- Proxy Soliciting Materials (revised) (PRER14A)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE
14A
Proxy
Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. 1)
Filed by
the Registrant
Q
Filed by
a Party other than the Registrant
£
Check the
appropriate box:
Q
Preliminary
Proxy Statement
£
Confidential,
for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
£
Definitive
Proxy Statement
£
Definitive
Additional Materials
£
Soliciting
Material Pursuant to §240.14a-12
SINOENERGY
CORPORATION
(Name
of Registrant as Specified In Its Charter)
(Name of
Person(s) Filing Proxy Statement, if other than the Registrant)
Payment
of Filing Fee (Check the appropriate box):
£
No
fee required.
£
Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title
of each class of securities to which transaction applies:
(2)
|
Aggregate
number of securities to which transaction
applies:
|
(3)
|
Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was
determined):
|
(4)
|
Proposed
maximum aggregate value of
transaction:
|
(5) Total
fee paid:
Q
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Fee
paid previously with preliminary
materials.
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£
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Check
box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its
filing.
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(1) Amount
Previously Paid:
(2) Form,
Schedule or Registration Statement No.:
(3) Filing
Party:
(4) Date
Filed:
PRELIMINARY PROXY STATEMENT
DATED APRIL 8, 2010—SUBJECT TO COMPLETION
SINOENERGY
CORPORATION
1603-1604,
Tower B Fortune Centre Ao City
Beiyuan
Road, Chaoyang District
Beijing,
People’s Republic of China 100107
[ ]
You are
cordially invited to attend a special meeting of shareholders of Sinoenergy
Corporation (the “company”), to be held on
[ ], 2010 at [ a.m.]
local time, at
[ ]
(the “shareholders’ meeting”).
At the
shareholders’ meeting, you will be asked to consider and vote upon a proposal to
approve the Amended and Restated Agreement and Plan of Merger, dated as of March
29, 2010, providing for the merger of SNEN Acquisition Corp., or Merger Sub,
with and into Sinoenergy Corporation (the “merger agreement”). Merger
Sub is a wholly owned subsidiary of Skywide Capital Management Limited, or
Skywide. Messrs. Tianzhou Deng and Bo Huang, who are, respectively,
our Chairman of the Board, and our Chief Executive Officer and a member of our
board, are the sole owners of Skywide.
If the
merger is completed, you will have the right to receive $1.90 in cash for each
share of Sinoenergy Corporation common stock that you own, and Merger Sub will
be merged with and into Sinoenergy Corporation. If the merger is
approved by our shareholders, Sinoenergy Corporation will become a private
corporation, wholly-owned by Messrs. Deng and Huang through their ownership of
Skywide.
At the
shareholders’ meeting, you will be asked to approve the merger agreement. The
board of directors has unanimously approved and declared advisable the merger,
the merger agreement and the transactions contemplated by the merger agreement,
and it has unanimously declared that the merger, the merger agreement and the
transactions contemplated by the merger agreement are fair to, and in the best
interests of, the company’s unaffiliated shareholders. The board of directors
unanimously recommends that the company’s unaffiliated shareholders vote “FOR”
the approval of the merger agreement.
Details
of the merger, the merger agreement and certain effects of the merger are
discussed in the enclosed proxy statement, the forepart of which includes a
summary of the terms of the merger and certain questions and answers relating to
the proposed transaction. A copy of the merger agreement is attached as Annex A
to the proxy statement. We encourage you to read the entire proxy
statement carefully. You may also obtain more information about the company from
documents we have filed with the Securities and Exchange
Commission.
YOUR VOTE
IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES OF THE COMPANY’S COMMON STOCK
YOU OWN. THE APPROVAL OF THE MERGER AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF A
MAJORITY OF THE SHARES OF COMMON STOCK ENTITLED TO VOTE THEREON.
ACCORDINGLY,
YOU ARE REQUESTED TO VOTE YOUR SHARES BY PROMPTLY COMPLETING, SIGNING AND DATING
THE ENCLOSED PROXY CARD AND RETURNING IT IN THE ENVELOPE PROVIDED, OR BY USING
THE TELEPHONE OR INTERNET VOTING FACILITIES WE HAVE MADE AVAILABLE TO YOU PRIOR
TO THE SPECIAL MEETING, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING.
Voting by
proxy will not prevent you from voting your shares in person if you subsequently
choose to attend the special meeting.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED OF THE MERGER; PASSED UPON THE MERITS OR FAIRNESS OF THE
MERGER AGREEMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY; OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Very
truly yours,
Anlin
Xiong, Secretary
This
proxy statement is dated [ ], 2010 and is first
being mailed to shareholders on or about [ ],
2010.
SINOENERGY
CORPORATION
1603-1604,
Tower B Fortune Centre Ao City
Beiyuan
Road, Chaoyang District
Beijing,
People’s Republic of China 100107
NOTICE
OF SPECIAL MEETING OF SHAREHOLDERS
TO
BE HELD ON [ ],
2010
Dear
Shareholder:
A special
meeting of the shareholders of Sinoenergy Corporation, a Nevada corporation
(“Sinoenergy” or the “company”), will be held on
[ ],
at [ A.M.], local time, at
[ ],
for the following purposes:
1. to
consider and vote on the approval of the Amended and Restated Agreement and Plan
of Merger dated as of March 29, 2010, by and among Sinoenergy, Skywide Capital
Management Limited, a British Virgin Islands company (“Skywide”) and SNEN
Acquisition Corp., a wholly owned subsidiary of Skywide (“Merger Sub”), as it
may be further amended from time to time (the “merger agreement”), pursuant to
which, upon effectiveness of the merger, each share of common stock, par value
$0.001 per share, of the company (other than shares held in the treasury of the
company or by any wholly-owned subsidiary of the company or owned by Skywide,
Merger Sub or any other wholly-owned subsidiary of Skywide) will be converted
into the right to receive $1.90 in cash, without interest; and
2. to
approve the adjournment or postponement of the special meeting, if necessary or
appropriate, to solicit additional proxies if there are insufficient votes at
the time of the special meeting to approve the merger agreement.
Only
shareholders of record at the close of business on
[ ], 2010, are entitled to notice of
and to vote at the special meeting and at any adjournment or postponement of the
special meeting. All shareholders of record are cordially invited to attend the
special meeting in person.
The
proposal to approve the merger agreement requires the affirmative vote of a
majority of the outstanding shares of the company’s common stock entitled to
vote thereon. Even if you plan to attend the special meeting in person, we
request that you complete, sign, date and return the enclosed proxy, or submit
your proxy by telephone or the Internet prior to the special meeting and thus
ensure that your shares will be represented at the special meeting if you are
unable to attend. If you sign, date and mail your proxy card without indicating
how you wish to vote, your proxy will be voted in favor of the approval of the
merger agreement. If you fail to return your proxy card or fail to submit your
proxy by telephone or the Internet, the effect will be that your shares will not
be counted for purposes of determining whether a quorum is present at the
special meeting and will have the same effect as votes against the approval of
the merger agreement. If you are a shareholder of record and do attend the
special meeting and wish to vote in person, you may revoke your proxy and vote
in person.
The Board
of Directors,
By: Anlin
Xiong
,
Secretary
Beijing,
People’s Republic of China
[ ]
TABLE OF CONTENTS
QUESTIONS
AND ANSWERS ABOUT THE SPECIAL MEETING AND THE
MERGER
|
10
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Background of the
Merger
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13
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Purposes and
Reasons for the Merger; Recommendation of the Special Committee and the
Board of Directors; Fairness of the Merger
|
27
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Opinion of
Sinoenergy’s Financial Advisor
|
33
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Purpose and Reasons
for the Merger for Skywide, Merger Sub, Tianzhou Deng and Bo
Huang
|
42
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Position of
Skywide, Merger Sub, Tianzhou Deng and Bo Huang as to the Fairness of the
Merger
|
42
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Plans for the
Company after the Merger
|
45
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Effects on the
Company if the Merger is Not Completed
|
50
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Estimated Fees and
Expenses of the Merger
|
51
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Litigation Related
to the Merger
|
51
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Provisions for the
Unaffiliated Shareholders
|
54
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Interests of the
Company’s Directors and Executive Officers in the
Merger
|
54
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Material United
States Federal Income Tax Consequences
|
57
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CAUTIONARY
STATEMENT CONCERNING FORWARD−LOOKING
INFORMATION
|
60
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THE
PARTIES TO THE MERGER
|
61
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Time, Place and
Purpose of the Special Meeting
|
61
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Record Date and
Voting
|
61
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Adjournments and
Postponements
|
63
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Share Ownership of
Directors and Executive Officers
|
64
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THE
MERGER AGREEMENT (PROPOSAL 1)
|
64
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Treatment of Stock
and Options/Warrants
|
65
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Exchange and
Payment Procedures
|
66
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Representations and
Warranties
|
67
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Conduct of Our
Business Pending the Merger
|
69
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No Solicitation of
Transactions
|
70
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Changes in the
Company’s Senior Note Obligations
|
75
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Termination Fees
and Expenses
|
77
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IMPORTANT
INFORMATION REGARDING SINOENERGY
|
79
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Description of
Property
|
79
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Legal
Proceedings
|
79
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Financial
Statements
|
79
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
79
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Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
|
79
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Quantitative and
Qualitative Disclosures about Market Risk
|
79
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Selected Historical
Financial Data
|
79
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Ratio of Earnings
to Fixed Charges
|
80
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Book Value Per
Share
|
81
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Market Price of the
Company’s Stock and Dividend Information
|
82
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Prior Public
Offerings and Stock Purchases
|
83
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Recent
Transactions
|
83
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Security Ownership
of Certain Beneficial Owners and Management
|
83
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Directors and
Executive Officers
|
85
|
IMPORTANT
INFORMATION REGARDING SKYWIDE CAPITAL MANAGEMENT LIMITED, SNEN ACQUISITION
CORP., TIANZHOU DENG AND BO HUANG
|
88
|
ADJOURNMENT
OR POSTPONEMENT OF THE special MEETING (PROPOSAL
2)
|
89
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SUBMISSION
OF SHAREHOLDER PROPOSALS
|
89
|
HOUSEHOLDING
|
89
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WHERE
YOU CAN FIND ADDITIONAL INFORMATION
|
90
|
|
|
Annex A –
Amended and Restated Merger Agreement
Annex B –
Opinion of Brean Murray, Carret & Co., LLC
Annex C –
Annual Report on Form 10-K for the fiscal year ended September 30,
2009
Annex D –
Quarterly Report on Form 10-Q for the period ended December 31,
2009
SINOENERGY
CORPORATION
1603-1604,
Tower B Fortune Centre Ao City
Beiyuan
Road, Chaoyang District
Beijing,
People’s Republic of China 100107
PROXY STATEMENT FOR SPECIAL MEETING
OF STOCKHOLDERS
TO BE HELD
ON ,
2010
We are
providing these proxy materials to you in connection with the solicitation of
proxies by the Board of Directors of Sinoenergy Corporation for a special
meeting of shareholders to be held on
[ ] [ ],
2010, at [ ]:00 AM Eastern Time, and for any adjournment or postponement
thereof. This proxy statement provides information that you should read before
you vote on the proposals that will be presented to you at the special meeting.
The special meeting will be held at
[ ].
In this
proxy statement, the terms “Sinoenergy,” “company,” “our company,” “we,” “our,”
“ours,” and “us” refer to Sinoenergy Corporation. References in this proxy
statement to our “unaffiliated shareholders” are deemed to refer to holders of
Sinoenergy common stock other than Skywide Capital Management Limited, SNEN
Acquisition Corp. and their affiliates (Messrs Tianzhou Deng and Huang Bo who
are, respectively, the Chairman of our Board of Directors and our Chief
Executive Officer and member of our Board).
This
Proxy Statement and a proxy card are first being mailed on or
about ,
2010 to shareholders who owned shares of Sinoenergy common stock as of the close
of business
on ,
2010.
SUMMARY TERM SHEET
The
following summary term sheet highlights selected information from this proxy
statement and may not contain all of the information that may be important to
you. Accordingly, we encourage you to read carefully this entire proxy
statement, its annexes and the documents referred to or incorporated by
reference in this proxy statement. Each item in this summary term sheet includes
a page reference directing you to a more complete description of that
item.
The
Parties to the Merger (Page [ ])
Sinoenergy
Corporation
1603-1604,
Tower B Fortune Centre Ao City
Beiyuan
Road, Chaoyang District,
Beijing,
People’s Republic of China 100107
Phone
number: 86-10-84928149
Sinoenergy,
a Nevada corporation, is a developer and operator of retail compressed natural
gas, or CNG, stations as well as a manufacturer of compressed natural gas
transport truck trailers, CNG station equipment, and natural gas fuel conversion
kits for automobiles, in China. In addition to its CNG related products and
services, the company designs and manufactures a wide variety of customized
pressure containers for use in the petroleum and chemical
industries.
Skywide
Capital Management Limited
P.O.
Box 3444, Road Town, Tortola BVI.
Phone
number: 86 10-84932965
Skywide
is a British Virgin Islands company. It does not actively engage in
any business, other than as the vehicle through which Messrs. Deng and Huang
have held their ownership interests in the company. Upon completion
of the merger, all of the company’s assets and liabilities, as well as all of
its business operations will become, by operation of law, the assets,
liabilities and business operations of Skywide.
SNEN
Acquisition Corp.
1603-1604,
Tower B Fortune Centre Ao City
Beiyuan
Road, Chaoyang District,
Beijing,
People’s Republic of China 100107
Phone
number: 86-10-84928149
Merger
Sub is a Nevada corporation and a wholly owned subsidiary of Skywide. Merger Sub
was organized solely for the purpose of entering into the merger agreement and
consummating the transactions contemplated by the merger agreement. It has not
conducted any activities to date other than activities incidental to its
formation and in connection with the transactions contemplated by the merger
agreement.
The
Shareholders’Meeting
Time,
Place and Date (Page [ ])
The
shareholders’ meeting will be held on
[ ],
2010, starting at [ ] A.M., local time, at
[ ].
Purpose
(Page [ ])
You will
be asked to consider and vote upon a proposal to approve the merger agreement.
The merger agreement provides that Merger Sub will be merged with and into
Sinoenergy, and each outstanding share of the company’s common stock (other than
shares held in the treasury of the company or by any wholly-owned subsidiary of
the company or by Skywide, Merger Sub or any other wholly-owned subsidiary of
Skywide) will be converted into the right to receive $1.90 in cash, without
interest. If the merger agreement is approved and the merger is
consummated, Mr. Deng and Mr. Huang, who are the directors of Skywide, will
continue to serve as the sole directors of the surviving corporation, and the
terms of Messrs. Robert I. Adler, Greg Marcinkowski, Xiang Dong (Donald) Yang,
Baoheng Shi and Renjie Lu, who along with Messrs. Deng and Huang, comprise the
current board of the company, will end upon the effective time of the
merger.
The
persons named in the accompanying proxy will also have discretionary authority
to vote upon other business, if any, that properly comes before the special
meeting and any adjournments or postponements of the special meeting, including
any adjournments or postponements for the purpose of soliciting additional
proxies. We know of no other matters that may come before the
shareholders’ meeting.
Record
Date and Voting (Page [ ])
You are
entitled to vote at the special meeting if you owned shares of the company’s
common stock at the close of business on
[ ],
the record date for the special meeting. You will have one vote for each share
of the company’s common stock that you owned at the close of business on the
record date. As of the record date, there were
[ ] shares of
the company’s common stock outstanding and entitled to be voted.
Vote
Required for Approval of the Merger Agreement (Page
[ ])
In order
to complete the merger, holders of a majority of the company’s common stock
outstanding and entitled to vote at the close of business on the record date
must vote “FOR” the approval of the merger agreement. Accordingly,
failure to vote or an abstention at the special meeting will count as a vote
AGAINST approval of the merger agreement. Inasmuch as we do not
require that the merger must be approved by a majority of the unaffiliated
shareholders, the vote of Skywide, which owned approximately 39.6% of the
company’s outstanding shares on the record date, will be counted in determining
whether the merger has received shareholder approval.
Share
Ownership of Directors and Executive Officers (Page
[ ])
Messrs.
Deng and Huang have informed us that Skywide plans to vote all shares of our
common stock owned by it (constituting of approximately 39% of the shares of our
common stock outstanding as of the record date for the special meeting) in favor
of the approval of the merger, and the approval and adoption of the merger
agreement and the other transactions contemplated thereby.
As of the
record date, Abax Nai Xin A Ltd. and Abax Jade Ltd. owned and are entitled to
vote a total of 34,750 shares at the special meeting. They hold the
company’s 3% guaranteed senior convertible notes due 2012 (the “convertible
notes”) in the aggregate principal amount of $9,300,000, with the right to
convert such notes into 2,214,286 additional shares of common stock. However, as
of the record date, Abax Nai Xin and Abax Jade had not converted their 3%
convertible notes into shares of common stock. Consequently, the shares
underlying those notes can not be voted for or against the merger
proposal. Mr. Xiang Dong (Donald) Yang, a director of the company,
has sole voting and dispositive power over the shares held by Abax Nai Xin and
Abax Jade, including the common shares those companies hold directly and the
shares underlying the 3% convertible notes that those companies may
acquire. Because Mr. Yang is an owner of Abax Nai Xin and Abax Jade,
he is deemed to beneficially own such shares notwithstanding his disclaimer of
beneficial ownership thereof. Mr. Yang disclaims beneficial ownership
of such shares. Mr. Yang has advised the company that although Abax
Nai Xin and Abax Jade do not intend to convert their 3% convertible notes into
common stock, they do intend to vote all shares of common stock held directly by
Abax Nai Xin and Abax Jade in favor of approval of the merger. No
other officer or directors owned any shares of common stock on the record
date.
No other
officer or directors owned any shares of common stock on the record
date.
Voting
and Proxies (Page [ ])
Any
Sinoenergy shareholder of record entitled to vote may:
·
|
submit
a proxy by telephone or the Internet, or by returning the enclose proxy by
mail or
|
·
|
vote
in person by appearing at the special
meeting.
|
If your
shares are held in “street name” by your broker, you should instruct your broker
on how to vote your shares using the instructions provided to you by your
broker. If you want to vote “FOR” the merger, you must instruct your
broker to vote your shares “FOR” the merger or you must request that your broker
provide you with a special proxy to enable you to vote your
shares. Otherwise, your shares will not be voted “FOR” the merger,
which will have the effect of a vote against the merger.
Revocability
of Proxy (Page [ ])
Any
Sinoenergy shareholder of record who executes and returns a proxy may revoke the
proxy at any time before it is voted in any one of the following three
ways:
·
|
filing
with the company’s Corporate Secretary, at or before the special meeting,
a written notice of revocation that is dated a later date than the
proxy;
|
·
|
sending
a later-dated proxy relating to the same shares by telephone, the Internet
or by mail to the company’s Corporate Secretary, at or before the special
meeting; or
|
·
|
attending
the special meeting and voting in person by
ballot.
|
Simply
attending the special meeting will not constitute revocation of a proxy. If you
have instructed your broker to vote your shares, the
above-described options
for revoking your proxy do not apply and instead you must follow the directions
provided to you by your broker to change these
instructions.
When
the Merger Will be Completed
If the
merger is approved by the company’s shareholders, we anticipate completing the
merger as soon as practical after the special meeting, subject to the
satisfaction of the other closing conditions.
Fairness
of the Merger; Reasons for the Recommendation of the Special Committee and our
Board of Directors (Pages [ ])
Prior to
the negotiation of the terms of the merger, our board appointed a special
committee, consisting of four independent directors (the “special committee”) to
evaluate the merits of the going private transaction and determine whether an
acquisition of the company by Skywide was in the best interests of the its
shareholders and, if they were to reach an affirmative conclusion in that
regard, to review, evaluate and negotiate the terms and conditions of the merger
and the merger agreement. The special committee unanimously determined that,
subject to negotiation of an appropriate purchase price, an acquisition of the
company by Skywide would be in the best interests of the company and its
shareholders. After negotiating a purchase price that the special
committee deemed appropriate and receiving the opinion described below regarding
the fairness of the merger consideration, the special committee subsequently
determined that the merger and the merger agreement are fair to, and in the best
interests of, the company’s unaffiliated shareholders, that is, the shareholders
other than Skywide and Messrs. Deng and Huang. Based on that
determination, the special committee unanimously recommended that the full board
of directors approve the merger and approve and adopt the merger agreement and
the other transactions contemplated thereby. After considering various factors,
including the unanimous recommendation of the special committee and the fairness
opinion described below, our board of directors unanimously:
·
|
determined
that the merger and the merger agreement are advisable and fair to and in
the best interests of Sinoenergy’s unaffiliated
shareholders;
|
·
|
approved
the merger and approved and adopted the merger agreement and the other
transactions contemplated
thereby; and
|
·
|
recommended
that Sinoenergy’s shareholders approve the merger and approve and adopt
the merger agreement and the other transactions contemplated
thereby.
|
Accordingly,
our board of directors, with Messrs. Deng and Huang abstaining, unanimously
recommends that you vote “FOR” the merger.
Position of Skywide, Merger Sub, Tianzhou Deng and Bo
Huang as to the Fairness of the Merger
(Page
[ ])
Skywide,
Merger Sub and Messrs. Deng and Huang believe that the merger is both
procedurally and substantively fair to the company’s unaffiliated shareholders
for the reasons discussed in the section entitled “Special Factors—Position of
Skywide, Merger Sub, Tianzhou Deng and Bo Huang as to the Fairness of the
Merger” beginning on page [ ].
Opinion
of the Company’s Financial Advisor (Page [ ] and Annex
B)
On April
20, 2009, after reviewing information provided by, and conducting interviews
with officials of, three financial advisory firms who actively provide fairness
opinions in connection with merger transactions, the special committee engaged
Brean Murray, Carret & Co., LLC, or Brean Murray, for the sole purpose of
providing an opinion as to the fairness of any merger consideration that the
special committee and Skywide might ultimately negotiate. Except for
Brean Murray’s engagement to provide that opinion, neither Brean Murray nor any
other firm was engaged to provide any financial advisory or other services in
connection with the merger transaction. On July 8, 2009, Brean Murray
delivered a written presentation to the special committee regarding the stock
price, comparable companies, comparable transactions and premiums paid analyses
it had employed in connection with its analysis of the fairness of the merger
consideration. On September 28, 2009, at a joint special meeting of
the special committee and the board, Brean Murray discussed the written
presentation that it had delivered on July 8, 2009 and presented its findings
and conclusions to the members of the special committee and to the other members
of our board of directors. At that meeting, Brean Murray advised the
directors that its review of events that had transpired since it had initially
provided its written presentation to the special committee on July 8, 2009 had
not caused it to conclude that there was any reason to alter its views regarding
the fairness of the merger consideration as set forth in its written
opinion. In that regard, Brean Murray noted that during the period in
question, the broader stock market indexes, as well as the stock values of the
Company’s peers, generally increased while the Company’s stock had diminished in
value. Also, on September 28, 2009, Brean Murray delivered its
written opinion, dated that date, to the special committee, which stated that,
as of that date, based upon and subject to the assumptions made, matters
considered, and limitations on its review as set forth in the opinion, the
merger consideration of $1.90 per share of common stock was fair, from a
financial point of view, to the common shareholders of Sinoenergy.
