements and the accompanying
notes and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations of Success Winner” included elsewhere in this proxy
statement/prospectus.
|
For the year ended December 31,
|
For the six months ended June 30,
|
|||||||||||||||||||||||||||
|
2006
|
2007
|
2008
|
2008
|
2008
|
2009
|
2009
|
||||||||||||||||||||||
|
RMB
|
RMB
|
RMB
|
$
|
RMB
|
RMB
|
$
|
||||||||||||||||||||||
|
(In thousands except per share and operating data)
|
||||||||||||||||||||||||||||
|
Summary statement
of operation data:
|
||||||||||||||||||||||||||||
|
Revenues
|
495,820 | 649,970 | 776,570 | 111,473 | 376,833 | 399,729 | 58,375 | |||||||||||||||||||||
|
Gross
profit
|
149,551 | 208,030 | 243,240 | 34,937 | 125,029 | 125,829 | 18,389 | |||||||||||||||||||||
|
Operating
income
|
113,794 | 163,706 | 187,300 | 26,902 | 97,743 | 98,342 | 14,372 | |||||||||||||||||||||
|
Net
income
|
101,254 | 145,606 | 165,017 | 23,702 | 86,217 | 74,265 | 10,853 | |||||||||||||||||||||
|
Basic
net (loss)/income per share
|
n/a | n/a | n/a | n/a | n/a | n/a | n/a | |||||||||||||||||||||
|
Diluted
net (loss)/income per share
|
n/a | n/a | n/a | n/a | n/a | n/a | n/a | |||||||||||||||||||||
|
For the year ended December 31,
|
For the six months ended
June 30, |
|||||||||||||||||||||||||||
|
|
2006
|
2007
|
2008
|
2008
|
2008
|
2009
|
2009
|
|||||||||||||||||||||
|
|
RMB
|
RMB
|
RMB
|
$ | RMB |
RMB
|
$ | |||||||||||||||||||||
|
|
(In thousands)
|
|||||||||||||||||||||||||||
|
Summary
statement of cash flow data:
|
||||||||||||||||||||||||||||
|
Net
cash provided by operating activities
|
103,245 | 107,262 | 155,230 | 22,300 | 23,277 | 41,914 | 6,130 | |||||||||||||||||||||
|
Net
cash provided by/(used in) investing activities
|
(3,574 | ) | (4,156 | ) | (6,625 | ) | (950 | ) | (5,357 | ) | (243 | ) | (35 | ) | ||||||||||||||
|
Net
cash provided by/(used in) financing activities
|
(91,980 | ) | (97,192 | ) | (115,506 | ) | (16,600 | ) | 1,815 | (30 | ) | (4 | ) | |||||||||||||||
|
As
of December 31,
|
As
of June 30,
|
|||||||||||||
|
|
2007
|
2008
|
2008
|
2009
|
2009
|
|||||||||
|
|
RMB
|
RMB
|
$
|
RMB
|
$
|
|||||||||
|
|
(In
thousands)
|
|||||||||||||
|
Summary
balance sheet data:
|
||||||||||||||
|
Cash
and cash equivalents
|
18,507
|
51,606
|
7,560
|
93,247
|
13,623
|
|||||||||
|
Working
capital
(1)
|
149,934
|
181,111
|
26,540
|
264,806
|
38,687
|
|||||||||
|
Total
assets
|
440,289
|
454,720
|
66,640
|
521,829
|
76,237
|
|||||||||
|
Share
capital
|
58,980
|
0
|
0
|
0
|
0
|
|||||||||
|
Retained
(deficit)/earnings
|
142,402
|
164,965
|
21,935
|
239,230
|
32,788
|
|||||||||
|
Total
shareholders’ equity
|
230,872
|
253,451
|
37,150
|
329,615
|
48,155
|
|||||||||
|
(1)
|
Working
capital is calculated as current assets minus current
liabilities.
|
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The
following unaudited pro forma condensed combined financial information has been
prepared assuming that the Acquisition (including the Redomestication) had
occurred (i) at the beginning of the pro forma statements of operations for the
six months ended June 30, 2009 and for the year ended December 13, 2008 and (ii)
at June 30, 2009 for the pro forma balance sheet. The unaudited pro
forma condensed combined financial information presents three possible scenarios
for the approval of the Acquisition by CHAC’s stockholders, as
follows:
Assuming No Redemption of Shares:
This presentation assumes that no stockholders exercise their redemption
rights; and
Assuming 33.33% Public Stock
Redemption:
This presentation assumes the holders of 4,266,239 shares of
CHAC’s outstanding common stock (33.33%) exercise their redemption
rights.
Assuming 75% Public Stock
Redemption/Repurchase:
This presentation assumes that holders of 75% of
CHAC’s oustanding common stock either: (i) exercise their redemption rights or
(ii) enter into agreements for their shares to be repurchased immediately after
the closing.
The
unaudited pro forma condensed combined financial information is provided for
illustrative purposes only. The historical financial information in
the unaudited pro forma condensed combined balance sheet has been adjusted to
give effect to pro forma events that are directly attributable to the
Acquisition and are factually supportable. The historical financial
information in the unaudited pro forma condensed combined statements of
operations has been adjusted to give effect to pro form events that are directly
attributable to the Acquisition, are factually supportable, and are expected to
have a continuing impact on the combined results.
The
historical financial statements of CHAC have been prepared under U.S. GAAP and
presented in U.S. Dollars. The historical financial statements of
Success Winner have been prepared under IFRS and presented in Chinese Renminbi
and for these proformas have been converted into U.S. Dollars and U.S.
GAAP. The unaudited pro form condensed combined financial statements
included herein are prepared under U.S. GAAP and presented in U.S.
dollars. However, following completion of the Acquisition and the
Redomestication, the combined entity intends to prepare its consolidated
financial statements under IFRS and present such consolidated financial
statements in Chinese Renminbi (with a convenience conversion to U.S.
dollars).
You
should not rely on the unaudited pro forma condensed combined balance sheet as
being indicative of the historical financial position that would have
been achieved had the Acquisition been consummated as of June 30, 2009, or the
unaudited pro forma condensed combined statement of operations for the six
months ended June 30, 2009 or the year ended December 31, 2008, as being
indicative of the historical financial results of operations that would have
been achieved had the Acquisition been consummated on the first day of such
period. See “Risk Factors Relating to the Acquisition” in this proxy
statement/prospectus for further information.
We are
providing the following information to aid you in your analysis of the financial
aspects of the Acquisition. We derived the historical financial
information of CHAC from the unaudited financial statements of CHAC for the six
months ended June 30, 2009 and from the audited financial statements of CHAC for
the year ended December 31, 2008 included elsewhere in this proxy
statement/prospectus. We derived the historical financial information
of Success Winner from the unaudited consolidated financial statements of
Success Winner for the six months ended June 30, 2009 and from the audited
consolidated financial statements of Success Winner for the year ended December
31, 2008 included elsewhere in this proxy statement/prospectus. This
information should be read together with CHAC’s and Success Winner’s audited
financial statements and related notes, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” for CHAC and Success Winner, and
other information included elsewhere in this proxy
statement/prospectus.
In order
to ensure that the Business Combination is approved by the shareholders, CHAC,
Hengda and their respective affiliates may enter into transactions to purchase
or facilitate the purchase of common stock of CHAC from shareholders who have
indicated their intention to vote against the acquisition and seek redemption of
their shares for cash. Such transactions may be entered into prior to the
meeting of shareholders to approve the acquisition, but would not be completed
until the acquisition was consummated. Such purchases could result in all or
substantially all of CHAC’s trust fund being expended to pay for such stock
repurchases post-transaction, which could result in CHAC not receiving any
working capital from the trust account to fund its post-transaction business
operations. Such purchases could also result in the issuance of additional
common stock or warrants of CHAC as an inducement for third parties to purchase
such shares. The lack of trust funds to fund Hengda’s business operations could
have a material adverse effect on its operations and business prospects. No such
transactions have occurred or been entered into as of the date of this proxy
statement/prospectus. If any of the funds held in CHAC’s trust account are used
to purchase common stock of CHAC from holders who would have otherwise voted
against the acquisition, holders of CHAC’s public stock who purchased such
shares in CHAC’s initial public offering may have grounds to seek rescission of
the purchase of the units the holder acquired in the initial public offering. In
such event, CHAC would be required to reclassify those shares subject to
rescission rights outside of stockholders’ equity. In order to allow
stockholders to understand the potential impact of such transactions on the
combined company, the column entitled “Pro Forma Combined Companies (With 75%
Public Stock Redemption/Repurchase)” includes information assuming that the
maximum number of persons elect redemption rights and that an additional 41.67%
of the public shares are repurchased at the value per public share held in
trust.
The
Acquisition is expected to be accounted for as a reverse recapitalization if,
immediately following completion of the transaction, the shareholders of Success
Winner and investors in Success Winner immediately prior to the Acquisition have
effective control of CHAC through (1) their shareholder interest in the combined
entity and excluding the Escrowed Shares, (2) significant representation on the
Board of Directors (initially two out of five members), with two other board
members being independent, and (3) being named to all of the senior executive
positions. For accounting purposes, Success Winner will be deemed to be the
accounting acquirer in the transaction and, consequently, the transaction will
be treated as a recapitalization of Success Winner, i.e., a capital transaction
involving the issuance of stock by CHAC for the stock of Success Winner.
Accordingly, the combined assets, liabilities and results of operations of
Success Winner will become the historical financial statements of CHAC at the
closing of the transaction, and CHAC’s assets (primarily cash and cash
equivalents), liabilities and results of operations will be consolidated with
Success Winner beginning on the acquisition date. No step-up in basis or
intangible assets or goodwill will be recorded in this transaction. All direct
costs of the transaction will be charged to operations in the period that such
costs are incurred.
Actual
results could differ from the pro forma information presented and depend on
several variables, including, pursuant to provisions in the Acquisition
Agreement, the release to Success Winner’s current shareholders in the aggregate
amount of up to 8,185,763 ordinary shares from an escrow account for achieving
certain income thresholds (as defined in the Acquisition Agreement) in each of
the three years ending December 31, 2009 through December 31, 2011, and two
stock price thresholds (as defined in the Acquisition Agreement) prior to April
30, 2012. Such Escrowed Shares will be recorded as an adjustment to the
accounting acquiree’s basis in the reverse recapitalization at par value, and
will be included in the calculations of earnings per share from that
date.
CHINA
HOLDINGS ACQUISITION CORP. AND SUBSIDIARY AND SUCCESS WINNER
LIMITED
(To be
known as China Ceramics Co., Ltd.)
Unaudited
Pro Forma Condensed Combined Balance Sheet
June 30,
2009
(In
thousands of U.S. Dollars, except per share amounts, and in U.S. GAAP, unless
otherwise noted)
|
Pro
Forma
|
||||||||||||||||||||||||||||||||||||||||||||
|
Pro
Forma
|
Additional Pro Forma
|
Pro Forma
|
Additional Pro Forma
|
Combined
|
||||||||||||||||||||||||||||||||||||||||
|
Combined
|
Adjustments for
|
Combined
|
Adjustments for
|
Companies
|
||||||||||||||||||||||||||||||||||||||||
|
China
|
Companies
|
Redemption of
|
Companies
|
Repurchase of
|
(with 75%
|
|||||||||||||||||||||||||||||||||||||||
|
Holdings
|
Success
|
Pro Forma Adjustments
|
(with No
|
4,266,239 Shares of
|
(with 33.33%
|
5,333,761 Shares of
|
Public Stock
|
|||||||||||||||||||||||||||||||||||||
|
Acquisition
|
Winner
|
and Eliminations
|
Stock
|
Common Stock
|
Public Stock
|
Common Stock
|
Redemption
/
|
|||||||||||||||||||||||||||||||||||||
|
Corp.
|
Limited
|
Debit
|
Credit
|
Redemption)
|
Debit
|
Credit
|
Redemption)
|
Debit
|
Credit
|
Repurchase)
|
||||||||||||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||||||||||||||||||
|
Current
assets:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 12 | $ | 13,623 | $ | 125,278 | a) | $ | 4,288 | b) | $ | 90,450 | $ | 41,754 | k) | $ | 48,696 | $ | 15,000 | m) | $ | 52,202 | l) | $ | 11,494 | |||||||||||||||||||
| 4,175 | g) | |||||||||||||||||||||||||||||||||||||||||||
| 40,000 | i) | |||||||||||||||||||||||||||||||||||||||||||
|
Investments
held in Trust
|
125,278 | - | 125,278 | a) | - | - | - | |||||||||||||||||||||||||||||||||||||
|
Accounts
receivable, net
|
- | 36,767 | 36,767 | 36,767 | 36,767 | |||||||||||||||||||||||||||||||||||||||
|
Other
receivables
|
512 | 491 | 1,003 | 1,003 | 1,003 | |||||||||||||||||||||||||||||||||||||||
|
Inventories
|
- | 15,756 | 15,756 | 15,756 | 15,756 | |||||||||||||||||||||||||||||||||||||||
|
Prepaid
expenses
|
18 | 132 | 150 | 150 | 150 | |||||||||||||||||||||||||||||||||||||||
|
Total
current assets
|
125,820 | 66,769 | 144,126 | 102,372 | 65,170 | |||||||||||||||||||||||||||||||||||||||
|
Property,
plant and equipment, net
|
1 | 9,444 | 40,000 | h) | 49,445 | 49,445 | 49,445 | |||||||||||||||||||||||||||||||||||||
|
Land
use rights, net
|
- | 24 | 24 | 24 | 24 | |||||||||||||||||||||||||||||||||||||||
|
Deferred
income taxes
|
257 | - | 257 | 257 | 257 | |||||||||||||||||||||||||||||||||||||||
|
TOTAL
ASSETS
|
$ | 126,078 | $ | 76,237 | $ | 193,852 | $ | 152,098 | $ | 114,896 | ||||||||||||||||||||||||||||||||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||||||||||||||||||||||||||||||||||||||
|
Current
liabilities:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Accounts
payable
|
$ | - | $ | 13,857 | $ | 13,857 | $ | 13,857 | $ | 13,857 | ||||||||||||||||||||||||||||||||||
|
Deferred
underwriting fee
|
4,288 | - | 4,288 | b) | - | - | - | |||||||||||||||||||||||||||||||||||||
|
Income
tax payable
|
- | 2,100 | 2,100 | 2,100 | 2,100 | |||||||||||||||||||||||||||||||||||||||
|
Accrued
expenses
|
120 | 2,217 | 4,175 | g) | 1,759 | e) | 2,253 | 2,253 | 2,253 | |||||||||||||||||||||||||||||||||||
| 2,332 | f) | |||||||||||||||||||||||||||||||||||||||||||
|
Deposits
from distributors
|
- | 1,812 | 1,812 | 1,812 | 1,812 | |||||||||||||||||||||||||||||||||||||||
|
Short-term
loan
|
- | 5,040 | 40,000 | i) | 40,000 | h) | 5,040 | 5,040 | 15,000 | m) | 20,040 | |||||||||||||||||||||||||||||||||
|
Accrued
commissions
|
- | 2,846 | 2,846 | 2,846 | 2,846 | |||||||||||||||||||||||||||||||||||||||
|
Due
to director
|
- | 210 | 210 | 210 | 210 | |||||||||||||||||||||||||||||||||||||||
|
Total
current liabilities
|
4,408 | 28,082 | 28,118 | 28,118 | 43,118 | |||||||||||||||||||||||||||||||||||||||
|
Common
stock subject to possible redemption
|
40,364 | - | 40,364 | c) | - | - | - | |||||||||||||||||||||||||||||||||||||
|
Stockholders'
equity:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Preferred
stock, $.0001 par value
|
- | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
|
Common
stock, $.001 par value
|
16 | - | 2 | j) | 14 | $ | 4 | k) | 10 | 5 | l) | 5 | ||||||||||||||||||||||||||||||||
|
Common
stock, $1.00 par value
|
- | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
|
Additional
paid-in capital
|
80,724 | 7,825 | 40,364 | c) | 128,915 | 41,750 | k) | 87,165 | 52,197 | l) | 34,968 | |||||||||||||||||||||||||||||||||
| 2 | j) | |||||||||||||||||||||||||||||||||||||||||||
|
Statutory
common reserve
|
3,783 | 3,783 | 3,783 | 3,783 | ||||||||||||||||||||||||||||||||||||||||
|
Retained
earnings
|
566 | 32,788 | 29,263 | 29,263 | 29,263 | |||||||||||||||||||||||||||||||||||||||
| 1,759 | e) | |||||||||||||||||||||||||||||||||||||||||||
| 2,332 | f) | |||||||||||||||||||||||||||||||||||||||||||
|
Accumulated
other comprehensive income
|
3,759 | 3,759 | 3,759 | 3,759 | ||||||||||||||||||||||||||||||||||||||||
|
Total
stockholders' equity
|
81,306 | 48,155 | 165,734 | 123,980 | 71,778 | |||||||||||||||||||||||||||||||||||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||||||||||||||||||||||||||||||||||||||
| $ | 126,078 | $ | 76,237 | $ | 193,852 | $ | 152,098 | $ | 114,896 | |||||||||||||||||||||||||||||||||||
Pro
Forma Adjustments and Eliminations (In thousands of U.S. Dollars, except for
share and per share data, unless otherwise noted):
The
adjustments assume that reverse acquisition accounting will apply to the
acquisition transaction.
|
a)
|
To
liquidate investments held in
trust.
|
|
b)
|
To
record payment of deferred underwriters' compensation charge to capital at
time of initial public offering but contingently payable until the
consummation of a business
combination.
|
|
c)
|
To
eliminate common stock subject to possible redemption on the assumption
that all shareholders approve of the proposed business
combination.
|
|
d)
|
To
record issuance of merger shares to the post-acquisition shareholders in
the business combination, as
follows:
|
|
To
the post-acquisition shareholders, inclusive of 5,169,000 shares released
at closing and 8,759,763 shares held in escrow
|
13,928,763 | |||
|
Less,
escrow shares not considered outstanding (excluding 574,000 shares in
escrow available to pay for indemnification claims - see below for
details)
|
(8,185,763 | ) | ||
|
Total
merger shares to be outstanding at closing
|
5,743,000 |
Concurrent
with the closing, 8,185,763 of the merger shares shall be delivered into an
escrow account and be subject to release to the post-acquisition shareholders
upon the attainment of certain financial thresholds as follows:
|
From
escrow at the close of 2009 audit, if certain earnings thresholds are
met
|
1,214,127 | |||
|
From
escrow at the close of 2010 audit, if certain earnings thresholds are
met
|
1,794,800 | |||
|
From
escrow at the close of 2011 audit, if certain earnings thresholds are
met
|
2,176,836 | |||
|
From
escrow if the closing price of China Ceramics' common stock is at or above
$20.00 per share for twenty trading days in a thirty trading day period
prior to April 30, 2012
|
2,000,000 | |||
|
From
escrow if the closing price of China Ceramics' common stock is at or above
$25.00 per share for twenty trading days in a thirty trading day period
prior to April 30, 2012
|
1,000,000 | |||
|
Total
merger shares held in escrow not considered outstanding at
closing
|
8,185,763 |
Upon
their release from escrow, the shares will be recorded as an adjustment to China
Ceramics' basis in Hengda, and will be included in the calculations of earnings
per share from such date.
|
e)
|
To
accrue balance of estimated direct transaction costs of CHAC for the
preparation and negotiation of the business combination based upon
engagement letters, actual invoices and/or currently updated fee estimates
as follows:
|
|
Legal
fees
|
$ | 700 | ||
|
SPAC
closing advisors
|
250 | |||
|
Directors
and officers insurance
|
200 | |||
|
Accounting
|
50 | |||
|
Consulting
and other professional fees
|
500 | |||
|
Registration
and listing costs
|
50 | |||
|
Travel
|
25 | |||
|
Total
estimated costs
|
1,775 | |||
|
Less,
costs incurred as of the balance sheet date
|
(16 | ) | ||
|
Balance
to accrue
|
$ | 1,759 |
Total
estimated transaction costs do not include contingent underwriters' fees that
are payable upon consummation of the business combination as these costs were
incurred in connection with CHAC's IPO and have already been provided for on the
financial statements of CHAC.
|
f)
|
To
accrue balance of estimated direct transaction costs of Success Winner for
the preparation and negotiation of the business combination based upon
engagement letters, actual invoices and/or currently updated fee estimates
as follows:
|
|
Legal
fees
|
$ | 200 | ||
|
Financial
advisors
|
1,500 | |||
|
Accounting
|
300 | |||
|
Consulting
and other professional fees
|
200 | |||
|
Roadshow
and travel
|
200 | |||
|
Total
estimated costs
|
2,400 | |||
|
Less,
costs incurred as of the balance sheet date
|
(68 | ) | ||
|
Balance
to accrue
|
$ | 2,332 |
Such
costs were not recorded as a charge to operations through June 30, 2009 and,
will be charged to operations subsequently by Success Winner.
|
g)
|
To
record the payment of costs related to the business
combination.
|
|
h)
|
To
record the acquisition of three lines of a new (twelve line maximum)
manufacturing facility immediately after closing in exchange for a $40,000
note issued by the developer of the
facility.
|
|
i)
|
To
repay the manufacturing facility note with proceeds from the trust
account.
|
|
j)
|
To
record the cancellation of 1,600,000 founders' shares of common stock at
closing.
|
|
k)
|
To
record redemption of 4,266,239 shares (33.33%) of China Holdings common
shares issued in China Holdings' IPO at June 30, 2009 redemption value of
$9.787 per share. The number of shares redeemed,
4,266,239, is based on 33.33% of the initial public offering shares
outstanding prior to the business combination and represents the maximum
number of shares that may be redeemed without precluding the consummation
of a business combination.
|
|
l)
|
To
record repurchase of 5,333,761 shares (41.67%) of China Holdings common
shares issued in China Holdings' IPO at June 30, 2009 redemption value of
$9.787 per share. These shares, together with the number
of shares redeemed of 4,266,239, assume that 9,600,000 (75%)of the initial
public offering shares outstanding prior to the business combination are
either redeemed by CHAC or repurchased by China Ceramics immediately after
the closing.
|
|
m)
|
To
reinstate a portion ($15,000) of the manufacturing facility note to
provide China Ceramics with adequate working
capital.
|
CHINA
HOLDINGS ACQUISITION CORP. AND SUBSIDIARY AND SUCCESS WINNER
LIMITED
(To be
known as China Ceramics Co., Ltd.)
Unaudited
Pro Forma Condensed Combined Statement of Operations
Year
ended December 31, 2008
(In
thousands of U.S. Dollars, except per share amounts, and in U.S. GAAP, unless
otherwise noted)
|
Pro Forma
|
||||||||||||||||||||||||||||||||||||||||||||
|
Pro Forma
|
Additional Pro Forma
|
Pro Forma
|
Additional Pro Forma
|
Combined
|
||||||||||||||||||||||||||||||||||||||||
|
Combined
|
Adjustments for
|
Combined
|
Adjustments for
|
Companies
|
||||||||||||||||||||||||||||||||||||||||
|
China
|
Companies
|
Redemption of
|
Companies
|
Repurchase of
|
(with 75%
|
|||||||||||||||||||||||||||||||||||||||
|
Holdings
|
Success
|
Pro Forma Adjustments
|
(with No
|
4,266,239 Shares of
|
(with 33.33%
|
5,333,761 Shares of
|
Public Stock
|
|||||||||||||||||||||||||||||||||||||
|
Acquisition
|
Winner
|
and Eliminations
|
Stock
|
Common Stock
|
Public Stock
|
Common Stock
|
Redemption/
|
|||||||||||||||||||||||||||||||||||||
|
Corp.
|
Limited
|
Debit
|
Credit
|
Redemption)
|
Debit
|
Credit
|
Redemption)
|
Debit
|
Credit
|
Repurchase)
|
||||||||||||||||||||||||||||||||||
|
Revenue,
net
|
$ | - | $ | 111,473 | $ | 111,473 | $ | 111,473 | $ | 111,473 | ||||||||||||||||||||||||||||||||||
|
Cost
of goods sold
|
- | 76,536 | 76,536 | 76,536 | 76,536 | |||||||||||||||||||||||||||||||||||||||
|
Gross
profit
|
- | 34,937 | 34,937 | 34,937 | 34,937 | |||||||||||||||||||||||||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Selling
expenses
|
- | 6,608 | 6,608 | 6,608 | 6,608 | |||||||||||||||||||||||||||||||||||||||
|
General
and administrative expenses
|
837 | 1,427 | 2,264 | 2,264 | 2,264 | |||||||||||||||||||||||||||||||||||||||
| 837 | 8,035 | 8,872 | 8,872 | 8,872 | ||||||||||||||||||||||||||||||||||||||||
|
Income
(loss) from operations
|
(837 | ) | 26,902 | 26,065 | 26,065 | 26,065 | ||||||||||||||||||||||||||||||||||||||
|
Other
income (expenses):
|
||||||||||||||||||||||||||||||||||||||||||||
|
Interest
expense
|
- | (135 | ) | (135 | ) | (135 | ) | (135 | ) | |||||||||||||||||||||||||||||||||||
|
Interest
income
|
2,917 | 57 | 98 |
a)
|
2,876 | 960 | f) | 1,916 | 1,201 | g) | 715 | |||||||||||||||||||||||||||||||||
|
Current
acquisition costs
|
- | - |
1,775
2,400
|
b)
c)
|
(4,175 | ) | (4,175 | ) | (4,175 | ) | ||||||||||||||||||||||||||||||||||
|
Write-off
of deferred acquisition costs
|
- | - | - | |||||||||||||||||||||||||||||||||||||||||
|
related
to terminated transaction
|
(1,586 | ) | (1,586 | ) | (1,586 | ) | (1,586 | ) | ||||||||||||||||||||||||||||||||||||
|
Other
income
|
- | 329 | 329 | 329 | 329 | |||||||||||||||||||||||||||||||||||||||
| 1,331 | 251 | (2,691 | ) | (3,651 | ) | (4,852 | ) | |||||||||||||||||||||||||||||||||||||
|
Income
before provision for income taxes
|
494 | 27,153 | 23,374 | 22,414 | 21,213 | |||||||||||||||||||||||||||||||||||||||
|
Provision
for income taxes
|
168 | 3,451 |
168
305
|
d)
e)
|
3,146 | 3,146 | 3,146 | |||||||||||||||||||||||||||||||||||||
|
Net
income
|
326 | 23,702 | 20,228 | 19,268 | 18,067 | |||||||||||||||||||||||||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Foreign
currency translation
|
- | 2,169 | 2,169 | 2,169 | 2,169 | |||||||||||||||||||||||||||||||||||||||
|
Comprehensive
income
|
$ | 326 | $ | 25,871 | $ | 22,397 | $ | 21,437 | $ | 20,236 | ||||||||||||||||||||||||||||||||||
|
Net
earnings per share:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Basic
|
$ | 0.02 | $ | 23,702,000.00 | $ | 1.00 | $ | 1.21 | $ | 1.71 | ||||||||||||||||||||||||||||||||||
|
Diluted
|
$ | 0.02 | $ | 23,702,000.00 | $ | 0.85 | $ | 0.99 | $ | 1.27 | ||||||||||||||||||||||||||||||||||
|
Weighted
number of shares outstanding:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Basic
|
16,000,000 | 1 | 20,143,000 | 15,876,761 | 10,543,000 | |||||||||||||||||||||||||||||||||||||||
|
Diluted
|
16,000,000 | 1 | 23,780,334 | 19,514,095 | 14,180,334 | |||||||||||||||||||||||||||||||||||||||
Pro
Forma Adjustments and Eliminations (In thousands of U.S. Dollars, except for
share and per share data, unless otherwise noted):
The
adjustments assume that reverse acquisition accounting will apply to the
acquisition transaction.
|
a)
|
To
record a reduction of interest income due to a reduction of the trust
balance resulting from the payment of deferred underwriters compensation
charges at the beginning of the
period.
|
|
Deferred
underwriting compensation
|
$ | 4,266 | ||
|
Average
interest rate
|
2.3 | % | ||
|
Reduction
of interest income
|
$ | 98 |
|
b)
|
To
accrue estimated direct transaction costs of CHAC for the preparation and
negotiation of the business combination based upon engagement letters,
actual invoices and/or currently updated fee estimates as
follows:
|
|
Legal
fees
|
$ | 700 | ||
|
SPAC
closing advisors
|
250 | |||
|
Directors
and officers insurance
|
200 | |||
|
Accounting
|
50 | |||
|
Consulting
and other professional fees
|
500 | |||
|
Registration
and listing costs
|
50 | |||
|
Travel
|
25 | |||
|
Total
estimated costs
|
$ | 1,775 |
Total
estimated transaction costs do not include contingent underwriters’ fees that
are payable upon consummation of the business combination as these costs were
incurred in connection with CHAC’s IPO and have already been provided for on the
financial statements of CHAC.
|
c)
|
To
accrue estimated direct transaction costs of Success Winner for the
preparation and negotiation of the business combination based upon
engagement letters, actual invoices and/or currently updated fee estimates
as follows:
|
|
Legal
fees
|
$ | 200 | ||
|
Financial
advisors
|
1,500 | |||
|
Accounting
|
300 | |||
|
Consulting
and other professional fees
|
200 | |||
|
Roadshow
and travel
|
200 | |||
|
Total
estimated costs
|
$ | 2,400 |
|
d)
|
To
adjust US Federal income taxes for adjustments ‘a)’ and ‘b)’ assuming that
no federal tax benefit may be
realized.
|
|
e)
|
To
adjust Chinese income taxes at the effective rate of 12.7% for the costs
incurred by Success Winner in adjustment
’c)’.
|
|
f)
|
To
record a reduction of interest income due to a reduction of the trust
balance resulting from the payment for redeemed shares at the beginning of
the period.
|
|
Cash
remitted for redeemed shares
|
$ | 41,754 | ||
|
Average
interest rate
|
2.3 | % | ||
|
Reduction
of interest income
|
$ | 960 |
|
g)
|
To
record a reduction of interest income due to a reduction of the trust
balance resulting from the payment for repurchased shares at the beginning
of the period.
|
|
Cash
remitted for repurchased shares
|
$ | 52,202 | ||
|
Average
interest rate
|
2.3 | % | ||
|
Reduction
of interest income
|
$ | 1,201 |
Pro
Forma Notes (In thousands of U.S. Dollars, except for share and per share data,
unless otherwise noted):
|
(1)
|
Pro
forma entries are recorded to the extent that they are a direct result of
the Business Combination and are expected to have continuing future
impact.
|
|
(2)
|
As
the Business Combination is being reflected as of it had occurred at the
beginning of the period presented, the calculation of weighted
average shares outstanding for basic and diluted earnings per share
assumes that the shares issuable relating to the Business Combination have
been outstanding for the entire period presented. If the maximum
numbers of shares are redeemed, this calculation is retroactively
adjusted to eliminate such shares for the entire
period. Similarly, if shares are assumed to be
repurchased, this calculation is retroactively adjusted to eliminate such
shares for the entire period. For purposes of determining common
stock equivalents, the trust liquidation value for the Company's common
stock of $9.79 USD on June 30, 2009 was utilized. Basic and diluted
weighted average number of common shares outstanding is calculated as
follows:
|
|
Number of
Shares with No
Stock
Redemption
|
Number of
Shares with
Maximum
Stock
Redemption
|
Number of
Shares with
75%
Public
Stock
Redemption/
Repurchase
|
||||||||||
|
Actual
number of common share outstanding
|
16,000,000 | 16,000,000 | 16,000,000 | |||||||||
|
Pro
forma shares:
|
||||||||||||
|
Number
of shares issuable in connection with the Business
Combination
|
13,928,763 | 13,928,763 | 13,928,763 | |||||||||
|
Less,
Founders' shares cancelled
|
(1,600,000 | ) | (1,600,000 | ) | (1,600,000 | ) | ||||||
|
Less,
shares redeemed by public shareholders
|
- | (4,266,239 | ) | (4,266,239 | ) | |||||||
|
Less,
shares repurchased
|
- | - | (5,333,761 | ) | ||||||||
|
Pro
forma weighted average number of common shares issued
|
28,328,763 | 24,062,524 | 18,728,763 | |||||||||
|
Less,
escrow shares not considered outstanding (excluding 574,000 shares in
escrow available to pay for indemnification claims)
|
(8,185,763 | ) | (8,185,763 | ) | (8,185,763 | ) | ||||||
|
Pro
forma weighted average number of common shares outstanding -
Basic
|
20,143,000 | 15,876,761 | 10,543,000 | |||||||||
|
Common
stock equivalents:
|
||||||||||||
|
Shares
issuable from "in the money" warrants outstanding:
|
||||||||||||
|
From
public offering warrants
|
12,800,000 | 12,800,000 | 12,800,000 | |||||||||
|
From
Founders' warrants
|
2,750,000 | 2,750,000 | 2,750,000 | |||||||||
|
Total
shares issuable
|
15,550,000 | 15,550,000 | 15,550,000 | |||||||||
|
Less,
number of shares available "on the market" pursuant to the treasury stock
method
(1)
|
(11,912,666 | ) | (11,912,666 | ) | (11,912,666 | ) | ||||||
|
Number
of "new" shares to be issued pursuant to the treasury stock
method
|
3,637,334 | 3,637,334 | 3,637,334 | |||||||||
|
Pro
forma weighted average number of common shares outstanding -
Diluted
|
23,780,334 | 19,514,095 | 14,180,334 | |||||||||
(1)
Assumes a share price of $9.79.
CHINA
HOLDINGS ACQUISITION CORP. AND SUBSIDIARY AND SUCCESS WINNER
LIMITED
(To be
known as China Ceramics Co., Ltd.)
Unaudited
Pro Forma Condensed Combined Statement of Operations
For the
six months ended June 30, 2009
(In
thousands of U.S. Dollars, except per share amounts, and in U.S. GAAP, unless
otherwise noted)
|
Pro
Forma
|
|||||||||||||||||||||||||||||||||||
|
Pro
Forma
|
Additional
Pro Forma
|
Pro
Forma
|
Additional
Pro Forma
|
Combined
|
|||||||||||||||||||||||||||||||
|
Combined
|
Adjustments
for
|
Combined
|
Adjustments
for
|
Companies
|
|||||||||||||||||||||||||||||||
|
China
|
Companies
|
Redemption
of
|
Companies
|
Repurchase
of
|
(with
75%
|
||||||||||||||||||||||||||||||
|
Holdings
|
Success
|
Pro
Forma Adjustments
|
(with
No
|
4,266,239
Shares of
|
(with
33.33%
|
5,333,761
Shares of
|
Public
Stock
|
||||||||||||||||||||||||||||
|
Acquisition
|
Winner
|
and
Eliminations
|
Stock
|
Common
Stock
|
Public
Stock
|
Common
Stock
|
Redemption/
|
||||||||||||||||||||||||||||
|
Corp.
|
Limited
|
Debit
|
Credit
|
Redemption)
|
Debit
|
Credit
|
Redemption)
|
Debit
|
Credit
|
Repurchase)
|
|||||||||||||||||||||||||
|
Revenue,
net
|
$ | - | $ | 58,375 | $ | 58,375 | $ | 58,375 | $ | 58,375 | |||||||||||||||||||||||||
|
Cost
of goods sold
|
- | 39,986 | 39,986 | 39,986 | 39,986 | ||||||||||||||||||||||||||||||
|
Gross
profit
|
- | 18,389 | 18,389 | 18,389 | 18,389 | ||||||||||||||||||||||||||||||
|
Operating
expenses:
|
|||||||||||||||||||||||||||||||||||
|
Selling
expenses
|
- | 3,311 | 3,311 | 3,311 | 3,311 | ||||||||||||||||||||||||||||||
|
General
and administrative expenses
|
279 | 706 | 985 | 985 | 985 | ||||||||||||||||||||||||||||||
| 279 | 4,017 | 4,296 | 4,296 | 4,296 | |||||||||||||||||||||||||||||||
|
Income
(loss) from operations
|
(279 | ) | 14,372 | 14,093 | 14,093 | 14,093 | |||||||||||||||||||||||||||||
|
Other
income (expenses):
|
|||||||||||||||||||||||||||||||||||
|
Interest
expense
|
- | (61 | ) | (61 | ) | (61 | ) | (61 | ) | ||||||||||||||||||||||||||
|
Interest
income
|
255 | 20 | 9 | a) | 266 | 84 | f) | 183 | 104 | g) | 79 | ||||||||||||||||||||||||
|
Current
acquisition costs
|
(16 | ) |
1,759
2,332
|
b)
c)
|
(4,107 | ) | (4,107 | ) | (4,107 | ) | |||||||||||||||||||||||||
|
Write-off
of deferred acquisition costs
|
- | - | |||||||||||||||||||||||||||||||||
|
related
to terminated transaction
|
(49 | ) | (49 | ) | (49 | ) | (49 | ) | |||||||||||||||||||||||||||
|
Other
income
|
- | 173 | 173 | 173 | 173 | ||||||||||||||||||||||||||||||
| 190 | 132 | (3,778 | ) | (3,861 | ) | (3,965 | ) | ||||||||||||||||||||||||||||
|
Income
(loss) before provision for income taxes
|
(89 | ) | 14,504 |
10,315
|
10,232 | 10,128 | |||||||||||||||||||||||||||||
|
Provision
(benefit) for income taxes
|
(30 | ) | 3,651 | 30 | b) |
583
|
e) | 3,068 | 3,068 | 3,068 | |||||||||||||||||||||||||
|
Net
income (loss)
|
(59 | ) | 10,853 | 7,247 | 7,164 | 7,060 | |||||||||||||||||||||||||||||
|
Other
comprehensive income:
|
|||||||||||||||||||||||||||||||||||
|
Foreign
currency translation
|
- | 45 | 45 | 45 | 45 | ||||||||||||||||||||||||||||||
|
Comprehensive
income (loss)
|
$ | (59 | ) | $ | 10,898 | $ | 7,292 | $ | 7,209 | $ | 7,105 | ||||||||||||||||||||||||
|
Net
earnings per share:
|
|||||||||||||||||||||||||||||||||||
|
Basic
|
$ | - | $ | 10,853,000.00 | $ | 0.36 | $ | 0.45 | $ | 0.67 | |||||||||||||||||||||||||
|
Diluted
|
$ | - | $ | 10,853,000.00 | $ | 0.30 | $ | 0.37 | $ | 0.50 | |||||||||||||||||||||||||
|
Weighted
number of shares outstanding:
|
|||||||||||||||||||||||||||||||||||
|
Basic
|
16,000,000 | 1 | 20,143,000 | 15,876,761 | 10,543,000 | ||||||||||||||||||||||||||||||
|
Diluted
|
16,000,000 | 1 | 23,780,334 | 19,514,095 | 14,180,334 | ||||||||||||||||||||||||||||||
Pro
Forma Adjustments and Eliminations (In thousands of U.S. Dollars, except for
share and per share data, unless otherwise noted):
The
adjustments assume that reverse acquisition accounting will apply to the
acquisition transaction.
|
a)
|
To
record a reduction of interest income due to a reduction of the trust
balance resulting from the payment of deferred underwriters compensation
charges at the beginning of the
period.
|
|
Deferred
underwriting compensation
|
$ | 4,266 | ||
|
Average
annualized interest rate
|
0.4 | % | ||
|
Annual
reduction of interest income
|
17 | |||
|
Pro
rata for six months
|
50.0 | % | ||
|
Reduction
of interest income
|
$ | 9 |
|
b)
|
To
accrue balance of estimated direct transaction costs of CHAC for the
preparation and negotiation of the business combination based upon
engagement letters, actual invoices and/or currently updated fee estimates
as follows:
|
|
Legal
fees
|
$ | 700 | ||
|
SPAC
closing advisors
|
250 | |||
|
Directors
and officers insurance
|
200 | |||
|
Accounting
|
50 | |||
|
Consulting
and other professional fees
|
500 | |||
|
Registration
and listing costs
|
50 | |||
|
Travel
|
25 | |||
|
Total
estimated costs
|
1,775 | |||
|
Less,
costs incurred as of the balance sheet date
|
(16 | ) | ||
|
Balance
to accrue
|
$ | 1,759 |
Total
estimated transaction costs do not include contingent underwriters’ fees that
are payable upon consummation of the business combination as these costs were
incurred in connection with CHAC’s IPO and have already been provided for on the
financial statements of CHAC.
|
c)
|
To
accrue balance of estimated direct transaction costs of Success Winner for
the preparation and negotiation of the business combination based upon
engagement letters, actual invoices and/or currently updated fee estimates
as follows:
|
|
Legal
fees
|
$ | 200 | ||
|
Financial
advisors
|
1,500 | |||
|
Accounting
|
300 | |||
|
Consulting
and other professional fees
|
200 | |||
|
Roadshow
and travel
|
200 | |||
|
Total
estimated costs
|
2,400 | |||
|
Less,
costs incurred as of the balance sheet date
|
(68 | ) | ||
|
Balance
to accrue
|
$ | 2,332 |
Such
costs were not recorded as a charge to operations through June 30, 2009 and,
will be charged to operations subsequently by Success Winner.
|
d)
|
To
adjust US Federal income taxes for adjustments ‘a)’ and ‘b)’ assuming that
no federal tax benefit may be
realized.
|
|
e)
|
To
adjust Chinese income taxes at the effective rate of 25 % for the costs
incurred by Success Winner in adjustment
’c)’.
|
|
f)
|
To
record a reduction of interest income due to a reduction of the trust
balance resulting from the payment for redeemed shares at the beginning of
the period.
|
|
Cash
remitted for redeemed shares
|
$ | 41,754 | ||
|
Average
annualized interest rate
|
0.4 | % | ||
|
Annual
reduction of interest income
|
167 | |||
|
Pro
rata for six months
|
50.0 | % | ||
|
Reduction
of interest income
|
$ | 84 |
|
g)
|
To
record a reduction of interest income due to a reduction of the trust
balance resulting from the payment for repurchased shares at the beginning
of the period.
|
|
Cash
remitted for repurchased shares
|
$ | 52,202 | ||
|
Average
annualized interest rate
|
0.4 | % | ||
|
Annual
reduction of interest income
|
209 | |||
|
Pro
rata for six months
|
50.0 | % | ||
|
Reduction
of interest income
|
$ | 104 |
Pro
Forma Notes (In thousands of U.S. Dollars, except for share and per share data,
unless otherwise noted):
|
(1)
|
Pro
forma entries are recorded to the extent that they are a direct result of
the Business Combination and are expected to have continuing future
impact.
|
|
(2)
|
As
the Business Combination is being reflected as of it had occurred at the
beginning of the period presented, the calculation of weighted
average shares outstanding for basic and diluted earnings per share
assumes that the shares issuable relating to the Business Combination have
been outstanding for the entire period presented. If the maximum
numbers of shares are redeemed, this calculation is retroactively
adjusted to eliminate such shares for the entire
period. Similarly, if shares are assumed to be
repurchased, this calculation is retroactively adjusted to eliminate such
shares for the entire period. For purposes of determining common
stock equivalents, the trust liquidation value for the Company's common
stock of $9.79 USD on June 30, 2009 was utilized. Basic and diluted
weighted average number of common shares outstanding is calculated as
follows:
|
|
Number of
Shares with
No Stock
Redemption
|
Number of
Shares with
Maximum
Stock
Redemption
|
Number of
Shares with
75% Public
Stock
Redemption/
Repurchase
|
||||||||||
|
Actual
number of common share outstanding
|
16,000,000 | 16,000,000 | 16,000,000 | |||||||||
|
Pro
forma shares:
|
||||||||||||
|
Number
of shares issuable in connection with the Business
Combination
|
13,928,763 | 13,928,763 | 13,928,763 | |||||||||
|
Less,
Founders' shares cancelled
|
(1,600,000 | ) | (1,600,000 | ) | (1,600,000 | ) | ||||||
|
Less,
shares redeemed by public shareholders
|
- | (4,266,239 | ) | (4,266,239 | ) | |||||||
|
Less,
shares repurchased
|
- | - | (5,333,761 | ) | ||||||||
|
Pro
forma weighted average number of common shares issued
|
28,328,763 | 24,062,524 | 18,728,763 | |||||||||
|
Less,
escrow shares not considered outstanding (excluding 574,000 shares in
escrow available to pay for indemnification claims)
|
(8,185,763 | ) | (8,185,763 | ) | (8,185,763 | ) | ||||||
|
Pro
forma weighted average number of common shares outstanding -
Basic
|
20,143,000 | 15,876,761 | 10,543,000 | |||||||||
|
Common
stock equivalents:
|
||||||||||||
|
Shares
issuable from "in the money" warrants outstanding:
|
||||||||||||
|
From
public offering warrants
|
12,800,000 | 12,800,000 | 12,800,000 | |||||||||
|
From
Founders' warrants
|
2,750,000 | 2,750,000 | 2,750,000 | |||||||||
|
Total
shares issuable
|
15,550,000 | 15,550,000 | 15,550,000 | |||||||||
|
Less,
number of shares available "on the market" pursuant to the treasury stock
method
|
(11,912,666 | ) | (11,912,666 | ) | (11,912,666 | ) | ||||||
|
Number
of "new" shares to be issued pursuant to the treasury stock
method
|
3,637,334 | 3,637,334 | 3,637,334 | |||||||||
|
Pro
forma weighted average number of common shares outstanding -
Diluted
|
23,780,334 | 19,514,095 | 14,180,334 | |||||||||
THE
CERAMICS INDUSTRY
Overview
Ceramic
tiles are widely used in the PRC as a construction material for residential and
commercial buildings. Ceramic tiles are used for flooring, interior walls for
decorative purposes and on exterior walls as siding due to their resistance to
temperature, extreme environments, erosion, abrasion and discoloration for
extended periods of time. In addition, ceramic tiles are easy to
maintain. In the PRC, commercial and residential buildings built with
ceramic tiles on exterior walls are viewed as more modern and are generally
regarded as being better constructed.
The PRC
is the largest consumer of ceramic tiles worldwide. According to the
China Ceramic Industrial Association, total worldwide consumption was 8.0
billion square meters in 2007, growing from 5.4 billion square meters in 2002, a
CAGR of 8.0%. In the PRC, consumption in 2007 was 2.7 billion square meters,
growing from 1.6 billion square meters in 2002, a CAGR of 11.0%. The export of
construction ceramic tiles from the PRC grew from 125 million square meters in
2002 to 671 million square meters in 2008, representing a CAGR of 32.3%
according to the China Building Ceramics and Sanitaryware Association. The value
of ceramic tiles exported from the PRC grew from $325 million to $2.71 billion,
a CAGR of 42.4%, during the same period.
The rapid
growth for construction materials in the PRC is driven by three trends:
population growth, population urbanization and an increasing standard of
living. According to the National Bureau of Statistics of China, the
population of China grew by 61 million people from 1.267 billion in 2000 to
1.328 billion in 2008. The population is expected to reach 1.36
billion by 2010 according to the Chinese Academy of Social
Sciences. As China evolves from an agrarian society to an
industrialized country the population is urbanizing, with the urban population
growing from 459 million in 2000 to 607 million in 2008. According to the
McKinsey Global Institute, another 350 million people will be added to PRC’s
urban population by 2025. The urbanization ratio of the PRC was only 45.7% in
2008 according to the National Bureau of Statistics of China, which is low when
compared with; 81.4% in the U.S. and 89.9% in the U.K., and also lower than
other developing countries such as Indonesia and Malaysia. The per
capita living space of the urban population in the PRC grew from 13.7 square
meters in 1990 to 27.1 square meters in 2006, which is low when compared with a
range of 30-50 square meters in European countries. Consequently the
construction materials industry in the PRC, according to Datamonitor, is
forecasted to grow from $213.4 billion in 2008 to $323.9 billion in 2013,
representing a CAGR of 8.7%.
Although
ceramic manufacturing in the PRC is distributed throughout the country, the
majority of ceramic tiles are manufactured in; Foshan of Guangdong, Jingdezhen
of Jiangxi, Zibo of Shandong, Jiajiang of Sichuan, and Jinjiang of Fujian.
Jinjiang is known as the exterior wall ceramic tile manufacturing center in the
PRC and represents approximately 70% of China’s output, according to the Fujian
Ceramics Industry Association. The exterior ceramic tile industry in
the PRC is highly fragmented with no one manufacturer believed by management to
have more than 5% market share.
As the
ceramic tile industry in the PRC matures, builders are demanding construction
materials that reduce building weight, making it possible to use light building
structures and accelerate the speed of construction. Government
policies meant to address energy efficiency are promoting the use of innovative
wall materials, particularly those performing well in heat preservation and
insulation and that are light in weight, and manufactured utilizing waste
materials, less energy and fewer raw materials. In an effort to
differentiate their products and meet government policies, ceramic tile
manufacturers are increasingly focusing on research and development
efforts.
HENGDA’S
BUSINESS
Overview
Hengda is
a leading Chinese manufacturer of ceramic tiles used for exterior siding and for
interior flooring and design in residential and commercial
buildings. The ceramic tiles, sold under the “HD” or “Hengda” brand
are available in over two thousand styles, colors and size combinations.
Currently, Hengda has five principal product categories: (i) porcelain tiles,
(ii) glazed tiles, (iii) glazed porcelain tiles, (iv) rustic tiles, and (v)
ultra-thin tiles. Porcelain tiles are Hengda’s major products and
accounted for over 80% of Hengda’s total revenue in 2008. The market
for Hengda’s products has been growing rapidly, due to the increasing demand for
construction materials in the PRC attributable to; population growth, population
urbanization and an increasing standard of living.
Hengda’s
manufacturing facility is located in Jinjiang, Fujian Province with an aggregate
annual production capacity of approximately 28 million square meters. The
company manufactures its five principal product categories using nine production
lines; each production line is optimized to manufacture specific size ranges to
maximize efficiency and output. Hengda will acquire a new facility in
Gaoan, Jiangxi Province in Q4 2009. The 12 production lines in Gaoan
are expected to increase Hengda’s production capacity by 42 million square
meters to a total of 70 million square meters in 2012.
Hengda
primarily sells its products through an exclusive distributor network and
directly to property developers. The company has a long-term
relationships with its customers; nine of its top ten clients in 2008 have been
purchasing from the company for over nine years. In the foreseeable future,
Hengda expects to enter into relationships with some large property developers
in China as their exclusive or primary provider of ceramic tiles.
Hengda
focuses its research and development efforts on developing innovative and
environmentally-friendly products. Hengda owns or has the exclusive
right to use 33 design patents and four utility model
patents. Hengda’s stringent quality management and marketing efforts
have created a strong business reputation and high brand awareness as
demonstrated by the company receiving recognition from the Intermediate People’s
Court of Xiangtan City of the “Chinese Well-Known Mark” award.
Hengda
will acquire a new facility being established in Gaoan, Jiangxi
Province. Hengda expects that three production lines will be
available for use in the fourth quarter of 2009, and another four and five
production lines will be established in 2010 and 2011, respectively. After the
completion of the twelve production lines in Gaoan, Hengda expects to increase
its production capacity by 42 million square meters by the end of 2011. The
production lines in the Gaoan facility can produce five principal categories of
Hengda’s existing products. Furthermore, the new production lines in Gaoan were
built using some of the most advanced equipment in the industry and operate at a
higher efficiency rate than the existing production lines.
Hengda’s
Products
Hengda
produces five types of ceramic tiles:
Porcelain
tiles:
Porcelain tiles are fired at extreme temperatures and
are therefore stronger and harder than other types of ceramic tiles. The
material and the color is the same throughout and porcelain tiles are extremely
wear-resistant. Although porcelain tiles have a matte surface, they absorb less
water than other ceramic tiles, and as such, they are a superior solution for
exterior tiling where there is frequent exposure to moisture.
Glazed tiles:
Glazed tiles
have a glossy finish and color patterns may be added to the exterior surface of
the tile. The glaze does not go beyond the exterior surface of the tile and the
interior color will show if the tile is chipped. Although glazed tiles are less
water-resistant than matte porcelain tiles, they are easier to clean due to
their glossy surface.
Glazed porcelain tiles:
Glazed porcelain tiles combine the advantages of porcelain tiles and
glazed tiles, thus enabling the tiles to have a porcelain body with a
stain-proof and glossy finish.
Rustic tiles:
Rustic tiles have greater versatility in their design as textures and colors can
be added to their exterior surfaces and therefore can be used in more decorative
situations. In addition to being used on exterior walls, rustic tiles are also
used for interior walls and flooring. Rustic tiles were put into
production in 2007.
Ultra-thin tiles:
Ultra-thin
tiles are only 4.0 mm thick, about half the thickness of traditional tiles. Due
to their thinness, these tiles are more environmentally-friendly as the
production process requires fewer raw materials and less energy. When
used in combination with a specialized insulating material, the combination
enables greater heat retention in the winter and keeps buildings cool in the
summer with less load bearing stress on exterior building walls. Ultra-thin
tiles were commercialized in 2008.
Ceramic
tiles can be manufactured in differing sizes according to customer
specifications, with the largest sized tiles measuring 600 mm by 600 mm. Hengda
can provide over 2,000 different combinations of products, colors, textures and
sizes to meet the various demands of its customers.
Hengda’s
Competitive Strengths
Hengda
believes the company can capitalize on the growth in the ceramics tile industry
in the PRC because of the following strengths:
Leading
exterior ceramic tile manufacturing company in the PRC
Hengda is
a leading exterior ceramic tile manufacturer in Fujian Province and possesses
economies of scale and scope that give the company an advantage over its
competitors. Hengda has an established track record of more than 15 years in the
ceramics industry.
Hengda is
strategically located in the Jinjiang region, a ceramic and construction
material hub in the PRC. As distributors and direct customers come to this area
to procure construction materials for sale, construction projects or export,
this location provides a regular flow of customers and demand to
Hengda. This centralized industry location allows Hengda to respond
quickly to customer demands and react rapidly to emerging market trends.
Additional geographic advantages include: 7 miles to the Jinjiang Airport, 40
miles to the Xiamen Airport and Xiamen Railway Station and 4 miles to Shenhu
Port. The proximity and ease of access to major ports and transportation enables
Hengda to leverage geographical convenience and decreases transportation and
logistics costs.
Leading
brand with a strong market reputation
Hengda’s
strong brand recognition allows it to market itself as a leader in the exterior
ceramic tile industry to property developers and distributors to the
construction industry. The “Hengda” and “HD” brands are well recognized and
highly regarded in markets where Hengda’s products are sold. In 2005
Hengda was certified as a “Famous Brand of Fujian Province”, and was recognized
as a “Chinese Well-known Mark” in 2005.
Hengda
focuses on strengthening its brands by attending national fairs and promoting
its products through inclusion in strategic or high-profile
projects. As a result, their products are being used for the 16
th
Asian
Games, the 11
th
National Chinese Games Village and the Chinese Academy of
Sciences. Hengda intends to further build on its brand’s market
position in the future.
Modern
and international-standard manufacturing facilities
To
further Hengda’s corporate strategy of producing high quality products, the
company has invested in modern, international-standard manufacturing
facilities. Hengda has imported, from Italy and Germany, advanced
equipment for its production lines and has implemented an overall stringent cost
and quality control management system. Since 2006, Hengda has spent over RMB20
million to upgrade its current production lines and achieved recovery and
recycle of waste water, waste dust, exhaust and kiln after-heat, which enabled
it to decrease energy costs by 20%. Hengda was awarded Energy Conservation
Advance Enterprise in 2008 from Jinjiang City Government.
In July
2002, Hengda was granted an ISO 9001:2000 accreditation, an international
standard that acknowledged their quality control process. Quality
control procedures begin at the receipt of raw materials and continue throughout
the manufacturing process ending with a final quality check prior to packaging.
Hengda’s employees are required to undergo internal training regarding its
quality control policies, targets and procedures, as well as production and
processing techniques. To date, Hengda has not received material claims for
defects against its products.
Hengda’s
new production facility in Gaoan is expected to incorporate the latest ceramic
tile manufacturing technology and will allow the company to maintain its
leadership position. The new production lines were built using some of the most
advanced equipment in the industry and incorporate similar recovery and recycle
of waste water, waste dust, exhaust and kiln after-heat as the existing lines,
but at a higher efficiency rate. Additionally, the production line
architecture optimizes throughput by eliminating conveyer feeds between each
step of the production process helping to reduce production
costs. Hengda’s management believes that the two facilities will
yield economic benefits by allowing Hengda to share resources and enable it to
optimize its supply and distribution chain thereby enhancing
efficiency.
Strong
research and development and design capabilities
Hengda
has devoted substantial resources to establishing research and development
capabilities in an effort to improve its products and diversify its product
mix. As of June 30, 2009, Hengda has obtained 13 design patents and 4
utility patents. Another 20 design patent applications were submitted and are
pending approval. In addition, Hengda was awarded a “High-tech Enterprise
Certificate” in 2007 from Fujian Provincial Department of Science and
Technology, affirming its innovations in the industry.
Hengda’s
R&D team focuses on new products as well as developing energy and resource
efficient production methods. As of June 30, 2009 the team had 72 employees and
its supervisor has more than 15 years of experience in the ceramics
industry. Hengda’s research and development team also works with the
Jingdezhen Ceramic Institute in the PRC to innovate and develop new production
processes and products.
Through
its efforts in research and development, Hengda believes that it is well
positioned to further expand its market share and widen its customer base by
continuing to develop technological advances in anticipation of, or in response
to, customer requirements and evolving government standards.
Experienced,
professional and dedicated management team
Hengda’s
experienced, professional and dedicated management team brings a wealth of
knowledge to Hengda’s day-to-day operations and provides strategic direction to
the company. Hengda’s Chairman and Founder, Huang Jia Dong, has more
than 20 years of experience in the ceramics industry and is Vice-Chairman of the
Fujian Province Ceramic Industry Association. The senior management
team comprised of five members has more than 80 years of experience in the
ceramic industry. Hengda believes that the extensive industry related
experience among the senior management team allows the company to better
anticipate market opportunities.
Hengda’s
Strategy
Hengda
intends to continue to build on its competitive strengths to increase its market
share and profitability. To achieve this, it plans to implement the
following business strategies:
Increase
production capacity through the acquisition of a new manufacturing
facility
In order
to meet demand for Hengda’s products which is currently in excess of 100% of
current capacity, Hengda plans to acquire a new facility in Gaoan, Jiangxi
Province in Q4 2009. Three production lines will be operational in the fourth
quarter of 2009, four lines operational in 2010, and the final five production
lines will be operational in 2011. The capital expenditure is
expected to be RMB279 million in 2009, RMB150 million in 2010, and RMB152
million in 2011. The 12 production lines in Gaoan will increase
Hengda’s production capacity by 42 million square meters to a total of 70
million square meters in 2012. In addition to a more efficient
manufacturing process, labor and raw materials costs are also expected to be
lower.
Further
enhance Hengda’s brand awareness
Hengda
plans to further enhance brand awareness of the “Hengda” and “HD” brand in the
PRC, in particular, to strengthen the recognition of Hengda as a leader in the
PRC exterior ceramic tile industry. Hengda plans on strengthening its
brands by; continuing to market its products to property developers and the
construction industry, working with distributors on local marketing, attending
national fairs and promoting its products through inclusion in strategic
high-profile projects. Expansion of Hengda’s branding initiatives
will enable it to increase its market share of the ceramic tile
industry.
Expand
sales distribution network and increase exports
Hengda
sells its products mainly to distributors located in major cities such as;
Shanghai, Beijing, Tianjin, Wuhan, Chengdu and Shenyang and other locations in
the PRC. Hengda intends to expand its distribution network to cover regions
within the PRC where it currently does not have a presence or does not have a
strong presence. In particular, Hengda plans to increase its distribution
network by establishing and increasing its presence in Zhejiang, Anhui,
Heilongjiang, Guizhou, Henan, Hebei, Shangdong, Shanxi, Shaanxi, and Yunnan
Provinces within the PRC.
Hengda
believes that its new production facility in Gaoan will better position the
company to expand into new markets and reach additional end customers as
transportation and logistical costs of delivering products to these areas will
be reduced.
Further,
Hengda is planning to conduct more direct sales to property developers and has
entered into the final bidding process as the ceramic tile provider to China
Resources Land Limited, one of the leading property developers in China. Hengda
will also seek to become an exclusive ceramic tile supplier to other leading
property developers in China such as Vanke and Evergrande.
Currently
Hengda exports approximately 5% of its products through PRC trading companies.
Hengda intends to increase the exported volume of its products by establishing
relationships with additional PRC trading companies and by promoting its
products in regional and international trade shows.
Develop
advanced products that meet evolving building construction
requirements
Hengda is
focusing its R&D initiatives on developing new products that address market
demand for advanced building materials and meet evolving Government policies for
energy efficiency. Specifically the R&D effort is focused on
tiles which;
|
·
|
Reduce
raw materials and energy consumption in the production
process;
|
|
·
|
Have
a density less than half of other
tiles;
|
|
·
|
Reduce
load bearing stress on exterior walls of buildings and tile shedding;
and
|
|
·
|
Utilize
a honeycomb structure which optimizes insulation
performance.
|
Hengda
will continue to invest in research and development to maintain its competitive
position in the industry.
Expansion
through mergers, acquisitions and strategic alliances
Hengda
may seek to further increase its market share through select acquisitions.
Management believes that it has sufficient expertise to find and acquire
suitable ceramic production facilities and/or companies to increase its scale
and geographic diversification within the PRC. Hengda’s management
intends to only pursue acquisitions where it believes that it will be able to
continue to provide cost competitive, high quality ceramic tiles to its
customers.
Production
Process and Facilities
A typical
production line for ceramic tiles is comprised of preparation equipment (which
typically includes a miller and a spray dryer), a press (which is used for
shaping raw ceramic material), a glazing line (used to supply glazed materials
to the pressed tiles), a kiln (used to harden the soft mixture of clay and
minerals into a hard ceramic body by subjecting the mixture to high temperature)
and packaging.
The
following chart sets out the major steps involved in the production
process:
The
procedures involved in the production of ceramic tiles are summarized
below:
(i) Inspecting
Raw
materials for ceramic products consist mainly of clay (comprised of inorganic
materials such as kaolin, flint and feldspar) obtained mostly from areas
adjacent to Hengda’s facilities, such as Dehua county of Quanzhou city. Raw
materials are inspected by quality control staff upon receipt. Batch
calculations that take into consideration both physical properties and chemical
compositions of the raw materials are performed to ensure that the right amounts
are mixed.
(ii) Mixing
and Grinding
After
stringent checks on the quality of the clay and weighing, the raw material
department mixes the clay as determined during inspection. The mixture is then
sent to a ball mill where water is added to form a slurry for finer grinding.
This process takes approximately 12 hours to complete. The slurry is then
filtered and metallic particles are removed magnetically. The slurry is
inspected at this stage for density, flow speed and water ratio. Compared with
many competitors who use stone ball millers, Hengda uses aluminum ball millers
to grind materials. Aluminum ball millers have a higher initial cost, but have
higher grinding speed and can better process stone chips existing in the
slurry. The slurry is then moved to a 1,200 ton slurry pool. Based on
production scheduled, portions of the slurry may be moved to smaller slurry
pools where coloring materials can be added. The mixture in smaller slurry pools
are churned for approximately 24 hours to keep quality and color consistent in
the end product.
(iii) Spray
Drying
A spray
dryer is then used to remove most of the water content in the slurry to obtain
granules with the required moisture level for processing. The slurry is pumped
into an atomizer, consisting of a rapidly rotating disk or nozzle where droplets
are formed. The droplets of the slurry spray are then dried by a
rising hot air column, forming small free-flowing granules of a standard size
and specific moisture content which is used in the next stage. The stream of
gases used to dry the slurry can be at temperatures as high as 1,100
°
C. The granules are then
moved to and held in steel containers (“hoppers”) for over 24 hours to ensure
consistency and uniformity of granule size and color.
(iv) Molding
The
granules flow from a hopper into the mold die where they are compressed by steel
plungers and then ejected by the bottom plunger in varying sizes based on
specifications. The automated presses used operate at pressures as high as 1,600
tons. The ceramic bisque, a shaped non-fired ceramic tile, is then passed
through to the dryer to remove most of the remaining water content present in
preparation for the firing and/or glazing stages. The tiles are fed into the
dryer and conveyed horizontally on rollers, at temperatures of 250
°
C for approximately 15 to
25 minutes based on tile type.
(v) Glazing
Glazing
involves applying one or more coats of glaze, comprised mainly of silica and
other coloring agents such as iron, chromium, cobalt or manganese, onto the tile
surface. The dried ceramic bisque is then sent to the glazing station where a
design and/or color is added. The glaze concentration and glazing quantity is
controlled by computers to avoid chromatic aberration and lack of uniformity.
Not all products, such as porcelain tiles, require glazing.
(vi) Firing
After
molding and/or glazing, the ceramic bisque is fired in a kiln. Typically, the
temperature in a kiln is about 1,200°C and the firing process takes less than
one hour. The entire firing process is monitored and controlled by computers.
Hengda currently has nine firing lines in its production facility.
(vii) Packaging
After the
firing process, tiles are inspected for quality. Tiles which pass inspection are
packaged and moved to the storage facility.
As of
June 30, 2009 Hengda’s production facility, located in Jinjiang City, Fujian
Province in the PRC had a total gross floor area of approximately 120,000 sq m
and employed 1,692 production personnel. The Jinjiang facility
consists of nine production lines with an annual production capacity of 28
million square meters. Historically, Hengda has not experienced any
form of disruption in its production facility.
In 2008
Hengda signed a letter of intent to acquire in Q4 2009, a new production
facility in Gaoan, Jiangxi Province with over 430,000 square meters of land.
Hengda is acting as the technical advisor during construction and providing
production start-up support. In advance of the closing of the
transaction with China Holdings, Hengda will sign a definitive agreement to
purchase the Gaoan facility. Three production lines will be
operational in the fourth quarter of 2009, four lines operational in 2010, and
the final five production lines will be operational in 2011. The 12
production lines in Gaoan will increase Hengda’s production capacity by 42
million square meters to a total of 70 million square meters in
2012.
Quality
Control & Assurance
The
quality of Hengda’s products is critical to its continued growth and
success. In July 2002, Hengda received ISO 9001:2000 accreditation,
an international certification certificate, acknowledging their quality control
process. Quality control procedures begin at the receipt of raw
materials and continue throughout the manufacturing process ending with a final
quality check prior to packaging. Hengda’s employees are required to undergo
internal training regarding its quality control policies, targets and
procedures, as well as production and processing techniques. As of June 30,
2009, Hengda’s quality assurance team consisted of 104 members.
Notable
Awards & Certificates
Hengda
has received numerous awards and certificates for its branding, product quality
and R&D achievements. Select awards include:
|
Year
Initially
Received
|
Award & Certificate Name
|
Issuer
|
||
|
2002
|
ISO9001:2000
Quality Management System Certificate
|
China
Certification Center for Quality Mark
|
||
|
2004
|
China
Compulsory Certification
|
Guojian
Lianxin Certification Center
|
||
|
2005
|
ISO
14001:2004 Environnemental Management Standards
Certificate
|
Fujian
Branch of Beijing World Standards Certification Centre
|
||
|
2005
|
Fujian
Well-known Mark
|
Fujian
Well-known Mark Award Commission
|
||
|
2005
|
Chinese
Well-known Mark
|
Intermediate
People’s Court of Xiangtan City
|
||
|
2006
|
Inspection
Exempted Products Certificate
|
National
Bureau of Quality and Technical Supervision
|
||
|
2007
|
High-tech
Enterprise Certificate
|
Fujian
Provincial Department of Science and Technology
|
||
|
2008
|
Energy
Conservation Advanced Enterprise
|
Jinjiang
City Government
|
||
|
2009
|
Fujian
100 Important Industrial Enterprise
|
Fujian
Economic and Trading
Commission
|
Customer,
Sales & Marketing
Hengda
primarily sells its products through an exclusive distributor network and
directly to property developers. Distributors are located in major
cities such as; Shanghai, Beijing, Tianjin, Wuhan, Chengdu and Shenyang and
other locations in the PRC. The company has long-term relationships with its
customers; nine of its top ten customers in 2008 have been purchasing from the
company for over nine years.
Hengda’s
major customers accounting for 5% or more of Hengda’s total revenue for the last
three years and the six months ended June 30, 2009 are: Foshan City Jundian
Ceramics Co., Ltd., Xiamen Tongying Trading Co., Ltd., Liaoning Yatong Logistics
Co. Ltd, Beijing Zhihe Construction Industry Trading Co., Ltd., Fuzhou Yuanteng
Construction Decoration Co., Ltd., Chaozhou Chenqiao Jianxing Building Materials
Co., Ltd. and Chendu City Dehui Construction Materials Co., Ltd. None
of these customers accounted for more than 10% of Hengda’s total revenue in
2008.
Hengda’s
business and profitability is not materially dependent on any industrial,
commercial or financial contract with any of its customers. None of
Hengda’s directors or executive officers or their respective affiliates has any
interest, direct or indirect, in any of Hengda’s customers.
Sales
and Marketing
The sales
and marketing department is responsible for; formulating sales policies and
pricing based on market analysis, surveys and forecasts, developing and
implementing Hengda’s sales and marketing campaigns, and promoting Hengda’s
products and brand. Additionally, the sales department is responsible for
cultivating new customers and business relationships, as well as servicing
existing accounts.
Hengda
participates in a variety of sales and marketing activities including; trade
shows, in-house sales and marketing seminars, factory tours, outdoor
advertising, B2B catalogs and customer calls. Hengda believes that these
techniques allow it to gather and better understand customers’ needs and
requirements and to obtain feedback on its products and services and intends to
continue utilizing these techniques.
In the
future Hengda intends to participate in international trade fairs and seminars
from time to time to promote its brand and products, and to establish a network
with industry professionals outside the PRC. To augment its plan to expand its
markets internationally, Hengda’s products will also be advertised on and
available to purchase on the Internet. As of June 30, 2009, Hengda’s Sales and
Marketing Department had 23 employees whose salaries are
commission-based.
Backlog
Hengda
typically receives orders from customers two months in advance of production on
a rolling basis. As of June 30, 2009, Hengda’s backlog was RMB168 million
which represents approximately the next two months of revenue at the time,
compared to a backlog of approximately RMB145 million on June 30, 2008, a year
over year increase of 15.9%.
Major
Suppliers
Clay and
coal are the two main raw materials required to manufacture ceramic
tiles. Hengda purchases these raw materials from at least two
independent suppliers respectively. Other major sourced materials include
coloring and packaging. Hengda is not dependent on any one of its PRC
based suppliers as it is able to source raw materials from alternative vendors
should the need arise.
Hengda’s
suppliers are selected by its purchasing department and are assessed on criteria
such as the; quality of materials supplied, duration of their business
relationship with Hengda, pricing, delivery reliability and response time to
orders placed by Hengda. Hengda has sufficient raw materials on-hand
to support, on average, three weeks of production at any point in time to
minimize any potential production delays that could arise due to a delay in raw
material delivery.
Hengda
has not experienced significant production disruptions due to a supply shortage
from its suppliers, nor has it had a major dispute with a supplier.
Hengda’s
major suppliers accounting for 5.0% or more of Hengda’s total purchases in
fiscal 2006, 2007 and 2008 and the six months ended June 30, 2009 are: Fujian
Province Dehua County Shangdi Guoshan Ceramic Mine, Dehua County Longxun Mining
Industry Development Co., Ltd, Foshan City Nanhai Zhongtai Glaze Production
Plant, Quanzhou Furen Trading Co., Ltd., Fuzhou Yuchang Trading Co., Ltd,
Quanzhou Fengzhe Hengran Ceramics Co., Ltd., Fuzhou Free Trade Zone
Tianlida, Jinjiang Xinglida Paper Industry Co., Ltd., Fujian Province Dehua
County Jiaxin Mining Industry Co., Ltd, Foshan Sanshui Jinying Inorganic
Materials Co., Ltd. and Jiangxi Tungsten Industry Group Co.,
Ltd. None of these major suppliers accounted for more than 10% of
Hengda’s total raw material purchases in 2008. Hengda’s business or
profitability is not materially dependent on any industrial, commercial or
financial contract with any of its suppliers.
None of
Hengda’s officers or directors or their respective affiliates has any interest,
direct or indirect, in any of the above major suppliers. There are no
arrangements or understanding with any suppliers pursuant to which any of
Hengda’s directors and executive officers were appointed.
Research
and Development
Hengda
has devoted substantial resources to establishing research and development
capabilities in an effort to improve its products and diversify its product mix.
Hengda’s R&D team focuses on new products as well as developing energy and
resource efficient production methods.
Hengda
focuses its research and development efforts on the following:
(a) Improving
and developing new production and processing techniques;
(b) Improving
the use and selection of raw materials to lower costs; and
(c) Developing
new products and designs to address changing market demands.
Hengda’s
research and development expenses were approximately RMB11.4 million, RMB14.9
million and RMB14.6 million for fiscal years 2006, 2007 and 2008,
respectively. From time to time, Hengda may enter into collaboration
with other research institutes to develop new products or improve its production
process. As of June 30, 2009 the R&D department had 72
employees.
Competition
Hengda
operates in a competitive environment and it expects to face more intense
competition from its existing competitors. Its competitors are privately owned
companies that are located mainly in the PRC. Hengda’s principal competitors are
Guangdong White Rabbit Ceramics, Guangdong New Pearl Ceramics, Foshan Shiwan
Yulong Ceramics Co., Ltd, Jiangxi Apollo Ceramics Co., Ltd., Jianjiang Haoyuan
Ceramics, Co., Ltd, Jinjiang Wanli Ceramics Co., Ltd, Jinjiang Tengda Ceramics
Co., Ltd and Jinjiang Haoshan Construction Materials Co., Ltd.
Properties
Hengda
owns land-use rights at two locations in Jinjiang, Fujian Province in the PRC
for an office building and workshop, and has pre-paid all amounts relating to
these properties. The land-use rights for these two locations expire
in 2055 and cover approximately 10,023 sq meters.
Hengda
currently leases 19 properties in Jinjiang, Fujian Province in the PRC for
various uses including warehouses, office space, workshops, staff quarters and
stock yards. The lease terms range from one to six
years.
Hengda
believes that its current property rights are sufficient for its current
operations. However, to continue growth, Hengda believes it needs to
expand its production capacity, which is why it has entered into a letter of
intent to acquire a new facility in Gaoan, Jiangxi Province, as described
above.
Intellectual
Property
Hengda’s
brand name distinguishes its products from that of its competitors and increases
consumer awareness of its products. Hengda has registered the
following trademarks in the PRC:
Registered
Trademarks
|
Trademark
|
Class/Products
|
Validity Term
|
Registration No,
|
|||
|
19/
Red floor tile and ceramic tile
|
From
December 14, 2003 to December 13, 2013
|
669884
|
|||
|
19/
Tile, ceramic tile and wave pattern tile
|
From
February 21, 2002 to February 20, 2012
|
1716827
|
|||
|
19/
Tile; non-metallic tile; ceramic tile; non-metallic wall tile for
constructional use; wave pattern tile; glass mosaic; non-metallic floor
tile
|
From
March 28, 2009 to March 27, 2019
|
4971248
|
|||
|
19/
Tile; ceramic tile; wave pattern tile; non-metallic tile for
constructional use; marble; manual stone; terrazzo; glass
mosaic
|
From
September 14, 2006 to September 13, 2016
|
3893819
|
Patents
As of
August 1, 2009, Jinjiang Hengda owns four utility model patents in the PRC for
exterior wall tiles, which were applied for in November of 2007. The
terms of such patents are for ten years from the application date.
Pursuant
to a Patent Licensing Contract dated May 8, 2009 between Jinjiang Hengda and
Huang Jia Dong, Huang Jia Dong has licensed to Jinjiang Hengda, for no
consideration, the exclusive right to use PRC design patents owned by Huang Jia
Dong during the terms of each of the patents: There are a total of
thirteen design patents for ceramic tiles which were applied for between August
2000 through November 2002. The terms of such patents are for ten
years from the application date.
According
to a letter issued by Huang Jia Dong on May 10, 2007, Jinjiang Hengda is
authorized by Huang Jia Dong to use designs for 20 ceramic tiles which have had
patent applications submitted by Huang Jia Dong to the State Intellectual
Property Office (SIPO) for the granting of design patents on December 7, 2006,
on its products under the trademarks No. 669884 and No. 1716827 in the
PRC. The applications are currently being processed by
SIPO.
Except as
disclosed above, as of the date of this Registration Statement, Hengda’s
business or profitability is not materially dependent on any other trademarks,
copyrights, registered designs, patents, grant of licenses from third parties,
new manufacturing processes or intellectual property rights.
Legal
Proceedings
There are
no material lawsuits currently pending against Hengda.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS OF SUCCESS WINNER
You
should read the following description of our results of operations and financial
condition in conjunction with the section above titled “Risk Factors” and our
consolidated audited financial statements presented in this filing. Unless
otherwise specified, all dollar amounts are in PRC RMBs.
Overview
Hengda is
a leading Chinese manufacturer of ceramic tiles used for exterior siding and for
interior flooring and design in residential and commercial
buildings. The ceramic tiles, sold under the “HD” or “Hengda” brand
are available in over two thousand styles, colors and size combinations.
Currently, Hengda has five principal product categories: (i) porcelain tiles,
(ii) glazed tiles, (iii) glazed porcelain tiles, (iv) rustic tiles, and (v)
ultra-thin tiles. Porcelain tiles are Hengda’s major products and
accounted for over 80% of Hengda’s total revenue in 2008. The market
for Hengda’s products has been growing rapidly, due to the increasing demand for
construction materials in the PRC attributable to; population growth, population
urbanization and an increasing standard of living.