On
February 8, 2010, the special committee engaged Brean Murray to provide an
updated analysis and opinion regarding the fairness of the merger consideration
to the unaffiliated shareholders from a financial point of view. On
March 22, 2010, Brean Murray delivered a written presentation to the special
committee regarding the updated stock price, comparable companies, comparable
transactions and premiums paid analyses it had employed in connection with the
rendition of its updated analyses of the fairness of the merger
consideration. On March 29, 2010, at a joint special meeting of the
special committee and the board, Brean Murray discussed the written presentation
that it had delivered on March 22, 2010 and presented its findings and
conclusions to the special committee. Also, on March 29, 2010, Brean
Murray delivered its updated written opinion, dated that date, to the special
committee, which stated that, as of that date, based upon and subject to the
assumptions made, matters considered, and limitations on its review as set forth
in the opinion, the merger consideration of $1.90 per share of common stock was
fair, from a financial point of view, to the unaffiliated shareholders of
Sinoenergy.
The full
text of Brean Murray’s updated written opinion, which sets forth the procedures
followed, assumptions made, qualifications and limitations on the review
undertaken and other matters considered by Brean Murray in preparing its opinion
is included as Annex B to this proxy statement.
Treatment
of the Company’s Convertible Notes (Page [ ])
The
company and the holders of the 3% convertible notes have entered into an
agreement providing that those notes will be paid in two installments commencing
ten days after the effective time. Accordingly, those notes will not
be converted into shares of the company’s common stock or convertible into any
shares or other ownership interests in Skywide. See “The Merger
Agreement – Changes in the Company’s Senior Note Obligations.”
Treatment
of Stock Options and Stock Purchase Warrants (Page
[ ])
The
merger agreement provides that all outstanding company stock options, except for
stock options held by Messrs. Deng and Huang, issued pursuant to the company’s
2006 long-term incentive plan, or 2006 Plan, and all outstanding company stock
purchase warrants, whether or not vested or exercisable, will be cashed out and
cancelled in connection with the completion of the merger. Each option or
warrant holder, except for Messrs. Deng and Huang, will receive an amount in
cash, less applicable withholding taxes, without interest, equal to the product
of:
·
|
the
number of shares of our common stock subject to each option or warrant, as
applicable, as of the effective time of the merger, multiplied
by
|
·
|
the
excess, if any, of $1.90 over the exercise price per share of common stock
subject to such option or warrant, as
applicable.
|
If the
amount of such product is zero, no payment will be made. We refer to
the amount of that product as the option consideration. Stock options
held by Messrs. Deng and Huang will be cancelled in connection with the
completion of the merger, and they will not receive any option
consideration.
Interests
of the Company’s Directors and Executive Officers in the Merger (Page
[ ])
Our
directors and executive officers may have interests in the merger that are in
addition to yours, including the following:
·
|
Messrs.
Deng and Huang, who are currently the company’s Chairman/Director and
Chief Executive Officer/Director, respectively, each own 50% of the equity
interests of Skywide. As a result of the merger, Merger Sub will be merged
with and into Sinoenergy and the surviving company will be privately owned
directly by Messrs. Deng and Huang, as a result of their ownership of
Skywide. Additionally, following the merger, Messrs. Deng and Huang will
retain their officer positions with the surviving company and will be the
surviving company’s directors, as a result of their ownership of Skywide
and their current positions as the directors of
Skywide;
|
·
|
the
company’s officers will serve as the initial officers of the surviving
company after the merger is
consummated;
|
·
|
our
officers and directors, other than Messrs. Deng and Huang, will have their
vested and unvested stock options cashed out and cancelled in connection
with the merger, meaning that they will receive cash payments for each
share of common stock subject to such option equal to the excess, if any,
of $1.90 per share over the exercise price per share of their options,
without interest and less applicable withholding taxes;
and
|
·
|
the
merger agreement provides for indemnification arrangements for each of our
current and former directors and officers that will continue for six years
following the effective time of the merger, as well as insurance coverage
covering his service to the company as a director or
officer.
|
Financing
of the Merger (Page [ ])
The total
amount of funds to be used as consideration in the merger is approximately $18.4
million. Messrs. Deng and Huang are contributing personal funds in
excess of that amount to Skywide, so that it will be able to pay, among other
things, the merger consideration and the option
consideration. Accordingly, Skywide will not be seeking financing
from any third parties in order to pay the merger consideration and the option
consideration.
Material
United States Federal Income Tax Consequences (Page
[ ])
If you
are a U.S. holder of our common stock, the merger will be a taxable transaction
to you. For U.S. federal income tax purposes, your receipt of cash in exchange
for your shares of our common stock generally will cause you to recognize a gain
or loss measured by the difference, if any, between the cash you receive in the
merger and your adjusted tax basis in your shares. If you are a non-U.S. holder
of our common stock, the merger will generally not be a taxable transaction to
you under U.S. federal income tax laws unless you have certain connections to
the United States. You should consult your own tax advisor for a full
understanding of how the merger will affect your taxes. In certain limited
cases, it is possible that a shareholder may be subject to distribution
treatment on his, her or its exchange of stock. See “Special Factors
– Material United States Federal Income Tax Consequences” at page
[ ].
Procedure
for Receiving Merger Consideration (Page [ ])
As soon
as practicable after the effective time of the merger, an exchange agent will
mail a letter of transmittal and instructions to you and our other shareholders.
The letter of transmittal and instructions will tell you how to surrender your
stock certificates, stock options or stock purchase warrants in exchange for the
merger consideration and/or option consideration. You should not return your
stock certificates, stock options or stock purchase warrants with the enclosed
proxy card, and you should not forward your stock certificates, stock options or
stock purchase warrants to the exchange agent without a letter of
transmittal.
No
Solicitation of Transactions (Page [ ])
The
merger agreement contains restrictions on our ability to solicit or engage in
discussions or negotiations with a third party regarding specified transactions
involving the company. Notwithstanding these restrictions, under certain
circumstances, our board of directors may respond to an unsolicited written bona
fide proposal for an alternative acquisition or terminate the merger agreement
and enter into an agreement with respect to a superior proposal.
Conditions
to the Merger (Page [ ])
Before we
can complete the merger, a number of conditions must be satisfied. These
include:
·
|
the
receipt of company shareholder
approval;
|
·
|
the
absence of actions or suits instituted by a governmental authority seeking
to prohibit or challenging the completion of the merger;
and
|
·
|
the
continuing accuracy of the representations and warranties we made in the
merger agreement, except to the extent the failure of such representations
and warranties to be true and correct would not constitute a material
adverse effect.
|
Termination
of the Merger Agreement (Page [ ])
Sinoenergy
and Skywide may agree in writing to terminate the merger agreement at any time
without completing the merger, even after the shareholders of Sinoenergy have
approved the merger agreement. The merger agreement may also be terminated at
any time prior to the effective time of the merger in certain other
circumstances, including:
·
|
by
either Skywide or the company if:
|
§
|
the
closing has not occurred on or before May 31, 2010 (in certain specified
circumstances such date may be extended by either Skywide or us until June
30, 2010);
|
§
|
a
final, non-appealable governmental order prohibits the
merger;
|
§
|
the
company shareholders do not approve the merger agreement at the special
meeting or any postponement or adjournment
thereof;
|
§
|
there
is a material breach by the non-terminating party of its representations,
warranties, covenants or agreements in the merger agreement such that the
closing conditions would not be
satisfied;
|
·
|
by
Skywide, if our board of directors withdraws, modifies or changes its
recommendation or approval of the transactions contemplated by the merger
agreement in a manner adverse to Skywide or recommends or approves an
acquisition proposal other than the transactions contemplated by the
merger agreement; or
|
·
|
by
the company, prior to the special meeting, if we receive a superior
proposal in accordance with the terms of the merger agreement, but only
after we have paid the termination fee described
below.
|
Termination
Fees and Expenses (Page[ ] )
Under
certain circumstances, in connection with the termination of the merger
agreement, the company or Skywide, as the case may be, will be required to pay
to the other party a termination fee equal to the reasonable out-of-pocket
expenses (including, without limitation, all fees and expenses of counsel,
accountants, investment bankers, experts and consultants) actually incurred by
the company or Skywide, as the case may be in connection with or related to the
authorization, preparation, negotiation, execution and performance of the merger
agreement and the merger. The termination fee payable by the company
is subject to a cap of 3% of the total merger consideration and option
consideration payable in connection with the merger, which is
$552,861.
Market
Price of Our Stock (Page [ ])
Our
common stock is listed on the NASDAQ Capital Market under the trading symbol
“SNEN.” On October 9, 2009, which was the last trading day before we announced
the merger, our common stock closed at $1.28 per share. On
[ ],
2010, which was the last trading day before this proxy statement was printed,
our common stock closed at $[ ] per share.
No
Rights of Appraisal (Page[ ])
Under
Nevada law, you do not have any appraisal or other rights of objection in
connection with the merger.
QUESTIONS AND ANSWERS ABOUT THE SPECIAL
MEETING AND THE MERGER
The
following questions and answers address briefly some questions you may have
regarding the special meeting and the proposed merger. These questions and
answers may not address all questions that may be important to you as a
shareholder of Sinoenergy Corporation. Please refer to the more detailed
information contained elsewhere in this proxy statement, the annexes to this
proxy statement and the documents referred to or incorporated by reference in
this proxy statement.
Q: Who
is soliciting my vote?
A: Your
vote is being solicited by the board on behalf of the company.
Q: What
matters will be brought before the special meeting?
A:
|
You
will be asked to approve the proposed merger pursuant to which Merger Sub
will be merged with and into
Sinoenergy.
|
Q: What
is the proposed merger?
A:
|
The
proposed merger is the merger of Merger Sub with and into the company
pursuant to the merger agreement. Once the merger agreement has been
approved by the company’s shareholders and the other closing conditions
under the merger agreement have been satisfied or waived, Merger Sub will
merge with and into Sinoenergy (the “merger”). Sinoenergy will be the
surviving company in the merger (the “surviving company”) and its name
will be changed at the effective time of the merger from Sinoenergy
Corporation to Skywide Capital Management
Limited.
|
Q: What
will I receive in the merger?
A:
|
Upon
completion of the merger, you will have the right to receive $1.90 in
cash, without interest, for each share of our common stock that you own on
the date that the merger becomes effective (the “merger consideration”).
For example, if you own 100 shares of our common stock, you will have the
right to receive $190.00 in cash in exchange for your Sinoenergy
shares.
|
Q: What
will happen if the merger proposal is not approved by our
shareholders?
A:
|
If
the merger is not approved, either Sinoenergy or Skywide will have the
right to terminate the merger
agreement.
|
Q: Where
and when is the special meeting?
A:
|
The
special meeting will take place at
[ ],
on
[ ],
2010, at [ ] A.M. local
time.
|
Q: What
vote of our shareholders is required to approve the merger
agreement?
A:
|
In
order to complete the merger, holders of a majority of the voting power of
the shareholders, which means a majority of the company’s common stock
outstanding and entitled to vote at the close of business on the record
date must vote “FOR” the approval of the merger agreement. Accordingly,
unvoted shares and abstentions will be effectively treated as votes
AGAINST approval of the merger
agreement.
|
Q: How
does the company’s board of directors recommend that I vote?
A:
|
Our
board of directors, with Messrs. Deng and Huang abstaining, has
unanimously recommended that our shareholders vote “FOR” the approval of
the merger agreement. You should read “Special Factors –
Reasons for the
Merger; Recommendation of the Special Committee and the Board of
Directors; Fairness of the Merger”
for a discussion of the factors
that our board of directors considered in deciding to recommend the
approval of the merger agreement.
|
Q: What
do I need to do now?
A:
|
We
urge you to read this proxy statement carefully, including its annexes,
and to consider how the merger affects you. If you are a shareholder of
record, then you can ensure that your shares are voted at the special
meeting by submitting your proxy
via:
|
(1)
telephone
, using the
toll-free number listed on each proxy card (if you are a registered shareholder,
that is if you hold your shares in your name) or vote instruction card (if your
shares are held in “street name,” that is if your shares are held in the name of
a broker, bank or other nominee, and your bank, broker or nominee makes voting
by telephone available);
(2)
the Internet
, at the address
provided on each proxy card (if you are a registered shareholder) or vote
instruction card (if your shares are held in “street name” and your bank, broker
or nominee makes Internet voting available); or
(3)
mail
, by marking, signing,
dating and mailing each proxy card or vote instruction card and returning it in
the envelope provided.
Q:
|
If
my shares are held in “street name” by my broker, will my broker vote my
shares for me?
|
A:
|
Yes,
but only if you provide instructions to your broker on how to vote. You
should follow the directions provided to you by your broker regarding how
to instruct your broker to vote your shares. Without those instructions,
your shares will not be voted. Such broker non-votes will count
as votes AGAINST approval of the merger
agreement.
|
Q: How
do I revoke or change my vote?
A:
|
You
can change your vote at any time before your proxy is voted at the special
meeting. You may revoke your proxy by notifying the company’s Corporate
Secretary in writing or by submitting a new proxy by telephone, the
Internet or mail, in each case, dated after the date of the proxy being
revoked. In addition, your proxy may be revoked by attending the special
meeting and voting in person. However, simply attending the special
meeting will not revoke your proxy.
|
If you
have instructed a broker to vote your shares, the above-described options for
changing your vote do not apply, and instead you must follow the instructions
received from your broker to change your vote.
Q: What
does it mean if I get more than one proxy card or vote instruction
card?
A:
|
If
your shares are registered differently and are in more than one account,
you will receive more than one card. Please complete and return all of the
proxy cards or vote instruction cards you receive (or submit your proxy by
telephone or the Internet, if available to you) to ensure that all of your
shares are voted.
|
Q: When
do you expect the merger to be completed?
A:
|
We
anticipate that, if the merger is approved by our shareholders, the merger
will be completed as soon as possible following the special meeting and
the satisfaction of other closing conditions. See “The Merger
Agreement—Conditions to the
Merger.”
|
Q: Should
I send in my share certificates, stock options or stock purchase warrants
now?
|
Shortly
after the merger is completed, you will receive a letter of transmittal
with instructions informing you how to send in your share certificates,
stock options or stock purchase warrants to the exchange agent in order to
receive the merger consideration. You should use the letter of transmittal
to exchange share certificates, stock options or stock purchase warrants
for the merger consideration to which you are entitled as a result of the
merger. DO NOT SEND ANY SHARE CERTIFICATES, STOCK OPTIONS OR STOCK
PURCHASE WARRANTS WITH YOUR PROXY.
|
Q:
|
Who
can help answer my other questions?
|
A:
|
If
you have any questions about the merger, need assistance in submitting
your proxy or voting your shares or need additional copies of the proxy
statement or the enclosed proxy card, please call our proxy solicitor,
Georgeson, Inc. (“Georgeson”) at (212) 440-9800 (banks and brokers) or
(877) 278-4751 (all others, toll
free).
|
|
If
your broker holds your shares, you should also call your broker for
additional information.
|
If you
would like additional copies, without charge, of this proxy statement or the
enclosed proxy card you should contact:
Sinoenergy
Corporation
Attention:
Investor Relations
1603-1604,
Tower B Fortune Centre Ao City
Beiyuan
Road, Chaoyang District,
Beijing,
People’s Republic of China 100107
Phone
number: 86-10-84928149
OR
Georgeson,
Inc.
Banks and
Brokers Call: outside the United States, (212) 440-9800
All
Others Call Toll Free: (877) 278-4751
SPECIAL FACTORS
Background
of the Merger
At
various times over a period of a year or more prior to April 2009, two of the
independent directors who comprise the special committee (Messrs. Lu and Shi)
explored the CNG market in China for specific, strategic alternatives for the
company including but not limited to approaching possible joint venture or
merger partners including several state-owned, privately and publicly held
Chinese energy sector companies. In addition, at least two
state-owned energy companies approached Sinoenergy about merging. The
actions taken by Messrs. Shi and Lu were with the approval, knowledge and active
participation of Mr. Deng, Chairman of the company. Conversations
were held with representatives of China Petroleum and Chemical Corp.
(“Sinopec”), China National Petroleum Corp. (“CNPC”), China National Offshore
Oil Corp. (“CNOOC”), the three multi-hundred billion dollar national government
owned petroleum companies, and various subsidiaries of those
companies. In numerous discussions leading up to April 2009, after
the potential merger/joint venture companies considered, among other things, the
$16 million debt load Sinoenergy was carrying, its high aging accounts
receivable balance, its relative difficulty in offering lower prices than
state-operated companies and the growing competitive retail market in China for
CNG, discussions failed to result in an agreement. Also, at various
times prior to April 2009, Mr. Deng, either directly, or through introductions
provided by Mr. Lu or Mr. Shi, engaged in similar conversations with
representatives from those companies. Inasmuch as Sinopec, CNPC and
CNOOC controlled the allocation of petroleum and natural gas resources in China
to all other companies engaged in the use and distribution of such resources,
those conversations were undertaken in order to attempt to strengthen the
capacity and capabilities of Sinoenergy’s retail CNG distribution
operations. Those discussions involved a variety of strategic
alliances which included preliminary merger discussions between Mr. Deng and the
Chief Executive Officer of Sino Gas International Holdings, Inc., a Nasdaq
Bulletin Board company, and other potential joint ventures and transactions that
would have ceded ownership interests in Sinoenergy to the companies who
participated in the discussions. However, those various efforts
ceased, in almost every case, either because the other party viewed the
company’s aggregate debt position and the large amount of its accounts
receivable as being a prohibitive barrier or because the other party desired to
receive a greater ownership position in Sinoenergy than was deemed appropriate
by Mr. Deng, Mr. Lu and/or Mr. Shi.
On April
2, 2009, our board of directors received a letter from Skywide, executed by
Messrs. Deng and Huang, which expressed Skywide’s interest in acquiring the
company by means of a “going private” transaction at a proposed price based upon
the weighted stock bidding price of the company’s common stock during the 20
consecutive transaction days before April 7, 2009. That price would
have been approximately $1.21 per share.
In
response to that letter, the board held a meeting on April 7,
2009. At that meeting, which was attended by all of the members of
the board, Mr. Huang explained why Mr. Deng and he believed their acquisition of
the company was the best course of action for the company and its shareholders
to take, as follows:
·
|
The
annual cost to the company over the prior two years of maintaining its
status as a “reporting company” whose capital stock was listed for trading
on the Nasdaq Stock Market was approximately $1,500,000 per
year. That amounted to approximately one-third of the company’s
annual net income.
|
·
|
During
that same two year period, the company’s business efforts were primarily
directed toward investing in construction projects designed to expand its
business and increase its operating
revenues. However:
|
§
|
the
company’s low stock price and difficult operating environment which
prevented us from raising the additional capital needed to fund our
expansion plans; and
|
§
|
the
capital shortage which resulted from the approximate $1,500,000 annual
drain caused by the cost of maintaining the company’s status as a US
publicly traded reporting company,
|
materially
impaired our ability to grow our business.
·
|
The
downward trend of the global and Chinese economies, coupled with changes
that had occurred in policies employed by various governmental authorities
who regulate the company’s business activities in China, had caused
Messrs. Deng and Huang to conclude that the company’s stock price would be
subjected to substantial downward pressures and considerable price
fluctuations, which might not be alleviated for the foreseeable
future.
|
·
|
A
low stock price subjected to such pressures and potential fluctuations
would restrict the ability of the company to provide for its capital needs
in the market. And that, in turn, would adversely affect the
further expansion of the company’s business and the development of the
company.
|
·
|
The
company’s obligations with regard to its senior notes and convertible
senior notes had increased by significantly, as a result of provisions of
the indentures governing such instruments which were adversely impacted by
the low market price and lack of liquidity in the company’s stock, with a
payment of $3,000,000 being due on October 31, 2009 and the remaining
balance of the senior notes, of approximately $13,000,000 being due on the
earlier of November 30, 2009 or seven days before the effective time of
the merger.
|
·
|
The
climate of economic uncertainty and severe business contractions
experienced by many of the company’s customers has complicated its
collection efforts which had already resulted in a significant increase in
the time it was taking to collect receivables and significant
writeoffs.
|
·
|
The
foregoing factors have combined to place further downward pressures on the
company’s stock price and liquidity and have further exacerbated the
company’s financial position as a result of its inability to raise
additional capital under such
conditions.
|
Mr. Huang
concluded his statements by expressing his and Mr. Deng’s desire to initiate a
dialog with the board to discuss concrete steps that should be taken to
establish a framework for Skywide’s proposed acquisition of the
company.
After
discussing Mr. Huang’s proposal, and expressing their collective agreement to
begin a dialog to explore a potential sale of the company to Skywide, the board
constituted a four member special committee consisting of Messrs. Lu Renjie, Shi
Baoheng, Robert I. Adler and Greg Marcinkowski, each of whom was a non-employee
director. That committee appointed Mr. Adler as its
chairman. In view of the approaches to possible merger/joint venture
partners that Messrs. Lu, Shi, and Deng had made since October 2008, the lack of
success the three of them had experienced in effectuating an agreement and the
further deterioration of the financial markets, the board of directors did not
give consideration to exploring other alternatives that might be available to
the company, or to engage in a test of the market for the shares through an
auction or similar procedure.
The board
meeting was then adjourned, the directors who were not members of the special
committee were excused, and the first meeting of the special committee was then
convened to discuss organizational matters.
During
the ensuing week, the special committee engaged in exploratory activities
regarding the selection of a financial advisor and legal counsel to assist the
committee in the activities it would be undertaking. In connection
therewith, Mr. Adler interviewed members of three law firms experienced in
representing special committees and three financial advisory firms actively
engaged in the provision of fairness opinions.
On April
15, 2009, the special committee held its second meeting which was attended by
Messrs. Adler, Lu and Marcinkowski. At that meeting, after receiving Mr. Adler’s
report and recommendations regarding the law firms and fairness opinion
providers he had interviewed, the special committee selected Brean Murray as its
financial advisor solely for the purpose of rendering a fairness opinion, and
Arent Fox LLP as its United States counsel. The special committee’s
selection of Brean Murray was based, among other reasons, upon its reputation as
a nationally recognized investment banking firm and because, as part of its
investment banking business, Brean Murray is continually engaged in the
valuation of businesses, especially in China. In making its selection of Brean
Murray, the special committee also considered as important factors Brean
Murray’s experience in China, as well as the fact that it has offices in China
at which it maintains a permanent staff of investment analysts and investment
bankers who primarily focus on Chinese business enterprises. Neither
the special committee nor the board engaged any other firm to provide investment
banking or other financial advisory services in connection with the
merger.
Between
April 15, 2009 and April 25, 2009, the members of the special committee engaged
in communications with its advisors and with one another as they gathered
factual information regarding the points raised by Mr. Huang at the April 7,
2009 board meeting, the state of the market for private and publicly traded
companies similar to our company and the appropriateness of selling the
company.
On April
26, 2009, the special committee invited Skywide to commence negotiations with it
with regard to a potential acquisition of the company.
In
response to that invitation, Skywide submitted a letter to the special committee
on April 27, 2009 which contained an offer to acquire the company in a merger
transaction at a price reflecting a 20% premium over the average weighted stock
price over the company’s shares during the period of 20 consecutive trading days
before April 7, 2009. That price would have amounted to $1.38 per
share.
Between
April 28, 2009 and May 25, 2009, the members of the committee continued to
consider information they solicited from the company’s advisors.
On May
26, 2009, all of the members of the special committee met to discuss the offer
articulated by Skywide in its letter of April 27, 2009. During the
course of that meeting,
·
|
Mr.
Adler advised the members of the committee that, based upon information
that been supplied to him, which he had reviewed and analyzed based upon
his experience as an investment analyst and portfolio
manager:
|
§
|
the
enterprise values of approximately 100 Chinese small-cap companies whose
common stock is traded in the United States were calculated on the basis
of the median values of various ratios which took into consideration,
among other things, each company’s:
|
o
|
EBITDA,
which means a company’s earnings unreduced by its charges for interest,
taxes, depreciation and amortization, and is considered to be a measure of
a company’s operating cash flow;
|
o
|
EBIT,
which means a company’s earnings unreduced by its charges for interest and
taxes, and is viewed as a measure of its earning power from ongoing
operations; and
|
§
|
those
analyses resulted in potential values ranging from a low of negative $1.65
per share to a high of $2.19 per share;
and
|
§
|
the
average premiums for acquisitions of control of Chinese companies
comparable to the company, based upon prevailing market prices on the day
before announcement of a tender offer or merger agreement, fell within the
range of 40% - 60%.
|
§
|
Mr.
Adler concluded his remarks by advising the committee that, on the basis
of his review of that valuation information and his experience as an
investment analyst and portfolio manager, he also had concluded that a
price based upon a 20% premium over the average prices prevailing for the
company’s shares in the mid-March - early April time frame was
inadequate.
|
·
|
Mr.
Shi, based upon his 40 years’ knowledge in general of the Chinese energy
industry as head of technology, research and development for Sinopec, and
the retail CNG segment of that industry in particular, expressed his
agreement that the proposed price offered by Skywide at that time was too
low and, based, in part, upon
|
§
|
his
understanding that much larger government owned companies having no
barriers to entry, as well as non-government owned companies within China
with lower debt loads, had begun expanding into the CNG market, rendering
Sinoenergy at a competitive
disadvantage;
|
§
|
his
prior discussions with other energy companies since the Fall of 2008 and
his knowledge of the operations and production capabilities of Sinopec,
CNPC and CNOOC, as well as smaller companies, in relation to Sinoenergy’s
production capabilities as an operator of retail CNG stations;
and
|
§
|
the
quantitative analyses he had made regarding, among other things,
Sinoenergy’s production
capabilities,
|
also was
of the view that an appropriate price range for Sinoenergy would be fairly
constrained by the competitive weaknesses it would experience as those other
companies expanded into the segment of the Chinese energy industry occupied by
Sinoenergy;
·
|
Mr.
Lu, based upon his 40 years’ knowledge and experience as a manager of
Chinese energy sector enterprises, stated his agreement with Mr. Adler’s
analysis and Mr. Shi’s opinion concerning the Chinese CNG market and the
upper limit on the company’s value.
|
·
|
The
committee then instructed its counsel to prepare a letter to Skywide which
would explain the reasons why the committee had concluded that Skywide’s
offer was too low, but which would not contain any counter-offer that
might have the effect of placing a ceiling on the parties’ price
discussions.
|
On June
1, 2009, the committee’s counsel sent a letter advising Skywide, as
follows:
·
|
The
committee had determined, based upon its views of current and foreseeable
economic and market conditions, and current and foreseeable prospects for
the company’s business, that a sale of the company at an appropriate price
might be in the best interests of the company and its
shareholders.
|
·
|
The
committee had reached the conclusion that Skywide’s offer, while
encouraging, was not high enough to justify a decision by the committee to
commence engaging in negotiations of a definitive merger
agreement.
|
·
|
The
committee reached that conclusion after considering various valuation
metrics customarily employed in determining the value for sale purposes of
business enterprises similar to the company including, but were not
limited to, revenue, EBITDA, EBIT, net income and book value calculations
based on the median values of various Chinese small-cap companies whose
common shares are traded in the United
States.
|
On June
4, 2009, Mintz & Fraade, PC, Skywide’s US counsel, responding to the special
committee’s rejection of Skywide’s initial offer, sent a letter to the
committee’s counsel stating that Skywide was prepared to offer $1.60 per share
for the company. Skywide’s counsel further stated that $1.60
reflected a 33.3% premium over the average trading price of the company’s shares
during the 20 day period prior to April 7, 2009, the date of Skywide’s original
offer, and also was four to five times the company’s net earnings from
operations during the prior two fiscal years.
On June
9, 2009, the committee met to discuss Skywide’s revised offer. At
that meeting, Mr. Adler advised the other committee members that, after
reviewing and analyzing publicly available data that had been provided to him,
he had concluded the following:
·
|
the
premiums recently paid for acquisitions of control, as well as total
acquisitions, of Chinese companies comparable to the company fell within
the range of 40% (mean) and 60% (median) of the closing price of the
target company’s shares on the day immediately preceding the date when the
transaction was first publicly disclosed
and
|
·
|
the
price-to-earnings, or P/E, ratios of various Chinese industrial companies
of a size comparable to the company whose shares were traded in the US
public markets fell within the range of 5.7X (median) and 6.5X
(mean).
|
Mr. Adler
then provided to the other committee members a further analysis that he had
undertaken which applied the company’s current operating earnings (excluding all
non-operating, non-recurring items and adjusted for tax impact) and its then
current stock price ($1.40) to the foregoing factors. That
analysis resulted in the following potential acquisition
price:
P/E Ratio
Analysis
Premiums Paid
Analysis
4X =
$1.57 33%
= $1.86
5X =
$1.96 40%
= $1.96
6X =
$2.34 60%
= $2.24
The
committee engaged in a discussion of the foregoing information in the context of
the company’s present and reasonably foreseeable prospects, taking into
consideration the difficulties the company was experiencing in collecting
certain sizable receivables and issues it was encountering in obtaining permits
to open and operate new facilities. In that regard, the committee,
after taking into consideration the losses that the company had sustained during
the quarters ended March 31 and June 30, 2009, concluded that such losses were
likely to continue during the balance of fiscal 2009 and into fiscal
2010. The members of the committee based that conclusion, among other
things, upon their awareness of:
·
|
the
payment extensions that the company had offered and was continuing to
offer to customers in light of the economic crisis affecting
them;
|
·
|
the
questionable collectability of the company’s receivables;
and
|
·
|
the
difficulties that the company was encountering in meeting its senior debt
repayment obligations as a result of the need to lower its prices in order
to compete with the lower prices being offered by the company’s
competition.
|
Mr. Adler
stated that, based upon the analysis he had provided to the committee at the
beginning of the committee meeting, a price based upon 5.7 times earnings was
probably more than the committee should expect a buyer to pay, and that a price
in the range of 5 times earnings would, in his view, be more acceptable given
the company’s current and foreseeable circumstances; and
Messrs.
Lu and Shi, after taking into account:
·
|
the
analysis provided by Mr. Adler;
|
·
|
the
factors that they had considered with regard to the discussions in which
they engaged at the committee’s meeting on May 26,
2009;
|
·
|
the
large amount of, and the difficulties the company was experiencing in
collecting, its accounts
receivable;
|
·
|
the
company’s inability to match the much more favorable payment terms that
the company’s much larger state-owned competitors were able to offer to
customers by reason of the financial support available to such competitors
from the government; and;
|
·
|
their
knowledge of the plans of two of China’s three largest state-owned energy
companies to build and operate thousands of CNG retail outlets that will
directly compete with the company’s retail
outlets,
|
stated
that, a price in the range between $1.90 and $2.00 would be
appropriate.
On June
16, 2009, the special committee rejected Skywide’s revised $1.60 per share offer
by stating, in a letter sent by its counsel to Skywide, that:
·
|
most
all-cash acquisitions of public companies are publicly disclosed on the
day immediately following the date when the target company and the
acquiring company announce that they have reached an agreement in
principle regarding a proposed
acquisition;
|
·
|
the
purchase price is usually based on the closing price of the target
company’s stock on the date immediately preceding the date when the
transaction is announced; and
|
·
|
it
had concluded, based upon analyses
of:
|
§
|
control
acquisition and total acquisition premiums of Chinese companies comparable
to the company, and
|
§
|
Chinese
industrial companies of a size comparable to the company whose shares were
traded in the US public markets,
|
that a
much higher purchase price than the most recent offer made by Skywide would be
more appropriate.
That
letter generated a telephone conference held on June 18, 2009 among Mr. Adler,
the special committee’s counsel, Messrs. Deng and Huang, Skywide’s US counsel
and various advisors to Skywide. Mr. Deng began that conference by
stating that, by reason of the various liquidity problems facing the company,
Skywide did not believe that the value of the company was greater than $1.80 per
share. Mr. Adler and the committee’s counsel responded that $1.80 per
share was too low when measured against the premiums that buyers had been paying
for Chinese companies comparable to the company, and that a price in the range
of $1.85 - $2.05 would be more appropriate, based on the information that the
committee had been considering.
Mr. Deng
then raised Skywide’s offer to $1.90 per share, and confirmed that Skywide had
the financing in place to consummate a transaction at that price. Mr.
Adler then advised Mr. Deng that he would bring that offer to the committee, and
advise the other committee members that, subject to obtaining Brean Murray’s
opinion that a price of $1.90 per share was fair from a financial point of view,
he would be prepared to recommend that the offer be accepted.
On June
19, 2009, the special committee held a meeting which was attended by all
members. After providing a report regarding the June 18, 2009
conference call, and advising the other members of the committee that Skywide
had increased its offer to $1.90 per share with no financing contingency, Mr.
Adler advised the committee that he was prepared to recommend that
offer.
Mr. Lu
then stated that, based upon:
·
|
the
dramatic slowdown of the company’s business as a result of the global
economic crisis;
|
·
|
the
company’s heavy debt load and the possibility that it might not generate
sufficient cash flows from its reduced business volume to service those
debts; and
|
·
|
the
very large amount – approximately $40 million – of accounts
receivable that were of questionable
collectability,
|
he
believed that the $2.05 price mentioned by Mr. Adler and the committee’s counsel
during the June 18, 2009 conference call was too high, and that a range of $1.85
- $1.95 would be appropriate.
After
further discussion, the special committee unanimously agreed to recommend that
our board approve Skywide’s acquisition of the company at a price of $1.90 per
share, and it authorized Mr. Adler, with the assistance of the committee’s
counsel, to negotiate the terms of a definitive merger agreement.
During
the period between June 19, 2009 and September 23, 2009, various drafts of a
proposed definitive merger agreement were created by the committee’s counsel and
revised pursuant to negotiations that took place among Mr. Adler, the special
committee’s counsel, Mr. Sheng Xiaoming, the company’s chief financial officer,
Sichenzia Ross Friedman Ference LLP, the company’s US corporate counsel,
Skywide’s US counsel and Harney Westwood & Riegels, Skywide’s British Virgin
Islands counsel. On September 23, 2009, the final draft of the
proposed definitive merger agreement was completed. That draft
agreement provided for Skywide’s acquisition of the company pursuant to a merger
of the company with and into Skywide.
During
that same period of time, the company engaged in negotiations with the holders
of its 12% guaranteed senior notes due 2012 in the principal amount of
$16,000,000 and its 3% guaranteed senior convertible notes due 2012 in the
principal amount of $14,000,000, regarding the waiver of various defaults that
would occur as a result of the consummation of the merger.
On
September 28, 2009, our special committee and board met jointly to receive
presentations from Brean Murray regarding its views of the fairness of the
merger consideration to our shareholders from a financial point of view, and to
receive a presentation from counsel to the special committee regarding the
terms, covenants and conditions of the merger agreement.
The
directors also discussed the need to enter into an agreement with Abax Nai Xin A
Ltd. and Abax Jade Ltd., the holders of the guaranteed senior notes and
guaranteed senior convertible notes, relating to a waiver of various defaults
under the agreements governing those notes that would occur as a result of the
consummation of the merger.
At that
meeting, Brean Murray discussed the written presentation that it had delivered
on July 8, 2009 and presented its findings and conclusions to the members of the
special committee and to the other members of our board of
directors. Also at that meeting, Brean Murray advised the directors
that its review of events that had transpired since it had initially provided
its written presentation to the special committee on July 8, 2009 had not caused
it to conclude that there was any reason to alter its views regarding the
fairness of the merger consideration as set forth in its written
opinion.
During
that presentation, Brean Murray advised the members of the special committee and
the other members of the board that its conclusions regarding the fairness of
the merger consideration were based on Brean Murray’s:
·
|
analysis
of the company’s stock price performance over the one year period ended in
June 2009;
|
·
|
comparable
companies analysis of the financial, operating and stock market data of 14
publicly traded companies deemed by Brean Murray to be reasonably
comparable to Sinoenergy;
|
·
|
comparable
transactions analysis of the implied enterprise and equity values of 12
transactions deemed to be reasonably comparable to the proposed
Sinoenergy-Skywide merger transaction in terms of size and business focus;
and
|
·
|
premiums
paid analysis of 98 “going private” transactions that were similar in size
to the proposed Sinoenergy
transaction.
|
Brean
Murray advised the special committee and the other directors that it had reached
the following conclusions based on those analyses:
Stock Price
Analysis
. Brean Murray found that:
·
|
the
closing price of Sinoenergy’s stock trended over the entire one year
period from an average of $2.97 on average daily volumes of 49,000 shares
to an average closing price of $1.39 during the two month period from
April 27 – June 26, 2009 on average daily volumes of 60,000 shares, to a
one week average of $1.55 during the week ended June 26, 2009 on average
daily volumes of 42,000 shares;
|
·
|
a
review of Sinoenergy’s stock price performance over the same one year
period relative to the Nasdaq Composite Index, the S&P 500 and an
index of 14 companies (not including Sinoenergy) comparable to Sinoenergy
revealed that the S&P 500 Index depreciated by 28.1% over that one
year period, while the Nasdaq Composite depreciated 20.6%, the comparable
companies index depreciated 41.8% and Sinoenergy’s stock price depreciated
by 70.0%;
|
·
|
a
volume weighted price analysis of Sinoenergy’s stock over the 252 trading
days which occurred during the year which concluded on June 26, 2009
resulted in a finding that 55.8% of total shares traded during the period
traded at or below the merger consideration and 44.2% of total shares
traded during the period traded above the merger consideration;
and
|
·
|
a
review of the moving average price of Sinoenergy’s stock on June 26, 2009,
and during the five day, ten day, one month, three month, six month and
one year periods preceding June 26, 2009, revealed that the stock traded
at a discount ranging from a low of 21.6% of the merger consideration to a
high of 40.0% of the merger consideration, and that the only period of
time when the stock traded at a premium,
i.e.
, at a
price in excess of the merger consideration, was during the one year
period preceding June 26, 2009.
|
Comparable Companies
Analysis
. Brean Murray’s comparable companies analysis
resulted in an implied share price range of -$1.58 to $3.59 per
share.
Comparable Transactions
Analysis
. Brean Murray’s comparable transactions analysis
resulted in an implied share price range of -$0.62 to $1.22 per share;
and
Premiums Paid
Analysis
. Brean Murray’s premiums paid analysis resulted in an
implied share price range of Sinoenergy’s common stock of $1.95 to $2.27 per
share. See “Special Factors – Opinion of Sinoenergy’s Financial
Advisor.”
After
Brean Murray completed its presentation, and answered various questions posed by
the directors, Brean Murray advised the board that it was prepared to issue a
written opinion stating that the merger consideration was fair to our
shareholders from a financial point of view.
The
special committee’s counsel then reviewed the terms and conditions of the
merger, as set forth in the proposed merger agreement with the board, and
responded to various questions posed by the directors.
The
special committee then met separately from the board to discuss whether it would
be prepared to make a recommendation to the board regarding the proposed
merger. After the terms of the proposed merger agreement and
discussing Brean Murray’s presentation, the committee:
·
|
determined,
based upon the presentation made to it by Brean Murray, that the proposed
merger consideration exceeds the value that the company’s common stock
could obtain in the foreseeable future if it continued as an independent,
public company;
|
·
|
concluded
that, in light of the company’s current business condition and financial
condition, and its business prospects for the foreseeable future, a sale
of the company would be preferable to its continuation as an independent
public company, and that it would be in the best interests of the company
and its shareholders who are not affiliated with Skywide, to recommend,
subject to the company’s successful negotiation and receipt of signed
waiver agreements from the holders of its 12% and 3% notes, that the board
proceed with a sale of the company to Skywide in accordance with the
terms, and subject to the conditions, of the proposed merger agreement;
and
|
·
|
unanimously
agreed to recommend that the board authorize the company to execute the
merger agreement after the waiver agreements had been
executed.
|
The
non-members of the special committee then rejoined the meeting. After
considering the special committee’s report and recommendations, and the
information the board had received from Brean Murray and the special committee’s
counsel, the board unanimously determined, with Messrs. Deng and Huang
abstaining, to authorize the company, subject to the company’s prior receipt of
fully executed waiver agreements relating to its 12% senior notes due 2012 in
the principal amount of $16,000,000 and the company’s 3% guaranteed senior
convertible notes due 2012 in the principal amount of $14,000,000, to execute
the merger agreement.
Prior to
execution of the proposed merger agreement, effective October 8, 2009, the
company entered into an agreement with the holders of the company’s 12% senior
notes due 2012 and the company’s 3% guaranteed senior convertible notes due 2012
(the “waiver agreement”). Pursuant to the waiver
agreement:
·
|
the
noteholders agreed to waive default of the provisions that require the
company’s common stock to be publicly traded, that require the company to
repurchase the notes upon a change of control, and that require the
company’s common stock to be traded on the Nasdaq Capital Market or the
Nasdaq Global Market;
|
·
|
the
holders of the 12% senior notes in principal amount of $16,000,000 agreed
that the company’s obligations under those notes must be satisfied by a
payment of $3,000,000 on October 31, 2009 and payment of the remaining
principal balance plus accrued interest on the earlier of November 30,
2009 or seven days before the merger becomes effective, and the company
agreed to make that payment, which will become due regardless of whether
the merger is approved;
|
·
|
the
company and the noteholders further agreed to execute definitive legal
documents satisfactory to the noteholders in connection with any proposed
changes to the terms and conditions of the indenture relating to the
company’s 3% guaranteed senior convertible notes due 2012 in the principal
amount of $14,000,000, and that indenture reflecting such changes is
effective up to and until completion of the
merger;
|
·
|
the
noteholders’ obligations were subject to the following
conditions:
|
o
|
Skywide
is to have sufficient cash or cash equivalents to pay in full the merger
consideration due to the company’s shareholders and must, immediately
before the effective time of the merger, be free of all liabilities other
than for fees and expenses relating to the
merger;
|
o
|
the
company must pay the noteholders’ legal fees and expenses;
and
|
o
|
the
company shall not be in default of its obligations under the notes or the
indentures relating to the notes.
|
On
October 12, 2009, Skywide and the company signed the merger agreement dated as
of that date which provided for the merger of the company with and into Skywide
(the “original merger agreement”), and the company issued a press release
announcing that agreement. On October 14, 2009, the company filed a
current report on Form 8-K describing the merger and the agreement with the
noteholders and included as exhibits a copy of the original merger agreement and
the agreement with the noteholders.
Four days
after the proposed merger was announced, the first of four purported class
action lawsuits commenced naming as defendants the company, our directors and,
in all but one of those cases, Skywide. The parties to all of those
actions have entered into a memorandum of understanding providing for the
settlement of all four actions subject to customary conditions, including the
completion of appropriate documentation, confirmatory discovery and all
necessary court approvals. See “Special Factors – Litigation
Related to the Merger.”
On
December 17, 2009, the company entered into an agreement (the “December 2009
Agreement”) with the holders of the company’s 12% senior notes and its 3% senior
convertible notes. The December 2009 Agreement amended and
supplemented the rights of the holders of the 12% senior notes and the 3% senior
convertible notes set forth in the indentures relating to the issuance of those
notes, as amended through October 5, 2009. Pursuant to the December
2009 Agreement:
·
|
The
company agreed to repay the remaining balance due on the 12% senior notes
of approximately $2 million by December 31, 2009. In
October 2009, the company had agreed to pay the senior notes in full by
November 30, 2009. As of November 30, 2009, the company had
paid approximately $14 million with respect to those notes. On
December 23, 2009, the company repaid the 12% senior notes in
full.
|
·
|
The
company agreed to pay the convertible notes in the principal amount of $14
million in two installments, with an initial payment of $5 million being
due ten days after the merger becomes effective and the balance 30 days
thereafter. Since the noteholders will not be converting the
notes, the company will be required to pay interest to provide the
noteholders with a yield to maturity of 13.8% net of payments previously
made.
|
·
|
The
noteholders reduced the remaining obligation for liquidated damages for
failure to register the shares of common stock issuable upon conversion of
the convertible notes to $280,000, which was paid on December 23,
2009.
|
·
|
The
provision that would have resulted in a further decrease in the conversion
price of the convertible notes if the company did not meet certain levels
of net income was eliminated.
|
·
|
The
provisions of the indenture relating to the reduction in the conversion
price of the convertible notes if the company issues stock at a price, or
issue convertible securities with a conversion or exercise price, that is
less than the conversion price (presently $4.20 per share) were
eliminated.
|
On
February 8, 2010, the special committee engaged Brean Murray to provide an
updated analysis and opinion regarding the fairness of the merger consideration
to the unaffiliated shareholders from a financial point of view.
On March
29, 2010, our special committee met to receive Brean Murray’s updated analysis
regarding the fairness of the merger consideration to our unaffiliated
shareholders from a financial point of view, and our board joined that meeting
to receive presentations from counsel to the special committee regarding the
status and proposed settlement of the shareholder lawsuits that had been
commenced after the proposed acquisition of the company had been announced, and
regarding the terms, covenants and conditions of the proposed merger
agreement.