Hengda’s
manufacturing facility is located in Jinjiang, Fujian Province with an aggregate
annual production capacity of approximately 28 million square meters. The
company manufactures its five principal product categories using nine production
lines; each production line is optimized to manufacture specific size ranges to
maximize efficiency and output. Hengda will acquire a new facility in
Gaoan, Jiangxi Province in Q4 2009. The 12 production lines in Gaoan
are expected to increase Hengda’s production capacity by 42 million square
meters to a total of 70 million square meters in 2012.
Basis
of Presentation
The
following discussion and analysis of Hengda’s financial condition and results of
operations is based on the selected financial information at and for the years
ended December 31, 2006, 2007 and 2008, and six months ended June 30, 2008 and
2009 and has been prepared based on the financial statements of Hengda and its
consolidated subsidiaries, Success Winner Limited, a British Virgin Islands
company, Stand Best Creation Limited, a Hong Kong company and Jinjiang Hengda
Ceramics Co. Ltd. Hengda is regarded as the continuing entity resulting from the
Reorganization (as further described in the section entitled “Corporate
Structure and Background”) since the management of all the entities which took
part in the reorganization were controlled by the same directors and under
common shareholders before and immediately after the
reorganization. Consequently, immediately after the reorganization, there
was a continuation of the control over the entities’ financial and operating
decisions and risk and benefits to the ultimate shareholders that existed prior
to the reorganization. The reorganization has been accounted for as a
reorganization under common control. Accordingly, the combined financial
statements for the years ended December 31, 2006, 2007 and 2008 and six months
ended June 30, 2008 and 2009 have been prepared on the basis of merger
accounting and comprise the financial statements of the subsidiaries which were
under common control of the ultimate shareholders and directors that existed
prior to the reorganization exercise during the relevant periods or since their
respective dates of incorporation. The combined financial statements have been
prepared in accordance with International Financial Reporting Standards
(“IFRSs”) including related interpretations issued by the International
Accounting Standard Board (“IASB”), and have been consistently applied
throughout the years ended December 31, 2006, 2007 and 2008 and six months ended
June 30, 2008 and 2009.
Hengda
has five reportable operating segments based on product
category: porcelain tiles, glazed tiles, glazed porcelain tiles,
rustic tiles and ultra-slim tiles. Pursuant to IFRS Standard 8,
Hengda began providing segment information beginning in 2009.
Corporate
Structure and Background
Jinjiang
Hengda Ceramics Co., Ltd. was established on September 30, 1993 under the laws
of PRC with the 15% of its initial shareholding owned by Fujian Province
Jinjiang City Anhai Junbing Hengda Construction Material Factory (“Anhai
Hengda”) and the balance of 85% owned by Chi Wah Trading Import and Export
Company (“Chi Wah”). Chi Wah is a sole proprietor under the laws of
Hong Kong with its legal and equitable interest solely owned by Wong Kung
Tok.
Stand
Best Creation Limited was established on January 17, 2008 under the laws of Hong
Kong with Wong Kung Tok as its sole shareholder and sole
director. Stand Best Creation Limited acquired the entire
shareholding of Jinjiang Hengda Ceramics Co., Ltd on April 1, 2008 at the
consideration of RMB58,980,000. As a result of this acquisition, Wong
Kung Tok became to indirectly and wholly own Jinjiang Hengda Ceramics Co.,
Ltd.
As at
June 30, 2009, Stand Best Creation Limited owed Wong Kung Tok HK$67,930,978.00
being the shareholder’s loan and according to the capitalization agreement dated
June 30, 2009, Stand Best Creation Limited allotted 9,999 shares to Wong Kung
Tok or its nominee for capitalization of the said shareholder’s
loan.
Success
Winner Limited was established on May 29, 2009 under the laws of British Virgin
Islands with Wong Kung Tok as its sole shareholder and sole
director.
On June
30, 2009, Wong Kung Tok nominated Success Winner Limited to take up the 9,999
shares allotted by Stand Best Creation Limited as per the capitalization
exercise aforementioned and on the same date, Wong Kung Tok transferred all its
shareholding in Stand Best Creation Limited to Winner Success
Limited. In effect, Wong Kung Tok as from June 30, 2009 indirectly
owns the entire shareholding of Stand Best Creation Limited and in turn, the
entire shareholding of Jinjiang Hengda Ceramics Co., Ltd.
Combined
Income Statements
The
following table sets forth Hengda’s financial results for the years ended
December 31, 2006, 2007 and 2008 and the six months ended June 30, 2008 and
2009.
|
Year Ended December 31
|
Six months Ended June 30
|
|||||||||||||||||||
|
RMB (‘000)
|
2006
|
2007
|
2008
|
2008
|
2009
|
|||||||||||||||
|
Revenue
|
495,820 | 649,970 | 776,570 | 376,833 | 399,729 | |||||||||||||||
|
Cost
of sales
|
(346,269 | ) | (441,940 | ) | (533,330 | ) | (251,804 | ) | (273,900 | ) | ||||||||||
|
Gross
profit
|
149,551 | 208,030 | 243,240 | 125,029 | 125,829 | |||||||||||||||
|
Other
income
|
1,586 | 2,339 | 2,685 | 1,415 | 1,319 | |||||||||||||||
|
Selling
and distribution expenses
|
(30,424 | ) | (38,166 | ) | (46,008 | ) | (21,745 | ) | (22,655 | ) | ||||||||||
|
Administrative
expenses
|
(5,333 | ) | (6,158 | ) | (9,932 | ) | (5,541 | ) | (4,832 | ) | ||||||||||
|
Finance
costs
|
(301 | ) | (576 | ) | (941 | ) | (397 | ) | (416 | ) | ||||||||||
|
Profit
before taxation
|
115,079 | 165,469 | 189,044 | 98,761 | 99,245 | |||||||||||||||
|
Income
tax expense
|
(13,825 | ) | (19,863 | ) | (24,027 | ) | (12,544 | ) | (24,980 | ) | ||||||||||
|
Profit
attributable to shareholders
|
101,254 | 145,606 | 165,017 | 86,217 | 74,265 | |||||||||||||||
Description
of Selected Income Statement Items
Revenue
Hengda
generates revenue from the sales of ceramic tiles, including porcelain tiles,
glazed porcelain tiles, glazed tiles, rustic tiles and ultra-thin
tiles. Hengda’s peak season in the last three years is between the
months of May to September. This is because the second and third quarters are
also the peak season of the property developing industry. In addition, Hengda
also observed lower sales between the months of January to March. This is
because property developing activities are low due to the effects of cold
weather and the PRC Spring Festival.
Cost of sales
.
Cost of sales consists of
costs directly attributable to production, including the cost of clay, color
materials, glaze materials, coal, salaries for staff engaged in production
activity, electricity, depreciation, packing materials, and related
expenses.
The most
significant factors that directly or indirectly affect Hengda’s cost of sales
are as follows:
|
·
|
Availability
and price of clay; and
|
|
·
|
Availability
and price of coal
|
Clay is
the key materials for making ceramic tiles, which accounted for approximately
25% of Hengda’s cost of sales in the first six months of 2009. The price of clay
is relatively stable as it is widely available since Fujian Province, where
Hengda is located, is one of the largest clay production areas in China. Hengda
has long-term relationships with its coal suppliers. Prices of coal have
experienced fluctuations in the past few years. The average price for coal was
approximately RMB1,084 per ton in the six months ended June 30 of 2008, compared
to approximately RMB936 per ton during the first half of 2009.
Other
income.
Other income consists of sales of waste parts such as
the exhausted metals, gears and transportation belts from equipment and
moldings.
Selling and distribution
expenses
. Selling and distribution expenses consist of sales
commission, payroll, traveling expenses, transportation and advertising
expenses. Hengda pays its distribution customers a commission ranging from 5% to
8% of invoiced amounts (including VAT) actually paid to Hengda.
Administrative expenses
.
Administrative expenses consist primarily of employee remuneration, payroll
taxes and benefits, general office expenses and depreciation. Hengda
expects administrative expenses to continue to increase in absolute amounts.
Hengda will incur additional expenses related to costs of compliance with
securities laws and other regulations, including increased audit and legal fees
and investor relations expenses once a publicly traded company.
Finance Costs.
Finance costs consist of interest expense on bank
loans.
Income taxes.
Income taxes
for the years ended December 31, 2008 and 2007 was RMB24.0 million and RMB19.9
million, respectively. The increase in PRC taxes paid was primarily
due to the increase in assessable profits of Hengda’s subsidiaries in the PRC as
a result of business expansion and revenue growth.
According
to the Income Tax Law of the PRC for Foreign Investment Enterprises and Foreign
Enterprises and as approved by relevant PRC tax authorities, Jinjiang Hengda
Ceramics Co., Ltd., a foreign-invested enterprise, was exempt from the PRC
corporate income tax for its first two profitable years, which were 2004 and
2005. Thereafter, it was entitled to a 50% reduction in the PRC corporate income
tax for the subsequent three years. Pursuant to the PRC Corporate Income Tax Law
and its Implementation Rules effective from January 1, 2008, starting from
January 1, 2008, the applicable tax rate for Jinjiang Hengda Ceramics Co., Ltd.
was 25%.
Results
of Operation
Six
months ended June 30, 2009 compared to six months ended June 30,
2008
Revenue.
The following table
sets forth the breakdown of revenue, by product segment, for the six months
ended June 30, 2008 and 2009:
|
Revenue
|
Six Months Ended June 30,
|
|||||||||||||||
|
RMB
(‘000)
|
2008
|
%
|
2009
|
%
|
||||||||||||
|
Porcelain
|
303,182 | 80.5 | % | 319,223 | 79.9 | % | ||||||||||
|
Glazed
Porcelain
|
8,442 | 2.2 | % | 14,658 | 3.7 | % | ||||||||||
|
Glazed
|
47,154 | 12.5 | % | 42,917 | 10.7 | % | ||||||||||
|
Rustic
|
17,835 | 4.8 | % | 18,360 | 4.6 | % | ||||||||||
|
Ultra-thin
|
220 | 0.1 | % | 4,571 | 1.1 | % | ||||||||||
|
Total
|
376,833 | 100.0 | % | 399,729 | 100.0 | % | ||||||||||
Revenue
grew by RMB22.9 million, or 6.1%, to RMB399.7 million for the six months ended
June 30, 2009, from RMB376.8 million for the same period in 2008. Although the
average selling price for ceramic tiles decreased by 7.9% to RMB25.5 per square
meter for the six months ended June 30, 2009 from an average selling price of
RMB27.7 per square meter for the six months ended June 30, 2008, the sales
volume increased by 2.1 million square meters to approximately 15.7 million
square meters for the six months ended June 30, 2009 from 13.6 million square
meters for the same period in 2008. In the second half of 2008, China
experienced a slow-down in its construction industry due to the global financial
crisis. In order to gain more market share and maintain ceramic tile
productions volumes, Hengda reduced its selling price.
|
·
|
Porcelain
tiles.
Revenue from porcelain tiles increased 5.3% from
RMB303.2 million for the six months ended June 30, 2008 to RMB319.2
million for the same period in 2009. Porcelain tiles have the
largest market of all of our tiles.
|
|
·
|
Glazed porcelain
tiles.
Revenue from glazed porcelain tiles increased
73.6% from approximately RMB8.4 million for the six months ended June 30,
2008 to RMB14.7 million for the same period in 2009. Glazed porcelain
tiles are a relatively new product (introduced in 2006) and the demand for
this product has been strong.
|
|
·
|
Glazed
tiles.
Revenue from glazed tiles decreased 9.0% from
RMB47.2 million for the six months ended June 30, 2008 to RMB42.9 million
for the same period in 2009. The selling price decreased in the six months
ended June 30, 2009 compared to the same period in 2008 though the sales
volumes were about at the same levels in both periods. This product has a
lower selling price than Hengda’s other
products.
|
|
·
|
Rustic tiles.
Revenue
from rustic tiles increased 2.9% from RMB17.8 million for the six months
ended June 30, 2008 to RMB18.4 million for the same period in 2009 due to
an increase in sales volume that was offset by Hengda reducing the selling
price in the last quarter of 2008.
|
|
·
|
Ultra-thin tiles.
Revenue from ultra-thin tiles increased 1977.9% from RMB220
thousand for the six months ended June 30, 2008 with 6 thousand sq. m to
RMB4.6 million for the same period in 2009. Ultra-thin tiles were a new
product commercialized in June 2008. As the demand for this
type of product is strong, ultra-thin tiles are expected to become a
larger portion of Hengda’s product
mix.
|
Cost
of sales
The
following table sets forth the breakdown of cost of sales, by product segment,
for the six months ended June 30, 2008 and 2009:
|
Cost of sales
|
Six Months Ended June 30,
|
|||||||||||||||
|
RMB (‘000)
|
2008
|
%
|
2009
|
%
|
||||||||||||
|
Porcelain
|
196,249 | 77.9 | % | 213,461 | 77.9 | % | ||||||||||
|
Glazed
Porcelain
|
6,100 | 2.4 | % | 10,547 | 3.9 | % | ||||||||||
|
Glazed
|
38,644 | 15.4 | % | 36,329 | 13.2 | % | ||||||||||
|
Rustic
|
10,695 | 4.2 | % | 11,210 | 4.1 | % | ||||||||||
|
Ultra-thin
|
116 | 0.1 | % | 2,353 | 0.9 | % | ||||||||||
|
Total
|
251,804 | 100.0 | % | 273,900 | 100.0 | % | ||||||||||
Cost of
sales was RMB273.9 million for the six months ended June 30, 2009 compared to
RMB251.8 million for the same period in 2008, representing an increase of
RMB22.1million, or 8.8%. The increase in cost of sales was primarily due to
higher sales volume though the price of raw materials such as coal decreased in
the six months ended June 30, 2009.
Gross profit.
The following
table sets forth the breakdown of Hengda’s gross profit and gross profit margin,
by product segment, for the six months ended June 30, 2008 and
2009
|
Six Months Ended June 30,
|
||||||||||||||||
|
RMB (‘000)
|
2008
|
2009
|
||||||||||||||
|
Gross
profit
|
Profit
margin
|
Gross
profit
|
Profit
margin
|
|||||||||||||
|
Porcelain
|
106,933 | 35.3 | % | 105,762 | 33.1 | % | ||||||||||
|
Glazed
Porcelain
|
2,342 | 27.7 | % | 4,111 | 28.0 | % | ||||||||||
|
Glazed
|
8,510 | 18.0 | % | 6,588 | 15.3 | % | ||||||||||
|
Rustic
|
7,140 | 40.0 | % | 7,150 | 38.9 | % | ||||||||||
|
Ultra-thin
|
104 | 47.3 | % | 2,218 | 48.5 | % | ||||||||||
|
All
products
|
125,029 | 33.2 | % | 125,829 | 31.5 | % | ||||||||||
Hengda’s
gross profit increased 0.6% from RMB125.0 million for the six months ended June
30, 2008 to RMB125.8 million for the same period in 2009. Its gross profit
margin decreased 1.7% from 33.2% for the six months ended June 30, 2008 to 31.5%
for the same period in 2009.
|
·
|
Porcelain tiles.
Gross
profit for porcelain tiles decreased 1.0% from RMB106.9 million for the
six months ended June 30, 2008 to RMB105.8 million for the same period in
2009. Its gross profit margin was 33.1% for the six months ended June 30,
2009 compared to 35.3% for the same period in 2008. The decrease in the
gross margin was due to a decrease in the selling price in the second half
of 2008.
|
|
·
|
Glazed porcelain tiles.
Gross profit for glazed porcelain tiles increased 78.3% from approximately
RMB2.3 million for the six months ended June 30, 2008 to RMB4.1 million
for the same period in 2009. Its gross profit margin was 28.0% for the six
months ended June 30, 2009 compared to 27.7% for the same period in
2008.
|
|
·
|
Glazed tiles.
Gross
profit for glazed tiles decreased 22.4% from RMB8.5 million for the six
months ended June 30, 2008 to RMB6.6 million for the same period in 2009.
Its gross profit margin was 15.3% for the six months ended June 30, 2009
compared to 18.0% for the same period in 2008. The decrease in the gross
margin was due to a decrease in price in the second half of
2008. This product has a traditionally lower selling price and
gross margin than Hengda’s other
products.
|
|
·
|
Rustic tiles.
Gross
profit for rustic tiles increased 0.1% from RMB7.1 million for the six
months ended June 30, 2008 to RMB7.2 million for the same period in 2009.
Its gross profit margin decreased 1.1% from 40.0% for the six months ended
June 30, 2008 to 38.9% for the same period in 2009. The decrease in the
gross margin was due to Hengda reducing its selling price for this
product.
|
|
·
|
Ultra-thin tiles.
Gross
profit for ultra-thin increased 2023.7% from RMB104 thousand for the six
months ended June 30, 2008 to RMB2.2 million for the six months ended June
30, 2009. Ultra-thin tiles were a new product line which began production
in June 2008.
|
Other income.
Other income
decreased 7.1% from RMB1.4 million for the six months ended June 30, 2008 to
RMB1.3 million for the same period in 2009. Other income mainly consist of sale
of waste parts such as the exhausted metals, gears and transportation belts from
equipment and moldings of RMB1.2 million in 2009.
Selling and distribution
expenses
. Selling and distribution expenses were RMB22.7 million for the
six months ended June 30, 2009 compared to RMB21.7 million for the same period
in 2008, representing an increase of RMB910 thousand or 4.2%. The increase in
selling and distribution expenses was primarily due to the increase in sales
commissions paid to distribution customers of RMB1.0 million for the six months
ended June 30 2009.
Administrative expenses
.
Administrative expenses were RMB4.8 million for the six months ended June 30,
2009, compared to RMB5.5 million for the same period in 2008, representing a
decrease of RMB0.7 million, or 12.8%. This was mainly due to management’s
reaction to the financial crisis in the second half of 2008 when it actively
decreased administrative and entertainment expenses.
Finance costs.
Finance costs
increased 4.8% from RMB397 thousand for the six months ended June 30, 2008 to
RMB416 thousand for the same period in 2009. The increase of interest expenses
for the six months ended June 30, 2009 was mainly due to an increase in bank
loans.
Profit before taxation.
Profit before taxation increased 0.4% from RMB98.8 million for the six months
ended June 30, 2008 to RMB99.2 million for the same period in 2009. The increase
of the profit before taxation was mainly due to the increase of sales volume of
Hengda’s products for the six months ended June 30, 2009.
Income taxes.
Hengda incurred
an income tax expense of RMB25.0 million for the six months ended June 30, 2009
compared to RMB12.5 million for the same period in 2008, representing an
increase of RMB12.5 million or 100%, due to the aforementioned different tax
rate applied between the periods. Jinjiang Hengda Ceramics
Co., Ltd.’s enterprise income tax rate was 25.0% for the six months ended June
30, 2009 compared to a 12.5% enterprise income tax rate for the same period in
2008.
Profit attributable to
shareholders.
Profit attributable to shareholders decreased by 16.0% from
RMB86.2 million for the six months ended 31, 2008 to the RMB74.3 million for the
same period in 2009 as a result of the factors described above.
Year
ended December 31, 2008 compared to the year ended December 31,
2007
Revenue.
Revenue grew 19.5%
from RMB650.0 million for 2007 to RMB776.6 million for 2008. The increase in
Hengda’s revenue was primarily the result of strong demand created by the
continued growth of the real estate construction market in China. Per
square meter sales volume increased from approximately 23.7 million square
meters for 2007 to approximately 28.9 million square meters for 2008,
representing a 22.0% volume growth rate. Hengda’s average selling price
decreased 2.0% from approximately RMB27.5 for 2007 to RMB26.9 for 2008. Hengda
proactively decreased its average selling price in the second half of 2008 in
response to the global financial crisis.
Cost of sales
. Cost of sales
was RMB533.3 million in the year ended December 31, 2008, compared to RMB441.9
million in the year ended December 31, 2007, representing an increase of RMB91.4
million, or 20.7%. The increase in cost of sales was mainly due to the increase
in sales volume and a corresponding increase in cost of raw materials to
manufacture products. Following an increase in the market price of coal because
the demand to coal surpassed the supply in 2008, Hengda began paying its coal
suppliers in advance in order to have a stable supply of coal.
Gross profit.
Hengda’s gross
profit grew 16.9% from RMB208.0 million for 2007 to RMB243.2 million for 2008.
Our gross profit margin decreased 0.7% from 32.0% for 2007 to 31.3% for
2008.
Other income.
Other income
increased 14.8% from approximately RMB2.3 million for 2007 to RMB2.7 million for
2008. Other income from selling waste parts grew 5.5% from approximately RMB2.2
million for 2007 to RMB2.3 million for 2008. Interest income was RMB394 thousand
for 2008 compared to RMB168 thousand for 2007, representing an increase of
RMB226 thousand or 134.5%.
Selling and distribution
expenses
. Selling and distribution expenses were RMB46.0 million for
2008, compared to RMB38.2 million for 2007, representing an increase of RMB7.8
million or 20.6%. The increase in selling and distribution expenses was
primarily due to an increase in sales commissions paid to distribution customers
resulting from more products sold to RMB39.4 million for 2008,
compared to RMB32.1million for 2007, representing an increase of RMB7.3million,
or 22.7%.
Administrative expenses
.
General and administrative expenses were RMB9.9 million for 2008, compared to
RMB6.2 million for 2007, representing an increase of RMB3.8 million, or 61.3%.
The increase was mainly attributable to (i) the costs relating to the company
preparing to list on a foreign exchange in 2008, which did not continue due to
the financial crisis and resulted in expenses of RMB1.7 million in 2008 and (ii)
the increase in salaries to RMB3.7 million for 2008 compared to RMB2.3 million
for 2007, representing an increase of RMB1.4 million, or 62.2%, due to the
increase in the number of employees in the administration department by 30
positions during the year of 2008.
Finance costs.
Finance costs
increased RMB0.37 million to RMB0.94 million for 2008 from RMB0.58 million for
2007. The increased interest expense was mainly attributable to an increase in
bank loans of RMB2.8 million in the year 2008 and an increase in the average
interest rates by the Chinese government several times during
2008.
Profit before taxation.
Profit before taxation grew 14.2% from RMB165.5 million for 2007 to RMB189.0
million for 2008. The increase was mainly due to the increase in revenue in
2008.
Income taxes.
Hengda incurred
an income tax expense of RMB24.0 million for 2008 compared to RMB19.9 million
for 2007, representing an increase of RMB4.2 million or 21.0%. Jinjiang Hengda
Ceramics Co., Ltd. was entitled to rate of 12% in 2007 and 12.5% in
2008.
Profit attributable to
shareholders.
Profit attributable to shareholders grew 13.3% from
RMB145.6 million for 2007 to RMB165.0 million in 2008 as a result of the factors
described above.
Year
ended December 31, 2007 compared to the year ended December 31,
2006
Revenue.
Revenue grew 31.1%
from RMB495.8 million for 2007 to RMB650.0 million for 2007. The increase of
Hengda’s revenue was primarily the result of demand created by the continued
growth of the real estate construction market in China and an increase in the
average selling price of Hengda’s products. Per square meter sales volume grew
from approximately 19.6 million square meters for 2006 to 23.7 million square
meters for 2007, representing a volume growth rate of 20.7%. Hengda’s average
selling price increased 8.6% from RMB25.3 per square meter for 2006 to RMB27.5
per square meter for 2007. Management believes that the average selling price
increase was primarily due to strong demand from the building industry in China
and Hengda’s reputation in the marketplace.
Cost of sales.
Cost of sales
was RMB441.9 million for 2007 compared to RMB346.3 million for 2006,
representing an increase of RMB95.7 million, or 27.6%. The increase in Hengda’s
cost of revenue was primarily due to the increase in sales volume and a
corresponding increase in the cost of raw materials.
Gross profit.
Hengda’s gross
profit grew 39.1% from RMB149.6 million for 2006 to RMB208.0 million for 2007.
Its gross profit margin increased 1.8% from 30.2% for 2006 to 32.0% for
2007.
Other income.
Other income
increased 47.5% from approximately RMB1.6 million for 2006 to RMB2.3 million for
2007. Income from selling waster parts grew 51.6% from approximately
RMB1.4 million for 2006 to RMB2.2 million for 2007. The interest income was
RMB168 thousand for 2007 compared to RMB154 thousand for 2006.
Selling and distribution
expenses
. Selling and distribution expenses were RMB38.2 million for 2007
compared to RMB30.4 million for 2006, representing an increase of RMB7.7 million
or 25.4%. The increase in selling and distribution expenses was primarily due to
increased sales commissions paid to distribution customers resulting from more
products sold to RMB32.1 million for 2007 compared to RMB25.8 million
for 2006, representing an increase of RMB6.3 million , or 24.4%.
Administrative expenses
.
Administrative expenses were RMB6.2 million for 2007, compared to RMB5.3 million
for 2006, representing an increase of RMB0.8 million, or 15.5%. This was due to
an increase in headcount which was required to accommodate the continued strong
increase in the demand for our products.
Finance costs.
Finance costs
increased RMB275 thousand to RMB576 thousand for 2007 from RMB301 thousand for
2006. The increased interest expense was mainly attributable to an increase in
bank loan of RMB5.0 million in the year 2007.
Profit before taxation.
Profit before taxation grew 43.8% from RMB115.1 million for 2006 to RMB165.5
million for 2007. The increase in profit before taxation was mainly due to the
increase of revenue in 2007.
Income taxes.
Hengda incurred
an income tax expense of RMB19.9 million for 2007 compared to RMB13.8 million
for 2006, representing an increase of RMB6.0 million or 43.7%. Jinjiang Hengda
Ceramics Co., Ltd. had a tax rate of 12% in both 2006 and 2007.
Profit attributable to
shareholders.
Profit attributable to shareholders grew 43.8% from
RMB101.3 million for 2006 to RMB145.6 million for 2007 as a result of the
factors described above.
Cash
Flow Analysis
The
following table presents a summary of Hengda’s cash flows and beginning and
ending cash balances for the years ended December 31, 2006, 2007 and 2008 and
the six months ended June 30, 2008 and 2009 (unaudited):
|
Year Ended December 31
|
Six months Ended
June 30
|
|||||||||||||||||||
|
RMB
(‘000)
|
2006
|
2007
|
2008
|
2008
|
2009
|
|||||||||||||||
|
Net
cash provided by operating activities
|
103,245 | 107,262 | 155,230 | 23,277 | 41,914 | |||||||||||||||
|
Net
cash provided by (used in) investing activities
|
(3,574 | ) | (4,156 | ) | (6,625 | ) | (5,357 | ) | (243 | ) | ||||||||||
|
Net
cash provided by (used in) financing activities
|
(91,980 | ) | (97,192 | ) | (115,506 | ) | 1,815 | (30 | ) | |||||||||||
|
Net
cash flow
|
7,691 | 5,914 | 33,099 | 19,735 | 41,641 | |||||||||||||||
|
Cash
and cash equivalents at beginning of period
|
4,902 | 12,593 | 18,507 | 18,507 | 51,606 | |||||||||||||||
|
Cash
and cash equivalents at end of period
|
12,593 | 18,507 | 51,606 | 38,242 | 93,247 | |||||||||||||||
Hengda
historically financed its liquidity requirement mainly through operating cash
flow and short-term bank loans. Hengda believes that the fund raising from CHAC
which it will receive as a result of the business combination, the financing
that it may receive from the developer of the Gaoan facilities and cash flow
from operations will be adequate to meet its liquidity requirements for the next
twelve months.
Cash flows from operating
activities.
Hengda’s net cash flow provided by operating
activities was RMB41.9 million for the six months ended June 30, 2009, an
increase of RMB18.6 million, or 79.8% from the RMB23.3 million net cash provided
by operating activities for the same period in 2008. The increase was mainly
attributable to an increase in trade receivables of RMB55.8 million
and an increase in trade payables of RMB2.0 million for the six months ended
June 30, 2009 whereas the trade receivables only increased RMB29.7 million and
trade payables decreased RMB41.6 million during the same period in
2008.
For the
year ended December 31, 2008, Hengda’s net cash inflow from operating activities
was RMB155.2 million. The positive net cash flow from operating activates was
mainly attributable to profit before taxation of RMB189.0 million and a decrease
of RMB24.7 million in inventories, partially offset by an increase of RMB14.6
million in trade receivables and a decrease of RMB45.1 million in trade
payables. Since mid-2008 Hengda has paid coal suppliers in advance, resulting in
the decrease in the trade payable for the year ended December 31, 2008
.
Cash flows from investing
activities.
Hengda’s cash flows provided by/used in investing activities
were primarily payments related to the acquisition/sale of property, plant and
equipment and interest.
Net cash
used in investing activities in the six months ended June 30, 2009 was RMB243
thousand, compared to RMB5.4 million of net cash outflow used in investing
activities in the same period of 2008. Such decrease was mainly due to a
decrease in acquisition of property, plant and equipment during the six months
ended June 30, 2009.
For the
year ended December 31, 2008, Hengda’s net cash used in investing activities was
RMB6.6 million and was mainly attributable to purchase of property, plant, and
equipment of RMB7.0 million, partially offset by RMB0.4 million in interest
received.
Cash flows from financing
activities.
Net cash used in financing activities was RMB30 thousand for
the six months ended June 30, 2009, representing a decrease of approximately
RMB1.8 million, as compared to approximately RMB1.8 million cash from financing
activities in the same period of 2008. During the six months ended June 30,
2009, Hengda’s net cash used in financing activities was primarily attributable
to an RMB22.4 million dividend paid to the shareholders, which was almost fully
offset by a new bank loan of RMB22.2 million obtained by the
company.
For the
year ended December 31, 2008, Hengda’s net cash used in financing activities was
RMB115.5 million and was primarily attributable to an RMB120.0 million dividends
paid to the shareholders.
Liquidity and Capital
Resources
.
The major
sources of Hengda’s liquidity for the fiscal year 2006, 2007 and 2008 and six
months ended June 30, 2009, were cash generated from operations and short term
borrowings. Hengda does not use off-balance sheet finance as a source of
liquidity or for other financing purposes.
Hengda’s
working capital was RMB181 million at December 31, 2008 as compared to RMB150
million at December 31, 2007, which was primarily due to a decrease in trade
payable of RMB45 million.
Cash and
cash equivalents were RMB51.6 million as of December 31, 2008, as compared to
RMB18.5 million at December 31, 2007. The Company believes that it has enough
cash available and expects to have enough income and cash flow from operations,
together with financing from the developer of the Gaoan facility, to operate for
the next 12 months.
However,
Hengda may sell additional equities or obtain credit facilities to enhance its
liquidity position or to increase its cash reserve for future acquisitions. The
sale of additional equity would result in further dilution to its shareholders.
The incurrence in indebtedness would result in increased fixed obligations and
could result in operating covenants that would restrict its operations. We
cannot assure you that financing will be available in amounts or on terms
acceptable to us, if at all.
Inventory
Management
Hengda’s
inventory is comprised of raw materials purchased from its suppliers situated in
Fujian, Guangdong and Jiangxi Provinces. These in turn comprise
mainly:
|
(i)
|
Clay;
|
|
(ii)
|
Coal;
|
|
(iii)
|
Colorings;
and
|
|
(iv)
|
Glazing
materials
|
Hengda
has sufficient raw materials to support, on average, three weeks of production
at any point in time. This helps to minimize any potential delays in its
production process which may arise due to insufficient raw materials. Hengda’s
production of ceramic tiles is based on customers’ orders. In doing so, Hengda
minimizes storage space and maintains a relatively low inventory level of
finished products. Its inventory turnover based on the year end closing
inventory balances and allowance for inventory obsolescence charged to the
income statement for the year ended 2006, 2007 and 2008 and the six months ended
June 30, 2009 are as follows:
|
FY2006
|
FY2007
|
FY2008
|
H12009 | |||||||||||||
|
Inventories
(RMB ‘000)
|
115,031 | 156,244 | 131,562 | 107,845 | ||||||||||||
|
Inventory
turnover (days)
(1)
|
107 | 112 | 98 | 80 | ||||||||||||
(1) The
FY2006, FY2007 and FY2008 average inventory turnover is computed based on the
formula: (simple average of the opening and closing inventories balance in a
financial year / cost of goods sold) × 365 days. The average inventory turnover
for the six months ended June 30, 2009 is computed based on the formula: (simple
average of the opening and closing inventories balance in a financial period /
cost of goods sold) × 182.5days.
There
were no provision for inventory obsolescence, inventory written off or inventory
written down to net realizable value in the last three years ended December 31,
2008.
Credit
Management
Credit
terms to its customers
Hengda
typically extends credit terms ranging from 90 to 120 days to its customers;
credit terms can vary from customer to customer. Hengda will grant credit terms
based on the reputation, creditworthiness, size of orders, payment records and
number of years Hengda has done business with the customer. Hengda does not have
a goods return policy.
Personnel
from Hengda’s sales and marketing department typically conduct visits to new
customers to evaluate their credit worthiness before entering into any
arrangements with them. In addition, Hengda will usually request a deposit of
RMB400,000 from new distributors upon signing a distributorship
agreement.
Hengda’s
average trade receivables’ turnover days in the last 3 years ended December 31,
2008 and during the six months ended June 30, 2009 were as follows:
|
FY2006
|
FY2007
|
FY2008
|
Six months
ended June
30, 2009
|
|||||||||||||
|
Trade
receivables (RMB ‘000)
|
140,389 | 181,236 | 195,848 | 251,664 | ||||||||||||
|
Trade
receivables turnover (days)
|
98 | 90 | 89 | 102 | ||||||||||||
(1) The
FY2006, FY2007 and FY2008 average trade receivables’ turnover is computed based
on the formula: (simple average of the opening and closing trade receivables
balance in a financial year / revenue) × 365 days. The average trade
receivables’ turnover for the six months ended June 30, 2009 is computed based
on the formula: (simple average of the opening and closing trade receivables
balance in a financial period / revenue) × 182.5 days.
Credit
terms from its suppliers
Hengda’s
suppliers typically extend credit periods of three to five months for Hengda’s
purchases of clay while its suppliers for the other materials including:
coloring, glazing and packaging generally extend a credit period of
approximately three to six months and coal suppliers generally extend Hengda
credit periods of about one month.
Although
coal suppliers requested that their customers pay in advance in order to secure
coal supply due to the high demand of coal since early 2008, the coal suppliers
have not asked Hengda to change the terms of the coal supplier
agreements.
Hengda’s
average trade and bills payables’ turnover days in the last three years ended
December 31, 2008 and for the six months ended June 30, 2009 were as
follows:
|
FY2006
|
FY2007
|
FY2008
|
Six months
ended June
30, 2009
|
|||||||||||||
|
Trade
payables
|
110,570 | 137,948 | 92,888 | 94,847 | ||||||||||||
|
Trade
payables turnover (days)
|
123 | 118 | 105 | 82 | ||||||||||||
(1) The
FY2006, FY2007 and FY2008 average trade payables’ turnover is computed based on
the formula: (simple average of the opening and closing trade balances in a
financial year / purchases of raw materials and outsourcing services) × 365
days. The average trade payables’ turnover for the six months ended June 30,
2009 is computed based on the formula: (simple average of the opening and
closing trade payable balances in a financial period / purchases of raw
materials and outsourcing services) × 182.5 days.
The fall
in trade payables turnover days from 123 in 2006 to 82 in 2009 was due primarily
to Hengda paying coal suppliers in advance in 2008.
Seasonality
The
second and third quarters are the peak season of the property developing
industry, and, therefore, Hengda sells more product between the months of May
and September. In addition, Hengda has lower sales between the months of January
and March, due to the effects of cold weather and the PRC Spring
Festival.
The
seasonality information above is based on its turnover trend in the last three
years and may slightly vary from year to year depending on the demand by its
customers and end customers for its products. However, management believes that
the seasonality information for the last three years still has representative
meaning of the seasonality trend going forward.
Capital
Expenditures
Hengda’s
capital expenditures primarily consist of expenditures on property, plant and
equipment. Capital expenditures on property, plant and equipment was RMB377
thousand for the six months ended June 30, 2009 compared to RMB5.5 million for
the same period in 2008. In response to the global financial crisis,
management reduced capital equipment spending during the first six months of
2009.
Hengda’s
capital expenditures on property, plant and equipment were RMB7.0 million in
2008. Hengda financed its capital expenditure requirements primarily
through its cash flows from operating activities.
In
connection with the acquisition of the Gaoan facility, Hengda expects to incur
capital expenditures in excess of RMB500 million over the next three years with
approximately RMB270 million to be incurred during 2009.
Off-Balance
Sheet Arrangements
Hengda
does not have any outstanding off-balance arrangements and does not enter into
any transactions that are established for the purpose of facilitating
off-balance sheet arrangements.
Critical
Accounting Policies and Judgment
Hengda’s
combined financial statements are prepared in accordance with IFRSs including
related interpretations, and have been consistently applied throughout the years
ended December 31, 2006, 2007 and 2008. Estimates and judgments are continually
evaluated and are based on historical experiences and other factors, including
expectations of future events that are believed to be reasonable under the
circumstances.
Revenue
recognition
Revenue
is recognized when it is probable that the economic benefits will flow to Hengda
and when the revenue can be measured reliably. Revenue is measured at the fair
value of the consideration received or receivable and represents amounts
receivable for goods and services provided in the normal course of business, net
of discounts and sales related taxes on the following basis:
|
|
i.
|
Revenue
from the sale of goods and scrap materials are recognized when the
significant risks and rewards of ownership have been transferred to the
buyer, provided that Hengda maintains neither managerial involvement to
the degree usually associated with ownership, nor effective control over
the goods sold; and
|
|
|
ii.
|
Interest
income is recognized on a time-proportion basis, taking into account the
principal outstanding and the effective interest rate
applicable.
|
Inventories
Inventories
are valued at the lower of cost and net realizable value. Cost incurred in
bringing each product to its present location and conditions are accounted for
as follows:
|
|
i.
|
Raw
materials at purchase cost on a weighted average basis;
and
|
|
|
ii.
|
Finished
goods and work in progress at cost of direct materials and labor and a
proportion of manufacturing overheads based on normal operating
capacity.
|
Net
realizable value is the estimated selling price in the ordinary course of
business less the estimated costs necessary to make the sale.
Property,
plant and equipment
Property,
plant and equipment are stated at cost less accumulated depreciation and
impairment losses. The cost of an asset comprises its purchase price and any
directly attributable costs of bringing the asset to the working condition and
location for its intended use. Expenditure incurred after property, plant and
equipment have been put into operation, such as repairs and maintenance, is
normally charged to the income statement in the period in which it is incurred.
In situations where it can be clearly demonstrated that the expenditure has
resulted in an increase in the future economic benefits expected to be obtained
from the use of the property, plant and equipment, and the expenditure of the
item can be measured reliably, the expenditure is capitalized as an additional
cost of that asset.
Depreciation
is calculated on the straight-line basis to write off the cost of property,
plant and equipment, less any estimated residual values, over the following
estimated useful lives:
|
Buildings
|
40
years
|
|
|
Renovation
|
10
years
|
|
|
Plant
and machinery
|
5-10
years
|
|
|
Motor
vehicle
|
10
years
|
|
|
Office
equipment
|
5-10
years
|
Depreciation
methods, useful lives and residual values are reviewed, and adjusted as
appropriate, at each reporting date.
The gain
or loss on disposal or retirement of an item of property, plant and equipment
recognized in the income statement is the difference between the net sales
proceeds and the carrying amount of the relevant asset.
Financial
assets
Financial
assets which are under the scope of IAS 39, other than hedging instruments, can
be divided into the following categories: financial assets at fair value through
income statement, held-to-maturity investments, loans and receivables, and
available-for-sale financial assets. Financial assets are assigned to the
different categories by management on initial recognition, depending on the
purpose for which the assets were acquired.
The
designation of financial assets is re-evaluated and classification may be
changed at the reporting date with the exception that the designation of
financial assets at fair value through income statement is not
revocable.
All
financial assets are recognized when, and only when, Hengda becomes a party to
the contractual provisions of the instrument. When financial assets are
recognized initially, they are measured at fair value, plus directly
attributable transaction costs.
De-recognition
of financial assets occurs when the rights to receive cash flows from the
instruments expire or are transferred and substantially all of the risks and
rewards of ownership have been transferred. Regular way purchases and sales of
financial assets are accounted for at trade date, i.e., the date that Hengda
commits itself to purchase or sell the asset. At each of the balance sheet
dates, financial assets are reviewed to assess whether there is objective
evidence of impairment. If any such evidence exists, impairment loss is
determined and recognized.
Receivables
are non-derivative financial assets with fixed or determinable payments that are
not quoted in an active market. They arise when Hengda provides money, goods or
services directly to a debtor with no intention of trading the receivables. They
are included in current assets, except for maturities greater than 12 months
after the balance sheet date. These are classified as non-current assets.
Receivables include trade and other receivables. They are subsequently measured
at amortized cost using the effective interest method, less provision for
impairment. If there is objective evidence that the asset has been impaired, the
financial asset is measured at the present value of the estimated future cash
flows discounted at the original effective interest rate. Impairment losses are
reversed in subsequent periods when an increase in the asset’s recoverable
amount can be related objectively to an event occurring after the impairment was
recognized, subject to a restriction that the carrying amount of the asset at
the date the impairment is reversed does not exceed what the amortized cost
would have been had the impairment not been recognized. The impairment or
writeback is recognized in the income statement.
Financial
liabilities
Hengda’s
financial liabilities include trade and other payables, accrued liabilities,
dividend payable and interest-bearing bank borrowings.
Financial
liabilities are recognized when Hengda becomes a party to the contractual
agreements of the instrument. All interest related charges are recognized as an
expense in “finance costs” in the income statement. Financial liabilities are
derecognized if Hengda’s obligations specified in the contract expire or are
discharged or cancelled.
Borrowings
are recognized initially at fair value of proceeds received less attributable
transaction costs, if any. Borrowings are subsequently stated at amortized cost
which is the initial fair value less any principal repayments. Any difference
between the proceeds (net of transaction costs) and the redemption value is
taken to the income statement over the period of the borrowings using the
effective interest method. The interest expense is chargeable on the amortized
cost over the period of the borrowings using the effective interest
method.
Gains and
losses are recognized in the profit and loss account when the liabilities are
derecognized as well as through the amortization process.
Borrowings
which are due to be settled within twelve months after the balance sheet are
included in current borrowings in the balance sheet even though the original
terms was for a period longer than twelve months and an agreement to refinance,
or to reschedule payments, on a long-term basis is completed after the balance
sheet date. Borrowings to be settled within Hengda’s normal operating cycle are
classified as current. Other borrowings due to be settled more than twelve
months after the balance sheet date are included in non-current borrowings in
the balance sheet. Trade and other payables and accrued liabilities are
initially measured at fair value, and subsequently measured at amortized cost,
using the effective interest rate method. Dividend distributions to shareholders
are included in current financial liabilities when the dividends are
payable.
CHAC
SELECTED FINANCIAL INFORMATION
CHAC was
incorporated in the State of Delaware on June 22, 2007 as a blank check company
for the purpose of acquiring, through a stock exchange, asset acquisition or
other similar business combination, or control, through contractual
arrangements, an operating business that has its principal operations located in
Asia, with a focus on potential acquisition targets in the PRC. CHAC has not
acquired an entity as of the date of this proxy statement/prospectus. CHAC is
considered to be in the development stage and is subject to the risks associated
with activities of development stage companies. The condensed financial
information set forth below should be read in conjunction with the audited
financial statements of CHAC and related notes and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations of CHAC” included
elsewhere in this proxy statement/prospectus.
|
|
Period from
|
|
Period from
|
|||||||||||||||||
|
(U.S.
Dollars in thousands,
except
per
share
amounts)
|
June 22, 2007
(Inception) to
December 31,
|
Year Ended
December 31,
|
Six
Months Ended June 30,
|
June 22, 2007
(Inception) to
June 30,
|
||||||||||||||||
|
2007
|
2008
|
2008
|
2009
|
2009
|
||||||||||||||||
|
|
(unaudited)
|
|||||||||||||||||||
|
Statement
of Income Data:
|
||||||||||||||||||||
|
Income
(loss) before provision for income taxes
|
489 | 495 | 1,556 | (89 | ) | 894 | ||||||||||||||
|
Net
(loss) income
|
299 | 326 | 950 | (59 | ) | 566 | ||||||||||||||
|
Basic
and diluted earnings (loss) per share
|
$ | 0.05 | $ | 0.02 | $ | 0.06 | $ | — | $ | 0.04 | ||||||||||
|
|
As of
|
|||||||||||
|
December 31, 2007
|
December 31, 2008
|
June 30, 2009
|
||||||||||
|
(unaudited)
|
||||||||||||
|
Balance
Sheet Data:
|
||||||||||||
|
Total
assets
|
$ | 126,020 | $ | 126,411 | $ | 126,078 | ||||||
|
Total
liabilities
|
4,618 | 4,681 | 4,408 | |||||||||
|
Common
stock subject to possible redemption
|
40,364 | 40,364 | 40,364 | |||||||||
|
Total
stockholders’ equity
|
81,039 | 81,365 | 81,306 | |||||||||
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS OF CHAC
Overview
CHAC is a
blank check company incorporated on June 22, 2007, for the purpose of acquiring
or acquiring control of one or more operating businesses having their primary
operations in Asia through a merger, capital stock exchange, stock purchase,
asset acquisition or other similar business combination or contractual
arrangements. CHAC intends to focus on potential acquisition targets (a “target
business”), in the People’s Republic of China, including Hong Kong and Macau
(“China” or “PRC”).
CHAC’s
initial public offering of 12,000,000 Units was declared effective on November
15, 2007. Each unit consists of one share of its common stock and one warrant.
The offering was consummated on November 21, 2007, and raised net proceeds of
approximately $110,900,000, of which approximately $110,800,000 were deposited
into its trust account. On December 14, 2007, the underwriters for its public
offering exercised their over-allotment option to the extent of 800,000 Units,
resulting in net proceeds of $7,440,000, which were also deposited into its
trust account. Accordingly, $125,278,000 (approximately $9.79 per Unit) was
deposited into its trust account, which includes $4,288,000 that will be paid to
its underwriters upon the consummation of a business combination with respect to
those shares which stockholders do not exercise their redemption
rights.
Results
of Operations- overview
We have
neither engaged in any operations, nor generated any operating revenues to date.
Our entire activity since inception has been: (i) to prepare for our
proposed fundraising through our initial public offering, which was consummated
in November 2007; and (ii) to consummate a business combination (the
“Business Combination”), including the search for a suitable target business and
activities relating to the Bright World acquisition. We will not generate any
operating revenues until after completion of a Business
Combination.
Results
of Operations for the year ended December 31, 2008 compared to the period ended
December 31, 2007
For the
period from June 22, 2007 (inception) to December 31, 2007, CHAC
generated $601,543 of non-operating income, primarily in the form of interest
income on investments in our trust account during the months of November and
December. For the year ended December 31, 2008, CHAC generated $2,917,577
of non-operating income, primarily in the form of interest income on investments
in our trust account. The increase in interest income during 2008 was due to the
trust being invested for an entire year although it was partially mitigated by a
significant drop in interest rates earned on securities in the trust account.
For the period from June 22, 2007 (inception) to December 31, 2007,
CHAC incurred $112,283 of formation and operating costs consisting primarily of
franchise taxes, accounting fees, administrative fees, and insurance premiums.
For the year ended December 31, 2008, CHAC incurred $836,402 of formation
and operating costs primarily consisting of franchise and capital taxes,
accounting fees, administrative fees, and insurance premiums. The increase in
formation and operating costs during 2008 was primarily due to CHAC operating
for an entire year and the incurrence of state capital taxes. As a result of the
termination of the Bright World acquisition, deferred acquisition costs of
$1,586,486 were written off at December 31, 2008. We expect to continue to
incur increased expenses as a result of being a public company (for legal,
financial reporting, accounting and auditing compliance), as well as, for due
diligence and other related costs.
Results
of Operations for the six months ended June 30, 2009 compared to the six months
ended June 30, 2008
For
the six months ended June 30, 2008 and June 30, 2009, CHAC generated
$1,786,924 and $255,063, respectively, of non-operating income, primarily in the
form of interest income on investments in our trust account. The decrease in
interest income during 2009 was due to a significant drop in interest rates
earned on securities in the trust account. For the six months ended June 30,
2008, CHAC incurred $230,576 of formation and operating costs consisting
primarily of franchise taxes, accounting fees, administrative fees, and
insurance premiums. For the six months ended June 30, 2009, CHAC incurred
$278,824 of formation and operating costs primarily consisting of franchise
taxes, accounting fees, administrative fees, exchange listing fees, and
insurance premiums. The increase in formation and operating costs during 2009
was primarily due to the timing of expenses related to exchange listings and
higher accounting and compliance costs, including costs associated with CHAC’s
annual meeting. During the six months ended June 30, 2008, CHAC capitalized
deferred acquisition costs of $1,517,926 related to the Bright World
acquisition. As a result of the termination of the Bright World acquisition,
deferred acquisition costs of $1,586,486 were written off at December 31,
2008. During the six months ended June 30, 2009, CHAC expensed an additional
$49,520 of costs related to the Bright World acquisition and $16,267 of costs
related to its proposed acquisition. We expect to continue to incur expenses as
a result of being a public company (for legal, financial reporting, accounting
and auditing compliance), as well as, for due diligence and other acquisition
related costs.
Liquidity
and Capital Resources
During
November and December, 2007, CHAC consummated its initial public offering (the
“Offering”), and the underwriters of the Offering exercised their over-allotment
option, resulting in net proceeds of approximately $118.3 million to CHAC. The
proceeds from the Offering, in combination with deferred underwriting fees of
approximately $4.3 million and approximately $2.7 million of proceeds from the
private placement of warrants on November 15, 2007, were placed in a trust
account. As a result of the preceding events, CHAC’s trust account had received
approximately $125.3 million.
We intend
to use substantially all of the net proceeds of the Offering to acquire one or
more target businesses, including identifying and evaluating prospective target
businesses, selecting one or more target businesses, and structuring,
negotiating and consummating the Business Combination. If a portion of the
Business Combination is paid for using stock or debt securities, we may apply
the net cash released to us from the trust account for general corporate
purposes, including for maintenance or expansion of operations of the acquired
business or businesses, the payment of principal or interest due on indebtedness
incurred in consummating our initial Business Combination, to fund the purchase
of other companies, the payment of dividends, to fund the repurchase of CHAC’s
shares and/or warrants, or for working capital.
At June
30, 2009, CHAC had cash and cash equivalents, interest receivable, and income
taxes receivable, aggregating approximately $524,000, available to settle
current liabilities aggregating approximately $120,000 for accrued expenses. We
do not believe we will need to raise additional funds in order to meet the
expenditures required for operating our business, exclusive of future due
diligence costs and professional fees associated with a Business Combination. We
will rely on interest earned of up to $3.2 million (of which approximately
$2,320,000 had been released to CHAC through June 30, 2009), on the trust
account to fund such expenditures and, to the extent that the interest earned is
below our expectations, we may have insufficient funds available to operate our
business prior to our initial Business Combination. Consequently, it is highly
likely that CHAC will be required to implement deferred and contingent fee
arrangements and/or raise additional funds through private borrowings from its
founders or third parties in order to fund due diligence and professional fees
in connection with any future acquisition. In the event that a Business
Combination is consummated, we may fund a portion of some expenses from the net
proceeds of the trust account. Moreover, we may need to raise additional funds
through a private offering of debt or equity securities if such funds are
required to consummate our initial Business Combination or because we become
obligated to convert into cash a significant number of shares of Public
Stockholders voting against our initial Business Combination or the Extended
Period, in which case we may issue additional securities or incur debt in
connection with such Business Combination. Such debt securities may include a
working capital revolving debt facility or a longer term debt facility. Subject
to compliance with applicable securities laws, we would only consummate such
financing simultaneously with the consummation of a Business
Combination.
Commencing
June 1, 2009, CHAC began deferring its monthly payment of $10,000 to an
affiliate of a stockholder for secretarial and administrative expenses until
funds are available for such payments.
Critical
Accounting Estimates
Our
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, income and
expenses. On an ongoing basis, we re-evaluate all of our estimates. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may materially
differ from these estimates under different assumptions or conditions as
additional information becomes available in future periods.
Management
has discussed the development and selection of critical accounting estimates
with the Audit Committee of the Board of Directors and the Audit Committee has
reviewed our disclosure relating to critical accounting estimates in this Proxy
Statement.
Contractual
Obligations
CHAC does
not have any long term debt, capital lease obligations, operating lease
obligations, purchase obligations or other long term
liabilities.
CHAC
BUSINESS
CHAC is a
blank check company incorporated on June 22, 2007, for the purpose of acquiring
or acquiring control of one or more operating businesses having their primary
operations in Asia through a merger, capital stock exchange, stock purchase,
asset acquisition or other similar business combination or contractual
arrangements. We intend to focus on potential acquisition targets (a “target
business”), in the People’s Republic of China, including Hong Kong and Macau
(“China” or “PRC”).
CHAC is
obligated to submit any business combination for approval by a majority of the
then holders of CHAC’s common stock, sold as part of the units (the “Units”) in
our public offering (the “Public Stockholders”). Public Stockholders that vote
against such proposed business combination and exercise their redemption rights
are, under certain conditions, described below, entitled to convert their shares
of common stock into a pro-rata distribution from the trust account (the
“Redemption Right”). Our stockholders prior to our public offering (the
“Existing Stockholders”), have agreed to vote their 3,200,000 founding shares of
common stock in accordance with the manner in which the majority of the shares
of CHAC common stock held by the Public Stockholders are voted with respect to a
business combination. In the event that a majority of the outstanding shares of
common stock voted by CHAC’s Public Stockholders approve a business combination,
and an amendment to CHAC’s amended and restated certificate of incorporation
allowing our perpetual existence is approved, and holders owning 33.33% or more
of CHAC’s outstanding common stock do not both vote against the business
combination and exercise their Redemption Rights, on a cumulative basis, the
business combination may then be consummated.
We
entered into a letter of intent with Hengda on July 10, 2009; therefore, we will
seek the consummation of that business combination by November 21, 2009.
However, if management anticipates that we may not be able to consummate a
business combination by November 21, 2009 (24 months from the date of the
closing of our public offering), we may seek to extend the time period within
which we may complete the business combination to 36 months, by calling a
special (or annual) meeting of our stockholders for the purpose of soliciting
their approval for such extension (the “Extended Period”). If we receive Public
Stockholder approval for the Extended Period and holders of 33.33% or more of
the shares held by our Public Stockholders do not vote against the Extended
Period and elect to redeem their common stock in connection with the vote for
the Extended Period, we will then have an additional 12 months in which to
complete the initial business combination. If the Extended Period is approved,
we will still be required to seek Public Stockholder approval before completing
a business combination. In the event there is no business combination within the
24 month deadline (if the Extended Period is not approved) described above (the
“Target Business Combination Period”), we will dissolve and distribute to our
Public Stockholders, in proportion to their respective equity interests, the
amount held in our trust account, and any remaining net assets, after the
distribution of the trust account. Our corporate existence will automatically
cease at the end of the 36 month period if we have not received stockholder
approval for an initial business combination.
Our
initial public offering of 12,000,000 Units was declared effective on November
15, 2007. Each unit consists of one share of our common stock and one warrant
(the “Public Warrants”). The offering was consummated on November 21, 2007, and
we raised net proceeds of approximately $110,900,000, of which approximately
$110,800,000 were deposited into our trust account. On December 14, 2007, the
underwriters for our public offering exercised their over-allotment option to
the extent of 800,000 Units, resulting in net proceeds of $7,440,000, which were
also deposited into our trust account. Accordingly, $125,278,000 (approximately
$9.79 per Unit) was deposited into our trust account, which includes $4,288,000
that will be paid to our underwriters upon the consummation of a business
combination with respect to those shares which stockholders do not exercise
their Redemption Rights.
Prior to
the closing of our public offering, we sold to certain of our Existing
Stockholders 2,750,000 warrants (“Private Warrants”), at a price of $1.00 per
Private Warrant, for an aggregate of $2,750,000. In addition, our Existing
Stockholders have waived their right to receive distributions with respect to
their founding shares of common stock and the shares underlying the Private
Warrants (but not shares purchased in our public offering or in the secondary
market) in the event of our liquidation. In addition, our Existing Stockholders
surrendered to us, without consideration, an aggregate 250,000 of their shares
of common stock for cancellation upon exercise of the over-allotment option by
the underwriters to maintain a 20% ownership of the common stock after the
closing of our public offering.
Each
Public Warrant is exercisable for one share of common stock. Except as set forth
below, the Public Warrants entitle the holder to purchase shares at $7.50 per
share, subject to adjustment in the event of stock dividends and splits,
reclassifications, combinations and similar events for a period commencing on
the later of: (a) completion of the business combination and (b) one year from
the closing date of our public offering, and ending five years from the date of
such offering. We have the ability to redeem the Public Warrants, in whole or in
part, at a price of $.01 per Public Warrant, at any time after the Public
Warrants become exercisable, upon a minimum of 30 days’ prior written notice of
redemption, and if, and only if, the last sale price of our common stock equals
or exceeds $14.25 per share, for any 20 trading days within a 30 trading day
period ending three business days before we send the notice of redemption. If we
dissolve before the consummation of a business combination, there will be no
distribution from our trust account with respect to such Public Warrants, which
will expire worthless.
The
Private Warrants are identical to the Public Warrants and may not be sold or
transferred, except in limited circumstances, until after the consummation of a
business combination. If the Company dissolves before the consummation of a
business combination, there will be no distribution from our trust account with
respect to such Private Warrants, which will also expire
worthless.
DIRECTORS,
EXECUTIVE OFFICERS, EXECUTIVE COMPENSATION
AND
CORPORATE GOVERNANCE
Current
Directors and Executive Officers
Our
current directors and executive officers are as follows:
|
Name
|
Age
|
Position
|
||
|
Paul K. Kelly*
(a)
|
68
|
Chairman
of the Board, Chief Executive Officer, Secretary and
Treasurer
|
||
|
James D. Dunning, Jr.*
|
61
|
President
and Director
|
||
|
Alan G. Hassenfeld*
|
59
|
Director
|
||
|
Gregory
E. Smith*
|
52
|
Director
|
||
|
Xiao
Feng*
|
46
|
Director
|
||
|
Cheng
Yan Davis
|
66
|
Director
|
||
|
* These
individuals will resign upon the consummation of the business
combination.
|
||||
|
(a) Mr.
Kelly will resign as Chairman of the Board and as an offier of
CHAC. He will remain as a Director of China
Ceramics.
|
||||
Paul K.
Kelly
is our Chairman of the Board and Chief Executive Officer. Since
February 1992, Mr. Kelly has been the President and Chief Executive Officer of
Knox & Co., an investment banking firm specializing in mergers and
acquisitions, corporate restructuring and international financial advisory
services for clients in the U.S., Asia, and throughout the world. In 2004, Mr.
Kelly formed the Westgate Group, Inc., a strategic advisory firm focusing upon
identifying and implementing cross-border business opportunities for clients
with an emphasis on Asia and the Pacific Basin, for which he acts as Chairman,
CEO, and is the majority shareholder. Mr. Kelly is also the President, Chief
Executive Officer and sole shareholder of PH II, Inc., a privately held
investment company which has investments in the United States and New Zealand.
He has held these positions with PH II since 1988. Mr. Kelly also serves as
Chairman and Chief Executive Officer of Knox Enterprises, Inc., successor to THT
Inc., a privately held diversified manufacturing company. In 1996, Mr. Kelly
founded the Carrington Club, a golf resort and karikari estate and winery in New
Zealand for which he is the owner and Edgewater Developers, a real estate
development company in New Zealand. From 1985 to 1990 Mr. Kelly served as
President and Chief Executive Officer of Peers & Co., an international
investment banking firm. From 1984 to 1985 Mr. Kelly was the President and a
director of Quadrex Securities Corp. From 1982 to 1984 he was an Executive Vice
President and Director of Dean Witter Reynolds, Inc., responsible for all
investment banking activities for financial institutions. Mr. Kelly also served
as Managing Director and a member of the Management Committee of Merrill Lynch
White Weld Capital Markets Group from 1980 to 1982 where he was responsible for
all investment banking activities for financial institutions on a worldwide
basis, and was also senior banker to Merrill Lynch & Co., the holding
company for all Merrill Lynch interests. From 1978 to 1980 Mr. Kelly was
Executive Vice President, Director and member of the Executive Committee of
Blyth Eastman Dillon, where he was co-head of the Corporate Finance Department.
He was responsible for all new business activities for the firm and headed the
Financial Institutions Group. Among the other positions held by Mr. Kelly prior
to 1978 include his positions from 1968 to 1975 as Vice President of The First
Boston Corporation where he established the commercial paper department and was
responsible for all corporate finance new business activities and as a partner,
member of the management committee and head of investment banking for Prescott,
Ball & Turbin from 1975 to 1978. Mr. Kelly is a member of the Board of
Trustees of the University of Pennsylvania, a member of the Business School
Advisory Board of the University of Auckland (NZ), and a member of the New
Zealand Business Roundtable. In addition, he is a member of the Director’s
Advisory Board of the Yale Cancer Center. He is a past director of American Life
and Health Insurance Company of New York, The Chicago Sun-Times Corporation,
Hydrox Corporation, Ltd. (New Zealand), MCR Corporation, and Porta Systems
Corporation (ASE). He graduated from the University of Pennsylvania in 1962 and
received an MBA in Finance from the Wharton School in 1964.
James D. Dunning,
Jr.
is our President and a member of our Board of Directors. Since April
2006 Mr. Dunning has been the Chairman of Doubledown Media, LLC, a multimedia
platform and database company targeting high net worth individuals. In February
2009, Doubledown Media, LLC filed to liquidate under Chapter 7 of the United
States Bankruptcy Code. Since January 1992, Mr. Dunning has served as Chairman
of the Dunning Group, Inc., a private media company specializing in media
leveraged buyouts. From April 2003 to March 2004, Mr. Dunning was a partner at
Michaelson & Co., a hedge fund. From April 2000 to August 2001, Mr. Dunning
was Chairman, President and CEO of Ziff Davis Media, Inc., a leading technology
and Internet magazine publisher in the United States. Mr. Dunning led the
management team that acquired Ziff-Davis Publishing Inc. from Ziff Davis Inc.,
and Softbank in December 1999. In August 1999 Mr. Dunning led the purchase of
USA Pubs, Inc., a magazine subscription database and business acquisition
company, and until August 2001 he served as the Chairman and CEO of USA Pubs,
Inc. From January 1999 to August 1999 Mr. Dunning was the Chairman and CEO of
EMAP Petersen. From 1996 until it was acquired in December 1999, Mr. Dunning
served as Chairman, President and CEO of The Petersen Companies, Inc. He led the
management team that purchased Petersen Publishing in September 1996 from its
founder, Robert E. Petersen. During Mr. Dunning’s tenure at Petersen it
developed from a publisher of special interest magazines into a complete
marketing solutions company and one of the largest publishers of
special-interest magazines in the U.S. In 1992, Mr. Dunning led the group that
purchased Transwestern Publishing Company (a division of US West, Inc.) a yellow
pages and database company. From 1992 to 1997 Mr. Dunning served as Chairman and
CEO of Transwestern Publishing Company. While at Transwestern Publishing
Company, Mr. Dunning led the buyout of SRDS, a media database and directory
business and served as the Chairman of the Board from 1994 to 1995. In 1987 he
led a buyout of Yellow Book, which went public as Multi-Local Media Information
Group (Yellow Book), a public yellow pages and directory company and served as
Chairman, President and CEO until 1992. From 1985 to 1986, Mr. Dunning served as
Executive Vice President for Ziff Davis Communications, Inc. Prior to
establishing his buyout businesses, Mr. Dunning was an investment banker from
1982 to 1985 at Thomson McKinnon Securities, Inc., one of the leading investment
banking firms during that time. He served as Senior Vice President and Director
of Corporate Finance and was in charge of the firm’s mergers and acquisitions
practice and venture capital and leveraged leasing groups. Mr. Dunning is a
member of the Board of Trustees of the University of Pennsylvania and an
Overseer of Athletics at the University of Pennsylvania. He is also a member of
the Board of Trustees of Deerfield Academy. He is a member of the audit
committees of both the University of Pennsylvania and Deerfield Academy. He is a
Director of TennAids-Peer Corp. He graduated from the Wharton School of Business
at the University of Pennsylvania in 1970 with a B.S. in Economics.
Alan G.
Hassenfeld
has been a member of our board of directors since our
inception. Since 1989, Mr. Hassenfeld has been Chairman of the Board of Hasbro,
Inc., one of the largest toy manufacturers in the world. The substantial
majority of Hasbro’s products are manufactured in China. From 1989 until May
2003 Mr. Hassenfeld also served as the Chief Executive Officer of Hasbro and
from 1989 to 1999 he served as President of Hasbro. Mr. Hassenfeld is also a
director of salesforce.com, a provider of on-demand customer relationship
management services. He serves on the Board of Trustees at Bryant University and
the University of Pennsylvania, on the Board of Overseers of the Harvard School
of Public Health, as a member of the Executive Committee of the Dean’s Council
at Harvard University’s John F. Kennedy School of Government, and as Trustee
Emeritus at Brown University. Mr. Hassenfeld serves as Chairman of the World
Scholar Athlete Games and The Jerusalem Foundation; Co-Chairman of the governing
body of the International Council of Toy Industries CARE Process; Chief Advisor
of the Chinese Toy Association; Chairman of Rhode Island Separation of Powers
(RISOP); and as director of Operation Smile, Refugees International, the Hasbro
Charitable Trust, and Miriam Hospital. He has received honorary degrees from
Bryant College, Roger Williams University, Johnson and Wales University, Rhode
Island College and Waterford Institute of Technology (Ireland). He graduated
from the University of Pennsylvania in 1970. Mr. Hassenfeld is a former chair of
the College House Advisory Board at the University of Pennsylvania and a former
member of the Board of Overseers of the School of Arts and Sciences. Mr.
Hassenfeld established the Hassenfeld Undergraduate Education Fund for Urban
Studies and created the Hassenfeld Humanities Term Professorship, both in the
School of Arts and Sciences at the University of Pennsylvania.
Gregory E.
Smith
has been a member of our board of directors since our inception.
Mr. Smith is the President and CEO of Cicada, which he founded in 1998. Cicada
provides data management technology and compliance solutions to financial
institutions, exchanges and data vendors. Cicada operates its principal software
development operations in Hong Kong and Shenzen, China. Prior to founding
Cicada, Mr. Smith served as Senior Vice President for Content at Dow Jones
Markets (Telerate) from 1997 until Dow Jones Markets was sold to Bridge
Information Systems, Inc. As Senior Vice President for Content, Mr. Smith was
responsible for all content created, licensed, contributed to, or otherwise
distributed by Dow Jones Markets. Mr. Smith was a member of the Executive
Committee of Dow Jones Markets. Before joining Dow Jones, Mr. Smith was
President of Indepth Data Inc., from its founding in 1985 until June 1997, when
Indepth was sold to Dow Jones & Company. Indepth Data, founded by Mr. Smith,
produced and distributed comprehensive coverage of the taxable fixed income
markets in the United States and the government and Eurobond markets in Europe.
Prior to establishing Indepth Data in 1985, Mr. Smith was an investment banker
at Thomson McKinnon, where he was a Vice President covering the financial
services sector and technology. Prior to joining Thomson McKinnon in 1983, Mr.
Smith was an investment banking associate with E. F. Hutton. Prior to joining
E.F. Hutton in 1981 Mr. Smith was in the doctoral program of the University of
Chicago Graduate School of Business. Mr. Smith is a 1978 graduate of Brown
University where he received honors in Economics.
Xiao Feng
has been a member of our board of directors since our inception. Mr. Feng is the
founder of Bosera Asset Management Co., Ltd., one of the largest fund management
companies in China. He established Bosera Asset Management in 1998 and has
served as vice chairman and president of Bosera Asset Management since its
inception. Prior to the establishment of Bosera, Mr. Feng was deputy director of
the China Securities Regulatory Commission’s Shenzhen Office, where he was
responsible for supervising the business practice of securities firms in
Shenzhen, one of the country’s financial centers. Prior to that, he worked with
the People’s Bank of China Shenzhen Office, as well as Shenzhen Konka Group. Mr.
Feng received a Ph.D. from Nankai University.
In 2000,
the China Securities Regulatory Commission launched an investigation into Bosera
Asset Management Co., Ltd. (“Bosera”), a fund management company founded by Mr.
Feng. The investigation closed in February 2002 with an order to rectify the
violation of self-trading rules by Bosera and certain of its employees. No
administrative action was taken against Mr. Feng as a result of this
investigation. During the investigation Mr. Feng remained Vice Chairman of
Bosera, his license to engage in the fund management business was suspended and
he stepped down from his post as CEO. At the conclusion of the investigation,
PRC regulatory authorities approved Mr. Feng’s return to the position of CEO of
Bosera Asset Management Co., Ltd. and his license was reinstated.
Cheng Yan
Davis
has been a member of our board of directors since our inception.
Since 1993, Ms. Davis has been the Vice Dean of International Programs and
Development at the University of Pennsylvania Graduate School of Education (GSE
International). GSE International was established by Ms. Davis in 1993, and was
the first international programs office among Ivy League graduate schools of
education in the U.S. Ms. Davis also serves as a Special Advisor to the
President of the University of Pennsylvania on internationalization efforts. GSE
International has developed many specialized training programs for groups
ranging from government officials and university presidents to finance
executives and corporate CEOs. Among these programs are training programs for
Chief Executive Officers and leading executives in the Chinese securities and
mutual fund industries, created in conjunction with the Wharton School. Over the
past three years, the Penn-Securities Association of China Program and the
Penn-China Mutual Fund CEO Leadership Program have trained over one hundred
Chinese executives in the latest theories and practices of the U.S. finance
sector. Since 1998, Ms. Davis has worked with Morgan Stanley on the
International Conference on Higher Education Management in Shanghai, the
establishment of the China Center, which focuses on management training for
U.S.—China joint ventures, and the China Pension Program, which works with the
state council of China in designing the architecture and training of a senior
workforce in comprehensive pension management. Ms. Davis has also worked with
CIGNA and Lucent Technologies on various professional education projects since
1997, designing a variety of training and professional development programs. Ms.
Davis also serves as an advisor on quality workforce standards for the Shanghai
Municipal Government and the Shanghai Foreign Trade Commission. Since 1997, Ms.
Davis has been invited to the Shanghai’s Mayor’s International Advisory Council
as a special observer and to offer suggestions on Shanghai human resource
development and workforce training. Ms. Davis has also been invited to custom
design new programs for China Telecom and China Industrial Commercial Bank.
These programs were designed in preparation of China’s entry into the World
Trade Organization. Ms. Davis initiated former President Jiang Zemin’s visit to
the University of Pennsylvania in 1997. Ms. Davis is a board member of the New
York Film Academy, Senior Advisor to Motorola and Oracle on international
government relations, and Advisor Professor to East China Normal University. In
addition, she has served as the Senior Observer for the Shanghai International
Business Leaders Advisory Council for the past fifteen years. She has received
numerous recognitions for her many contributions, including the first-ever
PennGSE Alumni Pioneers Award. Ms. Davis has a degree in Russian and English
from Shichuan Foreign Language University in China and an Ed D in Education from
the Graduate School of Education at the University of
Pennsylvania.
Special
Advisors
Our
special advisors will not participate in managing our operations. We have no
arrangements or agreements with our special advisors to provide services to us.
We expect that our special advisors will simply provide advice, introductions to
potential targets, and assistance to us, at our request, only if they are able
to do so. Nevertheless, we believe with their business backgrounds and extensive
contacts, our special advisors will be helpful to our search for a target
business and our consummation of a business combination.
Soopakij (Chris)
Chearavanont
has been a special advisor to the company since our
inception. Since 1993, Mr. Chearavanont has been a Director and the Chairman of
True Visions Public Company Limited (formerly United Broadcasting Corporation
Public Company Limited), the largest cable and satellite television operator in
Thailand. Since 1995, Mr. Chearavanont has been a Director and the Chairman of
Chia Tai Enterprises International Ltd., a holding company for agricultural,
property and retail businesses. Since 1995, Mr. Chearavanont has been the Vice
Chairman of Charoen Pokphand Group—Real Estate and Land Development Business
(Thailand). Since 1995, Mr. Chearavanont has been a Director and Chairman of
Fortune Leasing Company Ltd., a car leasing company, Mass Gain Investments Ltd.,
an investment company, Beijing Lotus Supermarket Chain Store Co., Ltd., a retail
company, Chia Tai Lotus (Shanghai) Company Ltd., a retail company, and Shanghai
Kinghill Ltd., a property company. Also since 1995, Mr. Chearavanont has been a
Director and Vice Chairman of Chia Tai Vision Ltd., a Chinese television
programming company. Mr. Chearavanont also serves on the Board of Directors of
C.P. Seven-Eleven Public Company Ltd. and True Corporation Public Company Ltd.
Since 2003, Mr. Chearavanont has been a member of Fudan Incentive Management
Fund Committee of Fudan University. Mr. Chearavanont currently serves as a
management committee member of Chia Tai International Center of Peking
University and as an adviser of the Standing Committee on Public Health of
Representatives. Mr. Chearavanont was awarded with Bai Yu Lan from Shanghai
Government in 2006. Since 2005, Mr. Chearavanont has been Vice President of
Thai-Chinese Promotion of Investment and Trade Association. Since 2004, Mr.
Chearavanont has been Vice President of Thailand Equestrian Federation. Mr.
Chearavanont is a committee member of Cultural Promotion Fund of Office of The
National Cultural Commission in Thailand. Since 2003, Mr. Chearavanont has been
the Vice Chairman of Thailand—the PRC Business Council and the member of Young
Thai Entrepreneurs Assembly. Since 1993, he has been a committee member on
Youth, Women and the Elderly. Mr. Chearavanont has a B.S. in the College of
Business and Public Administration of New York University.
Ruey Bin
Kao
has been a special advisor to our company since August 30, 2007.
Since April 2005, Mr. Kao has been the President of Motorola (China) Electronics
Ltd (Motorola). From June 2000 to April 2005, Mr. Kao was general manager at
Motorola responsible for Motorola’s infrastructure business in Greater China.
Prior to that, from 1993 until 2000, Mr. Kao was a Senior Manager at Motorola.
Mr. Kao was also acting President of Motorola from August to December 2003.
Prior to joining Motorola, Mr. Kao held various positions in AT&T Bell Labs
in the United States and China. Mr. Kao is currently on the Board of Directors
of Shenghua Group Corporation Ltd. Mr. Kao received his Doctor of Business
Administration from Hong Kong Polytechnic University in 2005. Mr. Kao also has a
master’s degree in Computer and Information Science from the University of
Delaware and a bachelor’s degree in Computer Science from Tamkang University in
Taiwan.
Director
Independence
The NYSE
Amex Equities (f/k/a the American Stock Exchange) (the “NYSE Amex”) requires
that a majority of our Board must be composed of “independent directors,” which
is defined generally as a person other than an officer or employee of the
Company or its subsidiaries or any other individual having a relationship,
which, in the opinion of the Company’s board of directors would interfere with
the director’s exercise of independent judgment in carrying out the
responsibilities of a director. In order to be considered to be independent for
purposes of Rule 10A-3 of the Exchange Act, a member of an audit committee of a
listed company may not, other than in his or her capacity as a member of the
audit committee, the board of directors, or any other board committee: (1)
accept, directly or indirectly, any consulting, advisory, or other compensatory
fee from the listed company or any of its subsidiaries; or (2) be an affiliated
person of the listed company or any of its subsidiaries.
Our Board
of Directors has determined that each of Alan G. Hassenfeld, Gregory E. Smith,
Xiao Feng and Cheng Yan Davis are “independent directors” as such term is
defined in Rule 10A-3 of the Exchange Act and the rules of the NYSE
Amex.
In making
this determination, our Board of Directors considered the relationships that
each non-employee director has with our Company and all other facts and
circumstances our Board of Directors deemed relevant in determining their
independence, including the beneficial ownership of our capital stock by each
non-employee director. In particular, our Board of Directors has determined
that, Messrs. Hassenfeld, Smith, Feng and Ms. Davis fall within the safe harbor
provisions of Rule 10A-3(e)(1)(ii) under the Exchange Act. The safe harbor
provisions of Rule 10A-3(e)(1)(ii) exempts holders of 10% or less of any class
of voting securities of an issuer from being deemed to be in control of, or an
affiliate of, that issuer. Currently, Messrs. Hassenfeld, Smith, Feng and Davis
each beneficially owns less than 10% of our outstanding common
stock.