At that
meeting, Brean Murray discussed the updated written presentation that it had
delivered on March 22, 2010 and presented its findings and conclusions to the
members of the special committee.
During
that presentation, Brean Murray advised the members of the special committee
that its conclusions regarding the fairness of the merger consideration were
based on Brean Murray’s:
·
|
analysis
of the company’s stock price performance over the two year period from
March 2008 to March 2010;
|
·
|
comparable
companies analysis of the financial, operating and stock market data of 14
publicly traded companies deemed by Brean Murray to be reasonably
comparable to Sinoenergy;
|
·
|
comparable
transactions analysis of the implied enterprise and equity values of 15
transactions deemed to be reasonably comparable to the proposed
Sinoenergy-Skywide merger transaction in terms of size and business focus;
and
|
·
|
premiums
paid analysis of 119 “going private” transactions between October 2007 and
March 2010 with equity values ranging from $5.5 million to $98.8
million.
|
Brean
Murray advised the special committee and the other directors that it had reached
the following conclusions based on those analyses:
Stock Price
Analysis
. Brean Murray found that:
·
|
the
closing price of Sinoenergy’s stock trended downward over the 19 month
period from March 10, 2008 through October 9, 2009 – the last trading date
before the proposed merger was announced, as
follows:
|
Daily During the Following
Periods
|
|
Average
Closing Price
|
|
|
Average Volume
|
|
19
months prior to October 9, 2009
|
|
$
|
3.18
|
|
|
|
54,575
|
|
One
year prior to October 9, 2009
|
|
$
|
1.75
|
|
|
|
67,715
|
|
Six
months prior to October 9, 2009
|
|
$
|
1.43
|
|
|
|
83,857
|
|
Three
months prior to prior to October 9, 2009
|
|
$
|
1.46
|
|
|
|
115,087
|
|
One
month prior to October 9, 2009
|
|
$
|
1.30
|
|
|
|
37,565
|
|
·
|
a
review of Sinoenergy’s stock price performance over the one year period
which preceded the announcement of the proposed merger relative to the
Nasdaq Composite Index, the S&P 500 index and an index of 14 companies
comparable to Sinoenergy revealed that the S&P 500 Index appreciated
by 19.2% over that one year period, the Nasdaq Composite appreciated
29.7%, the comparable companies index appreciated 89.4%, but Sinoenergy’s
stock price depreciated by 52.1%;
|
·
|
a
volume weighted price analysis of Sinoenergy’s stock over the 252 trading
days which occurred during the year which concluded on October 9, 2009
resulted in a finding that 70.8% of total shares traded during the period
traded at or below the merger consideration and 29.2% of total shares
traded during the period traded above the merger consideration;
and
|
·
|
a
review of the moving average price of Sinoenergy’s stock on October 9,
2009, and during the five day, ten day, one month, three month, six month
and one year periods preceding the October 12, 2009 announcement of the
proposed merger, revealed that the merger consideration constituted the
following premiums over such average
prices:
|
Moving
Average Price History
On October 9, 2009 and During the Indicated
Periods Preceding Announcement of the Proposed
Merger
|
|
10/9/09
|
5 days
|
10 days
|
1 month
|
3 months
|
6 months
|
1 year
|
Average
Price
|
$1.28
|
$1.37
|
$1.34
|
$1.32
|
$1.47
|
$1.43
|
$1.75
|
Premium
|
48.4%
|
38.9%
|
42.2%
|
43.5%
|
29.5%
|
32.9%
|
8.5%
|
Comparable Companies
Analysis
. In performing its comparable companies analysis,
Brean Murray compared the financial performance of Sinoenergy to the financial
performance of a peer group of 14 Chinese companies whose shares were publicly
traded in the United States. Those comparisons were made on the basis
of the companies’ respective revenues, EBITDA, EBIT, net income and book value,
which measures the difference between a company’s assets and its liabilities,
and is viewed as a measure of value for companies whose business and revenues
are stagnant or growing slowly.
In
making the various comparisons contained in the original analysis that it
conducted last year, Brean Murray reviewed financial statements which were
publicly available prior to July 1, 2009. Brean Murray considered in
its updated analysis the publicly available financial results of Sinoenergy and
the 14 peer group companies during their various fiscal quarters and fiscal
years which included June 2009 and which continued through December
2009. When viewed as of the October 12, 2009 date of announcement of
the proposed merger, Sinoenergy’s implied share equity values, based upon Brean
Murray’s updated financial analysis, fell within the range of -$1.79 to $2.59
per share.
However,
upon taking into consideration the post-announcement financial results of
Sinoenergy and those same 14 peer group companies, the range of Sinoenergy’s
implied share equity values shifted downward to a low of -$2.14 per share and to
a high of $1.74 per share.
Comparable Transactions
Analysis
. For the update of its fairness analysis, Brean
Murray added two presently pending transactions and one that closed on September
3, 2009 to the 12 acquisition transactions that were included in the analysis
that Brean Murray had presented to the special committee and the board on
September 28, 2009. When Brean Murray performed its original analysis prior to
the announcement of the proposed transaction, it employed financial data that
had become publicly available prior to July 1, 2009. For the update
of its comparable transactions analysis, Brean Murray employed publicly
available financial data for the company and the 15 comparable transactions
target companies covering periods that extended beyond July 1,
2009.
Brean
Murray’s original comparable transactions analysis resulted in an implied share
price range of -$0.62 to $1.22 per share. However, as a result of the
application of the more recent financial data for the company and those targets,
as well as the high level of Sinoenergy’s debt relative to its revenues, the
conclusions drawn by Brean Murray from its updated analysis comparable
transactions analysis were that, at both October 12, 2009 and March 16, 2010,
Sinoenergy’s implied share equity value was substantially negative at -$3.51 and
-$4.01, respectively.
Premiums Paid
Analysis
. Brean Murray analyzed the prices paid in 119 “going
private” transactions and determined the premiums that those prices represented
when compared to the targets’ stock prices one day, one week and one month prior
to the dates of announcement of the transactions. Brean Murray then
developed a range of premium percentages from that analysis, and then derived a
range of implied share values for the company by applying those percentages to
Sinoenergy’s corresponding stock prices one day, one week and one month prior to
the announcement of the proposed merger. Then, Brean Murray compared
that range of implied share values to the merger consideration.
Based
upon the median range of the premiums paid for the target group of companies,
Brean Murray’s premiums paid analysis resulted in an implied share price range
of Sinoenergy’s common stock of $1.83 to $1.98 per share. See “Special
Factors – Opinion of Sinoenergy’s Financial Advisor.”
After
Brean Murray completed its presentation, and answered various questions posed by
the members of the special committee, Brean Murray advised the committee that it
was prepared to issue a written updated opinion stating that the merger
consideration was fair to our unaffiliated shareholders from a financial point
of view.
The
special committee then met separately from the board to discuss whether it would
be prepared to make a recommendation to the board regarding the proposed
merger. After observing that Brean Murray’s historical stock price
analysis indicated that the merger consideration would constitute a significant
premium over what had been a stock price that had trended downward for most of
the two years that preceded the announcement of the merger, and concluding that
Brean Murray’s comparable companies, comparable transactions and premiums paid
analysis supported the conclusion that Brean Murray had reached, the special
committee unanimously concluded that the merger consideration was fair to the
unaffiliated shareholders and unanimously recommended that the board proceed
with a sale of the company to Skywide in accordance with the terms, and subject
to the conditions, of the proposed merger agreement.
The
non-members of the special committee then rejoined the meeting. After
considering the special committee’s report and recommendations, and receiving a
report from counsel to the special committee regarding the terms of the proposed
merger agreement and the proposed settlement of the lawsuits that had been
commenced subsequent to announcement of the proposed
merger, the board unanimously determined, with Messrs. Deng and
Huang abstaining, to authorize the company to execute the merger
agreement.
On March
29, 2010, Skywide and the company signed the merger agreement dated as of that
date which provides for the merger of Merger Sub with and into the
Company.
Purposes
and Reasons for the Merger; Recommendation of the Special Committee and the
Board of Directors; Fairness of the Merger
The
purpose of the merger for us is to enable our shareholders to immediately
realize the value of their investment in the company through their receipt of
the per share merger consideration of $1.90 in cash, without interest,
representing a premium of approximately 48.4% over the $1.28 closing sale price
of the company’s common stock
on the Nasdaq Capital Market on October 9, 2009 (the trading day immediately
prior to the date on which the company announced that it had entered into the
merger agreement).
For
Skywide, Merger Sub and Messrs. Deng and Huang, the purpose of the merger is to
allow them to acquire 100% control of the company and bear the rewards and risks
of such ownership of the company after shares of our common stock cease to be
publicly traded.
The
transaction has been structured as a cash merger in order to provide our
unaffiliated stockholders with cash for their shares of the company’s common
stock and to provide a prompt and orderly transfer of the unaffiliated
shareholders’ approximately 59.6% ownership of the company in a single step,
without the necessity of financing separate purchases of our common stock in a
two-step process – the first being a tender offer to be followed by a
second-step merger to acquire any shares of common stock not tendered into any
such tender offer.
The
special committee is a committee of our board of directors formed on April 7,
2009 for the sole purpose of reviewing, evaluating and negotiating the “going
private” transaction proposed by Skywide and otherwise representing the
interests of our unaffiliated shareholders. The special committee is comprised
of four independent (as defined under NASDAQ Rules) members on the company’s
board of directors who are not participating in the transaction with
Messrs. Deng and Huang and have no personal or financial interest in the
completion of the merger other than to receive the same consideration for any
shares of our common stock as any other shareholder. The special committee is
comprised of Robert I. Adler, who serves as Chairman of the special committee,
Lu Renjie, Shi Baohang and Greg Marcinkowski.
In
unanimously determining to recommend the approval of the merger agreement and
the merger to the board of directors, the members of the special committee
relied upon, among other things, their personal knowledge of the company, its
business and the industry in which the company operates, and consulted with
members of the company’s management (other than Messrs. Deng and Huang) with
respect to strategic and operational matters pertaining to the company deemed
relevant to the members of the special committee for purposes of their
evaluation of the acquisition proposal submitted by Skywide. The
special committee also obtained advice from and consulted with its legal
advisors, Arent Fox, LLP, and its financial advisors, Brean Murray, with respect
to matters the special committee determined to be reasonably within the
experience and expertise of Arent Fox, LLP and Brean Murray, respectively, and
reviewed and discussed with representatives of Brean Murray the financial
analyses they prepared and the assumptions, sensitivities and applicable
variables reflected in its analyses.
At a
meeting joint meeting of the special committee and the board on March 29, 2010,
the special committee reviewed the changes to the merger agreement and
unanimously recommended that our board of directors adopt resolutions
that:
·
|
approve
and declare advisable the merger agreement and the transactions
contemplated by the merger agreement, including the
merger,
|
·
|
determine
that the merger agreement and the transactions contemplated by it,
including the merger, are substantively and procedurally fair to and in
the best interests of our company and our unaffiliated shareholders,
and
|
·
|
recommend
that our shareholders adopt the merger
agreement.
|
At the
joint meeting, our board of directors, acting upon the recommendation of the
special committee, evaluated the merger, including the terms and conditions of
the merger agreement, and unanimously approved, with Messrs. Deng and Huang
abstaining, the resolutions recommended by the special committee.
In
reaching its decision to approve the merger agreement, the merger and the other
transactions contemplated by the merger agreement, to undertake the transaction
at this time and to recommend that our shareholders vote to approve the merger
agreement, the special committee and our board consulted with management, the
committee consulted with its legal and financial advisors and the board
consulted with its legal advisors. The special committee and our board
considered a number of substantive factors and potential benefits of the merger
including, without limitation, the following:
·
|
The
merger consideration, when viewed as a multiple of revenues or earnings
before interest, taxes, depreciation and amortization, was very
attractive;
|
·
|
The
company’s business, current financial condition and results of operations
and future prospects based on the special committee’s and board of
directors’ familiarity with such matters, including, but not limited to,
the following:
|
§
|
The
changes that have occurred in policies employed by various governmental
authorities who regulate the company’s business activities in China, are
likely to subject the company’s stock price to substantial downward
pressures and considerable price fluctuations, which might not be
alleviated for the foreseeable
future;
|
§
|
The
climate of economic uncertainty and severe business contractions
experienced by many of the company’s customers has complicated its
collection efforts which has resulted in a significant increase in the
time it is taking, and it is likely to take during the foreseeable future,
to collect receivables;
|
§
|
the
competitive weaknesses the company would experience as other much larger
companies within China expanded into the segment of the Chinese energy
industry occupied by it; and
|
§
|
the
difficulties that the company has incurred in securing much needed
expansion capital as a result of the foregoing factors, as well as the
almost $7,000,000 of annual securities compliance costs and increased
costs regarding our 12% and 3% notes due to the adverse effects of our the
low market price and lack of liquidity of our
stock;
|
·
|
the
company’s heavy debt load and the possibility that it might not generate
sufficient cash flows from its reduced business volume to service those
debts;
|
·
|
the
very large amount of accounts receivable that were of questionable
collectability;
|
·
|
The
recognition of challenges to the company’s efforts to increase shareholder
value as an independent publicly-traded company, including competition
from companies with substantially greater resources than the company
currently has;
|
·
|
The
fact that a termination fee limited solely to the expenses actually
incurred by Skywide would most likely permit anyone who decided to make an
unsolicited offer to acquire the company to be able to do so at a price
that would not be unreasonably high when viewed in the context of the
$1.90 price that we accepted;
|
·
|
The
price being paid for each share of our common stock in the transaction
represents a premium of over 48% over the closing sale price of $1.28
on the Nasdaq Capital Market on October 9, 2009 (the trading day
immediately prior to the date on which we announced that we had entered
into the merger agreement);
|
·
|
The
updated presentation made by Brean Murray to the special committee on
March 29, 2010 which reflected implied share equity values for our common
stock based upon its:
|
§
|
comparable
companies analysis which ranged between –$1.79 and $2.59 as of October 12,
2009 and between -2.14 and $1.74 as of March 16,
2010;
|
§
|
comparable
transactions analysis which, due to the company’s high level of
debt, was less than $0.00 per share as of October 12, 2009 and
as of March 16, 2010; and
|
§
|
premiums
paid analysis which ranged between $1.83 and $1.98 as of October 12,
2009;
|
·
|
The
facts that the $1.90 merger consideration
fell
|
§
|
within
the range of implied values which resulted from the comparable companies
analysis,
|
§
|
well
above the range of implied values which resulted from the comparable
transactions analysis and
|
§
|
within
the range of implied values which resulted from the premiums paid
analysis
|
confirmed
the special committee’s views that its decision to agree upon the $1.90 price
was reasonable when those implied values were considered in relation to the
various economic, competitive, financial and operational factors and challenges
mentioned above that the company was facing and would continue to face in the
foreseeable future;
·
|
The
opinion dated March 29, 2010 of Brean Murray that, subject to the
assumptions made, matters considered and limitations on the review
undertaken in connection with such opinion, the per share consideration to
be received by our unaffiliated shareholders was, as of such date, fair
from a financial point of view to such shareholders (the full text of the
written opinion of Brean Murray is attached as Annex B to this proxy
statement, and shareholders are urged to and should read the written
opinion carefully and in its
entirety);
|
·
|
The
fact that the merger consideration is all cash, which provides certainty
of value to our shareholders; and
|
·
|
The
limited number and nature of the conditions to Skywide’s obligation to
consummate the merger and the limited risk of non-satisfaction of these
conditions.
|
In
addition, although, except for the discussions that Messrs. Deng, Lu and Shi
engaged in prior to April 2009 discussed above, neither the special committee
nor the board gave consideration to exploring other alternatives that might be
available to the company in deciding to explore a potential sale of the company
to Skywide, or to engage in a test of the market for the company’s shares
through an auction or similar procedure, the special committee and the board
believed that sufficient procedural safeguards were and are present to ensure
that the merger is procedurally fair to our unaffiliated shareholders and to
permit the special committee and the board to represent effectively the
interests of our unaffiliated shareholders. These procedural safeguards, which
are not listed in any relative order of importance, are discussed
below:
·
|
The
company’s board of directors appointed the special committee to evaluate
the proposed transaction and to consider and negotiate the terms of the
merger agreement on behalf of the company (with the assistance of
disinterested members of management and the special committee’s legal and
financial advisors);
|
·
|
Although
the special committee did not retain an unaffiliated representative to act
solely on behalf of unaffiliated shareholders for purposes of negotiating
the terms of the merger or preparing a report concerning the fairness of
the merger, the special committee did select and retain the services of
its own independent legal and financial advisors to provide advice and
assistance to the special committee in evaluating the acquisition proposal
submitted by Skywide and negotiating the terms of the merger
agreement;
|
·
|
No
member of the special committee is an officer, employee or principal
shareholder of the company;
|
·
|
No
member of the special committee has any economic interest or expectancy of
economic interest in the surviving corporation of the
merger;
|
·
|
No
member of the special committee is entitled to any payment that is
contingent upon the approval or the consummation of the proposed
merger;
|
·
|
Each
member of the special committee is an independent director, as that term
is defined and construed under applicable SEC and NASDAQ listing
standards;
|
·
|
The
members of the special committee and board of directors had the
opportunity to, and did, question representatives of Arent Fox LLP and
Brean Murray as to matters relevant to their
deliberations;
|
·
|
Representatives
of Arent Fox LLP and Brean Murray made themselves available to members of
the special committee and board of directors who wished to contact them
individually to ask questions relevant to their individual duties or
deliberations;
|
·
|
The
financial and other terms and conditions of the merger agreement were the
product of extensive negotiations between the special committee and its
advisors, on one hand, and Skywide and its advisors, on the other
hand;
|
·
|
The
provisions of the merger agreement that allow the company, under certain
circumstances, to furnish information to and conduct negotiations with
third parties;
|
·
|
The
fact that, subject to compliance with the terms and conditions of the
merger agreement, the company is permitted to furnish information to and
conduct negotiations with third parties that make unsolicited acquisition
proposals and, upon payment of termination fee limited solely to the
expenses actually incurred by Skywide, terminate the merger agreement in
order to approve a superior proposal, which the special committee believed
was important in ensuring that the merger would be substantively fair to
the company’s unaffiliated stockholders and providing the special
committee with adequate flexibility to respond to solicitations from other
third parties;
|
·
|
The
special committee’s belief that the limited termination fee payable by the
company upon the company’s termination of the merger agreement to accept a
superior proposal:
|
§
|
is
reasonable in light of the overall terms of the merger agreement and the
benefits of the merger, and
|
§
|
is
within the range of termination fees in other transactions of this size
and nature and
|
§
|
would
not preclude another party from making a competing
proposal.
|
·
|
The
provisions of the merger agreement that allow the board of directors,
under certain circumstances, to terminate that agreement and accept a
superior proposal from a potential buyer other than Skywide at any time
prior to the date when the company’s shareholders vote and approve the
merger agreement;
|
·
|
The
other terms of the merger agreement, including the ability of the board of
directors to terminate the merger agreement in order to accept a superior
proposal (subject to paying Skywide a termination fee limited to the
expenses actually incurred by it);
and
|
·
|
The
recognition by the special committee and the board of directors that it
had no obligation to recommend the approval of the merger
agreement.
|
In light
of the procedural safeguards described above, the special committee did not
consider it necessary to retain an unaffiliated representative to act solely on
behalf of our unaffiliated shareholders for purposes of negotiating the terms of
the merger agreement or preparing a report concerning the fairness of the merger
agreement and the merger, or to require a separate affirmative vote of a
majority of our unaffiliated shareholders.
The board
of directors also considered and balanced against the potential benefits of the
merger a number of potentially adverse factors concerning the merger including,
without limitation, the following:
·
|
The
risk that the merger might not be completed in a timely manner or at
all;
|
·
|
The
interests of two of our executive officers and directors in the merger
(see “Interests of the company’s Directors and Executive Officers in the
Merger”);
|
·
|
The
merger consideration consists of cash and will therefore be taxable to our
shareholders for U.S. federal income tax
purposes;
|
·
|
The
requirement to pay Skywide a termination fee limited to the expenses
actually incurred by it in order for the board of directors to accept a
superior proposal;
|
·
|
The
possibility of management and employee disruption associated with the
merger; and
|
·
|
The
risk of diverting management focus and resources from other strategic
opportunities and from operational matters while working to implement the
merger.
|
The
foregoing discussion sets forth all of the material information and factors
considered by the special committee and our board of directors in reaching the
conclusion that the terms and conditions of the merger agreement are
procedurally and substantively fair to the company and our unaffiliated
shareholders. In view of the wide variety of factors considered by
the special committee and our board of directors, neither the special committee
nor our board of directors found it practicable to, and neither did quantify or
otherwise assign relative weights to the foregoing factors in reaching its
conclusion. In addition, individual members of the special committee
and our board of directors may have given different weights to different factors
and may have viewed some factors more positively or negatively than
others. In addition, the special committee and our board of directors
did not reach any specific conclusion on each factor considered, but conducted
an overall analysis of these factors. The special committee recommended that our
board of directors approve, and our board of directors approved, the merger
agreement based upon the totality of the information presented to and considered
by it.
Our board
of directors did not consider the liquidation value of our company’s assets
because it considers the company to be a viable going concern business where
value is derived from cash flows generated from its continuing
operations. In addition, our board of directors believes that the
value of our company’s assets that might be realized in liquidation would be
significantly less than its going concern value. Our board of
directors believes the analyses and additional factors it reviewed provided an
indication of our going concern value. Neither our special committee
nor our board of directors considered or relied upon any discounted cash flow
analyses because the company historically has not employed the kinds of cash
flow and other financial projections that must be reviewed in making such
analyses. Our board of directors did not consider firm offers made by
unaffiliated persons during the last two years, as no such offers were made
during the last two years. Inasmuch as the consummation of the merger
shall not subject the Company to any U.S. federal income tax liability, or
result in any change in the application of, or the Company’s potential
obligations under, the Internal Revenue Code of 1986, or Code, as amended, or
the regulations promulgated thereunder, there were no federal income tax
consequences for our board to consider.
In the
course of reaching its determination that the merger agreement and the
transactions contemplated thereby, including the merger, are substantively and
procedurally fair to our company and our unaffiliated shareholders and its
decision to approve the merger agreement and recommend the adoption of the
merger agreement by our shareholders, the board of directors considered the
financial analyses with respect to our company and the proposed merger reviewed
and discussed by Brean Murray on March 29, 2010 summarized below under “Opinion
of Sinoenergy’s Financial Advisor,” which, although not a valuation of our
company, the board believed provided useful guidance regarding the going concern
value of our company. In reaching its determination as to the
fairness of the transactions contemplated by the merger agreement, our board of
directors also considered the recommendation of the special committee and the
oral opinion of Brean Murray to the special committee on March 29, 2010 (which
was subsequently confirmed in writing by delivery of Brean Murray’s written
opinion dated the same date attached hereto as Annex B) with respect to the
fairness, from a financial point of view, of the consideration to be received by
the unaffiliated shareholders in the merger pursuant to the merger
agreement.
After
taking into account all of the factors set forth above, as well as others, the
board of directors agreed that the benefits of the merger outweigh the risks and
that the merger agreement and the merger are advisable and fair and in the best
interests of the company and its shareholders. Accordingly, the board
of directors believes that the merger agreement and the merger (which is the
Rule 13e-3 going private transaction for which a Schedule 13E-3 transaction
statement has been filed with the SEC), upon the terms and conditions set forth
in the merger agreement, are substantively and procedurally fair to the company
and our unaffiliated shareholders.
The board of directors has
unanimously approved the merger agreement and the merger and unanimously
recommends that the company’s unaffiliated shareholders vote to approve the
merger
agreement at the
special meeting.
Opinion
of Sinoenergy’s Financial Advisor
In
addition to the factors listed above, the special committee considered Brean
Murray’s fairness opinion described below in reaching the conclusions
to approve the merger agreement and to recommend that the company’s unaffiliated
shareholders approve the merger.
Presentation
to the Sinoenergy Board of Directors
Pursuant
to an engagement letter dated, April 20, 2009, the special committee retained
Brean Murray to render an opinion to the special committee as to the fairness,
from a financial point of view, to the holders of common stock of Sinoenergy of
the merger consideration of $1.90 per share of common stock to be received as
set forth in the Letter of Intent, dated June 24, 2009, between the special
committee and Skywide.
On July
8, 2009, Brean Murray delivered a written presentation to the special committee
regarding various analyses it had employed in connection with the rendition of
its fairness opinion. On September 28, 2009, Brean Murray orally
presented its findings and conclusions to the members of the special committee
and to the other members of our board of directors at a joint annual meeting of
the special committee and the board held on September 28, 2009. At
that meeting, Brean Murray advised the directors that its review of events that
had transpired since it had initially provided its written presentation to the
special committee on July 8, 2009 had not caused it to conclude that there was
any reason to alter its views regarding the fairness of the merger consideration
as set forth in its written opinion. On September 28, 2009, Brean
Murray delivered its written opinion, dated that date, to the special committee
to the effect that and subject to the various assumptions set forth therein,
that the merger consideration was fair, from a financial point of view, to
Sinoenergy and its shareholders.
Pursuant
to a modification of the company’s engagement letter with Brean Murray which was
entered into on February 8, 2010, Brean Murray was asked to update its opinion
to take into consideration events and circumstances that transpired since
September 29, 2009 that might have warranted any change in its
opinion.
On March
22, 2010, Brean Murray delivered a written presentation to the special committee
regarding various analyses it had employed in connection with the preparation of
its updated analysis of the fairness of the merger consideration from a
financial point of view to the unaffiliated shareholders. On March
29, 2010, Brean Murray orally presented its findings and conclusions to the
members of the special committee. See “Special Factors –
Opinion of Sinoenergy’s Financial Advisor.”
The
amount of the merger consideration was determined pursuant to negotiations
between the special committee and Skywide and not pursuant to recommendations of
Brean Murray. The full text of the written opinion of Brean Murray
dated March 29, 2010, is attached as Annex B and is incorporated by
reference. Holders of Sinoenergy common stock are urged to read the
opinion in its entirety for the assumptions made, procedures followed, other
matters considered and limits of the review by Brean Murray. The
summary of the written opinion of Brean Murray set forth herein is qualified in
its entirety by reference to the full text of such opinion.
Brean
Murray’s advisory services and opinion were provided for the information and
assistance of the special committee in connection with its consideration of the
acquisition and is not intended to be and does not constitute a recommendation
to you as to how you should vote or proceed with respect to the
acquisition. Brean Murray was not requested to, and did not, solicit
third party indications of interest in acquiring all or any part Sinoenergy and
Brean Murray was not requested to, and did not, negotiate the terms of the
acquisition or advise Sinoenergy or any members of its board of directors with
respect to alternatives to the merger. Brean Murray was not requested
to opine as to, and the Brean Murray opinion does not address, Sinoenergy’s
underlying business decision to proceed with or effect the acquisition, the
relative merits of the transaction as compared to any alternative business
strategy that might exist for Sinoenergy and the other alternatives to the
acquisition that might exist for Sinoenergy. Brean Murray does not
express any opinion as to the underlying valuation or future performance of
Sinoenergy, Skywide or the price at which Sinoenergy might trade at any time in
the future. Brean Murray’s opinion was delivered subject to the
conditions, scope of engagement, limitations and understandings set forth in the
opinion and Brean Murray’s engagement letter, and subject to the understanding
that the obligations of Brean Murray in the transaction are solely corporate
obligations, and no officer, director, employee, agent, shareholder or
controlling person of Brean Murray shall be subject to any personal liability
whatsoever to any person, nor will any such claim be asserted by or on behalf of
Sinoenergy or its affiliates. Brean Murray has advised Sinoenergy
that it does not believe any person other than the special committee has the
legal right to rely on the opinion and, absent any controlling precedent, Brean
Murray would resist any assertion otherwise, including, but not limited to, by
asserting the substance of the disclaimer contained in this proxy statement and
in the opinion. In the absence of controlling precedent, the ability of a
shareholder to rely on the Brean Murray fairness opinion would be resolved by a
court of competent jurisdiction. We acknowledge that resolution of the question
of a shareholder’s ability to rely on the Brean Murray fairness opinion will
have no effect on the rights and responsibilities of the special committee under
applicable state law or on the rights or responsibilities of either Brean Murray
or the special committee under federal securities law.
In
arriving at its opinion, Brean Murray considered such financial and other
matters it deemed relevant and took into account an assessment of general
economic, market and financial conditions, as well as its experience in
connection with similar transactions and securities valuations generally. In so
doing, among other things, Brean Murray:
(a)
|
Reviewed
the original merger
agreement;
|
(b)
|
Reviewed
publicly available historical financial and operating data concerning
Sinoenergy, including, without limitation, the Annual Report on Form 10-K
for the fiscal year ended September 30, 2009, and the quarterly report on
Form 10-Q for the period ended December 31,
2009;
|
(c)
|
Visited
Sinoenergy’s major facilities in the People’s Republic of
China;
|
(d)
|
Reviewed
publicly available business and financial information concerning
Sinoenergy and certain other information and data provided by management
of Sinoenergy;
|
(e)
|
Conducted
such other analyses and examinations and considered such other information
and financial, economic and market criteria as Brean Murray deemed
appropriate in arriving at its opinion, including a thorough comparison of
recent comparable transactions that it considered relevant in evaluating
the consideration received in connection with the acquisition and an
analysis of premiums paid in “going private” transactions for the period
from October 2007 to March
2010;
|
(f)
|
Analyzed
certain financial, stock market and other publicly available information
relating to the businesses of other companies whose operations Brean
Murray considered comparable and relevant in evaluating those of
Sinoenergy;
|
(g)
|
Reviewed
Sinoenergy’s historical financial and operating data, including the
reported historical prices and historical trading activity for
Sinoenergy’s common stock for the period from March, 2008 to March, 2010;
and
|
(h)
|
Conducted
discussions with Sinoenergy’s senior officers and directors concerning
Sinoenergy’s historical financial results, businesses, operations and
prospects.
|
In
arriving at its opinion, Brean Murray assumed and relied upon the accuracy and
completeness of the financial and other information provided to it without
assuming any responsibility for the independent verification of such
information. Further, Brean Murray relied upon the assurances of
Sinoenergy that it is not aware of any facts or circumstances that would make
such information inaccurate or misleading. With respect to the
financial information utilized, Brean Murray assumed that such information has
been reasonably prepared on a basis reflecting the best currently available
estimates and judgments, and that such information provides a reasonable basis
upon which it could make an analysis and form an opinion.
Brean
Murray assumed that the transaction will be consummated in a manner that
complies in all respects with the applicable provisions of the Securities Act of
1933, as amended, the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”) and all other applicable federal and state statutes, rules and
regulations. Brean Murray also assumed that obtaining all regulatory approvals
and third party consents required for the consummation of the acquisition would
not have an adverse impact on Sinoenergy, Skywide or on the anticipated benefits
of the acquisition. Brean Murray further assumed that the purchase of
Sinoenergy as described in the merger agreement would be consummated in a timely
manner without waiver or modification of any of the material terms or conditions
contained therein. In arriving at its opinion, Brean Murray did not
conduct an extensive physical inspection of Sinoenergy’s properties or
facilities and did not make or obtain any evaluation or appraisal of the assets
or liabilities of Sinoenergy. In addition, Brean Murray did not
attempt to confirm whether Sinoenergy and Skywide had good title to their
respective assets. Brean Murray’s opinion is necessarily based upon
financial, market, economic and other conditions and circumstances as they
existed and were disclosed on, and were evaluated as of March 22,
2010. Accordingly, subsequent developments may affect Brean Murray’s
opinion. Brean Murray has not assumed any obligation to update,
review or reaffirm its opinion.
The
summary set forth above does not purport to be a complete description of all the
analyses performed by Brean Murray. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analyses and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. Brean Murray did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, notwithstanding the separate factors summarized above,
Brean Murray believes, and has advised the special committee, that its analyses
must be considered as a whole and that selecting portions of its analyses and
the factors considered by it, without considering all analyses and factors,
could create an incomplete view of the process underlying its opinion. In
performing its analyses, Brean Murray made numerous assumptions with respect to
industry performance, business and economic conditions and other matters, many
of which are beyond the control of Sinoenergy. These analyses performed by Brean
Murray are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of businesses do not purport to be
appraisals or to reflect the prices at which businesses or securities may
actually be sold. Accordingly, such analyses and estimates are inherently
subject to uncertainty, being based upon numerous factors or events beyond the
control of the parties or their respective advisors. None of Sinoenergy, Brean
Murray or any other person assumes responsibility if future results are
materially different from those projected.
The
analyses performed were prepared solely as part of Brean Murray’s analysis of
the fairness, from a financial point of view, of the merger consideration to
the unaffiliated shareholders of Sinoenergy pursuant to Skywide’s
acquisition of Sinoenergy, and were provided to the special committee in
connection with the delivery of Brean Murray’s opinion. The opinion
of Brean Murray was just one of the many factors taken into account by the
special committee in making its determination to approve the transaction,
including those described elsewhere in this proxy
statement/prospectus.
Using
publicly available information, Brean Murray reviewed the historical stock price
performance of Sinoenergy’s common stock based on an analysis of the daily
closing prices and daily trading volumes of Sinoenergy’s common stock during
various time periods prior to signing the letter of intent, prior to the merger
announcement and subsequent to the merger announcement. Brean Murray
observed the following:
|
|
|
|
|
|
(000s
|
)
|
|
|
|
|
|
|
|
|
Average
|
|
|
Avg.
Daily
|
|
|
Daily
Close
|
|
Period
|
|
Close
|
|
|
Volume
|
|
|
High
|
|
|
Low
|
|
Prior
to Signing Letter of Intent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
Week
|
|
$
|
1.55
|
|
|
|
42
|
|
|
|
1.64
|
|
|
|
1.50
|
|
2
Weeks
|
|
|
1.52
|
|
|
|
89
|
|
|
|
1.64
|
|
|
|
1.41
|
|
1
Month
|
|
|
1.44
|
|
|
|
78
|
|
|
|
1.64
|
|
|
|
1.29
|
|
2
Months
|
|
|
1.39
|
|
|
|
60
|
|
|
|
1.64
|
|
|
|
1.23
|
|
6
Months
|
|
|
1.50
|
|
|
|
62
|
|
|
|
2.75
|
|
|
|
0.95
|
|
1
Year
|
|
|
2.97
|
|
|
|
49
|
|
|
|
7.04
|
|
|
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
to Merger Announcement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
Month
|
|
$
|
1.30
|
|
|
|
38
|
|
|
|
1.34
|
|
|
|
1.26
|
|
3
Months
|
|
|
1.46
|
|
|
|
115
|
|
|
|
2.25
|
|
|
|
1.23
|
|
6
Months
|
|
|
1.43
|
|
|
|
84
|
|
|
|
2.25
|
|
|
|
1.23
|
|
1
Year
|
|
|
1.75
|
|
|
|
68
|
|
|
|
3.35
|
|
|
|
0.95
|
|
1.6
Years
|
|
|
3.18
|
|
|
|
55
|
|
|
|
7.04
|
|
|
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since
Merger Announcement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
Month
|
|
$
|
1.83
|
|
|
|
204
|
|
|
|
1.87
|
|
|
|
1.79
|
|
3
Months
|
|
|
1.84
|
|
|
|
101
|
|
|
|
1.87
|
|
|
|
1.79
|
|
5
Months
|
|
|
1.79
|
|
|
|
77
|
|
|
|
1.87
|
|
|
|
1.61
|
|
Using
publicly available information, Brean Murray also reviewed the comparative stock
price performance of Sinoenergy’s common stock based on an analysis of the daily
closing prices of Sinoenergy’s common stock, the S&P 500 and Nasdaq indexes
and a market cap weighted index of the comparable companies listed
below. Brean Murray compared the performance of such indexes to the
performance of Sinoenergy’s common stock. Brean Murray observed the
following:
|
|
Prior
to Signing of Letter of Intent
|
|
Price
Appreciation
|
|
3
Months
|
|
|
6
Months
|
|
|
1
Year
|
|
Sinoenergy
Corporation
|
|
|
24.8
|
%
|
|
|
-35.5
|
%
|
|
|
-70.0
|
%
|
Comparable
Company Index
|
|
|
73.7
|
%
|
|
|
58.2
|
%
|
|
|
-41.8
|
%
|
NASDAQ
Composite Index
|
|
|
19.0
|
%
|
|
|
21.7
|
%
|
|
|
-20.6
|
%
|
S&P
500 Index
|
|
|
12.6
|
%
|
|
|
5.7
|
%
|
|
|
-28.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
to Merger Announcement
|
|
Price
Appreciation
|
|
3
Months
|
|
|
6
Months
|
|
|
1
Year
|
|
Sinoenergy
Corporation
|
|
|
-9.9
|
%
|
|
|
0.8
|
%
|
|
|
-52.1
|
%
|
Comparable
Company Index
|
|
|
72.9
|
%
|
|
|
153.7
|
%
|
|
|
89.4
|
%
|
NASDAQ
Composite Index
|
|
|
21.8
|
%
|
|
|
29.4
|
%
|
|
|
29.7
|
%
|
S&P
500 Index
|
|
|
21.9
|
%
|
|
|
24.8
|
%
|
|
|
19.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since
Merger Announcement
|
|
|
|
|
|
Price
Appreciation
|
|
3
Months
|
|
|
5
Months
|
|
|
|
|
|
Sinoenergy
Corporation
|
|
|
-15.4
|
%
|
|
|
-15.8
|
%
|
|
|
|
|
Comparable
Company Index
|
|
|
6.7
|
%
|
|
|
23.4
|
%
|
|
|
|
|
NASDAQ
Composite Index
|
|
|
9.1
|
%
|
|
|
11.2
|
%
|
|
|
|
|
S&P
500 Index
|
|
|
5.8
|
%
|
|
|
7.7
|
%
|
|
|
|
|
Using
publicly available information, Brean Murray also reviewed the historical stock
price distribution of Sinoenergy’s common stock based on an analysis of the
daily volume weighted average prices of Sinoenergy’s common stock one year prior
to signing the letter of intent, one year prior to the merger announcement and
five months subsequent to the merger announcement. Brean Murray
observed the following:
|
|
At
or Below
|
|
|
Merger
Consideration
|
Period
|
|
Trading
Volume
|
|
Trading
Days
|
One
Year Prior to Signing Letter of Intent
|
|
55.7%
|
|
40.5%
|
One
Year Prior to Merger Announcement
|
|
70.7%
|
|
67.1%
|
5
Months since Merger Announcement
|
|
99.4%
|
|
90.0%
|
Using
publicly available information, Brean Murray also reviewed the moving average
stock price history of Sinoenergy’s common stock based on an analysis of the
daily closing prices of Sinoenergy’s common stock during various time periods
prior to signing the letter of intent, prior to the merger announcement and
subsequent to the merger announcement. Brean Murray observed the
following:
|
|
Moving
|
|
Premium/(Discount)
|
|
|
Average
|
|
to
Merger
|
Period
|
|
Prices
|
|
Consideration
|
Prior
to Signing Letter of Intent
|
|
|
|
|
1-Day
|
|
1.56
|
|
21.8%
|
5-Day
|
|
1.56
|
|
21.6%
|
10-Day
|
|
1.51
|
|
25.5%
|
1-Month
|
|
1.44
|
|
31.7%
|
3-Month
|
|
1.36
|
|
40.0%
|
6-Month
|
|
1.50
|
|
26.7%
|
1-Year
|
|
2.97
|
|
(36.0%)
|
|
|
|
|
|
Prior
to Merger Announcement
|
|
|
|
|
1-Day
|
|
1.28
|
|
48.4%
|
5-Day
|
|
1.37
|
|
38.9%
|
10-Day
|
|
1.34
|
|
42.2%
|
1-Month
|
|
1.32
|
|
43.5%
|
3-Month
|
|
1.47
|
|
29.5%
|
6-Month
|
|
1.43
|
|
32.9%
|
1-Year
|
|
1.75
|
|
8.5%
|
|
|
|
|
|
Since
Merger Announcement
|
|
|
|
|
1-Day
|
|
1.54
|
|
23.4%
|
5-Day
|
|
1.64
|
|
16.0%
|
10-Day
|
|
1.66
|
|
14.8%
|
1-Month
|
|
1.67
|
|
14.1%
|
3-Month
|
|
1.75
|
|
8.6%
|
5
Months
|
|
1.79
|
|
6.3%
|
Comparable
Company Analysis
Using
publicly available information, Brean Murray reviewed the financial, operating
and stock market data of 14 publicly traded companies deemed to be reasonably
comparable to Sinoenergy. Specifically, each of the selected
companies: (i) was based in China; (ii) was listed on U.S. exchanges; and (iii)
operated in industrial sectors. The comparable companies were
comprised of the following:
China
Automotive Systems Inc. (NasdaqCM: CAAS)
China Bio
Energy Holding Co., Ltd. (NasdaqCM: CBEH)
China
Natural Gas, Inc. (NasdaqGM: CHNG)
China
North East Petroleum Holdings Ltd. (AMEX: NEP)
China
TransInfo Technology Corp. (NasdaqCM: CTFO)
Ever-Glory
International Group, Inc. (AMEX: EVK)
Hong Kong
Highpower Technology, Inc. (AMEX: HPJ)
Kandi
Technologies, Corp (NasdaqCM: KNDI)
Longwei
Petroleum Investment Holding Limited (OTCBB: LPIH)
Sino
Clean Energy Inc (OTCBB: SCLX)
SORL Auto
Parts, Inc. (NasdaqGM: SORL)
Tianyin
Pharmaceutical Co., Inc. (AMEX: TPI)
Tongxin
International, Ltd. (NasdaqGM: TXIC)
Wuhan
General Group (China) Inc. (NasdaqCM: WUHN)
Brean
Murray calculated the enterprise value of each selected company as a multiple of
its respective sales, EBITDA and EBIT for the latest 12 month
period. Brean Murray also calculated the equity value of each
selected company as a multiple of its respective net income and book value for
the latest 12 month period. All multiples were based on closing stock
prices on June 26, 2009, October 12, 2009 and March 16, 2010. The
median valuation multiples were as follows:
COMPARABLE
PUBLIC COMPANIES
|
|
MEDIAN
COMPARABLE MULTIPLE
|
|
|
|
|
|
|
|
|
|
June
26, 2009
|
|
October
12, 2009
|
|
March
16, 2010
|
Multiple
of Sales
|
|
1.2x
|
|
1.7x
|
|
2.0x
|
Multiple
of EBITDA
|
|
5.3x
|
|
7.4x
|
|
9.9x
|
Multiple
of EBIT
|
|
6.0x
|
|
9.9x
|
|
11.5x
|
Multiple
of Net Income
|
|
8.7x
|
|
13.2x
|
|
14.0x
|
Multiple
of Book Value
|
|
2.1x
|
|
3.0x
|
|
3.3x
|
Brean
Murray then applied the median valuation multiples described above to
Sinoenergy’s corresponding sales, EBITDA, EBIT and net income for the latest
twelve month period and Book Value for the most recent period to derive implied
share prices. Brean Murray utilized median values over mean values to
eliminate the effects of outlying values. Based on this analysis,
Brean Murray derived implied share price ranges of -$1.58 to $3.59 (as of June
26, 2009), -$1.79 to $2.59 (as of October 12, 2009) and -$2.14 to $1.74 (as of
March 16, 2010). Brean Murray noted that the merger consideration was
within or above the ranges implied by the analysis described
above. This analysis supported Brean Murray’s determination that the
merger consideration of $1.90 per share of common stock was fair, from a
financial point of view, to the unaffiliated shareholders.
Notwithstanding
the above, Brean Murray acknowledged that no company utilized in the comparable
public company analysis is identical to Sinoenergy and that mathematical
analyses of comparable public companies in isolation from other analyses are not
an effective method of evaluating transactions.