Our Audit
Committee consists of Gregory E. Smith, Alan G. Hassenfeld and Cheng Yan Davis
each of whom have been determined to be “independent” as defined in Rule 10A-3
of the Exchange Act and the rules of the NYSE Amex. Our Board of Directors has
determined that each of Messrs. Smith and Hassenfeld satisfies the financial
literacy and experience requirements of the NYSE Amex and the rules of the SEC
such that each member is an “audit committee financial expert”. The
responsibilities of our Audit Committee include:
|
|
·
|
meeting
with our management periodically to consider the adequacy of our internal
control over financial reporting and the objectivity of our financial
reporting;
|
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|
·
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appointing
the independent registered public accounting firm, determining the
compensation of the independent registered public accounting firm and
pre-approving the engagement of the independent registered public
accounting firm for audit and non-audit
services;
|
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·
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overseeing
the independent registered public accounting firm, including reviewing
independence and quality control procedures and experience and
qualifications of audit personnel that are providing us audit
services;
|
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·
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meeting
with the independent registered public accounting firm and reviewing the
scope and significant findings of the audits performed by them, and
meeting with management and internal financial personnel regarding these
matters;
|
|
|
·
|
reviewing
our financing plans, the adequacy and sufficiency of our financial and
accounting controls, practices and procedures, the activities and
recommendations of the auditors and our reporting policies and practices,
and reporting recommendations to our full board of directors for
approval;
|
|
|
·
|
establishing
procedures for the receipt, retention and treatment of complaints
regarding internal accounting controls or auditing matters and, if
applicable, the confidential, anonymous submissions by employees of
concerns regarding questionable accounting or auditing
matters;
|
|
|
·
|
preparing
the report required by the rules of the SEC to be included in our annual
proxy statement; and
|
|
|
·
|
monitoring
compliance on a quarterly basis with the terms of our public offering and,
if any noncompliance is identified, the Audit Committee is charged with
the immediate responsibility to take all action necessary to rectify such
noncompliance or otherwise cause compliance with the terms of our public
offering.
|
Financial
Experts on Audit Committee
The Audit
Committee will at all times be composed exclusively of “independent directors”
who are “financially literate” as defined under the NYSE Amex listing standards.
The NYSE Amex listing standards define “financially literate” as being able to
read and understand fundamental financial statements, including a company’s
balance sheet, income statement and cash flow statement.
In
addition, we must certify to the NYSE Amex that the committee has, and will
continue to have, at least one member who has past employment experience in
finance or accounting, requisite professional certification in accounting, or
other comparable experience or background that results in the individual’s
financial sophistication. The Board of Directors has determined that Gregory E.
Smith satisfies the NYSE Amex’s definition of financial sophistication and also
qualifies as an “Audit Committee Financial Expert,” as defined under rules and
regulations of the SEC.
Compensation
Committee
Our
Compensation Committee consists of each of Gregory E. Smith, Alan G. Hassenfeld
and Cheng Yan Davis, all of whom have been determined to be “independent” as
defined in Rule 10A-3 of the Exchange Act and the rules of the NYSE Amex. The
functions of our Compensation Committee include:
|
|
·
|
establishing
overall compensation policies and recommending to our board of directors
major compensation programs;
|
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·
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subsequent
to our consummation of a business combination, reviewing and approving the
compensation of our directors, including salary and bonus
awards;
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·
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administering
any employee benefit, pension and equity incentive
programs;
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·
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reviewing
officer and director indemnification and insurance matters;
and
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·
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preparing
an annual report on executive compensation for inclusion in our proxy
statement.
|
Governance
and Nominating Committee
Our
Governance and Nominating Committee will consist of each of Gregory E. Smith,
Alan G. Hassenfeld and Cheng Yan Davis, all of whom have been determined to be
“independent” as defined in Rule 10A-3 of the Exchange Act and the rules of the
NYSE Amex. The functions of our Governance and Nominating Committee
include:
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·
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recommending
qualified candidates for election to our Board of
Directors;
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·
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evaluating
and reviewing the performance of existing
directors;
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·
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making
recommendations to our Board of Directors regarding governance matters,
including our amended and restated certificate of incorporation and
charters of our committees; and
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·
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developing
and recommending to our Board of Directors governance and nominating
guidelines and principles applicable to
us.
|
Code
of Ethics
We have
adopted a code of ethics that applies to all of our executive officers,
directors and employees. The code of ethics codifies the business and ethical
principles that govern all aspects of our business. Our code of ethics is
included as an exhibit to CHAC’s Annual Report on Form 10-K.
Directors
and Executive Officers after the Business Combination
Our
directors and executive officers after the business combination will be as
follows:
|
Name
|
Age
|
Position
|
||
|
Huang
Jia Dong
|
51
|
Director
and Chairman of the Board
|
||
|
Su
Pei Zhi
|
55
|
Director
and Sales Deputy General Manager
|
||
|
Paul
K. Kelly (1)(2)(3)
|
68
|
Independent
Director
|
||
|
Cheng
Yan Davis (1)(2)(3)
|
66
|
Independent
Director
|
||
|
Li
Shun Qing
|
39
|
Chief
Executive Officer
|
||
|
Hen
Man Edmund
|
36
|
Chief
Financial Officer
|
||
|
(1)
Member of audit committee
|
||||
|
(2)
Member of compensation committee
|
||||
|
(3)
Member of nominations
committee
|
||||
Huang Jia
Dong
founded Jinjiang Hengda Ceramics Co., Ltd. in 1993 and served as the
chairman. Mr. Huang was previously involved in the construction material
distribution business. Mr. Huang has been appointed as the vice chairman of
Fujian Province Ceramic Industry Association since 2006 and the executive
director of Jinjiang City Chamber of Import and Export Trade since 2007. Mr.
Huang has a diploma in corporate management from Xiamen University.
Su Pei Zhi
joined Hengda in 1993 and served as the sales deputy general manager. He is the
head of Hengda’s sales and marketing team. Under the leadership of Mr. Su,
Hengda has established a nationally covered sales network including both
distribution customers and property developer customers.
Li Shun
Qing
joined Hengda in 1993 as its Manufacturing Deputy General Manager
where he heads Hengda’s operations. Mr. Li obtained ISO9000:2000 and
ISO9001:2000 Internal Quality Systems Auditor Certification in 2002 and 2004,
respectively. He also obtained the Certification of Standardization
Qualification in Fujian Province in 2006 and a Certification of Metering
Administrator in 2007. Under the leadership of Mr. Li, Hengda has established
stringent cost control systems which enable Hengda to better compete in the
industry.
Hen Man
Edmund
joined Hengda in 2008 as the Chief Financial
Offer. Prior to joining Hengda, Mr. Hen was a Financial Controller of
a switchgear manufacturer in Sichuan PRC. Prior to that, Mr. Hen was
the accountant of Dickson Concepts (International) Ltd., a public listed company
in Hong Kong. He also worked at a variety of international accountancy firms,
including Deloitte Touche Tohmatsu, in assurance and advisory services during
the period from 1995 to 2001. Mr. Hen graduated from the University of East
Anglia, United Kingdom, with a Bachelor Degree in Science in 1995. He is an
associate of the Institute of Chartered Accountants in England and Wales and an
associate of the Hong Kong Institute of Certified Public
Accountants.
See the
biographies for
Paul K.
Kelly
and
Cheng Yan
Davis
in the section entitled “Directors, Executive Officers, Executive
Compensation And Corporate Governance.”
Board
Committees
Our board
of directors after the business combination will establish an audit committee, a
compensation committee and a nominating and corporate governance
committee.
Audit
Committee
. The audit committee to be established after the
business combination will consist of [___________], Paul K. Kelly and Cheng Yan
Davis. [__________] will be the chair of our audit committee, and we have taken
reasonable actions to ensure that [__________] qualifies as an “audit committee
financial expert”, as such term is defined in the rules of the Securities and
Exchange Commission. [__________], Paul K. Kelly and Cheng Yan Davis will not
have any direct or indirect material relationship with China Ceramics other than
as a director and meet the criteria for independence set forth in Rule 10A-3
under the Exchange Act.
Our board
of directors after the business combination will adopt an audit committee
charter, providing for the following responsibilities of the audit
committee:
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·
|
retaining
and terminating our independent auditors and pre-approving all auditing
and non-auditing services permitted to be performed by the independent
auditors;
|
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·
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discussing
the annual audited financial statements with management and the
independent auditors;
|
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·
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annually
reviewing and reassessing the adequacy of our audit committee
charter;
|
|
|
·
|
such
other matters that are specifically delegated to our audit committee by
our board of directors after the business combination from time to
time;
|
|
|
·
|
meeting
separately, periodically, with management, the internal auditors and the
independent auditors; and
|
|
|
·
|
reporting
regularly to the board of
directors.
|
Compensation
Committee
. The compensation committee to be established after the
business combination will consist of [__________], Paul K. Kelly and Cheng Yan
Davis. [__________] will be the chair of our compensation
committee. [__________], Paul K. Kelly and Cheng Yan Davis will not
have any direct or indirect material relationship with China Ceramics other than
as a director.
Our board
of directors after the business combination will adopt a compensation committee
charter, providing for the following responsibilities of the compensation
committee:
|
|
·
|
reviewing
and making recommendations to the board regarding our compensation
policies and forms of compensation provided to our directors and
officers;
|
|
|
·
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reviewing
and making recommendations to the board regarding bonuses for our officers
and other employees;
|
|
|
·
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reviewing
and making recommendations to the board regarding share-based compensation
for our directors and officers;
|
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·
|
administering
our share option plans in accordance with the terms thereof;
and
|
|
|
·
|
such
other matters that are specifically delegated to the compensation
committee by our board of directors after the business combination from
time to time.
|
Nominating and Corporate Governance
Committee
. The nominating and corporate governance committee
to be established after the business combination will consist of [__________],
Paul K. Kelly and Cheng Yan Davis. [__________] will be the chair of our
nominating and corporate governance committee. [__________], Paul K.
Kelly and Cheng Yan Davis will not have any direct or indirect material
relationship with China Ceramics other than as a director.
Our board
of directors after the business combination will adopt a nominating and
corporate governance committee charter, providing for the following
responsibilities of the nominations committee:
|
|
·
|
overseeing
the process by which individuals may be nominated to our board of
directors after the business
combination;
|
|
|
·
|
identifying
potential directors and making recommendations as to the size, functions
and composition of our board of directors after the business combination
and its committees;
|
|
|
·
|
considering
nominees proposed by our
shareholders;
|
|
|
·
|
establishing
and periodically assessing the criteria for the selection of potential
directors; and
|
|
|
·
|
making
recommendations to the board of directors on new candidates for board
membership.
|
In making
nominations, the nominating and corporate governance committee is required to
submit candidates who have the highest personal and professional integrity, who
have demonstrated exceptional ability and judgment and who shall be most
effective, in conjunction with the other nominees to the board, in collectively
serving the long-term interests of the shareholders. In evaluating nominees, the
nominating and corporate governance committee is required to take into
consideration the following attributes, which are desirable for a member of the
board: leadership; independence; interpersonal skills; financial acumen;
business experiences; industry knowledge; and diversity of
viewpoints.
Corporate
Governance
Our board
of directors after the business combination will adopt a code of business
conduct and ethics applicable to our directors, offices and employees. In
addition, it will adopt a set of corporate governance guidelines. The guidelines
reflect certain guiding principles with respect to our board structure,
procedures and committees. These guidelines are not intended to change or
interpret any law, or China Ceramics’ Memorandum and Articles of
Association.
Insider
Trading Policy
Directors,
executive officers and employees may acquire confidential information from time
to time through their employment or fiduciary relationship with China
Ceramics.
Our board
of directors after the business combination will establish an insider trading
policy reinforcing the principles behind the insider trading prohibition under
U.S. law. Among other things, directors, executive officers and employees will
be prohibited from executing any trade in securities of our company and any
other company about which they acquire material non-public information in the
course of their duties for our company.
Compensation
of Directors and Executive Officers
Compensation
of Officers and Directors of CHAC
None of
CHAC’s officers, directors or shareholders have received any compensation for
services rendered to CHAC and no compensation of any kind, including finder’s
and consulting fees, will be paid to any such individuals, or any of their
respective affiliates, for services rendered to CHAC prior to or in connection
with a business combination.
CHAC’s
Chief Executive Officer, Paul K. Kelly and our President, James D. Dunning, Jr.
have purchased an aggregate of 3,200,000 shares of common stock (250,000 of
which were forfeited upon exercise of the underwriters over-allotment option)
for an aggregate purchase price of $28,750. As the price paid was fair market
value at the time, we do not consider the value of the shares of common stock at
the offering price to be compensation. Rather, we believe that because they own
such shares, no compensation (other than reimbursement of out of pocket
expenses) is necessary and such persons agreed to serve in such role without
compensation.
On
September 14, 2007, Paul K. Kelly and James D. Dunning, Jr. sold shares owned by
them to the persons named below for approximately $0.01 per share in
transactions exempt from registration under the Securities Act:
|
Paul
K. Kelly transferred 258,650 shares to Alan G.
Hassenfeld.
|
|
James
D. Dunning, Jr. transferred 258,650 shares to Alan G.
Hassenfeld.
|
|
Paul
K. Kelly transferred 64,650 shares to Gregory E. Smith.
|
|
James
D. Dunning, Jr. transferred 64,650 shares to Gregory E.
Smith
|
|
Paul
K. Kelly transferred 51,750 shares to Cheng Yan Davis.
|
|
James
D. Dunning, Jr. transferred 51,750 shares to Cheng Yan
Davis.
|
|
Paul
K. Kelly transferred 25,850 shares to Xiao Feng.
|
|
James
D. Dunning, Jr. transferred 25,850 shares to Xiao Feng.
|
|
Paul
K. Kelly transferred 25,850 shares to Soopakij (Chris)
Chearavanont.
|
|
James
D. Dunning, Jr. transferred 25,850 shares to Soopakij (Chris)
Chearavanont.
|
|
Paul
K. Kelly transferred 25,850 shares to Ruey Bin Kao.
|
|
James
D. Dunning, Jr. transferred 25,850 shares to Ruey Bin
Kao.
|
All such
transfers were exempt from registration pursuant to Sections 4(1) and 4(2) of
the Securities Act, due to the limited number of individuals involved and their
status as accredited investors.
CHAC has
agreed to pay Stuart Management Co., an affiliate of Paul K. Kelly, a total of
$10,000 per month for administrative services and secretarial support for a
period commencing on November 16, 2007 and ending on the earlier of our
consummation of a business combination or our liquidation. This arrangement is
being agreed to by Stuart Management Co. for our benefit and is not intended to
provide Stuart Management Co. compensation in lieu of a management fee. We
believe that such fees are at least as favorable as we could have obtained from
an unaffiliated third party.
Other
than this $10,000 per-month fee, no compensation of any kind, including finder’s
and consulting fees, will be paid to our directors or advisors, or any of their
respective affiliates, for services rendered prior to or in connection with a
business combination. However, these individuals and the founders 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. After a business combination, our
directors or advisors who remain with us may be paid consulting, management or
other fees from the combined company with any and all amounts being fully
disclosed to stockholders, to the extent then known, in the proxy solicitation
materials furnished to our stockholders. It is unlikely the amount of such
compensation will be known at the time of a stockholder meeting held to consider
a business combination, as it will be up to the directors of the
post-combination business to determine executive and director
compensation.
Compensation
of Officers and Directors of Success Winner
This
section discusses the compensation Success Winner paid in previous fiscal years
to certain executive officers, which we refer to as the “named executive
officers.” These named executive officers will also serve as executive officers
of China Ceramics upon consummation of the business combination. These named
executive officers include:
Huang Jia
Dong, who is Chairman of Hengda and will serve as Chairman of the Board of China
Ceramics after the business combination.
Su Pei
Zhi, who is Sales Deputy General Manager of Hengda and will serve as a Director
and Sales Deputy General Manager of China Ceramics after the business
combination.
Li Shun
Qing, who is Manufacturing Deputy General Manager of Hengda and will serve as
Chief Executive Officer of China Ceramics after the business
combination.
Hen Man
Edmund, who is Chief Financial Officer of Hengda and will serve as Chief
Financial Officer of China Ceramics after the business combination.
Compensation Discussion and
Analysis
Compensation
for the executives of Hengda is determined by the Board of Directors of Hengda.
Their decisions are founded upon their personal experiences, their knowledge of
the industry, their knowledge of the financial status of Hengda and their
evaluation of the performance of Hengda executives. The Board of Directors of
Hengda currently consists of Huang Jia Dong, Huang Hua Li and Huang Mei
Yan. Compensation is generally based on the relative importance of an
employee to Hengda and the perception of the Board of Directors of what
compensation level would be adequate to keep the employee satisfied. If an
executive performs well, the performance and, if applicable, the increase in
responsibilities might merit a salary increase.
Hengda’s
Board of Directors conducts reviews informally, and compensation is not
typically changed on a regimented time-frame.
Hengda
believes that, for the most part, its executives believe they are fairly
compensated. Hengda has not historically paid bonuses to its
executive officers.
Hengda
does not currently maintain any employee benefit plans that are not available to
all of Hengda’s full-time employees and does not award equity compensation to
its employees.
Summary
Compensation Table
The
compensation table lists the after-tax compensation paid to certain executive
officers of Hengda in the last three fiscal years
.
|
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
Total
|
||||||||||
|
RMB
|
RMB
|
RMB
|
||||||||||||
|
Huang
Jia Dong
|
2008
|
121,139 | — | 121,139 | ||||||||||
|
Chairman
|
2007
|
121,051 | — | 121,051 | ||||||||||
|
2006
|
96,677 | — | 96,677 | |||||||||||
|
Su
Pei Zhi (1)
|
2008
|
96,946 | — | 96,946 | ||||||||||
|
Sales
Deputy General
|
2007
|
77,319 | — | 77,319 | ||||||||||
|
Manager
|
2006
|
— | — | — | ||||||||||
|
Li
Shun Qing
|
2008
|
97,029 | — | 97,029 | ||||||||||
|
Manufacturing
Deputy
|
2007
|
95,556 | — | 95,556 | ||||||||||
|
General
Manager
|
2006
|
85,878 | — | 85,878 | ||||||||||
|
Hen
Man Edmund (2)
|
2008
|
40,000 | — | 40,000 | ||||||||||
|
Chief
Financial Officer
|
2007
|
— | — | — | ||||||||||
|
2006
|
— | — | — | |||||||||||
(1) Mr.
Su Pei Zhi was on leave during 2006 and early 2007 due to personal health
reasons.
(2) Mr.
Hen Man Edmund joined Hengda in August of 2008 and he only received 5 months of
compensation in 2008.
Post-Acquisition
Employment Agreements
The parties will be negotiating employment agreements with Messrs.
Huang Tia Dong, Li Shun Qing and Hen Man Edmund.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information regarding the beneficial
ownership of CHAC’s common stock as of August __, 2009 by:
|
|
·
|
each
person known by us to be the beneficial owner of more than 5% of our
outstanding shares of common stock;
|
|
|
·
|
each
of our officers and directors; and
|
|
|
·
|
all
our officers and directors as a
group.
|
As of
August __, 2009 there were a total of [__________] shares of common stock
outstanding (including [__________] public shares). Unless otherwise
indicated, we believe that all persons named in the table have sole voting and
investment power with respect to all shares of common stock beneficially owned
by them. The following table does not include the Private Warrants or the Public
Warrants, as these warrants are not exercisable within 60 days of August ___,
2009.
|
Name and Address of Beneficial Owner
(1)
|
Number of Shares of
Common Stock
Beneficially Owned
|
Percentage of
Ownership
|
||||||
|
Paul
K. Kelly
|
1,096,255 | 6.90 | % | |||||
|
James
D. Dunning, Jr.
|
1,096,255 | 6.90 | % | |||||
|
Alan
G. Hassenfeld
|
575,760 | 3.60 | % | |||||
|
Gregory
E. Smith
|
143,910 | * | ||||||
|
Cheng
Yan Davis
|
115,200 | * | ||||||
|
Xiao
Feng
|
57,540 | * | ||||||
|
Soopakij
(Chris) Chearavanont
|
57,540 | * | ||||||
|
Ruey
Bin Kao
|
57,540 | * | ||||||
|
All
directors and executive officers as a group
|
* | |||||||
|
(6
individuals)
|
3,200,000 | 19.30 | % | |||||
|
Del
Mar Asset Management
(2)
|
1,055,000 | 6.59 | % | |||||
|
The
Baupost Group, LLC, SAK Corporation and Seth A. Klarman
(3)
|
1,050,000 | 6.56 | % | |||||
|
David
Knott and Dorset Management Corporation
(4)
|
1,000,000 | 6.30 | % | |||||
|
Aldebaran
Investments LLC
(5)
|
981,582 | 6.13 | % | |||||
|
Polar
Securities
(6)
|
843,400 | 5.30 | % | |||||
|
*
|
Less
than 1%
|
|
(1)
|
Unless
otherwise indicated, the business address of each of the individuals 1000
N. West Street, Suite 1200, Wilmington, DE 19801.
|
|
(2)
|
Based
upon information contained in the Schedule 13G/A filed January 14, 2009 by
Del Mar Asset Management LP. The business address of Del Mar Asset
Management LP is 711 Fifth Ave, New York, NY. 10022. Pursuant
to the Schedule 13G/A, Mr. David Freelove is a managing member and general
partner of Del Mar Asset Management LP.
|
|
(3)
|
Based upon information contained in the Schedule 13G filed February 13, 2008 by The Baupost Group, L.L.C., SAK Corporation and Seth A. Klarman. The business address of The Baupost Group, L.L.C., SAK Corporation and Seth A. Klarman is 10 St. James Avenue, Suite 1700, Boston Massachusetts 02116. Pursuant to the Schedule 13G/A, Mr. Klarman is the sole director of SAK Corporation, which serves as manager for The Baupost Group. |
|
(4)
|
Based
upon information contained in the Schedule 13G/A filed February 13, 2009
by Dorset Management Corporation and David M. Knott. The business address
of Dorset Management Corporation and David Knott is 485 Underhill
Boulevard, Suite 205, Syosset, New York 11791. Pursuant to the Schedule
13G/A, Mr. Knott is the president of Dorset Management
Corporation.
|
|
(5)
|
Based
upon information contained in the Schedule 13G filed February 17, 2009 by
Aldebaran Investments LLC, 500 Park Avenue, 5th Floor, New York, NY
10022.
|
|
(6)
|
Based
upon information contained in the Schedule 13G dated July 31, 2009 by
Polar Securites Inc, 372 Bay Street, 21st floor, Toronto, Ontario M5H 2W9,
Canada. Pursuant to the Schedule 13G/A, Paul Sabourin is
the Chief Investment Officer of North Pole Capital
Master
|
SECURITY
OWNERSHIP OF THE COMBINED COMPANY AFTER THE ACQUISITION
The
following table sets forth information with respect to the beneficial ownership
of the combined company’s ordinary shares immediately after the consummation of
the acquisition by each person who is known by CHAC to beneficially own more
than 5% of CHAC’s ordinary shares, each officer, each director and all officers
and directors as a group. The table below assumes that the 1,600,000
shares issued to the CHAC founders have been canceled and that no shares of
CHAC’s common stock have been redeemed.
Ordinary
shares which an individual or group has a right to acquire within 60 days
pursuant to the exercise or conversion of options, warrants or other similar
convertible or derivative securities are deemed to be outstanding for the
purpose of computing the percentage ownership of such individual or group, but
are not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person shown in the table.
|
Name and Address of Beneficial Owner
(1)
|
Number of Shares of
Common Stock Beneficially Owned |
Percentage of
Ownership |
||||||
|
Paul
K. Kelly
|
1,490,003 | (2) | 7.06 | % | ||||
|
James
D. Dunning, Jr.
|
1,490,003 | (2) | 7.06 | % | ||||
|
Cheng
Yan Davis
|
156,600 | (3) | * | |||||
|
Huang
Jia Dong
|
1,092,732 | (4) | 5.42 | % | ||||
|
Su
Pei Zhi
|
0 | - | ||||||
|
[_____________]
|
0 | - | ||||||
|
Li
Shun Qing
|
0 | - | ||||||
|
Hen
Man Edmund
|
0 | - | ||||||
|
All
directors and executive officers as a group
|
2,739,335 | 12.48 | % | |||||
|
(7
individuals)
|
||||||||
|
Wong
Kung Tok
|
2,792,944 | 13.87 | % | |||||
|
Wong
Tsang Ying
|
1,311,278 | (5) | 6.51 | % | ||||
| Del Mar Asset Management (6) | 1,055,000 | 5.24 | % | |||||
|
The
Baupost Group, LLC, SAK Corporation and Seth A. Klarman
(7)
|
1,050,000 | 5.21 | % | |||||
|
*
|
Less
than 1%
|
|
(1)
|
Unless
otherwise indicated, the business address of each of the individuals 1000
N. West Street, Suite 1200, Wilmington, DE
19801.
|
|
(2)
|
Includes
warrants to purchase 941,875
shares.
|
|
(3)
|
Includes
warrants to purchase 99,000 shares.
|
|
(4)
|
Consist
of 1,092,732 shares owned by Sound Treasure Limited, an entity controlled
by Mr. Huang.
|
|
(5)
|
Consists
of 656,278 shares owned by Surmount Investments Group Limited, 327,500
shares owned by Top Plenty International Limited and 327, 500 shares owned
by Park Rise Holdings Limited. Mr. Wong has voting and
dispositive power over all of such shares. Mr. Wong’s address
is Unit 9D,Bonded Market Building,Huli Zone, Xiamen,
China.
|
|
(6)
|
Based upon information contained in the Schedule 13G/A filed January 14, 2009 by Del Mar Asset Management LP. The business address of Del Mar Asset Management LP is 711 Fifth Ave, New York, NY. 10022. Pursuant to the Schedule 13G/A, Mr. David Freelove is a managing member and general partner of Del Mar Asset Management LP. |
|
(7)
|
Based
upon information contained in the Schedule 13G filed February 13, 2008 by
The Baupost Group, L.L.C., SAK Corporation and Seth A. Klarman. The
business address of The Baupost Group, L.L.C., SAK Corporation and Seth A.
Klarman is 10 St. James Avenue, Suite 1700, Boston Massachusetts 02116.
Pursuant to the Schedule 13G/A, Mr. Klarman is the sole director of SAK
Corporation, which serves as manager for The Baupost
Group.
|
CERTAIN
TRANSACTIONS
Certain
Transactions of CHAC
On July
16, 2007, our Chief Executive Officer, Paul K. Kelly and our President, James D.
Dunning, Jr. purchased 2,875,000 of our shares for an aggregate purchase price
of $28,750. Effective November 15, 2007, our board of directors authorized a
stock dividend of 0.2 shares of common stock for each outstanding share of
common stock, effectively lowering the purchase price to approximately $0.008
per share and increasing each stockholder’s holdings by 20% and the number of
common shares issued to 3,450,000 (including 250,000 shares that were
forfeited upon exercise of the underwriters’ over-allotment option). As a result
of an increase in the size of the offering on November 15, 2007, the November
15, 2007 stock dividend was effectuated in order to maintain our founders’ and
special advisors’ ownership at a percentage of the number of shares to be
outstanding after this offering. This increase in offering size also resulted in
an increase in the amount of after-tax interest we may withdraw from the trust
account to $3,200,000.
Subsequent
to the issuance date, the foregoing persons transferred a portion of their
shares to our other current stockholders at a price per share equal to $0.01 per
share.
On
November 5, 2007, Paul K. Kelly, James D. Dunning, Jr., Alan G. Hassenfeld,
Gregory E. Smith, Xiao Feng, Cheng Yan Davis, Soopakij (Chris) Chearavanont and
Ruey Bin Kao agreed to purchase, for an aggregate purchase price of $2.75
million private placement warrants to purchase 2,750,000 share of common stock
at a price of $1.00 per warrant. Paul K. Kelly and James D, Dunning, Jr. each
purchased 941,875 warrants, Alan G. Hassenfeld purchased 495,000 warrants,
Gregory E. Smith purchased 123,750 warrants, Cheng Yan Davis purchased 99,000
warrants and Xiao Feng, Soopakij (Chris) Chearavanont and Ruey Bin Kao each
purchased 49,500 warrants.
Pursuant
to a registration rights agreement between us and our founders and special
advisors, our founders and special advisors are entitled to certain registration
rights. Specifically, (i) the private placement warrants and the underlying
shares of common stock, are entitled to certain registration rights commencing
90 days after the consummation of a business combination; and (ii) the existing
stockholders’ common stock will be entitled to certain registration rights six
months after the consummation of a business combination. We are only required to
use our best efforts to cause a registration statement relating to the resale of
such securities to be declared effective and, once effective, only to use our
best efforts to maintain the effectiveness of the registration statement. The
holders of warrants do not have the rights or privileges of holders of our
common stock or any voting rights until such holders exercise their respective
warrants and receive shares of common stock. Permitted transferees that receive
any of the above described securities from our founders will, under certain
circumstances, be entitled to the registration rights described herein. We will
bear the expenses incurred in connection with the filing of any such
registration statements.
We agreed
to pay Stuart Management Co., an affiliate of Paul K. Kelly, a total of $10,000
per month for administrative services and secretarial support for a period
commencing on the date of this prospectus and ending on the earlier of our
consummation of a business combination or our liquidation. This arrangement was
agreed to by Stuart Management Co. for our benefit and is not intended to
provide Stuart Management Co. compensation in lieu of a management fee. We
believe that such fees are at least as favorable as we could have obtained from
an unaffiliated third party.
Paul K.
Kelly and James D. Dunning, Jr. have each provided us with loans in the amount
of $122,366. Alan G. Hassenfeld has provided us with a loan in the amount of
$71,827, Gregory E. Smith has provided us with a loan in the amount of $16,702,
Cheng Yan Davis has provided us with a loan in the amount of $13,360, and Xiao
Feng, Soopakij (Chris) Chearavanont and Ruey Bin Kao have each provided us with
loans in the amount of $7,183 or $368,169 in total. These loans were provided to
pay the expenses of our public offering and certain accounting and legal fees
and expenses. The loans were repaid out of the proceeds of our public
offering.
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. Subject to availability of proceeds not placed in the trust
account and up to an aggregate of $3.2 million of the interest income, net of
taxes, on the balance in the trust account to be released to us, there is no
limit on the amount of out-of-pocket expenses that could be incurred. This
formula was a result of a negotiation between us and the underwriters and was
meant to help maximize the amount of money in the trust account that would be
returned to the investors if we do not consummate a business combination within
the permitted time. Our audit committee will review and approve all expense
reimbursements made to our directors and any expense reimbursements payable to
members of our audit committee will be reviewed and approved by our board of
directors, with the interested director or directors abstaining from such review
and approval. To the extent such out-of-pocket expenses exceed the available
proceeds not deposited in the trust account, such out-of-pocket expenses would
not be reimbursed by us unless we consummate a business
combination.
Other
than the $10,000 per month administrative fees and reimbursable out-of-pocket
expenses payable to Stuart Management Co., no compensation or fees of any kind,
including finders and consulting fees, will be paid to any of our directors, or
to any of their respective affiliates for services rendered to us prior to or
with respect to the business combination.
After a
business combination, any of our directors who remain with us may be paid
consulting, management or other fees from the combined company with any and all
amounts being fully disclosed to stockholders, to the extent then known, in the
proxy solicitation materials furnished to our stockholders. It is unlikely that
the amount of such compensation will be known at the time of a stockholder
meeting held to consider a business combination, as it will be up to the
directors of the post-combination business to determine executive and director
compensation. In this event, such compensation will be publicly disclosed at the
time of its determination in a Current Report on Form 8-K, as required by the
SEC.
Our Board
of Directors has approved the procedure whereby all ongoing and future
transactions between us and any of our directors or their respective affiliates,
including loans by our directors, will be on terms believed by us at that time,
based upon other similar arrangements known to us, to be no less favorable than
are available from unaffiliated third parties. Such transactions or loans,
including any forgiveness of loans, will require prior approval in each instance
by a majority of our uninterested “independent” directors, to the extent we have
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. It is our intention to obtain estimates
from unaffiliated third parties for similar goods or services to ascertain
whether such transactions with affiliates are on terms that are no less
favorable to us than are otherwise available from such unaffiliated third
parties. If a transaction with an affiliated third party were found to be on
terms less favorable to us than with an unaffiliated third party, we would not
engage in such transaction.
Certain
Transactions of Success Winner
Success
Winner has not had any transactions with any related person in its last three
fiscal years.
DESCRIPTION
OF CHAC’S SECURITIES
General
CHAC is
authorized to issue 40,000,000 shares of common stock, par value $.001, and
1,000,000 shares of preferred stock, par value $.0001.
Units
Each unit
consists of one share of common stock and one warrant. Each warrant
entitles the holder to purchase one share of common stock.
Common
Stock
CHAC has
one class of common stock. Holders of common stock are entitled to one vote for
each share held of record on all matters to be voted on by stockholders, and
will vote as one class on all such issues. In the event of the redomestication,
each outstanding share of common stock will be automatically converted into an
ordinary share of China Ceramics unless the holder exercises the conversion
rights described elsewhere herein. Pursuant to the Acquisition Agreement, the
redomestication will not be consummated unless the business combination is also
approved by the stockholders.
Even if
the Redomestication Proposal is approved by CHAC stockholders in accordance with
applicable law, CHAC will proceed with a business combination only if the
holders of a majority of the shares issued in the IPO present and entitled to
vote at the meeting to approve the business combination vote in favor of the
business combination and stockholders owning less than 33.33% of the shares sold
in the IPO vote against the business combination and exercise the conversion
rights discussed elsewhere herein. In connection with the vote
required for any business combination, all of CHAC’s officers and directors who
purchased shares in the IPO or following the IPO in the open market, may vote
their shares in any manner they determine, in their sole
discretion.
If CHAC
is forced to liquidate prior to a business combination, it will distribute to
all of its stockholders an aggregate sum equal to $9.79 per share, plus a
pro-rata share of the interest earned on the trust fund (prior to the payment of
any federal or state taxes due by CHAC). CHAC’s remaining net assets, if any,
including any amounts remaining in the trust fund after payment of the $9.80 per
share, plus a pro-rata share of the interest earned on the trust fund (prior to
the payment of any federal or state taxes due by CHAC), will be distributed to
the holders of its common stock. As of June 30, 2009, there was
approximately $125,278,000 in the CHAC Trust Account, or approximately $9.79 per
share issued in the initial public offering.
CHAC’s
stockholders have no conversion, preemptive or other subscription rights and
there are no sinking fund or redemption provisions applicable to the common
stock, except that stockholders have the right to have their shares of common
stock converted into cash equal to their
pro rata
share of the trust
fund if they vote against the business combination and the business combination
is approved and completed. Stockholders who convert their stock into their share
of the trust fund still have the right to exercise the warrants that they
received as part of the units.
Preferred
Stock
CHAC’s
Certificate of Incorporation authorizes the issuance of 1,000,000 shares of
blank check preferred stock with such designations, rights and preferences as
may be determined from time to time by its board of directors. Accordingly,
CHAC’s board of directors is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
that could adversely affect the voting power or other rights of the holders of
common stock, although it will not, prior to a business combination, issue
preferred stock which participates in any manner in the proceeds of the trust
fund, or which votes as a class with the common stock on a business combination.
The preferred stock could be utilized as a method of discouraging, delaying or
preventing a change in control of CHAC. Although CHAC does not currently intend
to issue any shares of preferred stock, it may do so in the future.
Warrants
There are
currently 15,550,000 warrants outstanding.
Each
warrant entitles the registered holder to purchase one share of CHAC common
stock at a price of $7.50 per share, subject to adjustment as discussed below,
at any time commencing on the completion of a business combination.
The
warrants will expire November 16, 2012 at 5:00 p.m., New York City time,
which date may be extended in the sole discretion of CHAC.
CHAC may
call the warrants for redemption,
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in
whole and not in part;
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at
a price of $.01 per warrant at any time after the warrants become
exercisable;
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upon
not less than 30 days’ prior written notice of redemption to each warrant
holder; and
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if,
and only if, (a) the reported last sale price of the common stock equals
or exceeds $14.25 per share, for any 20 trading days within a 30 trading
day period ending on the third business day prior to the notice of
redemption to the warrant holders, and (b) during each day of the
foregoing 30 trading day period and through the date CHAC exercises its
redemption right, CHAC has an effective registration statement with a
current prospectus on file with the SEC pursuant to which the underlying
common stock may be sold.
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The
warrants were issued in registered form under a warrant agreement between
Continental Stock Transfer and
Trust Company
, as warrant agent, and CHAC.
The
exercise price and number of shares of common stock issuable on exercise of the
warrants may be adjusted in certain circumstances including in the event of a
stock dividend, or recapitalization, reorganization, merger or consolidation.
However, the warrants will not be adjusted for issuances of common stock,
preferred stock or other securities at a price below their respective exercise
prices.
The
warrants may be exercised upon surrender of the warrant certificate on or prior
to the expiration date at the offices of the warrant agent, with the exercise
form on the reverse side of the warrant certificate completed and executed as
indicated, accompanied by full payment of the exercise price, by certified check
payable to CHAC, for the number of warrants being exercised. The warrantholders
do not have the rights or privileges of holders of common stock or any voting
rights until they exercise their warrants and receive shares of common stock.
After the issuance of shares of common stock upon exercise of the warrants, each
holder will be entitled to one vote for each share held of record on all matters
to be voted on by stockholders.
No
warrants will be exercisable unless at the time of exercise a prospectus
relating to common stock issuable upon exercise of the warrants is current and
the common stock 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.
Under the terms of the warrant agreement, CHAC has agreed to meet these
conditions and to maintain a current prospectus relating to common stock
issuable upon exercise of the warrants until the expiration of the warrants.
However, CHAC cannot assure you that it will be able to do so. The warrants may
be deprived of any value and the market for the warrants may be limited if the
prospectus relating to the common stock issuable upon the exercise of the
warrants is not current or if the common stock is not qualified or exempt from
qualification in the jurisdictions in which the holders of the warrants
reside.
No
fractional shares will be issued upon exercise of the warrants.
CHAC
currently has authorized share capital of 41,000,000 shares consisting of
40,000,000 shares of common stock with a par value of $0.001 per share and
1,000,000 shares of preferred stock with a par value of $0.0001 per share. China
Ceramics currently is authorized to issue of 51,000,000 shares of a single
class.
DESCRIPTION
OF THE COMBINED COMPANY’S
SECURITIES
FOLLOWING THE STOCK PURCHASE
The
following description of the material terms of the shares and warrants of
China Ceramics following the stock purchase includes a summary of specified
provisions of the Memorandum of Association and Articles of Association of China
Ceramics that will be in effect upon completion of the stock purchase and the
merger. This description is subject to the relevant provisions of the BVI
Business Companies Act and is qualified by reference to China Ceramics’
Memorandum of Association and Articles of Association, copies of which are
attached to this proxy statement/prospectus and are incorporated in this proxy
statement/prospectus by reference.
General
China
Ceramics has no authorized share capital, but it will be authorized to issue
51,000,000 shares of a single class.
Units
China
Ceramics will exchange units in the redomestication merger for any units of
CHAC. Each unit consists of one share of common stock and one warrant. Each
warrant entitles the holder to purchase one share of common stock on terms
described below under the heading “Warrants.” The common stock and warrants have
traded separately since December 17, 2007, so CHAC cannot determine how many
units remain outstanding.
Shares
The
holders of the combined company’s shares are entitled to one vote for each share
on all matters submitted to a vote of shareholders and do not have cumulative
voting rights. The holders of the shares are entitled to receive dividends if
and when declared by the board of directors. The holders of the shares are
entitled to share ratably in any distribution of the assets of the combined
company upon liquidation, dissolution or winding-up, after satisfaction of all
debts and other liabilities. Assuming no conversions, upon the completion of the
business combination with Success Winner, we will have a total
of 20,143,320 shares issued and outstanding.
Anti-takeover
Effect of Unissued Shares of Capital Stock
Shares.
After the stock
purchase and redomestication merger, China Ceramics will have outstanding
approximately 20,143,320 shares, assuming that none of the public shareholders
elects to exercise the conversion rights. Another 15,500,000 shares have
been reserved for issuance upon the exercise of outstanding
convertible securities. As a result, a total of 35,643,320 shares will be
issued or issuable by China Ceramics upon the completion of the stock purchase
and re-domestication merger. The total amount of shares that China Ceramics is
authorized to issue is 51,000,000, which means that
approximately 15,356,680 shares will be authorized but unissued. These
remaining shares of authorized and unissued shares will be available for future
issuance without additional shareholder approval. While the additional shares
are not designed to deter or prevent a change of control, under some
circumstances the combined company could use the additional shares to create
voting impediments or to frustrate persons seeking to effect a takeover or
otherwise gain control by, for example, issuing those shares in private
placements to purchasers who might side with the combined company’s board of
directors in opposing a hostile takeover bid.
Preference Stock
. The
memorandum and articles will grant the board of directors the authority, without
any further vote or action by the combined company’s stockholders, to issue
preference stock in one or more series and to fix the number of shares
constituting any such series and the preferences, limitations and relative
rights, including dividend rights, dividend rate, voting rights, terms of
redemption, redemption price or prices, conversion rights and liquidation
preferences of the shares constituting any series. The existence of authorized
but unissued preference stock could reduce the combined company’s attractiveness
as a target for an unsolicited takeover bid since the combined company could,
for example, issue shares of preference stock to parties who might oppose such a
takeover bid or shares that contain terms the potential acquirer may find
unattractive. This may have the effect of delaying or preventing a change in
control, may discourage bids for the common stock at a premium over the market
price of the common stock, and may adversely affect the market price of, and the
voting and other rights of the holders of, common stock.
Warrants
As
of , 2009,
there were warrants outstanding to purchase 15,550,000 shares of Common Stock,
which warrants will remain outstanding upon the consummation of the stock
purchase and redomestication merger. Of these warrants, 2,750,000 are held by
insiders and are not redeemable due to restrictions on the ability of these
insiders to trade securities of CHAC.
Each
warrant entitles the registered holder to purchase one share of our common stock
at a price of $7.50 per share, subject to adjustment as discussed below, at any
time commencing on the later of:
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the completion of the stock
purchase; or
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November 16,
2012.
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The warrants will expire at 5:00
p.m., New York City time on November 16, 2012 CHAC may
call the warrants for
redemption.
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in whole and not in
part;
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at a price of $.01 per warrant at
any time after the warrants become
exercisable;
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upon not less than 30 days’ prior
written notice of redemption to each warrantholder;
and
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if, and only if, the reported
last sale price of the common stock equals or exceeds $14.25 per share,
for any 20 trading days within a 30 trading day period ending on the third
business day prior to the notice of redemption to
warrantholders.
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The
warrants have been issued in registered form under a warrant agreement between
Continental Stock Transfer & Trust Company, as warrant agent, and
CHAC.
The
exercise price and number of shares of common stock issuable on exercise of the
warrants may be adjusted in certain circumstances, including in the event of a
stock dividend, recapitalization, reorganization, stock purchase or
consolidation of the company. However, the warrants will not be adjusted for
issuances of common stock at a price below their respective exercise
prices.
The
warrants may be exercised upon surrender of the warrant certificate on or prior
to the expiration date at the offices of the warrant agent, with the exercise
form on the reverse side of the warrant certificate completed and executed as
indicated, accompanied by full payment of the exercise price, by certified check
payable to us, for the number of warrants being exercised. The warrantholders do
not have the rights or privileges of holders of common stock and any voting
rights until they exercise their warrants and receive common stock. After the
issuance of shares of common stock upon exercise of the warrants, each holder
will be entitled to one vote for each share held of record on all matters to be
voted on by stockholders.
No
warrants will be exercisable unless at the time of exercise a prospectus
relating to the common stock issuable upon exercise of the warrant is current
and the common stock has been qualified (or is exempt from qualification) in the
jurisdictions in which the holders of the warrants reside. Under the terms of
the warrant agreement, CHAC has agreed to maintain a current prospectus relating
to the common stock issuable upon exercise of the warrants until the expiration
of the warrants. However, there is no assurance that CHAC will be able to do so.
The warrants may be deprived of any value and the market for the warrants may be
limited if the prospectus relating to the common stock issuable upon exercise of
the warrants is not current or if the common stock is not qualified (or exempt
from qualification) in the jurisdictions in which the holders of the warrants
reside.
No
fractional shares will be issued upon exercise of the warrants. However, if a
warrantholder exercises all warrants then owned of record by him, CHAC will pay
to the warrantholder, in lieu of the issuance of any fractional share which is
otherwise issuable to the warrantholder, an amount for such fractional share in
cash based on the market value of the common stock on the last trading day prior
to the exercise date.
There
will be 15,550,000 warrants outstanding as of the completion of all of the
transactions contemplated in this proxy statement/prospectus.
Registration
Rights Agreement
CHAC has
entered into a registration rights agreement providing for the registration of
the shares of common stock issued prior to the initial public offering. The
warrants, to be exercisable, must also continue to have the common stock
underlying the warrants registered on an effective registration
statement.
Transfer
Agent and Registrar
The
transfer agent and registrar for the shares of CHAC common stock, warrants and
units is Continental Stock Transfer & Trust Company, 17 Battery Place, New
York, New York 10004, (212) 509-4000.
MATERIAL
U.S. FEDERAL INCOME TAX CONSEQUENCES
General
The
following are the material U.S. federal income tax consequences of (i) the
business combination to China Ceramics, (ii) the merger to CHAC and the holders
of CHAC’s common stock and warrants, referred to as CHAC securities, and (iii)
owning ordinary shares and warrants in China Ceramics, referred to as China
Ceramics securities, following the merger and business combination. Because the
components of a unit of CHAC or China Ceramics, as the case may be, are
separable at the option of the holder, the holder of a unit should be treated,
for U.S. federal income tax purposes, as the owner of the underlying common
stock, or ordinary share, and warrant components of the unit, as the case may
be. As a result, the discussion below of the U.S. federal income tax
consequences with respect to actual holders of common stock, or ordinary shares,
and warrants should also apply to the holder of a unit (as the deemed owner of
the underlying common stock, or ordinary share, and warrant components of the
unit).
The
discussion below of the U.S. federal income tax consequences to “U.S. Holders”
will apply to a beneficial owner of CHAC securities or China Ceramics securities
that is for U.S. federal income tax purposes:
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an
individual citizen or resident of the United
States;
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a
corporation (or other entity treated as a corporation) that is created or
organized (or treated as created or organized) in or under the laws of the
United States, any state thereof or the District of
Columbia;
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an
estate whose income is includible in gross income for U.S. federal income
tax purposes regardless of its source;
or
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a
trust if (i) a U.S. court can exercise primary supervision over the
trust’s administration and one or more U.S. persons are authorized to
control all substantial decisions of the trust, or (ii) it has a valid
election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person.
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If a
beneficial owner of CHAC securities or China Ceramics securities is not
described as a U.S. Holder and is not an entity treated as a partnership or
other pass-through entity for U.S. federal income tax purposes, such owner will
be considered a “Non-U.S. Holder.” The material U.S. federal income tax
consequences applicable to Non-U.S. Holders owning China Ceramics securities are
described below.
This
summary is based on the Internal Revenue Code of 1986, as amended, or the
“Code,” its legislative history, existing and proposed Treasury regulations
promulgated thereunder, published rulings and court decisions, all as currently
in effect. These authorities are subject to change or differing interpretations,
possibly on a retroactive basis.
This
discussion does not address all aspects of U.S. federal income taxation that may
be relevant to CHAC, China Ceramics, or any particular holder of CHAC securities
or China Ceramics securities based on such holder’s individual circumstances. In
particular, this discussion considers only holders that own and hold CHAC
securities, and who will hold China Ceramics securities as a result of owning
the corresponding CHAC securities, as capital assets within the meaning of
Section 1221 of the Code. This discussion also does not address the potential
application of the alternative minimum tax or the U.S. federal income tax
consequences to holders that are subject to special rules,
including:
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financial
institutions or financial services
entities;
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broker-dealers;
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taxpayers
who have elected mark-to-market
accounting;
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tax-exempt
entities;
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governments
or agencies or instrumentalities
thereof;
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insurance
companies;
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regulated
investment companies;
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real
estate investment trusts;
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certain
expatriates or former long-term residents of the United
States;
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persons
that actually or constructively own 5% or more of CHAC’s voting
shares;
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persons
that acquired CHAC securities pursuant to the exercise of employee stock
options, in connection with employee stock incentive plans or otherwise as
compensation;
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persons
that hold CHAC securities or China Ceramics securities as part of a
straddle, constructive sale, hedging, conversion or other integrated
transaction; or
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persons
whose functional currency is not the U.S.
dollar.
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This
discussion does not address any aspect of U.S. federal non-income tax laws, such
as gift or estate tax laws, or state, local or non-U.S. tax laws. Additionally,
the discussion does not consider the tax treatment of partnerships or other
pass-through entities or persons who hold CHAC securities, or will hold China
Ceramics securities, through such entities. If a partnership (or other entity
classified as a partnership for U.S. federal income tax purposes) is the
beneficial owner of CHAC securities (or China Ceramics securities), the U.S.
federal income tax treatment of a partner in the partnership will generally
depend on the status of the partner and the activities of the
partnership.
CHAC has
not sought, and will not seek, a ruling from the Internal Revenue Service, or
“IRS,” or an opinion of counsel as to any U.S. federal income tax consequence
described herein. The IRS may disagree with the discussion herein, and its
determination may be upheld by a court. Moreover, there can be no assurance that
future legislation, regulation, administrative rulings or court decisions will
not adversely affect the accuracy of the statements in this
discussion.
Because
of the complexity of the tax laws and because the tax consequences to CHAC,
China Ceramics, or any particular holder of CHAC securities or of China Ceramics
securities following the merger and business combination may be affected by
matters not discussed herein, each holder of CHAC securities is urged to consult
with its tax advisor with respect to the specific tax consequences of
the merger and business combination, and the ownership and
disposition of CHAC securities and China Ceramics securities, including the
applicability and effect of state, local and non-U.S. tax laws, as well as U.S.
federal tax laws.
Tax
Consequences of the Business Combination With Respect to China
Ceramics
China
Ceramics should not recognize any gain or loss for U.S. federal income tax
purposes as a result of the business combination.
Tax
Consequences of the Merger
Tax
Consequences to U.S. Holders of CHAC Securities
The
merger should qualify as a reorganization for U.S. federal income tax purposes
under Section 368(a) of the Code. However, due to the absence of guidance
directly on point on how the provisions of Section 368(a) apply in the case of a
merger of a corporation with no active business and only investment-type assets,
this result is not entirely free from doubt.
If the
merger qualifies as a reorganization under Section 368(a), a U.S. Holder of CHAC
securities should not recognize gain or loss upon the exchange of its CHAC
securities solely for the securities of China Ceramics pursuant to the merger. A
U.S. Holder’s aggregate tax basis in the securities of China Ceramics received
in connection with the merger also should be the same as the aggregate tax basis
of the CHAC securities surrendered in the transaction (except to the extent of
any tax basis allocated to a fractional share for which a cash payment is
received in connection with the transaction). In addition, the holding period of
the China Ceramics securities received in the merger should include the holding
period of the securities of CHAC surrendered in the merger. A stockholder of
CHAC who receives cash for its shares of common stock upon its exercise
of conversion rights or appraisal rights (or receives cash in lieu of
a fractional share pursuant to the merger) should recognize gain or loss in an
amount equal to the difference between the cash received for such shares (or
fractional share) and its adjusted tax basis in such shares (or fractional
share).
If the
merger should fail to qualify as a reorganization under Section 368(a), a U.S.
Holder generally would recognize a gain or loss with respect to its securities
in CHAC in an amount equal to the difference, if any, between the U.S. Holder’s
adjusted tax basis in its CHAC securities and the fair market value of the
corresponding China Ceramics securities received in the merger. In such event,
the U.S. Holder’s basis in the China Ceramics securities would equal their fair
market value, and such U.S. Holder’s holding period for the China Ceramics
securities would begin on the day following the date of the merger.
Tax
Consequences to CHAC and China Ceramics
Assuming
(as discussed below) that China Ceramics will be treated as a foreign
corporation for U.S. federal income tax purposes, under Section 367 of the Code,
CHAC should recognize gain, but not loss, as a result of the merger equal to the
excess, if any, of the fair market value of each of its assets over such asset’s
adjusted tax basis at the effective time of the merger. Since any such gain will
be determined based on the value of its assets at that time, the amount of such
gain (and any U.S. federal income tax liability to CHAC by reason of such gain)
cannot be determined at this time. We urge you to consult your own tax advisors
with regard to these tax issues.
Section
7874(b) of the Code generally provides that a corporation organized outside the
United States which acquires, directly or indirectly, pursuant to a plan or
series of related transactions substantially all of the assets of a corporation
organized in the United States will be treated as a domestic corporation for
U.S. federal income tax purposes if shareholders of the acquired corporation, by
reason of owning shares of the acquired corporation, own at least 80% of either
the voting power or the value of the stock of the acquiring corporation after
the acquisition. Under temporary regulations recently promulgated under Section
7874, a warrant holder of either the acquired corporation or the acquiring
corporation is treated for this purpose as owning stock of the acquired
corporation or the acquiring corporation, as the case may be, with a value equal
to the excess of the value of the shares underlying the warrant over the
exercise price of the warrant. If Section 7874(b) were to apply to the merger,
then, among other things, China Ceramics, as the surviving entity, would be
subject to U.S. federal income tax on its worldwide taxable income following the
merger and business combination as if it were a domestic corporation, and CHAC
should not recognize gain (or loss) as a result of the merger.
After the
completion of the business combination, which will occur immediately after and
as part of the same plan as the merger, it is expected that the former
stockholders of CHAC (including warrant holders treated as owning stock of CHAC
pursuant to the temporary regulations under Section 7874) will own, by reason of
owning (or being treated as owning) stock of CHAC, less than 80% of the voting
power and the value of the ordinary shares of China Ceramics (including any
warrants treated as shares of China Ceramics pursuant to the temporary
regulations promulgated under Section 7874). Accordingly, it is expected that
Section 7874(b) should not apply to treat China Ceramics as a domestic
corporation for U.S. federal income tax purposes. However, due to the absence of
full guidance on how the rules of Section 7874(b) will apply to the transactions
contemplated by the merger and the business combination, this result is not
entirely free from doubt. If, for example, the merger were ultimately determined
for purposes of Section 7874(b) as occurring prior to, and separate from, the
business combination for U.S. federal income tax purposes, the share ownership
threshold for applicability of Section 7874(b) generally would be satisfied (and
China Ceramics would be treated as a domestic corporation for U.S. federal
income tax purposes) because the former stockholders of CHAC (including warrant
holders treated as owning stock of CHAC), by reason of owning (or being treated
as owning) stock of CHAC, would own all of the shares (including any warrants
treated as shares) of China Ceramics immediately after the merger. Although
normal “step transaction” tax principles support the view that the merger and
the business combination should be viewed together for purposes of determining
whether Section 7874(b) is applicable, because of the absence of guidance under
Section 7874(b) directly on point, this result is not entirely free from doubt.
The balance of this discussion assumes that China Ceramics will be treated as a
foreign corporation for U.S. federal income tax purposes.
Even if
Section 7874(b) does not apply to a transaction, Section 7874(a) of the Code
generally provides that where a corporation organized outside the United States
acquires, directly or indirectly, pursuant to a plan or series of related
transactions substantially all of the assets of a corporation organized in the
United States, the acquired corporation will be subject to U.S. federal income
tax on its “inversion gain” (which cannot be reduced by, for example, net
operating losses otherwise available to the acquired corporation) if the
shareholders of the acquired corporation, by reason of owning shares of the
acquired corporation, own at least 60% (but less than 80%) of either the voting
power or the value of the stock of the acquiring corporation after the
acquisition. Under temporary regulations recently promulgated under Section
7874, a warrant holder of either the acquired corporation or the acquiring
corporation is treated for this purpose as owning stock of the acquired
corporation or the acquiring corporation, as the case may be, with a value equal
to the excess of the value of the shares underlying the warrant over the
exercise price of the warrant. For this purpose, inversion gain includes any
gain recognized under Section 367 of the Code by reason of the transfer of the
properties of the acquired corporation to the acquiring corporation pursuant to
the transaction.
As
described above, under Section 367, CHAC should recognize gain (but not loss) as
a result of the merger equal to the excess, if any, of the fair market value of
each asset of CHAC over such asset’s adjusted tax basis at the effective time of
the merger. After the completion of the merger and business combination, it is
expected that the former stockholders of CHAC (including warrant holders treated
as owning stock of CHAC) will own, by reason of owning (or being treated as
owning) stock of CHAC, more than 60% of the voting power and the value of the
shares (including any warrants treated as shares) of China Ceramics.
Accordingly, the limitations under Section 7874(a) on the deductibility of net
operating losses, if any, against such gain should apply
.
Tax
Consequences to U.S. Holders of Ordinary Shares and Warrants of China
Ceramics
Taxation
of Distributions Paid on Ordinary Shares
Subject
to the passive foreign investment company, or “PFIC”, rules discussed below, a
U.S. Holder will be required to include in gross income as ordinary income the
amount of any dividend paid on the ordinary shares of China Ceramics. A
distribution on such ordinary shares will be treated as a dividend for U.S.
federal income tax purposes to the extent the distribution is paid out of
current or accumulated earnings and profits of China Ceramics (as determined for
U.S. federal income tax purposes). Such dividend will not be eligible for the
dividends received deduction generally allowed to domestic corporations in
respect of dividends received from other domestic corporations. Distributions in
excess of such earnings and profits will be applied against and reduce the U.S.
Holder’s basis in its ordinary shares in China Ceramics and, to the extent in
excess of such basis, will be treated as gain from the sale or exchange of such
ordinary shares.
With
respect to non-corporate U.S. Holders for taxable years beginning before January
1, 2011, dividends may be taxed at the lower applicable long-term capital gains
rate provided that (a) the ordinary shares of China Ceramics are readily
tradable on an established securities market in the United States, (b) China
Ceramics is not a PFIC, as discussed below, for either the taxable year in which
the dividend was paid or the preceding taxable year, and (c) certain holding
period requirements are met. It is not entirely clear, however, whether a U.S.
Holder’s holding period for its shares in China Ceramics would be suspended for
purposes of clause (c) above for the period that such holder had a right to have
its common stock in CHAC converted into cash, by CHAC. In addition, under
recently published IRS authority, ordinary shares are considered for purposes of
clause (a) above to be readily tradable on an established securities market in
the United States only if they are listed on certain exchanges, which presently
includes the NYSE Amex but does not include the OTC Bulletin Board. Although it
is contemplated that an application will be made for the ordinary shares of
China Ceramics to become listed on the NYSE Amex or elsewhere at an appropriate
time, prior to any such listing, or if China Ceramics is unable to obtain such a
listing, it is possible that the ordinary shares of China Ceramics will be
listed and traded only on the OTC Bulletin Board (in which case any dividends
paid on the ordinary shares of China Ceramics would not qualify for the lower
rate). U.S. Holders should consult their own tax advisors regarding the
availability of the lower rate for any dividends paid with respect to the shares
of China Ceramics.
If PRC
taxes apply to dividends paid to a U.S. Holder on the ordinary shares of China
Ceramics, such taxes may be treated as foreign taxes eligible for credit against
such holder’s U.S. federal income tax liability (subject to certain
limitations), and a U.S. Holder may be entitled to certain benefits under the
income tax treaty between the United States and the PRC. U.S. Holders should
consult their own tax advisors regarding the creditability of any such PRC tax
and their eligibility for the benefits of the income tax treaty between the
United States and the PRC.
Taxation
on the Disposition of Ordinary Shares and Warrants
Upon a
sale or other taxable disposition of the ordinary shares or warrants in China
Ceramics, and subject to the PFIC rules discussed below, a U.S. Holder should
recognize capital gain or loss in an amount equal to the difference between the
amount realized and the U.S. Holder’s adjusted tax basis in the ordinary shares
or warrants.
Capital
gains recognized by U.S. Holders generally are subject to U.S. federal income
tax at the same rate as ordinary income, except that long-term capital gains
recognized by non-corporate U.S. Holders are generally subject to U.S. federal
income tax at a maximum rate of 15% for taxable years beginning before January
1, 2011 (and 20% thereafter). Capital gain or loss will constitute long-term
capital gain or loss if the U.S. Holder’s holding period for the ordinary shares
or warrants exceeds one year. The deductibility of capital losses is subject to
various limitations.
If PRC
taxes apply to any gain from the disposition of the ordinary shares or warrants
in China Ceramics by a U.S. Holder, such taxes may be treated as foreign taxes
eligible for credit against such holder’s U.S. federal income tax liability
(subject to certain limitations), and a U.S. Holder may be entitled to certain
benefits under the income tax treaty between the United States and the PRC. U.S.
Holders should consult their own tax advisors regarding the creditability of any
such PRC tax and their eligibility for the benefits of the income tax treaty
between the United States and the PRC.
Exercise
or Lapse of the Warrants
Subject
to the discussion of the PFIC rules below, a U.S. Holder should not recognize
gain or loss upon the exercise for cash of a warrant to acquire ordinary shares
in China Ceramics. Ordinary shares acquired pursuant to an exercise for cash of
a warrant generally will have a tax basis equal to the U.S. Holder’s tax basis
in the warrant, increased by the amount paid to exercise the warrant. The
holding period of such ordinary shares generally would begin on the day after
the date of exercise of the warrant. If the terms of a warrant provide for any
adjustment to the number of ordinary shares for which the warrant may be
exercised or to the exercise price of the warrants, such adjustment may, under
certain circumstances, result in a constructive distribution that could be
taxable to the U.S. Holder of the warrants. Conversely, the absence of an
appropriate adjustment similarly may result in a constructive distribution that
could be taxable, as described above, to the U.S. Holders of the ordinary shares
in China Ceramics. If a warrant is allowed to lapse unexercised, a U.S. Holder
should recognize a capital loss equal to such holder’s tax basis in the warrant.
If a warrant is exercised other than by the payment of the exercise price in
cash, the tax treatment of such an exercise may vary from that described above.
U.S. Holders should consult their own tax advisors regarding the tax treatment
of such an exercise.
Passive
Foreign Investment Company Rules
A foreign
corporation will be a PFIC if at least 75% of its gross income in a taxable year
of the foreign corporation, including its pro rata share of the gross income of
any company in which it is considered to own at least 25% of the shares by
value, is passive income. Alternatively, a foreign corporation will be a PFIC if
at least 50% of its assets in a taxable year of the foreign corporation,
ordinarily determined based on fair market value and averaged quarterly over the
year, including its pro rata share of the assets of any company in which it is
considered to own at least 25% of the shares by value, are held for the
production of, or produce, passive income. Passive income generally includes
dividends, interest, rents and royalties (other than certain rents or royalties
derived from the active conduct of a trade or business) and gains from the
disposition of passive assets.
Based on
the expected composition of the assets and income of China Ceramics and its
subsidiaries after the merger and the business combination, we do not anticipate
that China Ceramics will be treated as a PFIC following the merger and the
business combination. The actual PFIC status of China Ceramics for its current
taxable year or any subsequent taxable year, however, will not be determinable
until after the end of such taxable year. Accordingly there can be no
assurance with respect to the status of China Ceramics as a PFIC for its current
taxable year or any future taxable year.
If China
Ceramics is determined to be a PFIC and a U.S. Holder did not make either a
timely qualified electing fund (“QEF”) election for China Ceramics’ first
taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold)
ordinary shares, or a mark-to-market election, as described below, such holder
generally will be subject to special rules with respect to:
|
•
|
any
gain recognized by the U.S. Holder on the sale or other disposition of its
ordinary shares or warrants;
and
|
|
•
|
any
“excess distribution” made to the U.S. Holder (generally, any
distributions to such U.S. Holder during a taxable year of the U.S. Holder
that are greater than 125% of the average annual distributions received by
such U.S. Holder in respect of the ordinary shares of China Ceramics
during the three preceding taxable years of such U.S. Holder or, if
shorter, such U.S. Holder’s holding period for the ordinary
shares).
|
Under
these rules:
|
•
|
the
U.S. Holder’s gain or excess distribution will be allocated ratably over
the U.S. Holder’s holding period for the ordinary shares or
warrants;
|
|
•
|
the
amount allocated to the U.S. Holder’s taxable year in which the U.S.
Holder recognized the gain or received the excess distribution or to the
period in the U.S. Holder’s holding period before the first day of the
first taxable year of China Ceramics in which China Ceramics was a PFIC
will be taxed as ordinary
income;
|
|
•
|
the
amount allocated to other taxable years of the U.S. Holder and included in
its holding period will be taxed at the highest tax rate in effect for
that year and applicable to the U.S. Holder;
and
|
|
•
|
the
interest charge generally applicable to underpayments of tax will be
imposed in respect of the tax attributable to each such other taxable year
of the U.S. Holder.
|
In
addition, if China Ceramics were a PFIC, a U.S. Holder who acquires its ordinary
shares or warrants from a deceased U.S. Holder who dies before January 1, 2010
and who had not made a timely QEF election for the ordinary shares generally
will be denied the step-up of U.S. federal income tax basis in such shares or
warrants to their fair market value at the date of the deceased holder’s death.
Instead, such U.S. Holder would have a tax basis in such shares or warrants
equal to the deceased holder’s tax basis, if lower.
In
general, a U.S. Holder may avoid the PFIC tax consequences described above in
respect to its ordinary shares in China Ceramics by making a timely QEF election
to include in income its pro rata share of China Ceramics’ net capital gains (as
long-term capital gain) and other earnings and profits (as ordinary income), on
a current basis, in each case whether or not distributed, in the taxable year of
the U.S. Holder in which or with which China Ceramics’ taxable year ends. A U.S.
Holder may make a separate election to defer the payment of taxes on
undistributed income inclusions under the QEF rules, but if deferred, any such
taxes will be subject to an interest charge.
A U.S.
Holder may not make a QEF election with respect to its warrants. As a result, if
a U.S. Holder sells or otherwise disposes of a warrant to purchase ordinary
shares of China Ceramics (other than upon exercise of a warrant), any gain
recognized generally will be subject to the special tax and interest charge
rules treating the gain as an excess distribution, as described above, if China
Ceramics were a PFIC at any time during the period the U.S. Holder held the
warrants. If a U.S. Holder that exercises such warrants properly makes a QEF
election with respect to the newly acquired ordinary shares in China Ceramics
(or has previously made a QEF election with respect to its ordinary shares in
China Ceramics), the QEF election will apply to the newly acquired ordinary
shares, but the adverse tax consequences relating to PFIC shares, adjusted to
take into account the current income inclusions resulting from the QEF election,
will continue to apply with respect to such newly acquired ordinary shares
(which generally will be deemed to have a holding period for the purposes of the
PFIC rules that includes the period the U.S. Holder held the warrants), unless
the U.S. Holder makes a purging election. The purging election creates a deemed
sale of such shares at their fair market value. The gain recognized by the
purging election will be subject to the special tax and interest charge rules
treating the gain as an excess distribution, as described above. As a result of
the purging election, the U.S. Holder will have a new basis and holding period
in the ordinary shares acquired upon the exercise of the warrants for purposes
of the PFIC rules.
The QEF
election is made on a shareholder-by-shareholder basis and, once made, can be
revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF
election by attaching a completed IRS Form 8621 (Return by a Shareholder of a
Passive Foreign Investment Company or QEF), including the information provided
in a PFIC annual information statement, to a timely filed U.S. federal income
tax return for the tax year to which the election relates. Retroactive QEF
elections generally may be made only by filing a protective statement with such
return and if certain other conditions are met or with the consent of the
IRS.
In order
to comply with the requirements of a QEF election, a U.S. Holder must receive
certain information from China Ceramics. Upon request from a U.S. Holder, China
Ceramics will endeavor to provide to the U.S. Holder, no later than 90 days
after the request, such information as the IRS may require, including a PFIC
annual information statement, in order to enable the U.S. Holder to make and
maintain a QEF election. However, there is no assurance that China Ceramics will
have timely knowledge of its status as a PFIC in the future or of the required
information to be provided.
If a U.S.
Holder has elected the application of the QEF rules to its ordinary shares in
China Ceramics, and the special tax and interest charge rules do not apply to
such shares (because of a timely QEF election for China Ceramics’ first taxable
year as a PFIC in which the U.S. Holder holds (or is deemed to hold) such shares
or a purge of the PFIC taint pursuant to a purging election), any gain
recognized on the appreciation of such shares should be taxable as capital gain
and no interest charge will be imposed. As discussed above, U.S. Holders of a
QEF are currently taxed on their pro rata shares of the QEF’s earnings and
profits, whether or not distributed. In such case, a subsequent distribution of
such earnings and profits that were previously included in income should not be
taxable as a dividend to those U.S. Holders who made a QEF election. The tax
basis of a U.S. Holder’s shares in a QEF will be increased by amounts that are
included in income, and decreased by amounts distributed but not taxed as
dividends, under the above rules. Similar basis adjustments apply to property if
by reason of holding such property the U.S. Holder is treated under the
applicable attribution rules as owning shares in a QEF.
Although
a determination as to China Ceramics’ PFIC status will be made annually, an
initial determination that it is a PFIC will generally apply for subsequent
years to a U.S. Holder who held ordinary shares or warrants of China Ceramics
while it was a PFIC, whether or not it met the test for PFIC status in those
years. A U.S. Holder who makes the QEF election discussed above for China
Ceramics’ first taxable year as a PFIC in which the U.S. Holder holds (or is
deemed to hold) ordinary shares in China Ceramics, however, will not be subject
to the PFIC tax and interest charge rules (or the denial of basis step-up at
death) discussed above in respect to such shares. In addition, such U.S. Holder
will not be subject to the QEF inclusion regime with respect to such shares for
any taxable year of China Ceramics that ends within or with a taxable year of
the U.S. Holder and in which China Ceramics is not a PFIC. On the other hand, if
the QEF election is not effective for each of the taxable years of China
Ceramics in which China Ceramics is a PFIC and during which the U.S. Holder
holds (or is deemed to hold) ordinary shares in China Ceramics, the PFIC rules
discussed above will continue to apply to such shares unless the U.S. Holder
makes a purging election and pays the tax and interest charge with respect to
the gain inherent in such shares attributable to the pre-QEF election
period.
Alternatively,
if a U.S. Holder, at the close of its taxable year, owns shares in a PFIC that
are treated as marketable stock, the U.S. Holder may make a mark-to-market
election with respect to such shares for such taxable year. If the U.S. Holder
makes a valid mark-to-market election for the first taxable year of the U.S.
Holder in which the U.S. Holder holds (or is deemed to hold) ordinary shares in
China Ceramics and for which China Ceramics is determined to be a PFIC, such
holder generally will not be subject to the PFIC rules described above in
respect to its ordinary shares. Instead, in general, the U.S. Holder will
include as ordinary income each year the excess, if any, of the fair market
value of its ordinary shares at the end of its taxable year over the adjusted
basis in its ordinary shares. The U.S. Holder also will be allowed to take an
ordinary loss in respect of the excess, if any, of the adjusted basis of its
ordinary shares over the fair market value of its ordinary shares at the end of
its taxable year (but only to the extent of the net amount of previously
included income as a result of the mark-to-market election). The U.S. Holder’s
basis in its ordinary shares will be adjusted to reflect any such income or loss
amounts, and any further gain recognized on a sale or other taxable disposition
of the ordinary shares will be treated as ordinary income. Currently, a
mark-to-market election may not be made with respect to warrants.
The
mark-to-market election is available only for stock that is regularly traded on
a national securities exchange that is registered with the Securities and
Exchange Commission, including the NYSE Amex, or on a foreign exchange or market
that the IRS determines has rules sufficient to ensure that the market price
represents a legitimate and sound fair market value. Although it is contemplated
that an application will be made for the ordinary shares of China Ceramics to
become listed on the NYSE Amex or elsewhere at an appropriate time, prior to any
such listing, or if China Ceramics is unable to obtain such a listing, it is
possible that the ordinary shares of China Ceramics will be listed and traded
only on the OTC Bulletin Board. If the ordinary shares of China Ceramics were to
be quoted and traded only on the OTC Bulletin Board, such shares may not
currently qualify as marketable stock for purposes of the election. As a result,
U.S. Holders should consult their own tax advisors regarding the availability
and tax consequences of a mark-to-market election in respect to the ordinary
shares of China Ceramics under their particular circumstances.
If China
Ceramics is a PFIC and, at any time, has a foreign subsidiary that is classified
as a PFIC, U.S. Holders generally would be deemed to own a portion of the shares
of such lower-tier PFIC, and generally could incur liability for the deferred
tax and interest charge described above if China Ceramics receives a
distribution from, or disposes of all or part of its interest in, the lower-tier
PFIC. Upon request, China Ceramics will endeavor to cause any lower-tier PFIC to
provide to a U.S. Holder no later than 90 days after the request the information
that may be required to make or maintain a QEF election with respect to the
lower-tier PFIC. However, there is no assurance that China Ceramics will have
timely knowledge of the status of any such lower-tier PFIC or of the required
information to be provided. U.S. Holders are urged to consult their own tax
advisors regarding the tax issues raised by lower-tier PFICs.
If a U.S.
Holder owns (or is deemed to own) shares in a PFIC during any taxable year of
the U.S. Holder, such holder may have to file an IRS Form 8621 (whether or not a
QEF or mark-to-market election is made).
The rules
dealing with PFICs and with the QEF and mark-to-market elections are very
complex and are affected by various factors in addition to those described
above. Accordingly, U.S. Holders of ordinary shares and warrants in China
Ceramics should consult their own tax advisors concerning the application of the
PFIC rules to such ordinary shares and warrants under their particular
circumstances.
Tax
Consequences to Non-U.S. Holders of Ordinary Shares and Warrants of China
Ceramics
Dividends
paid to a Non-U.S. Holder in respect to its ordinary shares in China Ceramics
generally will not be subject to U.S. federal income tax, unless the dividends
are effectively connected with the Non-U.S. Holder’s conduct of a trade or
business within the United States (and, if required by an applicable income tax
treaty, are attributable to a permanent establishment or fixed base that such
holder maintains in the United States).
In
addition, a Non-U.S. Holder generally will not be subject to U.S. federal income
tax on any gain attributable to a sale or other disposition of ordinary shares
or warrants in China Ceramics unless such gain is effectively connected with its
conduct of a trade or business in the United States (and, if required by an
applicable income tax treaty, is attributable to a permanent establishment or
fixed base that such holder maintains in the United States) or the Non-U.S.
Holder is an individual who is present in the United States for 183 days or more
in the taxable year of sale or other disposition and certain other conditions
are met (in which case, such gain from United States sources generally is
subject to tax at a 30% rate or a lower applicable tax treaty
rate).
Dividends
and gains that are effectively connected with the Non-U.S. Holder’s conduct of a
trade or business in the United States (and, if required by an applicable income
tax treaty, are attributable to a permanent establishment or fixed base in the
United States) generally will be subject to tax in the same manner as for a U.S.
Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S.
federal income tax purposes, may also be subject to an additional branch profits
tax at a 30% rate or a lower applicable tax treaty rate.
Backup
Withholding and Information Reporting
In
general, information reporting for U.S. federal income tax purposes generally
should apply to distributions made on the ordinary shares of China Ceramics
within the United States to a non-corporate U.S. Holder and to the proceeds from
sales and other dispositions of ordinary shares or warrants of China Ceramics by
a non-corporate U.S. Holder to or through a U.S. office of a broker. Payments
made (and sales and other dispositions effected at an office) outside the United
States generally should be subject to information reporting in limited
circumstances.
In
addition, backup withholding of U.S. federal income tax, currently at a rate of
28%, generally should apply to dividends paid on the ordinary shares of China
Ceramics to a non-corporate U.S. Holder and the proceeds from sales and other
dispositions of shares or warrants of China Ceramics by a non-corporate U.S.
Holder, in each case who (a) fails to provide an accurate taxpayer
identification number; (b) is notified by the IRS that backup withholding is
required; or (c) in certain circumstances, fails to comply with applicable
certification requirements.
A
Non-U.S. Holder generally may eliminate the requirement for information
reporting and backup withholding by providing certification of its foreign
status, under penalties of perjury, on a duly executed applicable IRS Form W-8
or by otherwise establishing an exemption.
Backup
withholding is not an additional tax. Rather, the amount of any backup
withholding will be allowed as a credit against a U.S. Holder’s or a non-U.S.
Holder’s U.S. federal income tax liability and may entitle such holder to a
refund, provided that certain required information is timely furnished to the
IRS.
EXPERTS
The
consolidated financial statements of Success Winner and its subsidiaries as of
December 31, 2007 and 2008 and for each of the years in the three-year period
ended December 31, 2008 have been included in this proxy
statement/prospectus in reliance on the report of Foo Kon Tan Grant Thornton,
(Singapore), an independent registered public accounting firm, appearing
elsewhere in this proxy statement/prospectus upon the authority of the said firm
as experts in accounting and auditing.
The
consolidated financial statements of CHAC as of December 31, 2008 and 2007 and
for the year ended December 31, 2008 and for the period from June 22, 2007
to December 31, 2007 and for the cumulative period from June 22, 2007 to
December 31, 2008 included in this proxy statement/prospectus have been audited
by McGladrey & Pullen, LLP, an independent registered public accounting
firm, to the extent set forth in their report appearing elsewhere in this joint
proxy statement/prospectus and are included herein in reliance upon the
authority of McGladrey & Pullen, LLP as experts in accounting and
auditing.
LEGAL
MATTERS
The
validity of the shares of China Ceramics to be issued in the Acquisition and
certain other matters relating to British Virgin Islands law will be passed upon
for us by Harney Westwood & Riegels. Loeb & Loeb LLP, has
acted as special United States counsel to China Ceramics.
STOCKHOLDER
PROPOSALS AND OTHER MATTERS
Management
of CHAC knows of no other matters which may be brought before the CHAC special
meeting. If any matter other than the proposed Acquisition or related matters
should properly come before the special meeting, however, the persons named in
the enclosed proxies will vote proxies in accordance with their judgment on
those matters.
Under
Delaware law, only business stated in the notice of special meeting may be
transacted at the special meeting.