Comparable
Transaction Analyses
Using
publicly available information, Brean Murray reviewed the implied
enterprise and equity values of 15 transactions deemed to be reasonably
comparable to the proposed Sinoenergy-Skywide merger transaction in terms of
size and/or business focus. Specifically, each of the selected
transactions: (i) involved companies operating in the energy equipment sector;
(ii) was announced since August 2005; and (iii) had publicly disclosed
values. These transactions were chosen based on Sinoenergy’s focus on
energy equipment, the comparable size of the transactions and the recent period
in which these transactions were completed. The comparable
transactions were comprised of the following:
Target
Name / Acquiror Name
Date Announced
|
Target Name
|
Acquiror Name
|
12/30/09
|
China
Natural Gas Co., Ltd.
|
CNPC
Hong Kong Ltd. (SEHK: 135)
|
09/10/09
|
CNPC
Shennan Oil Technology Development Co., Ltd.
|
CNPC
Hong Kong Ltd. (SEHK: 135)
|
09/03/09
|
Structural
Composites Industries, Inc.
|
Worthington
Cylinder Corporation
|
04/01/09
|
Midsund
Bruk AS
|
Aker
Solutions AS
|
09/02/08
|
Holvrieka
Holding B.V.
|
Enric
Energy Equipment Holdings Ltd. (SEHK: 3899)
|
07/21/08
|
Lovato
Gas SpA
|
Landi
Renzo SpA
|
04/08/08
|
Nitram
Energy Inc.
|
Peerless
Mfg Co. (NasdaqGM: PMFG)
|
04/01/08
|
Seremban
Engineering Sdn Bhd
|
Success
Transformer Corp Bhd (KLSE:SUCCESS)
|
11/27/07
|
Collicutt
Energy Services Ltd
|
Finning
International Inc. (TSX: FTT)
|
10/19/07
|
Daekyung
Mach. & Engineering Co., Ltd.
|
National
Pension Service 07-1 Corporate Restructuring Association
QCP
|
08/03/07
|
Enric
Energy Eqpt. Holdings Ltd. (SEHK: 3899)
|
China
Intl. Marine Containers Group Co. Ltd. (SZSE: 200039)
|
02/05/07
|
Hanover
Compressor Co.
|
Universal
Compression Holdings
|
12/08/06
|
Burg
Industries BV
|
China
Intl. Marine Containers Group Co. Ltd. (SZSE: 200039)
|
04/14/06
|
Wuhan
Boiler Co Ltd (SZSE: 200770)
|
Alstom
|
08/03/05
|
Chart
Industries Inc.
|
First
Reserve Corp.
|
Brean
Murray calculated the enterprise value of each selected transaction as a
multiple of its latest 12 months of revenue and EBITDA. Brean Murray
also calculated the equity value of each selected transaction as a multiple of
its latest 12 months of net income. All multiples were based on
information available at the time of the relevant transaction. The
median transaction multiples were as follows:
|
|
MEDIAN
TRANSACTION
MULTIPLE
|
|
|
COMPARABLE
TRANSACTIONS
|
|
|
|
|
|
|
|
|
|
|
June
26, 2009
|
|
October
12, 2009
|
|
March
16, 2010
|
Multiple
of Sales
|
|
1.2x
|
|
1.0x
|
|
1.2x
|
Multiple
of EBITDA
|
|
10.4x
|
|
10.4x
|
|
10.4x
|
Multiple
of Net Income
|
|
13.5x
|
|
13.0x
|
|
12.5x
|
Brean
Murray then applied the median multiples derived from the selected transactions
to Sinoenergy's corresponding sales, EBITDA and net income for the latest twelve
month period in order to derive implied per share equity values for
Sinoenergy. Brean Murray utilized median values over mean values to
eliminate the effects of outlying values. Based on this analysis,
Brean Murray derived an implied share price range of -$0.62 to $1.22 (as of June
26, 2009), an implied share price of -$3.51 (as of October 12, 2009) and an
implied share price of -$4.01 (as of March 16, 2010). Brean Murray
noted that the merger consideration was above the ranges implied by the analysis
described above. This analysis supported Brean Murray’s determination
that the merger consideration of $1.90 per share of common stock was fair, from
a financial point of view, to the unaffiliated shareholders.
Notwithstanding
the above, Brean Murray acknowledged that each of the transactions identified
has characteristics that differentiate it from the contemplated
transaction. The acquirers in these representative transactions were
strategic in nature, and thus typically pay for their acquisitions with the
expectation of achieving potential synergies that exist with the target.
Transactions multiples vary for many different reasons, including among other
things: differences in pre-transaction operating performance; level of
indebtedness; other hidden or intangible assets not apparent in historical
operating performance and non-disclosed add-backs. Mathematical
analyses of comparable transactions in isolation from other analyses are not an
effective method of evaluating transactions.
Using
publicly available information, Brean Murray conducted an analysis of the
premiums paid in 119 “going private” transactions that were similar in size to
the proposed Sinoenergy transaction. Specifically, each of the
selected transactions: (i) were announced between June 2007
and December 2009; (ii) involved a U.S.-listed target company; (iii)
had an equity value between $5.5 million and $98.8 million; (iv) had a publicly
disclosed value; and (v) were majority acquisitions.
For
each of the target companies, Brean Murray examined the closing stock price one
day, one week and one month prior to the announcement of the transaction in
order to calculate the median premium paid over the target’s closing stock price
at those points in time. The median premiums paid were as
follows:
|
|
|
|
|
|
|
|
PERIOD
PRIOR TO ANNOUNCEMENT
|
|
MEDIAN
PREMIUM
|
|
|
|
June
26, 2009
|
|
|
October
12, 2009
|
|
|
March
16, 2010
|
|
One
Day
|
|
|
45.6
|
%
|
|
|
46.4
|
%
|
|
|
46.4
|
%
|
One
Week
|
|
|
45.2
|
%
|
|
|
45.2
|
%
|
|
|
45.1
|
%
|
One
Month
|
|
|
43.3
|
%
|
|
|
48.8
|
%
|
|
|
48.6
|
%
|
Brean
Murray then applied the observed median premiums to Sinoenergy’s corresponding
stock price 1-day, 1-week and 1-month prior to signing the Letter of Intent
(June 26, 2009) and 1-day, 1-week and 1-month prior to announcing the Merger
Agreement (October 12, 2009) to derive implied share values for
Sinoenergy. Brean Murray utilized median values over mean values to
eliminate the effects of outlying values. Based on this analysis,
Brean Murray derived implied share price ranges of Sinoenergy’s common stock of
$1.95 to $2.27 per share (as of June 26, 2009) and $1.83 to $1.98 (as of October
12, 2009). Brean Murray noted that the merger consideration of $1.90
per share is within or near the low end of the ranges implied by the analysis
described above. This analysis supported Brean Murray’s determination
that the merger consideration of $1.90 per share of common stock was fair, from
a financial point of view, to the unaffiliated shareholders.
Summary
Based on
the information and analyses set forth above, Brean Murray delivered its written
opinion to the special committee, which stated that, as of March 29, 2010, based
upon and subject to the assumptions made, matters considered, and limitations on
its review as set forth in the opinion, the merger consideration of $1.90 per
share of common stock was fair, from a financial point of view, to the common
shareholders of Sinoenergy.
Brean
Murray was selected by the special committee to render an opinion to the special
committee because Brean Murray is a nationally recognized investment banking
firm and because, as part of its investment banking business, Brean Murray is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The special committee’s
selection of Brean Murray was also based upon its experience in China, as well
as the fact that it has offices in China at which it maintains a permanent staff
of investment analysts and investment bankers who primarily focus on Chinese
business enterprises. In addition, in the ordinary course of its
business, Brean Murray and its affiliates may trade the equity securities of
Sinoenergy for their own account and for the accounts of their customers, and,
accordingly, may at any time hold a long or short position in such
securities. Brean Murray and its affiliates in the ordinary course of
business in the future may provide investment banking services to Sinoenergy,
including serving as a financial advisor on potential acquisitions and as an
underwriter or private placement agent for equity offerings, and may in the
future receive, fees for the rendering of such services. Pursuant to
the Brean Murray engagement letter, Brean Murray will be entitled to receive a
customary fee. Additionally, Sinoenergy has agreed to indemnify Brean
Murray against certain liabilities, including liabilities under the federal
securities laws. The terms of the fee arrangement with Brean Murray,
which are customary in transactions of this nature, were negotiated at arm's
length between the special committee and Brean Murray, and the Sinoenergy board
of directors was aware of and approved the arrangement.
Purpose
and Reasons for the Merger for Skywide, Merger Sub, Tianzhou Deng and Bo
Huang
Skywide,
Merger Sub, Tianzhou Deng and Bo Huang are making the statements included in
this section solely for the purpose of complying with the requirements of Rule
13e-3 and related rules under the Exchange Act.
If
the merger is completed, Merger Sub will merge with and into our company, with
our company, which will then be named Skywide Capital Management Limited, being
the surviving company. For Skywide and Messrs. Deng and Huang, the purpose of
the merger is to allow Messrs. Deng and Huang to own through Skywide all of the
equity interests in our company and to bear the rewards and risks of such
ownership after shares of our company’s common stock cease to be publicly
traded. For Merger Sub, the purpose of the merger is to effectuate
the transactions contemplated by the merger agreement.
Skywide,
Merger Sub and Messrs. Deng and Huang believe that it is best for our company to
operate as a privately held entity in order to allow our company greater
operational flexibility and to focus on its long-term growth and continuing
improvements to its business without the constraints and distractions caused by
the public equity market’s valuation of its common stock. Although Skywide and
Messrs. Deng and Huang believe that there will be significant opportunities
associated with their investment in the company, they realize that there are
also substantial risks (including the risks and uncertainties relating to the
prospects of our company) and that such opportunities may not ever be fully
realized.
Skywide,
Merger Sub and Messrs. Deng and Huang believe that structuring the transaction
as a merger transaction is preferable to other transaction structures because
(1) it will enable Skywide to acquire all of the outstanding shares of our
company at the same time, and (2) it represents an opportunity for our company’s
unaffiliated shareholders to receive fair value for their shares of common stock
in cash.
Position
of Skywide, Merger Sub, Tianzhou Deng and Bo Huang as to the Fairness of the
Merger
Under
applicable SEC rules, Skywide, Merger Sub and Messrs. Deng and Huang are engaged
in a “going private” transaction. Those rules require them to express
their beliefs as to the fairness of the merger to Sinoenergy’s unaffiliated
shareholders. Skywide, Merger Sub and Messrs. Deng and Huang are making the
statements included in this section solely for the purpose of complying with the
requirements of Rule 13e-3 and related rules under the Exchange Act. The views
of Skywide, Merger Sub and Messrs. Deng and Huang should not be construed as a
recommendation to any shareholder as to how that shareholder should vote on the
proposal to adopt the merger agreement.
Skywide,
Merger Sub and Messrs. Deng and Huang attempted to negotiate the terms of a
transaction that would be most favorable to them, and not to the shareholders of
our company, and, accordingly, did not negotiate the merger agreement with a
goal of obtaining terms that were fair to such shareholders. However,
Skywide, Merger Sub and Messrs. Deng and Huang do believe that a sale of our
company is in the best interests of the unaffiliated shareholders and that the
merger consideration exceeds the value that they believe our company’s common
stock could obtain in the foreseeable future if if the merger were not
consummated and the company continued as an independent, public
company.
None
of Skywide, Merger Sub and Messrs. Deng and Huang undertook any independent
deliberations or participated in any deliberations that our board undertook as
to the substantive and procedural fairness of the merger to the unaffiliated
shareholders of our company, nor did they undertake any independent evaluation
of the fairness of the merger or engage a financial advisor for such
purpose. Skywide and Messrs. Deng and Huang did rely on Brean
Murray’s analysis and opinion with respect to the fairness of the merger
consideration, from a financial point of view, to the company’s unaffiliated
shareholders. Accordingly, Skywide, Merger Sub and Messrs. Deng and
Huang hereby expressly adopt Brean Murray’s conclusion and analysis, as
described in Brean Murray’s opinion dated March 29, 2010. As a
result, Skywide, Merger Sub and Messrs. Deng and Huang believe that the proposed
merger is substantively and procedurally fair to the company’s unaffiliated
shareholders on the basis of the factors discussed below.
Skywide,
Merger Sub and Messrs. Deng and Huang believe that the proposed merger is
substantively fair to the unaffiliated shareholders based on the following
factors:
·
|
the
premium represented by the $1.90 per share price to be paid in the merger,
which is a 48% premium to the closing price of the company’s common stock
on the last trading day prior to the announcement of the merger and a 43%
premium to the average closing price of the company’s common stock over
the period of 30 trading days which ended immediately prior to the date of
announcement of the merger;
|
·
|
the
financial advisor to the special committee, Brean Murray, delivered its
updated written opinion, dated March 29, 2010 which stated that, as of
that date, based upon and subject to the assumptions made, matters
considered, and limitations on its review as set forth in the opinion, the
merger consideration of $1.90 per share of common stock was fair, from a
financial point of view, to the unaffiliated
shareholders.
|
·
|
the
company’s ability, subject to compliance with the terms and conditions of
the merger agreement, to terminate the merger agreement prior to the
completion of the merger in order to accept an alternative transaction
proposed by a third party that is a “superior proposal” (as defined in the
merger agreement and further explained under “The Merger Agreement—No
Solicitation of Transactions” below), upon the payment to Skywide of a
termination fee limited to the expenses actually incurred by it;
and
|
·
|
the
fact that the merger consideration is all cash, allowing the unaffiliated
shareholders to immediately realize a certain and fair value for all
shares of their company common stock without brokerage and other costs
typically associated with market
sales.
|
Skywide,
Merger Sub and Messrs. Deng and Huang believe that the proposed merger is
substantively and procedurally fair to the company’s unaffiliated shareholders
based on the following factors:
·
|
the
directors on the special committee are not employees of the company or any
of its subsidiaries, are not affiliated with Skywide, Merger Sub and/or
Messrs. Deng and Huang, and have no financial interest in the merger that
is different from that of the unaffiliated shareholders other than the
acceleration of vesting of stock options and the payment of fees normally
paid to non-employee directors in connection with the activities they
undertake as members of the board and its various committees, as more
fully described under “Special Factors—Interests of the company’s
Directors and Executive Officers in the Merger”
below;
|
·
|
none
of the directors of the company (other than Tianzhou Deng and Bo Huang) is
affiliated with Skywide, Merger Sub, Mr. Deng or Mr. Huang, and none has
any financial interest in the merger that is different from that of the
unaffiliated shareholders other than the acceleration of vesting of stock
options and the payment of fees normally paid to non-employee directors in
connection with the activities they undertake as members of the board and
its various committees, as more fully described under “Special
Factors—Interests of the Company’s Directors and Executive
Officers in the Merger”
below;
|
·
|
the
special committee engaged Brean Murray, as its financial advisor, and
Arent Fox LLP, as its legal advisor, each of which has extensive
experience in transactions similar to the proposed
merger;
|
·
|
Neither
Brean Murray nor Arent Fox LLP has previously been engaged to provide
advice to Skywide, Merger Sub, Mr. Deng or Mr.
Huang;
|
·
|
the
special committee made all material decisions relating to the company’s
strategic alternatives since the date the special committee was
established on April 7, 2009, including recommending to the company’s
board of directors that the company enter into the merger
agreement;
|
·
|
the
financial and other terms and conditions of the merger agreement were the
product of arm’s-length negotiations between the special committee and its
advisors, on the one hand, and Skywide and Messrs. Deng and Huang and
their advisors, on the other hand;
|
·
|
the
company’s ability, under certain circumstances, to provide information to,
or participate in discussions or negotiations with, third parties
regarding other proposals; and
|
·
|
the
company’s ability, subject to compliance with the terms and conditions of
the merger agreement, to terminate the merger agreement prior to the
completion of the merger in order to accept an alternative transaction
proposed by a third party that is a “superior proposal” (as defined in the
merger agreement and further explained under “The Merger Agreement – No
Solicitation of Transactions” below), upon the payment to Skywide of a
termination fee limited to the actual expenses incurred by
it.
|
In
arriving at the $1.90 per share merger consideration, Skywide, Merge Sub and
Messrs. Deng and Huang did not consider the liquidation value of Sinoenergy
because they considered Sinoenergy to be a viable, going concern and therefore
did not consider liquidation value to be a relevant methodology. Although
Skywide, Merger Sub and Messrs. Deng and Huang did not calculate a specific
going concern value per share of Sinoenergy’s common stock, Skywide, Merger Sub
and Messrs. Deng and Huang instead chose to consider their knowledge of
Sinoenergy’s business and prospects, based on which they believe that the merger
consideration is fair in relation to Sinoenergy’s going concern value per share.
Skywide, Merger Sub and Messrs. Deng and Huang did not consider net book value,
which is an accounting concept, as a factor because they believed that net book
value is not a material indicator of the value of Sinoenergy as a going concern
but rather is indicative of historical costs.
Skywide,
Merger Sub and Messrs. Deng and Huang did not consider firm offers made by
unaffiliated persons during the last two years, as no such offers were made
during the last two years. Skywide, Merger Sub and Messrs. Deng and Huang did
not consider the purchase prices paid by Skywide for shares of Sinoenergy’s
common stock purchased during the previous two years in determining the fairness
of the merger to the unaffiliated shareholders because Skywide acquired all
of its equity interest in Sinoenergy and its subsidiaries more than three years
before the merger agreement was announced and prior to any discussions between
Sinoenergy, on the one hand, and Skywide, Merger Sub and Messrs. Deng and Huang,
on the other, about the proposed merger. Inasmuch as the consummation
of the merger shall not subject any of Skywide, Merger Sub, Mr. Deng or Mr.
Huang to any U.S. federal income tax liability, or result in any change in the
application of, or their respective potential obligations under, the Code, or
the regulations promulgated thereunder, there were no federal income tax
consequences for any of them to consider.
The
foregoing discussion of the information and factors considered and given weight
by Skywide, Merger Sub and Messrs. Deng and Huang in connection with the
fairness of the merger is not intended to be exhaustive but is believed to
include all material factors considered by Skywide, Merger Sub and Messrs. Deng
and Huang. Skywide, Merger Sub and Messrs. Deng and Huang did not find it
practicable to assign, and did not, assign or otherwise attach, relative weights
to the individual factors in reaching their position as to the fairness of the
merger. Rather, their fairness determinations were made after consideration of
all of the foregoing factors as a whole. Skywide, Merger Sub and Messrs. Deng
and Huang believe the foregoing factors provide a reasonable basis for their
belief that the merger is substantively and procedurally fair to the
unaffiliated shareholders.
Plans
for the Company after the Merger
It is
expected that, upon consummation of the proposed merger, the company’s business
and other operations will be conducted in a manner substantially identical to
the manner in which it is currently being conducted. However, following the
consummation of the proposed merger, the management and/or board of directors of
the surviving company will continue to assess the assets, capital structure,
operations, business and personnel of the surviving company and, as a result,
may implement changes they believe are appropriate to enhance the business and
operations of the surviving company.
Following
the consummation of the merger, the registration of Sinoenergy’s common stock
and Sinoenergy’s reporting obligation under the Exchange Act with respect to its
common stock will be terminated upon application to the SEC. In addition, upon
consummation of the merger, Sinoenergy’s common stock will no longer be listed
on any exchange or quotation system, including NASDAQ, and price quotations will
no longer be available. Sinoenergy will not be subject to the obligations and
constraints, and the related direct and indirect costs, associated with having
publicly traded equity securities.
Effects
of the Merger
Upon
consummation of the proposed merger, Merger Sub will be merged with and into
Sinoenergy, which will be the surviving company and will be privately owned
directly by Skywide, and indirectly through Skywide by its sole shareholders,
Messrs. Deng and Huang. Following the merger, the company’s common stock will
cease to be quoted on NASDAQ and registration of the company’s common stock
under the Exchange Act will be terminated upon application to the SEC. The
equity interests of Messrs. Deng and Huang are more fully described under
“—Interests of the Company’s Directors and Executive Officers in the Merger
”
beginning on
page[ ].
Upon
the consummation of the proposed merger, each share of the company’s common
stock issued and outstanding immediately prior to the effective time of the
merger (other than shares held in the company’s treasury or by any wholly-owned
subsidiary of the company or owned by Skywide, any shareholder of Skywide or any
wholly-owned subsidiary of Skywide) will be converted into the right to receive
$1.90 in cash, without interest and less any applicable withholding taxes. The
proposed merger will become effective at the time, which we refer to in this
proxy statement as the “effective time” of the merger, when the surviving
company files articles of merger with the Secretary of State of the State of
Nevada or such later time as provided in the articles of merger and agreed to by
Skywide and the company.
The
merger agreement provides that, prior to the effective time of the merger, our
board of directors will take appropriate action to cause any unvested stock
options or stock purchase warrants for shares of Sinoenergy common stock to
become vested before the merger and exercisable. The merger agreement further
provides that, immediately prior to the effective time of the merger, each
then-outstanding stock option or warrant will be cancelled in exchange for an
amount in cash (less any applicable withholding required by law) payable at or
as soon as practicable after the effective time, equal to the product of
(A) the total number of shares of common stock underlying such option or
warrant and (B) the excess, if any, of the merger consideration over the
per share exercise price of such option or warrant. Notwithstanding the
foregoing, options and warrants held by Skywide, any shareholder of Skywide and
any wholly-owned subsidiary of Skywide will be cancelled and no consideration of
any kind will be paid with regard to any stock options or warrants held by
them.
If
the proposed merger is completed, the company’s unaffiliated shareholders will
have no interests in the company’s net book value or net earnings after the
merger. The table below sets forth the indirect interests in the company’s book
value and net earnings for the company and Messrs. Deng and Huang immediately
following the merger, based on the company’s net book value of $46.2 million as
of September 30, 2009, and net loss of the company of $13.1 million for the
fiscal year ended September 30, 2009. Following the merger, the
entire interest in the company’s net book value and net income will be held by
Messrs. Deng and Huang.
|
|
Ownership
Prior to the Merger (1)
|
|
|
Ownership
After the Merger (2)
|
|
Name
|
|
Net
Book Value
|
|
|
Net
Loss
|
|
|
Net
Book Value
|
|
|
Net
Loss
|
|
|
|
$
in 000s
|
|
|
%
|
|
|
$
in 000s
|
|
|
%
|
|
|
$
in 000s
|
|
|
%
|
|
|
$
in 000s
|
|
|
%
|
|
Tianzhou
Deng (3)
|
|
$
|
9,071
|
|
|
|
19.6
|
|
|
$
|
(2,754
|
)
|
|
|
19.6
|
|
|
$
|
23,091
|
|
|
|
50
|
|
|
$
|
(6,552
|
)
|
|
|
50
|
|
Huang
Bo (3)
|
|
$
|
9,071
|
|
|
|
19.6
|
|
|
$
|
(2,754
|
)
|
|
|
19.6
|
|
|
$
|
23,091
|
|
|
|
50
|
|
|
$
|
(6,552
|
)
|
|
|
50
|
|
(1) Based
upon beneficial ownership as of the date of this proxy statement and
Sinoenergy’s net book value at September 30, 2009 and net loss for the fiscal
year ended September 30, 2009. As of September 30, 2009, there were
15,922,391 shares of the company’s common stock issued and
outstanding.
(2) Based
upon Sinoenergy’s net book value at September 30, 2009 and net loss for the
fiscal year ended September 30, 2009, and without giving effect to any
additional indebtedness to be incurred in connection with the
merger.
(3) As
of September 30, 2009, Messrs. Deng and Huang beneficially owned 3,138,551
shares each (excluding any shares issuable upon exercise of stock
options). Messrs. Deng and Huang each own a 50% equity interest in
Skywide, which owns 6,277,102 shares of common stock. Thus, Mr. Deng
and Mr. Huang are deemed to beneficially own 50% of the shares owned by
Skywide. Since Skywide will be the our sole shareholder following the
merger, the entire interest in the company will be held by Messrs. Deng and
Huang as the sole shareholders of Skywide.