ENFORCEABILITY
OF CIVIL LIABILITIES
Success
Winner is a British Virgin Islands company and its principal executive offices
will be located outside the United States in China. A majority of its directors
and officers and certain of the experts named in this proxy statement/prospectus
reside outside the United States. In addition, a substantial portion of its
assets and the assets of its directors, officers and certain of its experts are
located outside the United States. As a result, you may have difficulty serving
legal process within the United States upon Success Winner or any of these
persons. You may also have difficulty enforcing, both in and outside the United
States, judgments you may obtain in United States courts against Success Winner
or these persons in any action, including actions based upon the civil liability
provisions of United States federal or state securities laws. Furthermore, it is
uncertain whether the courts of the British Virgin Islands or China would enter
judgments in original actions brought in those courts predicated on United
States federal or state securities laws.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
China
Ceramics has filed a registration statement on Form S-4 to register the issuance
of China Ceramics’ securities to CHAC security holders in the Acquisition. This
proxy statement/prospectus is a part of that registration statement and
constitutes a prospectus of China Ceramics in addition to a proxy statement of
CHAC for the CHAC special meeting. As allowed by the rules of the Securities and
Exchange Commission, this proxy statement/prospectus does not contain all of the
information that you can find in the registration statement or the exhibits to
the registration statement. You should refer to the registration statement and
its exhibits for additional information that is not contained in this proxy
statement/prospectus.
CHAC is
subject to the informational requirements of the Securities Exchange Act, and is
required to file reports, any proxy statements and other information with the
Securities and Exchange Commission. Any reports, statements or other information
that CHAC files with the Securities and Exchange Commission, including this
proxy statement/prospectus may be inspected and copied at the public reference
facilities maintained by the Securities and Exchange Commission at 100 F Street,
N.E., Room 1580, Washington, D.C. 20549. Copies of this material can also be
obtained upon written request from the Public Reference Section of the
Securities and Exchange Commission at its principal office in Washington, D.C.
20549, at prescribed rates or from its website on the Internet at www.sec.gov,
free of charge. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on public reference rooms.
Neither
CHAC nor Success Winner has authorized anyone to provide you with information
that differs from that contained in this proxy statement/prospectus. You should
not assume that the information contained in this proxy statement/prospectus is
accurate as on any date other than the date of this proxy statement/prospectus,
and neither the mailing of this proxy statement/prospectus to CHAC stockholders
nor the consummation of the Acquisition shall create any implication to the
contrary.
This
proxy statement/prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, any securities, or the solicitation of a proxy,
in any jurisdiction to or from any person to whom it is not lawful to make any
such offer or solicitation in such jurisdiction.
137
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China
Holdings Acquisition Corp.
|
|
|
|
Unaudited
Condensed Balance Sheets as of June 30, 2009 and December 31,
2008
|
F-2
|
|
|
Unaudited
Condensed Statements of Operations for the Six Months Ended June 30, 2009
and 2008
|
F-3
|
|
|
Unaudited
Condensed Statements of Stockholders’ Equity for the Six Months Ended June
30, 2009 and 2008
|
F-4
|
|
|
Unaudited
Condensed Statements of Cash Flows for the Six Months Ended June 30, 2009
and 2008
|
F-5
|
|
|
Notes
to Unaudited Condensed Financial Statements
|
F-6
|
|
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Report
of Independent Registered Public Accounting Firm
|
F-18
|
|
|
Balance
Sheets, December 31, 2007 and December 31, 2008
|
F-19
|
|
|
Statements
of Income, for the period from June 22, 2007 (inception) to
December 31, 2007, for the year ended December 31, 2008 and for
the period from June 22, 2007 (inception) to December 31,
2008
|
F-20
|
|
|
Statement
of Stockholders’ Equity, for the period from June 22, 2007
(inception) to December 31, 2008
|
F-21
|
|
|
Statements
of Cash Flows, for the period from June 22, 2007 (inception) to
December 31, 2007, for the year ended December 31, 2008 and for
the period from June 22, 2007 (inception) to December 31,
2008
|
F-22
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|
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Notes
to Audited Financial Statements
|
F-23
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|
|
Success
Winner Limited
|
|
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|
Review
Report of Independent Registered Public Accounting Firm for t he Six
Months Period Ended June 30,
2009
|
F-31
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|
|
Unaudited
Combined States of Comprehensive Income for the Financial Period Ended
June 30, 2009
|
F-33
|
|
|
Unaudited
Combined State of Financial Position as at June 30, 20090
|
F-34
|
|
|
Unaudited
Combined Statements of Changes in Equity for the Financial Period Ended
June 30, 2009
|
F-35
|
|
|
Unaudited
Combined Statement of Cash Flow for the Financial Period Ended June 20,
2009
|
F-36
|
|
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Notes
to Unaudited Combined Financial Statements
|
F-37
|
|
|
Report
from the Independent Auditors
|
F-72
|
|
|
Combined
Income Statements for the Financial Years Ended December 31, 2005, 2006,
2007 and 2008
|
F-74
|
|
|
Combined
Balance Sheets for the Financial Years Ended December 31, 2005, 2006, 2007
and 2008
|
F-75
|
|
|
Combined
Statements of Changes in Equity for the Financial Years Ended December 31,
2005, 2006, 2007 and 2008
|
F-76
|
|
|
Combined
Cash Flow Statements for the Financial Years Ended December 31, 2005,
2006, 2007 and 2008
|
F-77
|
|
|
Notes
to Combined Financial Statements
|
F-78
|
China Holdings
Acquisition Corp.
(a corporation in the development
stage)
Condensed Balance
Sheets
See accompanying notes to financial
statements.
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Unaudited Condensed Statements of
Operations
|
For the three
months ended June 30, 2008 |
For the
three months ended June 30, 2009 |
For the
six months ended June 30, 2008 |
For the
six months ended June 30, 2009 |
For the period from
June 22, 2007 (inception) to June 30, 2009 |
||||||||||||||||
|
Interest income
|
$697,040 | $85,990 | $1,786,924 | $255,063 | $3,774,183 | |||||||||||||||
|
Formation and operating
costs
|
108,221 | 119,554 | 230,576 | 278,824 | 1,227,509 | |||||||||||||||
|
Current acquisition
costs
|
—
|
16,267
|
—
|
16,267
|
16,267
|
|||||||||||||||
|
Write-off of deferred
acquisition costs related to terminated transaction
|
— | — | — | 49,520 | 1,636,006 | |||||||||||||||
|
Income before provision for
income taxes
|
588,819 | (49,831 | ) | 1,556,348 | (89,548 | ) | 894,401 | |||||||||||||
|
Provision (benefit) for income
taxes
|
229,158 | (18,302 | ) | 606,292 | (30,446 | ) | 328,317 | |||||||||||||
|
Net income (loss) for the
period
|
$359,661 | $(31,529 | ) | $950,056 | $(59,102 | ) | $566,084 | |||||||||||||
|
Weighted average number of
shares outstanding, basic and diluted
|
16,000,000 | 16,000,000 | 16,000,000 | 16,000,000 | 13,686,034 | |||||||||||||||
|
Net earnings per share, basic
and diluted
|
$0.02 | $— | $0.06 | $— | $0.04 | |||||||||||||||
See accompanying notes to financial
statements.
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Condensed Statement of Stockholders’
Equity
For the period from June 22,
2007 (inception) to June 30, 2009
| Common stock |
Additional
Paid-In Capital |
Retained
Earnings |
Total
Stockholders’ Equity |
|||||||||||||||||
| Shares | Amount | |||||||||||||||||||
|
Balance, June 22,
2007
|
— | $— | $— | $— | $— | |||||||||||||||
|
Issuance of Common Stock to
initial shareholders at $0.008 per share for 3,450,000 shares, of which
250,000 were cancelled in connection with the underwriters’ partial
exercise of the over allotment option
|
3,200,000 | 3,200 | 25,550 | — | 28,750 | |||||||||||||||
|
Proceeds from issuance of
warrants
|
— | — | 2,750,000 | — | 2,750,000 | |||||||||||||||
|
Sale of 12,800,000 units
through public offering net of underwriter’s discount and offering
expenses and including $40,363,965 of proceeds allocable to 4,266,239
shares of common stock subject to possible redemption
|
12,800,000 | 12,800 | 118,312,483 | — | 118,325,283 | |||||||||||||||
|
Proceeds subject to possible
redemption
|
— | — | (40,363,965 | ) | — | (40,363,965 | ) | |||||||||||||
|
Net income for the
period
|
— | — | — | 298,693 | 298,693 | |||||||||||||||
|
Balance, December 31,
2007
|
16,000,000 | 16,000 | 80,724,068 | 298,693 | 81,038,761 | |||||||||||||||
|
Net income for the
year
|
— | — | — | 326,493 | 326,493 | |||||||||||||||
|
Balance, December 31,
2008
|
16,000,000 | $16,000 | 80,724,068 | 625,186 | 81,365,254 | |||||||||||||||
|
Unaudited:
|
||||||||||||||||||||
|
Net loss for the
period
|
— | — | — | (59,102 | ) | (59,102 | ) | |||||||||||||
|
Balance, June 30,
2009
|
16,000,000 | $16,000 | $80,724,068 | $566,084 | $81,306,152 | |||||||||||||||
See accompanying notes to financial
statements.
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Unaudited Condensed Statements of
Cash Flows
|
For the six
months ended June 30, 2008 |
For the
six
months ended June 30, 2009 |
For the period from
June 22, 2007 (inception) to June 30, 2009 |
||||||||||
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
||||||||||||
|
Net income (loss)
|
$950,056 | $(59,102 | ) | $566,084 | ||||||||
|
Adjustments to reconcile net
income (loss) to net cash used in operating
activities:
|
||||||||||||
|
Depreciation
|
192 | 191 | 606 | |||||||||
|
Deferred income
taxes
|
(89,809 | ) | 454,715 | (256,810 | ) | |||||||
|
Interest earned on trust
fund
|
(2,017,483 | ) | (345,335 | ) | (3,736,362 | ) | ||||||
|
Changes in operating assets
and liabilities:
|
||||||||||||
|
Interest
receivable
|
235,315 | 90,389 | (25,974 | ) | ||||||||
|
Income taxes
receivable
|
— | (485,707 | ) | (485,707 | ) | |||||||
|
Prepaid expenses
|
46,310 | 16,085 | (17,993 | ) | ||||||||
|
Income and capital taxes
payable
|
37,194 | (224,554 | ) | — | ||||||||
|
Accrued expenses
|
(12,116 | ) | (49,009 | ) | 119,926 | |||||||
|
Net cash used in operating
activities
|
(850,341 | ) | (602,327 | ) | (3,836,230 | ) | ||||||
|
CASH FLOWS FROM INVESTING
ACTIVITIES
|
||||||||||||
|
Purchases of investments held
in Trust Fund
|
— | — | (125,278,000 | ) | ||||||||
|
Withdrawals from trust
fund
|
1,869,117 | 512,450 | 3,736,052 | |||||||||
|
Purchases of
equipment
|
— | — | (1,530 | ) | ||||||||
|
Net cash (used in) provided by
investing activities
|
1,869,117 | 512,450 | (121,543,478 | ) | ||||||||
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
||||||||||||
|
Proceeds from issuance of
common stock to initial stockholders
|
— | — | 28,750 | |||||||||
|
Proceeds from note payable to
initial stockholder
|
— | — | 368,169 | |||||||||
|
Repayment of note payable to
initial stockholder
|
— | — | (368,169 | ) | ||||||||
|
Proceeds from public
offering
|
— | — | 128,000,000 | |||||||||
|
Proceeds from issuance of
warrants in private placement
|
— | — | 2,750,000 | |||||||||
|
Payment of acquisition
costs
|
(549,123 | ) | — | — | ||||||||
|
Payment of registration
costs
|
(14,837 | ) | — | (5,386,717 | ) | |||||||
|
Net cash provided by (used in)
financing activities
|
(563,960 | ) | — | 125,392,033 | ||||||||
|
Net increase in cash and cash
equivalents
|
454,816 | (89,877 | ) | 12,325 | ||||||||
|
Cash and cash
equivalents
|
||||||||||||
|
Beginning of
period
|
67,753 | 102,202 | — | |||||||||
|
End of period
|
$522,569 | $12,325 | 12,325 | |||||||||
|
Supplemental disclosure of
non-cash financing activities
|
||||||||||||
|
Accrual of deferred
acquisition costs
|
$968,803 | $— | $— | |||||||||
|
Accrual of deferred
underwriting fees
|
$— | — | $4,288,000 | |||||||||
|
Supplemental disclosure of cash
flow information:
|
||||||||||||
|
Cash paid for income and
capital taxes
|
$658,907 | $225,100 | $1,414,801 | |||||||||
See accompanying notes to financial
statements.
China Holdings Acquisition Corp.
(a corporation in the
development stage)
Notes to Financial
Statements
Note 1 – Organization and Nature of
Business Operations
China Holdings Acquisition Corp.
(the “Company”) is a blank check company incorporated on June 22, 2007, for
the purpose of acquiring or acquiring control of one or more operating
businesses having their primary operations in Asia through a merger, capital
stock exchange, stock purchase, asset acquisition or other similar business
combination or contractual arrangements (a “Business Combination”). The Company
has focused on potential acquisition targets in the People’s Republic of China
(“China”) (a “Target Business”) since its initial public offering. All activity
from June 22, 2007 (inception) to June 30, 2009 is related to the
Company’s formation and capital raising activities.
The Company is considered to be a
development stage company and as such the financial statements presented herein
are presented in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 7.
The financial statements at
June 30, 2009 and for the periods from June 22, 2007 (inception) to
June 30, 2009, the three and six months ended June 30, 2008, and the
three and six months ended June 30, 2009 are unaudited. In the opinion of
management, all adjustments (consisting of normal adjustments) have been made
that are necessary to present fairly the financial position of the Company as of
June 30, 2009, the results of its operations and cash flows for the three
and six months ended June 30, 2008, the three and six months ended
June 30, 2009, and for the period from June 22, 2007 (inception)
through June 30, 2009. Management of the Company has reviewed subsequent
events through August 13, 2009. Operating results for the interim periods
presented are not necessarily indicative of the results to be expected for the
full year. The condensed balance sheet at December 31, 2008 has been
derived from the audited financial statements.
The financial statements and related
notes have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission (the “SEC”). Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the financial statements
and other information included in the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2008, as filed with the SEC.
The Company, after signing a
definitive agreement for a Business Combination, of which no assurance is given,
is obligated to submit such transaction for approval by a majority of the
holders of common stock of the Company sold as part of the units in our Offering
(the “Public Stockholders”). Public Stockholders that vote against such proposed
Business Combination and exercise their redemption rights are, under certain
conditions described below, entitled to convert their shares into a pro-rata
distribution from the trust account (the “Redemption Right”).
As a result of the Redemption Right,
$40,363,965 has been classified as common stock subject to possible redemption
on the accompanying balance sheet. The Company’s stockholders prior to the
Offering (the “Initial Stockholders”), have agreed to vote their 3,200,000
founding shares of common stock in accordance with the manner in which the
majority of the shares of common stock held by the Public Stockholders are voted
with respect to a Business Combination. In the event that a majority of the
outstanding shares of common stock voted by the Public Stockholders vote to
approve a Business Combination, and an amendment to our amended and restated
certificate of incorporation allowing our perpetual existence is approved, and
holders owning 33.33% or more of the outstanding common stock do not vote
against both the Business Combination and the Extended Period (as defined below)
and do not exercise their Redemption Rights, on a cumulative basis, the Business
Combination may then be consummated
.
If the Company does not execute a
letter of intent, agreement in principle or definitive agreement for a Business
Combination prior to 18 months from the date of the closing of the Offering, the
Company’s board will convene, adopt and recommend to their stockholders a plan
of dissolution and distribution and file a proxy statement with the SEC seeking
stockholder approval for such plan (see Note 10). If, however, a letter of
intent, agreement in principle or definitive agreement for a Business
Combination has been executed prior to 18 months from the date of the closing of
the Offering, the Company will seek the consummation of that Business
Combination by November 21, 2009. However, if the Company has entered into a
letter of intent, agreement in principle or definitive agreement within 18
months following the closing of the Offering and management anticipates that the
Company may not be able to consummate a Business Combination within the 24
months from the date of the closing of the Offering, the Company may seek to
extend the time period within which it may complete its Business Combination to
36 months, by calling a special (or annual) meeting of stockholders for the
purpose of soliciting their approval for such extension (the “Extended Period”).
If the Company receives
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Note 1 – Organization and Nature of
Business Operations (continued)
Public Stockholder approval for the
Extended Period and holders of 33.33% or more of the shares held by Public
Stockholders do not vote against the Extended Period and elect to redeem their
common stock in connection with the vote for the Extended Period, the Company
will then have an additional 12 months in which to complete the initial Business
Combination. If the Extended Period is approved, the Company will still be
required to seek Public Stockholder approval before completing a Business
Combination. In the event there is no Business Combination within the 24-month
deadline (if the Extended Period is not approved) described above (the “Target
Business Combination Period”), the Company will dissolve and distribute to its
Public Stockholders, in proportion to their respective equity interests, the
amount held in the trust account, and any remaining net assets, after the
distribution of the trust account. In the event of liquidation, the per share
value of the residual assets remaining available for distribution (including
trust account assets) may be less than the initial public offering price per
share in the Offering. The Company’s corporate existence will automatically
cease at the end of the 36-month period if the Company has not received
stockholder approval for an initial Business Combination. The financial
statements have been prepared assuming that the Company will continue as a going
concern.
Note 2 – Trust Account
As a result of the Offering and
related events, the Company’s trust account has received $125,278,000
(approximately $9.79 per unit), which includes $4,288,000 that will be paid to
the underwriters upon the consummation of a Business Combination pro-rata with
respect to those shares for which stockholders do not exercise their Redemption
Rights.
The funds in the trust account are
invested in permitted United States government securities in the JP Morgan U.S.
Government Money Market Fund, Institutional share class (ticker: UGXX). Up to an
aggregate of $3,200,000 of after-tax interest income on the balance of the trust
account was permitted to be released to the Company to fund working capital, due
diligence and general corporate requirements of which approximately $2,320,000
had been released through June 30, 2009.
The Company adopted SFAS
No. 157 on January 1, 2008, delaying, as permitted, application for
non-financial assets and non-financial liabilities. SFAS No. 157
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. SFAS No. 157 establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value
into three levels, and requires that assets and liabilities carried at fair
value are classified and disclosed in one of the following three categories:
Level 1:
quoted prices (unadjusted) in active markets for an identical asset or liability
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 the asset or liability are only used when there is
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
No. 157, the Company determines the level in the fair value hierarchy
within which each fair value measurement falls in its entirety, based on the
lowest level input that is significant to the fair value measurement in its
entirety. In determining the appropriate levels, the Company performs an
analysis of the assets and liabilities that are subject to SFAS No. 157 at
each reporting period end.
The money market funds in which the
funds in trust have been invested, as described above, is measured and recorded
at fair value on the Company’s balance sheet on a recurring basis. The following
table presents the money market funds - held in trust at its level within the
fair value hierarchy at December 31, 2008 and June 30, 2009.
| Total | Level 1 | Level 2 | Level 3 | |||||||||
|
Investment held in Trust,
December 31, 2008
|
$ | 125,445,425 | $ | 125,445,425 | $ | — | $ | — | ||||
|
Investment held in Trust, June
30, 2009
|
$ | 125,278,310 | $ | 125,278,310 | $ | — | $ | — | ||||
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Note 3 – Private Warrants and
Offering
The Private Warrants (see Note 8)
were issued on November 15, 2007, for net proceeds of $2,750,000, which
were subsequently deposited into the trust account.
Our Offering of 12,000,000 units was
declared effective on November 15, 2007. Each unit consists of one share of
the Company’s common stock and one Public Warrant (see Note 8) and was sold to
the public at the price of $10.00 per unit. The Offering was consummated on
November 21, 2007, and we raised net proceeds of $110,900,000, of which
$110,800,000 were deposited into our trust account.
On December 14, 2007, the
underwriters for our Offering exercised their over-allotment option to the
extent of 800,000 units, resulting in net proceeds of $7,440,000, which were
deposited into our trust account.
Note 4 – Summary of Significant
Accounting Policies
Cash and cash equivalents -
Cash and cash equivalents are deposits with financial institutions
as well as short-term money market instruments with maturities of three months
or less when purchased.
Concentration of Credit
Risk
-
Financial instruments
that potentially subject the Company to a significant concentration of credit
risk consist primarily of cash and cash equivalents. The Company may maintain
deposits in federally insured financial institutions in excess of federally
insured limits. However, management believes the Company is not exposed to
significant credit risk due to the financial position of the depository
institutions in which those deposits are held.
Net Earnings per Common
Share
-
Net earnings per share is computed based on the weighted average number of
shares of common stock outstanding for the period.
Basic net earnings per share
excludes dilution and is computed by dividing earnings available to common
stockholders by the weighted average common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Since the 15,550,000 outstanding warrants are not
yet exercisable, they have been excluded from the Company’s computation of
diluted earnings per share for the three and six months ended June 30,
2008, the three and six months ended June 30, 2009, and the period from
June 22, 2007 (inception) to June 30, 2009. Therefore, basic and
diluted earnings per share are the same for the periods presented.
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 and disclosure of contingent 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.
Income Taxes -
Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax basis of assets and
liabilities that will result in future taxable or deductible amounts and are
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred income tax assets to the amount
expected to be realized. Realization of the future tax benefits is dependent
upon many factors, including the Company’s ability to generate taxable income
within the loss carry-forward period, which runs through 2028.
In June 2006, the Financial
Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes,” an interpretation of FASB
Statement No. 109 (“FIN 48”), which provides criteria for the recognition,
measurement, presentation and disclosure of uncertain tax positions. A tax
benefit from an uncertain position may be recognized only if it is “more
likely than not” that the position is sustainable based on its technical merits.
The Company has applied the provisions if FIN 48 since inception.
The Company recognizes interest and
penalties related to uncertain tax positions in income tax expense. There were
no adjustments for uncertain tax positions in the current year. All tax years
remain open to examination by the major tax jurisdiction to which we are
subject.
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Note 4 – Summary of Significant
Accounting Policies (continued)
Recently Issued Accounting
Pronouncements
- In December 2007, the FASB issued SFAS
No. 141(R), Business Combinations (“SFAS 141R”), which establishes
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree. SFAS 141R
also provides guidance for recognizing and measuring the goodwill acquired in
the business combination and determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. SFAS 141R applies to us with respect to any
acquisitions that we complete and require any related acquisition costs to be
expensed as incurred.
In December 2007, the FASB issued
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements
an amendment of ARB No. 51 (“SFAS 160”), which establishes accounting and
reporting standards for the ownership interests in subsidiaries held by parties
other than the parent and for the deconsolidation of a subsidiary. SFAS 160
also establishes disclosure requirements that clearly identify and distinguish
between the interest of the parent and the interests of the non-controlling
owners. SFAS 160 is effective for financial statements issued for fiscal years
beginning after December 15, 2008. SFAS 160 will apply to us with
respect to any acquisitions, that we complete on or after January 1, 2009,
which will result in a noncontrolling interest.
In June 2008, the FASB ratified
Emerging Issues Task Force (EITF) Issue No. 07-5, “Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF
07-5”). EITF 07-5 mandates a two-step process for evaluating whether an
equity-linked financial instrument or embedded feature is indexed to the
entity’s own stock. It is effective for fiscal years beginning after
December 15, 2008. Any outstanding instrument at the date of adoption will
require a retrospective application of the accounting through a cumulative
effect adjustment to retained earnings upon adoption. The Company has adopted
EITF 07-5 and has determined that there is no impact on the Company’s
financial statements.
The Company 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.
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Note 5 – Income Taxes
The Company has recorded a deferred
tax asset for the tax effect of temporary differences of $711,525 and $256,810
at December 31, 2008 and June 30, 2009, respectively. In
recognition of the Company’s twenty-year carry-forward period in the event of a
Business Combination, and its carry-back opportunities in the event of
liquidation, the Company has not recorded a valuation allowance on the
accompanying balance sheets. The temporary differences creating the Company’s
deferred tax assets relate to currently non-deductible formation and operating
costs. The effective tax rate of 39% for the three and six months ended
June 30, 2008 differs from the Federal statutory rate of 34% due to the
effect of state income taxes of 5%. The effective tax rate of 34% for the three
and six months ended June 30, 2009 equals the Federal statutory rate of
34%. The effective tax rate of 37% for the period from June 22, 2007
(inception) to June 30, 2009 differs from the Federal statutory rate of 34%
due to the effect of state income taxes of 3%.
The Company’s termination of the
Bright World acquisition (see Note 9) on April 3, 2009 results in the Company
qualifying for the deduction of $1,636,006 of expenses on its 2009 U.S. Federal
Income Tax return. Accordingly, the Company has reversed a substantial portion
of its deferred tax asset and realized it as income taxes receivable.
During the year ended
December 31, 2008, the Company’s state tax computation based upon income
fell below the minimum level required by an alternative, capital-based state tax
computation. Consequently, the Company ultimately did not record a state tax
provision based upon income for 2008 and, instead, recorded a capital-based
state tax provision which was included in the income statement caption
“Formation and operating costs” in the Company’s Annual Report filed on Form
10-K.
The components of income tax expense
(benefit) are:
|
For the three
months ended June 30, 2008 |
For the three
months ended June 30, 2009 |
For the six
months ended June 30, 2008 |
For the six
months ended June 30, 2009 |
For the period
from June 22, 2007 (inception) to June 30, 2009 |
||||||||||||||||
|
Currently
payable:
|
||||||||||||||||||||
|
Federal
|
$ | 219,313 | $ | (533,806 | ) | $ | 562,082 | $ | (485,161 | ) | $ | 552,089 | ||||||||
|
State
|
52,277 | — | 134,019 | — | 45,116 | |||||||||||||||
|
Deferred:
|
||||||||||||||||||||
|
Federal
|
(34,262 | ) | 515,504 | (72,516 | ) | 454,715 | (260,467 | ) | ||||||||||||
|
State
|
(8,170 | ) | — | (17,293 | ) | — | (8,421 | ) | ||||||||||||
|
Total income tax expense
(benefit)
|
$ | 229,158 | $ | (18,302 | ) | $ | 606,292 | $ | (30,446 | ) | $ | 328,317 | ||||||||
Note 6 – Commitments
Administrative Fees
The Company has agreed to pay an
affiliate of a stockholder $10,000 per month for secretarial and administrative
services. The arrangement commenced on November 16, 2007 and terminates
upon the earlier of (i) the completion of the Company’s Business
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Note 6 – Commitments (continued)
Combination, or (ii) the
Company’s dissolution. The Company recognized: $30,000 of expense under this
arrangement for each of the three months ended June 30, 2008 and
June 30, 2009; $60,000 of expense for each of the six month periods ended
June 30, 2008 and June 30, 2009; and $195,000 of expense for the
period from June 22, 2007 (inception) to June 30, 2009. Commencing
June 1, 2009, the Company begun deferring its monthly payment for such
services unless funds were available for such payment.
Underwriting Agreement
In connection with the Offering, the
Company entered into an underwriting agreement (the “Underwriting Agreement”)
with the underwriters in the Offering.
Pursuant to the Underwriting
Agreement, the Company was obligated to Citi (the “Representative”), the
representative of the underwriters, for certain fees and expenses related to the
Offering, including underwriting discounts of $8,960,000. The Company paid
$4,672,000 of the underwriting discounts upon closing of the Offering. The
Company and the Representatives have agreed that payment of the additional
portion of the underwriting discount of $4,288,000 will be deferred until
consummation of the Business Combination. Accordingly, a deferred underwriting
fee comprised of the deferred portion of the underwriting discount is included
on the accompanying balance sheets at December 31, 2008 and June 30,
2009.
Initial Stockholders
Pursuant to letter agreements with
the Company and the Representatives in the Offering and the warrant private
placement offering described below, the Initial Stockholders have waived their
right to receive distributions with respect to their founding shares and the
shares underlying the Private Warrants (but not shares purchased in the Offering
or in the secondary market) in the event of the Company’s liquidation.
Note 7 – Capital Stock
Preferred Stock
The Company is authorized to issue
1,000,000 shares of preferred stock, par value $0.0001 per share, with such
designations, voting and other rights and preferences as may be determined from
time to time by the Board of Directors. No shares of preferred stock were
outstanding as of December 31, 2008, nor as of June 30, 2009.
Common Stock
On November 15, 2007, the
Company’s Board of Directors authorized a stock dividend of 0.2 shares for each
outstanding share of common stock. All references in the accompanying financial
statements to the number of shares of common stock have been retroactively
restated to reflect this transaction.
The Company is authorized to issue
40,000,000 shares of common stock, par value $0.001 per share, with such
designations, voting and other rights and preferences as may be determined from
time to time by the Board of Directors. The Company intends to authorize
additional shares prior to the closing of the proposed acquisition described in
Note 10.
Note 8 – Warrants
Public Warrants
Each warrant sold in the Offering (a
“Public Warrant”) is exercisable for one share of common stock. Except as set
forth below, the Public Warrants entitle the holder to purchase shares at $7.50
per share, subject to adjustment in the event of stock dividends and splits,
reclassifications, combinations and similar events for a period commencing on
the later of: (a) completion of the Business Combination and (b) one
year from the closing date of the Offering of the Company’s securities, and
ending November 16, 2012. The Company has the ability to redeem the Public
Warrants, in whole or in part, at a price of $.01 per Public Warrant, at any
time after the Public Warrants become exercisable, upon a minimum of 30 days’
prior written notice of redemption, and if, and only if, the last sale price of
the Company’s common stock equals or exceeds $14.25 per share, for any 20
trading days within a 30 trading day period ending three business days before
the Company sent the notice of redemption. If the Company dissolves before the
consummation of a Business Combination, there will be no distribution from the
trust account with respect to such Public Warrants, which will expire worthless.
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Note 8 – Warrants (continued)
Private Warrants
Prior to the closing of the
Offering, the Company sold to certain of its Initial Stockholders 2,750,000
warrants (“Private Warrants”) in a private placement, at a price of $1.00 per
Private Warrant, for an aggregate of $2,750,000.
The Private Warrants are identical
to the Public Warrants and may not be sold or transferred, except in limited
circumstances, until after the consummation of a Business Combination. If the
Company dissolves before the consummation of a Business Combination, there will
be no distribution from the trust account with respect to such Private Warrants,
which will expire worthless.
As the proceeds from the exercise of
the Public Warrants and Private Warrants will not be received until after the
completion of a Business Combination, the expected proceeds from exercise will
not have any effect on the Company’s financial condition or results of
operations prior to a Business Combination.
Reserve Common Stock
At December 31, 2008, and
June 30, 2009, 15,550,000 shares of common stock were reserved for issuance
upon exercise of Public Warrants and the Private Warrants.
Registration Rights – Warrants
In accordance with the Warrant
Agreement related to the Public Warrants and the registration rights agreement
associated with the Private Warrants (collectively the Public Warrants and
Private Warrants are the “Warrants”), the Company will only be required to use
its best efforts to register the Warrants and the shares of Common Stock
issuable upon exercise of the Warrants and once effective to use its best
efforts to maintain the effectiveness of such registration statement. 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. However, with regards to the
Private Warrants, the Company may satisfy its obligation by delivering
unregistered shares of common stock. Additionally, in the event that a
registration statement is not effective at the time of exercise, the holders of
such Warrants shall not be entitled to exercise. 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 a Warrant exercise. Consequently, the
Warrants may expire unexercised, unredeemed and worthless. The holders of
Warrants do not have the rights or privileges of holders of the Company’s common
stock or any voting rights until such holders exercise their respective warrants
and receive shares of the Company’s common stock.
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Note 9 – Termination of Bright World
Acquisition
As previously announced on a Form
8-K filed on April 3, 2009, the Company announced the withdrawal of our
pre-conditional voluntary cash offer (the “ Pre-Conditional Offer”) to acquire
all the issued shares of Bright World Precision Machinery Limited (“Bright
World”).
As previously announced on a Form
8-K filed on July 21, 2008 and on a Form 8-K filed on October 24, 2008, the
Company entered into a definitive Undertaking Agreement on July 20, 2008, which
was subsequently amended on October 24, 2008 (the “Undertaking Agreement”), with
World Sharehold Limited (the “Selling Shareholder”), the majority shareholder of
Bright World, Wang Wei Yao and Shao Jian Jun (collectively, with World
Sharehold, the “Sellers”), pursuant to which the Company agreed to make a
voluntary conditional cash offer, and the Sellers agreed to accept the voluntary
conditional cash offer in respect of all of the Bright World shares held by
them, upon satisfaction of certain pre-conditions. One pre-condition was that,
after July 20, 2008, no change occurred in the financial condition, operations,
results of operations or prospects of Bright World, World Precise Machinery
(China) Co., Ltd (“WPM”), Bright World Heavy Machinery Tools (China) Co., Ltd
(“BWHM”), Shanghai Shangduan Stamping Machines Co., Ltd (“SSS”) or any of their
subsidiaries (Bright World, WPM, BWHM, SSS and their subsidiaries herein
collectively referred to as the “Group”) that caused, among other things, the
Group’s profit after tax for the full year period ending December 31, 2008 to
decrease 10% or more as compared to the Group’s profit after tax for the
corresponding full year period ended December 31, 2007 (the “MAC
Pre-Condition”).
On March 31, 2009, the board of
directors of Bright World announced that, subsequent to the February 20, 2009
release of Bright World’s announcement of its unaudited results for the year
ended December 31, 2008 (“FY2008 Financial Statements”) and response to queries
on February 28, 2009, from the Singapore Exchange Securities Trading Limited
with respect to the FY2008 Financial Statements, Bright World’s auditors made
certain adjustments to the FY2008 Financial Statements to increase the allowance
for doubtful debts (the “Adjustment to the Results Announcement”). The
Adjustment to the Results Announcement states that the Group’s profit after tax
for the full year ended December 31, 2008 decreased by 11.3% to approximately
RMB 127.9 million as compared to approximately RMB 144.3 million for the
corresponding full year period ended December 31, 2007.
On April 1, 2009, the Company
delivered a letter to the Singapore Securities Industry Council (the “SIC”) in
which the Company (x) stated that, in light of the Adjustment to the Results
Announcement, the MAC Pre-Condition had not been satisfied, (y) stated that we
were entitled to withdraw the Pre-Conditional Offer, in accordance with the
terms of the Undertaking Agreement, and (z) sought confirmation from the SIC
that it had no objections to us withdrawing the Pre-Conditional Offer.
On April 2, 2009, the SIC confirmed
that it had no objections to the Company withdrawing the Pre-Conditional Offer,
and the board of directors of the Company approved the withdrawal of the
Pre-Conditional Offer.
On April 3, 2009, the Company issued
a press release announcing the withdrawal of the Pre-Conditional Offer.
Accordingly, the Company has written-off $1,636,006 of aggregate acquisition
costs through March 31, 2009 due to the termination of the acquisition of
Bright World.
On April 29, 2009, the Company
terminated the Undertaking Agreement effective as of April 3, 2009.
Note 10 – Potential Business
Combination and Subsequent Event
On May 11, 2009, the Company
entered into a letter of intent for a potential Business Combination. As a
result, the Company has met the condition under its amended and restated
certificate of incorporation that permits it until November 21, 2009 to
complete an initial Business Combination meeting the criteria set forth therein.
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Note 10 – Potential Business
Combination and Subsequent Event (continued)
On August 7, 2009, the Company
(a/k/a the “Parent” or “China Holdings”), China Ceramics Co., Ltd., a British
Virgin Islands company and a wholly-owned subsidiary of Parent (“Purchaser”),
Jinjiang Hengda Ceramics Co., Ltd., a Chinese enterprise (“Hengda,” or
“Target”), Success Winner Limited (“Success”), a British Virgin Islands company
and the owner of 100% of the equity interests of the Stand Best Creation
Limited, a Hong Kong company which owns 100% of the equity interest of Hengda
(“Stand Best”), and Mr. Wong Kung Tok (the “Seller”), the owner of 100% of the
equity interests of the Success, entered into a Stock Purchase Agreement (the
“Agreement”).
Acquisition of Target; Acquisition
Consideration
Upon the closing of the transactions
contemplated in the Agreement, China Holdings will acquire 100% of the issued
and outstanding shares of Success, which owns 100% of the equity interest of
Stand Best, which owns 100% of the equity interests of Hengda, from Success’
sole shareholder, Mr. Wong Kung Tok, in exchange for an aggregate of 5,743,000
shares of the common stock, par value $0.001 per share (“Parent Common Stock”).
We refer to this stock purchase as the “acquisition.” In addition, 8,185,763
shares of the Parent Common Stock will be placed in escrow (the “Contingent
Shares”) and released to the Seller in the event the targets described below are
achieved:
| • |
In the
event that Hengda achieves net earnings before taxes (excluding (A)
expenses incurred for the acquisition, (B) the effect on financial results
of any Contingent Shares released from escrow and (C) earnings derived
from any acquisition of a business or assets made by Hengda or Stand Best
after the closing date of the acquisition other than earnings from Jiangxi
Hengdali Ceramics and Construction Material Limited or any additional
assets acquired in connection with Jiangxi Hengdali Ceramics) for the
fiscal year ending December 31, 2009 of equal to or greater than
$28,000,000, then an additional 0.3284 of a share of Parent Common Stock
for each dollar of net earnings before taxes over $28,000,000 for the
fiscal year ending December 31, 2009 will be released to the Seller, up to
a maximum of 1,214,127 shares of Parent Common Stock.
|
| • |
In the
event that Hengda achieves net earnings after taxes (excluding (A) the
effect on financial results of any Contingent Shares released from escrow
and (B) earnings derived from any acquisition of a business or assets made
by Hengda or Stand Best after the Closing Date other than earnings from
Jiangxi Hengdali Ceramics and Construction Material Limited or any
additional assets acquired in connection with Jiangxi Hengdali Ceramics)
for the fiscal year ending December 31, 2010 of equal to or greater than
$23,772,993, then an additional 0.2359 of a share of Parent Common Stock
for each dollar of net earnings after taxes over $23,772,993 for the
fiscal year ending December 31, 2010 will be released to the Seller, up to
a maximum of 1,794,800 shares of Parent Common Stock.
|
| • |
In the
event that Hengda achieves net earnings after taxes (excluding (A) the
effect on financial results of any Contingent Shares released from escrow
and (B) earnings derived from any acquisition of a business or assets made
by Hengda or Stand Best after the Closing Date other than earnings from
Jiangxi Hengdali Ceramics and Construction Material Limited or any
additional assets acquired in connection with Jiangxi Hengdali Ceramics)
for the fiscal year ending December 31, 2011 of equal to or greater than
$31,380,292, then an additional 0.1790 of a share of Parent Common Stock
for each dollar of net earnings after taxes over $31,380,292 for the
fiscal year ending December 31, 2011 will be released to the Seller, up to
a maximum of 2,176,836 shares of Parent Common Stock.
|
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Note 10 – Potential Business
Combination and Subsequent Event (continued)
| • |
In the
event that the closing price of Parent Common Stock is at or above $20.00
per share for any twenty trading days in a 30 trading day period prior to
April 30, 2012, then the Parent shall issue an additional 2,000,000 shares
of Parent Common Stock to the Seller.
|
| • |
In the
event that the closing price of Parent Common Stock is at or above $25.00
per share for any twenty trading days in a 30 trading day period prior to
April 30, 2012, then the Parent shall issue an additional 1,000,000 shares
of Parent Common Stock to the Seller.
|
The Seller will place 574,000 of the
shares issued to it in escrow. Such shares may be used to pay for the
indemnification obligations described below.
Representations and Warranties
In the Agreement, Hengda, Success
and the Seller (collectively, the “Warrantors”) make certain representations and
warranties (with certain exceptions set forth in the disclosure schedule to the
Agreement) relating to, among other things: (a) capital structure; (b) proper
corporate organization and similar corporate matters; (c) authorization,
execution, delivery and enforceability of the Agreement and other transaction
documents; (d) required consents; (e) licenses and permits; (f) taxes and
audits; (g) financial information; (h) absence of certain changes or events; (i)
absence of undisclosed liabilities; (j) title to assets and properties; (k)
material contracts; and (l) compliance with laws, including those relating to
the PRC, foreign corrupt practices and money laundering.
In the Agreement, the Seller makes
certain representations and warranties (with certain exceptions set forth in the
disclosure schedule to the Agreement) relating to, among other things: (a) title
to shares; and (b) certain securities law matters.
In the Agreement, China Holdings and
Purchaser make certain representations and warranties relating to, among other
things: (a) proper corporate organization and similar corporate matters; (b)
authorization, execution, delivery and enforceability of the Agreement and other
transaction documents; (c) capital structure; and (d) validity of share
issuance.
Conduct Prior to Closing; Covenants
The Warrantors have agreed to use
their best efforts to cause Hengda and its subsidiaries and affiliated entities
to continue to operate its business in the ordinary course prior to the closing
(with certain exceptions) and not to take certain specified actions without the
prior written consent of China Holdings.
The Agreement also contains
covenants of Hengda, Success and the Seller, including covenants providing for:
| • |
Hengda
and Success providing access to its books and records to China Holdings,
and providing information relating to Hengda’s business as China Holdings,
its counsel and other representations may request;
|
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Note 10 – Potential Business
Combination and Subsequent Event (continued)
| • |
Hengda,
Success, Seller, China Holdings and Purchaser agree not to, directly or
indirectly, solicit, encourage or enter into any negotiation or
arrangement with any party. Other than the other parties to the Agreement
concerning the sale of all of any part of Hengda’s business or the capital
stock or other securities of Success or any of its subsidiaries that takes
the form of a sale of stock or assets, merger, consolidation or any joint
venture or partnership;
|
| • |
China
Holdings giving the Seller piggy-back registration rights relating to the
shares of Parent Common Stock issued in connection with the acquisition.
|
| • |
Seller
and each of the other persons receiving stock consideration in connection
with the acquisition will each enter into a lock-up agreement pursuant to
which the shares of Parent Common Stock will be locked-up for a period of
twelve months, except with respect to 655,000 shares of Parent Common
Stock, which will be locked-up for a period of six months.
|
Conditions to Closing
General Conditions
Consummation of the Agreement and
the acquisition is conditioned on (a) no law or court order prohibiting or
limiting consummation of the acquisition or materially limiting China Holdings’
right to control the Target; (b) holders of a majority of China Holdings’ common
stock approving the business combination in accordance with its Articles of
Incorporation, with holders of less than 33.33% of China Holdings’ public shares
of common stock voting against the acquisition and properly exercising their
rights to convert such public shares of common stock to cash; (c) the absence of
any proceeding pending or threatened to enjoin or otherwise restrict the
acquisition.
Warrantors’ Conditions to Closing
The obligations of Hengda, Success
and Seller to consummate the transactions contemplated by the Agreement, in
addition to the conditions described above, are conditioned upon the
representations and warranties of China Holdings and Purchaser being true on and
as of the closing date of the Agreement, and China Holdings and Purchaser
complying with all required covenants in the Agreement.
China Holdings’ and Purchaser’s
Conditions to Closing
The obligations of China Holdings to
consummate the transactions contemplated by the Agreement, in addition to the
conditions described above in the first paragraph of this section, are
conditioned upon each of the following, among other things:
| • |
the
representations and warranties of the Warrantors shall be true on and as
of the closing date of the Agreement, and each of the Warrantors has
complied with all required covenants in the Agreement;
|
| • |
China
Holdings shall have received legal opinions from counsel to the Target;
|
| • |
receipt
by the Warrantors of certain third party consents; and
|
| • |
there
not being any material adverse change with respect to the Target;
|
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Note 10 – Potential Business
Combination and Subsequent Event (continued)
If permitted under applicable law,
either China Holdings or Purchaser on the one hand or Hengda, Seller or Success
on the other hand may waive any inaccuracies in the representations and
warranties made to such party in the Agreement and may waive compliance with any
agreements or conditions for the benefit of itself or such party contained in
the Agreement.
Termination
The Agreement may be terminated
and/or abandoned at any time prior to the closing, whether before or after
approval of the proposals being presented to China Holdings’ shareholders, by:
| • |
either
China Holdings or any Warrantor, if the closing has not occurred by
November 21, 2009;
|
| • |
Any
Warrantor, if there has been a breach by China Holdings of any covenant,
representations or warranties contained in the Agreement, and in any event
if such breach is subject to cure and China Holdings has not cured such
breach within five days after written notice of intent to terminate from
any Warrantor; or
|
| • |
China
Holdings or Purchaser, if there has been a breach by any of the Warrantors
of any covenant, representations or warranties contained in the Agreement,
and in any event if such breach is subject to cure and China Holdings or
Purchaser has not cured such breach within five days after written notice
of intent to terminate from any Warrantor.
|
Indemnification
The Warrantors have agreed, jointly
and severally, to indemnify China Holdings from any damages arising from: (a)
any breach of any representation, warranty or covenant made by the Warrantors or
(b) the failure to pay any third party claims for the period of time prior to
the acquisition. China Holdings and purchaser have agreed to indemnify the
Seller from any damages arising from (a) any breach of any representation,
warranty or covenant made by Parent or the Purchaser and (b) actions or
inactions of the Purchaser with regard to the business of Hengda occurring after
the closing date of the acquisition. The indemnification obligations are subject
to a $100,000 floor and are capped at $5,740,000.
Board of Directors and Stockholders
China Holdings Acquisition Corp.
Wilmington, Delaware
We have audited the accompanying
balance sheets of China Holdings Acquisition Corp.. (a corporation in the
development stage) as of December 31, 2007 and December 31, 2008 and
the related statements of income, stockholders’ equity and cash flows for the
periods from June 22, 2007 (inception) to December 31, 2007, for the
year ended December 31, 2008, and for the period from June 22, 2007
(inception) to December 31, 2008. 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 standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provides a reasonable basis for our
opinion.
In our opinion, the financial
statements referred to above present fairly, in all material respects, the
financial position of China Holdings Acquisition Corp. as of December 31,
2007 and December 31, 2008 and the results of its operations and its cash
flows for the periods from June 22, 2007 (inception) to December 31,
2007, for the year ended December 31, 2008, and for the period from
June 22, 2007 (inception) to December 31, 2008 in conformity with
United States generally accepted accounting principles.
We were not engaged to examine
management’s assessment of the effectiveness of China Holdings Acquisition
Corp.’s internal control over financial reporting as of December 31, 2008,
included in “Management’s Report on Internal Control Over Financial Reporting”
and, accordingly, we do not express an opinion thereon.
The accompanying financial
statements have been prepared assuming that China Holdings Acquisition Corp.
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company will face a mandatory liquidation on November 21,
2009 if a business combination is not consummated, which raises substantial
doubt about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/
McGladrey & Pullen, LLP
McGLADREY & PULLEN, LLP
April 15, 2009
New York, New York
(a corporation in the development
stage)
Balance Sheets
See accompanying notes to financial
statements.
(a corporation in the development
stage)
Statements of Income
|
For the period from
June 22, 2007 (inception) to December 31, 2007 |
For the
year ended December 31, 2008 |
For the period from
June 22, 2007 (inception) to December 31, 2008 |
|||||||
|
Interest income
|
$ | 601,543 | $ | 2,917,577 | $ | 3,519,120 | |||
|
Formation and operating costs
(Note 7)
|
112,283 | 836,402 | 948,685 | ||||||
|
Write-off of deferred
acquisition costs related to terminated transaction
|
— | 1,586,486 | 1,586,486 | ||||||
|
Income before provision for
income taxes
|
489,260 | 494,689 | 983,949 | ||||||
|
Provision for income
taxes
|
190,567 | 168,196 | 358,763 | ||||||
|
Net income for the
period
|
$ | 298,693 | $ | 326,493 | $ | 625,186 | |||
|
Weighted average number of
shares outstanding, basic and diluted
|
6,196,450 | 16,000,000 | 12,903,178 | ||||||
|
Net earnings per share, basic
and diluted
|
$ | 0.05 | $ | 0.02 | $ | 0.05 | |||
See accompanying notes to financial
statements.
(a corporation in the development
stage)
Statement of Stockholders’ Equity
For the period from June 22,
2007 (inception) to December 31, 2008
| Common stock |
Additional
Paid-In Capital |
Retained
Earnings |
Total
Stockholders’ Equity |
|||||||||||||
| Shares | Amount | |||||||||||||||
|
Balance, June 22,
2007
|
— | $ | — | $ | — | $ | — | $ | — | |||||||
|
Issuance of Common Stock to
initial shareholders at $0.008 per share for 3,450,000 shares, of which
250,000 were cancelled in connection with the underwriters’ partial
exercise of the over allotment option
|
3,200,000 | 3,200 | 25,550 | — | 28,750 | |||||||||||
|
Proceeds from issuance of
warrants
|
— | — | 2,750,000 | — | 2,750,000 | |||||||||||
|
Sale of 12,800,000 units
through public offering net of underwriter’s discount and offering
expenses and including $40,363,965 of proceeds allocable to 4,266,239
shares of common stock subject to possible redemption
|
12,800,000 | 12,800 | 118,312,483 | — | 118,325,283 | |||||||||||
|
Proceeds subject to possible
redemption
|
— | — | (40,363,965 | ) | — | (40,363,965 | ) | |||||||||
|
Net income for the
period
|
— | — | — | 298,693 | 298,693 | |||||||||||
|
Balance, December 31,
2007
|
16,000,000 | 16,000 | 80,724,068 | 298,693 | 81,038,761 | |||||||||||
|
Net income for the
year
|
— | — | — | 326,493 | 326,493 | |||||||||||
|
Balance, December 31,
2008
|
16,000,000 | $ | 16,000 | 80,724,068 | $ | 625,186 | $ | 81,365,254 | ||||||||
See accompanying notes to financial
statements.
(a corporation in the development
stage)
Statements of Cash Flows
See accompanying notes to financial
statements.
(a corporation in the development
stage)
Notes to Financial Statements
Note 1 – Organization and Nature of
Business Operations
China Holdings Acquisition Corp.
(the “Company”) is a blank check company incorporated on June 22, 2007, for
the purpose of acquiring or acquiring control of one or more operating
businesses having their primary operations in Asia through a merger, capital
stock exchange, stock purchase, asset acquisition or other similar business
combination or contractual arrangements. The Company has focused on potential
acquisition targets in the People’s Republic of China (“China”) (a “Target
Business”) since its initial public offering (the “Offering” - see Note 2). All
activity from June 22, 2007 (inception) to December 31, 2008 is
related to the Company’s formation and capital raising activities.
The Company is considered to be a
development stage company and as such the financial statements presented herein
are presented in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 7.
The Company, after signing a
definitive agreement for a Business Combination, of which no assurance is given,
is obligated to submit such transaction for approval by a majority of the
holders of common stock of the Company sold as part of the units in our Offering
(the “Public Stockholders”). Public Stockholders that vote against such proposed
business combination and exercise their redemption rights are, under certain
conditions described below, entitled to convert their shares into a pro-rata
distribution from the trust account (the “Redemption Right”).
As a result of the Redemption Right,
$40,363,965 has been classified as common stock subject to possible redemption
on the accompanying balance sheet. The Company’s stockholders prior to the
Offering (the “Initial Stockholders”), have agreed to vote their 3,200,000
founding shares of common stock in accordance with the manner in which the
majority of the shares of common stock held by the Public Stockholders are voted
with respect to a business combination. In the event that a majority of the
outstanding shares of common stock voted by the Public Stockholders vote to
approve a business combination, and an amendment to our amended and restated
certificate of incorporation allowing our perpetual existence is approved, and
holders owning 33.33% or more of the outstanding common stock do not vote
against both the business combination and the Extended Period (as defined below)
and do not exercise their Redemption Rights, on a cumulative basis, the business
combination may then be consummated
.
If the Company does not execute a
letter of intent, agreement in principle or definitive agreement for a Business
Combination prior to 18 months from the date of the closing of the Offering, the
Company’s board will convene, adopt and recommend to their stockholders a plan
of dissolution and distribution and file a proxy statement with the SEC seeking
stockholder approval for such plan. If, however, a letter of intent, agreement
in principle or definitive agreement for a Business Combination has been
executed prior to 18 months from the date of the closing of the Offering, the
Company will seek the consummation of that Business Combination by November 21,
2009. However, if the Company has entered into a letter of intent, agreement in
principle or definitive agreement within 18 months following the closing of the
Offering and management anticipates that the Company may not be able to
consummate a Business Combination within the 24 months from the date of the
closing of the Offering, the Company may seek to extend the time period within
which it may complete its Business Combination to 36 months, by calling a
special (or annual) meeting of stockholders for the purpose of soliciting their
approval for such extension (the “Extended Period”). If the Company receives
Public Stockholder approval for the Extended Period and holders of 33.33% or
more of the shares held by Public Stockholders do not vote against the Extended
Period and elect to redeem their common stock in connection with the vote for
the Extended Period, the Company will then have an additional 12 months in which
to complete the initial Business Combination. If the Extended Period is
approved, the Company will still be required to seek Public Stockholder approval
before completing a Business Combination. In the event there is no Business
Combination within the 24-month deadline (if the Extended Period is not
approved) described above (the “Target Business Combination Period”), the
Company will dissolve and distribute to its Public Stockholders, in proportion
to their respective equity interests, the amount held in the Trust Account, and
any remaining net assets, after the distribution of the Trust Account. In the
event of liquidation, the per share value of the residual assets remaining
available for distribution (including Trust Account assets) may be less than the
initial public offering price per share in the Offering. The Company’s corporate
existence will automatically cease at the end of the 36-month period if the
Company has not received stockholder approval for an initial Business
Combination.
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Note 2 – Trust Account
As a result of the Offering and
related events, the Company’s trust account has received $125,278,000
(approximately $9.79 per unit), which includes $4,288,000 that will be paid to
the underwriters upon the consummation of a Business Combination pro-rata with
respect to those shares for which stockholders do not exercise their Redemption
Rights.
The funds in the trust account are
invested in permitted United States government securities in the JP Morgan U.S.
Government Money Market Fund, Agency share class (ticker: OGAXX). Up to an
aggregate of $3,200,000 of after-tax interest income on the balance of the trust
account may be released to the Company to fund working capital, due diligence
and general corporate requirements.
The Company adopted SFAS
No. 157 on January 1, 2008, delaying, as permitted, application for
non-financial assets and non-financial liabilities. SFAS No. 157
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. SFAS No. 157 establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value
into three levels, and requires that assets and liabilities carried at fair
value are classified and disclosed in one of the following three categories:
Level 1:
quoted prices (unadjusted) in active markets for an identical asset or liability
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 the asset or liability are only used when there is
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
No. 157, the Company determines the level in the fair value hierarchy
within which each fair value measurement falls in its entirety, based on the
lowest level input that is significant to the fair value measurement in its
entirety. In determining the appropriate levels, the Company performs an
analysis of the assets and liabilities that are subject to SFAS No. 157 at
each reporting period end.
The money market funds - held in
trust, as described above, is the only financial instrument that is measured and
recorded at fair value on the Company’s balance sheet on a recurring basis. The
following table presents the money market funds - held in trust at its level
within the fair value hierarchy at December 31, 2008.
| Total | Level 1 | Level 2 | Level 3 | |||||||||
|
Investment held in
Trust
|
$ | 125,445,425 | $ | 125,445,425 | $ | — | $ | — | ||||
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Note 3 – Private Warrants and
Offering
The Private Warrants (see Note 9)
were issued on November 15, 2007, for net proceeds of $2,750,000, which
were subsequently deposited into the trust account.
Our Offering of 12,000,000 units was
declared effective on November 15, 2007. Each unit consists of one share of
the Company’s common stock and one Public Warrant (see Note 9) and was sold to
the public at the price of $10.00 per unit. The Offering was consummated on
November 21, 2007, and we raised net proceeds of $110,900,000, of which
$110,800,000 were deposited into our trust account.
On December 14, 2007, the
underwriters for our Offering exercised their over-allotment option to the
extent of 800,000 units, resulting in net proceeds of $7,440,000, which were
deposited into our trust account.
Note 4 – Summary of Significant
Accounting Policies
Cash and cash equivalents -
Cash and cash equivalents are deposits with financial institutions
as well as short-term money market instruments with maturities of three months
or less when purchased.
Concentration of Credit
Risk
-
Financial instruments
that potentially subject the Company to a significant concentration of credit
risk consist primarily of cash and cash equivalents. The Company may maintain
deposits in federally insured financial institutions in excess of federally
insured limits. However, management believes the Company is not exposed to
significant credit risk due to the financial position of the depository
institutions in which those deposits are held.
Net Earnings per Common
Share
-
Net earnings per share is computed based on the weighted average number of
shares of common stock outstanding.
Basic net earnings per share
excludes dilution and is computed by dividing earnings available to common
stockholders by the weighted average common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Since the 15,550,000 outstanding warrants are not
yet exercisable, they have been excluded from the Company’s computation of
diluted earnings per share for the period from June 22, 2007 (inception) to
December 31, 2007, the year ended December 31, 2008, and the period
from June 22, 2007 (inception) to December 31, 2008. Therefore, basic
and diluted earnings per share are the same for the periods presented.
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 and disclosure of contingent 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.
Income Taxes -
Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax basis of assets and
liabilities that will result in future taxable or deductible amounts and are
based on enacted tax laws and rates
China Holdings Acquisition Corp.
(a corporation in the development
stage)
applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred income tax assets to the amount
expected to be realized. There were no adjustments for uncertain tax positions
in the current year
The Company recognizes interest and
penalties related to uncertain tax positions in income tax expense. All tax
years remain open to examination by the major taxing jurisdictions to which we
are subject.
In June 2006, the Financial
Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes,” an interpretation of FASB
Statement No. 109 (“FIN 48”), which provides criteria for the recognition,
measurement, presentation and disclosure of uncertain tax positions. A tax
benefit from an uncertain position may be recognized only if it is “more
likely than not” that the position is sustainable based on its technical merits.
The Company recognizes interest and
penalties related to uncertain tax positions in income tax expense. All tax
years remain open to examination by the major tax jurisdiction to which we are
subject.
Recently Issued Accounting
Pronouncements -
The Company 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.
In September 2006 the Financial
Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements (SFAS No. 157). SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurement. SFAS
No. 157 also emphasizes that fair value is a market-based measurement, not
an entity-specific measurement, and sets out a fair value hierarchy with the
highest priority being quoted prices in active markets. Under SFAS
No. 157, fair value measurements are disclosed by level within that
hierarchy. In February 2008, the FASB issued FASB Staff Position
No. 157-2, Effective Date of FASB Statement No. 157, which permits a
one-year deferral for the implementation of SFAS No. 157 with regard to
nonfinancial assets and liabilities that are not recognized or disclosed at fair
value in the financial statements on a recurring basis. The Company adopted
SFAS No. 157 for the fiscal year beginning January 1, 2008, except for
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis for
which delayed application is permitted until our fiscal year beginning
January 1, 2009. The Company is currently assessing the potential
effect of the adoption of the remaining provisions of SFAS No. 157 on its
financial position, results of operations and cash flows. The adoption of the
remaining provisions of SFAS No. 157 is not expected to have a material
impact on the Company’s financial position, results of operations or cash flows.
In December 2007, the FASB issued
SFAS No. 141(R), Business Combinations (“SFAS 141R”), which establishes
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree. SFAS
141R also provides guidance for recognizing and measuring the goodwill acquired
in the business combination and determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141R will apply to us with
respect to any acquisitions that we complete on or after January 1, 2009.
In December 2007, the FASB released
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements
an amendment of ARB No. 51 (“SFAS 160”), which establishes accounting and
reporting standards for the ownership interests in subsidiaries held by parties
other than the parent and for the deconsolidation of a subsidiary. SFAS 160
also establishes disclosure requirements that clearly identify and distinguish
between the interest of the parent and the interests of the non-controlling
owners. SFAS 160 is effective for financial statements issued for fiscal years
beginning after December 15, 2008. SFAS 160 will apply to us with
respect to any acquisitions, that we complete on or after January 1, 2009,
which will result in a noncontrolling interest.
In June 2008, the FASB ratified
Emerging Issues Task Force (EITF) Issue No. 07-5, “Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF
07-5”). EITF 07-5 mandates a two-step process for evaluating whether an
equity-linked financial instrument or embedded feature is indexed to the
entity’s own stock. It is effective for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years, which is
our first quarter of 2009. Any outstanding instrument at the date of adoption
will require a retrospective application of the accounting through a cumulative
effect adjustment to retained earnings upon adoption. The Company is
currently evaluating the impact that adoption of EITF 07-5 will have on its
financial statements.
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Note 5 – Notes Payable to
Stockholders
The Company issued an aggregate of
$368,169 unsecured promissory notes to certain of its sponsors from inception
through November 20, 2007 (the “Notes”). The Notes were non-interest
bearing and were payable before or on June 30, 2008. The Notes were fully
repaid during December, 2007.
Note 6 – Income Taxes
The Company has applied the
provisions of FIN 48 since inception.
Deferred income taxes are provided
for the differences between the bases of assets and liabilities for financial
reporting and income tax purposes. A valuation allowance is established
when necessary to reduce deferred tax assets to the amount expected to be
realized. Realization of the future tax benefits is dependent upon many
factors, including the Company’s ability to generate taxable income within the
loss carry-forward period, which runs through 2028.
The Company has recorded a deferred
tax asset for the tax effect of temporary differences of $43,734 and $711,525 at
December 31, 2007 and December 31, 2008, respectively. In
recognition of the Company’s twenty-year carry-forward period in the event of a
business combination, and its carry-back opportunities in the event of
liquidation, the Company has not recorded a valuation allowance on the
accompanying balance sheets. The temporary differences creating the Company’s
deferred tax assets relate to currently non-deductible formation and operating
costs. The effective tax rate of 39% for the period from June 22, 2007
(inception) to December 31, 2007 differs from the Federal statutory rate of
34% due to the effect of state income taxes of 5%. The effective tax rate of 34%
for the year ended December 31, 2008 equals the Federal statutory rate of
34%. The effective tax rate of 36% for the period from June 22, 2007
(inception) to December 31, 2008 differs from the Federal statutory rate of
34% due to the effect of state income taxes of 2%.
For the year ended December 31,
2008, the Company’s state tax computation based upon income fell below the
minimum level required by an alternative, capital-based state tax computation.
Consequently, the Company did not record a state tax provision based upon income
for 2008 and, instead, recorded a capital-based state tax provision of $343,967
which is included in the income statement caption “Formation and operating
costs”.
The components of income tax expense
(benefit) are:
|
For the period from
June 22, 2007 (inception) to December 31, 2007 |
For the year ended
December 31, 2008 |
For the period
from June 22, 2007 (inception) to December 31, 2008 |
||||||||||
|
Currently
payable:
|
||||||||||||
|
Federal
|
$ | 189,185 | $ | 848,065 | $ | 1,037,250 | ||||||
|
State
|
45,116 | — | 45,116 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(35,313 | ) | (679,869 | ) | (715,182 | ) | ||||||
|
State
|
(8,421 | ) | — | (8,421 | ) | |||||||
|
Total
|
$ | 190,567 | $ | 168,196 | $ | 358,763 | ||||||
Note 7 – Commitments
Administrative Fees
The Company has agreed to pay an
affiliate of a stockholder $10,000 per month for secretarial and administrative
services. The arrangement commenced on November 16, 2007 and terminates
upon the earlier of (i) the completion of the Company’s
Business
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Combination, or (ii) the
Company’s dissolution. The Company recognized $15,000, $120,000, and $135,000 of
expense under this arrangement for the period from June 22, 2007
(inception) to December 31, 2007, the year ended December 31, 2008,
and for the period from June 22, 2007 (inception) to December 31,
2008, respectively.
Underwriting Agreement
In connection with the Offering, the
Company entered into an underwriting agreement (the “Underwriting Agreement”)
with the underwriters in the Offering.
Pursuant to the Underwriting
Agreement, the Company was obligated to Citi (the “Representative”), the
representative of the underwriters, for certain fees and expenses related to the
Offering, including underwriting discounts of $8,960,000. The Company paid
$4,672,000 of the underwriting discounts upon closing of the Offering. The
Company and the Representatives have agreed that payment of the underwriting
discount of $4,288,000 will be deferred until consummation of the Business
Combination. Accordingly, a deferred underwriting fee comprised of the deferred
portion of the underwriting discount is included on the accompanying balance
sheets at December 31, 2007 and 2008.
Initial Stockholders
Pursuant to letter agreements with
the Company and the Representatives in the Offering and the warrant private
placement offering described below, the Initial Stockholders have waived their
right to receive distributions with respect to their founding shares and the
shares underlying the Private Warrants (but not shares purchased in the Offering
or in the secondary market) in the event of the Company’s liquidation.
Note 8 – Capital Stock
Preferred Stock
The Company is authorized to issue
1,000,000 shares of preferred stock, par value $0.0001 per share, with such
designations, voting and other rights and preferences as may be determined from
time to time by the Board of Directors. No shares of preferred stock were
outstanding as of December 31, 2007, nor as of December 31, 2008.
Common Stock
On November 15, 2007, the
Company’s Board of Directors authorized a stock dividend of 0.2 shares for each
outstanding share of common stock. All references in the accompanying financial
statements to the number of shares of common stock have been retroactively
restated to reflect this transaction.
The Company is authorized to issue
40,000,000 shares of common stock, par value $0.001 per share, with such
designations, voting and other rights and preferences as may be determined from
time to time by the Board of Directors.
Note 9 – Warrants
Public Warrants
Each warrant sold in the Offering (a
“Public Warrant”) is exercisable for one share of common stock. Except as set
forth below, the Public Warrants entitle the holder to purchase shares at $7.50
per share, subject to adjustment in the event of stock dividends and splits,
reclassifications, combinations and similar events for a period commencing on
the later of: (a) completion of the Business Combination and (b) one
year from the closing date of the Offering of the Company’s securities, and
ending November 16, 2012. The Company has the ability to redeem the Public
Warrants, in whole or in part, at a price of $.01 per Public Warrant, at any
time after the Public Warrants become exercisable, upon a minimum of 30 days’
prior written notice of redemption, and if, and only if, the last sale price of
the Company’s common stock equals or exceeds $14.25 per share, for any 20
trading days within a 30 trading day period ending three business days before
the Company sent the notice of redemption. If the Company dissolves before the
consummation of a Business Combination, there will be no distribution from the
Trust Account with respect to such Public Warrants, which will expire worthless.
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Private Warrants
Prior to the closing of the
Offering, the Company sold to certain of its Initial Stockholders 2,750,000
warrants (“Private Warrants”) in a private placement, at a price of $1.00 per
Private Warrant, for an aggregate of $2,750,000.
The Private Warrants are identical
to the Public Warrants and may not be sold or transferred, except in limited
circumstances, until after the consummation of a Business Combination. If the
Company dissolves before the consummation of a Business Combination, there will
be no distribution from the Trust Account with respect to such Private Warrants,
which will expire worthless.
As the proceeds from the exercise of
the Public Warrants and Private Warrants will not be received until after the
completion of a Business Combination, the expected proceeds from exercise will
not have any effect on the Company’s financial condition or results of
operations prior to a Business Combination.
Reserve Common Stock
At December 31, 2007, and
December 31, 2008, 15,550,000 shares of common stock were reserved for
issuance upon exercise of Public Warrants and the Private Warrants.
Registration Rights – Warrants
In accordance with the Warrant
Agreement related to the Public Warrants and the registration rights agreement
associated with the Private Warrants (collectively the Public Warrants and
Private Warrants are the “Warrants”), the Company will only be required to use
its best efforts to register the Warrants and the shares of Common Stock
issuable upon exercise of the Warrants and once effective to use its best
efforts to maintain the effectiveness of such registration statement. 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. However, with regards to the
Private Warrants, the Company may satisfy its obligation by delivering
unregistered shares of common stock. Additionally, in the event that a
registration statement is not effective at the time of exercise, the holders of
such Warrants shall not be entitled to exercise. 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 a Warrant exercise. Consequently, the
Warrants may expire unexercised, unredeemed and worthless. The holders of
Warrants do not have the rights or privileges of holders of the Company’s common
stock or any voting rights until such holders exercise their respective warrants
and receive shares of the Company’s common stock.
China Holdings Acquisition Corp.
(a corporation in the development
stage)
Note 10 – Acquisition of Bright World
and subsequent event
As previously announced on a Form
8-K filed on April 3, 2009, the Company announced the withdrawal of our
pre-conditional voluntary cash offer (the “ Pre-Conditional Offer”) to acquire
all the issued shares of Bright World Precision Machinery Limited (“Bright
World”).
As previously announced on a Form
8-K filed on July 21, 2008 and on a Form 8-K filed on October 24, 2008, the
Company entered into a definitive Undertaking Agreement on July 20, 2008, which
was subsequently amended on October 24, 2008 (the “Undertaking Agreement”), with
World Sharehold Limited (the “Selling Shareholder”), the majority shareholder of
Bright World, Wang Wei Yao and Shao Jian Jun (collectively, with World
Sharehold, the “Sellers”), pursuant to which the Company agreed to make a
voluntary conditional cash offer, and the Sellers agreed to accept the voluntary
conditional cash offer in respect of all of the Bright World shares held by
them, upon satisfaction of certain pre-conditions. One pre-condition was that,
after July 20, 2008, no change occurred in the financial condition, operations,
results of operations or prospects of Bright World, World Precise Machinery
(China) Co., Ltd (“WPM”), Bright World Heavy Machinery Tools (China) Co., Ltd
(“BWHM”), Shanghai Shangduan Stamping Machines Co., Ltd (“SSS”) or any of their
subsidiaries (Bright World, WPM, BWHM, SSS and their subsidiaries herein
collectively referred to as the “Group”) that caused, among other things, the
Group’s profit after tax for the full year period ending December 31, 2008 to
decrease 10% or more as compared to the Group’s profit after tax for the
corresponding full year period ended December 31, 2007 (the “MAC
Pre-Condition”).
On March 31, 2009, the board of
directors of Bright World announced that, subsequent to the February 20, 2009
release of Bright World’s announcement of its unaudited results for the year
ended December 31, 2008 (“FY2008 Financial Statements”) and response to queries
on February 28, 2009, from the Singapore Exchange Securities Trading Limited
with respect to the FY2008 Financial Statements, Bright World’s auditors made
certain adjustments to the FY2008 Financial Statements to increase the allowance
for doubtful debts (the “Adjustment to the Results Announcement”). The
Adjustment to the Results Announcement states that the Group’s profit after tax
for the full year ended December 31, 2008 decreased by 11.3% to approximately
RMB 127.9 million as compared to approximately RMB 144.3 million for the
corresponding full year period ended December 31, 2007.
On April 1, 2009, the Company
delivered a letter to the Singapore Securities Industry Council (the “SIC”) in
which the Company (x) stated that, in light of the Adjustment to the Results
Announcement, the MAC Pre-Condition had not been satisfied, (y) stated that we
were entitled to withdraw the Pre-Conditional Offer, in accordance with the
terms of the Undertaking Agreement, and (z) sought confirmation from the SIC
that it had no objections to us withdrawing the Pre-Conditional Offer.
On April 2, 2009, the SIC confirmed
that it had no objections to the Company withdrawing the Pre-Conditional Offer,
and the board of directors of the Company approved the withdrawal of the
Pre-Conditional Offer.
On April 3, 2009, the Company issued
a press release announcing the withdrawal of the Pre-Conditional Offer.
Accordingly, the Company has written-off $1,586,486 of previously deferred
acquisition costs due to the termination of the acquisition of Bright World.
Financial
statements for the period ended 30 June 2009
REVIEW
REPORT FROM THE INDEPENDENT AUDITORS FOR THE SIX MONTHS PERIOD ENDED 30 JUNE
2009
17 August
2009
The
Director
Success
Winner Limited
Suite
2202, 22nd Floor, Chinachem Tower,
34-37
Connaught Road Central,
Hong
Kong
Dear
Sir
We have
reviewed the Unaudited Combined Financial Statements of the Company and its
subsidiaries (collectively the “Group”), as set out in on pages 1 to 33, which
comprises the Unaudited Combined Statement of Financial Position of the Group as
at 30 June 2009, the Unaudited Combined Statement of Comprehensive Income,
Unaudited Combined Statement of Changes in Equity and Unaudited Combined Cash
Flow Statement of the Group for the period ended 30 June 2009 and a summary of
significant accounting policies and other explanatory notes (the “Unaudited
Combined Financial Statements”). The Unaudited Combined Financial Statements,
which have been prepared in accordance with International Financial Reporting
Standards (“IFRS”), are the responsibility of the management of the Company. Our
responsibility is to express an opinion on the Unaudited Combined Financial
Statements based on our review.
Scope of
Review
We
conducted our review in accordance with International Standard on Review
Engagements. A review of the Unaudited Combined Financial Statements consists of
making inquiries, primarily of persons responsible for the financial and
accounting matters, and applying analytical and other review procedures. A
review is substantially less in scope than an audit conducted in accordance with
the International Standards on Auditing and consequently does not enable us to
obtain assurance that we would become aware of all significant matters that
might be identified in an audit. Accordingly, we do not express an audit
opinion.
For the
purpose of this report, the comparative figures for the corresponding six months
period ended 30 June 2008 were extracted from the unaudited combined management
financial statements and we have carried out a review of those financial
information. The unaudited combined management financial statements of the Group
for the six months period ended 30 June 2008 is the responsibility of the
management of the Company.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
REVIEW
REPORT FROM THE REPORTING ACCOUNTANT FOR THE SIX MONTHS PERIOD ENDED 30 JUNE
2009 (Continued)
Conclusion
Based on
our review, nothing has come to our attention that causes us to believe that the
Unaudited Combined Financial Statements do not present fairly, in all material
respects, the unaudited combined financial position of the Group as at 30 June
2009, and of its unaudited combined results, unaudited combined statement of
changes in equity and unaudited combined cash flows for the six months period
ended 30 June 2009 in accordance with IFRS.
/s/ Foo
Kon Tan Grant Thornton
Public
Accountants and Certified Public Accountants
Singapore
Financial
statements for the period ended 30 June 2009
UNAUDITED
COMBINED STATEMENT OF COMPREHENSIVE INCOME FOR THE FINANCIAL PERIOD ENDED 30
JUNE 2009
|
Notes
|
Period
ended 30 June
|
|||||||||||
|
2009
|
2008
|
|||||||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||||||
|
RMB’000
|
RMB’000
|
|||||||||||
|
Revenue
|
4
|
399,729 | 376,833 | |||||||||
|
Cost
of sales
|
(273,900 | ) | (251,804 | ) | ||||||||
|
Gross
profit
|
125,829 | 125,029 | ||||||||||
|
Other
income
|
4
|
1,319 | 1,415 | |||||||||
|
Selling
and distribution expenses
|
(22,655 | ) | (21,745 | ) | ||||||||
|
Administrative
expenses
|
(4,832 | ) | (5,541 | ) | ||||||||
|
Finance
costs
|
5
|
(416 | ) | (397 | ) | |||||||
|
Profit
before taxation
|
6
|
|
99,245 | 98,761 | ||||||||
|
Income
tax expense
|
7
|
|
(24,980 | ) | (12,544 | ) | ||||||
|
Profit
for the period
|
74,265 | 86,217 | ||||||||||
|
Other
comprehensive income:
|
||||||||||||
|
Exchange
differences on translating foreign Operations
|
(20 | ) | 67 | |||||||||
|
Total
profit and comprehensive income for the period attributable to owners of
the company
|
74,245 | 86,284 | ||||||||||
|
Earnings
per share — Basic (RMB cents)
|
8
|
N/A | N/A | |||||||||
The
annexed notes form an integral part of and
should be
read in conjunction with these Unaudited Combined Financial
Statements
UNAUDITED
COMBINED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2009
|
ASSETS
AND LIABILITIES
|
Notes
|
As
at 30
June
2009
(Unaudited)
RMB’000
|
As
at 31
December
2008
(Audited)
RMB’000
|
|||||||||
|
Non-current
assets
|
||||||||||||
|
Property,
plant and equipment
|
9 | 64,643 | 72,172 | |||||||||
|
Land
use rights
|
10 | 166 | 168 | |||||||||
| 64,809 | 72,340 | |||||||||||
|
Current
assets
|
||||||||||||
|
Inventories
|
11 | 107,845 | 131,562 | |||||||||
|
Trade
receivables
|
12 | 251,664 | 195,848 | |||||||||
|
Prepayments
and other receivables
|
13 | 4,264 | 3,364 | |||||||||
|
Cash
and bank balances
|
14 | 93,247 | 51,606 | |||||||||
| 457,020 | 382,380 | |||||||||||
|
Current
liabilities
|
||||||||||||
|
Trade
payables
|
15 | 94,847 | 92,888 | |||||||||
|
Accrued
liabilities and other payables
|
16 | 48,498 | 90,948 | |||||||||
|
Interest-bearing
bank borrowings
|
17 | 34,500 | 12,300 | |||||||||
|
Income
tax payable
|
14,369 | 5,133 | ||||||||||
| 192,214 | 201,269 | |||||||||||
|
Net
current assets
|
264,806 | 181,111 | ||||||||||
|
Net
assets
|
329,615 | 253,451 | ||||||||||
|
EQUITY
|
||||||||||||
|
Total
shareholders’ equity
|
329,615 | 253,451 | ||||||||||
* Amount
less than RMB1,000
The
annexed notes form an integral part of and
should be
read in conjunction with these Unaudited Combined Financial
Statements
Financial
statements for the period ended 30 June 2009
UNAUDITED
COMBINED STATEMENTS OF CHANGES IN EQUITY FOR THE FINANCIAL PERIOD ENDED 30 JUNE
2009
|
Share
capital
RMB’000
(Note 18)
|
Statutory
reserve
RMB’000
(Note 19)
|
Currency
translation
reserve
RMB’000
(Note 19)
|
Merger
reserve
RMB’000
|
Retained
earnings
RMB’000
|
Total
equity
RMB’000
|
|||||||||||||||||||
|
Balance
at 1 January 2009
|
0 | * | 29,490 | 16 | 58,980 | 164,965 | 253,451 | |||||||||||||||||
| Total comprehensive income for the period | - | - | (20 | ) | - | 74,265 | 74,245 | |||||||||||||||||
|
Arising
from reorganization
|
- | - | - | 1,919 | - | 1,919 | ||||||||||||||||||
|
Balance at 30 June 2009
(Unaudited)
|
0 | * | 29,490 | (4 | ) | 60,899 | 239,230 | 329,615 | ||||||||||||||||
| Balance at 1 January 2008 | 58,980 | 29,490 | - | - | 142,402 | 230,872 | ||||||||||||||||||
| Total comprehensive income for the period | - | - | 67 | - | 86,217 | 86,284 | ||||||||||||||||||
|
Arising
from reorganization
|
(58,980 | ) | - | - | 58,980 | - | - | |||||||||||||||||
|
Balance
at 30 June 2008 (Unaudited)
|
0 | * | 29,490 | 67 | 58,980 | 228,619 | 317,156 | |||||||||||||||||
*
Amount
less than RMB1,000
The
annexed notes form an integral part of and
should be
read in conjunction with these Unaudited Combined Financial
Statements
Financial
statements for the period ended 30 June 2009
UNAUDITED
COMBINED STATEMENT OF CASH FLOW FOR THE FINANCIAL PERIOD ENDED 30 JUNE
2009
|
Notes
|
Period
ended 30 June
|
|||||||||||
|
2009
|
2008
|
|||||||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||||||
|
|
RMB’000
|
RMB’000
|
||||||||||
|
Cash
flows from operating activities
|
||||||||||||
|
Profit
before taxation
|
99,245 | 98,761 | ||||||||||
|
Adjustments
for :
|
||||||||||||
|
Depreciation
of property, plant and equipment
|
6 | 7,906 | 7,744 | |||||||||
|
Amortisation
of land use rights
|
10 | 2 | 2 | |||||||||
|
Interest
income
|
4 | (134 | ) | (138 | ) | |||||||
|
Finance
costs
|
5 | 416 | 397 | |||||||||
|
Operating
profit before working capital changes
|
107,435 | 106,766 | ||||||||||
|
(Increase)/decrease
in inventories
|
23,717 | 23,773 | ||||||||||
|
Increase
in trade receivables
|
(55,816 | ) | (29,725 | ) | ||||||||
|
Increase
in prepayments and other receivables
|
(900 | ) | (13,998 | ) | ||||||||
|
Increase/
(decrease) in trade payables
|
1,959 | (41,641 | ) | |||||||||
|
Decrease
in accrued liabilities and other payables
|
(18,321 | ) | (10,430 | ) | ||||||||
|
Cash
generated from operations
|
58,074 | 34,745 | ||||||||||
|
Interest
paid
|
(416 | ) | (397 | ) | ||||||||
|
Income
tax paid
|
(15,744 | ) | (11,071 | ) | ||||||||
|
Net
cash (used in)/generated from operating activities
|
41,914 | 23,277 | ||||||||||
|
Cash
flows from investing activities
|
||||||||||||
|
Acquisition
of property, plant and equipment
|
9 | (377 | ) | (5,495 | ) | |||||||
|
Interest
received
|
134 | 138 | ||||||||||
|
Net
Cash used in investing activities
|
(243 | ) | (5,357 | ) | ||||||||
|
Cash
flows from financing activities
|
||||||||||||
|
Bank
borrowings obtained
|
34,500 | 9,500 | ||||||||||
|
Repayment
of bank loans
|
(12,300 | ) | (9,500 | ) | ||||||||
|
Advances
from/ (Repayment to) related party
|
— | 105 | ||||||||||
|
Advances
from/ (Repayment to) director
|
225 | 1,710 | ||||||||||
|
Dividend
paid
|
(22,455 | ) | — | |||||||||
|
Net
cash generated from/(used in) financing activities
|
(30 | ) | 1,815 | |||||||||
|
Net
decrease in cash and cash equivalents
|
41,641 | 19,735 | ||||||||||
|
Cash
and cash equivalents at 1 January
|
51,606 | 18,507 | ||||||||||
|
Cash
and cash equivalents at 30 June
|
14 | 93,247 | 38,242 | |||||||||
*Amount
less than RMB1,000
The
annexed notes form an integral part of and
should be
read in conjunction with these Unaudited Combined Financial
Statements
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements
|
1.
|
THE
COMPANY
|
The
Company (Registration No. 1533513) was incorporated in British Virgin Islands on
29 May 2009 under the British Virgin Islands Business Companies Act as a limited
liability company under the name of Success Winner Limited. At the date of
incorporation, the paid-up and issued capital of the Company was US$1 divided
into 1 share of US$1.00 each.
The
registered office of the Company is located at P. O. Box 957, Offshore
Incorporations Centre, Road Town, Tortola, British Virgin Islands. The principal
place of business of the Company is located at Junbing industrial Zone, Anhai,
Jinjiang City, Fujian Province, The Peoples’ Republic of China
(“PRC”).
The
principal activity of the Company is investment holding. The principal
activities of the company’s subsidiaries are set out in Note 2 to the Unaudited
Combined Financial Statements.
|
2.
|
THE
REORGANISATION AND BASIS OF
PRESENTATION
|
A
reorganisation exercise was undertaken by the Group to rationalise the corporate
structure for an acquisition by the Special Purpose Acquisition Company (the
“Reorganisation Exercise”). The following steps were undertaken in the
Reorganisation Exercise:
(a) Acquisition
of Jinjiang Hengda Ceramics Co., Ltd (“Jinjiang Hengda”)
Pursuant
to an equity transfer agreement dated 1 April 2008 entered into between the
former shareholders, Chi Wah Trading Import & Export Co. (“Chi Wah Trading”)
and Jinjiang City Anhai Junbing Hengda Construction Material Factory (“Anhai
Junbing”) and Stand Best Creation Limited (“Stand Best”), Stand Best acquired
100% of the equity in Jinjiang Hengda for a consideration of RMB58,980,000 based
on the paid-up capital of Jinjiang Hengda. The transfer of the equity in
Jinjiang Hengda to Stand Best was approved by the Jinjiang Ministry of Commerce
on 30 April 2008.
(b) Capitalisation
of amount due from Stand Best to Mr Wong Kung Tok
Pursuant
to the capitalisation agreement dated 30 June 2009 entered into between Mr Wong
Kung Tok and Stand Best, Stand Best capitalised the sum of HK$67,930,978
(equivalent to approximately RMB58.9 mil) owing to Mr Wong Kung Tok via the
issuance of an aggregate of 9,999 ordinary shares of HK$1.00 each as fully paid
in its share capital to the Company.
Following
the capitalisation, Stand Best’s paid up share capital was increased from
HK$1.00 to HK$10,000 divided into 10,000 ordinary shares of HK$1.00
each.
(c) Incorporation
of the Company
On 29 May
2009, the Company was incorporated in British Virgin Islands as the investment
holding company of the Group. 1 ordinary share of US$1.00 was issued by the
Company to Mr Wong Kung Tok and was fully paid on 30 June 2009.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
2. THE
REORGANISATION AND BASIS OF PRESENTATION (Continued)
(d) Acquisition
by the Company
Pursuant
to an instrument of transfer dated 30 June 2009 entered into between the Company
and Stand Best, the Company acquired the remaining 1 ordinary share at par value
of HK$1.00 of Stand Best for a consideration of HK$1.00 from Mr Wong Kung
Tok.
Pursuant
to the Reorganisation as set out above, the Company will become the holding
company of the Group.
The Group
structure is shown as follows:
As at the
date of this report, the Company has direct interests in the following wholly
owned subsidiaries and there are no other subsidiaries or associated companies
of the Group.
|
Name
of
|
Jurisdiction of
|
Principal activities
|
Equity
|
Registered capital
|
||||
|
Subsidiaries
|
incorporation /
|
interest
|
and paid-up
|
|||||
|
establishment
|
held
|
capital
|
||||||
|
Stand
Best
|
Hong
Kong
|
Investment
holding
|
100%
|
HK$10,000
|
||||
|
Creation
Limited
|
||||||||
|
Jinjiang
Hengda Ceramics Co., Ltd
|
PRC
|
Design,
development and manufacture of ceramic tiles
|
100%
|
RMB58,980,000
|
The Group
is regarded as a continuing entity resulting from the Reorganisation since the
management of all the entities which took part in the Reorganisation was
controlled by the same directors and under common shareholders before and
immediately after the Reorganisation. Consequently, immediately after the
Reorganisation, there was a continuation of the control over the entities
financial and operating policy decision and risk and benefits to the ultimate
shareholders that existed prior to the Reorganisation.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
2. THE
REORGANISATION AND BASIS OF PRESENTATION (Continued)
The
Reorganisation has been accounted for as a Reorganisation under common control
in a manner similar to pooling of interests. Accordingly, the Unaudited Combined
Financial Statements for the period ended 30 June 2009 have been prepared on the
basis of merger accounting and comprise the financial statements of the
subsidiaries which were under common control of the ultimate shareholders and
directors that existed prior to the Reorganisation Exercise during the under
review periods or since their respective dates of incorporation.
The
Unaudited Combined Financial Statements of Group are presented as if the Company
was in existence throughout the previous reported financial period
notwithstanding the fact that the Company was not the holding corporation for
the reported financial period as in substance the combined entities are
continuing to trade as before but with a new legal parent form
subsequently.
|
3.
|
SIGINIFICANT
ACCOUNTING POLICIES
|
Statement
of compliance
The
Unaudited Combined Financial Statements have been prepared in accordance with
International Financial Reporting Standards (“IFRS”) including related
Interpretations issued by the International Accounting Standard Board (“IASB”),
and are consistent with those applied in the audited Combined Financial
Statements for the financial year ended 31 December 2008.
Basis
of preparation of Unaudited Combined Financial Statements
On ‘1
January 2009, the Group adopted the new or revised IFRS and interpretations that
are mandatory for application on that date. Changes to the Group’s accounting
policies have been made as required, in accordance with the transitional
provisions in the respective IFRS.
The
following are the new or amended IFRS adopted by the Group:
|
IAS 1 (Revised 2008)
|
Presentation
of Financial Statements — Capital Disclosure
|
|
|
1AS 23 (Revised)
|
Borrowing
costs — Comprehensive Revision to Prohibit Immediate
Expensing
|
|
|
IFRS
8
|
Operating
Segments
|
The
adoption of the above IFRS and interpretations did not result in substantial
changes to the Group’s accounting policies nor any significant impact on these
interim Unaudited Combined Financial Statements except for the
followings:
IAS 1 (Revised
2008)
The
revised Standard requires all changes in equity arising from transactions with
owners in their capacity as owners to be presented separately from components of
comprehensive income. Components of comprehensive income are presented in a
separate statement of comprehensive income.
The
‘balance sheet’ and ‘cash flow statement’ have been re-titled to ‘statement of
financial position’ and ‘statement of cash flows’ respectively.
Comparative
for 2008 have been restated to conform to the requirements of the revised
standard.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
3. SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Basis
of preparation of Unaudited Combined Financial Statements
(Continued)
IFRS 8
The new
standard requires segment information to be presented on the same basis as that
used for internal reporting purposes. This has resulted on five business
segments presented. These business segments are reported in the manner that is
consistent with the internal reporting provided to the chief operating
decision-maker.
At the
date of this report, certain new standards, amendments and interpretations to
existing standards have been published and are mandatory for the Group’s
accounting periods after 1 January 2009 or later periods and which the Group has
not early adopted.
The
following are the IFRS that have been published but not yet effective
:
|
IAS
27
|
Consolidated
and Separate Financial Statements — Consequential Amendments Arising from
Amendments to IFRS 3
|
|
|
IAS
28
|
Investments
in Associates — Consequential Amendments Arising from Amendments to IFRS
3
|
|
|
IAS
31
|
Interests
in Joint Ventures — Consequential Amendments Arising from Amendments to
IFRS 3
|
|
|
IAS
39
|
Financial
Instruments: Recognition and Measurement Amendments for Eligible Hedged
Items
|
|
|
IFRS
2
|
Share-based
Payment — Amendment Relating to Vesting Conditions and
Cancellations
|
|
|
IFRS
3
|
Business
Combinations — Comprehensive Revision on Applying the Acquisition
Method
|
|
|
IFRIC
17
|
Distributions
of non-cash assets to owners
|
|
|
IFRIC
18
|
Transfers
of assets from customers
|
|
|
Annual Improvement Process
|
Improvements
to IFRSs 2008
|
The
management does not anticipate that the adoption of the above IFRSs (including
consequential amendments) and interpretations will result in any material impact
to the Unaudited Combined Financial Statements in the period of initial
application.
Critical
accounting estimates and judgment
Estimates
and judgments are continually evaluated and are based on historical experiences
and other factors, including expectations of future events that are believed to
be reasonable under the circumstances.
The Group
makes estimates and assumptions concerning the future. The resulting accounting
estimates and assumptions that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next
financial year are discussed below:
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
3. SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Key
sources of estimation uncertainty
Depreciation of property,
plant and equipment
Property,
plant and equipment are depreciated on a straight-line basis over their
estimated useful lives. Management estimates the useful lives of property, plant
and equipment to be within 3 to 40 years. The carrying amounts of the Group’s
property, plant and equipment as at 30 June 2009 and 31 December 2008 was
approximately RMB64,643,000 and RMB72,172,000 respectively. Changes in the
expected level of usage and technological developments could impact the economic
useful lives and the residual values of these assets, therefore future
depreciation charges could be revised.
Income
tax
The Group
has exposure to income taxes in the PRC. Significant judgement is required in
determining the provision for income taxes. There are certain transactions and
computations for which the ultimate tax determination is uncertain during the
ordinary course of business. The Group recognises liabilities for expected tax
issues based on estimates of whether additional taxes will be due. When the
final tax outcome of these matters is different from the amounts that were
initially recognised, such differences will impact the income tax and deferred
tax provisions in the period in which such determination is made.
Critical
judgment made in applying accounting policies
In the
process of applying the Group’s accounting policies as described below, the
management is of the opinion that there are no instances of application of
judgments which are expected to have a significant effect on the amounts
recognized in the financial statements.
Impairment of trade
receivables
The
Group’s management assesses the collectability of trade receivables. This
estimate is based on the credit history of the Group’s customers and the current
market condition. Management reassesses the impairment loss at the statement of
financial position date and makes the provision, if any.
Net realizable value of
inventories
Net
realizable value of inventories is the management’s estimation of future selling
price in the ordinary course of business, less estimated costs of completion and
selling expenses. These estimates are based on the current market condition and
the historical experience of selling products of “similar nature”. It could
change significantly as a result of competitors in response to the severe
industry’s cycles.
|
|
(a)
|
Basis
of preparation under common control business combination and
subsidiaries
|
|
|
A
business combination involving entities under common control is a business
combination in which all the combining entities or business are ultimately
controlled by the same party or parties both before and after the business
combination, and that control is not
transitory.
|
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
3. SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|
|
(a)
|
Basis
of preparation under common control business combination and subsidiaries
(Continued)
|
The
reorganization exercise described in Note 2 to the Unaudited Combined Financial
Statements resulted in a business combination involving common control entities,
and accordingly the accounting treatment is outside the scope of !FRS 3 Business
Combination. For such common control business combinations, the merger
accounting principles are applied to include the assets, liabilities, results,
changes in equity and cash flows of the combining entities in the Unaudited
Combined Financial Statements.
In
applying merger accounting, components of financial statements of the combining
entities or businesses for the reporting periods in which the common control
combination occurs are included in the Unaudited Combined Financial Statements
of the combined entity as if the combination had occurred from the date when the
combining entities or businesses first came under the control of the controlling
party or parties.
A single
uniform set of accounting policies is adopted by the combined entity. Therefore,
the combined entity recognised the assets, liabilities and equity of the
combining entities or businesses at the carrying amounts recognised previously
in the Unaudited Combined Financial Statements of the controlling party or
parties prior to the common control combination. The carrying amounts are
included as if such Unaudited Combined Financial Statements had been prepared by
the controlling party or parties, including adjustments required to conform to
the combined entity’s accounting policies and applying those policies to all
periods presented.
There is
no recognition of any goodwill or excess of the acquirers interest in the net
fair value of the acquiree’s identifiable assets, liabilities and contingent
liabilities over cost at the time of the common control combination. The effects
of all transactions between the combining entities or businesses, whether
occurring before or after the combination, are eliminated in preparing the
Unaudited Combined Financial Statements of the combined entity.
Subsidiaries
are entities controlled by the Group. Control exists when the Group has the
power to govern the financial and operating policies of an entity so as to
obtain benefits from its activities. The existence and effect of potential
voting rights that are currently exercisable or convertible are considered when
assessing whether the Group controls another entity.
For
acquisition of subsidiaries under common control, the identifiable assets and
liabilities were accounted for at their carrying values, in a manner similar to
the pooling-of-interest method of consolidation.
In
preparing the Unaudited Combined Financial Statements, transactions, balances
and unrealized gains on transactions between the combining entities are
eliminated. Unrealized losses are also eliminated but are considered an
impairment indicator of the assets transferred.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
3. SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|
|
(b)
|
Property,
plant and equipment
|
Property,
plant and equipment are stated at cost less accumulated depreciation and
impairment losses. The cost of an asset comprises its purchase price and any
directly attributable costs of bringing the asset to the working condition and
location for its intended use. Expenditure incurred after property, plant and
equipment have been put into operation, such as repairs and maintenance, is
normally charged to the income statement in the period in which it is incurred.
In situations where it can be clearly demonstrated that the expenditure has
resulted in an increase in the future economic benefits expected to be obtained
from the use of the property, plant and equipment, and the expenditure of the
item can be measured reliably, the expenditure is capitalised as an additional
cost of that asset.
Depreciation
is calculated on the straight-line basis to write off the cost of property,
plant and equipment, less any estimated residual values, over the following
estimated useful lives:
|
Buildings
|
40
years
|
|
Renovation
|
10
years
|
|
Plant
and machinery
|
5-10
years
|
|
Motor
vehicles
|
10
years
|
|
Office
equipment
|
5-10
years
|
If there
is a change in the level of usage and technological developments affecting the
useful lives and the residual values of these assets, the residual values,
useful lives and depreciation method will be reviewed and adjusted as
appropriate at each statement of financial position date.
For
acquisition and disposal during the financial period, depreciation is provided
from the month of acquisition and to the month before disposal respectively.
Fully depreciated property, plant and equipment are retained in the books of
accounts until they are no longer in use.
The gain
or foss on disposal or retirement of an item of property, plant and equipment
recognised in the income statement is the difference between the net sales
proceeds and the carrying amount of the relevant asset.
|
|
(c)
|
Land
use rights
|
Land use
rights are stated at cost less accumulated amortisation and impairment losses.
Amortisation is charged so as to write off the cost of land use rights, using
the straight-line method, over the period of the grant of 50 years, which is the
lease term.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
3. SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|
|
(d)
|
Impairment
of non-financial assets
|
An
assessment is made at each statement of financial position date of whether there
is any indication of impairment of the Group’s property, plant and equipment and
land use rights, or whether there is any indication that an impairment loss
previously recognised for an asset in prior years may no longer exist or may
have decreased. If any such indication exists, the asset’s recoverable amount is
estimated. An asset’s recoverable amount is calculated as the higher of the
asset’s value in use or its net selling price.
An
impairment loss is recognised only if the carrying amount of an asset exceeds
its recoverable amount. An impairment loss is charged to the combined statement
of comprehensive income in the period in which it arises.
A
previously recognised impairment loss is reversed only if there has been a
change in the estimates used to determine the recoverable amount of an asset,
and to the extent that the carrying amount does not exceed the carrying amount
that would have been determined, had no impairment loss been recognised for the
asset in prior years.
A
reversal of an impairment loss is credited to the combined statement of
comprehensive income in the period in which it arises.
|
|
(e)
|
Financial
assets
|
Financial
assets which are within the scope of IAS 39, other than hedging instruments, are
classified as either financial assets at fair value through statement of
comprehensive income, loans and receivables, held-to-maturity investments, or
available-for-sale financial assets. Financial assets which are initially
recognised at fair value, are assigned to the different categories by management
on initial recognition, depending on the purpose for which the assets were
acquired.
The
designation of financial assets is re-evaluated and classification may be
changed at the reporting date with the exception that the designation of
financial assets at fair value through statement of comprehensive income is not
revocable.
All
financial assets are recognised when, and only when, the Group becomes a party
to the contractual provisions of the instrument. When financial assets are
recognised initially, they are measured at fair value, plus directly
attributable transaction costs.
De-recognition
of financial assets occurs when the rights to receive cash flows from the assets
expire or are transferred and substantially all of the risks and rewards of
ownership have been transferred. At each of the statement of financial position
date, financial assets are reviewed to assess whether there is objective
evidence of impairment. If any such evidence exists, impairment loss is
determined and recognised.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
3. SIGNIFICANT
ACCOUNTING POLICIES (Continued)
(e) Financial
assets (Continued)
Receivables
Receivables
are non-derivative financial assets with fixed or determinable payments that are
not quoted in an active market. They arise when the Group provides money, goods
or services directly to a debtor with no intention of trading the receivables.
They are included in current assets, except for maturities greater than 12
months after the balance sheet date. These are classified as non-current
assets.
Receivables
include trade and other receivables. They are subsequently measured at amortised
cost using the effective interest method, less provision for impairment. If
there is objective evidence that the asset has been impaired, the financial
asset is measured at the present value of the estimated future cash flows
discounted at the original effective interest rate. Impairment losses are
reversed in subsequent periods when an increase in the asset’s recoverable
amount can be related objectively to an event occurring after the impairment was
recognised, subject to a restriction that the carrying amount of the asset at
the date the impairment is reversed does not exceed what the amortised cost
would have been had the impairment not been recognised. The impairment or
writeback is recognised in the income statement.
|
|
(f)
|
Financial
liabilities
|
The
Group’s financial liabilities include trade and other payables, accrued
liabilities, dividend payable and interest-bearing bank borrowings.
Financial
liabilities are recognised when the Group becomes a party to the contractual
agreements of the instrument All interest related charges are recognised as an
expense in “finance costs” in the income statement. Financial liabilities are
derecognised if the Group’s obligations specified in the contract expire or are
discharged or cancelled.
Borrowings
are recognised initially at fair value of proceeds received less attributable
transaction costs, if any. Borrowings are subsequently stated at amortised cost
which is the initial fair value less any principal repayments. Any difference
between the proceeds (net of transaction costs) and the redemption value is
taken to the income statement over the period of the borrowings using the
effective interest method. The interest expense is chargeable on the amortised
cost over the period of the borrowings using the effective interest
method.
Gains and
losses are recognised in the profit and loss account when the liabilities are
derecognised as well as through the amortisation process.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
3. SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Borrowings
which are due to be settled within twelve months after the balance sheet are
included in current borrowings in the balance sheet even though the original
terms was for a period longer than twelve months and an agreement to refinance,
or to reschedule payments, on a long-term basis is completed after the balance
sheet date. Borrowings to be settled within the Group’s normal operating cycle
are classified as current. Other borrowings due to be settled more than twelve
months after the balance sheet date are included in non-current borrowings in
the balance sheet.
Trade and
other payables and accrued liabilities are initially measured at fair value, and
subsequently measured at amortised cost, using the effective interest rate
method.
Dividend
distributions to shareholders are included in current financial liabilities when
the dividends are payable.
|
|
(g)
|
Inventories
|
Inventories
are valued at the lower of cost and net realisable value. Cost incurred in
bringing each product to its present location and conditions are accounted for
as follows:
|
|
(a)
|
Raw
materials at purchase cost on a weighted average basis;
and
|
|
|
(b)
|
Finished
goods and work in progress at cost of direct materials and labour and a
proportion of manufacturing overheads based on normal operating
capacity.
|
Net
realisable value is the estimated selling price in the ordinary course of
business less the estimated costs necessary to make the sale.
|
|
(h)
|
Cash
and cash equivalents
|
For the
purpose of the combined cash flow statements, cash and cash equivalents comprise
cash on hand and in banks.
|
|
(i)
|
Provisions
|
Provisions
are recognised when present obligations will probably lead to an outflow of
economic resources from the Group which can be estimated reliably. Timing or
amount of the outflow may still be uncertain. A present obligation arises from
the presence of a legal or constructive commitment that has resulted from past
events.
Provisions
are measured at the estimated expenditure required to settle the present
obligation, based on the most reliable evidence available at the statement of
financial position date, including the risks and uncertainties associated with
the present obligation. Any reimbursement expected to be received in the course
of settlement of the present obligation is recognised as a separate asset, not
exceeding the amount of the related provision.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
3.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Where
there are a number of similar obligations, the likelihood that an outflow of
economic resources will be required in settlement of the obligations is
determined by considering the class of obligations as a whole. in addition, long
term provisions are discounted to their present values, where the effect of the
time value of money is material.
All
provisions are reviewed at the statement of financial position date and adjusted
to reflect the current best estimates.
In cases
where the possible outflow of economic resources as a result of present
obligations is considered impossible or remote, or the amount to be provided for
cannot be measured reliably, no liability is recognised in the statement of
financial position, unless assumed in the course of a business
combination.
|
|
(j)
|
Recognition
of revenue
|
Revenue
is recognised when it is probable that the economic benefits will flow to the
Group and when the revenue can be measured reliably. Revenue is measured at the
fair value of the consideration received or receivable and represents amounts
receivable for goods and services provided in the normal course of business, net
of trade discounts, sales rebates and sales related taxes on the following
bases:
|
|
(i)
|
Revenue
from the sale of goods and scrap materials are recognised when the
significant risks and rewards of ownership have been transferred to the
buyer, provided that the Group maintains neither managerial involvement to
the degree usually associated with ownership, nor effective control over
the goods sold; and
|
|
|
(ii)
|
Interest
income is recognised on a time-proportion basis, taking into account the
principal outstanding and the effective interest rate
applicable.
|
|
|
(k)
|
Income
tax
|
Current
tax
Current
tax is the expected tax payable on the taxable income for the year, using tax
rates enacted at the statement of financial position date, and any adjustment to
tax payable in respect of previous years. PRC corporate income tax is provided
at rates applicable to an enterprise in the PRC on income for financial
reporting purpose, adjusted for income and expenses items which are not
assessable or deductible for income tax purposes.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
3. SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Deferred
tax
Deferred
tax is the tax expected to be payable or recoverable on differences between the
carrying amounts of assets and liabilities in the Unaudited Combined Financial
Statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the statement of financial position liability
method. Deferred tax liabilities are generally recognised for all taxable
temporary differences, and deferred tax assets are recognised to the extent that
it is probable that taxable profits will be available against which deductible
temporary differences can be utilised. Such assets and liabilities are not
recognised if the temporary difference arises from the initial recognition of
other assets and liabilities in a transaction that is not a business combination
and that affects neither the tax profit nor the accounting profit.
The
carrying amount of deferred tax assets is reviewed at the statement of financial
position date and reduced to the extent that it is no longer probable that
sufficient taxable profits will be available to allow all or part of the asset
to be recovered. Any such reduction is reversed to the extent that it becomes
probable that sufficient taxable profit will be available.
Deferred
tax assets and liabilities are not discounted. Deferred tax is calculated at the
tax rates that are expected to apply in the year when the liability is settled
or the asset realised. Deferred tax is charged or credited to the statement of
comprehensive income, except when it relates to items charged or credited
directly to equity, in which case the deferred tax is also dealt with in
equity.
(k) Income
tax (Continued)
Valued-added
tax
The
Group’s sale of goods in the PRC are subjected to Value-added tax (“VAT”) at the
applicable tax rate of 6% for PRC domestic sales. Input VAT on purchases cannot
be deducted from output VAT. The amount payable to the taxation authority is
included as part of “other payables” in the statement of financial
position.
The VAT
tax rate has changed from 6% to 17% with effect from May 2009 pursuant to a
“Notice of Ministry of Finance and the State Tax Bureau concerning the VAT Levy
Policies of Applying Lower VAT Rate and Summary Measures on Certain
Goods”.
Revenues,
expenses and assets are recognised net of the amount of VAT except
where:
|
|
·
|
VAT
incurred on the purchase of assets or services is not recoverable from the
taxation authority, in which case VAT is recognised as part of the cost of
acquisition of the asset or as part of the expense item as applicable;
and
|
|
|
·
|
Receivables
and payables are stated with the amount of VAT
included.
|
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
3. SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|
|
(l)
|
Employees
benefits
|
Retirement benefits
scheme
Pursuant
to the relevant regulations of the PRC government, the Group participates in a
local municipal government retirement benefits scheme (the “Scheme”), whereby
the subsidiaries of the Company in the PRC are required to contribute a certain
percentage of the basic salaries of its employees to the Scheme to fund their
retirement benefits. The local municipal government undertakes to assume the
retirement benefits obligations of all existing and future retired employees of
the subsidiaries of the Company. The only obligation of the Group with respect
to the Scheme is to pay the ongoing required contributions under the Scheme
mentioned above. Contributions under the Scheme are charged to the statement of
comprehensive income as incurred. There are no provisions under the Scheme
whereby forfeited contributions may be used to reduce future
contributions.
Key management
personnel
Key
management personnel are those persons having the authority and responsibility
for planning, directing and controlling the activities of the combined entity.
Directors and certain general managers are considered key management
personnel.
|
|
(m)
|
Foreign
currencies
|
|
|
(i)
|
Functional and
presentation currency
|
Items
included in the financial statements of each entity in the Group are measured
using the currency that best reflects the economic substance of the underlying
events and circumstances relevant to that entity (the “functional currency”).
The functional currency of the Company is United States dollars, Stand Best
Creation Limited is Hong Kong dollars and Jinjiang Hengda Ceramics Co., Ltd is
Renminbi. The Group’s principal operations are predominantly conducted in the
People’s Republic of China (“PRC”) and thus the financial statements are
presented in Renminbi (to the nearest thousand), being the currency that best
reflects the economic substance of the underlying events and circumstances
relevant to the Group.
|
|
(ii)
|
Transactions and
balances
|
Foreign
currency transactions are translated to the functional currencies of the
entities using the exchange rates prevailing at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies are translated
at the closing rates ruling at the respective statement of financial position
dates. Foreign exchange gains and losses resulting from the settlement of such
transactions and from the translation at year-end exchange rates of monetary
assets and liabilities denominated in foreign currencies are recognised in the
statement of comprehensive income.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
SIGNIFICANT
ACCOUNTING POLICIES (Continued)
(m) Foreign
currencies (Continued)
Non-monetary
items that are measured in terms of historical cost in a foreign currency are
translated using the exchange rates as at the dates of the initial transactions.
Non- monetary items measured at fair value in a foreign currency are translated
using the exchange rates at the date when the fair value was
determined.
|
|
(iii)
|
Group
companies
|
The
results and financial positions of the Group entities that have functional
currencies different from the presentation currency are translated into the
presentation currency as follows:
|
|
(1)
|
Assets
and liabilities for each statement of financial position presented are
translated at the closing rate at the date of that statement of financial
position;
|
|
|
(2)
|
Income
and expenses for each statement of comprehensive income are translated at
average exchange rates (unless this average is not a reasonable
approximation of the cumulative effect of the rates prevailing on the
transaction dates, in which case income and expenses are translated at the
dates of the transactions); and
|
|
|
(3)
|
All
resulting exchange differences are recognised as a separate component of
equity.
|
|
|
(n)
|
Related
parties
|
|
|
|
A
party is considered to be related to the Group
if:
|
|
|
(i)
|
directly,
or indirectly through one or more intermediaries, the party (1) controls,
is controlled, or is under common control with, the Company/Group; (2) has
an interest in the Company that gives it significant influence over the
Company/Group; or (3) has joint control over the
Company/Group;
|
|
|
(ii)
|
the
party is an associate;
|
|
|
(iii)
|
the
party is a jointly-controlled
entity;
|
|
|
(iv)
|
the
party is a member of the key management personnel of the Company or its
parent;
|
|
|
(v)
|
the
party is a close member of the family of any individual referred to in (i)
or (iv);
|
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
3. SIGNIFICANT
ACCOUNTING POLICIES (Continued)
(n) Related
parties (Continued)
|
|
(vi)
|
the
party is an entity that is controlled, jointly controlled or significantly
influenced by or for which significant voting power in such entity resides
with, directly or indirectly, any individual referred to in (iv) or (v);
or
|
|
|
(vii)
|
the
party is a post-employment benefit plan for the benefit of employees of
the Company/Group, or of any entity that is a related party of the
Company/Group.
|
|
|
(o)
|
Operating
leases
|
Leases
where substantially all the risks and rewards of ownership of assets remain with
the lessor are accounted for as operating leases. Annual rentals applicable to
such operating leases are charged to the combined statement of comprehensive
income on a straight-line basis over the lease terms except where an alternative
basis is more representative of the pattern of benefits to be derived from the
leased assets. Lease incentives received are recognised in the combined
statement of comprehensive income as an integral part of the aggregate net lease
payments made. Contingent rentals are charged to the combined statement of
comprehensive income in the accounting period in which they are
incurred.
|
|
(p)
|
Segment
reporting
|
A
operating segment is a distinguishable component of the Group that engages in
business activities from which it may earn revenues and incur expenses
(including revenues and expenses relating to transactions with other components
of the same entity), whose operating results are regularly reviewed by the
entity’s chief operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance, and for which discrete
financial information is available.
|
|
(q)
|
Share
capital
|
Ordinary
shares are classified as equity. Share capital is determined using the nominal
value of shares that have been issued. Any transaction costs associated with the
issuing of shares are deducted from the proceeds (net of any related income tax
benefits) to the extent that they are incidental costs directly attributable to
the equity transaction.
Retained
earnings include all current and prior period results as determined in the
combined statement of comprehensive income.
|
|
(r)
|
Research
and development costs
|
Research
costs are expensed as incurred, except for development costs which relates to
the design and testing of new or improved materials, products or processes which
are recognised as an asset to the extent that it is expected that such assets
will generate future economic benefits.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
|
4.
|
REVENUE
AND OTHER INCOME
|
Revenue
represents the net invoiced value of services provided, after allowances for
trade discounts. An analysis of the Group’s revenue and other income is as
follows:
|
Period
ended 30 June
|
||||||||
|
2009
|
2008
|
|||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||
|
RMB’000
|
RMB’000
|
|||||||
|
Revenue
|
||||||||
|
Sale
of goods
|
399,729
|
376,833
|
||||||
|
Other
income
|
||||||||
|
Sale
of scrap materials
|
1,185 | 1,277 | ||||||
|
Interest
income
|
134 | 138 | ||||||
| 1,319 | 1,415 | |||||||
|
5.
|
FINANCE
COSTS
|
|
Period
ended 30 June
|
||||||||
|
2009
|
2008
|
|||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||
|
RMB’000
|
RMB’000
|
|||||||
|
Interest
on bank borrowings
|
416 | 397 | ||||||
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
|
6.
|
PROFIT
BEFORE TAXATION
|
The
Group’s profit before taxation is arrived at after charging:
|
Period
ended 30 June
|
||||||||
|
2009
|
2008
|
|||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||
|
RMB’000
|
RMB’000
|
|||||||
|
Amortisation
of land use rights
|
2 | 2 | ||||||
|
Cost
of inventories recognised as expense
|
162,972 | 169,644 | ||||||
|
Depreciation
expense charge to:
|
||||||||
|
-
cost of sales
|
7,642 | 7,497 | ||||||
|
-
administrative expenses
|
264 | 247 | ||||||
|
Directors’
remuneration
|
||||||||
|
-
salaries and related cost
|
71 | 71 | ||||||
|
-
retirement scheme contribution
|
2 | 4 | ||||||
|
Key
management personnel (other than directors)
|
||||||||
|
-
salaries and related cost
|
305 | 289 | ||||||
|
-
retirement scheme contribution
|
8 | 7 | ||||||
|
Research
and development personnel
|
||||||||
|
-
salaries and related cost
|
419 | 441 | ||||||
|
-
retirement scheme contribution
|
– | 3 | ||||||
|
Other
personnel
|
||||||||
|
-
salaries and related cost
|
17,235 | 15,864 | ||||||
|
-
retirement scheme contribution
|
270 | 265 | ||||||
|
Operating
lease expenses
|
6,523 | 6,596 | ||||||
|
7.
|
INCOME
TAX EXPENSE
|
|
Period
ended 30 June
|
||||||||
|
2009
|
2008
|
|||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||
|
RMB’000
|
RMB’000
|
|||||||
|
Current
year provision:
|
||||||||
|
PRC
income tax
|
24,980 | 12,544 | ||||||
No
deferred tax has been provided as the Group did not have any significant
temporary differences which gave rise to a deferred tax asset or liability at 30
June 2008 and 2009.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
7. INCOME
TAX EXPENSE (Continued)
Reconciliation
between tax expense and profit before taxation at applicable tax rates is as
follows:
|
Period
ended 30 June
|
||||||||
|
|
2009
(Unaudited)
RMB’000
|
2008
(Unaudited)
RMB’000
|
||||||
|
Profit
before taxation
|
99,245
|
98,761
|
||||||
|
Tax
calculated at a tax rate of 25%
|
24,811 | 24,690 | ||||||
|
Tax
effect of tax exemption and concession
|
— | (12,558 | ) | |||||
|
Tax
effect on non-deductible expenses
|
169 | 412 | ||||||
| 24,980 | 12,544 | |||||||
Pursuant
to the PRC Enterprise Income Tax :Law passed by the Tenth National People’s
Congress on 16 March 2007, the new enterprise income tax rates for domestic
enterprises and foreign investment enterprises are unified at 25% and was
effective from 1 January 2008. However, Jinjiang Hengda Ceramics Co., Ltd is
entitled a 50% reduction in income tax for the financial year ended 31 December
2008 pursuant to the “Income Tax Law of the PRC for Enterprises with Foreign
Investments and Foreign Enterprises”. The Company ‘s tax rate is at 25%
effective from 1 January 2009.
|
8.
|
EARNINGS
PER SHARE
|
Earnings
per share information is not presented as its inclusion, for the purpose of this
report, is considered by the director of the Company not meaningful due to the
Group Reorganisation and the preparation of the results of the Group for the
under review periods on the consolidated basis as disclosed in Note 2 to the
financial statements.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
|
9.
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
Buildings
RMB’000
|
Renovation
RMB’000
|
Plant and
machinery
RMB’000
|
Motor
vehicles
RMB’000
|
Office
equipment
RMB’000
|
Total
RMB’000
|
|||||||||||||||||||
|
At
1 January 2008
|
||||||||||||||||||||||||
|
Cost
|
2,913 | 450 | 151,257 | 4,624 | 1,139 | 160,383 | ||||||||||||||||||
|
Accumulated
depreciation
|
(634 | ) | (- | ) | (77,133 | ) | (1,322 | ) | (528 | ) | (79,617 | ) | ||||||||||||
|
Net
book amount
|
2,279 | 450 | 74,124 | 3,302 | 611 | 80,766 | ||||||||||||||||||
|
Year
ended 31 December 2008
|
||||||||||||||||||||||||
|
Opening
net book amount
|
2,279 | 450 | 74,124 | 3,302 | 611 | 80,766 | ||||||||||||||||||
|
Additions
|
— | — | 6,281 | 512 | 226 | 7,019 | ||||||||||||||||||
|
Depreciation
|
(69 | ) | (43 | ) | (14,802 | ) | (472 | ) | (227 | ) | (15,613 | ) | ||||||||||||
|
Closing
net book amount
|
2,210 | 407 | 65,603 | 3,342 | 610 | 72,172 | ||||||||||||||||||
|
At
31 December 2008 and 1 January 2009
|
||||||||||||||||||||||||
|
Cost
|
2,913 | 450 | 157,538 | 5,136 | 1,365 | 167,402 | ||||||||||||||||||
|
Accumulated
depreciation
|
(703 | ) | (43 | ) | (91,935 | ) | (1,794 | ) | (755 | ) | (95,230 | ) | ||||||||||||
|
Net
book amount
|
2,210 | 407 | 65,603 | 3,342 | 610 | 72,172 | ||||||||||||||||||
|
Period
ended 30 June 2009
|
||||||||||||||||||||||||
|
Opening
net book amount
|
2,210 | 407 | 65,603 | 3,342 | 610 | 72,172 | ||||||||||||||||||
|
Additions
|
— | — | 361 | — | 16 | 377 | ||||||||||||||||||
|
Depreciation
|
(35 | ) | (21 | ) | (7,485 | ) | (244 | ) | (121 | ) | (7,906 | ) | ||||||||||||
|
Closing
net book amount
|
2,175 | 386 | 58,479 | 3,098 | 505 | 64,643 | ||||||||||||||||||
|
At
30 June 2009
|
||||||||||||||||||||||||
|
Cost
|
2,913 | 450 | 157,899 | 5,136 | 1,381 | 167,779 | ||||||||||||||||||
|
Accumulated
depreciation
|
(738 | ) | (64 | ) | (99,421 | ) | (2,038 | ) | (875 | ) | (103,136 | ) | ||||||||||||
|
Net
book amount
|
2,175 | 386 | 58,478 | 3,098 | 506 | 64,643 | ||||||||||||||||||
All
property, plant and equipment held by the Group are located in the
PRC.
The
Group’s buildings including renovation with a carrying value of approximately
RMB2, 617,000 and RMB2, 561,000 were pledged as securities to secure the Group’s
interest-bearing bank borrowings at 31 December 2008 and 30 June 2009 (Note
17).
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
|
10.
|
LAND
USE RIGHTS
|
|
|
As
at 30
June
2009
(Unaudited)
RMB’000
|
As
at 31
December
2008
(Audited)
RMB’000
|
||||||
|
At
beginning of the period / year
|
||||||||
|
Cost
|
180 | 180 | ||||||
|
Accumulated
amortisation
|
(12 | ) | (8 | ) | ||||
|
Net
book amount
|
168 | 172 | ||||||
|
For
the period / year
|
||||||||
|
Opening
net book amount
|
168 | 172 | ||||||
|
Amortisation
charge
|
(2 | ) | (4 | ) | ||||
|
Net
book amount
|
166 | 168 | ||||||
|
At
end of the period / year
|
||||||||
|
Cost
|
180 | 180 | ||||||
|
Accumulated
amortisation
|
(14 | ) | (12 | ) | ||||
|
Net
book amount
|
166 | 168 | ||||||
The land
use rights of the Group refer to lands located in PRC which were pledged to the
banks as securities for interest-bearing bank borrowings granted to the Group in
Note 17.
Amortisation
expenses of approximately RMB2, 000 and RMB2, 000 have been charged in
administrative expenses on the face of the Combined Income Statement for the
periods ended 30 June 2008 and 2009 respectively.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
|
11.
|
INVENTORIES
|
|
As
at 30
|
As
at 31
|
|||||||
| June 2009 | December 2008 | |||||||
|
(Unaudited)
|
(Audited)
|
|||||||
|
RMB’000
|
RMB’000
|
|||||||
|
At cost
|
||||||||
|
Raw
materials
|
14,752 | 26,400 | ||||||
|
Work
in progress
|
5,024 | 5,024 | ||||||
|
Finished
goods
|
88,069 | 100,138 | ||||||
| 107,845 | 131,562 | |||||||
During
the financial period ended 30 June 2009, there has been no inventory written off
or allowance of inventory obsolescence made.
|
12.
|
TRADE
RECEIVABLES
|
Trade
receivables are non-interest bearing and generally have credit terms ranging
from 90 days to 120 days and are denominated in Renminbi.
|
(i)
|
Trade receivables that
are neither past due nor
impaired
|
Trade
receivables that are neither past due nor impaired are substantially companies
with a good collection track record with the Group.
|
(ii)
|
Trade receivables that
are past due and/or impaired
|
There is
no trade receivable that is past due and/or impaired.
|
(iii)
|
Trade receivables that
are past due but not
impaired
|
There is
no trade receivable that is past due but not impaired.
There is
no impairment loss recognised in the Combined Income Statements as all the
receivables were subsequently received.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
|
13.
|
PREPAYMENTS
AND OTHER RECEIVABLES
|
|
As
at 30
June
2009
(Unaudited)
RMB’000
|
As
at 31
December
2008
(Audited)
RMB’000
|
|||||||
|
Amounts
due by former related party
|
3,363 | 3,363 | ||||||
|
Amounts
due by director
|
0 | * | — | |||||
|
Others
|
1 | 1 | ||||||
|
Prepayments
|
900 | — | ||||||
| 4,264 | 3,364 | |||||||
The
amounts due by a former related party relate to purchase of property, plant and
equipment and is denominated in Renminbi. These amounts are interest free,
unsecured and repayable on demand. The amount remains outstanding as at the date
of this report. The amount due by a former related party has been subsequently
repaid on 3rd August 2009. The amount due by director has been subsequently
repaid on 29th July 2009.
Prepayments
are amount prepaid for advertisement expenses.
* Amount
less than RMB1,000
|
14.
|
CASH
AND BANK BALANCES
|
|
As
at 30
|
As
at 31
|
|||||||
| June 2009 | December 2008 | |||||||
|
(Unaudited)
|
(Audited)
|
|||||||
|
RMB’000
|
RMB’000
|
|||||||
|
Cash
on hand
|
31 | 49 | ||||||
|
Cash
at bank
|
93,216 | 51,557 | ||||||
| 93,247 | 51,606 | |||||||
Cash and
bank balances are denominated in the following currencies:
|
As
at 30
|
As
at 31
|
|||||||
| June 2009 | December 2008 | |||||||
|
(Unaudited)
|
(Audited)
|
|||||||
|
RMB’000
|
RMB’000
|
|||||||
|
Renminbi
|
93,244 | 51,603 | ||||||
|
Hong
Kong dollar
|
3 | 3 | ||||||
| 93,247 | 51,606 | |||||||
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
14. CASH
AND BANK BALANCES (Continued)
Bank
balances denominated in Renminbi are deposited with banks in the PRC and are not
freely convertible to foreign currencies. The conversion of these RMB
denominated balances into foreign currencies is subject to the foreign exchange
control rules and regulations promulgated by the PRC Government.
The cash
at bank bears effective interest rates of 0.68% and ranging from 0.36% and 0.81%
per annum for the period ended 30 June 2009 and the year ended 31 December 2008
respectively.
|
15.
|
TRADE
PAYABLES
|
|
As
at 30
|
As
at 31
|
|||||||
| June 2009 | December 2008 | |||||||
|
(Unaudited)
|
(Audited)
|
|||||||
|
RMB’000
|
RMB’000
|
|||||||
|
Trade
payables
|
94,847 | 92,888 | ||||||
Trade
payables are denominated in Renminbi and generally have credit terms ranging
from 30 days to 180 days.
|
16.
|
ACCRUED
LIABILITIES AND OTHER PAYABLES
|
|
As
at 30
|
As
at 31
|
|||||||
|
June
2009 December 2008
|
||||||||
| June 2009 | December 2008 | |||||||
|
(Unaudited)
|
(Audited)
|
|||||||
|
RMB’000
|
RMB’000
|
|||||||
|
Dividend
payable
|
-
|
22,455 | ||||||
|
Accrued
liabilities
|
28,370 | 49,527 | ||||||
|
Deposits
payables
|
12,400 | 12,400 | ||||||
|
VAT
payable
|
6,289 | 3,448 | ||||||
|
Amount
owing to a director
|
1,439 | 3,118 | ||||||
| 48,498 | 90,948 | |||||||
Accrued
liabilities and other payables are denominated in the followings
currencies:
|
As
at 30
|
As
at 31
|
|||||||
| June 2009 | December 2008 | |||||||
|
(Unaudited)
|
(Audited)
|
|||||||
|
RMB’000
|
RMB’000
|
|||||||
|
Renminbi
|
48,050 | 89,270 | ||||||
|
Hong
Kong dollar
|
448 | 1,678 | ||||||
| 48,498 | 90,948 | |||||||
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
16. ACCRUED
LIABILITIES AND OTHER PAYABLES (Continued)
Amount
owing to a director relates to advances to the Group for working capital
purposes and is denominated in Hong Kong dollar amounting to approximately
RMB448, 000. The amount is interest free, unsecured and repayable on
demand.
Accrued
liabilities consist mainly of accrued rental, accrued wages, sales commission,
repair and maintenance and electricity expenses.
|
17.
|
INTEREST-
BEARING BANK BORROWINGS
|
|
As
at 30
|
As
at 31
|
|||||||
| June 2009 | December 2008 | |||||||
|
(Unaudited)
|
(Audited)
|
|||||||
|
RMB’000
|
RMB’000
|
|||||||
|
Current
|
||||||||
|
Short-term
bank borrowings
|
||||||||
|
Secured and repayable within one year
|
34,500 | 12,300 | ||||||
The
Group’s interest-bearing bank borrowings are guaranteed by a director and the
pledge of the Group’s building and land use rights (Note 9 and 10). Short-term
bank borrowings bear effective interests rates ranging from 9.3375% to 9.711%
and ranging from 6.0750% to 6.9030% per annum during the year 31 December 2008
and period ended 30 June 2009 respectively.
|
18.
|
SHARE
CAPITAL
|
|
As
at 30
|
As
at 31
|
|||||||
| June 2009 | December 2008 | |||||||
|
(Unaudited)
|
(Audited)
|
|||||||
|
RMB’000
|
RMB’000
|
|||||||
|
Paid-up
share capital
|
0 | * | 0 | * | ||||
* Amount
less than RMB1,000
The
Company was incorporated in British Virgin Islands on 29 May 2009 under the
British Virgin Islands Business Companies Act as a limited liability company. At
date of incorporation, the authorised share capital of the Company was US$50,000
comprising 50,000 ordinary shares of US$1.00 each. At the date of this report,
the issued share capital of the Company was US$1 comprising 1 fully paid shares
of US$1.00 each.
The share
capital balance as at 31 December 2008 represent the issued share capital of
Stand Best Creation Limited.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
|
19.
|
RESERVES
|
a) Statutory
reserve
In
accordance with the relevant laws and regulations of the PRC, the subsidiaries
of the Company established in the PRC are required to transfer 10% of its profit
after taxation prepared in accordance with the accounting regulation of the PRC
to the statutory reserve until the reserve balance reaches 50% of the respective
registered capital. Such reserve may be used to offset accumulated losses or
increase the registered capital of these subsidiaries, subject to the approval
from the PRC authorities, and are not available for dividend distribution to the
shareholders.
b)
Currency
translation
reserve
The
reserve comprises all foreign exchange differences arising from the translation
of the financial statements of Stand Best Creation Limited whose financial
statements for 30 June 2009 were presented in Hong Kong dollar.
c) Merger
reserve
The
merger reserve of the Group represents the difference between the nominal value
of the shares of the subsidiaries acquired over the nominal value of the shares
of the Company issued in exchange thereof.
|
20.
|
SIGNIFICANT
RELATED PARTY TRANSACTIONS
|
Other
than the related party information disclosed elsewhere in the Unaudited Combined
Financial Statements, the following are significant related party transactions
entered into between the Group and former related parties at agreed
rates:
|
Period
ended 30 June
|
||||||||
|
2009
|
2008
|
|||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||
|
RMB’000
|
RMB’000
|
|||||||
|
Rental paid to a former related party
|
- | 391 | ||||||
The
former related party refers to a former shareholder of Jinjiang Hengda, Jinjiang
City Anhai Junbing Hengda Construction Material Factory Co., Ltd in which a
director of Jinjiang Hengda had an interest in the said company. The former
shareholder ceased to be a related party or a shareholder of the Company from
23
rd
April 2008.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
|
21.
|
COMMITMENTS
|
|
|
(a)
|
Operating
lease commitments
|
The Group
leases production factories, warehouses and employees’ hostel from non related
parties under non-cancellable operating lease arrangements. The leases have
varying terms and the total future minimum lease payments of the Group under
non-cancellable operating leases for assets are as follows:
|
As
at 30
|
As
at 31
|
|||||||
| June 2009 | December 2008 | |||||||
|
(Unaudited)
|
(Audited)
|
|||||||
|
RMB’000
|
RMB’000
|
|||||||
|
Not
later than one year
|
10,962 | 13,192 | ||||||
|
Later
than one year and not later than five years
|
8,373 | 8,734 | ||||||
| 19,335 | 21,926 | |||||||
|
(b)
|
Other
commitments
|
|
As
at 30
|
As
at 31
|
|||||||
| June 2009 | December 2008 | |||||||
|
(Unaudited)
|
(Audited)
|
|||||||
|
RMB’000
|
RMB’000
|
|||||||
|
Advertising
expenditure contracted but not provided for in the financial
statements
|
- | 1,800 | ||||||
|
22.
|
SEGMENT
INFORMATION
|
For
management purposes, the Group is organised into business units based on their
business activities, and has five reportable operating segments as
follows:
|
1)
|
Glazed
tiles
|
Glazed
tiles have a glossy finish and coloured patterns may be added to the tiles. They
glazed does not go beyond the surface of the tile and the colour on the inside
will show if it is chipped. Although glazed tiles are less water resistant than
matt tiles, they are easier to clean due to their glossy
surface.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
22. SEGMENT
INFORMATION (Continued)
|
2)
|
Porcelain
tiles
|
Porcelain
tiles are fired at extreme temperature and are therefore stronger and harder
than other types of ceramic tiles. They have the same colour on both surfaces
and from the inside of the tiles and are extremely wear-resistant. Although
porcelain tiles have a matt surface, they absorb less water than other ceramic
tiles, and as such, they are an excellent choice for exterior tiling where there
is regular exposure to moisture.
|
3)
|
Glazed
porcelain tiles
|
Glazed
porcelain tiles combined the advantages of the two types of tiles, enabling the
tile to have a porcelain body with a stain-proof and glossy finish.
|
4)
|
Rustic
tiles
|
Rustic
tiles are generally used for interior walls and flooring as they are
aesthetically beautiful and have greater versatility in their
design.
|
5)
|
Ultra-slim
tiles
|
Ultra-slim
tiles constitute half the thickness of average tiles. Due to their thinness,
such tiles are environmentally friendly as they can be applied on walls with
special materials that are able to retain heat during winter and keep buildings
cool during summer. The production process is also more environmentally friendly
because less raw materials energy were used during the production
process.
Management
monitors the operating results of its business units separately for the purpose
of making decisions about resource allocation and performance assessment.
Segment performance is evaluated based on operating profit or loss which in
certain respects, as explained in the table below, is measured differently from
operating profit or loss in the consolidated financial statements. Group income
taxes are managed on a group basis and are not allocated to operating
segments.
Transfer
prices between operating segments are on an arm’s length basis in a manner
similar to transaction with third parties, if any.
The
segment information provided to the management for the reportable segments for
the financial period from 1 January 2009 to 30 June 2009 is as
follows:
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
22.
SEGMENT INFORMATION (Continued)
(A)
Financial period from 1
January 2009 to 30 June 2009 (unaudited)
|
|
Glazed Tiles
RMB’000
|
Porcelain
Tiles
RMB’000
|
Glazed
Porcelain
Tiles
RMB’000
|
Rustic
Tiles
RMB’000
|
Ultra-
Slim
Tiles
RMB’000
|
Total
RMB’000
|
||||||||||||||||||
|
Revenue:
|
||||||||||||||||||||||||
|
-
external sales (
1
)
|
42,917 | 319,223 | 14,658 | 18,360 | 4,571 | 399,729 | ||||||||||||||||||
|
Results:
|
||||||||||||||||||||||||
|
Interest
income
|
16 | 106 | 5 | 6 | 1 | 134 | ||||||||||||||||||
|
interest
expenses
|
50 | 329 | 15 | 18 | 4 | 416 | ||||||||||||||||||
|
Depreciation
and amortisation
|
950 | 6,239 | 297 | 343 | 79 | 7,909 | ||||||||||||||||||
|
Segment
profit
|
11,990 | 78,830 | 3,755 | 4,339 | 1,001 | 99,915 | ||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Addition
to non-current assets (
2
)
|
45 | 298 | 14 | 16 | 4 | 377 | ||||||||||||||||||
|
Reportable
segment assets
|
62,619 | 411,705 | 19,614 | 22,662 | 5,226 | 521,826 | ||||||||||||||||||
|
Reportable
segment liabilities
|
23,012 | 151,298 | 7,208 | 8,328 | 1,920 | 191,766 | ||||||||||||||||||
|
|
(1)
|
There
is no revenue from transactions with a single external customer amounting
to 10 per cent or more of the Group’s
revenue.
|
|
|
(2)
|
Additions
to non-current assets consist of additions to property, plant and
equipment and land use rights.
|
(B)
Reconciliation of reportable
segment revenue, profit and loss, assets and liabilities
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
22.
SEGMENT INFORMATION (Continued)
The
segment information provided to the management for the reportable segments for
the financial period from 1 January 2008 to 30 June 2008 is as
follows:
(A)
Financial period from 1
January 2008 to 30 June 2008 (Unaudited)
|
|
Glazed
Tiles
RMB’000
|
Porcelain
Tiles
RMB’000
|
Glazed
Porcelain
Tiles
RMB’000
|
Rustic
Tiles
RMB’000
|
Ultra-
Slim
Tiles
RMB’000
|
Total
RMB’000
|
||||||||||||||||||
|
Revenue:
|
||||||||||||||||||||||||
|
-
external sales (
1
)
|
47,154 | 303,182 | 8,442 | 17,835 | 220 | 376,833 | ||||||||||||||||||
|
Results:
|
||||||||||||||||||||||||
|
Interest
income
|
197 | 1,121 | 33 | 63 | 1 | 1,415 | ||||||||||||||||||
|
Interest
expenses
|
55 | 315 | 9 | 18 | 0 | * | 397 | |||||||||||||||||
|
Depreciation
and amortisation
|
1,079 | 6,135 | 180 | 348 | 4 | 7,746 | ||||||||||||||||||
|
Segment
profit
|
13,995 | 79,566 | 2,342 | 4,511 | 53 | 100,467 | ||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Addition
to non-current assets (
2
)
|
765 | 4,352 | 128 | 247 | 3 | 5,495 | ||||||||||||||||||
|
Reportable
segment assets
|
63,342 | 360,119 | 10,602 | 20,417 | 237 | 454,717 | ||||||||||||||||||
|
Reportable
segment liabilities
|
27,803 | 158,069 | 4,653 | 8,962 | 104 | 199,591 | ||||||||||||||||||
|
|
(1)
|
There
is no revenue from transactions with a single external customer amounting
to 10 per cent or more of the Group’s
revenue.
|
|
|
(2)
|
Additions
to non-current assets consist of additions to property, plant and
equipment and land use rights.
|
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
22.
SEGMENTS INFORMATION (Continued)
(B)
Reconciliation of reportable
segment revenue, profit and loss, assets and liabilities
|
As
at
30
June 2008
RMB’000
(Unaudited)
|
||||
|
Profit
or loss
|
||||
|
Total
profit for reportable segments
|
100,467 | |||
|
Unallocated
other income and expenses
|
(1,706 | ) | ||
|
Profit
from operations
|
98,761 | |||
|
Assets
|
||||
|
Total
assets for reportable segments
|
454,717 | |||
|
Unallocated
assets
|
3 | |||
|
Group
assets
|
454,720 | |||
|
Liabilities
|
||||
|
Total
liabilities for reportable segments
|
199,591 | |||
|
Unallocated
liabilities
|
1,678 | |||
|
Group
liabilities
|
201,269 | |||
|
23.
|
FINANCIAL
RISK MANAGEMENT OBJECTIVES -
POLICIES
|
The
Group’s overall financial risk management programme seeks to minimise potential
adverse effects of financial performance of the group. Management has in place
processes and procedures to monitor the Group’s risk exposures whilst balancing
the costs associated with such monitoring and management against the costs of
risk occurrence. The Group’s risk management policies are reviewed periodically
for changes in market conditions and the Group’s operations.
The Group
is exposed to financial risks arising from its operations and the use of
financial instruments. The key financial risks included credit risk, liquidity
risk, interest rate risk, foreign currency risk and market price
risk.
The Group
does not hold or issue derivative financial instruments for trading purposes or
to hedge against fluctuations, if any, in interest rates and foreign
exchange.
There has
been no change to the Group’s exposure to these financial risks or the manner in
which it manages and measures the risk.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
23.
FINANCIAL RISK MANAGEMENT OBJECTIVES — POLICIES
(Continued)
(i) Credit
risk
Credit
risk is the risk that one party to a financial instrument will fail to discharge
an obligation and cause the Group to incur a financial loss. The Group’s
exposure to credit risk arises primarily from bank balances and trade
receivables. For trade receivables, the Group adopt the policy of dealing only
with customers of appropriate credit history to mitigate credit risk. For other
financial assets, the Group adopt the policy of dealing only with high credit
quality counterparties.
As the
Group does not hold any collateral, the maximum exposure to credit risk for each
class of financial assets is the carrying amount of that class of financial
assets presented on the balance sheet.
Bank
balances
The
Group’s bank deposits are placed with reputable banks in the PRC.
Trade
receivables
The
Group’s objective is to seek continual growth while minimising losses incurred
due to increased credit risk exposure.
The Group
does not have significant concentration of credit risk as the top five customers
in aggregate form approximately 25.58% and 29.71% of trade receivables balance
as at 30 June 2009 and 31 December 2008 respectively.
The
Group’s exposure to credit risks is influenced mainly by the individual
characteristics of each customer. The Group typically gives the existing
customers credit terms ranging from 90 days to 120 days. In deciding whether
credit shall be extended, the Group will take into consideration factors such as
the relationship with the customer, its payment history and credit worthiness.
In relation to new customers, the sales and marketing department will prepare
credit proposals for approval by the managing director.
The Group
performs ongoing credit evaluation of its customers’ financial condition and
requires no collateral from its customers. The provision for impairment loss for
doubtful debts is based upon a review of the expected collectibles of all trade
and other receivables.
Further
details of credit risks on trade receivables are disclosed in Note
12.
(ii)
Liquidity risk
Liquidity
risk is the risk that the Group will encounter difficulty in raising funds to
meet commitments associated with financial instruments. Liquidity risk may
result from an inability to sell a financial asset quickly at close to its fair
value.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
23. FINANCIAL
RISK MANAGEMENT OBJECTIVES — POLICIES (Continued)
(ii)
Liquidity
risk (Continued)
The
Group’s exposure to liquidity risk arises primarily from mismatches of the
maturities of financial assets and liabilities. The Group’s objective is to
maintain a balance between continuity of funding and flexibility through the use
of stand-by credit facilities.
The
Group’s financial liabilities, including trade payables, accrued liabilities and
other payables and bank borrowings, as at 30 June 2009 and 31 December 2008,
have maturity period of less than 1 year or on demand from the respective
balance sheet date.
The Group
ensures that there are adequate funds to meet all its obligations in a timely
and cost-effective manner. The Group maintains sufficient level of cash and cash
equivalents and has available adequate amount of committed credit facilities
from financial institutions to meet its working capital
requirements.
(iii)
Interest
rate risk
Interest
rate risk is the risk that the fair value or future cash flows of the Group’s
financial instruments will fluctuate because of changes in market interest
rates.
The
Group’s exposure to interest rate risk arises primarily from short-term bank
borrowings. The Group does not have investment in other financial assets. The
Group’s policy is to maintain all its borrowings on a fixed rate basis. The
interest rates and terms of repayment of the bank borrowings are disclosed in
Note 17.
Bank
borrowings subject to fixed interest rates are contractually repriced at
intervals of 12 months. The other financial instruments of the Group are not
subject to significant interest rate risk.
(iv)
Foreign
currency risk
Currency
risk is the risk that the value of a financial instrument will fluctuate due to
changes in foreign exchange rates. Currency risk arises when transactions are
denominated in foreign currencies.
The
Group’s operations are primarily conducted in the PRC. All the sales and
purchases transactions are denominated in RMB. As such, the operations are not
exposed to exchange rate fluctuation.
As at 30
June 2009 and 31 December 2008, all the monetary assets and monetary liabilities
were denominated in RMB except for certain insignificant amount of bank balances
(Note 14) and other payables (Note 16) which were denominated in foreign
currencies.
In the
opinion of the management, the Group does not have any significant currency
exposure. Accordingly, the Group has not used any financial instrument to hedge
its foreign currency risk as its risk exposure is considered to be
minimal.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
23. FINANCIAL
RISK MANAGEMENT OBJECTIVES — POLICIES (Continued)
The
management monitors its exposure to currency risk is on an on-going basis and
endeavours to keep the net exposure at an acceptable parameter.
(v)
Price
risk
Price
risk is the risk that the value of a financial instrument will fluctuate due to
changes in market prices.
The Group
does not hold any quoted or marketable financial instrument, hence is not
exposed to any movement in market prices.
|
24.
|
CAPITAL
MANAGEMENT
|
The
Group’s objectives when managing capital are:
|
|
(i)
|
To
safeguard the Group’s ability to continue as a going concern and to be
able to service its debts when they are
due;
|
|
|
(ii)
|
To
maintain an optimal capital structure so as to maximise shareholder value;
and
|
|
|
(iii)
|
To
maintain a strong credit rating and healthy capital ratios in order to
support the Group’s stability and
growth.
|
The Group
actively and regularly reviews and manages its capital structure to ensure
optimal capital structure and shareholder returns, taking into consideration the
future capital requirements of the Group and capital efficiency, prevailing and
projected profitability, projected operating cash flows, projected capital
expenditures and projected strategic investment opportunities.
The Group
is not subject to externally imposed capital requirements, except for, as
disclosed in Note 19(a), the Group’s PRC subsidiary is required by the Foreign
Enterprise Law of the PRO to contribute to and maintain a non-distributable
statutory reserve fund whose utilisation is subject to approval by the relevant
PRO authorities.
In order
to maintain or adjust the capital structure, the Group may adjust the amount of
dividends paid to shareholders, return capital to shareholders, increase share
capital, obtain new borrowings or sell assets to reduce debt.
There
were no changes in the Group’s overall approach to capital management during the
under review periods.
Success
Winner Limited and its subsidiaries
Financial
statements for the period ended 30 June 2009
Notes To
The Unaudited Combined Financial Statements (Continued)
|
25.
|
FINANCIAL
INSTRUMENTS
|
As at 30
June 2009 and 31 December 2008, the Group’s financial instruments mainly
consisted of cash and bank balances, trade receivables, other receivables, trade
payables, accrued liabilities, other payables and bank borrowings.
Fair
value
The
carrying amounts of financial assets and financial liabilities with a maturity
of less than one year approximate their fair values.
The Group
does not anticipate that the carrying amounts recorded at balance sheet date
would be significantly different from the values that would eventually be
received or settled.
|
26.
|
SUBSEQUENT
EVENTS
|
Except
for the events disclosed in Note 2, no other item, transaction or event of a
‘material or unusual nature has arisen in the interval between 31 December 2008
and the date of the report from the independent auditors.
Financial
statements for the period ended 30 June 2009
Statement
by director
The
director is responsible for the preparation and fair presentation of these
unaudited combined financial statements in accordance with the provisions of
International Financial Reporting Standards. This responsibility includes:
designing, implementing and maintaining internal control relevant to the
preparation and fair presentation of financial statements that are free from
material misstatement, whether due to fraud or error, selecting and applying
appropriate accounting policies; and making accounting estimates that are
reasonable in the circumstances
In the
opinion of the director,
|
(a)
|
the
accompanying unaudited combined statement of financial position, unaudited
combined statement of comprehensive income, unaudited combined statement
of changes in equity and the unaudited combined statement of cash flow,
together with the notes thereon are drawn up so as to give a true and fair
view of the state of affairs of the Group as at 30 June 2009 and of the
results of the business, changes in equity and cash flows of the Group for
the financial periods then ended,
and
|
|
(b)
|
at
the date of this statement, there are reasonable grounds to believe that
the Company will be able to pay its debts as and when they fall
due.
|
By
Director
WONG KUNG
TOK
Dated: 17
AUG 2009
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
REPORT
FROM THE INDEPENDENT AUDITORS FOR THE FINANCIAL YEARS ENDED 31 DECEMBER 2005,
2006, 2007 AND 2008
5 August
2009
The
Director
Success
Winner Limited
Suite
2202, 22n
d
Floor,
Chinachem Tower,
34-37
Connaught Road Central,
Hong
Kong
Dear
Sir
We have
audited the accompanying combined financial statements of the Company and its
subsidiaries (collectively the “Group”), as set out in on pages F-74 to F-103,
which comprises the Combined Balance Sheets of the Group as at 31 December 2005,
2006, 2007 and 2008, the Combined Income Statements, Combined Statements of
Changes in Equity and Combined Cash Flow Statements of the Group for each of the
years ended 31 December 2005, 2006, 2007 and 2008 (the “Relevant Periods”) and a
summary of significant accounting policies and other explanatory notes (the
“Combined Financial Statements”). The Combined Financial Statements, which have
been prepared in accordance with International Financial Reporting Standards
(“IFRS”), are the responsibility of the management of the Company. Our
responsibility is to express an opinion on the Combined Financial Statements
based on our audit.
Management’s responsibility
for the Combined Financial Statements
Management
is responsible for the preparation and fair presentation of these Combined
Financial Statements in accordance with IFRS. This responsibility include:
designing, implementing and maintaining internal control relevant to the
preparation and fair presentation of the Combined Financial Statements that are
free from material misstatements, whether due to fraud or error; selecting and
applying appropriate accounting policies; and making accounting estimates that
are reasonable in the circumstances.
Auditors’
responsibility
Our
responsibility is to express an opinion on these Combined Financial Statements
based on our audit. We conducted our audit in accordance with International
Standards on Auditing. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance
whether the Combined Financial Statements are free from material
misstatement.
An audit
involves performing procedures to obtain audit evidence about the amounts and
disclosures in the Combined Financial Statements. The procedures selected depend
on the auditors’ judgement, including the assessment of the risks of material
misstatement of the Combined Financial Statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the Combined
Financial Statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating
the overall presentation of the Combined Financial Statements.
We
believe that the audit evidence we have obtained is sufficient and appropriate
to provide a basis for our opinion.
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
REPORT
FROM THE INDEPENDENT AUDITORS FOR THE FINANCIAL YEARS ENDED 31 DECEMBER 2005,
2006, 2007 AND 2008
Opinion
In our
opinion, the Combined Financial Statements, for the purpose of this report and
prepared on the basis set out in Note 2 of this report, presents fairly, in all
material respects, the Group’s combined results, combined changes in equity and
combined cash flows for each of the years ended 31 December 2005, 2006, 2007 and
2008, and of the Group’s financial positions as at 31 December 2005, 2006, 2007
and 2008 and have been properly prepared in accordance with IFRS.
/s/
Foo Kon Tan Grant Thornton
Foo
Kon Tan Grant Thornton
Public
Accountants and Certified Public Accountants Singapore
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
COMBINED
INCOME STATEMENTS
FOR
THE FINANCIAL YEARS ENDED 31 DECEMBER 2005, 2006, 2007 AND 2008
|
|
Year ended 31
December
|
||||||||||||||||
|
2005
|
2006
|
2007
|
2008
|
||||||||||||||
|
Notes
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
|||||||||||||
|
Revenue
|
4
|
396,608 | 495,820 | 649,970 | 776,570 | ||||||||||||
|
Cost
of sales
|
(282,205 | ) | (346,269 | ) | (441,940 | ) | (533,330 | ) | |||||||||
|
Gross
profit
|
114,403 | 149,551 | 208,030 | 243,240 | |||||||||||||
|
Other
income
|
4
|
1,228 | 1,586 | 2,339 | 2,685 | ||||||||||||
|
Selling
and distribution expenses
|
(24,828 | ) | (30,424 | ) | (38,166 | ) | (46,008 | ) | |||||||||
|
Administrative
expenses
|
(4,085 | ) | (5,333 | ) | (6,158 | ) | (9,932 | ) | |||||||||
|
Finance
costs
|
5
|
- | (301 | ) | (576 | ) | (941 | ) | |||||||||
|
Profit
before taxation
|
6
|
86,718 | 115,079 | 165,469 | 189,044 | ||||||||||||
|
Income
tax expense
|
7
|
- | (13,825 | ) | (19,863 | ) | (24,027 | ) | |||||||||
|
Profit
attributable to shareholders
|
86,718 | 101,254 | 145,606 | 165,017 | |||||||||||||
|
Earnings
per share — Basic
|
|||||||||||||||||
|
(RMB
cents)
|
8
|
N/A | N/A | N/A | N/A | ||||||||||||
The
annexed notes form an integral part of and
should be
read in conjunction with these Combined Financial Statements
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
COMBINED
BALANCE SHEETS
AS
AT 31 DECEMBER 2005, 2006, 2007 AND 2008
|
As at 31 December
|
||||||||||||||||||||
|
ASSETS AND
|
Notes
|
2005
|
2006
|
2007
|
2008
|
|||||||||||||||
|
LIABILITIES
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
||||||||||||||||
|
Non-current assets
|
||||||||||||||||||||
|
Property,
plant and equipment
|
9
|
91,734 | 90,574 | 80,766 | 72,172 | |||||||||||||||
|
Land
use rights
|
10
|
179 | 175 | 172 | 168 | |||||||||||||||
| 91,913 | 90,749 | 80,938 | 72,340 | |||||||||||||||||
|
Current
assets
|
||||||||||||||||||||
|
Inventories
|
11
|
88,814 | 115,031 | 156,244 | 131,562 | |||||||||||||||
|
Trade
receivables
|
12
|
119,582 | 140,389 | 181,236 | 195,848 | |||||||||||||||
|
Other
receivables
|
13
|
2,913 | 2,914 | 3,364 | 3,364 | |||||||||||||||
|
Cash
and bank balances
|
14
|
4,902 | 12,593 | 18,507 | 51,606 | |||||||||||||||
| 216,211 | 270,927 | 359,351 | 382,380 | |||||||||||||||||
|
Current
liabilities
|
||||||||||||||||||||
|
Trade
payables
|
15
|
83,588 | 110,570 | 137,948 | 92,888 | |||||||||||||||
|
Accrued
liabilities and other payables
|
16
|
180,475 | 158,143 | 56,526 | 90,948 | |||||||||||||||
|
Interest-bearing
bank borrowings
|
17
|
- | 4,500 | 9,500 | 12,300 | |||||||||||||||
|
Income
tax payable
|
- | 3,197 | 5,443 | 5,133 | ||||||||||||||||
| 264,063 | 276,410 | 209,417 | 201,269 | |||||||||||||||||
|
Net
current (liabilities) / assets
|
(47,852 | ) | (5,483 | ) | 149,934 | 181,111 | ||||||||||||||
|
Net
assets
|
44,061 | 85,266 | 230,872 | 253,451 | ||||||||||||||||
|
EQUITY
|
||||||||||||||||||||
|
Total
shareholder’s equity
|
44,061 | 85,266 | 230,872 | 253,451 | ||||||||||||||||
*Amount
less than RMB1,000
The
annexed notes form an integral part of and
should be
read in conjunction with these Combined Financial Statements
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
COMBINED
STATEMENTS OF CHANGES IN EQUITY
FOR
THE FINANCIAL YEARS ENDED 31 DECEMBER 2005, 2006, 2007 AND 2008
|
Currency
|
||||||||||||||||||||||||
|
Statutory
|
translation
|
|||||||||||||||||||||||
|
Share
|
reserve
|
reserve
|
||||||||||||||||||||||
|
capital
|
RMB’000
|
RMB’000
|
Merger
|
Retained
|
Total
|
|||||||||||||||||||
|
RMB’000
|
(Note
|
(Note
|
reserve
|
earnings
|
equity
|
|||||||||||||||||||
|
(Note 18)
|
19(a))
|
19(b))
|
RMB’000
|
RMB’000
|
RMB’000
|
|||||||||||||||||||
|
Balance
at January 2005
|
27,900 | 7,489 | - |
-
|
-
|
35,389 | ||||||||||||||||||
|
Net
profit for the year
|
- | - | - | - | 86,718 | 86,718 | ||||||||||||||||||
|
Total
recognised income for the year
|
- | - | - | - | 86,718 | 86,718 | ||||||||||||||||||
|
Transfer
to statutory reserve
|
- | 8,672 | - | - | (8,672 | ) | - | |||||||||||||||||
|
Dividends
(Note 20)
|
- | - | - | - | (78,046 | ) | (78,046 | ) | ||||||||||||||||
|
Balance
at 31 December 2005
|
27,900 | 16,161 | - | - | - | 44,061 | ||||||||||||||||||
|
Balance
at 1 January 2006
|
27,900 | 16,161 | - | - | - | 44,061 | ||||||||||||||||||
|
Net
profit for the year
|
- | - | - | - | 101,254 | 101,254 | ||||||||||||||||||
|
Total
recognised income for the year
|
- | - | - | - | 101,254 | 101,254 | ||||||||||||||||||
|
Transfer
to statutory reserve
|
- | 10,125 | - | - | (10,125 | ) | - | |||||||||||||||||
|
Increase
in paid-up capital
|
31,080 | - | - | - | - | 31,080 | ||||||||||||||||||
|
Dividends
(Note 20)
|
- | - | - | - | (91,129 | ) | (91,129 | ) | ||||||||||||||||
|
Balance
at 31 December 2006
|
58,980 | 26,286 | - | - | - | 85,266 | ||||||||||||||||||
|
Balance
at 1 January 2007
|
58,980 | 26,286 | - | - | - | 85,266 | ||||||||||||||||||
|
Net
profit for the year
|
- | - | - | - | 145,606 | 145,606 | ||||||||||||||||||
|
Total
recognised income for the year
|
- | - | - | - | 145,606 | 145,606 | ||||||||||||||||||
|
Transfer
to statutory reserve
|
- | 3,204 | - | - | (3,204 | ) | - | |||||||||||||||||
|
Balance
at 31 December 2007
|
58,980 | 29,490 | - | - | 142,402 | 230,872 | ||||||||||||||||||
|
Balance
at 1 January 2008
|
58,980 | 29,490 | - | - | 142,402 | 230,872 | ||||||||||||||||||
|
Currency
translation reserve
|
- | - | 16 | - | - | 16 | ||||||||||||||||||
|
Net
profit recognised directly in equity
|
- | - | 16 | - | - | 16 | ||||||||||||||||||
|
Net
profit for the year
|
- | - | - | - | 165,017 | 165,017 | ||||||||||||||||||
|
Total
recognised income for the year
|
- | - | 16 | - | 165,017 | 165,033 | ||||||||||||||||||
|
Arising
from Reorganisation
|
(58,980 | ) | - | - | 58,980 | - | - | |||||||||||||||||
|
Dividends
(Note 20)
|
- | - | - | - | (142,454 | ) | (142,454 | ) | ||||||||||||||||
|
Balance
at 31 December 2008
|
0 | * | 29,490 | 16 | 58,980 | 164,965 | 253,451 | |||||||||||||||||
* Amount
less than RMB1,000
The
annexed notes form an integral part of and
should be
read in conjunction with these Combined Financial Statements
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
COMBINED
CASH FLOW STATEMENTS
FOR
THE FINANCIAL YEARS ENDED 31 DECEMBER 2005, 2006, 2007 AND 2008
|
Year Ended 31 December
|
||||||||||||||||||||
|
2005
|
2006
|
2007
|
2008
|
|||||||||||||||||
|
Notes
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
||||||||||||||||
|
Cash
flows from operating activities
|
||||||||||||||||||||
|
Profit
before taxation
|
86,718 | 115,079 | 165,469 | 189,044 | ||||||||||||||||
|
Adjustments
for
|
||||||||||||||||||||
|
Amortisation
of land use rights
|
10
|
1 | 4 | 3 | 4 | |||||||||||||||
|
Bad
debts written off
|
6
|
200 | 112 | - | - | |||||||||||||||
|
Depreciation
of property, plant and equipment
|
6/9
|
13,147 | 13,728 | 14,792 | 15,613 | |||||||||||||||
|
Finance
costs
|
5
|
- | 301 | 576 | 941 | |||||||||||||||
|
Interest
income
|
4
|
(104 | ) | (154 | ) | (168 | ) | (394 | ) | |||||||||||
|
Operating
profit before working capital changes
|
99,962 | 129,070 | 180,672 | 205,208 | ||||||||||||||||
|
(Increase)/decrease
in inventories
|
(18,617 | ) | (26,217 | ) | (41,213 | ) | 24,682 | |||||||||||||
|
Increase
in trade receivables
|
(44,301 | ) | (20,919 | ) | (40,847 | ) | (14,612 | ) | ||||||||||||
|
Increase/(decrease)
in trade payables
|
1,546 | 26,982 | 27,378 | (45,060 | ) | |||||||||||||||
|
Increase/(decrease)
in accrued liabilities and other payables
|
10,262 | 5,258 | (535 | ) | 10,290 | |||||||||||||||
|
Cash
generated from operations
|
48,852 | 114,174 | 125,455 | 180,508 | ||||||||||||||||
|
Interest
paid
|
- | (301 | ) | (576 | ) | (941 | ) | |||||||||||||
|
Income
tax paid
|
(10,628 | ) | (17,617 | ) | (24,337 | ) | ||||||||||||||
|
Net
cash generated from operating activities
|
48,852 | 103,245 | 107,262 | 155,230 | ||||||||||||||||
|
Cash
flows from investing activities
|
||||||||||||||||||||
|
Acquisition
of property, plant and equipment
|
9
|
(1,726 | ) | (3,728 | ) | (4,324 | ) | (7,019 | ) | |||||||||||
|
Interest
received
|
104 | 154 | 168 | 394 | ||||||||||||||||
|
Net
cash used in investing activities
|
(1,622 | ) | (3,574 | ) | (4,156 | ) | (6,625 | ) | ||||||||||||
|
Cash
flows from financing activities
|
||||||||||||||||||||
|
Bank
borrowings obtained
|
- | 9,000 | 9,500 | 12,300 | ||||||||||||||||
|
Repayments
of bank borrowings
|
- | (4,500 | ) | (4,500 | ) | (9,500 | ) | |||||||||||||
|
Advances
to related party
|
- | (1 | ) | (450 | ) | - | ||||||||||||||
|
Advances/(repayments)
to a director
|
6,000 | (40,100 | ) | (10,500 | ) | 1,694 | ||||||||||||||
|
Increase
in paid up capital
|
- | 31,080 | - | 0 | * | |||||||||||||||
|
Dividend
paid
|
20
|
(52,351 | ) | (87,459 | ) | (91,242 | ) | (120,000 | ) | |||||||||||
|
Net
cash used in financing activities
|
(46,351 | ) | (91,980 | ) | (97,192 | ) | (115,506 | ) | ||||||||||||
|
Net
increase in cash and cash equivalents
|
879 | 7,691 | 5,914 | 33,099 | ||||||||||||||||
|
Cash
and cash equivalents at 1 January
|
4,023 | 4,902 | 12,593 | 18,507 | ||||||||||||||||
|
Cash
and cash equivalents at 31 December
|
14
|
4,902 | 12,593 | 18,507 | 51,606 | |||||||||||||||
* Amount
less than RMB1,000
The
annexed notes form an integral part of and
should be
read in conjunction with these Combined Financial Statements
Financial
statements for the year ended 31 december 2005, 2006, 2007 and 2008
NOTES
TO THE COMBINED FINANCIAL STATEMENT
|
1.
|
THE
COMPANY
|
The
Company (Registration No. 1533513) was incorporated in British Virgin Islands on
29 May 2009 under the British Virgin Islands Business Companies Act as a limited
liability company under the name of Success Winner Limited. At the date of
incorporation, the paid-up and issued capital of the Company was US$1 divided
into 1 share of US$1.00 each.