The
primary benefits of the proposed merger to the company’s shareholders, including
the unaffiliated shareholders, but excluding Skywide and Messrs. Deng and Huang,
include the following:
·
|
the
receipt by such shareholders of a cash payment of $1.90, without interest
and less any applicable withholding taxes, for each share of Sinoenergy
common stock held by such shareholders as described above, representing a
premium of approximately:
|
§
|
48%
premium over our closing stock price of $1.28 per share on October 9,
2009, the last trading day before we announced the execution of the merger
agreement; and
|
§
|
43%
over the average closing stock price of our common stock for the
30-trading day period ending on October 8,
2009;
|
·
|
the
avoidance of the investment risk of holding shares of our common stock,
which historically has been thinly traded, which can result in price
volatility and
illiquidity; and
|
·
|
the
avoidance of the risk associated with any possible decrease in our future
earnings, growth or value following the merger, including risks relating
to defaults under the company’s agreements with the holders of $30 million
face value of notes issued in September 2007, with significant payments
being due in October and November 2009, and the collectability of the
company’s accounts and other receivables, which is the basis for the going
concern disclosure in the company’s financial statements at September
30, 2009.
|
The
primary detriments of the merger to the company’s shareholders, including the
unaffiliated shareholders, but excluding Skywide and Messrs. Deng and Huang,
include the following:
·
|
such
shareholders will cease to have an interest in Sinoenergy and, therefore,
will no longer benefit from possible increases in our future earnings,
growth or value or payment of dividends on shares of our common stock, if
any;
|
·
|
in
general, the receipt of cash pursuant to the merger will be a taxable
transaction for U.S. federal income tax purposes and may also be a
taxable transaction under applicable state, local, foreign and other tax
laws. As a result, a shareholder who receives cash in exchange of all of
such shareholder’s Sinoenergy common stock in the merger generally will be
required to recognize taxable gain or loss as a result of the merger for
U.S. federal income tax purposes equal to the difference between the
amount of cash received and such shareholder’s aggregate adjusted tax
basis in such stock; and
|
·
|
the
possibility that Sinoenergy could, at a later date, engage in acquisitions
or other transactions that create value, and that the shareholders will
not participate in such value
creation.
|
The
primary benefits of the merger to Messrs. Deng and Huang (as a result of their
ownership in surviving company) include the following:
·
|
if
the surviving company successfully executes its business strategies, the
value of Messrs. Deng’s and Huang’s equity investment could increase
because of possible increases in future earnings, increases in underlying
value of the surviving company’s business or the payment of dividends, if
any, that will accrue to them in their capacities as shareholders of
Skywide;
|
·
|
because
the company would no longer be a publicly-traded company, it will no
longer have continued pressure to make decisions that may produce better
short term results, but which may not over the long term lead to a
maximization of its equity value;
|
·
|
the
surviving company’s directors, officers and beneficial owners of more than
10% of the shares of common stock will not be subject to the reporting
requirements under the Exchange Act and liability for short-swing profit
recovery under Section 16 of the Exchange
Act;
|
·
|
the
surviving company will not have the expenses associated with being a
public company or the obligations under the Sarbanes Oxley Act of a
company registered under the Exchange Act;
and
|
·
|
following
the merger, Messrs. Deng and Huang will own 100% of the surviving company
and thus, will have full control of the surviving
company.
|
The
primary detriments of the merger to Messrs. Deng and Huang (as a result of their
ownership in surviving company) include the following:
·
|
all
of the risk of any possible decrease in the earnings, growth or value of
the surviving company following the merger will be borne by Messrs. Deng
and Huang;
|
·
|
following
the merger, Messrs. Deng and Huang will incur substantial risk resulting
from the limited liquidity of their equity interests in the surviving
company as there will be no trading market for the surviving company’s
equity securities; and
|
·
|
following
the merger, the surviving company will be obligated to repay the
indebtedness due and owing to the noteholders pursuant to the 3%
guaranteed senior convertible notes due 2012, subject to any modifications
made to such notes and obligations pursuant to any amendments negotiated
by the noteholders and Skywide in accordance with the waiver
agreement.
|
The
primary benefits of the merger to the company’s officers include the
following:
·
|
following
the merger, the company’s officers will retain their officer positions
with the surviving company, although they will not enter into employment
agreements with the surviving
company;
|
·
|
because
the company would no longer be a publicly-traded company, it will no
longer have continued pressure to make decisions that may produce better
short-term results, but which may not over the long term lead to a
maximization of its equity value;
|
·
|
the
surviving company’s officers will not be subject to the reporting
requirements under the Exchange Act and liability for short-swing profit
recovery under Section 16 of the Exchange Act;
and;
|
·
|
the
surviving company will not have the expenses associated with being a
public company.
|
The
primary detriments of the merger to the company’s officers include the
following:
·
|
following
the merger, the officers of the surviving company, other than Messrs. Deng
and Huang, will not have equity interests in the surviving company,
including any stock options; and
|
·
|
even
if the officers of the surviving company, other than Messrs. Deng and
Huang, were to receive equity interests in the surviving company,
subsequent to the completion of the merger, the liquidity of their equity
interests in the surviving company would be highly limited as there will
be no trading market for the surviving company’s equity
securities.
|
Sinoenergy
common stock is currently registered under the Exchange Act and is quoted on
NASDAQ under the symbol “SNEN.” As a result of the merger, the company will
become a privately held corporation without a public market for its common
stock, its common stock will no longer be listed on any exchange, including
NASDAQ, and price quotations for the company’s stock will no longer be
available. In addition, the registration of the company’s common stock under the
Exchange Act will be terminated following the merger. Therefore, the provisions
of the Exchange Act will no longer apply to the company, including the
requirement that the company furnish a proxy or information statement to its
shareholders in connection with meetings of its shareholders. The company will
also no longer be required to file periodic reports with the SEC.
At
the effective time of the merger, the officers of the company will become the
officers of the surviving company. It is not presently anticipated that, after
the completion of the merger, the compensation of the company’s officers will
materially increase or that there will be any material alterations to the
existing employment agreements between the company and its officers, other than
with respect to Messrs. Deng and Huang regarding any compensation or gain
resulting from their joint ownership of the surviving company. None of the
company’s officers will be entitled to any payments under any employment or
other agreements pursuant to “change-of-control” or similar provisions as a
result of the completion of the merger, nor will the company’s officers receive
any equity securities in the surviving company. Further, other than Messrs. Deng
and Huang, none of the company’s officers will occupy any seats on the board of
directors of the surviving company as a result of the completion of the proposed
merger.
With
respect to the company’s directors, other than Messrs. Deng and Huang, none of
the company’s directors will serve as directors, or in any other capacity, for
the surviving company as a result of the merger, nor will they receive any
equity interest in the surviving company as a result of the
merger. Messrs. Deng and Huang, the directors of Skywide, will be the
directors of the surviving company and the term of office of the other directors
will terminate at the effective time of the merger.
In
connection with the issuance of notes in the principal amount of $30 million,
the company entered into an investor rights agreement where one of the initial
noteholders or an affiliate has the right to name a director of the company as
long as that investor and its affiliates continues to hold more than 5% of the
company’s common stock, on an “as converted” basis. Mr. Xiang Dong
(Donald) Yang is the present nominee of the noteholders. Pursuant to
the waiver agreement, and the December 2009 Agreement, the company paid the $16
million principal amount of the 12% senior notes, and must pay the 3% senior
notes in two installments, with an initial payment of $5 million being due ten
days after the merger becomes effective and the balance 30 days
thereafter. Pursuant to the merger agreement, Mr. Yang’s term as a
director of the company will end upon the effective time of the
merger.
Effects
on the Company if the Merger is Not Completed
If the
proposed merger is not approved by Sinoenergy’s shareholders, or if the merger
is not completed for any other reason, shareholders will not receive any payment
for their shares, including stock options and stock purchase warrants, in
connection with the merger. Instead, Sinoenergy will remain independent and
subject to SEC reporting obligations, unless our board of directors determines
that such reporting is no longer required and not in Sinoenergy’s best interests
and determines to terminate them if possible. In addition, Sinoenergy’s common
stock would also continue to be listed and traded on NASDAQ, provided that we
continue to meet NASDAQ’s continued listing requirements, and we will remain
subject to SEC reporting obligations. On October 9, 2009, the company
received a notice from The Nasdaq Stock Market stating that, because of the
company’s failure to hold an annual meeting of shareholders at which proxies
were solicited, the company is in violation of Nasdaq’s rule requiring
Nasdaq-listed issuers to hold an annual meeting of shareholders, to solicit
proxies and to provide proxy statements to Nasdaq. The Nasdaq Stock
Market granted the company’s appeal from that determination, conditioned on the
holding of a meeting for the election of the company’s directors on or before
January 19, 2010. The company held its annual meeting of shareholders
on January 19, 2010 at which its current directors were reelected.
If
the proposed merger is not completed, the price of Sinoenergy common stock may
decrease from its current trading price, which price is likely supported by the
expectation that the merger will be consummated at a cash price of $1.90 per
share. In addition, if the proposed merger is not completed, we expect that,
except as noted below, management will operate Sinoenergy’s business in a manner
similar to that in which it is being operated today and that Sinoenergy’s
shareholders will likely continue to be subject to the same risks and
opportunities as are currently applicable. Certain operating and strategic risks
that we face could worsen if the proposed merger is not completed, including
increased competitive risks during the current economic downturn and as a result
of the continuing growth of our competitors, lower profitability due to the
costs associated with the failed merger transaction and possibly increasing
costs associated with being a public reporting company, difficulty retaining
management in the aftermath of the failed merger transaction and uncertain
opportunities for widespread liquidity at a set price. If the proposed merger is
not consummated, there can be no assurance as to the effect of these risks and
opportunities on the future value of your shares of Sinoenergy’s common stock.
In such a case, our board of directors will continue to evaluate and review,
among other things, the business operations, properties and capitalization of
Sinoenergy, make such changes to our business methods and plans as it deems
appropriate, and continue seeking to identify strategic alternatives to enhance
value for shareholders. If the proposed merger is not approved by our
shareholders, or if the merger is not consummated for any other reason, there
can be no assurance that any other similar transaction acceptable to Sinoenergy
will be offered, or that the business, prospects, results of operations, or
stock price or trading market of Sinoenergy’s shares will not be adversely
impacted, or that our management team will remain intact.
In
addition, in the limited circumstances described below under “The Merger
Agreement —Termination Fees and Expenses” beginning on
page [ ], we or Skywide may be required to pay the other
party, as applicable, a termination fee equal to the reasonable out-of-pocket
expenses (including, without limitation, all fees and expenses of counsel,
accountants, investment bankers, experts and consultants) actually incurred by
the company or Skywide, as the case may be, in connection with or related to the
authorization, preparation, negotiation, execution and performance of the merger
agreement and the merger.
Financing
of the Merger
The total
amount of funds to be used as consideration in the merger is approximately $18.4
million. Messrs Deng and Huang will contribute $20,000,000 of their
personal funds to Skywide to cover payment of the merger consideration, the
option consideration and the expenses of the transaction, and will not be
seeking financing from any third parties in connection
therewith. Neither Skywide nor Messrs. Deng and Huang have imposed
any conditions on the provision of such financing, and they have not made any
alternative financing arrangements regarding payment of that $20,000,000
sum.
Estimated
Fees and Expenses of the Merger
Except as
set forth below, all fees and expenses incurred in connection with the merger
agreement, the merger and the other transactions contemplated by the merger
agreement will be paid by the party incurring such fees or expenses, whether or
not the merger is consummated. Except for the payment of Brean Murray’s $180,000
fixed fee for the preparation of its fairness opinion, we will not pay any fees
or commissions to any broker, dealer or other person in connection with the
merger. Brean Murray’s fees are included under “Financial Advisors”
in the table below.
The
following is an estimate of fees and expenses to be incurred by us in connection
with the merger:
|
|
|
|
|
|
|
$
|
650,000
|
|
|
|
|
255,000
|
|
|
|
|
15,000
|
|
|
|
|
1,028
|
|
|
|
|
15,000
|
|
Proxy
Solicitation and Information Agent
|
|
|
15,000
|
|
|
|
|
8,972
|
|
|
|
$
|
960,000
|
|
The
following is an estimate of the fees and expenses to be incurred by the Skywide
and its affiliates in connection with the merger:
Litigation
Related to the Merger
We are a
defendant in a purported class action commenced on October 16, 2009 in the
Supreme Court of the State of New York, Nassau County, by alleged class
representative plaintiffs Stephen Trecaso and Linda Watts (the “New York
Action”) against us and our directors which alleges a claim for breach of
fiduciary duty, and which makes a demand for injunctive relief or alternatively,
damages arising out of the merger agreement. The complaint generally,
alleges that the company and the board of directors engaged in a defective sales
process which will permit Skywide to buy the company for an unfair
price. We filed motions to dismiss this action on the grounds
that there is no jurisdiction over the company or director Robert Adler in New
York and that Robert Adler was not served properly. These motions
were adjourned pending settlement discussions.
We are
also a defendant in three other purported class actions that have been filed
against us, our directors and Skywide in the Eighth Judicial District Court of
the State of Nevada in and for Clark County (collectively the “Nevada Actions”
and, together with the New York Action, the “Four Actions”) which allege a claim
for breach of fiduciary duty and which also make a demand for injunctive relief
for a meaningful auction with third parties or alternatively, damages arising
out of the merger agreement. The alleged class
representative plaintiffs in each of those four actions and the respective dates
of commencement of those actions are (i) Robert E. Guzman October 27,
2009, (ii) Carol Karch October 27, 2009 and (iii) Robert Grabowski November 2,
2009. As of the date of this proxy statement, only the company and
director and Greg Marcinkowski have been served in the Nevada
Actions. The complaints generally allege that the company and the
board of directors engaged in a defective sales process which will permit
Skywide to buy the company for an unfair price and permitted Skywide disclosure
of material inside information. The company and Mr.
Marcinkowski removed each of the Nevada Actions to the
United States District Court for the District of Nevada where they are presently
pending. Plaintiffs then filed motions seeking to remand
the actions back to the Nevada State Courts however, these motions have been
adjourned pending settlement discussions.
On March
5, 2010, counsel for all of the plaintiffs and all of the defendants in the Four
Actions entered into a memorandum of understanding proposing
settlement of the Four Actions (the “Settlement”). Before Sinoenergy
can proceed with the shareholders’ meeting and call for a
vote on the proposal to approve the merger, the terms of the
Settlement, and the amount of attorneys’ fees and disbursements to be awarded to
and apportioned among counsel for the plaintiffs in the Four Actions
must be approved by the federal court in the Nevada Actions.
The terms
of the proposed settlement, as set forth in the memorandum of understanding,
provide that:
·
|
the
provisions contained in Section 7.1(b)(ii) of the original merger
agreement, which accorded to Skywide a right to match or top an offer
deemed by our board to be a “Superior Proposal,” would be
eliminated;
|
·
|
any
termination fee payable to Skywide would be limited to Skywide’s actual
expenses, and would be subject to a cap of 3% of the total value of the
merger transaction, which is
$552,861;
|
·
|
an
updated fairness opinion would be – and has been – obtained and a
discussion contained in the preliminary proxy statement of the fairness
opinion that we originally filed would be revised so as to reflect the
substance of the updated fairness
opinion
|
·
|
counsel
for the plaintiffs in the Four Actions could conduct, and they have
already conducted, certain pre-trial discovery consisting of a review of
an agreed upon list of documents, the deposition of the Chairman of the
special committee and one of the members of the Brean Murray team who
conducted the analysis upon which Brean Murray has based its fairness
opinion and updated opinion;
|
·
|
counsel
for the plaintiffs in the Four Actions would be, and they were, given two
opportunities to review and provide comments regarding the disclosures
that we make in this proxy statement, and we would consider such comments
in good faith in making a determination whether and to what extent to
incorporate such comments into the final version of the proxy statement;
and
|
·
|
counsel
for the plaintiffs in the Four Actions would apply for an award of counsel
fees (including costs and expenses), based upon the benefits that the
settlement will provide to Sinoenergy’s shareholders, in an amount not to
exceed, in the aggregate, $470,000.
|
·
|
the
company and its directors as well as Skywide vigorously deny any
wrongdoing or liability with respect to all claims asserted in the Four
Actions, including that they have committed any violations of law, that
they have acted improperly in any way, that they have any liability or owe
any damages of any kind to the class of plaintiffs and that the class of
plaintiffs would release them from any and all claims, whether known or
unknown, that they know or suspect exist at the time of the release;
and
|
·
|
for
dismissal with prejudice of the Four
Actions.
|
Each of
Skywide and the company’s directors and officers liability insurance carrier has
agreed to pay one half of the counsel fee to be awarded to plaintiffs’ counsel
in the Four Actions, up to a maximum of $470,000.
Before
the Four Actions can be settled so that we may proceed to hold the shareholders’
meeting, the following must occur:
·
|
a
formal stipulation of settlement of the Four Actions must be executed by
counsel for all of the plaintiffs and all of
the defendants;
|
·
|
general
releases running from the defendants to all of the named plaintiffs in the
Four Actions, and general releases running from all plaintiffs in the Four
Actions to all of the defendants must be executed and
exchanged;
|
·
|
stipulations
of discontinuance of the Nevada Actions must be executed by counsel for
the parties in those actions;
|
·
|
a
stipulation of dismissal in the New York action must be executed by
counsel for the parties in that
action;
|
·
|
a
stipulation consolidating the Nevada Actions before one federal district
court in Nevada together with a joint letter setting forth the basic terms
of settlement and request for expedited treatment must be executed by
counsel for the parties in those
actions;
|
·
|
stipulations
staying the actions in the Nevada federal court and in the New York state
court must be executed by counsel for the parties in those
actions;
|
·
|
a
motion to expedite approval of the form of a notice to be given to the
company’s shareholders in advance of the court holding a fairness hearing
as to the reasonableness and fairness of the Settlement and Plaintiffs’
counsel fees and expenses; said notice will apprise Plaintiffs of the
proposed settlement of the Four Actions and set forth the general terms of
the settlement
|
·
|
the
notice to shareholders regarding the proposed settlement and revised proxy
materials must then be sent to all
shareholders;
|
·
|
a
hearing to approve the fairness of the Settlement and to approve of the
plaintiffs’ counsel fees and expenses must be held by the
federal court in Nevada; and
|
·
|
stipulations
of discontinuance of the four Nevada Actions and dismissal of the New York
Action must be filed.
|
If the
Nevada federal court refuses to hold a single expedited hearing to approve the
general terms of the Settlement, the Court would first hold a hearing to approve
the terms of the settlement and the form of notice to be given to the
shareholders, followed thereafter by a second hearing for the benefit of the
shareholders as to the overall fairness and reasonableness of the Settlement
including an award of attorneys’ fees and expenses.
Provisions
for the Unaffiliated Shareholders
No
provision has been made to grant the unaffiliated shareholders access to the
corporate files of Sinoenergy or those of Skywide, or the files of Messrs. Deng
and Huang, or to obtain counsel at the expense of Sinoenergy or any other such
party.
Interests
of the Company’s Directors and Executive Officers in the Merger
In
considering the recommendation of our board of directors with respect to the
merger, you should be aware that some of our directors and executive officers
have interests in the merger in addition to the interests of our shareholders
generally. Such interests, which are described below, are not unusual in the
context of a merger transaction such as the one being proposed for your
consideration. Our board of directors was aware of these interests at
the time when it approved the merger agreement and the merger. By
reason of the fact that such interests are typically found in transactions of
this nature, the board did not consider them to be material with regard to the
deliberations it undertook in connection with the issuance of those
approvals.
Messrs.
Deng and Huang
Messrs.
Deng and Huang each own 50% of the equity interests of Skywide. As a result of
the merger, Merger Sub will be merged with and into Sinoenergy, which will be
the surviving company and will be privately owned directly by Skywide, and
indirectly through Skywide by its sole shareholders, Messrs. Deng and Huang.
Accordingly, following the merger, the collective beneficial ownership of
Sinoenergy by Messrs. Deng and Huang (through their ownership of Skywide) will
increase from approximately 40% to 100%. As a result of the increase in their
proportional ownership of Sinoenergy, through their 100% ownership of the
surviving company, Messrs. Deng and Huang will enjoy correspondingly increased
benefits from any future earnings and growth of Sinoenergy’s business after the
merger, which, if Messrs. Deng and Huang successfully manage its business, could
exceed the value of their original investments in Sinoenergy, including the
amounts paid by them in the merger. Messrs. Deng and Huang (through their
ownership of the surviving company) will also bear a correspondingly increased
risk of any possible decrease in the future earnings, growth or value of
Sinoenergy’s business. Additionally, the investment of Messrs. Deng and Huang
(through their ownership of the surviving company) in Sinoenergy will be
illiquid, with no public trading market for such securities and no certainty
that an opportunity to sell Sinoenergy’s business at an attractive price will
present itself at any time soon or ever, or that interim liquidity achieved
through dividends will be sufficient to recover their investment, let alone make
a profit.
The
merger may also provide additional means to enhance shareholder value for
Messrs. Deng and Huang, including improved profitability due to the elimination
of the expenses associated with public company reporting and compliance,
increased flexibility and responsiveness in management of the business to
achieve growth and respond to competition without the restrictions of quarterly
earnings comparisons, and additional means for making liquidity available, such
as through dividends or other distributions.
Additionally,
following the merger, Messrs. Deng and Huang, who are currently the company’s
chairman of the board and chief executive officer/director, respectively, will
retain their officer positions with the surviving company and will continue as
the surviving company’s directors.
Treatment
of Stock Options
As of the
record date, there were 555,359 shares of our common stock subject to stock
options granted under our 2006 Plan to our executive officers and our directors,
including options to purchase 50,000 shares held by each of Messrs. Deng and
Huang. Each outstanding stock option that remains unexercised as of
the completion of the merger, other than options held by Messrs. Deng and Huang
who will not receive any payment for their options, whether or not the option is
vested or exercisable, will be cancelled, and, except for stock options held by
Messrs. Deng and Huang, the holder of such stock option will be entitled to
receive a cash payment, without interest and less applicable withholding taxes,
equal to the product of:
·
|
the
number of shares of our common stock subject to the option as of the
effective time of the merger, multiplied
by
|
·
|
the
excess, if any, of $1.90 over the exercise price per share of common stock
subject to such option.
|
If the
amount of such product is zero, no payment will be made. Of the
options outstanding on the record date, all but options to purchase 80,000
shares at an average exercise price of $1.305 per share, have exercise prices in
excess of $1.90.