The
registered office of the Company is located at P. 0. Box 957, Offshore
Incorporations Centre, Road Town, Tortola, British Virgin Islands. The principal
place of business of the Company is located at Junbing Industrial Zone, Anhai,
Jinjiang City, Fujian Province, The Peoples’ Republic of China
(“PRC”).
The
principal activity of the Company is investment holding. The principal
activities of the company’s subsidiaries are set out in Note 2 to the Combined
Financial Statements.
|
2.
|
THE
REORGANISATION AND BASIS OF
PRESENTATION
|
A
reorganisation exercise was undertaken by the Group to rationalise the corporate
structure for an acquisition by the Special Purpose Acquisition Company (the
“Reorganisation Exercise”). The following steps were undertaken in the
Reorganisation Exercise:
|
|
(a)
|
Acquisition
of Jinjiang Hengda Ceramics Co., Ltd (“Jinjiang
Hengda”)
|
Pursuant
to an equity transfer agreement dated 1 April 2008 entered into between the
former shareholders, Chi Wah Trading Import & Export Co. (“Chi Wah Trading’)
and Jinjiang City Anhai Junbing Hengda Construction Material Factory (“Anhai
Junbing”) and Stand Best Creation Limited (“Stand Best”), Stand Best acquired
100% of the equity in Jinjiang Hengda for a consideration of RMB58,980,000 based
on the paid-up capital of Jinjiang Hengda. The transfer of the equity in
Jinjiang Hengda to Stand Best was approved by the Jinjiang Ministry of Commerce
on 30 April 2008.
|
|
(b)
|
Capitalisation
of amount due from Stand Best to Mr Wong Kung
Tok
|
Pursuant
to the capitalisation agreement dated 30 June 2009 entered into between Mr Wong
Kung Tok and Stand Best, Stand Best capitalised the sum of HK$67,930,978
(equivalent to approximately RMB58.9 mil) owing to Mr Wong Kung Tok via the
issuance of an aggregate of 9,999 ordinary shares of HK$1.00 each as fully paid
in its share capital to the Company.
Following
the capitalisation, Stand Best’s paid up share capital was increased from
HK$1.00 to HK$10,000 divided into 10,000 ordinary shares of HK$1.00
each.
|
|
(c)
|
Incorporation
of the Company
|
On 29 May
2009, the Company was incorporated in British Virgin Islands as the investment
holding company of the Group. 1 ordinary share of US$1.00 was issued by the
Company to Mr Wong Kung Tok and was fully paid on 30 June 2009.
|
|
(d)
|
Acquisition
by the Company
|
Pursuant
to an instrument of transfer dated 30 June 2009 entered into between the Company
and Stand Best, the Company acquired the remaining 1 ordinary share at par value
of HK$1.00 of Stand Best for a consideration of HK$1.00 from Mr Wong Kung
Tok.
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 december 2005, 2006, 2007 and 2008
NOTES
TO THE COMBINED FINANCIAL STATEMENT
|
2.
|
THE
REORGANISATION AND BASIS OF PRESENTATION
(CONTINUED)
|
Pursuant
to the Reorganisation as set out above, the Company will become the holding
company of the Group.
The Group
structure is shown as follows:
|
Success
Winner Limited
(incorporated
in British Virgin Islands)
|
|
↓
100%
|
|
Stand
Best Creation Limited
(incorporated
in Hong Kong)
|
|
↓
100%
|
|
Jinjiang
Hengda Ceramics Co., Ltd
(incorporated
in the
PRC)
|
As
at the date of this report, the Company has direct interests in the following
wholly owned subsidiaries and there are no other subsidiaries or associated
companies of the Group.
|
Name
of
|
Jurisdiction
of
|
Principal
activities
|
Equity
|
Registered
capital
|
||||
|
subsidiaries
|
incorporation
/
|
interest
|
and
paid-up
|
|||||
|
establishment
|
held
|
capital
|
||||||
|
Stand
Best
|
Hong
Kong
|
Investment
holding
|
100%
|
HK$10,000
|
||||
|
Creation
Limited
|
||||||||
|
Jinjiang
Hengda Ceramics Co., Ltd
|
|
PRC
|
|
Design,
development and manufacture of ceramic tiles
|
|
100%
|
|
RMB58,980,000
|
The Group
is regarded as a continuing entity resulting from the Reorganisation since the
management of all the entities which took part in the Reorganisation was
controlled by the same directors and under common shareholders before and
immediately after the Reorganisation. Consequently, immediately after the
Reorganisation, there was a continuation of the control over the entities
financial and operating policy decision and risk and benefits to the ultimate
shareholders that existed prior to the Reorganisation. The Reorganisation has
been accounted for as a Reorganisation under common control in a manner similar
to pooling of interests. Accordingly, the Combined Financial Statements for the
years ended 31 December 2005, 2006, 2007 and 2008 have been prepared on the
basis of merger accounting and comprise the financial statements of the
subsidiaries which were under common control of the ultimate shareholders and
directors that existed prior to the Reorganisation Exercise during the Relevant
Periods or since their respective dates of incorporation.
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES TO THE COMBINED FINANCIAL
STATEMENT
|
3.
|
SIGNIFICANT
ACCOUNTING POLICIES
|
Statement
of compliance
The
Combined Financial Statements have been prepared in accordance with
International Financial Reporting Standards (“IFRSs”) including related
interpretations issued by the International Accounting Standard Board (“IASB”),
and have been consistently applied throughout the years ended 31 December 2005,
2006, 2007 and 2008.
Basis
of preparation of Combined Financial Statements
The Group
has early adopted IFRSs and interpretations which are effective for accounting
periods beginning on or after 1 January 2008 for the preparation of these
Combined Financial Statements of the Group since 1 January 2005. IFRS 1,
First-time Adoption of Financial Reporting Standards, has been applied in
preparing these Combined Financial Statements. These Combined Financial
Statements are the first set of financial statements prepared in accordance with
IFRS by the Group.
The
accounting policies set out below have been applied consistently to all periods
presented in these Combined Financial Statements and in preparing an opening
IFRS balance sheet as at 1 January 2005 for the purpose of the first set of IFRS
financial statements. The accounting policies have been applied consistently by
the Group.
At the
date of this report, the following new and amended IFRSs and interpretations
were issued but not yet effective:
|
IAS
1 (Revised)
|
Presentation
of Financial Statements
|
|
|
IAS
1
|
Presentation
of Financial Statements — Amendments Relating to Disclosure of Puttable
Financial Instruments and Obligations Arising on
Liquidation
|
|
|
IAS
23 (Revised)
|
Borrowing Costs — Comprehensive Revision to
Prohibit Immediate
Expensing
|
|
|
IAS
27
|
Consolidated and Separate Financial Statements
— Consequential
Amendments
Arising from Amendments to IFRS 3
|
|
|
IAS
27 (Amendment)
|
Cost
of An Investment on First-Time Adoption
|
|
|
IAS
28
|
Investments in Associates — Consequential
Amendments Arising from
Amendments
to IFRS 3
|
|
|
IAS
31
|
Interests in Joint Ventures — Consequential
Amendments Arising from
Amendments
to IFRS 3
|
|
|
IAS
32
|
Financial
Instruments: Presentation — Amendments Relating to Puttable Financial
Instruments and Obligation Arising on Liquidation
|
|
|
IAS
39
|
Financial
Instruments: Recognition and Measurement — Amendments for Eligible Hedged
Items
|
|
|
IFRS
1
|
First-time
Adoption of IFRS — Amendment Relating to Cost of an Investment on
First-Time Adoption
|
|
|
IFRS
2
|
Share-based Payment — Amendment Relating to
Vesting Conditions and
Cancellations
|
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES TO THE COMBINED FINANCIAL
STATEMENT
|
3.
|
SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
|
|
IFRS
3
|
Business Combinations — Comprehensive Revision
on Applying the
Acquisition
Method
|
|
|
IFRS
7
|
Financial Instruments: Disclosures —
Amendments Relating to Puttable
Financial
Instruments and Obligations Arising on
Liquidation
|
|
|
IFRS
8
|
Operating
Segments
|
|
|
IFRIC
13
|
Customer
Loyalty Programmes
|
|
|
IFRIC
15
|
Agreements
for the Construction of Real Estate
|
|
|
IFRIC
16
|
Hedges
of a Net Investment in a Foreign Operation
|
|
|
IFRIC
17
|
Distributions
of Non-Cash Assets to Owners
|
|
|
Annual
Improvement Process
|
Improvements
to IFRSs
2008
|
The
management does not anticipate that the adoption of the above IFRSs (including
consequential amendments) and interpretations will result in any material impact
to the financial statements in the period of initial application, except for IAS
1 (Revised) and IFRS 8 as indicated below.
IAS 1
(Revised)
The
revised Standard requires:
|
|
·
|
changes
in equity arising from transactions with owners in their capacity as
owners to be presented separately from components of comprehensive
income;
|
|
|
·
|
components
of comprehensive income to be excluded from statement of changes in
equity;
|
|
|
·
|
items
of income and expenses and components of other comprehensive income to be
presented either in a single statement of comprehensive income with
subtotals, or in two separate statements (a separate statement of profit
and loss followed by a statement of comprehensive
income);
|
|
|
·
|
presentation of restated balance
sheet as at the beginning of the comparative period when entities make
restatements or reclassifications of comparative
information.
|
The
revisions also include changes in the titles of some of the financial statements
primary statements. The Group will apply the revised standard from 1 January
2009 and provide comparative information that conforms to the requirements of
the revised standard. The key impact of the application of the revised standard
is the presentation of an additional primary statement, that is, the statement
of comprehensive income.
IFRS 8
IFRS 8
replaces IAS 14 Segment Reporting. In doing so it extends the scope of segment
reporting. It requires the identification of operating segments based on
internal reports that are regularly reviewed by the Group’s chief operating
decision maker in order to allocate resources to the segment and assess its
performance. It requires amongst others, reconciliations of total reportable
segment revenues, total profit or loss, total assets, and other amounts
disclosed for reportable segments to corresponding amounts in the entity’s
Combined Financial Statements and an explanation of how segment profit or loss
and segment assets are measured for each reportable segment The Group will apply
IFRS 8 from 1 January 2009 and provide comparative information that conforms to
the requirements of IFRS 8. The Group expects operating segments to be disclosed
under IFRS 8.
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES TO THE COMBINED FINANCIAL
STATEMENT
|
3.
|
SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
|
Critical
accounting estimates and judgements
Estimates
and judgements are continually evaluated and are based on historical experience
and other factors, including expectations of future events that are believed to
be reasonable under the circumstances.
The Group
makes estimates and assumptions concerning the future. The resulting accounting
estimates and assumptions that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next
financial year are discussed below:
Key
sources of estimation uncertainty
Depreciation of property,
plant and equipment
Property,
plant and equipment are depreciated on a straight-line basis over their
estimated useful lives. Management estimates the useful lives of property, plant
and equipment to be within 5 to 40 years. The carrying amounts of the Group’s
property, plant and equipment as at 31 December 2005, 2006, 2007 and 2008 were
RMB91,734,000, RMB90,574,000, RMB80,766,000 and RMB72,172,000 respectively.
Changes in the expected level of usage and technological developments could
impact the economic useful lives and the residual values of these assets,
therefore future depreciation charges could be revised.
Income
tax
The Group
has exposure to income taxes in the PRC. Significant judgement is required in
determining the provision for income taxes. There are certain transactions and
computations for which the ultimate tax determination is uncertain during the
ordinary course of business. The Group recognises liabilities for expected tax
issues based on estimates of whether additional taxes will be due. When the
final tax outcome of these matters is different from the amounts that were
initially recognised, such differences will impact the income tax and deferred
tax provisions in the period in which such determination is made.
Critical
judgement made in applying accounting policies
In the
process of applying the Group’s accounting policies as described below,
management is of the opinion that there are no instances of application of
judgments which are expected to have a significant effect on the amounts
recognised in the financial statements.
Impairment of trade
receivables
The
Group’s management assesses the collectability of trade receivables. This
estimate is based on the credit history of the Group’s customers and the current
market condition. Management assesses the collectability of trade receivables at
the balance sheet date and makes the provision, if any.
Net realizable value of
inventories
Net
realizable value of inventories is the management’s estimation of future selling
price in the ordinary course of business, less estimated costs of completion and
selling expenses. These estimates are based on the current market condition and
the historical experience of selling products of “similar nature”. It could
change significantly as a result of competitors in response to the severe
industry’s cycles.
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES TO THE COMBINED FINANCIAL
STATEMENT
|
3.
|
SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
|
|
(a)
|
Basis
of preparation under common control business
combination
|
A
business combination involving entities under common control is a business
combination in which all the combining entities or business are ultimately
controlled by the same party or parties both before and after the business
combination, and that control is not transitory. The reorganisation exercise
described in Note 2 to the Combined Financial Statements resulted
in
a business combination
involving common control entities, and accordingly the accounting treatment is
outside the scope of IFRS 3 Business Combination. For such common control
business combinations, the merger accounting principles are applied to include
the assets, liabilities, results, changes in equity and cash flows of the
combining entities in the Combined Financial Statements.
In
applying merger accounting, components of financial statements of the combining
entities or businesses for the reporting periods in which the common control
combination occurs are included in the Combined Financial Statements of the
combined entity as if the combination had occurred from the date when the
combining entities or businesses first came under the control of the controlling
party or parties.
A single
uniform set of accounting policies is adopted by the combined entity. Therefore,
the combined entity recognised the assets, liabilities and equity of the
combining entities or businesses at the carrying amounts recognised previously
in the Combined Financial Statements of the controlling party or parties prior
to the common control combination. The carrying amounts are included as if such
Combined Financial Statements had been prepared by the controlling party or
parties, including adjustments required to conform to the combined entity’s
accounting policies and applying those policies to all periods
presented.
There is
no recognition of any goodwill or excess of the acquirers interest in the net
fair value of the acquiree’s identifiable assets, liabilities and contingent
liabilities over cost at the time of the common control combination. The effects
of all transactions between the combining entities or businesses, whether
occurring before or after the combination, are eliminated in preparing the
Combined Financial Statements of the combined entity.
Subsidiaries
are entities controlled by the Group. Control exists when the Group has the
power to govern the financial and operating policies of an entity so as to
obtain benefits from its activities. The existence and effect of potential
voting rights that are currently exercisable or convertible are considered when
assessing whether the Group controls another entity.
For
acquisition of subsidiaries under common control, the identifiable assets and
liabilities were accounted for at their carrying values, in a manner similar to
the pooling-of-interest method of consolidation.
In
preparing the Combined Financial Statements, transactions, balances and
unrealised gains on transactions between the combining entities are eliminated.
Unrealised losses are also eliminated but are considered an impairment indicator
of the assets transferred.
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES TO THE COMBINED FINANCIAL
STATEMENT
|
3.
|
SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
|
|
(b)
|
Property,
plant and equipment
|
Property,
plant and equipment are stated at cost less accumulated depreciation and
impairment losses. The cost of an asset comprises its purchase price and any
directly attributable costs of bringing the asset to the working condition and
location for its intended use. Expenditure incurred after property, plant and
equipment have been put into operation, such as repairs and maintenance, is
normally charged to the income statement in the period in which it is incurred.
In situations where it can be clearly demonstrated that the expenditure has
resulted in an increase in the future economic benefits expected to be obtained
from the use of the property, plant and equipment, and the expenditure of the
item can be measured reliably, the expenditure is capitalised as an additional
cost of that asset.
Depreciation
is calculated on the straight-line basis to write off the cost of property,
plant and equipment, less any estimated residual values, over the following
estimated useful lives:
|
Buildings
|
40 years
|
|
|
Renovation
|
10 years
|
|
|
Plant
and machinery
|
5-10 years
|
|
|
Motor
vehicles
|
10 years
|
|
|
Office
equipment
|
5-10 years
|
Depreciation
methods, useful lives and residual values are reviewed, and adjusted as
appropriate, at each reporting date.
The gain
or loss on disposal or retirement of an item of property, plant and equipment
recognised in the income statement is the difference between the net sales
proceeds and the carrying amount of the relevant asset.
|
|
(c)
|
Land
use rights
|
Land use
rights represent up-front payments to acquire long-term interests in the usage
of land.
Land use
rights are stated at cost less accumulated amortisation and impairment losses.
Amortisation is charged so as to write off the cost of land use rights, using
the straight-line method, over the period of the grant of 50 years, which is the
lease term.
|
|
(d)
|
Impairment
of non-financial assets
|
Assessment
is made at each balance sheet date of whether there is any indication of
impairment of the Group’s property, plant and equipment and intangible assets,
or whether there is any indication that an impairment loss previously recognised
for an asset in prior years may no longer exist or may have decreased. If any
such indication exists, the asset’s recoverable amount is
estimated.
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES TO THE COMBINED FINANCIAL
STATEMENT
|
3.
|
SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
An
impairment loss is recognised only if the carrying amount of an asset exceeds
its recoverable amount. An impairment loss is charged to the combined income
statement in the period in which it arises.
A
previously recognised impairment loss is reversed only if there has been a
change in the estimates used to determine the recoverable amount of an asset,
however not to an amount higher than the carrying amount that would have been
determined had no impairment loss been recognised for the asset in prior
years.
A
reversal of an impairment loss is credited to the combined income statement in
the period in which it arises.
|
|
(e)
|
Financial
assets
|
Financial
assets
which are
under the scope of lAS 39, other than hedging instruments, can be divided into
the following categories: financial assets at fair value through income
statement, held-to-maturity investments, loans and receivables, and
available-for-sale financial assets. Financial assets are assigned to the
different categories by management on initial recognition, depending on the
purpose for which the assets were acquired.
The
designation of financial assets is re-evaluated and classification may be
changed at the reporting date with the exception that the designation of
financial assets at fair value through income statement is not
revocable.
All
financial assets are recognised when, and only when, the Group becomes a party
to the contractual provisions of the instrument. When financial assets are
recognised initially, they are measured at fair value, plus directly
attributable transaction costs.
De-recognition
of financial assets occurs when the rights to receive cash flows from the
instruments expire or are transferred and substantially all of the risks and
rewards of ownership have been transferred. Regular way purchases and sales of
financial assets are accounted for at trade date, i.e., the date that the Group
commits itself to purchase or sell the asset. At each of the balance sheet date,
financial assets are reviewed to assess whether there is objective evidence of
impairment. If any such evidence exists, impairment loss is determined and
recognised.
Receivables
Receivables
are non-derivative financial assets with fixed or determinable payments that are
not quoted in an active market. They arise when the Group provides money, goods
or services directly to a debtor with no intention of trading the receivables.
They are included in current assets, except for maturities greater than 12
months after the balance sheet date. These are classified as non-current
assets.
Receivables
include trade and other receivables. They are subsequently measured at amortised
cost using the effective interest method, less provision for impairment. If
there is objective evidence that the asset has been impaired, the financial
asset is measured at the present value of the estimated future cash flows
discounted at the original effective interest rate. Impairment losses are
reversed in subsequent periods when an increase in the asset’s recoverable
amount can be related objectively to an event occurring after the impairment was
recognised, subject to a restriction that the carrying amount of the asset at
the date the impairment is reversed does not exceed what the amortised cost
would have been had the impairment not been recognised. The impairment or
writeback is recognised in the income statement.
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES TO THE COMBINED FINANCIAL
STATEMENT
|
3.
|
SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
|
|
(f)
|
Financial
liabilities
|
The
Group’s financial liabilities include trade and other payables, accrued
liabilities, dividend payable and interest-bearing bank borrowings.
Financial
liabilities are recognised when the Group becomes a party to the contractual
agreements of the instrument. All interest related charges are recognised as an
expense in “finance costs” in the income statement. Financial liabilities are
derecognised if the Group’s obligations specified in the contract expire or are
discharged or cancelled.
Borrowings
are recognised initially at fair value of proceeds received less attributable
transaction costs, if any. Borrowings are subsequently stated at amortised cost
which is the initial fair value less any principal repayments. Any difference
between the proceeds (net of transaction costs) and the redemption value is
taken to the income statement over the period of the borrowings using the
effective interest method. The interest expense is chargeable on the amortised
cost over the period of the borrowings using the effective interest
method.
Gains and
losses are recognised in the profit and loss account when the liabilities are
derecognised as well as through the amortisation process.
Borrowings
which are due to be settled within twelve months after the balance sheet are
included in current borrowings in the balance sheet even though the original
terms was for a period longer than twelve months and an agreement to refinance,
or to reschedule payments, on a long-term basis is completed after the balance
sheet date. Borrowings to be settled within the Group’s normal operating cycle
are classified as current. Other borrowings due to be settled more than twelve
months after the balance sheet date are included in non-current borrowings in
the balance sheet.
Trade and
other payables and accrued liabilities are initially measured at fair value, and
subsequently measured at amortised cost, using the effective interest rate
method.
Dividend
distributions to shareholders are included in current financial liabilities when
the dividends are payable.
|
|
(g)
|
Inventories
|
Inventories
are valued at the lower of cost and net realisable value. Cost incurred in
bringing
each product to its
present location and conditions are accounted for as
follows:
|
|
(i)
|
Raw
materials at purchase cost on a weighted average basis;
and
|
|
|
(ii)
|
Finished
goods and work in progress at cost of direct materials and labour and a
proportion of manufacturing overheads based on normal operating
capacity.
|
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES TO THE COMBINED FINANCIAL
STATEMENT
|
3.
|
SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
|
|
(g)
|
Inventories
(continued)
|
Net
realisable value is the estimated selling price in the ordinary course of
business less the estimated costs necessary to make the sale.
|
|
(h)
|
Cash
and cash equivalents
|
For the
purpose of the combined cash flow statements, cash and cash equivalents comprise
cash on hand and in banks.
|
|
(i)
|
Provisions
|
Provisions
are recognised when present obligations will probably lead to an outflow of
economic resources from the Group which can be estimated reliably. Timing or
amount of the outflow may still be uncertain. A present obligation arises from
the presence of a legal or constructive commitment that has resulted from past
events.
Provisions
are measured at the estimated expenditure required to settle the present
obligation, based on the most reliable evidence available at the balance sheet
date, including the risks and uncertainties associated with the present
obligation. Any reimbursement expected to be received in the course of
settlement of the present obligation is recognised as a separate asset, not
exceeding the amount of the related provision.
Where
there are a number of similar obligations, the likelihood that an outflow of
economic resources will be required in settlement of the obligations is
determined by considering the class of obligations as a whole.
In
addition, long term
provisions are discounted to their present values, where the effect of the time
value of money is material.
All
provisions are reviewed at the balance sheet date and adjusted to reflect the
current best estimates.
In cases
where the possible outflow of economic resources as a result of present
obligations is considered impossible or remote, or the amount to be provided for
cannot be measured reliably, no liability is recognised in the balance sheet,
unless assumed in the course of a business combination.
|
|
(j)
|
Recognition
of revenue
|
Revenue
is recognised when it is probable that the economic benefits will flow to the
Group and when the revenue can be measured reliably. Revenue is
measured at the fair value of the consideration received or receivable and
represents receivable for goods and services provided in the normal course of
business, net of trade discounts, sales rebates and sales related taxes on the
following bases:
|
|
(i)
|
Revenue
from the sale of goods and scrap materials are recognised when the
significant risks and rewards of ownership have been transferred to the
buyer, provided that the Group maintains neither managerial involvement to
the degree usually associated with ownership, nor effective control over
the goods sold; and
|
|
|
(ii)
|
Interest
income is recognised on a time-proportion basis, taking into account the
principal outstanding and the effective interest rate
applicable.
|
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES
TO THE COMBINED FINANCIAL STATEMENT
|
3.
|
SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
|
|
(k)
|
Income
tax
|
Current
tax
Current
tax is the expected tax payable on the taxable income for the year, using tax
rates enacted at the balance sheet date, and any adjustment to tax payable in
respect of previous years. PRC corporate income tax is provided at rates
applicable to an enterprise in the PRC on income for financial reporting
purpose, adjusted for income and expenses items which are not assessable or
deductible for income tax purposes.
Deferred
tax
Deferred
tax is the tax expected to be payable or recoverable on differences between the
carrying amounts of assets and liabilities in the Combined Financial Statements
and the corresponding tax bases used in the computation of taxable profit, and
is accounted for using the balance sheet liability method.
Deferred
tax liabilities are generally recognised for all taxable temporary differences,
and deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary differences
can be utilised. Such assets and liabilities are not recognised if the temporary
difference arises from the initial recognition of other assets and liabilities
in a transaction that is not a business combination and that affects neither the
tax profit nor the accounting profit.
The
carrying amount of deferred tax assets is reviewed at the balance sheet date and
reduced to the extent that it is no longer probable that sufficient taxable
profits will be available to allow all or part of the asset to be recovered. Any
such reduction is reversed to the extent that it becomes probable that
sufficient taxable profit will be available.
Deferred
tax assets and liabilities are not discounted. Deferred tax is calculated at the
tax rates that are expected to apply in the year when the liability is settled
or the asset realised. Deferred tax is charged or credited to the income
statement, except when it relates to items charged or credited directly to
equity, in which case the deferred tax is also dealt with
in
equity.
Valued-added
tax
The
Group’s sale of goods in the PRC are subjected to Value-added tax (“VAT”) at the
applicable tax rate of 6% for PRC domestic sales. Input VAT on purchases cannot
be deducted from output VAT. The amount payable to the taxation authority is
included as part of “other payables” in the balance sheet.
Revenues,
expenses and assets are recognised net of the amount of VAT except:
|
|
·
|
Where
the VAT incurred on a purchase of assets or services is not recoverable
from the taxation authority, in which case the VAT is recognised as part
of the cost of acquisition of the asset or as part of the expense item as
applicable; and
|
|
|
·
|
Receivables and payables that are
stated with the amount of VAT
included.
|
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES
TO THE COMBINED FINANCIAL STATEMENT
|
3.
|
SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
|
|
(l)
|
Employees
benefits
|
Retirement benefits
scheme
Pursuant
to the relevant regulations of the PRC government, the Group participates in a
local municipal government retirement benefits scheme (the “Scheme”), whereby
the subsidiaries of the Company in the PRC are required to contribute a certain
percentage of the basic salaries of its employees to the Scheme to fund their
retirement benefits. The local municipal government undertakes to assume the
retirement benefits obligations of all existing and future retired employees of
the subsidiaries of the Company. The only obligation of the Group with respect
to the Scheme is to pay the ongoing required contributions under the Scheme
mentioned above. Contributions under the Scheme are charged to the income
statement as incurred. There are no provisions under the Scheme whereby
forfeited contributions may be used to reduce future contributions.
Key management
personnel
Key
management personnel are those persons having the authority and responsibility
for planning, directing and controlling the activities of the entity. Directors
and certain general managers are considered key management
personnel.
|
|
(m)
|
Foreign
currencies
|
|
|
(i)
|
Functional and
presentation currency
|
Items
included in the financial statements of each entity in the Group are measured
using the currency that best reflects the economic substance of the underlying
events and circumstances relevant to that entity (the “functional currency”).
The functional currency of the Company is United States dollars, Stand Best
Creation Limited is Hong Kong dollars and Jinjiang Hengda Ceramics Co., Ltd is
Renminbi. The Group’s principal operations are predominantly conducted in the
People’s Republic of China (“PRC”) and thus the financial statements are
presented in Renminbi (to the nearest thousand), being the currency that best
reflects the economic substance of the underlying events and circumstances
relevant to the Group.
|
|
(ii)
|
Transactions and
balances
|
Foreign
currency transactions are measured and recorded in the functional currency using
the exchange rates prevailing at the dates of the transactions. Monetary assets
and liabilities denominated in foreign currencies are translated at the closing
rates ruling at the respective balance sheet dates. Foreign exchange gains and
losses resulting from the settlement of such transactions and from the
translation at year-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the income
statement.
Non-monetary
items that are measured in terms of historical cost in a foreign currency are
translated using the exchange rates as at the dates of the initial transactions.
Non- monetary items measured at fair value in a foreign currency are translated
using the exchange rates at the date when the fair value was
determined.
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES
TO THE COMBINED FINANCIAL STATEMENT
|
3.
|
SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
|
|
(m)
|
Foreign
currencies (continued)
|
|
|
(iii)
|
Group
companies
|
The
results and financial positions of the Group entities that have functional
currencies different from the presentation currency are translated into the
presentation currency as follows:
|
|
(1)
|
Assets
and liabilities for each balance sheet presented are translated at the
closing rate at the date of that balance
sheet;
|
|
|
(2)
|
Income
and expenses for each income statement are translated at average exchange
rates (unless this average is not a reasonable approximation of the
cumulative effect of the rates prevailing on the transaction dates, in
which case income and expenses are translated at the dates of the
transactions); and
|
|
|
(3)
|
All
resulting exchange differences are recognized as a separate component of
equity.
|
|
|
(n)
|
Related
parties
|
A party
is considered to be related to the Group if:
|
|
(i)
|
directly,
or indirectly through one or more intermediaries, the party (1) controls,
is controlled, or is under common control with, the Company/Group; (2) has
an interest in the Company that gives it significant influence over the
Company/Group; or (3) has joint control over the
Company/Group;
|
|
|
(ii)
|
the
party is an associate;
|
|
|
(iii)
|
the
party is a jointly-controlled
entity;
|
|
|
(iv)
|
the
party is a member of the key management personnel of the Company or its
parent;
|
|
|
(v)
|
the
party is a close member of the family of any individual referred to in (i)
or (iv);
|
|
|
(vi)
|
the
party is an entity that is controlled, jointly controlled or significantly
influenced by or for which significant voting power
in
such entity resides
with, directly or indirectly, any individual referred to in (iv) or (v);
or
|
|
|
(vii)
|
the
party is a post-employment benefit plan for the benefit of employees of
the Company/Group, or of any entity that is a related party of the
Company/Group.
|
|
|
(o)
|
Operating
leases
|
Leases
where substantially all the risks and rewards of ownership of assets remain with
the lessor are accounted for as operating leases. Annual rentals applicable to
such operating leases are charged to the combined income statements on a
straight-line basis over the lease terms except where an alternative basis is
more representative of the pattern of benefits to be derived from the leased
assets. Lease incentives received are recognised in the combined income
statements as an integral part of the aggregate net lease payments made.
Contingent rentals are charged to the combined income statements in the
accounting period in which they are incurred.
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES
TO THE COMBINED FINANCIAL STATEMENT
|
3.
|
SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
|
|
(p)
|
Segment
reporting
|
A segment
is a distinguishable component of the Group within a particular economic
environment (geographical segment) and to a particular industry (business
segment) which is subject to risks and rewards that are different from those of
other segments.
Business
segments
As the
Group operates principally in a single business segment which is the manufacture
and sale of medium to high-end ceramic tiles, no reporting by business
operations is presented.
Geographical
segments
As the
business of the Group is engaged entirely in the PRC, no reporting by
geographical location of operations is presented.
|
|
(q)
|
Share
capital
|
Ordinary
shares are classified as equity. Share capital is determined using the nominal
value of shares that have been issued. Any transaction costs associated with the
issuing of shares are deducted from the proceeds (net of any related income tax
benefits) to the extent that they are incidental cost directly attributable to
the equity transaction.
Retained
earnings include all current and prior period results as determined in the
combined income statements.
|
|
(r)
|
Research
and development costs
|
Research
costs are expensed as incurred, except for development costs which relates to
the design and testing of new or improved materials, products or processes which
are recognised as an asset to the extent that it is expected that such assets
will generate future economic benefits.
|
4.
|
REVENUE
AND OTHER INCOME
|
Revenue
represents the net invoiced value of goods sold, after allowances for trade
discounts. An analysis of the Group’s revenue and other income is as
follows:
|
Year Ended 31 December
|
||||||||||||||||
|
2005
|
2006
|
2007
|
2008
|
|||||||||||||
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
|||||||||||||
|
Revenue
|
||||||||||||||||
|
Sale
of goods
|
396,608 | 495,820 | 649,970 | 776,570 | ||||||||||||
|
Other
income
|
||||||||||||||||
|
Sale
of scrap materials
|
1,124 | 1,432 | 2,171 | 2,291 | ||||||||||||
|
Interest
income
|
104 | 054 | 168 | 394 | ||||||||||||
| 1,228 | 1,586 | 2,339 | 2,685 | |||||||||||||
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES
TO THE COMBINED FINANCIAL STATEMENT
|
5.
|
FINANCE
COSTS
|
|
Year Ended 31 December
|
||||||||||||||||
|
2005
RMB’000
|
2006
RMB’000
|
2007
RMB’000
|
2008
RMB’000
|
|||||||||||||
|
Interest
on bank borrowings
|
— | 301 | 576 | 941 | ||||||||||||
|
6.
|
PROFIT
BEFORE TAXATION
|
The
Group’s profit before taxation is arrived at after charging:
|
Year ended 31 December
|
||||||||||||||||
|
2005
RMB’000
|
2006
RMB’000
|
2007
RMB’000
|
2008
RMB’000
|
|||||||||||||
|
Amortisation
of land use rights
|
1 | 4 | 3 | 4 | ||||||||||||
|
Bad
debts written off
|
200 | 112 | - | - | ||||||||||||
|
Cost
of inventories recognised as expense
|
166,361 | 213,096 | 273,532 | 364,532 | ||||||||||||
|
Depreciation
expense charged to
|
||||||||||||||||
|
-
cost of sales
|
12,920 | 13,438 | 14,385 | 15,102 | ||||||||||||
|
-
administrative expenses
|
227 | 290 | 407 | 511 | ||||||||||||
|
Directors’
remuneration
|
||||||||||||||||
|
-
salaries and related cost
|
162 | 114 | 124 | 142 | ||||||||||||
|
-
retirement scheme contribution
|
3 | 4 | 3 | 5 | ||||||||||||
|
Key
management personnel (other than directors)
|
||||||||||||||||
|
-
salaries and related cost
|
352 | 435 | 494 | 596 | ||||||||||||
|
-
retirement scheme contribution
|
6 | 13 | 13 | 15 | ||||||||||||
|
Research
and development personnel
|
||||||||||||||||
|
-
salaries and related cost
|
552 | 1,152 | 1,523 | 877 | ||||||||||||
|
-
retirement scheme contribution
|
10 | 17 | 24 | 14 | ||||||||||||
|
Other
personnel
|
||||||||||||||||
|
-
salaries and related cost
|
20,777 | 26,629 | 29,553 | 32,910 | ||||||||||||
|
-
retirement scheme contribution
|
358 | 402 | 462 | 526 | ||||||||||||
|
Operating
lease expenses
|
11,034 | 11,214 | 13,192 | 13,192 | ||||||||||||
|
7.
|
INCOME
TAX EXPENSE
|
|
Year ended 31 December
|
|||||||||||||||
|
2005
|
2006
|
2007
|
2008
|
||||||||||||
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
||||||||||||
|
Current
year provision: PRC income tax
|
-
|
13,825 | 19,863 | 24,027 | |||||||||||
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES
TO THE COMBINED FINANCIAL STATEMENT
|
7.
|
INCOME
TAX EXPENSE (CONTINUED)
|
No
deferred tax has been provided as the Group did not have any significant
temporary differences which gave rise to a deferred tax asset or liability at 31
December 2005, 2006, 2007 and 2008.
Reconciliation
between tax expense and profit before taxation at applicable tax rates is as
follows:
|
Year ended 31
|
||||||||||||||||
|
December
|
||||||||||||||||
|
2005
|
2006
|
2007
|
2008
|
|||||||||||||
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
|||||||||||||
|
Profit before taxation
|
86,718 | 115,079 | 165,469 | 189,044 | ||||||||||||
|
Tax
calculated at a tax rate of 27%
|
||||||||||||||||
|
(2008:
25%)
|
23,414 | 31,071 | 44,677 | 47,261 | ||||||||||||
|
Tax
effect of tax exemption and concession
|
(23,414 | ) | (17,262 | ) | (24,820 | ) | (23,631 | ) | ||||||||
|
Tax
effect on non deductible expenses
|
- | 16 | 6 | 397 | ||||||||||||
|
-
|
13,825 | 19,863 | 24,027 | |||||||||||||
Pursuant
to the income Tax Law of the PRC for Enterprises with Foreign Investments and
Foreign Enterprises”, the provision for PRC income tax for the foreign
investment enterprises of production nature established in the Coastal Economic
Open Zone is calculated based on statutory income tax at a rate of 27% for the
relevant period, which included a 24% enterprise income tax and a 3% local
income tax.
Pursuant
to the PRC Enterprise Income Tax :Law passed by the Tenth National People’s
Congress on 16 March 2007, the new enterprise income tax rates for domestic
enterprises and foreign investment enterprises are unified at 25% and was
effective from 1 January 2008.
Based on
the “Income Tax Law of the PRC for Enterprises with Foreign Investments and
Foreign Enterprises”, Jinjiang Hengda Ceramics Co., Ltd is entitled to full
exemption from income tax for the first two years and a 50% reduction in income
tax for the next three years starting from its first profitable year of
operations.
The first
profitable year of Jinjiang Hengda Ceramics Co., Ltd is the calendar year ended
31 December 2004 for the purpose of determining the tax holiday period. Jinjiang
Hengda Ceramics Co., Ltd has obtained written confirmation from the relevant PRC
tax authorities confirming that its 5 year tax holiday period commenced from 1
January 2004 and that the first profit making year was the calendar year ended
31 December 2004.
|
8.
|
EARNINGS
PER SHARE
|
Earnings
per share information is not presented as its inclusion, for the purpose of this
report, is considered
by
the director of the Company not meaningful due to the Group
Reorganisation and the preparation of the results of the Group for the Relevant
Periods on the consolidated basis as disclosed in Note 2 to the financial
statements.
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES
TO THE COMBINED FINANCIAL STATEMENT
|
9.
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
|
|
Plant and
|
Motor
|
Office
|
|
||||||||||||||||||
|
Buildings
|
Renovation
|
machinery
|
vehicles
|
equipment
|
Total
|
|||||||||||||||||||
|
Cost
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
||||||||||||||||||
|
At
1 January 2005
|
2,913 |
-
|
131,337 | 2,804 | 430 | 137,484 | ||||||||||||||||||
|
Additions
|
- |
-
|
4,405 | 641 | 301 | 5,347 | ||||||||||||||||||
|
At
31 December 2005
|
2,913 |
-
|
135,742 | 3,445 | 731 | 142,831 | ||||||||||||||||||
|
Additions
|
- |
-
|
11,765 | 558 | 245 | 12,568 | ||||||||||||||||||
|
At
31 December 2006
|
2,913 |
-
|
147,507 | 4,003 | 976 | 155,399 | ||||||||||||||||||
|
Additions
|
- | 450 | 3,750 | 621 | 163 | 4,984 | ||||||||||||||||||
|
At
31 December 2007
|
2,913 | 450 | 151,257 | 4,624 | 1,139 | 160,383 | ||||||||||||||||||
|
Additions
|
- |
-
|
6,281 | 512 | 226 | 7,019 | ||||||||||||||||||
|
At
31 December 2008
|
2,913 | 450 | 157,538 | 5,136 | 1,365 | 167,402 | ||||||||||||||||||
|
Accumulated
depreciation
|
||||||||||||||||||||||||
|
At
1 January 2005
|
427 | - | 37,147 | 276 | 100 | 37,950 | ||||||||||||||||||
|
Depreciation
charge
|
69 | - | 12,679 | 304 | 95 | 13,147 | ||||||||||||||||||
|
At
31 December 2005
|
496 | - | 49,826 | 580 | 195 | 51,097 | ||||||||||||||||||
|
Depreciation
charge
|
69 | - | 13,183 | 335 | 141 | 13,728 | ||||||||||||||||||
|
At
31 December 2006
|
565 | - | 63,009 | 915 | 336 | 64,825 | ||||||||||||||||||
|
Depreciation
charge
|
69 | - | 14,124 | 407 | 192 | 14,792 | ||||||||||||||||||
|
At
31 December 2007
|
634 | - | 77,133 | 1,322 | 528 | 79,617 | ||||||||||||||||||
|
Depreciation
charge
|
69 | 43 | 14,802 | 472 | 227 | 15,613 | ||||||||||||||||||
|
At
31 December 2008
|
703 | 43 | 91,935 | 1,794 | 755 | 95,230 | ||||||||||||||||||
|
Net
book amount
|
||||||||||||||||||||||||
|
At
31 December 2005
|
2,417 | - | 85,916 | 2,865 | 536 | 91,734 | ||||||||||||||||||
|
At
31 December 2006
|
2,348 | - | 84,498 | 3,088 | 640 | 90,574 | ||||||||||||||||||
|
At
31 December 2007
|
2,279 | 450 | 74,124 | 3,302 | 611 | 80,766 | ||||||||||||||||||
|
At
31 December 2008
|
2,210 | 407 | 65,603 | 3,342 | 610 | 72,172 | ||||||||||||||||||
All
property, plant and equipment held by the Group are located in the
PRC.
The
Group’s building including renovation with a carrying value of approximately
RMB2,729,000 and RMB2,617,000 was pledged as securities to secure the Group’s
interest-bearing bank borrowings at 31 December 2007 and 2008 respectively (Note
17).
During
the financial years 2005, 2006, 2007 and 2008, the Group acquired property,
plant and equipment with an aggregate cost of RMB5,347,000, RMB12,568,000,
RMB4,984,000 and RMB7,019,000 respectively, of which RMB3,621,000, RMB8,840,000,
RMB660,000 and Nil remains outstanding as at year end (Note 16)
|
10.
|
LAND
USE RIGHTS
|
|
2005
RMB’000
|
2006
RMB’000
|
2007
RMB’000
|
2008
RMB’000
|
|||||||||||||
|
At
beginning of the year
|
||||||||||||||||
|
Cost
|
- | 180 | 180 | 180 | ||||||||||||
|
Accumulated
amortisation
|
- |
(1
|
)
|
(5 | ) | (8 | ) | |||||||||
|
Net
book amount
|
- | 179 | 175 | 172 | ||||||||||||
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES
TO THE COMBINED FINANCIAL STATEMENT
|
10.
|
LAND
USE RIGHTS (CONTINUED)
|
|
2005
RMB’000
|
2006
RMB’000
|
2007
RMB’000
|
2008
RMB’000
|
|||||||||||||
|
For
the year
|
||||||||||||||||
|
Opening
net book amount
|
-
|
179 | 175 | 172 | ||||||||||||
|
Addition
|
180 | - | - | - | ||||||||||||
|
Amortisation
|
(1 | ) | (4 | ) | (3 | ) | (4 | ) | ||||||||
|
Closing
net book amount
|
179 | 175 | 172 | 168 | ||||||||||||
|
At
end of the year
|
||||||||||||||||
|
Cost
|
180 | 180 | 180 | 180 | ||||||||||||
|
Accumulated
amortisation
|
(1 | ) | (5 | ) | (8 | ) | (12 | ) | ||||||||
|
Net
book amount
|
179 | 175 | 172 | 168 | ||||||||||||
The land
use rights of the Group refer to lands located in PRC which were pledged to the
banks as securities for interest-bearing bank borrowings granted to the Group in
Note 17.
Amortisation
expenses of approximately RMB1,000, RMB4,000, RMB3,000 and RMB4,000 have been
charged in administrative expenses on the face of the Combined Income Statement
for the years ended 31 December 2005, 2006, 2007 and 2008
respectively.
|
11.
|
INVENTORIES
|
|
As at 31 December
|
||||||||||||||||
|
2005
|
2006
|
2007
|
2008
|
|||||||||||||
|
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
||||||||||||
|
At
cost
|
||||||||||||||||
|
Raw
materials
|
16,724 | 23,176 | 33,408 | 26,400 | ||||||||||||
|
Work
in progress
|
4,822 | 5,079 | 5,431 | 5,024 | ||||||||||||
|
Finished
goods
|
67,268 | 86,776 | 117,405 | 100,138 | ||||||||||||
| 88,814 | 115,031 | 156,244 | 131,562 | |||||||||||||
There has
been no inventory written off or allowance of inventory obsolescence for the
years ended 31 December 2005, 2006, 2007, and 2008.
|
12.
|
TRADE
RECEIVABLES
|
Trade
receivables are non-interest bearing and generally have credit terms ranging
from 90 days to 120 days and are denominated in Renminbi.
|
|
(i)
|
Trade
receivables that are neither past due nor
impaired
|
Trade
receivables that are neither past due nor impaired are substantially companies
with a good collection track record with the Group.
|
|
(ii)
|
Trade receivables that
are past due and/or impaired
|
|
|
There
is no trade receivable that is past due and/or
impaired.
|
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES
TO THE COMBINED FINANCIAL STATEMENT
|
12.
|
TRADE
RECEIVABLES (CONTINUED)
|
|
|
(iii)
|
Trade receivables that
are past due but not impaired
.
The
aging analysis of trade receivables past due but not impaired is as
follows:
|
|
As
at 31 December
|
|||||||||||||||
|
2005
|
2006
|
2007
|
2008
|
||||||||||||
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
||||||||||||
|
Past
due 0-3 months
|
11,226 | 14,741 | 1,039 |
-
|
|||||||||||
|
Past
due 3-6 months
|
- | - | - |
-
|
|||||||||||
|
Past
due over 6 months
|
225 | - | - |
-
|
|||||||||||
| 11,451 | 14,741 | 1,039 |
-
|
||||||||||||
There is
no impairment loss recognised in the Combined Income Statements as all the
receivables were subsequently received.
|
13.
|
OTHER
RECEIVABLES
|
|
As at 31 December
|
||||||||||||||||
|
2005
RMB’000
|
2006
RMB’000
|
2007
RMB’000
|
2008
RMB’000
|
|||||||||||||
|
Amount
due by former related party
|
- | - | - | 3,363 | ||||||||||||
|
Amount
due by a related party
|
2,913 | 2,914 | 3,364 | - | ||||||||||||
|
Others
|
- | - | - | 1 | ||||||||||||
| 2,913 | 2,914 | 3,364 | 3,364 | |||||||||||||
The
amount due by a related party relates to purchase of property, plant and
equipment and are denominated in Renminbi. These amounts are interest free,
unsecured and repayable on demand. The amount remains outstanding as at the date
of this report. The related parties ceased to be a shareholders or related
parties of the Company from
23rd
April 2008. The amount
due by former related party has been subsequently repaid on 3rd August
2009.
|
14.
|
CASH
AND BANK BALANCES
|
|
As at 31 December
|
||||||||||||||||
|
2005
RMB’000
|
2006
RMB’000
|
2007
RMB’000
|
2008
RMB’000
|
|||||||||||||
|
Cash
on hand
|
52 | 84 | 97 | 49 | ||||||||||||
|
Cash
at bank
|
4,850 | 12,509 | 18,410 | 51,557 | ||||||||||||
| 4,902 | 12,593 | 18,507 | 51,606 | |||||||||||||
Cash and
bank balances are denominated in the following currencies:
|
As at 31 December
|
||||||||||||||||
|
2005
RMB’000
|
2006
RMB’000
|
2007
RMB’000
|
2008
RMB’000
|
|||||||||||||
|
Reniminbi
|
4,902 | 12,593 | 18,507 | 51,603 | ||||||||||||
|
Hong
Kong dollar
|
- | - | - | 3 | ||||||||||||
| 4,902 | 12,593 | 18,507 | 51,606 | |||||||||||||
Bank
balances denominated in Renminbi are deposited with banks in the PRC and are not
freely convertible to foreign currencies. The conversion of these RMB
denominated balances into foreign currencies is subject to the foreign exchange
control rules and regulations promulgated by the PRC
Government.
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES
TO THE COMBINED FINANCIAL STATEMENT
|
14.
|
CASH
AND BANK BALANCES (CONTINUED)
|
The cash
at bank bears interest at rates of 0.72%, 0.72%, ranging from 0.72% to 0.81% and
ranging from 0.36% to 0.81% per annum during the years ended 31 December 2005,
2006, 2007 and 2008 respectively.
|
15.
|
TRADE
PAYABLES
|
|
As at 31 December
|
||||||||||||||||
|
2005
RMB’000
|
2006
RMB’000
|
2007
RMB’000
|
2008
RMB’000
|
|||||||||||||
|
Trade
payables
|
83,588 | 110,570 | 137,948 | 92,888 | ||||||||||||
Trade
payables are denominated in Renminbi and generally have credit terms ranging
from 30 days to 180 days.
|
16.
|
ACCRUED
LIABILITIES AND OTHER PAYABLES
|
|
As
at 31 December
|
||||||||||||||||
|
2005
RMB’000
|
2006
RMB’000
|
2007
RMB’000
|
2008
RMB’000
|
|||||||||||||
|
Dividend
payable
|
87,573 | 91,243 | 1 | 22,455 | ||||||||||||
|
Amount
owing to a director
|
51,583 | 11,940 | 1,440 | 3,118 | ||||||||||||
|
Accrued
liabilities
|
26,856 | 33,127 | 40,009 | 49,527 | ||||||||||||
|
Deposits
payables
|
9,200 | 11,200 | 11,200 | 12,400 | ||||||||||||
|
Other
payables for acquisition of property, plant and equipment
|
3,196 | 8,383 | 660 | |||||||||||||
|
VAT
payable
|
2,067 | 2,250 | 3,216 | 3,448 | ||||||||||||
| 180,475 | 158,143 | 56,526 | 90,948 | |||||||||||||
Accrued
liabilities and other payables are denominated in the following
currencies:
|
As
at 31 December
|
||||||||||||||||
|
2005
RMB’000
|
2006
RMB’000
|
2007
RMB’000
|
2008
RMB’000
|
|||||||||||||
|
Renminbi
|
180,475 | 158,143 | 56,526 | 89,270 | ||||||||||||
|
Hong
Kong dollar
|
- | - | - | 1,678 | ||||||||||||
| 180,475 | 158,143 | 56,526 | 90,948 | |||||||||||||
Amount
owing to a director relates to advances to the Group for working capital
purposes and purchase of property, plant and equipment. The amount is interest
free, unsecured and repayable on demand. The amount denominated in Hong Kong
dollar has been capitalised to equity on 30 June 2009.
Accrued
liabilities consist mainly of accrued rental, accrued wages, sales commission,
repair and maintenance and electricity expenses.
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES
TO THE COMBINED FINANCIAL STATEMENT
|
17.
|
INTEREST-
BEARING BANK BORROWINGS
|
|
As at 31 December
|
||||||||||||||||
|
2005
RMB’000
|
2006
RMB’000
|
2007
RMB’000
|
2008
RMB’000
|
|||||||||||||
|
Current
|
||||||||||||||||
|
Short-term
bank borrowing
|
||||||||||||||||
|
Secured
and repayable within one year
|
- | 4,500 | 9,500 | 12,300 | ||||||||||||
The
Group’s interest-bearing bank borrowings are guaranteed by a director and the
pledge of the Group’s buildings and land use rights (Note 9 and 10). Short-term
bank borrowings bear effective interests rates of 7.605%, ranging from 6.39% to
7.956% and ranging from 9.3375% to 9.711% per annum during the years ended 31
December 2006, 2007 and 2008 respectively.
The
carrying amounts of interest-bearing bank borrowings are denominated in
Renminbi.
|
18.
|
SHARE
CAPITAL
|
|
As at 31 December
|
||||||||||||||||
|
2005
RMB’000
|
2006
RMB’000
|
2007
RMB’000
|
2008
RMB’000
|
|||||||||||||
|
Combined
paid-up share capital
|
27,900 | 59,980 | 59,980 | * | ||||||||||||
|
*Amount
less than RMB1,000
|
||||||||||||||||
The
Company was incorporated in British Virgin Islands on 29 May 2009 under the
British Virgin Islands Business Companies Act as a limited liability company. At
date of incorporation, the authorised share capital of the Company was US$50,000
comprising 50,000 ordinary shares of US$1.00 each. At the date of this report,
the issued share capital of the Company was US$1 comprising 1 fully paid shares
of US$1.00 each.
The share
capital balances as at 31 December 2005, 2006 and 2007 represent the issued
share capital of Jinjiang Hengda. The share capital balance as at 31 December
2008 represents the issued share capital of Stand Best Creation Limited as the
Reorganisation Exercise as mentioned in Note 2 has not been completed as at 31
December 2008.
|
19.
|
RESERVES
|
|
|
(a)
|
Statutory
reserve
|
In
accordance with the relevant laws and regulations of the PRC, the subsidiaries
of the Company established in the PRC are required to transfer 10% of its profit
after taxation prepared in accordance with the accounting regulation of the PRC
to the statutory reserve until the reserve balance reaches 50% of the respective
registered capital. Such reserve may be used to offset accumulated losses or
increase the registered capital of these subsidiaries, subject to the approval
from the PRC authorities, and are not available for dividend distribution to the
shareholders.
|
|
(b)
|
Currency
translation reserve
|
The
reserve comprises all foreign exchange differences arising from the translation
of the financial statements of Stand Best Creation Limited whose financial
statements for 31 December 2008 were presented in Hong Kong
dollar.
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES
TO THE COMBINED FINANCIAL STATEMENT
|
19.
|
RESERVES
(CONTINUED)
|
|
|
(c)
|
Merger
reserve
|
The
merger reserve of the Group represents the difference between the nominal value
of the shares of the subsidiaries acquired over the nominal value of the shares
of the Company issued in exchange thereof.
|
20.
|
DIVIDENDS
|
Dividends
disclosed during the Relevant Periods represented dividends declared by Jinjiang
Hengda Ceramics Co., Ltd to its equity owners. The rate of dividend and the
number of shares ranking for dividends are not presented as such information is
not meaningful.
|
21.
|
SIGNIFICANT
RELATED PARTY TRANSACTIONS
|
Other
than the related party information disclosed elsewhere in the Combined Financial
Statements, the following are significant related party transactions entered
into between the Group and former related parties at agreed rates:
|
As at 31 December
|
||||||||||||||||
|
2005
RMB’000
|
2006
RMB’000
|
2007
RMB’000
|
2008
RMB’000
|
|||||||||||||
|
Rental
paid to a former related party
|
1,566 | 1,566 | 1,566 | 522 | ||||||||||||
The
former related party refers to a former shareholder of Jinjiang Hengda, Jinjiang
City Anhai Junbing Hengda Construction Material Factory Co., Ltd in which a
director of Jinjiang Hengda has an interest in the said company. The former
shareholder ceased to be a related party or a shareholder of the Company from
23
rd
April 2008.
|
22.
|
COMMITMENTS
|
|
|
(a)
|
Operating
lease commitments
|
The Group
leases office building from a former related party under non-cancellable
operating lease arrangements. The former shareholder ceased to be a related
party or a shareholder of the Company from 23rd April 2008. The Group also
leases production factories, warehouses and employees’ hostel from non related
parties under non-cancellable operating lease arrangements. The leases have
varying terms and the total future minimum lease payments of the Group under
non-cancellable operating leases for assets are as follows:
|
As at 31 December
|
||||||||||||||||
|
2005
RMB’000
|
2006
RMB’000
|
2007
RMB’000
|
2008
RMB’000
|
|||||||||||||
|
Not
later than one year
|
11,214 | 13,192 | 13,192 | 13,192 | ||||||||||||
|
Later
than one year and not later than five years
|
48,310 | 35,118 | 21,926 | 8,734 | ||||||||||||
| 59,524 | 48,310 | 35,118 | 21,926 | |||||||||||||
|
22.
|
COMMITMENTS
(CONTINUED)
|
|
|
(b)
|
Other
commitments
|
|
As at 31 December
|
||||||||||||||||
|
2005
RMB’000
|
2006
RMB’000
|
2007
RMB’000
|
2008
RMB’000
|
|||||||||||||
|
Advertising
expenditure contracted
but
not provided for in the financial
statements
|
- | - | 2,700 | 1,800 | ||||||||||||
|
23.
|
FINANCIAL
RISK MANAGEMENT OBJECTIVES -
POLICIES
|
The
Group’s overall financial risk management programme seeks to minimise potential
adverse effects of financial performance of the group. Management has in place
processes and procedures to monitor the Group’s risk exposures whilst balancing
the costs associated with such monitoring and management against the costs of
risk occurrence. The Group’s risk management policies are reviewed periodically
for changes in market conditions and the Group’s operations.
The Group
is exposed to financial risks arising from its operations and the use of
financial instruments. The key financial risks included credit risk, liquidity
risk, interest rate risk, foreign currency risk and market price
risk.
The Group
do not hold or issue derivative financial instruments for trading purposes or to
hedge against fluctuations, if any, in interest rates and foreign
exchange.
There has
been no change to the Group’s exposure to these financial risks or the manner in
which it manages and measures the risk.
|
|
(i)
|
Credit
risk
|
Credit
risk is the risk that one party to a financial instrument will fail to discharge
an obligation and cause the Group to incur a financial loss. The Group’s
exposure to credit risk arises primarily from bank balances and trade
receivables. For trade receivables, the Group adopt the policy of dealing only
with customers of appropriate credit history to mitigate credit risk. For other
financial assets, the Group adopt the policy of dealing only with high credit
quality counterparties.
As the
Group does not hold any collateral, the maximum exposure to credit risk for each
class of financial assets is the carrying amount of that class of financial
assets presented on the balance sheet.
Bank
balances
The
Group’s bank deposits are placed with reputable banks in the PRC.
Trade
receivables
The
Group’s objective is to seek continual growth while minimising losses incurred
due to increased credit risk exposure.
The Group
has significant concentration of credit risk as the Group’s top three largest
trade receivables represent approximately 40%, 38%, 24%, and 20% of the trade
receivable balance as at 31 December 2005, 2006, 2007 and 2008
respectively.
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES
TO THE COMBINED FINANCIAL STATEMENT
|
23.
|
FINANCIAL
RISK MANAGEMENT OBLIGATIONS - POLICIES
(CONTINUED)
|
The
Group’s exposure to credit risks is influenced mainly by the individual
characteristics of each customer. The Group typically gives the existing
customers credit terms ranging from 90 days to 120 days. In deciding whether
credit shall be extended, the Group will take into consideration factors such as
the relationship with the customer, its payment history and credit worthiness.
In relation to new customers, the sales and marketing department will prepare
credit proposals for approval by the managing director.
The Group
performs ongoing credit evaluation of its customers’ financial condition and
requires no collateral from its customers. The provision for impairment loss for
doubtful debts is based upon a review of the expected collectibles of all trade
and other receivables.
Further
details of credit risks on trade receivables are disclosed in Note
12.
|
|
(ii)
|
Liquidity
risk
|
Liquidity
risk is the risk that the Group will encounter difficulty in raising funds to
meet commitments associated with financial instruments. Liquidity risk may
result from an inability to sell a financial asset quickly at close to its fair
value.
The
Group’s exposure to liquidity risk arises primarily from mismatches of the
maturities of financial assets and liabilities. The Group’s objective is to
maintain a balance between continuity of funding and flexibility through the use
of stand-by credit facilities.
The
Group’s financial liabilities, including trade payables, accrued liabilities and
other payables and bank borrowings, for the years ended 31 December 2005, 2006,
2007 and 2008 have maturity period of less than 1 year or on demand from the
respective balance sheet date.
The Group
ensures that there are adequate funds to meet all its obligations in a timely
and cost-effective manner. The Group maintains sufficient level of cash and cash
equivalents and has available adequate amount of committed credit facilities
from financial institutions to meet its working capital
requirements.
|
|
(iii)
|
Interest rate
risk
|
Interest
rate risk is the risk that the fair value or future cash flows of the Group’s
financial instruments will fluctuate because of changes in market interest
rates.
The
Group’s exposure to interest rate risk arises primarily from short-term bank
borrowings. The Group does not have investment in other financial assets. The
Group’s policy is to maintain all its borrowings on a fixed rate basis. The
interest rates and terms of repayment of the bank borrowings are disclosed in
Note 17.
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES
TO THE COMBINED FINANCIAL STATEMENT
|
23.
|
FINANCIAL
RISK MANAGEMENT OBLIGATIONS - POLICIES
(CONTINUED)
|
|
|
(iii)
|
Interest rate risk
(continued)
|
Bank
borrowings subject to fixed interest rates are contractually repriced at
intervals of 12 months. The other financial instruments of the Group are not
subject to significant interest rate risk.
|
|
(iv)
|
Foreign currency
risk
|
Currency
risk is the risk that the value of a financial instrument will fluctuate due to
changes in foreign exchange rates. Currency risk arises when transactions are
denominated in foreign currencies.
The
Group’s operations are primarily conducted in the PRC. All the sales and
purchases transactions are denominated in RMB. As such, the operations are not
exposed to exchange rate fluctuation.
As at 31
December 2005, 2006, 2007 and 2008, all the monetary assets and monetary
liabilities were denominated in RMB except for certain insignificant amount of
bank balances (Note 14) and other payables (Note 16) which were denominated in
foreign currencies.
In the
opinion of the management, the Group does not have any significant currency
exposure. Accordingly, the Group has not used any financial instrument to hedge
its foreign currency risk as its risk exposure is considered to be
minimal.
The
management monitors its exposure to currency risk is on an on-going basis and
endeavours to keep the net exposure at an acceptable parameter.
|
|
(v)
|
Price
risk
|
Price
risk is the risk that the value of a financial instrument will fluctuate due to
changes in market prices.
The Group
does not hold any quoted or marketable financial instrument, hence is not
exposed to any movement in market prices.
|
24.
|
CAPITAL
MANAGEMENT
|
The
Group’s objectives when managing capital are:
|
|
(i)
|
To
safeguard the Group’s ability to continue as a going concern and to be
able to service its debts when they are
due;
|
|
|
(ii)
|
To
maintain an optimal capital structure so as to maximise shareholder value;
and
|
|
|
(iii)
|
To
maintain a strong credit rating and healthy capital ratios in order to
support the Group’s stability and
growth.
|
The Group
actively and regularly reviews and manages its capital structure to ensure
optimal capital structure and shareholder returns, taking into consideration the
future capital requirements of the Group and capital efficiency, prevailing and
projected profitability, projected operating cash flows, projected capital
expenditures and projected strategic investment opportunities.
Success
Winner Limited and its subsidiaries
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
NOTES
TO THE COMBINED FINANCIAL STATEMENT
|
24.
|
CAPITAL
MANAGEMENT (CONTINUED)
|
The Group
is not subject to externally imposed capital requirements, except for, as
disclosed in Note 19(a), the Group’s PRC subsidiary is required by the Foreign
Enterprise Law of the PRC to contribute to and maintain a non-distributable
statutory reserve fund whose utilisation is subject to approval by the relevant
PRC authorities. This externally imposed capital requirement has been complied
with by the PRC subsidiary for the financial years ended 31 December 2005, 2006,
2007 and 2008.
In order
to maintain or adjust the capital structure, the Group may adjust the amount of
dividends paid to shareholders, return capital to shareholders, increase share
capital, obtain new borrowings or sell assets to reduce debt.
There
were no changes in the Group’s overall approach to capital management during the
Relevant Periods.
|
25.
|
FINANCIAL
INSTRUMENTS
|
As at 31
December 2005, 2006, 2007 and 2008, the Group’s financial instruments mainly
consisted of cash and bank balances, trade receivables, other receivables, trade
payables, accrued liabilities, other payables and bank borrowings.
Fair
value
The
carrying amounts of financial assets and financial liabilities with a maturity
of less than one year approximate their fair values.
The Group
does not anticipate that the carrying amounts recorded at balance sheet date
would be significantly different from the values that would eventually be
received or settled.
|
26.
|
SUBSEQUENT
EVENTS
|
Except
for the events disclosed in Note 2, no other item, transaction or event of a
material or unusual nature has arisen in the interval between 31 December 2008
and the date of the report from the independent auditors.
Financial
statements for the year ended 31 December 2005, 2006, 2007 and 2008
Statement
by director
The
director is responsible for the preparation and fair presentation of these
combined financial statements in accordance with the provisions of International
Financial Reporting Standards. This responsibility includes: designing,
implementing and maintaining internal control relevant to the preparation and
fair presentation of financial statements that are free from material
misstatement, whether due to fraud or error, selecting and applying appropriate
accounting policies; and making accounting estimates that are reasonable in the
circumstances
In the
opinion of the director,
|
(a)
|
the
accompanying combined balance sheets, combined income statement, combined
statement of changes in equity and the combined cash flow statement,
together with the notes thereon are drawn up so as to give a true and fair
view of the state of affairs of the Group as at 31 December 2005, 2006,
2007 and 2008 and of the results of the business, changes in equity and
cash flows of the Group for the financial years then ended,
and
|
|
(b)
|
at
the date of this statement, there are reasonable grounds to believe that
the Company will be able to pay its debts as and when they fall
due.
|
By
Director
|
|
WONG
KUNG TOK
|
Dated: 5
AUG 2009
Annex
A
MERGER
AND STOCK PURCHASE AGREEMENT
dated
August
19, 2009
by
and among
China
Holdings Acquisition Corp., a Delaware corporation,
as
the Parent,
China
Ceramics Co., Ltd., a British Virgin Islands company,
as
the Purchaser,
Jinjiang
Hengda Ceramics Co., Ltd., a Chinese enterprise
as
Hengda,
Success
Winner Limited, a British Virgin Islands company,
as
the Company,
and
Wong
Kung Tok
as
the Seller
|
3.23
|
Directors
and Officers
|
27
|
|
3.24
|
Labor
Matters
|
27
|
|
3.25
|
Pension
and Benefit Plans
|
28
|
|
3.26
|
Executive
Officers
|
28
|
|
3.27
|
Tax
Matters
|
28
|
|
3.28
|
Fees
|
29
|
|
3.29
|
Business
Operations
|
29
|
|
3.30
|
Powers
of Attorney and Suretyships
|
30
|
|
3.31
|
Other
Information
|
30
|
|
3.32
|
Certain
Business Practices
|
30
|
|
3.33
|
Money
Laundering Laws
|
30
|
|
3.34
|
OFAC
|
31
|
|
3.35
|
Additional
PRC Representations and Warranties
|
31
|
|
ARTICLE
IV REPRESENTATIONS AND WARRANTIES OF THE SELLER
|
32
|
|
|
4.1
|
Ownership
of Stock; Authority
|
32
|
|
4.2
|
Approvals
|
32
|
|
4.3
|
Non-Contravention
|
33
|
|
4.4
|
Litigation
and Claims
|
33
|
|
4.5
|
Investment
Representations
|
33
|
|
4.6
|
Tax
|
34
|
|
ARTICLE
V REPRESENTATIONS AND WARRANTIES OF PARENT
|
34
|
|
|
5.1
|
Due
Incorporation
|
34
|
|
5.2
|
Corporate
Authorization
|
35
|
|
5.3
|
Governmental
Authorization
|
35
|
|
5.4
|
No
Violation
|
35
|
|
5.5
|
Consents
|
35
|
|
5.6
|
Litigation
|
35
|
|
5.7
|
Issuance
of Parent Common Stock
|
36
|
|
5.8
|
Charter
Documents; Legality
|
36
|
|
5.9
|
Capitalization
and Ownership of the Parent
|
36
|
|
5.10
|
Financial
Statements
|
36
|
|
5.11
|
Other
Information
|
37
|
|
5.12
|
Compliance
with Laws
|
37
|
|
5.13
|
Money
Laundering Laws
|
37
|
|
5.14
|
Ownership
of Parent Common Stock
|
37
|
|
5.15
|
Purchaser
|
37
|
|
ARTICLE
VI COVENANTS OF THE COMPANY AND THE SELLER PENDING CLOSING
|
37
|
|
|
6.1
|
Conduct
of the Business
|
37
|
|
6.2
|
Access
to Information
|
39
|
|
6.3
|
Notices
of Certain Events
|
39
|
|
6.4
|
SEC
Filings
|
40
|
|
6.5
|
Financial
Information
|
40
|
|
6.6
|
Exclusivity
|
41
|
|
ARTICLE
VII COVENANTS OF THE COMPANY AND THE SELLER
|
41
|
|
|
7.1
|
Confidentiality
|
41
|
|
7.2
|
Non-Competition
|
41
|
|
7.3
|
Reporting
and Compliance With Law
|
42
|
|
7.4
|
Injunctive
Relief
|
42
|
|
ARTICLE
VIII COVENANTS OF ALL PARTIES HERETO
|
42
|
|
|
8.1
|
Best
Efforts; Further Assurances
|
42
|
|
8.2
|
Confidentiality
|
43
|
|
8.3
|
Best
Efforts to Obtain Consents
|
43
|
|
8.4
|
[Reserved]
|
43
|
|
8.5
|
Registration
|
43
|
|
8.6
|
Procedures
on Registration
|
44
|
|
8.7
|
Lock-up
|
44
|
|
8.8
|
Exclusivity
|
45
|
|
ARTICLE
IX CONDITIONS TO CLOSING
|
45
|
|
|
9.1
|
Condition
to the Obligations of Parent, the Purchaser, the Seller, Hengda and the
Company
|
45
|
|
9.2
|
Conditions
to Obligations of Parent and the Purchaser
|
46
|
|
9.3
|
Conditions
to Obligations of the Company, Hengda and the Seller
|
47
|
|
ARTICLE
X RELIANCE ON REPRESENTATIONS AND WARRANTIES
|
48
|
|
|
10.1
|
Reliance
on Representations and Warranties of the Company and the
Seller
|
48
|
|
10.2
|
Reliance
on Representations and Warranties of Parent and the
Purchaser
|
48
|
|
ARTICLE
XI INDEMNIFICATION
|
49
|
|
|
11.1
|
Indemnification
of Parent, Purchaser
|
49
|
|
11.2
|
Indemnification
of Seller
|
49
|
|
11.3
|
Procedure
|
49
|
|
11.4
|
Periodic
Payments
|
51
|
|
11.5
|
Insurance
|
51
|
|
11.6
|
Limitations
on Indemnification
|
51
|
|
11.7
|
Survival
of Indemnification Rights
|
52
|
|
11.8
|
Offset
|
52
|
|
ARTICLE
XII DISPUTE RESOLUTION
|
52
|
|
|
12.1
|
Arbitration
|
52
|
|
12.2
|
Waiver
of Jury Trial; Exemplary Damages
|
54
|
|
12.3
|
Attorneys’
Fees
|
54
|
|
|
||
|
ARTICLE
XIII TERMINATION
|
54
|
|
|
13.1
|
Termination
Without Default
|
54
|
|
13.2
|
Termination
Upon Default
|
54
|
|
13.3
|
Survival
|
55
|
|
ARTICLE
XIV MISCELLANEOUS
|
55
|
|
|
14.1
|
Waiver
|
55
|
|
14.2
|
Notices
|
55
|
|
14.3
|
Amendments;
No Waivers
|
56
|
|
14.4
|
Ambiguities
|
56
|
|
14.5
|
Publicity
|
56
|
|
14.6
|
Expenses
|
56
|
|
14.7
|
Successors
and Assigns
|
57
|
|
14.8
|
Governing
Law; Jurisdiction
|
57
|
|
14.9
|
Counterparts;
Effectiveness
|
57
|
|
14.10
|
Entire
Agreement
|
57
|
|
14.11
|
Severability
|
57
|
|
14.12
|
Withholding
Rights
|
58
|
|
14.13
|
Captions
|
58
|
|
14.14
|
Construction
|
58
|
MERGER AND STOCK PURCHASE
AGREEMENT
MERGER
AND STOCK PURCHASE AGREEMENT, dated August 19, 2009 (this “Agreement”), by and
among China Holdings Acquisition Corp., a Delaware corporation (“Parent”), China
Ceramics Co., Ltd., a British Virgin Islands company and a wholly-owned
subsidiary of Parent (“Purchaser”), Jinjiang Hengda Ceramics Co., Ltd., a
Chinese enterprise (“Hengda”), Success Winner Limited (the “Company”), a British
Virgin Islands company and the owner of 100% of the equity interests of the
Stand Best Creation Limited, a Hong Kong company which owns 100% of the equity
interest of Hengda (“Stand Best”), and Mr. Wong Kung Tok (the “Seller”), the
owner of 100% of the equity interests of the Company.
WITNESSETH:
WHEREAS,
Hengda is in the business of the manufacture and export of ceramic tiles (the
“Business”);
WHEREAS,
the Seller owns 100% of the issued and outstanding equity securities of the
Company (the “Shares”), the Company owns 100% of the issued and outstanding
equity securities of Stand Best and Stand Best owns 100% of the issued and
outstanding equity securities of Hengda;
WHEREAS,
Parent owns all of the issued and outstanding shares of equity securities of
Purchaser, which was formed for the sole purposes of the merger of the Parent
with and into Purchaser, in which Purchaser will be the surviving corporation
(the ‘‘
Redomestication
Merger
’’), and the acquisition by the Purchaser of the Shares in
accordance with and subject to the terms and conditions of this Agreement (the
“Transaction”).
WHEREAS,
the Redomestication Merger and the Transaction are part of the same integrated
transaction, such that neither of the Redomestication Merger and the Transaction
may occur without the other.
NOW,
THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements herein contained and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
ARTICLE
I
DEFINITIONS
1.1
Definitions
. The
following terms, as used herein, have the following meanings:
“2008
Financial Statements” has the meaning set forth in Section 3.10(a).
“Accounts
Receivable” has the meaning set forth in Section 3.11.
“Act” has
the meaning set forth in Section 8.5.
“Action”
means any action, suit, investigation, hearing or proceeding, including any
audit for taxes or otherwise.
“Additional
Agreements” means each of the Lock-up Agreements, the Employment Agreements, the
Escrow Agreements, the Voting Agreement.
“Affiliate”
means, with respect to any Person, any Person directly or indirectly
controlling, controlled by, or under common control with such other
Person. With respect to any natural person, the term Affiliate shall
also include any member of said person’s immediate family, any family limited
partnership, limited liability company or other entity in which said person owns
any beneficial interest and any trust, voting or otherwise, of which said person
is a trustee or of which said person or any of said person’s immediate family is
a beneficiary.
“Agreement”
has the meaning set forth in the Preamble.
“Arbitrator”
has the meaning set forth in Section 12.1(b).
“Authority”
shall mean any governmental, regulatory or administrative body, agency or
authority, any court or judicial authority, any arbitrator, or any public,
private or industry regulatory authority, whether international, national,
Federal, state, or local.
“Benefits
Arrangement” has the meaning set forth in Section 3.25.
“Books
and Records” means all books and records, ledgers, employee records, customer
lists, files, correspondence, and other records of every kind (whether written,
electronic, or otherwise embodied) owned or used by the Company or any
Subsidiary or in which the Company’s or any Subsidiary’s assets, business, or
transactions are otherwise reflected.
“Business”
has the meaning set forth in the Recitals.
“Business
Day” means any day other than a Saturday, Sunday or a legal holiday on which
commercial banking institutions in New York are not open for
business.
“BVI Law”
has the meaning set forth in Section 1A.1.
“Charter
Documents” has the meaning set forth in Section 3.3.
“Closing”
has the meaning set forth in Section 2.2.
“Closing
Date” has the meaning set forth in Section 2.2.
“Code”
means the Internal Revenue Code of 1986, as amended.
“Company”
has the meaning set forth in the Preamble.
“Company
Benefit Plans” has the meaning set forth in Section 3.25.
“Company
Consent” has the meaning set forth in Section 3.9.
“Company
Indemnitees” has the meaning set forth in Section 11.3.
“Company
Plan” has the meaning set forth in Section 3.25.
“Contingent
Shares” has the meaning set forth in Section 2.3.
“Contract”
means a contract, lease, license, indenture, note, bond, agreement, permit,
concession, franchise or other instrument.
“Conversion
Ratio” has the meaning set forth in Section 1A.6(a).
“Current
Company Plans” has the meaning set forth in Section 3.25.
“Customer”
has the meaning set forth in Section 7.2(b)
“December
Balance Sheet” has the meaning set forth in Section 3.10(b).
“Delaware
Law” has the meaning set forth in Section 1A.1.
“Dissenting
Shares” has the meaning set forth in Section 1A.11(b).
“Dissenter”
has the meaning set forth in Section 1A.11(a).
“Earnout
Escrow Agreement” has the meaning set forth in Section 2.3.
“Effective
Time” has the meaning set forth in Section 1A.2.
“Effectiveness
Period” has the meaning set forth in Section 8.5.
“Employment
Agreements” means the agreements between the Company and each of the persons
listed on
Schedule
9.2(l)
.
“ERISA”
means the Employee Retirement Income Security Act of 1974.
“ERISA
Affiliate” has the meaning set forth in Section 3.25.
“ERISA
Affiliate Plan” has the meaning set forth in Section 3.25.
“Escrow
Agreements” has the meaning set forth in Section 2.3.
“Exchange
Act” means the Securities Exchange Act of 1934.
“Exchange
Act Filings” means filings under the Exchange Act made by the Parent prior to
the Closing Date.
“Financial
Statements” has the means set forth in Section 3.10(a).
“Founders”
means the pre-initial public offering shareholders of Parent.
“GAAP”
means U.S. generally accepted accounting principles, consistently applied and
interpreted.
“Hengda”
has the meaning set forth in the Preamble.
“IFRS”
means the International Financial Reporting Standards adopted by the
International Accounting Standards Board.
“Indebtedness”
includes with respect to any Person, (a) all obligations of such Person for
borrowed money, or with respect to deposits or advances of any kind (including
amounts by reason of overdrafts and amounts owed by reason of letter of credit
reimbursement agreements) including with respect thereto, all interest, fees and
costs, (b) all obligations of such Person evidenced by bonds, debentures, notes,
liens, mortgages or similar instruments, (c) all obligations of such Person
under conditional sale or other title retention agreements relating to property
purchased by such Person, (d) all obligations of such Person issued or assumed
as the deferred purchase price of property or services (other than accounts
payable to creditors for goods and services incurred in the ordinary course of
business), (e) all Indebtedness of others secured by (or for which the holder of
such Indebtedness has an existing right, contingent or otherwise, to be secured
by) any lien or security interest on property owned or acquired by such Person,
whether or not the obligations secured thereby have been assumed, (f) all
obligations of such Person under leases required to be accounted for as capital
leases under IFRS, and (g) all guarantees by such Person.
“Indemnification
Notice” has the meaning set forth in Section 11.3(a).
“Indemnified
Parties” has the meaning set forth in Section 11.3(a).
“Indemnifying
Party” has the meaning set forth in Section 11.3.
“Interim
Financial Statements” has the means set forth in Section 3.10(a).
“Intellectual
Property” means any and all of the following: (A) U.S., international and
non-U.S. patents, patent applications and statutory invention registrations; (B)
trademarks, licenses, inventions, service marks, trade names, trade dress,
slogans, logos and Internet domain names, including registrations and
applications for registration thereof; (C) copyrights, including registrations
and applications for registration thereof, and copyrightable materials; (D)
trade secrets, know-how and similar confidential and proprietary information;
(E) the additional names listed on
Schedule 3.7
and all
derivations thereof; (F) u.r.l.s, Internet domain names and Websites; and (G)
any other type of Intellectual Property right, and all embodiments and fixations
thereof and related documentation, registrations and franchises and all
additions, improvements and accessions thereto, in each case which is owned or
licensed or filed by the Company (or by the Seller with respect to the Company)
or any Subsidiary or used or held for use in the Business, whether registered or
unregistered or domestic or foreign.
“Intellectual
Property Rights” has the meaning set forth in Section 3.16.
“Key
Personnel” has the means set forth in Section 7.1.
“Law”
means any domestic or foreign Federal, state, municipality or local law,
statute, ordinance, code, rule or regulation or common law.
“Leases”
has the meaning set forth in Section 3.14.
“Legal
Requirement” means any federal, state, local, municipal, provincial, foreign or
other law, statute, constitution, principle of common law, resolution,
ordinance, code, edict, decree, rule, regulation, ruling or requirement issued,
enacted, adopted, promulgated, implemented or otherwise put into effect by or
under the authority of any Authority (or under the authority of any national
securities exchange upon which the Parent is then listed or traded)
“Lien”
means, with respect to any asset, any mortgage, lien, pledge, charge, security
interest or encumbrance of any kind in respect of such asset, including any
agreement to give any of the foregoing and any conditional sale and including
any voting agreement or proxy.
“Lock-Up
Agreements” means each of the Lock-Up Agreements between the Parent and each of
the Persons set forth on
Schedule 3.2
, and the
Parent and each of the Founders in the form attached hereto as
Exhibit
A
.
“Loss(es)”
has the meaning set forth in Section 11.1.
“Material
Adverse Change” means a material adverse change in the business, assets,
condition (financial or otherwise), liabilities, results of operations or
prospects of the Business individually or in the aggregate;
provided
,
however
, without
prejudicing whether any other matter qualifies as a Material Adverse Change, any
matter individually or in the aggregate involving a loss or payment in excess of
$500,000 shall constitute a Material Adverse Change, per se and
further
provided
, that if
Hengda’s net income before taxes is less than RMB 94,200,000 for the six months
ended June 30, 2009 pursuant to Hengda’s auditor reviewed financial statements
for such six month period, a Material Adverse Change shall be deemed to have
occurred, without prejudicing whether any other matter qualifies as a Material
Adverse Change.
“Material
Adverse Effect” means a material adverse effect on the business, assets,
condition (financial or otherwise), liabilities, results of operations or
prospects of the Business individually or in the aggregate;
provided,
however
, without
prejudicing whether any other matter qualifies as a Material Adverse Effect, any
matter individually or in the aggregate involving a loss or payment in excess of
$500,000 shall constitute a Material Adverse Effect, per se.
“MOA” has
the meaning set forth in Section 1A.4.
“Money
Laundering Laws” has the meaning set forth in Section 3.33.
“Multiemployer
Plans” has the meaning set forth in Section 3.25.
“OFAC”
has the meaning set forth in Section 3.34.
“Offices”
has the meaning set forth in Section 3.1.
“Order”
means any decree, order, judgment, writ, award, injunction, rule or consent of
or by an Authority.
“Outside
Closing Date” has the meaning set forth in Section 13.1.
“Parent”
has the meaning set forth in the Preamble.
“Parent
Charter Documents” has the meaning set forth in Section 5.9.
“Parent
Common Stock” means the Common Stock, $.0001 par value per share, of
Parent.
“Parent
Financial Statements” has the meaning set forth in Section 5.11(a).
“Parent
Material Adverse Effect” has the meaning set forth in Section 5.6.
“Parent
Indemnitees” has the meaning set forth in Section 11.1.
“Parent
Securities” has the meaning set forth in Section 8.5(a)(v).
“Parent
Stock Rights” has the meaning set forth in Section 1A.6(b).
“Parent
Stock Rights Agreements” has the meaning set forth in Section
1A.6(b).
“PBGC”
has the meaning set forth in Section 3.25.
“Permits”
has the meaning set forth in Section 3.20.
“Person”
means an individual, a corporation, a partnership, a limited liability company,
an association, a trust or other entity or organization, including a government,
domestic or foreign, or political subdivision thereof, or an agency or
instrumentality thereof.
“Plan”
has the meaning set forth in Section 3.25.
“PRC”
means the People’s Republic of China, for the purposes of this Agreement,
excluding the Hong Kong Special Administrative Region and the Macao Special
Administrative Region and Taiwan.
“Pre-Closing
Period” has the meaning set forth in Section 8.4(b).
“Proceeding”
has the meaning set forth in Section 3.27(b).
“Purchaser”
has the meaning set forth in the preamble.
“Purchaser
Ordinary Shares” has the meaning set forth in Section 1A.6(a).
“Purchaser
Stock Rights” has the meaning set forth in Section 1A.6(b).
“Purchase
Price Escrow Agreement” has the meaning set forth in Section 2.3.
“Real
Property” means, collectively, all real properties and interests therein
(including the right to use), together with all buildings, fixtures, trade
fixtures, plant and other improvements located thereon or attached thereto; all
rights arising out of the use thereof (including air, water, oil and mineral
rights); and all subleases, franchises, licenses, permits, easements and
rights-of-way which are appurtenant thereto.
“Rebate
Obligations” has the meaning set forth in Section 3.29(c).
“Redomestication
Merger” has the meaning set forth in the Recitals.
“Reg. D”
has the meaning set forth in Section 4.5(a).
“Registrable
Securities” has the meaning set forth in Section 8.5(a).
“Restrictive
Covenants” has the meaning set forth in Section 7.5.
“SEC”
means the Securities and Exchange Commission.
“Securities
Act” means the Securities Act of 1933.
“Seller”
has the meaning set forth in the Preamble.
“Shares”
has the meaning set forth in the Recitals.
“Subsidiary”
or “Subsidiaries” means one of the Company’s direct or indirect subsidiaries or
all of the Company’s direct or indirect subsidiaries, as
applicable.
“Surviving
Corporation” has the meaning set forth in Section 1A.1.
“Stand
Best” has the meaning set forth in the Preamble.
“Tangible
Assets” means all tangible personal property and interests therein, including
inventory, machinery, computers and accessories, furniture, office equipment,
communications equipment, and other tangible property.
“Taxes”
includes all forms of taxation, whenever created or imposed, and whether of the
United States or elsewhere, and whether imposed by a local, municipal,
governmental, state, foreign, federal or other Authority, or in connection with
any agreement with respect to Taxes, including all interest, penalties and
additions imposed with respect to such amounts.
“Tax
Liability” has the meaning set forth in Section 3.27(b).
“Tax
Return” means all federal, state, local, provincial and foreign Tax returns,
declarations, statements, reports, schedules, forms and information returns and
any amended Tax return relating to Taxes.
“Third
Party Claim” has the meaning set forth in Section 11.3(a).
“Transaction”
has the meaning set forth in the Recitals.
“UCC”
shall mean the Uniform Commercial Code of the State of New York, or any
corresponding or succeeding provisions of Laws of the State of New York
,
or any corresponding or
succeeding provisions of Laws, in each case as the same may have been and
hereafter may be adopted, supplemented, modified, amended, restated or replaced
from time to time.
“Voting
Agreement” has the meaning set forth in Section 2.3(a).
“Website(s)”
shall mean all of the internet domain names for the Company or any Subsidiary
set forth on
Schedule
3.16(a)
.
ARTICLE
IA
REDOMESTICATION
MERGER
1A.1.
Redomestication
Merger
. At the Effective Time, and subject to and upon the
terms and conditions of this Agreement, and in accordance with the applicable
provisions of the Delaware General Corporation Law (‘‘Delaware Law’’) and the
BVI Business Companies Act, 2004 (as amended) (‘‘BVI Law’’), respectively,
Parent shall be merged with and into Purchaser, the separate corporate existence
of Parent shall cease and Purchaser shall continue as the surviving corporation.
Purchaser as the surviving corporation after the Redomestication Merger is
hereinafter sometimes referred to as the ‘‘Surviving Corporation.’’
1A.2.
Effective
Time
. The parties hereto shall cause the Redomestication
Merger to be consummated by filing the Certificate of Merger with the Secretary
of State of the State of Delaware, in accordance with the relevant provisions of
Delaware Law, and the Articles of Merger with the Registrar of Corporate Affairs
in the British Virgin Islands, in accordance with the relevant provisions of BVI
Law (the time of such filings, or such later time as specified in the
Certificate of Merger and the Articles of Merger, being the ‘‘Effective
Time’’).
1A.3.
Effect of
the Redomestication Merger
. At the Effective Time, the effect
of the Redomestication Merger shall be as provided in this Agreement, the
Certificate of Merger, the Articles of Merger and the applicable provisions of
Delaware Law and BVI Law. Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time, all the property, rights, privileges,
agreements, powers and franchises, debts, liabilities, duties and obligations of
the Parent and Purchaser shall become the property, rights, privileges,
agreements, powers and franchises, debts, liabilities, duties and obligations of
the Surviving Corporation, which shall include the assumption by Surviving
Corporation of any and all agreements, covenants, duties and obligations of the
Parent set forth in this Agreement to be performed after the Closing, and all
securities of Surviving Corporation issued and outstanding as a result of the
conversion under Section 1A.6(a) hereof shall be listed on the public trading
market on which the Purchaser Ordinary Shares may be trading at such
time.
1A.4.
Memorandum
and Articles of Association
. At the Effective Time, the
Certificate of Incorporation and By-Laws of the Parent, as in effect immediately
prior to the Effective Time, shall cease and the Memorandum and Articles of
Association (‘‘MOA’’) of Purchaser, as in effect immediately prior to the
Effective Time, shall be the MOA of the Surviving Corporation.
1A.5.
Directors
and Officers of the Surviving Corporation
. Immediately after
the Effective Time, the board of directors of the Surviving Corporation, shall
be the Board of Directors of the Purchaser immediately prior to the
Redomestication Merger.
1A.6.
Effect on
Capital Stock
. By virtue of the Redomestication Merger and
without any action on the part of Purchaser, the Parent or the holders of any of
the following securities:
(a)
Conversion
of Parent Common Stock
. At the Effective Time, every one share
of the Parent Common Stock issued and outstanding immediately prior to the
Effective Time (other than those described in Section 1A.6(c) or Section 1A.11
below) shall be converted automatically into one common share (“Purchase
Ordinary Shares”) of Purchaser (the ‘‘Conversion Ratio’’), subject to any
adjustments made pursuant to Section 1A.6(d). At the Effective Time, all shares
of Parent Common Stock shall cease to be outstanding and shall automatically be
canceled and retired and shall cease to exist. The holders of certificates
previously evidencing shares of Parent Common Stock outstanding immediately
prior to the Effective Time shall cease to have any rights with respect to such
shares of Parent Common Stock, except as provided herein or by Law. Each
certificate previously evidencing Parent Common Stock shall be exchanged for a
certificate representing such number of shares of Purchaser Ordinary Shares
calculated by multiplying the Conversion Ratio then in effect by the number of
shares of Parent Common Stock previously evidenced by the canceled certificates
upon the surrender of such certificate in accordance with Section
1A.7.
(b)
Parent Stock
Rights
. At the Effective Time, each right to purchase Parent
Common Stock (the “Parent Stock Rights”) shall be converted into one
substantially equivalent option, warrant or other right to purchase Purchaser
Ordinary Shares (“Purchaser Stock Rights”). At the Effective Time, the Parent
Stock Rights shall cease to be outstanding and shall automatically be canceled
and retired and shall cease to exist. Each of the rights to purchase Parent
Common Stock shall have, and be subject to, the same terms and conditions set
forth in the applicable agreements governing the rights to purchase Parent Stock
Rights (the ‘‘Parent Stock Rights Agreements’’) which are outstanding
immediately prior to the Effective Time, except that in the event of an
adjustment made pursuant to Section 1A.6(d), (i) each of the Purchaser Stock
Rights will be exercisable for that number of whole shares of Purchaser Ordinary
Shares equal to the product of the number of shares of Parent Common Stock that
were issuable upon exercise of such option or warrant immediately prior to the
Effective Time multiplied by the Conversion Ratio then in effect and rounded
down to the nearest whole number of shares of Purchaser Ordinary Shares, and
(ii) the per share exercise price for the shares of Purchaser Ordinary Shares
issuable upon exercise of such Purchaser Stock Rights will be equal to the
quotient determined by dividing the exercise price per share of Parent Common
Stock at which each such option or warrant was exercisable immediately prior to
the Effective Time by the Conversion Ratio then in effect, rounded down to the
nearest whole cent. At or prior to the Effective Time, Purchaser shall take all
corporate action necessary to reserve for future issuance, and shall maintain
such reservation for so long as any of the Purchaser Stock Rights remain
outstanding, a sufficient number of shares of Purchaser Ordinary Shares for
delivery upon the exercise of such Purchaser Stock Rights.
(c)
Cancellation of Parent
Common Stock Owned by Parent
. At the Effective Time, if there
are any shares of Parent Common Stock that are owned by the Parent as treasury
stock or any shares of Parent Common Stock owned by any direct or indirect
wholly owned subsidiary of the Parent immediately prior to the Effective Time,
such shares shall be canceled and extinguished without any conversion thereof or
payment therefor.
(d)
Adjustments to Conversion
Ratio
. The Conversion Ratio shall be adjusted to reflect fully
the effect of any share sub-division or combination, stock dividend (including
any dividend or distribution of securities convertible into Purchaser Ordinary
Shares or Parent Common Stock), reorganization, recapitalization or other like
change with respect to Purchaser Ordinary Shares or Parent Common Stock
occurring after the date hereof and prior to the Effective Time, so as to
provide holders of Parent Common Stock and Purchaser Ordinary Shares the same
economic effect as contemplated by this Agreement prior to such share
sub-division or combination, stock dividend, reorganization, recapitalization or
like change.
(e)
No Fractional
Shares
. No fractional shares of Purchase Ordinary Shares shall
be issued in connection with the Redomestication Merger, and no certificates or
scrip for any such fractional shares shall be issued. Any shareholder
of Parent who would otherwise be entitled to receive a fraction of a share of
Purchaser Ordinary Shares (after aggregating all fractional shares of Purchaser
Ordinary Shares issuable to such holder) shall, in lieu of such fraction of a
share, be paid in cash the dollar amount (rounded to the nearest whole cent),
without interest, determined by multiplying such fraction by the closing bid
price of a Purchaser Ordinary Share on the public trading market on which the
Purchaser Ordinary Shares may be trading at the Effective Time.
(f)
Transfers of
Ownership
. If any certificate for shares of Purchaser Ordinary
Shares is to be issued in a name other than that in which the certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Purchaser or any agent designated by it any transfer
or other taxes required by reason of the issuance of a certificate for shares of
Purchaser Ordinary Shares in any name other than that of the registered holder
of the certificate surrendered, or established to the satisfaction of Purchaser
or any agent designated by it that such tax has been paid or is not
payable.
(g)
No
Liability
. Notwithstanding anything to the contrary in this
Section 1A.6, none of the Surviving Corporation, Purchaser or any party
hereto shall be liable to any person for any amount properly paid to a public
official pursuant to any applicable abandoned property, escheat or similar
law.
1A.7.
Surrender
of Certificates
. All shares of Purchaser Ordinary Shares
issued upon the surrender of shares of Parent Common Stock in accordance with
the terms hereof, and all Purchaser Stock Rights issued upon surrender of Parent
Stock Rights in accordance with the terms hereof, shall be deemed to have been
issued in full satisfaction of all rights pertaining to such securities,
provided that any restrictions on the sale and transfer of Parent Common Stock
shall also apply to the Purchaser Ordinary Shares so issued in
exchange.
1A.8.
Lost,
Stolen or Destroyed Certificates
. In the event any
certificates or Parent Stock Rights Agreements shall have been lost, stolen or
destroyed, Purchaser shall issue in exchange for such lost, stolen or destroyed
certificates or Parent Stock Rights Agreements, as the case may be, upon the
making of an affidavit of that fact by the holder thereof, such shares of
Purchaser Ordinary Shares or Purchaser Stock Rights, as may be required pursuant
to Section 1A.7; provided, however, that Surviving Corporation may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificates or Parent Stock Rights
Agreement to deliver a bond in such sum as it may reasonably direct as indemnity
against any claim that may be made against Surviving Corporation with respect to
the certificates or Parent Stock Rights Agreements alleged to have been lost,
stolen or destroyed.
1A.9.
Section
368 Reorganization
. For U.S. federal income tax purposes, the
Redomestication Merger is intended to constitute a ‘‘reorganization’’ within the
meaning of Section 368(a) of the Code. The parties to this Agreement hereby (i)
adopt this Agreement as a ‘‘plan of reorganization’’ within the meaning of
Section 1.368-2(g) of the United States Treasury Regulations, (ii) agree to file
and retain such information as shall be required under Section 1.368-3 of the
United States Treasury Regulations, and (iii) shall file all Tax and other
informational returns on a basis consistent with such characterization.
Notwithstanding the foregoing or anything else to the contrary contained in this
Agreement, the parties acknowledge and agree that no party is making any
representation or warranty as to the qualification of the Redomestication Merger
as a reorganization under Section 368 of the Code or as to the effect, if any,
that any transaction consummated on, after or prior to the Effective Time has or
may have on any such reorganization status. Each of the parties acknowledge and
agree that each (i) has had the opportunity to obtain independent legal and tax
advice with respect to the transactions contemplated by this Agreement, and (ii)
is responsible for paying its own Taxes, including any adverse Tax consequences
that may result if the Redomestication Merger is determined not to qualify as a
reorganization under Section 368 of the Code.
1A.10.
Taking of
Necessary Action; Further Action
. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Parent and Purchaser, the officers and directors of Parent
and Purchaser are fully authorized in the name of their respective corporations
or otherwise to take, and will take, all such lawful and necessary action, so
long as such action is not inconsistent with this Agreement.
1A.11.
Shares
Subject to Appraisal Rights
.
(a)
Notwithstanding
Section 1A.6(a)
,
Dissenting Shares (as hereinafter defined) shall not be converted into a right
to receive Purchaser Ordinary Shares and the holders thereof shall be entitled
only to such rights as are granted by the Delaware Law. Each holder of
Dissenting Shares who becomes entitled to payment for such shares pursuant to
Delaware Law shall receive payment therefor from the Surviving Corporation in
accordance with the Delaware Law, provided, however, that (i) if any shareholder
of Parent who asserts appraisal rights in connection with the Redomestication
Merger (a ‘‘Dissenter’’) has failed to establish his entitlement to such rights
as provided in Delaware, or (ii) if any such Dissenter has effectively withdrawn
his demand for payment for such shares or waived or lost his right to payment
for his shares under the appraisal rights process under Delaware Law the shares
of Parent Common Stock held by such Dissenter shall be treated as if they had
been converted, as of the Effective Time, into a right to receive shares of
Purchaser Ordinary Shares and as provided in Section 1A.6(a). The Parent
shall give Purchaser prompt notice of any demands for payment received by the
Parent from a person asserting appraisal rights, and Purchaser shall have the
right to participate in all negotiations and proceedings with respect to such
demands. The Parent shall not, except with the prior written consent of
Purchaser, make any payment with respect to, or settlement or offer to settle,
any such demands.
(b)
As used herein, ‘‘Dissenting Shares’’ means any shares of Parent Common Stock
held by shareholders who are entitled to appraisal rights under Delaware Law,
and who have properly exercised, perfected and not subsequently withdrawn or
lost or waived their rights to demand payment with respect to their shares in
accordance with Delaware Law.
ARTICLE
II
PURCHASE
AND SALE OF COMMON STOCK
2.1
Sale of
Common Stock
. Immediately after the Redomestication Merger and
subject to the terms and conditions herein stated, the Seller shall sell,
assign, transfer and deliver to Purchaser at the Closing, and Purchaser shall
purchase from Seller at the Closing, free and clear of all Liens, the Shares,
which Shares represent all of the issued and outstanding ownership interests in
the Company..
2.2
Closing
. The
closing of the Transaction (the “Closing”) shall take place at the offices of
Loeb & Loeb LLP, 345 Park Avenue, New York, New York 10154, at 10:00 A.M.
local time, three (3) business days after all conditions to the
Closing set forth in Article VIII hereof have been satisfied or waived, or such
other place, time or date as Purchaser and Seller agree in
writing. The date of the Closing shall be referred to herein as the
“Closing Date”. In addition to those obligations set forth in Article
IX, at the Closing:
(a)
the Purchaser shall deliver the Purchase Price (as set forth in Section 2.3
below); and
(b)
the Seller shall deliver to the Purchaser stock certificate(s) evidencing the
Shares held by it, together with duly executed stock transfer deeds, which shall
be duly stamped and shall be executed in favor of Purchaser.
2.3
Purchase
Price
.
(a)
Purchaser shall purchase the Shares for $10.00 and 5,743,320 shares of Purchaser
Ordinary Shares (the “Purchase Price”). Of the Purchase Price, 574,000 shares of
Purchaser Ordinary Shares will be placed in escrow by Seller pursuant to an
Escrow Agreement (the “Purchase Price Escrow Agreement”).
(b)
In addition, as additional purchase price, Purchaser shall issue to the
Seller up to an aggregate of 8,185,763 shares of the Purchaser Ordinary Shares
(“Contingent Shares”), which shall be placed into escrow pursuant to the terms
of an Escrow Agreement relating to the Contingent Shares (the “Earnout Escrow
Agreement,” and together with the Purchase Price Escrow Agreement, the “Escrow
Agreements”). Pursuant to the terms of the Earnout Escrow
Agreement:
(i) In
the event that Hengda achieves net earnings before taxes (excluding (A) expenses
incurred for this Transaction, (B) the effect on financial results of any
Contingent Shares released pursuant to the terms of the Earnout Escrow Agreement
and (C) earnings derived from any acquisition of a business or assets made by
Hengda or Stand Best after the Closing Date other than earnings from Jiangxi
Hengdali Ceramics
and
Construction Material Limited
or any additional assets acquired in
connection with Jiangxi Hengdali Ceramics) for the fiscal year ending December
31, 2009 of equal to or greater than $28,000,000, then the Purchaser
shall issue an additional 0.3284 of a share of Purchaser Ordinary Shares for
each dollar of net earnings before taxes over $28,000,000 for the fiscal year
ending December 31, 2009 to the Seller, up to a maximum of 1,214,127 shares of
Purchaser Ordinary Shares.
(ii) In
the event that Hengda achieves net earnings after taxes (excluding (A) the
effect on financial results of any Contingent Shares released pursuant to the
terms of the Earnout Escrow Agreement and (B) earnings derived from any
acquisition of a business or assets made by Hengda or Stand Best after the
Closing Date other than earnings from Jiangxi Hengdali Ceramics
and Construction Material Limited
or any additional assets acquired in connection with Jiangxi Hengdali
Ceramics) for the fiscal year ending December 31, 2010 of equal to or greater
than $23,772,993, then the Purchaser shall issue an additional 0.2359 of a share
of Purchaser Ordinary Shares for each dollar of net earnings after taxes over
$23,772,993 for the fiscal year ending December 31, 2010 to the Seller, up to a
maximum of 1,794,800 shares of Purchaser Ordinary Shares.
(iii) In
the event that Hengda achieves net earnings after taxes (excluding (A) the
effect on financial results of any Contingent Shares released pursuant to the
terms of the Earnout Escrow Agreement and (B) earnings derived from any
acquisition of a business or assets made by Hengda or Stand Best after the
Closing Date other than earnings from Jiangxi Hengdali Ceramics
and Construction Material Limited
or any additional assets acquired in connection with Jiangxi Hengdali
Ceramics) for the fiscal year ending December 31, 2011 of equal to or greater
than $31,380,292, then the Purchaser shall issue an additional 0.1790 of a share
of Purchaser Ordinary Shares for each dollar of net earnings after taxes over
$31,380,292 for the fiscal year ending December 31, 2011 to the Seller, up to a
maximum of 2,176,836 shares of Purchaser Ordinary Shares.
(iv) In
the event that the closing price of Purchaser Ordinary Shares is at or above
$20.00 per share for any twenty trading days in a 30 trading day period prior to
April 30, 2012, then the Purchaser shall issue an additional 2,000,000 shares of
Purchaser Ordinary Shares to the Seller.
(v) In
the event that the closing price of Purchaser Ordinary Shares is at or above
$25.00 per share for any twenty trading days in a 30 trading day period prior to
April 30, 2012, then the Purchaser shall issue an additional 1,000,000 shares of
Purchaser Ordinary Shares to the Seller.
(c) The
Seller will be responsible for paying the equity component of any amounts owed
to investment bankers set forth on
Schedule 3.28
hired
by Hengda out of the Purchase Price or Seller’s assets and the Company will be
responsible for paying the cash component of any amounts owed to investment
bankers set forth on
Schedule 3.28
hired
by Hengda out of the Company’s assets.
2.4
Board of
Directors and D&O Insurance
.
(a) Immediately
after the Closing, the Purchaser’s Board of Directors will consist of five (5)
directors. Seller shall designate three (3) persons to the Board of
Directors, of which one (1) designee shall qualify as an independent director
under the Securities Act of 1933, as amended, and the rules of any applicable
securities exchange. The Purchaser shall designate two (2) persons to
the Board of Directors. The parties to this Agreement shall enter
into a two year voting agreement (the “Voting Agreement”) relating to nominees
to the Purchaser’s Board of Directors.
(b) Immediately
prior to the Closing, Parent will purchase a directors and officers liability
insurance policy for the pre-Transaction directors and officers, which will
cover the directors and officers for a period of six years after the
Closing. The policy will be paid for with funds made available in
connection with the Closing.
ARTICLE
III
REPRESENTATIONS
AND WARRANTIES OF
THE
SELLER AND THE COMPANY
Each of
the Seller, the Company and Hengda, jointly and severally, hereby represent and
warrant to Parent and Purchaser that:
3.1
Corporate
Existence and Power
.
Hengda is a
company duly formed, validly existing and in good standing under and by virtue
of the Laws of the People’s Republic of China, and has all power and authority,
corporate and otherwise, and all governmental licenses, franchises, permits,
authorizations, consents and approvals required to own and operate its
properties and assets and to carry on its business as now conducted and as
proposed to be conducted. The Company and each Subsidiary is duly
formed, validly existing and in good standing under and by virtue of the Laws of
the jurisdiction of its organization, and has all power and authority, corporate
and otherwise, and all governmental licenses, franchises, permits,
authorizations, consents and approvals required to own and operate its
properties and assets and to carry on its business as now conducted and as
proposed to be conducted. Except as set forth on
Schedule 3.1
, neither
the Company nor any Subsidiary is qualified to do business as a foreign
corporation in any jurisdiction. Except as set forth in
Schedule 3.1
, there
is no jurisdiction in which the character of the property owned or leased by the
Company or any Subsidiary or the nature of their respective activities make
qualification in any such jurisdiction necessary, except where the failure to so
qualify would not have a Material Adverse Effect. The only offices,
warehouses or business locations of the Company and each Subsidiary are listed
on
Schedule 3.1
(the “Offices”). Neither the Company nor any Subsidiary has taken any
action, adopted any plan, or made any agreement in respect of any Transaction,
consolidation, sale of all or substantially all of its respective assets,
reorganization, recapitalization, dissolution or liquidation, except as
explicitly set forth in this Agreement.
3.2
Corporate
Authorization
.
The execution,
delivery and performance by the Company and Hengda of this Agreement and each of
the Additional Agreements to which the Company or Hengda is named as a party and
the consummation by the Company and Hengda of the transactions contemplated
hereby and thereby are within the corporate powers of the Company and Hengda and
have been duly authorized by all necessary action on the part of the Company and
Hengda, including the approval of the Seller. This
Agreement constitutes, and, upon their execution and delivery, each of the
Additional Agreements will constitute, a valid and legally binding agreement of
the Company and Hengda, enforceable against the Company and Hengda in accordance
with their respective terms, subject to (i) laws of general application relating
to bankruptcy, insolvency and the relief of debtors, or (ii) rules of law
governing specific performance, injunctive relief or other equitable
remedies.
Schedule 3.2
sets forth (a) each of the Persons that will receive any portion of the Purchase
Price and the number of shares of Purchase Ordinary Shares each such Person
shall receive in connection with the Transaction and (b) each of the Persons
that will receive any Contingent Shares and the number of Contingent Shares each
such Person shall receive in the event any of the Performance Thresholds (as
defined in the Earnout Escrow Agreement) are achieved.
3.3
Charter
Documents; Legality
. The Company has previously delivered to
Parent true and complete copies of its organizational documents, minute books
and stock books (the “Charter Documents”), as in effect or constituted on the
date hereof. The execution, delivery, and performance by the Company
and the Seller of this Agreement and any Additional Agreement to which the
Company or the Seller is to be a party has not violated and will not violate,
and the consummation by the Company or the Seller of the transactions
contemplated hereby or thereby will not violate, any of the Charter Documents or
any Law.
3.4
Subsidiaries
.
Schedule 3.4
sets
forth each of the Subsidiaries. The Company has previously delivered
to Parent true and complete copies of the Charter Documents for each Subsidiary,
as in effect or constituted on the date hereof. Neither the Company
nor any Subsidiary is a party to any agreement relating to the formation of any
joint venture, association or other Person.
3.5
Capitalization
and Ownership
.
Schedule 3.5
sets
forth, with respect to the Company and each Subsidiary, (i) such company’s
authorized capital, (ii) the number of such company’s securities that are
outstanding, (iii) each stockholder owning such company’s securities and the
number of shares of such securities owned by such stockholder, and (iv) each
security convertible into or exercisable or exchangeable for such company’s
securities, the number and type of securities such security is convertible into,
the exercise or conversion price of such security and the holder of such
security. As set forth on
Schedule 3.5
, no
person other than the Seller or the Company owns any securities of the Company
or the Subsidiaries. As set forth on
Schedule 3.5
, there
is no Contract that requires or under any circumstance would require the Company
or any Subsidiary to issue, or grant any right to acquire, any securities of the
Company or any Subsidiary, or any security or instrument exercisable or
exchangeable for or convertible into, the capital stock or membership interest
of the Company or any Subsidiary or to merge, consolidate, dissolve, liquidate,
restructure, or recapitalize the Company or any Subsidiary. The
Shares and the securities of each Subsidiary (i) have been duly authorized and
validly issued and are fully paid and nonassessable, and (ii) were issued in
compliance with all applicable federal and state securities laws.
3.6
Affiliates
. Other
than the Seller, the Company is not controlled by any Person and the Company is
not in control of any other Person other than the Subsidiaries.
Schedule 3.6
lists
each Contract, arrangement, or understanding to which the Company and the Seller
or any Affiliate of the Seller or the Company is a party. Except as
disclosed in
Schedule
3.6
, none of the Seller, Stand Best or the Company nor any of their
respective Affiliates (i) owns, directly or indirectly, in whole or in part, any
tangible or intangible property (including Intellectual Property rights) that
the Company or any Subsidiary uses or the use of which is necessary for the
conduct of the Business, or (ii) have engaged in any transaction with the
Company or any Subsidiary.
3.7
Assumed
Names
.
Schedule 3.7
is a
complete and correct list of all assumed or “doing business as” names currently
or formerly used by the Company or any Subsidiary, including names on any
Websites. Neither the Company nor any Subsidiary has used any name
other than the names listed on
Schedule 3.7
to
conduct its business. The Company and each Subsidiary have filed
appropriate “doing business as” certificates in all applicable
jurisdictions. Except as indicated on
Schedule 3.7
, all
Websites are in good working order.
3.8
Governmental
Authorization
. None of the execution, delivery or performance
by the Company or any Subsidiary of this Agreement or any Additional Agreement
requires any consent, approval, license or other action by or in respect of, or
registration, declaration or filing with, any Authority.
3.9
Consents
. The
Contracts listed on
Schedule 3.9
are the
only material agreements, commitments, arrangements, contracts or other
instruments binding upon the Company, any Subsidiary or any of their respective
properties requiring a consent, approval, authorization, order or other action
of or filing with any Person as a result of the execution, delivery or
performance of this Agreement or any of the Additional Agreements or the
consummation of the transactions contemplated hereby or thereby (each of the
foregoing, a “Company Consent”).
3.10
Financial
Statements
.
(a) Attached
hereto as
Schedule
3.10(a)
are audited consolidated financial statements for the years ended
December 31, 2006, 2007 and 2008 (collectively, the “2008 Financial Statements”)
and unaudited consolidated financial statements for the period ended March 31,
2009 (the “Interim Financial Statements, and together with the 2008 Financial
Statements, the “Financial Statements”). The Financial Statements (i)
were prepared from the Books and Records; (ii) except as set forth on
Schedule 3.10
, were
prepared in accordance with IFRS; (iii) fairly and accurately present the
Company’s financial condition and the results of its operations as of their
respective dates and for the periods then ended; (iv) contain and reflect
all necessary adjustments and accruals for a fair presentation of the Company’s
financial condition as of their dates; and (v) contain and reflect adequate
provisions for all reasonably anticipated liabilities for all material income,
property, sales, payroll or other Taxes applicable to the Company with respect
to the periods then ended. The Company has heretofore delivered to
Parent complete and accurate copies of all “management letters” received by it
from the Company’s accountants and all responses during the last three years by
lawyers engaged by the Company to inquiries from the Company’s accountant or any
predecessor accountants.
(b) Except
as specifically disclosed, reflected or fully reserved against on the December
31, 2008 balance sheet (the “December Balance Sheet”) and for liabilities and
obligations of a similar nature and in similar amounts incurred in the ordinary
course of business since the date of the December Balance Sheet and except as
set forth on
Schedule
3.10(b)
, there are no liabilities, debts or obligations of any nature
(whether accrued, absolute, contingent, liquidated or unliquidated, unasserted
or otherwise) relating to Hengda. All debts and liabilities, fixed or
contingent, which should be included in accordance with IFRS on an accrual basis
on the December Balance Sheet are included therein.
(c) The
December Balance Sheet accurately reflects the outstanding Indebtedness of the
Company as of the respective dates thereof. Except as set forth on
Schedule
3.10(b)
, the Company does not have any Indebtedness.
(d) All
forecasts, presentations or projections relating to the future results of
operations of the Company were based upon reasonable assumptions and were
prepared in good faith by the Company.
(e) Nothing
done by the Company or any Subsidiary will prevent the Parent from complying
with the Sarbanes-Oxley Act of 2002 after the Transaction is
consummated.
(f) All
Books and Records of the Company and each Subsidiary have been properly and
accurately kept and completed in all material respects, and there are no
material inaccuracies or discrepancies of any kind contained or reflected
therein. The Company and each Subsidiary have none of their records,
systems controls, data or information recorded, stored, maintained, operated or
otherwise wholly or partly dependent on or held by any means (including any
mechanical, electronic or photographic process, whether computerized or not)
which (including all means of access thereto and therefrom) is not under the
exclusive ownership (excluding licensed software programs) and direct control of
the Company or its Subsidiaries and which is not located at the Offices or at
locations set forth on
Schedule
3.10(e)
.
3.11
Accounts
Receivable
. Except as set forth in
Schedule 3.11
, all
accounts, notes and other receivables, whether or not accrued, and whether or
not billed, of the Company or any Subsidiary, in accordance with IFRS (“Accounts
Receivable”) represent bona fide revenues of the Company or any Subsidiary
generated by the Business and are fully collectible, net of any reserves shown
on the Interim Financial Statements. Except as set forth on
Schedule 3.11
, all
accounts and notes receivable reflected on the December Balance Sheet, or
arising since December 31, 2008, have been collected, or are and to the
knowledge of the Company or any Subsidiary will be good and collectible, in each
case at the aggregate recorded amounts thereof without right of recourse,
defense, deduction, return of goods, counterclaim, offset, or set off on the
part of the obligor.
3.12
Books and
Records
.
(a) The
Books and Records accurately and fairly, in reasonable detail, reflect the
Company’s and each Subsidiary’s transactions and dispositions of
assets. The Company and each Subsidiary maintain a system of internal
accounting controls sufficient to provide reasonable assurance
that:
(i) transactions
are executed in accordance with management’s authorization;
(ii) access
to assets is permitted only in accordance with management’s authorization;
and
(iii) recorded
assets are compared with existing assets at reasonable intervals, and
appropriate action is taken with respect to any differences.
(b) The
Company and each Subsidiary have heretofore made all of their Books and Records
available to Parent for its inspection and has heretofore delivered to Parent
complete and accurate copies of documents referred to in the Schedules or as
Parent otherwise has requested. All Contracts, documents, and other
papers or copies thereof delivered to Parent by or on behalf of the Company or
any Subsidiary in connection with this Agreement and the transactions
contemplated herein are accurate, complete, and authentic.
3.13
Absence
of Certain Changes
.
(a) Except
as set forth in
Schedule 3.13(a)
,
since December 31, 2008, the Company and each Subsidiary has conducted its
respective business in the ordinary course of business consistent with past
practices, and with respect to the Company and each Subsidiary there has not
been:
(i) any
Material Adverse Change or any event, occurrence, development or state of
circumstances or facts which could reasonably be expected to result individually
or in the aggregate in a Material Adverse Effect on the Company’s and each
Subsidiary’s ability to consummate the transactions contemplated herein or upon
the value to Parent or Purchaser of the transactions contemplated
hereby;
(ii) any
transaction, contract, agreement or other instrument entered into, or commitment
made, by the Company or any Subsidiary relating to the Business or any
relinquishment by the Company or any Subsidiary of any Contract or other right,
in either case other than transactions and commitments in the ordinary course of
business consistent in all respects, including kind and amount, with past
practices and those contemplated by this Agreement;
(iii) any
increase of bonus, salary or other compensation paid of more than 10% for any
employee making an annual salary of greater than $75,000 or in excess of
$750,000 in the aggregate on an annual basis, or change in the bonus or profit
sharing policies of the Company or any Subsidiary;
(iv) any
capital expenditure except in the ordinary course of business consistent with
past practice (including with respect to kind and amount);
(v) any
sale, lease, license or other disposition of any of its assets except (i)
pursuant to existing Contracts or commitments disclosed herein and (ii) sales of
products or inventory in the ordinary course of business consistent with past
practice;
(vi) acceptance
of any returns except in the ordinary course of business, consistent with past
practice (including with respect to kind and amount);
(vii) any
default under any term or provision of any Contract;
(viii) an
increase in the amount of Indebtedness;
(ix) the
incurrence of Liens on any of its assets;
(x) any
damage, destruction or loss of property related to any of its assets not covered
by insurance;
(xi) any
delay, acceleration or cancellation of any receivables or indebtedness owed to
it or write-off or additional reserves made with respect to the
same;
(xii) any
transaction or consolidation with or acquisition of any other
Person;
(xiii) the
lapse of any insurance policy protecting its assets;
(xiv) any
change in its accounting principles or methods or write down in the value of any
inventory or assets;
(xv) any
change in location where it conducts business;
(xvi) any
extension of any loans other than travel or other expense advances to employees
in the ordinary course of business consistent with past practice exceeding
$1,000 individually or $10,000 in the aggregate;
(xvii) any
increase or reduction in the prices of products sold except in the ordinary
course of business consistent with past practice (including with respect to
amount);
(xviii) any
agreement to change any practices or terms, including payment terms, with
respect to customers or suppliers;
(xix) any
change in hiring practices for employees, consultants or advisors;
(xx) any
dividend or distribution to the Seller; or
(xxi) any
agreement to do any of the foregoing.
(b) Except
as set forth on
Schedule 3.13(a)
and
actions taken in good faith to invest in the Company’s or any Subsidiary’s
business, since December 31, 2008, through and including the Closing Date,
neither the Company nor any Subsidiary has taken any action nor has had any
event occur that would have violated any covenants of the Company or any
Subsidiary set forth in Article VI hereof.
3.14
Real
Property
.
(a) Except
as set forth on Schedule 3.14(a), neither the Company nor any Subsidiary owns
any Real Property. Except as set forth on Schedule 3.14(a), all
leases and all amendments thereto (the “Leases”) are valid and enforceable by
the Company or the Subsidiary which is a party to such lease against the other
parties thereto. Neither the Company nor any Subsidiary has breached
or violated, and is not in default under, any of the Leases or any local zoning
ordinance, the breach or violation of which could individually or in the
aggregate have a Material Adverse Effect, and no notice from any Person has been
received by the Company or any Subsidiary or served upon the Company, any
Subsidiary or the Seller claiming any violation of any Lease or any local zoning
ordinance.
(b) Neither
the Company nor any Subsidiary has experienced any material interruption in the
delivery of adequate quantities of any utilities (including electricity, natural
gas, potable water, water for cooling or similar purposes and fuel oil) or other
public services (including sanitary and industrial sewer service) required by
the Company or any Subsidiary in the operation of the Business.
3.15
Tangible
Personal Property
.
(a) Each
piece of Tangible Assets is in operating condition and repair and functions in
accordance with its intended use (ordinary wear and tear excepted), has been
properly maintained, and is suitable for its present uses.
(b) The
Company or one of the Subsidiaries has, and upon consummation of the
transactions contemplated hereby will continue to have, good, valid and
marketable title in and to each piece of Tangible Assets, free and clear of all
Liens, except as set forth on
Schedule
3.15(b)
.
(c) Except
as set forth on Schedule 3.15(c), the Company or one of the Subsidiaries has
good title to, or a valid leasehold or license interest in, all its respective
properties and assets (whether tangible or intangible), free and clear of all
Liens. The personal and other properties and assets owned by the
Company or any Subsidiary or leased or licensed by the Company or any Subsidiary
from a third party constitute all such properties and assets used in and
necessary to the Business as presently conducted and as presently proposed to be
conducted.
(d) The
materials and supplies included in the inventory of the Company or any
Subsidiary as of the Closing Date will be (i) substantially equivalent in
quality and quantity, subject to seasonality, to the materials and supplies, and
additions thereto, generally included in such inventory in the past; and (ii)
valued in accordance with IFRS, applied on a basis consistent with that used in
the Financial Statements.
3.16
Intellectual
Property
. The Company and its Subsidiaries own or are validly
licensing or otherwise have the right to use any patents, trademarks, trade
names, service marks, domain names, copyrights, and any applications therefore,
trade secrets, computer software programs, and tangible or intangible
proprietary information or material which are material to the conduct of their
business taken as a whole (the “
Intellectual Property
Rights
”). No claims are pending or, to the knowledge of the Seller, the
Company or any Subsidiary, threatened that the Company or any of its
Subsidiaries is infringing or otherwise adversely affecting the rights of any
Person with regard to any Intellectual Property Right. To the knowledge of the
Seller, the Company or any Subsidiary, no Person is infringing the rights of the
Company or any of its Subsidiaries with respect to any Intellectual Property
Right.
3.17
Relationships
With Customers, Suppliers, Etc
.
(a)
Schedule 3.17(a)
sets
forth since December 31, 2008, all purchases, costs and fees (other than fees or
costs related to attorneys, accountants and office leases) in excess of $250,000
for any single item or series of related items.
(b) Except
as set forth on
Schedule 3.17(b)
,
since December 31, 2008: (a) there has not been any termination of the
business relationship of the Company or any Subsidiary with any material
licensee, customer or supplier, other than in the ordinary course of business
where a contract has been concluded with a customer without subsequent follow-on
business or where a supplier’s products are either no longer available or
applicable to the ongoing business; (b) to the knowledge of the Company or any
Subsidiary, there has not been any threatened termination or withholding of
payments by, or any material dispute with, any material licensee, customer or
supplier; and (c) neither the Company nor any Subsidiary has received any notice
or been informed that any such event will occur in the future, either as a
result of the consummation of the transactions contemplated by this Agreement or
otherwise. Except as set forth on
Schedule 3.17(b)
,
neither the Company nor any Subsidiary is currently in any dispute over any
terms of any contract or agreement to which the Company or any Subsidiary and
any material licensee, customer or supplier is a party.
3.18
Litigation
. There
is no Action (or any basis therefor) pending against, or to the knowledge of the
Company or any Subsidiary, threatened against or affecting the Company or any
Subsidiary, any of their respective officers or directors, the Seller, the
business of the Company or any Subsidiary, or any Contract before any court or
arbitrator or any governmental body, agency or official or which in any manner
challenges or seeks to prevent, enjoin, alter or delay the transactions
contemplated hereby. There are no outstanding judgments against the
Company or any Subsidiary. Neither the Company nor any Subsidiary is
now, nor have they been in the past five years, subject to any proceeding with
the Federal Trade Commission or the Equal Employment Opportunity Commission or
any comparable body of any state or political subdivision.
3.19
Contracts
.
(a) Except
as set forth on Schedule 3.19(a), each Contract to which the Company or any
Subsidiary is a party is a valid and binding agreement, and is in full force and
effect, and neither the Company nor any Subsidiary, as applicable, nor, to the
knowledge of the Company or any Subsidiary, any other party thereto, is in
breach or default (whether with or without the passage of time or the giving of
notice or both) under the terms of any such Contract. Neither the
Company nor any Subsidiary has assigned, delegated, or otherwise transferred any
of its rights or obligations with respect to any Contracts, or granted any power
of attorney with respect thereto. The Company and each Subsidiary has
given a true and correct fully executed copy of each material Contract to
Parent.
(b) The
Company and each Subsidiary is in compliance with all material covenants,
including all financial covenants, in all notes, indentures, bonds and other
instruments or agreements evidencing any Indebtedness.
3.20
Licenses
and Permits
. The Company or any Subsidiary has obtained each
material license, franchise, permit, order or approval or other similar
authorization affecting, or relating in any way to, the Business, from the
applicable government agency or entity issuing the same (the
“Permits”). Such Permits are valid and in full force and effect and,
assuming the related Company Consents, if any, have been obtained or waived
prior to the Closing Date, none of the Permits will be terminated or impaired or
become terminable as a result of the transactions contemplated
hereby. The Company or any Subsidiary has all Permits necessary to
operate the Business other than those Permits whose absence individually or in
the aggregate would not cause a Material Adverse Effect.
3.21
Compliance
with Laws
. Neither the Company nor any Subsidiary is in
violation of, has not violated, and to the knowledge of the Company or any
Subsidiary, is not under investigation with respect to, nor has been threatened
to be charged with or given notice of, any violation or alleged violation of,
any Law or Order, nor is there any basis for any such charge.
3.22
Pre-payments
. Except
as set forth on
Schedule 3.22
,
neither the Company nor any Subsidiary has received any payments with respect to
any services to be rendered or goods to be provided after the
Closing.
3.23
Directors
and Officers
.
Schedule 3.23
sets
forth a true and complete list of the names, addresses and titles of the
directors and officers of the Company and each Subsidiary.
3.24
Labor
Matters
. Except for disputes, agreements and other matters
that, individually or in the aggregate, do not have or are not expected to have
a Material Adverse Effect, (a) there are no collective bargaining or other labor
union agreements to which the Company or any of its Subsidiaries is a party or
by which it is bound; (b) no labor and/or employment dispute exists or, to the
knowledge of the Seller, the Company or any Subsidiary, is imminent with respect
to the employees of the Company or any of its Subsidiaries; (c) there is
no strike, work stoppage or other labor and/or employment dispute involving the
Company or any of its Subsidiaries pending or, to the knowledge of the Seller,
the Company or any Subsidiary, threatened; (d) no claim, complaint, charge
or Actions by or before any Authority brought by or on behalf of any employee,
prospective employee, former employee, retiree, labor organization or other
representative of its employees is pending or, to the knowledge of the Sellers
or the Company, threatened against the Company or any of its Subsidiaries;
(e) no grievance is pending or, to the knowledge of the Seller, the
Company or any Subsidiary, threatened against the Company or any of its
Subsidiaries; and (f) neither the Company nor any of its Subsidiaries is a party
to, or otherwise bound by, any consent decree with, or citation by, any
Authorities relating to employees or employment practices.
3.25
Pension
and Benefit Plans
. Except as set forth in
Schedule 3.25
,
neither the Company nor any of its Subsidiaries maintains any collective
bargaining agreement or any bonus, pension, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase, stock
option, phantom stock, retirement, vacation, severance, disability, death
benefit, hospitalization, medical or other plan, arrangement or understanding
(whether or not legally binding) providing benefits to any current or former
employee, officer or director of the Company or any such Subsidiary
(collectively, the “Company Benefit Plans”). Neither the execution and delivery
of this Agreement nor the consummation of the Transaction will (either alone or
in conjunction with any other event) result in, cause the accelerated vesting or
delivery of, or increase the amount or value of, any payment or benefit to any
employee of the Company or any such Subsidiary. The consummation of the
Transaction will not trigger any severance or termination agreements or
arrangements between the Company or any of its Subsidiaries and any of their
respective current or former employees, officers or directors, nor does the
Company have any general severance plan or policy. Since December 31, 2008,
there has not been any adoption or amendment in any material respect by the
Company or any of its Subsidiaries of any Company Benefit Plan.
3.26
Executive
Officers
. Except as set forth in
Schedule 3.26
, no
executive officer of the Company nor any of its Subsidiaries has notified such
entity in writing that such officer intends to leave the Company or any such
Subsidiary or otherwise terminate such officer’s employment with the Company or
such Subsidiary in connection with the consummation of the Transaction or within
60 days following the Closing Date.
3.27
Tax
Matters
.
(a) The
Company and its Subsidiaries have timely filed, or have caused to be timely
filed on their behalf, all Tax Returns that are or were required to be filed by
or with respect to any of them, either separately or as a member of group of
corporations, pursuant to applicable Legal Requirements. All Tax Returns filed
by (or that include on a consolidated basis) the Company and its Subsidiaries
were (and, as to a Tax Return not filed as of the date hereof, will be) in all
respects true, complete and accurate. To the knowledge of the Seller and the
Company, there are no unpaid Taxes claimed to be due by any Authority in charge
of taxation of any jurisdiction, nor any claim for additional Taxes for any
period for which Tax Returns have been filed, and none of their officers or
directors know of any basis for any such claim.
(b) Neither
the Company nor any of its Subsidiaries has received any notice that any
Authority will audit or examine (except for any general audits or examinations
routinely performed by such Authorities), seek information with respect to, or
make material claims or assessments with respect to any Taxes for any period
since January 1, 2003.
(c) The
Financial Statements reflect an adequate reserve for all Taxes known to be
payable by the Company and its Subsidiaries (in addition to any reserve for
deferred Taxes to reflect timing differences between book and Tax items) for all
taxable periods and portions thereof through the date of such financial
statements. None of the Company or its Subsidiaries is a party to or bound by
any Tax indemnity, Tax sharing or similar agreement, and the Company and its
Subsidiaries currently have no material liability and will not have any material
liabilities for any Taxes of any other Person under any agreement or by the
operation of any Law. No deficiency with respect to any Taxes has been proposed,
asserted or assessed against the Company or its Subsidiaries, and no requests
for waivers of the time to assess any such Taxes are pending.
(d) Neither
the Company nor any of its Subsidiaries has requested any extension of time
within which to file any Tax Return, which Tax Return has not since been filed.
Neither the Company nor any of its Subsidiaries has executed any outstanding
waivers or comparable consents regarding the application of the statute of
limitations with respect to any Taxes or Tax Returns. No power of attorney
currently in force has been granted by the Company or any of its Subsidiaries
concerning any Taxes or Tax Return.
(e) Neither
the Company nor any of its Subsidiaries (i) is currently engaged in the conduct
of a trade or business within the United States; (ii) is a corporation or
other entity organized or incorporated in the United States; and (iii) owns or
has ever owned any United States real property interests described in
Section 897 of the Code.
3.28
Fees
. Except
as set forth on
Schedule 3.28
, there
is no investment banker, broker, finder, restructuring or other intermediary
that has been retained by or is authorized to act on behalf of the Company, any
Subsidiary, the Seller or any of its respective Affiliates who might be entitled
to any fee or commission from either Purchaser, Parent or any of its Affiliates
upon consummation of the transactions contemplated by this
Agreement. The amount of any fee owed to any Person listed on
Schedule 3.28
is
listed opposite such Person’s name.
3.29
Business
Operations
.
(a) The
Company and each Subsidiary owns all of its servers and other computer equipment
(other than webservers) necessary to operate its Business as conducted as of the
date hereof and as such Business will be conducted as of the
Closing.
(b) Purchaser
has been furnished with complete and correct copies of the standard terms and
conditions of sale, if any, of each of the products of the Company and each
Subsidiary. Except as set forth on
Schedule 3.29(b)
or
as required by law, no product manufactured, sold or delivered by the Company or
any Subsidiary is subject to any guaranty, warranty or other indemnity, express
or implied, beyond such standard terms and conditions. Any warranty
reserve reflected in the Financial Statements is in accordance with
IFRS.
(c) Except
in the ordinary course of business or as set forth on
Schedule 3.29(c)
,
neither the Company nor any Subsidiary has entered into, or offered to enter
into, any written agreement, Contract or other arrangement with respect to the
Business pursuant to which the Company or any Subsidiary is or will be obligated
to make any rebates, discounts, promotional allowances or similar payments or
arrangements to any customer (“Rebate Obligations”). All Rebate
Obligations listed on
Schedule 3.29(c)
and
all ordinary course Rebate Obligations are reflected in the 2008 Financial
Statements in accordance with IFRS.
(d) Except
as set forth in
Schedule 3.29(d)
,
neither the Company nor any Subsidiary has experienced any returns of its
products since January 1, 2007 other than returns in the ordinary course of
business consistent with past experience, including with respect to kind and
amount. All product returns listed on
Schedule 3.29(d)
are
reflected on the 2008 Financial Statements in accordance with IFRS.
3.30
Powers of
Attorney and Suretyships
. Neither the Company nor any
Subsidiary has any general or special powers of attorney outstanding (whether as
grantor or grantee thereof) or any obligation or liability (whether actual,
accrued, accruing, contingent, or otherwise) as guarantor, surety, co-signer,
endorser, co-maker, indemnitor or otherwise in respect of the obligation of any
Person.
3.31
Other
Information
.
Neither this Agreement, nor any of the documents or other information
made available to Parent or its Affiliates, attorneys, accountants, agents or
representatives pursuant hereto or in connection with Parent’s due diligence
review of the Business or the transactions contemplated by this Agreement
contained, contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary in order to make the
statements contained therein not misleading. To the best knowledge of
the Company and each Subsidiary, the Company and each Subsidiary has provided
Parent with all material information regarding the Business.
3.32
Certain
Business Practices
. Neither the Company, nor any Subsidiary,
nor any director, officer, agent or employee of the Company or any Subsidiary
(in their capacities as such) has (i) used any funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees, to foreign or domestic political parties or
campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977
or (iii) made any other unlawful payment. Neither the Company, nor
any Subsidiary, nor any director, officer, agent or employee of the Company or
any Subsidiary (nor any Person acting on behalf of any of the foregoing, but
solely in his or her capacity as a director, officer, employee or agent of the
Company) has, since January 1, 2000, directly or indirectly, given or agreed to
give any gift or similar benefit in any material amount to any customer,
supplier, governmental employee or other Person who is or may be in a position
to help or hinder the Company or any Subsidiary or assist the Company or any
Subsidiary in connection with any actual or proposed transaction, which, if not
given could reasonably be expected to have had an adverse effect on the Company
or any Subsidiary, or which, if not continued in the future, could reasonably be
expected to adversely affect the business or prospects of the Company or any
Subsidiary that could reasonably be expected to subject the Company or any
Subsidiary to suit or penalty in any private or governmental litigation or
proceeding.
3.33
Money
Laundering Laws
. The operations of the Company and each
Subsidiary are and have been conducted at all times in compliance with
laundering statutes in all applicable jurisdictions, the rules and regulations
thereunder and any related or similar rules, regulations or guidelines, issued,
administered or enforced by any governmental authority (collectively, the “Money
Laundering Laws”), and no Action involving the Company or any Subsidiary with
respect to the Money Laundering Laws is pending or, to the knowledge of the
Company, threatened.
3.34
OFAC
. None
of the Company, any Subsidiary, any director or officer of the Company or any
Subsidiary, or, to the knowledge of the Seller, the Company or any Subsidiary,
any agent, employee, affiliate or Person acting on behalf of the Company is
currently identified on the specially designated nationals or other blocked
person list or otherwise currently subject to any U.S. sanctions administered by
the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”);
and the Company or any Subsidiary has not, directly or indirectly, used any
funds, or loaned, contributed or otherwise made available such funds to any
Subsidiary, joint venture partner or other Person, in connection with any sales
or operations in Cuba, Iran, Syria, Sudan, Myanmar or any other country
sanctioned by OFAC or for the purpose of financing the activities of any Person
currently subject to, or otherwise in violation of, any U.S. sanctions
administered by OFAC in the last five (5) fiscal years.
3.35
Additional
PRC Representations and Warranties
.
(a) All
material consents, approvals, authorizations or licenses requisite under PRC law
for the due and proper establishment and operation of the Company and its
Subsidiaries have been duly obtained from the relevant PRC Authority and are in
full force and effect.
(b) All
filings and registrations with the PRC Authorities required in respect of the
Company and its Subsidiaries and their respective operations including, without
limitation, the registration with and/or approval by the Ministry of Commerce,
the State Administration of Industry and Commerce, the State Administration for
Foreign Exchange, tax bureau and customs offices and other PRC Authorities that
administer foreign investment enterprises have been duly completed in accordance
with the relevant PRC rules and regulations, except where the failure to
complete such filings and registrations does not, and would not, individually or
in the aggregate, have a Material Adverse Effect.
(c) Except
as set forth on Schedule 3.35(c), the Company and its Subsidiaries have complied
with all relevant PRC laws and regulations regarding the contribution and
payment of their registered share capital.
(d) Neither
the Company nor any of its Subsidiaries is in receipt of any letter or notice
from any relevant PRC Authority notifying it of the revocation, or otherwise
questioning the validity, of any licenses or qualifications issued to it or any
subsidy granted to it by any PRC Authority for non-compliance with the terms
thereof or with applicable PRC laws, or the need for compliance or remedial
actions in respect of the activities carried out by the Company or any of its
Subsidiaries, except where the notice or the letter does not, and would not,
individually or in the aggregate, have a Material Adverse Effect.
(e) The
Company and its Subsidiaries have conducted their respective business activities
within the permitted scope of business or have otherwise operated their
respective businesses in compliance, in all material respects, with all relevant
legal requirements and with all requisite licenses and approvals granted by
competent PRC Authorities, except where such non-compliance has not had and
would not reasonably be expected to have, resulted in a Material Adverse Effect.
As to licenses, approvals and government grants and concessions requisite or
material for the conduct of any part of the Company’s or its Subsidiaries’
business which is subject to periodic renewal, the Seller, the Company and each
Subsidiary have no knowledge of any grounds on which such requisite renewals
will not be granted by the relevant PRC Authorities, except where such grounds
does not, and would not, individually or in the aggregate, result in a Material
Adverse Effect.
(f) With
regard to employment and staff or labor, the Company and its Subsidiaries have
complied, in all material respects, with all applicable PRC laws and
regulations, including without limitation, laws and regulations pertaining to
welfare funds, social benefits, medical benefits, insurance, retirement
benefits, pensions or the like.
ARTICLE
IV
REPRESENTATIONS
AND WARRANTIES OF THE SELLER
The
Seller represents to the Purchaser and the Parent as follows:
4.1
Ownership
of Stock; Authority
.
(a) The
Seller has good and marketable title to the Shares, free and clear of any and
all Liens.
(b) The
Seller has full legal capacity, power and authority to execute and deliver this
Agreement and the Additional Agreements to which it is named as a party, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. This Agreement and the
Additional Agreements to which the Seller is named as a party have been, or at
Closing will be, duly executed and delivered by the Seller and are, or upon
their execution and delivery will be, valid and legally binding obligations of
the Seller, enforceable against the Seller in accordance with their respective
terms, subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, or (ii) rules of law governing specific
performance, injunctive relief or other equitable remedies.
(c) The
execution and delivery by the Seller of any or all of the Agreement and the
Additional Agreements to which the Seller is a party, nor the consummation by
the Seller of the transactions contemplated thereby, will (i) conflict with,
result in a breach of, constitute (with or without due notice or lapse of time
or both) a default under, or require any notice, consent or waiver under, any
instrument, contract, agreement or arrangement to which the Seller is a party or
by which the Seller is bound, or (ii) result in the imposition of any Lien upon
the Shares.
4.2
Approvals
. Except
as contemplated by this Agreement, no consent, approval, waiver, authorization
or novation is required to be obtained by the Seller from, and no notice or
filing is required to be given by the Seller to or made by the Seller with, any
Authority or other Person in connection with the execution, delivery and
performance by the Seller of this Agreement and each of the Additional
Agreements, and the sale and transfer of the Shares.
4.3
Non-Contravention
. The
execution, delivery and performance by the Seller of this Agreement and each of
the Additional Agreements, and the consummation of the transactions contemplated
thereby, do not and will not (a) violate any provision of the organizational
documents of the Seller or (b) violate or result in a breach of or constitute a
default under any Law, judgment, injunction, Order, decree or other restriction
of any Authority to which the Seller or the Shares, are subject.
4.4
Litigation
and Claims
. There is no civil, criminal or administrative
action, suit, demand, claim, hearing, proceeding or disclosed investigation
pending or, to the knowledge of the Seller, threatened, against the Seller, and
the Seller is not subject to any Order, writ, judgment, award, injunction or
decree of any Authority of competent jurisdiction or any arbitrator that would
prevent consummation of the transactions contemplated hereby or materially
impair the ability of the Seller to perform its obligations
hereunder.
4.5
Investment
Representations
.
(a) The
Seller is an “accredited investor” as such term is defined in Rule 501 of
Regulation D (“Reg. D”) promulgated under the Act. The Seller
acknowledges that Parent has the right to require evidence of its
status as an accredited investor, if necessary.
(b) The
Seller acknowledges that it has prior investment experience, including
investments in non-listed and non-registered securities, or has employed the
services of an investment advisor, attorney or accountant to evaluate the merits
and risks of such an investment on its behalf, and the Seller represents that it
understands the highly speculative nature of an investment in shares of
Purchaser Ordinary Shares, which may result in the loss of the total amount of
such investment.
(c) The
Seller has adequate means of providing for the Seller’s current needs and
possible personal contingencies, and the Seller has no need, and anticipates no
need in the foreseeable future, for liquidity in the Seller’s investment in
shares of Purchaser Ordinary Shares. The Seller is able to bear the
economic risks of this investment and, consequently, without limiting the
generality of the foregoing, the Seller is able to hold the shares of Purchaser
Ordinary Shares for an indefinite period of time and has a sufficient net worth
to sustain a loss of the entire investment in the event such loss should
occur.
(d) The
Seller has made an overall commitment to investments which are not readily
marketable that are disproportionate to the Seller’s net worth, and the Seller’s
investment in the shares of Purchaser Ordinary Shares will not cause such
overall commitment to become excessive.
(e) Except
as otherwise set forth in Article V, Purchaser has not and is not making any
representations or warranties to the Seller or providing any advice or
information to the Seller. The Seller acknowledges that it has
retained its own professional advisors to evaluate the tax and other
consequences of an investment in the shares of Purchaser Ordinary
Shares.
(f) The
Seller acknowledges that this offering of shares of Purchaser Ordinary Shares
has not been reviewed by the SEC because this is intended to be a non-public
offering pursuant to Section 4(2) of the Act and Rule 506 under Reg.
D. The shares of Purchaser Ordinary Shares will be received by the
Seller for investment and not for distribution or resale to
others.
(g) The
Seller understands and consents to the placement of a legend on any certificate
or other document evidencing shares of Purchaser Ordinary Shares stating that
such shares of Purchaser Ordinary Shares have not been registered under the Act
and setting forth or referring to the restrictions on transferability and sale
thereof. Each certificate evidencing shares of Purchaser Ordinary
Shares shall bear the legends set forth below, or legends substantially
equivalent thereto, together with any other legends that may be required by
federal or state securities laws at the time of the issuance of the shares of
Purchaser Ordinary Shares:
THE
SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL (I) REGISTERED
UNDER THE ACT OR (II) THE ISSUER OF THE SHARES (THE “ISSUER”) HAS RECEIVED AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER THAT SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE
ACT.
4.6
Tax
. Neither
the Seller nor the Company will be required to pay any transfer Taxes to any
Authority with respect to any transaction contemplated by this
Agreement.
ARTICLE
V
REPRESENTATIONS
AND WARRANTIES OF PARENT
Parent
represents and warrants to the Company and the Seller as follows:
5.1
Due
Incorporation
. Parent is a company duly organized, validly
existing and in good standing under the Laws of the State of Delaware. Except as
set forth on
Schedule
5.1
, the Parent is not qualified to do business as a foreign corporation
in any jurisdiction, and there is no jurisdiction in which the character of the
property owned or leased by the Parent or the nature of its activities make
qualification of the Parent in any such jurisdiction necessary, except where the
failure to so qualify would have a Parent Material Adverse
Effect. Purchaser is a company duly organized, validly existing and
in good standing under the Laws of the British Virgin Islands. Parent
has all requisite power and authority, corporate and otherwise, and all
governmental licenses, franchises, permits, authorizations, consents and
approvals required to own, lease, and operate its assets, properties and
businesses and to carry on its business as now conducted on the date
hereof. Purchaser has not conducted any business to date and has only
engaged in certain activities relating to its organization. Parent
has not adopted any plan, or made any agreement in respect of, any merger,
consolidation, sale of all or substantially all of its assets, reorganization,
recapitalization, dissolution or liquidation.
5.2
Corporate
Authorization
. Except for a vote of the stockholders of the
Parent to approve the transaction contemplated by this Agreement, and provided
that fewer than 33.33% of Parent’s public stockholders exercise their redemption
rights (as specified in the Parent’s organizational documents), the execution,
delivery and performance by Parent and the Purchaser of this Agreement and each
of the other Additional Agreements to which it is a party and the consummation
by Parent and the Purchaser of the transactions contemplated hereby and thereby
are within the corporate powers of Parent and the Purchaser and have been duly
authorized by all necessary corporate action on the part of Parent and the
Purchaser. This Agreement constitutes, and upon their execution and
delivery, each of the Additional Agreements will constitute, the valid and
legally binding agreement of Parent or the Purchaser, as applicable, enforceable
against each in accordance with their respective terms.
5.3
Governmental
Authorization
. None of the execution, delivery or performance
by Parent or the Purchaser of this Agreement or any Additional Agreement
requires any consent, approval, license or other action by or in respect of, or
registration, declaration or filing with, any Authority by Parent or the
Purchaser, except, if required, for the filing of a Form D with the SEC and
applicable state authorities and a registration statement upon exercise by the
Seller of its registration rights pursuant to the terms of this
Agreement.
5.4
No
Violation
. Provided that Parent presents the transactions
contemplated by this Agreement to its stockholders for approval and such
stockholders approve the transaction and fewer than 33.33% of Parent’s public
stockholders exercise their redemption rights with respect to such transaction
(as specified in the Parent’s Certificate of Incorporation and Bylaws), neither
the execution and delivery of this Agreement or any Additional Agreement to be
executed by Parent or the Purchaser hereunder nor the consummation of the
transactions contemplated herein and therein will (a) violate any provision of
Parent’s or the Purchaser’s charter documents; (b) violate any Laws or Orders to
which either Parent or the Purchaser or their property is subject, or (c)
violate the provisions of any material agreement or other material instrument
binding upon or benefiting Parent or the Purchaser.
5.5
Consents
. Except
for a vote of the stockholders of the Parent to approve the transaction
contemplated by this Agreement, and provided that fewer than 33.33% of Parent’s
public stockholders exercise their redemption rights (as specified in the
Parent’s organizational documents), there are no agreements, commitments,
arrangements, contracts or other instruments binding upon Parent or the
Purchaser or any of their properties requiring a consent, approval,
authorization, order or other action of or filing with any Person as a result of
the execution, delivery and performance of this Agreement or any of the
Additional Agreements or the consummation of the transactions contemplated
hereby or thereby.
5.6
Litigation
. There
is no action, suit, investigation, hearing or proceeding pending against, or to
the knowledge of Parent, threatened against or affecting, Parent, any of its
officers or directors, or the business of Parent, before any court or arbitrator
or any governmental body, agency or official which if adversely determined
against Parent, has or could reasonably be expected to have a material adverse
effect on the business, assets, condition (financial or otherwise), liabilities,
results or operations or prospects of Parent (“Parent Material Adverse Effect”),
or which in any manner challenges or seeks to prevent, enjoin, alter or delay
the transactions contemplated hereby. There are no outstanding
judgments against Parent.
5.7
Issuance
of Purchaser Ordinary Shares
. The Purchaser Ordinary Shares,
when issued in accordance with this Agreement, will be duly authorized and
validly issued, fully paid and nonassessable.
5.8
Charter
Documents; Legality
. Parent has previously delivered to the
Company true and complete copies of its Certificate of Incorporation and Bylaws
(the “Parent Charter Documents”), as in effect or constituted on the date
hereof. Provided that Parent presents the transactions contemplated
by this Agreement to its stockholders for approval and such stockholders approve
the transaction and fewer than 33.33% of Parent’s public stockholders exercise
their redemption rights with respect to such transaction (as specified in the
Parent’s organizational documents), the execution, delivery, and performance by
Parent and the Purchaser of this Agreement and any Additional Agreement to which
Parent or the Purchaser is to be a party has not violated and will not violate,
and the consummation by Parent or the Purchaser of the transactions contemplated
hereby or thereby will not violate, any of the Parent Charter Documents or any
Law.
5.9
Capitalization
and Ownership of the Parent
.
Schedule 5.9
sets
forth, with respect to the Parent, (i) Parent’s authorized capital, (ii) the
number of Parent’s securities that are outstanding, and (iii) the number of
securities convertible into or exercisable or exchangeable for the Parent’s
securities. Except as set forth in the Exchange Act Filings, there is
no Contract that requires or under any circumstance would require the Parent to
issue, or grant any right to acquire, any securities of the Parent, or any
security or instrument exercisable or exchangeable for or convertible into, the
capital stock of the Parent or to merge, consolidate, dissolve, liquidate,
restructure, or recapitalize the Parent.
5.10
Financial
Statements
.
(a) Parent
has filed with the SEC true and correct copies of the audited consolidated
balance sheets of Parent and its consolidated subsidiaries as of December 31,
2008, and the related consolidated statements of operations, cash flows and
stockholders’ equity and cash flows for the year then ended, including footnotes
thereto (the “Parent Financial Statements”). The Parent Financial
Statements (i) were prepared in accordance with GAAP; (ii) fairly and accurately
present the Parent’s financial condition and the results of its operations as of
their respective dates and for the periods then ended, in all material respects;
(iii) contain and reflect all necessary adjustments and accruals for a fair
presentation of the Parent’s financial condition as of their dates, in all
material respects; and (iv) contain and reflect adequate provisions for all
reasonably anticipated liabilities for all material income, property, sales,
payroll or other Taxes applicable to the Parent with respect to the periods then
ended. The Parent has heretofore delivered to the Company complete
and accurate copies of all “management letters” received by it from the Parent’s
accountants and all responses during the last three years by lawyers engaged by
the Parent to inquiries from the Parent’s accountant or any predecessor
accountants.
(b) Except
as specifically disclosed or as reflected in the Exchange Act Filings, reflected
or fully reserved against in the Parent Financial Statements and for liabilities
and obligations of a similar nature and in similar amounts incurred in the
ordinary course of business since the date of the Parent Financial Statements,
there are no liabilities, debts or obligations of any nature (whether accrued,
absolute, contingent, liquidated or unliquidated, unasserted or otherwise)
relating to the Parent. All debts and liabilities, fixed or
contingent, which should be included under GAAP on an accrual basis on the
Parent Financial Statements are included therein.
5.11
Other
Information
.
Neither this Agreement nor any of the documents filed by the Parent with
the SEC, nor any other documents or other information made available to the
Company or the Seller or their Affiliates, attorneys, accountants, agents or
representatives pursuant hereto or in connection with the Company’s and the
Seller’s due diligence review of the business of the Parent or the transactions
contemplated by this Agreement contains or will contain any untrue statement of
a material fact or omits or will omit to state a material fact necessary in
order to make the statements contained therein not misleading. To the
best knowledge of the Parent, the Parent has provided the Company with all
material information regarding its business.
5.12
Compliance
with Laws
. The Parent is not in violation of, has not
violated, and to the knowledge of Parent, is not under investigation with
respect to nor have been threatened to be charged with or given notice of, any
violation or alleged violation of, any Law or Order, nor is there any basis for
any such charge.
5.13
Money
Laundering Laws
. The operations of the Parent are and have
been conducted at all times in compliance with Money Laundering Laws and no
Action involving the Parent with respect to the Money Laundering Laws is pending
or, to the knowledge of the Parent, threatened.
5.14
Ownership
of Purchaser Ordinary Shares
. Upon issuance and delivery of
the Purchaser Ordinary Shares to the Seller pursuant to this Agreement against
payment of the consideration therefor, the Purchaser Ordinary Shares will be
duly authorized and validly issued, fully paid and nonassessable, free and clear
of all Liens, other than (i) restrictions arising from applicable securities
laws, and (ii) any Lien created by or through the Seller. The issuance and sale
of the Purchaser Ordinary Shares pursuant hereto will not be subject to or give
rise to any preemptive rights or rights of first refusal.
5.15
Purchaser.
Purchaser
was formed in the British Virgin Islands on July 30, 2009. Purchaser
has no liabilities, debts or obligations of any nature (whether accrued,
absolute, contingent, liquidated or unliquidated, unasserted or otherwise)
except those incurred in connection with this Agreement and all of the
transactions contemplated hereby.
ARTICLE
VI
COVENANTS
OF THE COMPANY AND THE SELLER PENDING CLOSING
The
Company, Hengda and the Seller covenant and agree that:
6.1
Conduct
of the Business
.
From the date
hereof through the Closing Date, the Company and each Subsidiary shall conduct
the Business only in the ordinary course (including the payment of accounts
payable and the collection of accounts receivable), consistent with past
practices, and shall not enter into any material transactions without the prior
written consent of Parent, and use its best efforts to preserve intact the
Company’s business relationships with employees, suppliers, customers and other
third parties. Without limiting the generality of the foregoing, from
the date hereof until the Closing Date, without Parent’s prior written consent,
neither the Company nor any Subsidiary shall:
(a) except
in the ordinary course of business, amend, waive any provision of, terminate
prior to its scheduled expiration date, or otherwise compromise in any way, any
Contract (including contracts described in clause (b) below), or any other right
or asset;
(b) except
as contemplated by this Agreement, enter into any contract, agreement, lease,
license or commitment, which (i) is with respect to real property, (ii) except
in the ordinary course of business, extends for a term of one year or more or
(iii) obligates the payment of more than $250,000 (individually or in the
aggregate);
(c) make
any capital expenditures in excess of $250,000 (individually or in the
aggregate);
(d) sell,
lease, license or otherwise dispose of any assets or assets covered by any
Contract except (i) pursuant to existing contracts or commitments disclosed
herein and (ii) sales of inventory in the ordinary course consistent with past
practice;
(e) pay,
declare or promise to pay any dividends or other distributions with respect to
its capital stock, or pay, declare or promise to pay any other payments to the
Seller or any Affiliate of the Company;
(f) authorize
any salary increase of more than 10% for any employee making an annual salary of
greater than $75,000 or in excess of $750,000 in the aggregate on an annual
basis or change the bonus or profit sharing policies of the Company or any
Subsidiary;
(g) except
for Indebtedness listed on
Schedule 6.1(g)
obtain or suffer to exist any Indebtedness;
(h) suffer
or incur any Lien on any asset except for Liens existing as of the date hereof
as set forth on
Schedule
3.15(b)
;
(i) suffer
any material damage, destruction or loss of property related to any assets that
is not covered by insurance;
(j) delay,
accelerate or cancel any receivables or Indebtedness or write-off or make
further reserves against the same, except in the ordinary course of
business;
(k) merge
or consolidate with or acquire any other Person or be acquired by any other
Person;
(l) suffer
any insurance policy protecting assets to lapse;
(m) make
any change in its accounting principles or methods or write down the value of
any inventory or assets;
(n) change
the place of business of the Company or any Subsidiary;
(o) extend
any loans to any Person, other than travel or other expense advances to
employees in the ordinary course of business;
(p) issue,
redeem or repurchase any shares of its capital stock;
(q) effect
or agree to any changes in shipping practices, terms or rates;
(r)
reduce the prices of
products sold from Inventory for customers except in the ordinary course of
business;
(s) effect
or agree to any change in any practices or terms, including payment terms, with
respect to customers or suppliers;
(t)
make or rescind any
election related to Taxes, file any amended income Tax Return or make any
changes in its methods of Tax accounting; or
(u)
agree to do any of the
foregoing.
The
Company and each of its Subsidiaries will not (i) take or agree to take any
action that might make any representation or warranty of the Company or Hengda
hereunder inaccurate in any respect at, or as of any time prior to, the Closing
Date or (ii) omit to take, or agree to omit to take, any action necessary to
prevent any such representation or warranty from being inaccurate in any respect
at any such time.
6.2
Access to
Information
.
(a) From
the date hereof until and including the Closing Date, the Company and each
Subsidiary shall (a) continue to give Parent, its counsel and other
representatives full access to the offices, properties and Books and Records of
the Company, (b) furnish to Parent, its counsel and other representatives such
information relating to the Business as such Persons may request and (c) cause
the employees, counsel, accountants and representatives of the Company and each
Subsidiary to cooperate with Parent in its investigation of the Business;
provided
that no
investigation pursuant to this Section 6.2 (or any investigation prior to
the date hereof) shall affect any representation or warranty given by the
Company, any Subsidiary or the Seller hereunder or under the Ancillary
Agreements.
(b) The
Company shall arrange for representatives of Parent to meet with or speak to the
representatives of the three largest customers of the Company and each
Subsidiary
.
6.3
Notices
of Certain Events
.
The Company shall
promptly notify Parent of:
(i) any
notice or other communication from any Person alleging or raising the
possibility that the consent of such Person is or may be required in connection
with the transactions contemplated by this Agreement or that the transactions
contemplated by this Agreement might give rise to any claims or causes of action
or other rights by or on behalf of such Person or result in the loss of any
rights or privileges of the Company or any Subsidiary to any such
Person;
(ii) any
notice or other communication from any Authority in connection with the
transactions contemplated by this Agreement;
(iii) any
actions, suits, claims, investigations or proceedings commenced or threatened
against, relating to or involving or otherwise affecting the Company, any
Subsidiary or the Business or that relate to the consummation of the
transactions contemplated by this Agreement; and
(iv) the
occurrence of any fact or circumstance which might make any representation made
hereunder by the Company, any Subsidiary and/or the Seller false in any respect
or result in the omission or the failure to state a material fact.
6.4
SEC
Filings
.
(a) The
Company, Hengda and the Seller acknowledge that:
(i) the
Parent’s stockholders must approve the transactions contemplated by this
Agreement prior to the transactions contemplated hereby being consummated and
that, in connection with such approval, the Parent must call a special meeting
of its stockholders requiring Parent to prepare and file with the SEC a proxy
statement and proxy card;
(ii) the
Parent will be required to file Quarterly and Annual reports that may be
required to contain information about the transactions contemplated by this
Agreement; and
(iii) the
Parent will be required to file Current Reports on Form 8-K to announce the
transactions contemplated hereby and other significant events that may occur in
connection with such transaction.
(b) In
connection with any filing the Parent makes with the SEC that requires
information about the transactions contemplated by this Agreement to be
included, the Company, Hengda and the Seller will, in connection with the
disclosure included in any such filing or the responses provided to the SEC in
connection with the SEC’s comments to a filing, use their best efforts to (i)
cooperate with the Parent, (ii) respond to questions about the Company, Hengda
or the Seller required in any filing or requested by the SEC, and (iii) provide
any information requested by Parent or Parent’s representatives in connection
with any filing with the SEC. In the proxy statement distributed to
Parent’s stockholders, the effectiveness of the Transaction shall be conditioned
upon the approval of the Redomestication Merger, and the effectiveness of the
Redomestication Merger shall be conditioned upon the approval of the
Transaction.
6.5
Financial
Information
. The Seller, Hengda and the Company will provide
additional financial information requested by the Parent or the Purchaser for
inclusion in any filings to be made by the Parent with the SEC. If
requested by the Parent or the Purchaser, such information must be reviewed or
audited by Hengda’s auditors.
6.6
Exclusivity
. So
long as this Agreement has not been terminated in accordance with Article XIII
hereof, none of the Company, Hengda or the Seller, nor anyone acting on their
behalf shall, directly or indirectly, (i) knowingly encourage, solicit, initiate
or participate in discussions or negotiations with, or provide any information
to or cooperate in any manner with any Person (an “Excluded Person”), other than
Parent, Purchaser or their Affiliates, or an officer, partner, employee or other
representative of an Excluded Person, concerning the sale of all or any part of
the Business or the capital stock or other securities of the Company, whether
such transaction takes the form of a sale of stock or assets, merger,
consolidation or otherwise or any joint venture or partnership, or (ii)
otherwise solicit, initiate or knowingly encourage the submission of any
proposal contemplating the sale of all or any part of the Business of the
Company or any Subsidiary or the capital stock or other securities of the
Company or any Subsidiary, whether such transaction takes the form of a sale of
stock or assets, merger, consolidation or otherwise or any joint venture or
partnership or (iii) consummate any such transaction or accept any offer or
agree to engage in any such transaction. The Company, Hengda and the
Seller shall promptly communicate to Parent and the Purchaser the terms of any
proposal, contract or sale which it or they may receive in respect of any of the
foregoing. The Company, Hengda and the Seller will include the
identity of the person making such proposal or offer, copies (if written) or a
written description of the material terms (if oral) thereof and any other such
material information with respect thereto as Parent or the Purchaser may
reasonably request.
ARTICLE
VII
COVENANTS
OF THE COMPANY AND THE SELLER
The
Company, Hengda and the Seller, severally but not jointly, covenant and agree
that:
7.1
Confidentiality
.
Except as
otherwise required by law, the Seller, the Company and Hengda and their
respective Affiliates, and Key Personnel shall not, without the prior written
consent of Parent, or a person authorized thereby, disclose to any other Person
or use (whether for its own account or the account of any other party) any
confidential information or proprietary work product of Parent, the Purchaser,
the Company or any Subsidiary or any client of Parent, the Purchaser, the
Company or any Subsidiary. In the event the Company, Hengda or the
Seller believes that it is required to disclose any such confidential
information pursuant to applicable Laws, the Company, Hengda or the Seller
shall, if possible under the circumstances, give timely written notice to Parent
so that Parent may have an opportunity to obtain a protective order or other
appropriate relief. The Company, Hengda and the Seller shall
cooperate fully in any such action by Parent. “Key Personnel” shall mean Mr.
Huang Jia Dong, Mr. Li Shun Qing and Mr. Hen Man Edmund.
7.2
Non-Competition
. During
the period beginning on the Closing Date and ending on the two year anniversary
of the Closing Date, neither the Seller nor any of its Affiliates shall directly
or indirectly, in his, her and its own capacity or through one or more
Affiliates, whether as owner, consultant, executive, partner, member, manager,
officer, director, venturer, or agent, or through stock ownership, investment of
capital, lending of money or property, or rendering of services, or otherwise,
engage in the Business; provided, that the Seller may own not more than 3% of
the outstanding shares of a company engaged in such Business if such shares are
listed on a national securities exchange.
7.3
Reporting
and Compliance With Law
. From the date hereof through the
Closing Date, the Company and each Subsidiary shall duly and timely file all Tax
Returns required to be filed with Authorities, pay any and all Taxes required by
any Authority and duly observe and conform, in all material respects, to all
applicable Laws and Orders.
7.4
Injunctive
Relief
.
If the Seller
breaches, or threatens to commit a breach of, any of the covenants set forth in
Sections 7.1, 7.2, 7.3 or Section 14.6 (the “Restrictive Covenants”), Parent
shall have the following rights and remedies, which shall be in addition to, and
not in lieu of, any other rights and remedies available to Parent by agreement
(including those set forth in Section 11.1 hereof), under law or in
equity:
(a) The
right and remedy to have the Restrictive Covenants specifically enforced by any
court having equity jurisdiction, all without the need to post a bond or any
other security or to prove any amount of actual damage or that money damages
would not provide an adequate remedy, it being acknowledged and agreed that any
such breach or threatened breach will cause irreparable injury to Parent and
that monetary damages will not provide adequate remedy to Parent;
and
(b) The
right and remedy to require the Seller (i) to account for and pay over to Parent
all compensation, profits, monies, accruals, increments or other benefits
derived or received by the Seller, the Company or any Subsidiary or any
associated party as the result of any such breach; and (ii) to indemnify Parent
against any other losses, damages (including special and consequential damages),
costs and expenses, including actual attorneys fees and court costs, which may
be incurred by it and which result from or arise out of any such breach or
threatened breach.
ARTICLE
VIII
COVENANTS
OF ALL PARTIES HERETO
The
parties hereto, as applicable, covenant and agree that:
8.1
Best
Efforts; Further Assurances
.
Subject to the
terms and conditions of this Agreement, each party shall use its best efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary or desirable under applicable Laws, and in the case of the
Company, Hengda and the Seller as reasonably requested by Parent, to consummate
and implement expeditiously the transactions contemplated by this
Agreement. The parties hereto shall execute and deliver such other
documents, certificates, agreements and other writings and take such other
actions as may be necessary or desirable in order to consummate or implement
expeditiously the transactions contemplated by this Agreement.
8.2
Confidentiality
.
Any information
(except publicly available or freely usable material obtained from another
source) respecting any party or its Affiliates will be kept in strict confidence
by all other parties to this Agreement and their agents. Except as
required by Law, neither the Company, Hengda, the Seller, nor any of their
respective Affiliates, directors, officers, employees or agents will disclose
the terms of the transactions contemplated hereunder at any time, currently, or
on or after the Closing, regardless of whether the Closing takes place, except
as necessary to their attorneys, accountants and professional advisors, in which
instance such persons and any employees or agents of the Company or any
Subsidiary shall be advised of the confidential nature of the terms of the
transaction and shall themselves be required by the Company to keep such
information confidential. Except as required by Law, each party shall
retain all information obtained from the other and their lawyers on a
confidential basis except such information may be discussed as necessary to
their attorneys, accountants and professional advisors, in which instance such
persons and any employees or agents of such party shall be advised of the
confidential nature of the terms of the transaction and shall themselves be
required by such party to keep such information confidential.
8.3
Best
Efforts to Obtain Consents
.
The Company and
Hengda hereby agrees to use its reasonable best efforts to obtain each
respective Company Consent as promptly as practicable hereafter.
8.4 [Reserved].
8.5 Registration.
(a)
Registration
. Within
six months of the Closing Date, the Company shall file a registration statement
relating to the resale of the Registrable Securities (as defined below) and
cause such registration statement to be declared effective by the SEC as soon as
reasonably practicable after the filing of such registration
statement.
(b)
Piggy-Back
Registration
. (i) If at any time prior to the one year
anniversary of the Closing Date, the Purchaser proposes to register any of its
securities under the Act for its own account or for the account of any security
holder other than the Seller, other than pursuant to a registration statement on
Form S-4, F-4 or S-8 or any successor forms thereto , the Purchaser will give
written notice to the Seller of its intention to effect such a registration not
later than ten (10) days prior to the anticipated filing date (a “Piggyback
Registration”). Subject to Section 8.5(a)(iv) hereof, the Purchaser
will include in such Piggyback Registration all issued and outstanding shares of
Purchaser Ordinary Shares issued pursuant to this Agreement (“Registrable
Securities”) with respect to which the Purchaser has received written requests
for inclusion therein within ten (10) business days after the receipt by the
Seller of the Purchaser’s notice. The Seller shall be permitted to withdraw all
or any part of the Registrable Securities from a Piggyback Registration at any
time prior to the effective date of such Piggyback Registration. If a
Piggyback Registration is an underwritten offering, all Persons whose securities
are included in the Piggyback Registration shall be obligated to sell their
securities on the terms and conditions of the underwriting.
(i) If
a Piggyback Registration is an underwritten registration, and the managing
underwriters advise the Parent in writing that in their opinion the total number
or dollar amount of securities requested to be included in such registration
exceeds the number or dollar amount of securities which can be sold in such
offering, and such offering was demanded by persons other than the Seller, the
Purchaser will include in such registration in the following priority: (1)
first, securities of the Purchaser sold for the account of any third-party
holders if the registration was initiated by such holders pursuant to
contractual demand registration rights, (2) second, pro-rata among the holders
of any other securities according to the number of shares requested to be
registered by such other holders and the Seller, (3) Purchaser Ordinary Shares
sold for the account of the Purchaser, and (4) pro-rata among any other holders
of Purchaser Securities.
(ii) If
a Piggyback Registration is an underwritten registration, and the managing
underwriters advise the Purchaser in writing that in their opinion the total
number or dollar amount of securities requested to be included in such
registration exceeds the number or dollar amount of securities which can be sold
in such offering, and the Purchaser initiated the registration for the purpose
of selling Purchaser Securities for its own account, the Purchaser will include
in such registration in the following priority: (1) first, Purchaser Ordinary
Shares sold for the account of the Purchaser; and (2) second, pro-rata among any
other holders of any other securities exercising contractual registration rights
and the Seller according to the number of shares requested to be registered by
such other holders and the Seller.
8.6
Procedures
on Registration
. If and whenever the Purchaser is required by
the provisions hereof to effect the registration of any Registrable Securities
under the Act, the Purchaser will:
(a) furnish
to the Seller such number of copies of the registration statement and the
prospectus included therein as the Seller reasonably may request to facilitate
the public sale or disposition of the Registrable Securities covered by such
registration statement;
(b) use
its commercially reasonable efforts to register or qualify the Seller’s
Registrable Securities covered by such registration statement under the
securities or “blue sky” laws of such jurisdictions within the United States as
the Seller may reasonably request, provided, however, that the Parent shall not
for any such purpose be required to qualify generally to transact business as a
foreign corporation in any jurisdiction where it is not so qualified or to
consent to general service of process in any such jurisdiction;
(c) list
the Registrable Securities covered by such registration statement with any
securities exchange on which the Ordinary Shares of the Purchaser are then
listed;
(d) immediately
notify the Seller at any time when a prospectus relating thereto is required to
be delivered under the Securities Act of the happening of any event of which the
Purchaser has knowledge as a result of which the prospectus contained in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing; and
(e) notify
the Seller of the effectiveness of each registration statement
filed.
8.7
Lock-up
.
(a) The
Seller and each other Person set forth on
Schedule 3.2
will
each enter into a Lock-Up Agreement pursuant to which 100% of the Parent Common
Stock beneficially owned by the such Person set forth on
Schedule 3.2
pursuant
to Section 2.3 (the “Lock-up Shares”) will be locked-up for a period of twelve
(12) months following the consummation of the Transaction.
(b) Notwithstanding
anything to the contrary contained herein, Top Plenty International Limited and
Park Rise Holdings Limited will each enter into Lock-Up Agreements pursuant to
which they will each be able to sell 327,500 of the Lock-up Shares after a
period of 6 months from the Closing Date, subject to compliance with applicable
laws.
8.8
Exclusivity
. So
long as this Agreement has not been terminated in accordance with Article XIII
hereof, none of the Company, Hengda, the Seller, the Parent or the Purchaser,
nor anyone acting on their behalf shall, directly or indirectly, (i) knowingly
encourage, solicit, initiate or participate in discussions or negotiations with,
or provide any information to or cooperate in any manner with any Person (an
“Excluded Person”), other than the other parties to this Agreement or their
Affiliates, or an officer, partner, employee or other representative of an
Excluded Person, concerning the sale of all or any part of the Business or the
capital stock or other securities of the Company or any Subsidiary, whether such
transaction takes the form of a sale of stock or assets, merger, consolidation
or otherwise or any joint venture or partnership, or (ii) otherwise solicit,
initiate or knowingly encourage the submission of any proposal contemplating the
sale of all or any part of the Business of the Company or any Subsidiary or the
capital stock or other securities of the Company or any Subsidiary other than as
contemplated by this Agreement, whether such transaction takes the form of a
sale of stock or assets, merger, consolidation or otherwise or any joint venture
or partnership or (iii) consummate any such transaction or accept any offer or
agree to engage in any such transaction. The Company, Hengda and the
Seller shall promptly communicate to Parent and the Purchaser and the Parent and
the Purchaser shall promptly communicate to the Company, Hengda and the Seller
the terms of any proposal, contract or sale which it or they may receive in
respect of any transaction similar to, or having the same effect as, the
Transaction. Any such communication will include the identity of the
person making such proposal or offer, copies (if written) or a written
description of the material terms (if oral) thereof and any other such material
information with respect thereto as other parties may reasonably
request.
ARTICLE
IX
CONDITIONS
TO CLOSING
9.1
Condition
to the Obligations of Parent, the Purchaser, the Seller, Hengda and the
Company
.
The
obligations of Parent, the Purchaser, the Seller, Hengda and the Company to
consummate the Closing are subject to the satisfaction of all the following
conditions:
(a) No
provision of any applicable Law or Order shall prohibit or impose any condition
on the consummation of the Closing or limit in any material way Parent’s right
to control or operate the Company or any Subsidiary, or any material portion of
the Business.
(b) There
shall not be pending or threatened any proceeding by a third-party to enjoin or
otherwise restrict the consummation of the Closing.
(c) Parent’s
stockholders shall have approved the transactions contemplated by this Agreement
and fewer than 33.33% of the issued and outstanding Parent Common Stock owned by
Parent’s public stockholders will have exercised their redemption rights (as
specified in the Parent’s Certificate of Incorporation and Bylaws).
(d) The
Redomestication Merger shall have been consummated and the applicable
certificates filed in the appropriate jurisdictions.
9.2
Conditions
to Obligations of Parent and the Purchaser
.
In addition to the terms and
provisions of Section 2.3, the obligation of Parent and the Purchaser to
consummate the Closing is subject to the satisfaction, or the waiver at Parent’s
and the Purchaser’s sole and absolute discretion, of all the following further
conditions:
(a) (i)
Each of the Company, Hengda and the Seller shall have duly performed in all
material respects all of their respective obligations hereunder required to be
performed by them at or prior to the Closing Date, (ii) the representations and
warranties of the Company, Hengda and the Seller contained in this Agreement,
the Additional Agreements and in any certificate or other writing delivered by
the Company, Hengda or the Seller pursuant hereto, disregarding all
qualifications and exceptions contained therein relating to materiality or
Material Adverse Effect, shall be true and correct at and as of the Closing
Date, as if made at and as of such date with only such exceptions as could not
in the aggregate reasonably be expected to have a Material Adverse Effect, (iii)
there shall have been no event, change or occurrence which individually or
together with any other event, change or occurrence, could reasonably be
expected to have a Material Adverse Change or a Material Adverse Effect,
regardless of whether it involved a known risk, and (iv) Parent and the
Purchaser shall have received a certificate signed by the President and
Secretary of the Company and Hengda to the effect set forth in clauses (i), (ii)
and (iii) of this Section 9.2(a).
(b) Parent
shall have received (i) a certified copy of the organizational documents of the
Company and each Subsidiary, (ii) copies of resolutions duly adopted by the
Board of Directors of the Company and Hengda, authorizing this Agreement and the
Additional Agreements (if necessary) and the transactions contemplated hereby
and thereby, (iii) a certificate of a Director of the Company and Hengda
certifying each of the foregoing and as to signatures of the officer(s)
authorized to execute this Agreement and any certificate or document to be
delivered pursuant hereto, together with evidence of the incumbency of such
Secretary, and (iv) a recent good standing certificate regarding the Company and
each Subsidiary from the applicable regulatory authority in its jurisdiction of
formation and each other jurisdiction in which the Company and each Subsidiary
is qualified to do business.
(c) Parent
or the Purchaser shall have reasonably determined that, after Parent or the
Purchaser has had the opportunity to meet or speak to representatives of the
three largest customers of the Company and each Subsidiary pursuant to Section
6.2, all such customers will continue the relationship such customer had with
the Company and each Subsidiary.
(d) Parent
shall have received a copy of all material Company Consents (including any
required consents of the landlords under the Leases), in form and substance
reasonably satisfactory to Parent, and no such material Company Consent shall
have been revoked.
(e) The
Company shall have delivered to Parent documents satisfactory to Parent to
evidence the release of all Liens on any portion of the assets of the Company or
any Subsidiary and the filing of appropriate termination
statements.
(f)
The Parent shall have received updated Schedules to this
Agreement as of a date within three days of the Closing Date.
(g) Parent’s
stockholders approve the transactions contemplated by this Agreement by November
21, 2009.
(h) Parent
will have received an opinion of counsel to the Company and the Seller
substantially in the form of
Exhibit B
hereto.
(i)
Certificates representing all of the Shares shall be presented at
the Closing for cancellation, together with the original stock ledgers and
minute books of the Company.
(j)
The Additional Agreements shall be in full force and effect or become
effective on the Closing Date.
(k) Hengda’s
Director and Officer insurance policy shall include the officers and directors
of the Parent.
(l)
Each of the persons listed on Schedule 9.2(l) will have entered into an
Employment Agreement with Hengda.
(m) Hengda
will have entered into a definitive agreement for the purchase of all of the
outstanding securities of Jiangxi Hengdali Ceramics and Construction Material
Limited in form and substance satisfactory to the Parent.
9.3
Conditions
to Obligations of the Company, Hengda and the Seller
.
In addition to
the terms and provisions of Section 2.3, the obligation of the Company, Hengda
and the Seller to consummate the Closing is subject to the satisfaction, or the
waiver at the Company’s, Hengda’ and the Seller’s discretion, of all the
following further conditions:
(a) (i)
Each of the Parent and the Purchaser shall have performed in all material
respects all of their respective obligations hereunder required to be performed
by it at or prior to the Closing Date, (ii) the representations and warranties
of Parent contained in this Agreement, the Additional Agreements and in any
certificate or other writing delivered by Parent or the Purchaser pursuant
hereto, disregarding all qualifications and expectations contained therein
relating to materiality, shall be true and correct in all material respects at
and as of the Closing Date, as if made at and as of such date, provided,
however, that the Parent and the Purchaser and/or their respective affiliates,
are permitted to enter into such arrangements as would be necessary for the
Parent to secure the approval of its stockholders of the transactions
contemplated by this Agreement (including such arrangements as would require the
Combined Company to use monies available due to the transactions contemplated by
this Agreement), and (iii) the Seller and the Company shall have received a
certificate signed by an authorized officer of Parent and the Purchaser to the
effect set forth in clauses (i) and (ii) of this Section
9.2(a).
(b) The
Company and the Seller shall have received (i) a copy of the organizational
documents of each of Parent and the Purchaser, (ii) copies of resolutions duly
adopted by the Boards of Directors of the Parent and the Purchaser authorizing
this Agreement and the Additional Agreements (if necessary) and the transaction
contemplated hereby and thereby, (iii) a certificate of the Secretary or
Assistant Secretary of Parent and the Purchaser certifying each of the foregoing
and as to signatures of the officer(s) authorized to execute this Agreement and
any certificate or document to be delivered pursuant hereto, together with
evidence of the incumbency of such Secretary or Assistant Secretary, and (iv) a
recent good standing certificate regarding Parent and the Purchaser from the
office of the Secretary of State of its respective jurisdiction of organization
and each other jurisdiction in which each of Parent and the Purchaser is
qualified to do business.
(c) Prior
to the Redomestication Merger, the Founders will enter into Lock-Up Agreements
pursuant to which 100% of the Parent Common Stock beneficially owned by each
such Founder will be locked-up for a period of twelve (12) months following the
consummation of the Transaction.
(d) Prior
to the Redomestication Merger, the Founders will reduce the number of shares of
Parent Common Stock that they collectively own to 1,600,000
shares. Such shares shall be sold at a price per share of
$0.01.
ARTICLE
X
RELIANCE
ON REPRESENTATIONS AND WARRANTIES
10.1
Reliance
on Representations and Warranties of the Company and the
Seller
. Notwithstanding any right of Parent and the Purchaser
to fully investigate the affairs of the Company and each Subsidiary and
notwithstanding any knowledge of facts determined or determinable by Parent and
the Purchaser pursuant to such investigation or right of investigation, Parent
and the Purchaser shall have the right to rely fully upon the representations,
warranties, covenants and agreements of the Company, Hengda and the Seller
contained in this Agreement.
10.2
Reliance
on Representations and Warranties of Parent and the Purchaser
.
Notwithstanding any
right of the Company, Hengda or the Seller to investigate the affairs of Parent
and the Purchaser and notwithstanding any knowledge of facts determined or
determinable by the Company, Hengda or the Seller pursuant to such investigation
or right of investigation, the Company, Hengda and the Seller shall have the
right to rely fully upon the representations, warranties, covenants and
agreements of Parent and the Purchaser contained in this
Agreement.
ARTICLE
XI
INDEMNIFICATION
11.1
Indemnification
of Parent, Purchaser
.
The Seller, the
Company and Hengda hereby jointly and severally agree to indemnify and hold
harmless Parent, Purchaser, and their Affiliates and each of their respective
directors, officers, employees, shareholders, attorneys and agents and permitted
assignees (collectively, the “Parent Indemnitees,”
provided
,
however
, the term
“Parent Indemnitees” shall not include the Seller or Hengda regardless of their
capacity), against and in respect of any and all loss, payment, demand, penalty,
liability, judgment, damage, diminution in value, claim or out-of-pocket costs
and expenses (including actual costs of investigation and attorneys’ fees and
other costs and expenses) (all of the foregoing collectively, “Losses”) incurred
or sustained by any Parent Indemnitee as a result of (i) any breach, inaccuracy
or nonfulfillment or the alleged breach, inaccuracy or nonfulfillment of any of
the representations, warranties and covenants of the Company, Hengda or the
Seller contained herein or in the Additional Agreements (
but not the Employment
Agreements
) or any certificate or other writing delivered pursuant
hereto, or (ii) the failure to pay any claims by any third parties (including
breach of contract claims, violations of warranties, trademark infringement,
privacy violations, torts or consumer complaints) with respect to the business
of the Company or any Subsidiary for any period prior to the Closing Date;
provided
, that Losses
in connection with Section 11.1(ii), shall be deemed to include any amounts
payable after the Closing pursuant to or otherwise in connection with any of the
foregoing matters.
11.2
Indemnification
of Seller
.
Parent and the
Purchaser hereby agree to indemnify and hold harmless the Seller and its
respective Affiliates, and each of their respective directors, officers,
employees, shareholders, attorneys, agents and permitted assignees (the “Company
Indemnitees”) against and in respect of any Losses incurred or sustained by the
Company Indemnitees after the Closing as a result of (i) any breach, inaccuracy
or nonfulfillment or the alleged breach, inaccuracy or nonfulfillment of any of
the representations, warranties and covenants of Parent or the Purchaser
contained herein or any certificate or other writing delivered pursuant hereto,
and (ii) actions or inactions of the Purchaser with regard to the Business
occurring after the Closing.
11.3
Procedure
. The
following shall apply with respect to all claims by either a Parent Indemnitee
or a Company Indemnitee (together, “Indemnified Party”) for
indemnification:
(a) An
Indemnified Party shall give the party required to provide indemnification
pursuant to Section 11.1 or 11.2 (each an “Indemnifying Party”), prompt written
notice (an “Indemnification Notice”) of any third-party claim, investigation,
action, suit, hearing or proceeding with respect to which such Indemnified Party
seeks indemnification pursuant to Section 11.1 or 11.2 (a “Third Party
Claim”), which shall describe in reasonable detail the loss, liability or damage
that has been or may be suffered by the Indemnified Party. The
failure to give the Indemnification Notice shall not impair any of the rights or
benefits of such Indemnified Party under Section 11.1 or 11.2, except to the
extent such failure materially and adversely affects the ability of the
Indemnifying Parties to defend such claim or to the limited extent the failure
to give such notice increases the amount of such liability.
(b) In
the case of any Third Party Claims as to which indemnification is sought by any
Indemnified Party, such Indemnified Party shall be entitled, at the sole expense
and liability of the Indemnifying Party, to exercise full control of the
defense, compromise or settlement of any Third Party Claim unless the
Indemnifying Party, within a reasonable time after the giving of an
Indemnification Notice by the Indemnified Party (but in any event within 10 days
thereafter), shall (i) deliver a written confirmation to such Indemnified Party
that the indemnification provisions of Section 11.1 or 11.2 are applicable to
such claim, investigation, action, suit, hearing or proceeding and the
Indemnifying Parties will indemnify such Indemnified Party in respect of such
claim, investigation, action or proceeding pursuant to the terms of Section 11.1
or 11.2 and, notwithstanding anything to the contrary, shall do so without
asserting any challenge, defense, limitation on the Indemnifying Parties
liability for Losses, counterclaim or offset, (ii) notify such Indemnified Party
in writing that the Indemnifying Parties are assuming the defense thereof, and
(iii) retain legal counsel reasonably satisfactory to such Indemnified Party to
conduct the defense of such Third Party Claim.
(c) If
the Indemnifying Party assumes the defense of any such Third Party Claim then
the Indemnified Party shall cooperate with the Indemnifying Party in any manner
reasonably requested in connection with the defense, compromise or settlement
thereof. If the Indemnifying Parties so assume the defense of any
such Third Party Claim the Indemnified Party shall have the right to employ
separate counsel and to participate in (but not control) the defense,
compromise, or settlement thereof, but the fees and expenses of such counsel
employed by the Indemnified Party shall be at the expense of such Indemnified
Party unless (i) the Indemnifying Parties have agreed to pay such fees and
expenses, or (ii) the named parties to any such Third Party Claim (including any
impleaded parties) include an Indemnified Party and an Indemnifying Party and
such Indemnified Party shall have been advised by its counsel that there may be
a conflict of interest between such Indemnified Party and the Indemnifying
Parties in the conduct of the defense thereof, and in any such case the
reasonable fees and expenses of such separate counsel shall be borne by the
Indemnifying Parties.
(d) If
the Indemnifying Party elects to direct the defense of any Third Party Claim,
the Indemnified Party shall not pay, or permit to be paid, any part of any claim
or demand arising from such asserted liability unless the Indemnifying Parties
withdraw from or fail to vigorously prosecute the defense of such asserted
liability, or unless a judgment is entered against the Indemnified Party for
such liability. If the Indemnifying Parties do not elect to defend,
or if, after commencing or undertaking any such defense, the Indemnifying
Parties fail to prosecute vigorously or withdraw such defense, the Indemnified
Party shall have the right to undertake the defense or settlement thereof, at
the Indemnifying Parties’ expense. Notwithstanding anything to the
contrary, the Indemnifying Parties shall not be entitled to control, but may
participate in, and the Indemnified Party (at the expense of the Indemnifying
Parties) shall be entitled to have sole control over, the defense or settlement
of (x) that part of any Third Party Claim (i) that seeks a temporary restraining
order, a preliminary or permanent injunction or specific performance against the
Indemnified Party, or (ii) to the extent such Third Party Claim involves
criminal allegations against the Indemnified Party or (y) the entire Third Party
Claim if such Third Party Claim could impose liability on the part of the
Indemnified Party in an amount which is greater than the amount as to which the
Indemnified Party is entitled to indemnification under this
Agreement. In the event the Indemnified Party retains control of the
Third Party Claim, the Indemnified Party will not settle the subject claim
without the prior written consent of the Indemnifying Party, which consent will
not be unreasonably withheld or delayed.
(e) If
the Indemnified Party assumes the defense of any such Third Party Claim pursuant
to Section 11.1 or 11.2 and proposes to settle the same prior to a final
judgment thereon or to forgo appeal with respect thereto, then the Indemnified
Party shall give the Indemnifying Parties prompt written notice thereof and the
Indemnifying Parties shall have the right to participate in the settlement,
assume or reassume the defense thereof or prosecute such appeal, in each case at
the Indemnifying Parties’ expense. The Indemnifying Parties shall
not, without the prior written consent of such Indemnified Party, settle or
compromise or consent to entry of any judgment with respect to any such Third
Party Claim (i) in which any relief other than the payment of money damages is
or may be sought against such Indemnified Party or (ii) which does not include
as an unconditional term thereof the giving by the claimant, person conducting
such investigation or initiating such hearing, plaintiff or petitioner to such
Indemnified Party a release from all liability with respect to such Third Party
Claim and all other claims or causes of action (known or unknown) arising or
which might arise out of the same facts.
11.4
Periodic
Payments
.
Any
indemnification required by Section 11.1 or 11.2 for costs, disbursements or
expenses of any Indemnified Party in connection with investigating, preparing to
defend or defending any claim, action, suit, hearing, proceeding or
investigation shall be made by periodic payments by the Indemnifying Parties to
each Indemnified Party during the course of the investigation or defense, as and
when bills are received or costs, disbursements or expenses are
incurred.
11.5
Insurance
. Any
indemnification payments hereunder shall only be reduced by any insurance
proceeds or other third party reimbursement actually received by the
Company.
11.6
Limitations
on Indemnification
. Notwithstanding anything to the contrary
in this Article XI, (a) no claim for indemnification shall be made by an
Indemnified Party unless the aggregate Claims of such Indemnified Party exceed
one hundred thousand dollars ($100,000) (the “Deductible Amount”), in which
event all Claims of such party above the Deductible Amount shall be recoverable
hereunder; and (b) in no event shall an Indemnifying Party’s aggregate
obligation to indemnify an Indemnified Party exceed five million seven hundred
forty thousand dollars ($5,740,000).
11.7
Survival
of Indemnification Rights
.
The
representations and warranties of the Company, Hengda, the Seller, Parent and
the Purchaser shall survive until the 18 month anniversary of the Closing
Date. The indemnification to which any Indemnified Party is entitled
from the Indemnifying Parties pursuant to Section 11.1 or 11.2 for Losses shall
be effective so long as it is asserted prior to the 18 month anniversary of the
Closing Date in the case of all representations and warranties of the Seller and
Parent hereunder.
11.8
Offset
.
(a) In
the event that the Purchaser is entitled to indemnification pursuant to this
Article XI, the indemnification shall take the form of Purchaser Ordinary Shares
issued, with each share being deemed to have a value $10.00. The
Purchaser Ordinary Shares to pay for such indemnification shall be taken, first,
from the shares held in escrow pursuant to the Purchase Price Escrow Agreement,
pro rata based upon each Indemnifying Party’s Purchaser Ordinary Shares received
pursuant to this Agreement, and, second, from the Purchaser Ordinary Shares held
by the Seller. In the event that the Seller has sold the Purchaser
Ordinary Shares which would have been used to satisfy the indemnification
obligation, the Seller agrees that either it, its affiliates, or its successors
will pay, pro rata based upon each Indemnifying Party’s Purchaser Ordinary
Shares received pursuant to this Agreement, the amount due to the Parent
Indemnitees pursuant to this Article XI in cash.
(b) In
the event that the Parent Indemnitees other than the Purchaser are entitled to
indemnification pursuant to this Article XI, the indemnification shall take the
form of cash.
(c) In
the event that the Company Indemnitees are entitled to indemnification pursuant
to this Article XI, the indemnification shall take the form of Purchase Ordinary
Shares issued by the Purchaser, with each share being deemed to have a value
$10.00.
ARTICLE
XII
DISPUTE
RESOLUTION
12.1
Arbitration
.
(a) In
the event a dispute arises relating to this Agreement, the parties agree to meet
to resolve their disputes in good faith. Any party may seek
injunctive relief, without the need to post a bond, pending the completion of
arbitration under this Agreement for any breach or threatened breach of any
covenant contained herein.
(b) If
after good faith negotiations the dispute is not resolved, the parties shall
promptly submit any dispute, claim, or controversy arising out of or relating to
this Agreement, or any Additional Agreement (including with respect to the
meaning, effect, validity, termination, interpretation, performance, or
enforcement of this Agreement or any Additional Agreement) or any alleged breach
thereof (including any action in tort, contract, equity, or otherwise), to
binding arbitration before one arbitrator that is familiar with the Business and
not an Affiliate of any party to this Agreement (“Arbitrator”). The
parties agree that binding arbitration shall be the sole means of resolving any
dispute, claim, or controversy arising out of or relating to this Agreement or
any Additional Agreement (including with respect to the meaning, effect,
validity, termination, interpretation, performance or enforcement of this
Agreement or any Additional Agreement) or any alleged breach thereof (including
any claim in tort, contract, equity, or otherwise).
(c) If
the parties cannot agree upon the Arbitrator, the Arbitrator shall be selected
by the New York chapter head of the American Arbitration Association upon the
request of either side. The Arbitrator shall be selected within 30
days of request.
(d) The
laws of the State of New York shall apply to any arbitration
hereunder. In any arbitration hereunder, this Agreement and any
agreement contemplated hereby shall be governed by the laws of the State of New
York applicable to a contract negotiated, signed, and wholly to be performed in
the State of New York, which laws the Arbitrator shall apply in rendering his
decision. The Arbitrator shall issue a written decision, setting
forth findings of fact and conclusions of law, within sixty (60) days after he
shall have been selected. The Arbitrator shall have no authority to
award punitive or other exemplary damages.
(e) The
arbitration shall be held in the City of New York, New York in accordance with
and under the then-current provisions of the rules of the American Arbitration
Association, except as otherwise provided herein.
(f) On
application to the Arbitrator, any party shall have rights to discovery to the
same extent as would be provided under the Federal Rules of Civil Procedure, and
the Federal Rules of Evidence shall apply to any arbitration under this
Agreement;
provided
, however,
that the Arbitrator shall limit any discovery or evidence such that his decision
shall be rendered within the period referred to in Section 12.1(d).
(g) The
Arbitrator may, at his discretion and at the expense of the party who will bear
the cost of the arbitration, employ experts to assist him in his
determinations.
(h) The
costs of the arbitration proceeding and any proceeding in court to confirm any
arbitration award or to obtain relief as provided in Section 12.1, as applicable
(including actual attorneys’ fees and costs), shall be borne by the unsuccessful
party and shall be awarded as part of the Arbitrator’s decision, unless the
Arbitrator shall otherwise allocate such costs for the reasons set forth in such
decision. The determination of the Arbitrator shall be final and
binding upon the parties and not subject to appeal.
(i)
Any judgment upon any award rendered by the Arbitrator
may be entered in and enforced by any court of competent
jurisdiction. The parties expressly consent to the exclusive
jurisdiction of the courts (Federal and state) in New York, New York to enforce
any award of the Arbitrator or to render any provisional, temporary, or
injunctive relief in connection with or in aid of the
Arbitration. The parties expressly consent to the personal and
subject matter jurisdiction of the Arbitrator to arbitrate any and all matters
to be submitted to arbitration hereunder. None of the parties hereto
shall challenge any arbitration hereunder on the grounds that any party
necessary to such arbitration (including the parties hereto) shall have been
absent from such arbitration for any reason, including that such party shall
have been the subject of any bankruptcy, reorganization, or insolvency
proceeding.
(j)
The parties shall indemnify the Arbitrator and any
experts employed by the Arbitrator and hold them harmless from and against any
claim or demand arising out of any arbitration under this Agreement or any
agreement contemplated hereby, unless resulting from the willful misconduct of
the person indemnified.
(k) This
arbitration clause shall survive the termination of this Agreement and any
agreement contemplated hereby.
12.2
Waiver of
Jury Trial; Exemplary Damages
.
ALL PARTIES
HEREBY WAIVE THEIR RIGHTS TO TRIAL BY JURY WITH RESPECT TO ANY DISPUTE ARISING
UNDER THIS AGREEMENT OR ANY ADDITIONAL AGREEMENT. No party shall be
awarded punitive or other exemplary damages respecting any dispute arising under
this Agreement or any Additional Agreement.
12.3
Attorneys’
Fees
.
The unsuccessful
party to any court or other proceeding arising out of this Agreement that is not
resolved by arbitration under Section 12.1 shall pay to the prevailing party all
actual attorneys’ fees and costs actually incurred by the prevailing party, in
addition to any other relief to which it may be entitled. As used in
this Section 12.3 and elsewhere in this Agreement, “actual attorneys’ fees”
means the full and actual cost of any legal services actually performed in
connection with the matter for which such fees are sought, calculated on the
basis on the usual fees charged by the attorneys performing such services, and
shall not be limited to “reasonable attorneys’ fees” as that term may be defined
in statutory or decisional law.
ARTICLE
XIII
TERMINATION
13.1
Termination
Without Default
. In the event that the Closing of the
transactions contemplated hereunder has not occurred by November 21, 2009 (the
“Outside Closing Date”) and no material breach of this Agreement by the party
seeking to terminate this Agreement shall have occurred or have been made (as
provided in Section 13.2 hereof), Parent and the Purchaser, on the one hand, or
the Company and the Seller, on the other hand, shall have the right, at its or
their sole option, to terminate this Agreement without liability to the other
side. Such right may be exercised by Parent and the Purchaser, on the
one hand, or the Company and the Seller, on the other, as the case may be,
giving written notice to the other at any time after the Outside Closing
Date.
13.2
Termination
Upon Default
.
(a) Parent
and the Purchaser may terminate this Agreement by giving notice to the Company
and the Seller on or prior to the Closing Date, without prejudice to any rights
or obligations Parent and Purchaser may have, if the Company, Hengda or the
Seller shall have materially breached any representation or warranty or breached
any agreement or covenant contained herein or in any Additional Agreement to be
performed prior to Closing and such breach shall not be cured within the earlier
of the Outside Closing Date and five (5) days following receipt by the Company
or the Seller of a notice describing in reasonable detail the nature of such
breach.
(b) The
Company, Hengda and the Seller may terminate this Agreement by giving prior
written notice to Parent on or prior to the Closing, without prejudice to any
rights or obligations the Company or the Seller may have, if Parent or the
Purchaser shall have materially breached any of its covenants, agreements,
representations, and warranties contained herein to be performed prior to
Closing and such breach shall not be cured within the earlier of the Outside
Closing Date and five (5) days following receipt by Parent of a notice
describing in reasonable detail the nature of such breach.
13.3
Survival
. The
provisions of Article XI and Article XII and Sections 8.2 and 14.6 shall survive
any termination hereof pursuant to this Article XIII.
ARTICLE
XIV
MISCELLANEOUS
14.1
Waiver
.
Reference is made to the final prospectus of the Parent
,
dated November 16, 2007 (the
“Prospectus”).
(a) The
Company, Hengda and Seller have read the Prospectus and understand that the
Parent has established a trust account, initially in an amount of at least
$117,570,000 for the benefit of the public stockholders of the Parent and the
underwriters of the Parent’s initial public offering (the “Underwriters”)
and that, except for a
portion of the interest earned on the amounts held in the trust account, the
Parent may disburse monies from the trust account only: (i) to the Parent’s
public stockholders in the event of the redemption of their shares or the
dissolution and liquidation of the Parent or (ii) to the Parent and the
Underwriters after it consummates a business combination.
(b) For
and in consideration of the Parent agreeing to enter into this Agreement with
the Company, the Seller, the Company and Hengda each hereby agrees that it does
not have any right, title, interest or claim of any kind (the “Claim”) in or to
any monies in the trust account and hereby agrees that it will not seek recourse
against the trust account for any claim it may have in the future as a result
of, or arising out of, any negotiations, contracts or agreements with the
Parent.
14.2
Notices
. All
notices, requests, demands and other communications to any party hereunder shall
be in writing and shall be given to such party at its address or telecopier
number set forth below, or such other address or telecopier number as such party
may hereinafter specify by notice to each other party hereto:
|
if
to Parent and Purchaser, to:
|
|
c/o
China Holdings Acquisition Corp.
|
|
1000
N. West Street, Suite 1200
|
|
Wilmington,
DE 19801
|
|
Attn: Paul
K. Kelly
|
|
Telecopy: c/o
Knox & Co. (203-226-8022)
|
|
with
a copy to:
|
|
Loeb
& Loeb LLP
|
|
345
Park Avenue
|
|
New
York, New York 10154
|
|
Attention: Mitchell
S. Nussbaum
|
|
Telecopy:
212-407-4990
|
|
if
to the Company, Hengda or the Seller:
|
|
Jinjiang
Hengda Ceramics Co., Ltd.
|
|
Junbing
Industrial Zone,
|
|
Anhai,
Jinjiang City
|
|
Fujian
Province, PRC
|
|
Attention:
Huang Jia
Dong
|
|
Telecopy:
+86 (595) 8578 3691
|
Each such
notice, request or other communication shall be effective (i) if given by
telecopy, when such telecopy is transmitted to the telecopy number specified
herein and the appropriate answer back is received or, (ii) if given by
certified mail, 72 hours after such communication is deposited in the mails with
first class postage prepaid, properly addressed or, (iii) if given by any other
means, when delivered at the address specified herein.
14.3
Amendments;
No Waivers
.
(a) Any
provision of this Agreement may be amended or waived if, and only if, such
amendment or waiver is in writing and signed, in the case of an amendment, by
each party hereto, or in the case of a waiver, by the party against whom the
waiver is to be effective.
(b) No
failure or delay by any party hereto in exercising any right, power or privilege
hereunder shall operate as a waiver thereof nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The rights and remedies
herein provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
14.4
Ambiguities
. The
parties acknowledge that each party and its counsel has materially participated
in the drafting of this Agreement and consequently the rule of contract
interpretation that, and ambiguities if any in, the writing be construed against
the drafter, shall not apply.
14.5
Publicity
. Except
as required by law, the parties agree that neither they nor their agents shall
issue any press release or make any other public disclosure concerning the
transactions contemplated hereunder without the prior approval of the other
party hereto.
14.6
Expenses
. Except
as specifically provided in this Agreement, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such cost or expense.
14.7
Successors
and Assigns
.
The provisions of
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns;
provided
, that
(i) none of the Company, Hengda nor the Seller may assign, delegate or
otherwise transfer any of its rights or obligations under this Agreement without
the prior written consent of Parent; and (ii) in the event Parent or the
Purchaser assigns its rights and obligations under this Agreement to an
Affiliate, Parent or the Purchaser shall continue to remain liable for its
obligations hereunder. Except as specifically set forth in clause
(ii) above, neither Parent nor the Purchaser may assign, delegate or otherwise
transfer any of its rights or obligations under this Agreement without the prior
written consent of the Company.
14.8
Governing
Law; Jurisdiction
. This Agreement has been entered into in the
State of New York. This Agreement shall be construed in accordance
with and governed by the laws of the State of New York, without giving effect to
the conflict of laws principles thereof. The parties hereto hereby
irrevocably consent to the exclusive jurisdiction of the state or federal courts
sitting in the City of New York, State of New York in connection with any
controversy or claim arising out of or relating to this Agreement, or the
negotiation or breach thereof, and hereby waive any claim or defense that such
forum is inconvenient or otherwise improper. Each party hereby agrees
that any such court shall have in personam jurisdiction over it and consents to
service of process in any manner authorized by New York law.
14.9
Counterparts;
Effectiveness
. This Agreement may be signed by facsimile
signatures and in any number of counterparts, each of which shall be an original
and all of which shall be deemed to be one and the same instrument, with the
same effect as if the signatures thereto and hereto were upon the same
instrument.
14.10
Entire
Agreement
.
This Agreement
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersedes all prior agreements, understandings and
negotiations, both written and oral, among the parties with respect to the
subject matter of this Agreement, including, without limitation, that certain
Stock Purchase Agreement dated August 7, 2009 among the Parent, Purchaser,
Hengda, the Company and the Seller, which shall no longer be of any force or
effect. No representation, inducement, promise, understanding,
condition or warranty not set forth herein has been made or relied upon by any
party hereto. Neither this Agreement nor any provision hereof is
intended to confer upon any Person other than the parties hereto any rights or
remedies hereunder other than Indemnified Parties as set forth in Section 11.1
and 11.2 hereof, which shall be third party beneficiaries hereof.
14.11
Severability
.
If any one or more
provisions of this Agreement shall, for any reasons, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement, but
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein.
14.12
Withholding
Rights
.
Purchaser shall
be entitled to deduct and withhold from the number of shares of Purchaser
Ordinary Shares otherwise deliverable under this Agreement, such amounts as
Purchaser reasonably determines are required to be deducted and withheld with
respect to such delivery and payment under the Code or any provision of state,
local, provincial or foreign tax law. To the extent that any amounts
are so withheld, such withheld amounts shall be treated for all purposes as
having been delivered and paid to the Person otherwise entitled to the Purchaser
Ordinary Shares in respect of which such deduction and withholding was made by
Purchaser. Notwithstanding the foregoing, Purchaser, at its option, may require
any such amounts required to be deducted and withheld to be reimbursed in cash
to Purchaser prior to the issuance of the Purchaser Ordinary
Shares.
14.13
Captions
.
The captions
herein are included for convenience of reference only and shall be ignored in
the construction or interpretation hereof.
14.14
Construction
.
References in
this Agreement to “Articles,” “Sections,” “Schedules” and “Exhibits”
shall be to the
Articles, Sections, Schedules and Exhibits
of this Agreement,
unless otherwise specifically provided; all Schedules to this Agreement are
incorporated herein by reference; any use in this Agreement of the singular or
plural, or the masculine, feminine or neuter gender, shall be deemed to include
the others, unless the context otherwise requires; the words “herein”, “hereof”
and “hereunder” and words of similar import, when used in this Agreement, shall
refer to this Agreement as a whole and not to any particular provision of this
Agreement; the word “including” when used in this Agreement shall mean
“including without limitation”; and except as otherwise specified in this
Agreement, all references in this Agreement (a) to any agreement, document,
certificate or other written instrument shall be a reference to such agreement,
document, certificate or instrument, in each case together with all exhibits,
schedules, attachments and appendices thereto, and as amended, restated,
supplemented or otherwise modified from time to time in accordance with the
terms thereof; and (b) to any law, statute or regulation shall be deemed
references to such law, statute or regulation as the same may be supplemented,
amended, consolidated, superseded or modified from time to time.
[The
balance of this page is intentionally left blank]
IN
WITNESS WHEREOF, Parent, Purchaser, Hengda and the Company have caused this
Agreement to be duly executed by their respective authorized officers and the
Seller has executed this Agreement as of the day and year first above
written.
|
CHINA
HOLDINGS ACQUISITION CORP.
|
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By:
|
|
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Name:
Paul K. Kelly
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Title:
Chairman and Chief Executive Officer
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CHINA
CERAMICS CO., LTD.
|
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By:
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Name:
Paul K. Kelly
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Title:
Director
|
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JINJIANG
HENGDA CERAMICS CO., LTD.
|
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By:
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Name:
Huang Jia Dong
|
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Title:
Chairman
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SUCCESS
WINNER LIMITED
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By:
|
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Name:
Wong Kung Tok
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Title:
Director
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SELLER
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Wong
Kung
Tok
|
|
ANNEX
B
Section 262 of the General
Corporation Law of the State of Delaware
§ 262. Appraisal
Rights
(a) Any
stockholder of a corporation of this State who holds shares of stock on the date
of the making of a demand pursuant to subsection (d) of this section with
respect to such shares, who continuously holds such shares through the effective
date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to § 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder’s shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this
section, the word “stockholder” means a holder of record of stock in a stock
corporation and also a member of record of a nonstock corporation; the words
“stock” and “share” mean and include what is ordinarily meant by those words and
also membership or membership interest of a member of a nonstock corporation;
and the words “depository receipt” mean a receipt or other instrument issued by
a depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal
rights shall be available for the shares of any class or series of stock of a
constituent corporation in a merger or consolidation to be effected pursuant to
§ 251 (other than a merger effected pursuant to § 251(g) of this
title), § 252, § 254, § 257, § 258, § 263 or § 264
of this title:
(1) Provided,
however, that no appraisal rights under this section shall be available for the
shares of any class or series of stock, which stock, or depository receipts in
respect thereof, at the record date fixed to determine the stockholders entitled
to receive notice of and to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, were either (i) listed on a national
securities exchange or (ii) held of record by more than 2,000 holders; and
further provided that no appraisal rights shall be available for any shares of
stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of § 251 of this
title.
(2) Notwithstanding
paragraph (1) of this subsection, appraisal rights under this section shall
be available for the shares of any class or series of stock of a constituent
corporation if the holders thereof are required by the terms of an agreement of
merger or consolidation pursuant to §§ 251, 252, 254, 257, 258, 263 and 264
of this title to accept for such stock anything except:
a. Shares
of stock of the corporation surviving or resulting from such merger or
consolidation, or depository receipts in respect thereof;
b. Shares
of stock of any other corporation, or depository receipts in respect thereof,
which shares of stock (or depository receipts in respect thereof) or depository
receipts at the effective date of the merger or consolidation will be either
listed on a national securities exchange or held of record by more than
2,000 holders;
c. Cash
in lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a. and b. of this paragraph; or
d. Any
combination of the shares of stock, depository receipts and cash in lieu of
fractional shares or fractional depository receipts described in the foregoing
subparagraphs a., b. and c. of this paragraph.
(3) In
the event all of the stock of a subsidiary Delaware corporation party to a
merger effected under § 253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any
corporation may provide in its certificate of incorporation that appraisal
rights under this section shall be available for the shares of any class or
series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal
rights shall be perfected as follows:
(1) If
a proposed merger or consolidation for which appraisal rights are provided under
this section is to be submitted for approval at a meeting of stockholders, the
corporation, not less than 20 days prior to the meeting, shall notify each
of its stockholders who was such on the record date for such meeting with
respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for
any or all of the shares of the constituent corporations, and shall include in
such notice a copy of this section. Each stockholder electing to demand the
appraisal of such stockholder’s shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand for
appraisal of such stockholder’s shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of such stockholder’s
shares. A proxy or vote against the merger or consolidation shall not constitute
such a demand. A stockholder electing to take such action must do so by a
separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If
the merger or consolidation was approved pursuant to § 228 or § 253 of
this title, then either a constituent corporation before the effective date of
the merger or consolidation or the surviving or resulting corporation within
10 days thereafter shall notify each of the holders of any class or series
of stock of such constituent corporation who are entitled to appraisal rights of
the approval of the merger or consolidation and that appraisal rights are
available for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy of this
section. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the effective
date of the merger or consolidation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of such notice, demand
in writing from the surviving or resulting corporation the appraisal of such
holder’s shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder’s shares. If such notice did not
notify stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders of
any class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or
(ii) the surviving or resulting corporation shall send such a second notice
to all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder’s shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within
120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may commence an appraisal proceeding by filing a petition in
the Court of Chancery demanding a determination of the value of the stock of all
such stockholders. Notwithstanding the foregoing, at any time within
60 days after the effective date of the merger or consolidation, any
stockholder who has not commenced an appraisal proceeding or joined that
proceeding as a named party shall have the right to withdraw such stockholder’s
demand for appraisal and to accept the terms offered upon the merger or
consolidation. Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within
10 days after such stockholder’s written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later. Notwithstanding
subsection (a) of this section, a person who is the beneficial owner of
shares of such stock held either in a voting trust or by a nominee on behalf of
such person may, in such person’s own name, file a petition or request from the
corporation the statement described in this subsection.
(f) Upon
the filing of any such petition by a stockholder, service of a copy thereof
shall be made upon the surviving or resulting corporation, which shall within
20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the
day of the hearing, in a newspaper of general circulation published in the City
of Wilmington, Delaware or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the Court,
and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At
the hearing on such petition, the Court shall determine the stockholders who
have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After
the Court determines the stockholders entitled to an appraisal, the appraisal
proceeding shall be conducted in accordance with the rules of the Court of
Chancery, including any rules specifically governing appraisal proceedings.
Through such proceeding the Court shall determine the fair value of the shares
exclusive of any element of value arising from the accomplishment or expectation
of the merger or consolidation, together with interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. Unless the Court in its
discretion determines otherwise for good cause shown, interest from the
effective date of the merger through the date of payment of the judgment shall
be compounded quarterly and shall accrue at 5% over the Federal Reserve discount
rate (including any surcharge) as established from time to time during the
period between the effective date of the merger and the date of payment of the
judgment. Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, proceed to trial upon the appraisal prior to the final
determination of the stockholders entitled to an appraisal. Any stockholder
whose name appears on the list filed by the surviving or resulting corporation
pursuant to subsection (f) of this section and who has submitted such
stockholder’s certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The
Court shall direct the payment of the fair value of the shares, together with
interest, if any, by the surviving or resulting corporation to the stockholders
entitled thereto. Payment shall be so made to each such stockholder, in the case
of holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court’s decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any
state.
(j) The
costs of the proceeding may be determined by the Court and taxed upon the
parties as the Court deems equitable in the circumstances. Upon application of a
stockholder, the Court may order all or a portion of the expenses incurred by
any stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorney’s fees and the fees and expenses of experts, to
be charged pro rata against the value of all the shares entitled to an
appraisal.
(k) From
and after the effective date of the merger or consolidation, no stockholder who
has demanded appraisal rights as provided in subsection (d) of this section
shall be entitled to vote such stock for any purpose or to receive payment of
dividends or other distributions on the stock (except dividends or other
distributions payable to stockholders of record at a date which is prior to the
effective date of the merger or consolidation); provided, however, that if no
petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder’s
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just; provided, however that this provision shall not affect the right of any
stockholder who has not commenced an appraisal proceeding or joined that
proceeding as a named party to withdraw such stockholder’s demand for appraisal
and to accept the terms offered upon the merger or consolidation within
60 days after the effective date of the merger or consolidation, as set
forth in subsection (e) of this section.
(l) The
shares of the surviving or resulting corporation to which the shares of such
objecting stockholders would have been converted had they assented to the merger
or consolidation shall have the status of authorized and unissued shares of the
surviving or resulting corporation.
(8 Del.
C. 1953, § 262; 56 Del. Laws, c. 50; 56 Del. Laws, c. 186, § 24; 57
Del. Laws, c. 148, §§ 27-29; 59 Del. Laws, c. 106, § 12; 60 Del. Laws,
c. 371, §§ 3-12; 63 Del. Laws, c. 25, § 14; 63 Del. Laws, c. 152,
§§ 1, 2; 64 Del. Laws, c. 112, §§ 46-54; 66 Del. Laws, c. 136,
§§ 30-32; 66 Del. Laws, c. 352, § 9; 67 Del. Laws, c. 376, §§ 19,
20; 68 Del. Laws, c. 337, §§ 3, 4; 69 Del. Laws, c. 61, § 10; 69 Del.
Laws, c. 262, §§ 1-9; 70 Del. Laws, c. 79, § 16; 70 Del. Laws, c. 186,
§ 1; 70 Del. Laws, c. 299, §§ 2, 3; 70 Del. Laws, c. 349, § 22;
71 Del. Laws, c. 120, § 15; 71 Del. Laws, c. 339, §§ 49-52; 73 Del.
Laws, c. 82, § 21.)
PART II
INFORMATION
NOT REQUIRED IN PROXY STATEMENT
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Item 20.
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Indemnification of Directors
and Officers
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British
Virgin Islands law does not limit the extent to which a company’s articles of
association may provide for indemnification of officers and directors, provided
that the officer or director acted in good faith and in what he believed to be
the best interest of the company and believed his conduct was lawful except to
the extent any such provision may be held by the British Virgin Islands courts
to be contrary to public policy, such as to provide indemnification against
civil fraud or the consequences of committing a crime.
Under the
registrant’s Memorandum and Articles of Association, the registrant may
indemnify our directors, officers and liquidators against expenses (including
attorney’s fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such persons in connection with actions, suits or
proceedings to which they are a party or are threatened to be made a party by
reason of their acting as the registrant’s directors, officers or liquidators.
To be entitled to indemnification, these persons must have acted honestly, in
good faith and in the best interest or not opposed to the interest of the
registrant, and must have had no reasonable cause to believe their conduct was
unlawful.
The
registrant has agreed to purchase and maintain officers’ and directors’
liability insurance, which insures against certain liabilities that officers and
directors in its group companies may incur in such capacities, including
liabilities arising under the U.S. securities laws, subject to certain
exceptions.
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Item 21.
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Exhibits
and Financial Statement
Schedules
|
(a) Exhibits —
See Exhibit Index which is hereby incorporated herein by
reference.
(b) Financial
Statement Schedules.
EXHIBIT
INDEX
|
2.1
|
Merger
and Stock Purchase Agreement among CHAC, China Ceramics Co., Ltd., Hengda,
Success Winner and the Seller
|
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3.1
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Memorandum
of Association of China Ceramics Co., Ltd.
|
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3.2
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Articles
of Association of China Ceramics Co., Ltd.
|
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4.1
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CHAC
Specimen Unit Certificate*
|
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4.2
|
CHAC
Specimen Common Stock Certificate*
|
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4.3
|
CHAC
Specimen Public Warrant Certificate*
|
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4.4
|
Warrant
Agreement, dated as of November 15, 2007, by and between CHAC and
Continental Stock Transfer & Trust Company **
|
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5.1
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Opinion
of
Harney
Westwood & Riegels*****
|
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10.1
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Form
of Letter Agreement between CHAC and each of the directors, executive
officers and Initial Stockholders of CHAC*
|
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10.2
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Investment
Management Trust Agreement, dated November 15, 2007, by and between CHAC
and Continental Stock Transfer & Trust Company**
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10.3
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Form
of Services Agreement between CHAC and Stuart Management
Co.*
|
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10.4
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Form
of Registration Rights Agreement among CHAC and the
founders*
|
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10.5
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Form
of Warrant Purchase Agreement between CHAC and Paul K. Kelly, James D.
Dunning, Jr., Alan G. Hassenfeld, Gregory E. Smith, Feng Xiao, Cheng Yan
Davis, Soopakij (Chris) Chearavanont and Ruey Bin Kao.*
|
|
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10.6
|
Promissory
Notes between CHAC and Paul K. Kelly*
|
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10.7
|
Promissory
Notes between CHAC and James D. Dunning, Jr.*
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10.8
|
Promissory
Note between CHAC and Alan G. Hassenfeld*
|
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10.9
|
Promissory
Note between CHAC and Gregory E. Smith*
|
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10.10
|
Promissory
Note between CHAC and Cheng Yan Davis*
|
|
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10.11
|
Promissory
Note between CHAC and Xiao Feng*
|
|
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10.12
|
Promissory
Note between CHAC and Soopakij (Chris) Chearavanont*
|
|
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10.13
|
Promissory
Note between CHAC and Ruey Bin Kao*
|
|
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10.14
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Undertaking
Agreement, dated as of July 20, 2008, among CHAC, World Sharehold Limited,
Wang Wei Yao and Shao Jian Jun***
|
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10.15
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Letter
dated July 11, 2008 from CHAC to the Board of Directors of Bright World
Precision Machinery Limited***
|
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10.16
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Letter
dated July 15, 2008 from the Board of Directors of Bright World Precision
Machinery Limited to China Holdings Acquisition
Corp.***
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10.17
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Amendment
to Undertaking Agreement, dated as of October 24, 2008, among China CHAC,
World Sharehold Limited, Wang Wei Yao and Shao Jian
Jun****
|
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10.18
|
Founders’
Agreement, dated as of October 24, 2008, among CHAC and the members of the
persons whose names are set forth on Exhibit A attached
thereto****
|
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14
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CHAC
Code of Business Conduct and Ethics*
|
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23.1
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Consent of Foo Kon Tan Grant Thornton, (Singapore), an independent registered public accounting firm | |
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23.2
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Consent of McGladrey & Pullen, LLP, an independent registered public accounting firm | |
| 23.3 |
Consent
of Harney, Westwood & Riegels (included in Exhibit
5.1)
|
|
*
|
Incorporated by reference to
exhibits of the same number filed with CHAC’s Registration Statement on
Form S-1 or amendments thereto (File
No. 333-145154)
|
|
**
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Incorporated by reference to
CHAC’s Form 8-K, dated November 21,
2007
|
|
***
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Incorporated by reference to
CHAC’s Form 8-K, dated July 21,
2008
|
|
****
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Incorporated by reference to
CHAC’s Form 8-K, dated October 24, 2008
|
|
*****
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To be filed by amendment |
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Item 22.
|
Undertakings
|
(A) The
undersigned registrant hereby undertakes:
(1) to file, during any period in
which offers or sales are being made, a post-effective amendment to this
registration statement:
(i) to include any proxy
statement/prospectus required by Section 10(a)(3) of the Securities Act;
(ii) to reflect in the proxy
statement/prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of proxy statement/prospectus filed
with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in the
effective registration statement;
(iii) to include any material
information with respect to the plan of distribution not previously disclosed in
the registration statement or any material change to such information in the
registration statement;
(2) that,
for the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof;
(3) to
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering; and
(4) to
file a post-effective amendment to the registration statement to include any
financial statements required by Item 8.A. of Form 20-F at the start
of any delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the
Act need not be furnished, provided, that the registrant includes in the proxy
statement/prospectus, by means of a post-effective amendment, financial
statements required pursuant to this paragraph (A)(4) and other information
necessary to ensure that all other information in the prospectus is at least as
current as the date of those financial statements.
(B) The undersigned registrant
hereby undertakes that, for purposes of determining any liability under the
Securities Act to any purchaser:
(1) If
the registrant is subject to Rule 430C, each prospectus filed pursuant to
Rule 424(b) as part of a registration statement relating to an offering,
other than registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be deemed to be part of
and included in the registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made in a
document incorporated or deemed incorporated by reference in to the registration
statement or prospectus that is part of the registration statement will, as to a
purchaser with a time of contract of sale prior to such first use, supersede or
modify any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such date of first use.
(2) in
a primary offering of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered tor sold to such
purchaser by means of any of the following communications, the undersigned
registrant will be a seller to the purchaser and will be considered to offer or
sell such securities to such purchaser:
(i) any
preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424;
(ii) any
free writing prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned registrant;
(iii) the
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(iv) any other communication that
is an offer in the offering made by the undersigned registrant to the purchaser.
(C) The
undersigned registrant hereby undertakes that, for purposes of determining
liability under the Securities Act, each filing of the registrant’s annual
report pursuant to Section 13(a) or Section 15(d) of the Exchange Act
(and, where applicable, each filing of an employee benefit plan’s annual report
pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(D)
(1) The
undersigned registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a proxy
statement/prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the undersigned registrant undertakes that such reoffering
proxy statement/prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
items of the applicable form.
(2) The
registrant undertakes that every proxy statement/prospectus: (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Exchange Act
and is used in connection with an offering of securities subject to
Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(E) Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(F) The
undersigned registrant hereby undertakes: (i) to respond to requests for
information that is incorporated by reference into the proxy
statement/prospectus, if any, within one business day of receipt of such
request, and to send the incorporated documents by first-class mail or other
equally prompt means, and (ii) to arrange or provide for a facility in the
United States for the purpose of responding to such requests. The undertaking in
subparagraph (i) above includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Westport, Connecticut, United States
of America on August 26, 2009.
|
CHINA CERAMICS CO.,
LTD.
|
||
|
By:
|
/s/ Paul K. Kelly | |
|
Name: Paul
K. Kelly
|
||
|
Title: Chief
Executive Officer, Secretary and
Treasurer
|
||
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities indicated, on
August , 2009.
|
Name
|
Title
|
|
| /s/ Paul K. Kelly |
Chief
Executive Officer, Secretary and Treasurer (principal executive
officer and principal financial and accounting officer) |
|
|
Paul
K. Kelly
|
||
| /s/ Paul K. Kelly |
Director
|
|
|
Paul
K. Kelly
|
|
Signature of Authorized
Representative in the United States
Pursuant
to the Securities Act of 1933, as amended, the undersigned, the duly authorized
representative in the United States of China Ceramics Co., Ltd., has signed this
registration statement or amendment thereto in Westport, Connecticut, on August
26, 2009
|
By:
|
/s/ Paul K. Kelly | |
|
Name: Paul
K. Kelly
|
||
|
Title: Chief
Executive Officer, Secretary and
Treasurer
|
||
EXHIBIT INDEX
|
2.1
|
Merger
and Stock Purchase Agreement among CHAC, China Ceramics Co., Ltd., Hengda,
Success Winner and the Seller
|
|
|
3.1
|
Memorandum
of Association of China Ceramics Co., Ltd.
|
|
|
3.2
|
Articles
of Association of China Ceramics Co., Ltd.
|
|
|
4.1
|
CHAC
Specimen Unit Certificate*
|
|
|
4.2
|
CHAC
Specimen Common Stock Certificate*
|
|
|
4.3
|
CHAC
Specimen Public Warrant Certificate*
|
|
|
4.4
|
Warrant
Agreement, dated as of November 15, 2007, by and between CHAC and
Continental Stock Transfer & Trust Company **
|
|
|
5.1
|
Opinion
of
Harney
Westwood & Riegels*****
|
|
|
10.1
|
Form
of Letter Agreement between CHAC and each of the directors, executive
officers and Initial Stockholders of CHAC*
|
|
|
10.2
|
Investment
Management Trust Agreement, dated November 15, 2007, by and between CHAC
and Continental Stock Transfer & Trust Company**
|
|
|
10.3
|
Form
of Services Agreement between CHAC and Stuart Management
Co.*
|
|
|
10.4
|
Form
of Registration Rights Agreement among CHAC and the
founders*
|
|
|
10.5
|
Form
of Warrant Purchase Agreement between CHAC and Paul K. Kelly, James D.
Dunning, Jr., Alan G. Hassenfeld, Gregory E. Smith, Feng Xiao, Cheng Yan
Davis, Soopakij (Chris) Chearavanont and Ruey Bin Kao.*
|
|
|
10.6
|
Promissory
Notes between CHAC and Paul K. Kelly*
|
|
|
10.7
|
Promissory
Notes between CHAC and James D. Dunning, Jr.*
|
|
|
10.8
|
Promissory
Note between CHAC and Alan G. Hassenfeld*
|
|
|
10.9
|
Promissory
Note between CHAC and Gregory E. Smith*
|
|
|
10.10
|
Promissory
Note between CHAC and Cheng Yan Davis*
|
|
|
10.11
|
Promissory
Note between CHAC and Xiao Feng*
|
|
|
10.12
|
Promissory
Note between CHAC and Soopakij (Chris) Chearavanont*
|
|
|
10.13
|
Promissory
Note between CHAC and Ruey Bin Kao*
|
|
|
10.14
|
Undertaking
Agreement, dated as of July 20, 2008, among CHAC, World Sharehold Limited,
Wang Wei Yao and Shao Jian Jun***
|
|
|
10.15
|
Letter
dated July 11, 2008 from CHAC to the Board of Directors of Bright World
Precision Machinery Limited***
|
|
|
10.16
|
Letter
dated July 15, 2008 from the Board of Directors of Bright World Precision
Machinery Limited to China Holdings Acquisition
Corp.***
|
|
|
10.17
|
Amendment
to Undertaking Agreement, dated as of October 24, 2008, among China CHAC,
World Sharehold Limited, Wang Wei Yao and Shao Jian
Jun****
|
|
|
10.18
|
Founders’
Agreement, dated as of October 24, 2008, among CHAC and the members of the
persons whose names are set forth on Exhibit A attached
thereto****
|
|
|
14
|
CHAC
Code of Business Conduct and Ethics*
|
|
|
23.1
|
Consent of Foo Kon Tan Grant Thornton, (Singapore), an independent registered public accounting firm | |
|
23.2
|
Consent of McGladrey & Pullen, LLP, an independent registered public accounting firm | |
| 23.3 |
Consent
of Harney, Westwood & Riegels (included in Exhibit
5.1)
|
|
*
|
Incorporated by reference to
exhibits of the same number filed with CHAC’s Registration Statement on
Form S-1 or amendments thereto (File
No. 333-145154)
|
|
**
|
Incorporated by reference to
CHAC’s Form 8-K, dated November 21,
2007
|
|
***
|
Incorporated by reference to
CHAC’s Form 8-K, dated July 21,
2008
|
|
****
|
Incorporated by reference to
CHAC’s Form 8-K, dated October 24, 2008
|
|
*****
|
To be filed by amendment |
II-5