The
following table summarizes the options with exercise prices of less than $1.90
per share held by our executive officers and directors as of September 30, 2009
and the consideration that each of them will receive, other than Messrs. Deng
and Huang, pursuant to the merger agreement in connection with the cancellation
of their options, based on the weighted average exercise prices of those
options:
Non-Employee Directors
:
|
No.
of Shares
Underlying
Options
|
Weighted
Average
Exercise
Price
of Options
|
|
|
|
|
|
Robert
I. Adler
|
20,000
|
$1.305
|
$11,900
|
Greg
Marcinkowski
|
20,000
|
$1.305
|
$11,900
|
Renjie
Lu
|
20,000
|
$1.305
|
$11,900
|
Baoheng
Shi
|
20,000
|
$1.305
|
$11,900
|
Post-Merger
Employment of the Company’s officers other than Messrs. Deng and
Huang
At the
effective time of the merger, the officers of the company will become the
officers of the surviving company. Accordingly, Shiao Ming Sheng, Anlin Xiong
and Cindy Ye, our Chief Financial Officer, Vice-President/Secretary and
Financial Controller, respectively, will hold the same positions with the
surviving company. It is not presently anticipated that, after the completion of
the merger, the compensation of the company’s officers will materially increase
or that there will be any material alterations to the existing employment
agreements between the company and its officers, other than with respect to
Messrs. Deng and Huang regarding any compensation or gain resulting from their
joint ownership of the surviving company. None of the company’s officers will be
entitled to any payments under any employment or other agreements pursuant to
“change-of-control” or similar provisions as a result of the completion of the
proposed merger, nor will the company’s officers receive any equity securities
in the surviving company. Further, other than Messrs. Deng and Huang,
none of the company’s officers will occupy any seats on the board of directors
of the surviving company as a result of the completion of the proposed
merger.
With
respect to the company’s directors, other than Messrs. Deng and Huang, none of
the company’s directors will serve as directors, or in any other capacity, for
the surviving company as a result of the merger, nor will they receive any
equity interest in the surviving company as a result of the
merger. Messrs. Deng and Huang, the directors of Skywide, will be the
directors of the surviving company.
Indemnification
and Insurance
The
merger agreement provides that, without limiting any additional rights that any
employee, officer or director of the company may have under any employment
agreement, benefit plan or the company’s certificate of incorporation or bylaws,
for a period of six years after the effective time of the merger, Skywide will,
and will cause the surviving company to, indemnify and hold harmless each
present (as of the effective time of the merger) and former officer or director
of the company or any of our subsidiaries against all claims, losses,
liabilities, damages, judgments, inquiries, fines and reasonable fees, costs and
expenses, including attorney’s fees and disbursements, incurred in connection
with any claim arising out of actions taken by them in their capacity as
officers or directors prior to the effective time of the merger or taken by them
at the request of the company or any of our subsidiaries, to the fullest extent
permitted under applicable law. In this regard, the surviving company may be
required to advance expenses to an indemnified officer or director, provided
that the person to whom expenses are advanced provides an undertaking, to the
extent required by Nevada law, to repay such advances if it is ultimately
determined that this person is not entitled to indemnification. The surviving
company will not settle, compromise or consent to the entry of any judgment in
any action, suit, proceeding, investigation or claim under which indemnification
could be sought unless such settlement, compromise or consent includes an
unconditional release of the indemnified person or the indemnified person
otherwise consents.
The
merger agreement provides that for a period of six years after the effective
time of the merger, the memorandum of association and articles of association of
Skywide will continue to contain provisions with respect to indemnification,
advancement of expenses and exculpation of former or present directors and
officers that are no less favorable than presently set forth in our current
articles of incorporation and bylaws of the company.
The
merger agreement provides that prior to the effective time of the merger, we
will endeavor to obtain and fully pay (and if we are unable to do so, Skywide,
after the effective time of the merger, will cause the surviving company to
obtain and fully pay) for “tail” insurance policies with a claims period of at
least six years from the effective time of the merger from an insurance carrier
with the same or better credit rating as our current insurance carrier with
respect to directors’ and officers’ liability insurance in an amount and scope
at least as favorable as our existing policies with respect to matters existing
or occurring at or prior to the effective time of the merger. In addition,
Skywide will, and shall cause the surviving company to, honor and perform under
specified indemnification agreements entered into by the company or any of our
subsidiaries.
Special
Committee Compensation
The
special committee of our board of directors is composed of its chairman, Robert
I. Adler, and members Greg Marcinkowski, Lu Renjie and Shi Baoheng. Each member
of the special committee are being paid $20,000 for his service to the special
committee, except for Mr. Adler, who is being paid $30,000 for his service as
chairman of the special committee.
Material
United States Federal Income Tax Consequences
The
following is a general discussion of the material U.S. federal income tax
consequences of the merger to holders of our common stock. We base this summary
on the provisions of the Code, applicable current and proposed U.S. Treasury
Regulations, judicial authority, and administrative rulings and practice, all of
which are subject to change, possibly on a retroactive basis. This summary
describes the provisions of these sources of law only as they are currently in
effect. All of these sources of law may change at any time, and any
change in the law may apply retroactively. We cannot assure you that
new laws, interpretations of law or court decisions, any of which may take
effect retroactively, will not cause any statement in this section to be
inaccurate.
For
purposes of this discussion, we use the term “U.S. holder” to mean a beneficial
owner of shares that is for U.S. federal income tax purposes:
·
|
a
citizen or individual resident of the United
States;
|
·
|
a
corporation, or other entity taxable as a corporation for U.S. federal
income tax purposes, created or organized in or under the laws of the U.S.
or any State or the District of
Columbia;
|
·
|
a
trust if it (1) is subject to the primary supervision of a court within
the U.S. and one or more U.S. persons have the authority to control all
substantial decisions of the trust or (2) has a valid election in effect
under applicable U.S. Treasury Regulations to be treated as a U.S. person;
or
|
·
|
an
estate the income of which is subject to U.S. federal income tax
regardless of its source.
|
A
non-U.S. holder is a person (other than a partnership) that is not a U.S.
holder.
If a
partnership (or other entity taxable as a partnership for U.S. federal income
tax purposes) holds our common stock, the tax treatment of a partner in the
partnership will generally depend on the status of the partner and the
activities of the partnership. If you are a partnership or a partner of a
partnership holding our common stock, you should consult your tax advisor
regarding the tax consequences of disposing our common stock.
This
discussion assumes that a holder holds shares of our common stock as a capital
asset within the meaning of Section 1221 of the Code (generally, property held
for investment). This discussion does not address all aspects of U.S. federal
income tax that may be relevant to a holder in light of its particular
circumstances, or that may apply to a holder that is subject to special
treatment under the U.S. federal income tax laws (including, for example,
insurance companies, dealers in securities or foreign currencies, traders in
securities who elect the mark-to-market method of accounting for their
securities, shareholders subject to the alternative minimum tax, persons that
have a functional currency other than the U.S. dollar, tax-exempt organizations,
qualified retirement plans or trusts, financial institutions, mutual funds,
partnerships or other pass through entities for U.S. federal income tax
purposes, controlled foreign corporations, passive foreign investment companies,
certain expatriates, corporations that accumulate earnings to avoid U.S. federal
income tax, shareholders who hold shares of our common stock as part of a hedge,
straddle, constructive sale or conversion transaction, or shareholders who
acquired their shares of our common stock through the exercise of employee stock
options or other compensation arrangements). In addition, the discussion does
not address any tax considerations under state, local or foreign laws or U.S.
federal laws other than those pertaining to the U.S. federal income tax that may
apply to holders. Finally, this discussion does not address any special
characterization or other rules that may affect holders that are related or
deemed related to Skywide under federal income tax principles. Holders are urged
to consult their own tax advisors to determine the particular tax consequences,
including the application and effect of any state, local or foreign income and
other tax laws, of the receipt of cash in exchange for our common stock pursuant
to the merger.
U.S.
Holders
The
receipt of cash in the merger by U.S. holders of our common stock will be a
taxable transaction for U.S. federal income tax purposes (and may also be a
taxable transaction under applicable state, local and foreign tax
laws).
When a
taxable U.S. holder sells or otherwise disposes of our shares, the holder will
recognize gain or loss for federal income tax purposes in an amount equal to the
difference between (a) the amount of cash and the fair market value of any
property received on the sale or other disposition, and (b) the holder’s
adjusted basis in the shares for tax purposes. This gain or loss will
be capital gain or loss if the U.S. holder has held the shares as a capital
asset. The gain or loss will be long-term gain or loss if the U.S.
holder has held the shares for more than one year. Long-term capital
gains of an individual taxable U.S. holder are generally taxed at preferential
rates. The highest marginal individual federal income tax rate is
currently 35%. The maximum federal income tax rate on long-term
capital gains applicable to individuals is 15% for sales and exchanges of assets
held for more than one year and occurring after May 6, 2003 through December 31,
2010. The characterization of income as capital gain or ordinary income may
affect the deductibility of capital losses. A non-corporate taxpayer
may deduct capital losses not offset by capital gains against its ordinary
income only up to a maximum of $3,000 annually. A non-corporate
taxpayer may carry unused capital losses forward indefinitely. A
corporate taxpayer must pay tax on its net capital gains at corporate
ordinary-income rates. A corporate taxpayer may deduct capital losses
only to the extent of capital gains, with unused losses carried back three years
and forward five years. If a U.S. holder acquired different blocks of our common
stock at different times and different prices, such holder must determine its
adjusted tax basis and holding period separately with respect to each block of
our common stock.
Under the
Code, a U.S. holder of our common stock may be subject, under certain
circumstances, to information reporting on the cash received in the merger
unless such U.S. holder is a corporation or other exempt recipient. Backup
withholding will also apply (currently at a rate of 28%) with respect to the
amount of cash received, unless a U.S. holder provides proof of an applicable
exemption or a correct taxpayer identification number, and otherwise complies
with the applicable requirements of the backup withholding rules. Backup
withholding is not an additional tax and any amounts withheld under the backup
withholding rules may be refunded or credited against a U.S. holder’s U.S.
federal income tax liability, if any, provided that such U.S. holder furnishes
the required information to the Internal Revenue Service in a timely
manner.
Non-U.S.
Holders
Any gain
realized on the receipt of cash in the merger by a non-U.S. holder generally
will not be subject to United States federal income tax unless:
·
|
the
gain is effectively connected with a trade or business of the non-U.S.
holder in the United States (and, if required by an applicable income tax
treaty, is attributable to a United States permanent establishment of the
non-U.S. holder);
|
·
|
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 that disposition, and certain
other conditions are met; or
|
·
|
the
company is or has been a “United States real property holding corporation”
for U.S. federal income tax purposes and the non-U.S. holder owned more
than 5% of the Company’s common stock at any time during the five years
preceding the merger.
|
An
individual non-U.S. holder described in the first bullet point immediately above
will be subject to tax on the net gain derived from the merger under regular
graduated U.S. federal income tax rates. An individual non-U.S. holder described
in the second bullet point immediately above will be subject to a flat 30% tax
on the gain derived from the merger, which may be offset by U.S. source capital
losses, even though the individual is not considered a resident of the United
States. If a non-U.S. holder that is a foreign corporation falls under the first
bullet point immediately above, it will be subject to tax on its net gain in the
same manner as if it were a United States person as defined under the Code and,
in addition, may be subject to the branch profits tax equal to 30% of its
effectively connected earnings and profits or at such lower rate as may be
specified by an applicable income tax treaty.
With
respect to the third bullet, the company believes it is not, has not been and
does not anticipate becoming a “United States real property holding corporation”
for U.S. federal income tax purposes.
Information
reporting and, depending on the circumstances, backup withholding (currently at
a rate of 28%) will apply to the cash received in the merger, unless the
beneficial owner certifies under penalty of perjury that it is a non-U.S. holder
(and the payor does not have actual knowledge or reason to know that the
beneficial owner is a United States person as defined under the Code) or such
owner otherwise establishes an exemption. Backup withholding is not an
additional tax and any amounts withheld under the backup withholding rules may
be refunded or credited against a non-U.S. holder’s U.S. federal income tax
liability, if any, provided that such non-U.S. holder furnishes the required
information to the Internal Revenue Service in a timely manner.
Information
for both U.S. Holders and non-U.S. Holders
The
company presently has net operating loss (“NOL”) carryforwards. These
NOL carryforwards will remain after the merger. However, assuming that none of
the company’s shareholders who are being cashed out in the merger are related to
Skywide, the company will be subject to restrictions and limitations on the rate
at which it will be able to use those remaining NOLs for U.S. federal income tax
purposes. We do not know the amount of NOLs that the company may be able to use
in the future, as that determination is based on various unknown factors such as
any built-in gain or loss the company may have in its assets at the effective
time. In addition, the company will retain other tax attributes it may have
after the merger but their use may be limited. For example, the company may have
excess foreign tax credits that may be limited after the merger.
Neither
Skywide nor its shareholders have acquired any company stock within the last
twelve (12) months. Thus, the merger lacks at least one of the four required
components of an Intermediary Transaction as described in IRS Notices, and
should not be treated as such. An Intermediary Transaction is a “listed
transaction” under the applicable Treasury Regulations and could subject holders
to special penalties and an extension of the general three year statute of
limitation on IRS assessments. In addition, if Skywide immediately caused the
company to liquidate or to merge into Skywide, then the public shareholders
could be deemed to have received liquidation proceeds from the company and may
be deemed to have transferee liability. However, Skywide has warranted that it
will not liquidate or merge the company for at least 12 months following the
merger.
Also,
certain shareholders who at any time during the past five years owned 10% or
more of the total combined voting power from all classes of the company’s voting
stock may be subject to recharacterization rules regarding the character of gain
on the exchange of their shares in the company. These special rules may be found
in Section 1248 of the Code and the Treasury Regulations promulgated
thereunder.
Regulatory
Approvals
Neither
the company nor Skywide was required to obtain the approval of any governmental
authority in connection with the merger.
CAUTIONARY STATEMENT CONCERNING
FORWARD−LOOKING INFORMATION
Those
statements herein that involve expectations or intentions (such as those related
to the closing of the transactions contemplated by the merger agreement) are
forward-looking statements within the meaning of the U.S. securities laws,
involving risks and uncertainties, and are not guarantees of future performance.
You are cautioned that these statements are only predictions and that
forward-looking statements are subject to a number of risks, assumptions and
uncertainties that could cause actual results to differ materially from those
projected in such forward-looking statements. These risks, assumptions and
uncertainties include, but are not limited to: the possibility that we may fail
to meet several significant closing conditions - the failure of any one of which
may result in the transaction not being consummated; the risk that the
transaction may close more slowly than expected or not at all; potential
disruptions resulting from the transaction making it more difficult to maintain
relationships with customers, employees or suppliers; transaction costs;
decisions by the SEC or other governmental or regulatory bodies; the vote of our
shareholders; uncertainties related to litigation; economic and political
conditions in the U.S. and abroad; and other risks outlined in our filings with
the SEC, including the annual report on Form 10-K for the year ended September
30, 2009. All forward-looking statements are effective only as of the date they
are made and we disclaim any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
THE PARTIES TO THE MERGER
Sinoenergy
Corporation
The
company is a developer and operator of retail CNG stations as well as a
manufacturer of compressed natural gas (CNG) transport truck trailers, CNG
station equipment, and natural gas fuel conversion kits for automobiles, in
China. In addition to its CNG related products and services, the company designs
and manufactures a wide variety of customized pressure containers for use in the
petroleum, chemical and other industries.
The
company is incorporated in the state of Nevada with its principal executive
offices at 1603-1604, Tower B Fortune Centre Ao City, Beiyuan Road, Chaoyang
District, Beijing, People’s Republic of China 100107. The company’s telephone
number is 86-10-84928149.
Skywide
Capital Management Limited
Skywide
is a British Virgin Islands company organized as a corporation with limited
liability. It does not actively engage in any business, other than as
the vehicle through which Messrs. Deng and Huang have held their ownership
interests in the company. Upon completion of the merger, all of the
company’s assets and liabilities, as well as all of its business operations will
become, by operation of law, the assets, liabilities and business operations of
Skywide.
SNEN
Acquisition Corp.
Merger
Sub, is a Nevada corporation formed by Skywide solely for purposes of entering
into the merger agreement and consummating the transactions contemplated by the
merger. Subject to the terms and conditions of the merger agreement and in
accordance with Nevada law, at the effective time of the merger, Merger Sub will
merge with and into Sinoenergy, with Sinoenergy continuing as the surviving
corporation. Merger Sub currently has
de minimis
assets and has not
conducted any activities to date other than activities incidental to its
formation and in connection with the transactions contemplated by the merger
agreement.
THE SPECIAL MEETING
Time,
Place and Purpose of the Special Meeting
This
proxy statement is being furnished to our shareholders as part of the
solicitation of proxies by our board of directors for use at the special meeting
to be held on
[ ], 2010,
starting at [ ] A.M., local time, at
[ ],
or at any postponement or adjournment thereof. The purpose of the special
meeting is for our shareholders to elect seven directors and to consider and
vote upon a proposal to approve the merger agreement. Our shareholders must
approve the merger agreement for the merger to occur. If the shareholders fail
to approve the merger agreement, the merger will not occur. A copy of the merger
agreement is attached to this proxy statement as Annex A. This proxy statement
and the enclosed form of proxy are first being mailed to our shareholders on or
about
[ ].
Record
Date and Voting
The
holders of record of the company’s common stock as of the close of business on
[ ],
2010, the record date for the special meeting, are entitled to receive notice
of, and to vote at, the special meeting. On the record date, there were
[ ]
shares of the company’s common stock outstanding.
As long
as not less than [ ] shares of the company’s common stock are present
in person or by proxy at the time of commencement of the special meeting, a
quorum for the transaction of business for all purposes of the special meeting
shall exist. The company’s common stock is the only class of stock with voting
rights. A quorum is necessary to hold the special meeting. Any shares
of the company’s common stock held in treasury by the company are not considered
to be outstanding for purposes of determining a quorum. Once a share
is represented at the special meeting, it will be counted for the purpose of
determining a quorum at the special meeting and any postponement or adjournment
of the special meeting. However, if a new record date is set for the adjourned
annual meeting, then a new quorum will have to be established.
Required
Vote
Each
outstanding share of the company’s common stock on the record date entitles the
holder to one vote on each proposal to be presented to the shareholders at the
special meeting. It is a condition to the completion of the merger that holders
of a majority of the voting power of the outstanding shares entitled to vote at
the close of business on the record date vote “FOR” the approval of the merger
agreement. That means not less than [ ] shares of
our common stock must vote in favor of the merger. If a quorum is
present at the start of the special meeting, a proposal to adjourn or postpone
the special meeting will be approved if the number of votes cast in favor of the
proposal exceeds the number of votes cast in opposition to that
proposal.
Voting
Procedure
In order
to vote at the special meeting, you must either execute a proxy, which may be
provided by us or by your broker, and deliver the proxy to us, if you are a
shareholder of record, or to your broker, if your shares are held in “street
name.”
If you
are a shareholder of record, which means that you hold your shares in your own
name, in order for your shares of the company’s common stock to be included in
the vote, you must submit a proxy by telephone or the Internet or return the
enclosed proxy card by mail or vote in person at the special
meeting.
If your
shares are held in “street name,” which means that your shares are held on your
behalf by your broker, you should instruct your broker how to vote your shares
using the instructions provided by your broker. If you have not received any
voting instructions or if you require further information regarding the voting
or your shares, contact your broker and your broker can give you directions on
how to vote your shares. Under NASDAQ rules, brokers who hold shares in “street
name” for customers may not exercise their voting discretion with respect to the
approval of non-routine matters such as the merger proposal and thus, absent
specific instructions from you, as the beneficial owner of your shares, brokers
are not empowered to vote such shares with respect to the approval of such
proposals. Abstentions and broker non-votes, if any, will be treated as shares
that are present and entitled to vote at the special meeting for purposes of
determining whether a quorum exists, but will not be voted in favor of or
against the merger. Abstentions and broker non-votes will be effectively treated
as votes AGAINST approval of the merger agreement.
If you own some shares in your own name
and some shares in street name, you need to follow the voting instructions that
are applicable to shares you own and shares that are held in street
name. If your shares are held in more than one brokerage firm, you
will have to give separate voting instructions to each brokerage
firm.
If you
submit a proxy by telephone or the Internet or by returning a signed proxy card
by mail, or if you transmit your proxy to your broker in the manner set out in
the instructions from you broker, your shares will be voted at the special
meeting in accordance with your instructions. If no instructions are indicated
on your proxy card, your shares of the company’s common stock will be voted
“FOR” the approval of the merger agreement.
No
matters other than the proposals to elect the company’s directors and to approve
the merger agreement, and, if necessary, a proposal to adjourn the shareholders’
meeting, will be brought before the shareholders’ meeting. If, however, any
other matter is properly presented at the special meeting or any adjournment or
postponement of the special meeting, the persons appointed as proxies will have
discretionary authority to vote the shares represented by duly executed proxies
in accordance with their discretion and judgment.
Revocation
of Proxies
You may
revoke your proxy at any time before the vote is taken at the special meeting.
To revoke your proxy, you must either advise our Corporate Secretary in writing,
submit a proxy by telephone, the Internet or mail dated after the date of the
proxy you wish to revoke or attend the special meeting and vote your shares in
person. Attendance at the special meeting will not by itself constitute
revocation of a proxy.
If you
have instructed your broker to vote your shares, the above-described options for
revoking your proxy do not apply and instead you must follow the directions
provided by your broker to change these instructions.
Proxy
Solicitation
We and
our proxy solicitation firm, Georgeson, Inc., or Georgeson, are soliciting
proxies for the special meeting from our shareholders. We will
bear the entire cost of our and Georgeson’s solicitations, including the payment
of fees of $8,500, plus reasonable expenses, to Georgeson for its
services. In addition to solicitations by mail, our directors,
officers and regular employees, without additional remuneration, may solicit
proxies by telephone, facsimile transmission, email and personal
interviews. Brokers, custodians and fiduciaries will be requested to
forward proxy soliciting material to the owners of our common stock held in
their names. We will reimburse them for their reasonable
out-of-pocket expenses incurred in connection with the distribution of proxy
materials.
Adjournments
and Postponements
Although
it is not currently expected, the special meeting may be adjourned or postponed
for the purpose of soliciting additional proxies. Any adjournment may be made
without notice, other than by an announcement made at the special meeting. If a
quorum exists, then if the number of votes cast in favor of a motion to adjourn
exceeds the number of votes cast in opposition to that motion, the shareholders’
meeting will be adjourned. Alternatively, if no quorum exists, then a majority
of shares present in person or by proxy at the special meeting may adjourn the
special meeting. Any signed proxies received by the company will be
voted in favor of an adjournment in these circumstances, although a proxy voted
“against” approval of the merger agreement will not be voted in favor of an
adjournment for the purpose of soliciting additional proxies. Any adjournment or
postponement of the special meeting for the purpose of soliciting additional
proxies will allow the company’s shareholders who have already sent in their
proxies to revoke them at any time prior to their use at the special meeting as
adjourned or postponed.
Share
Ownership of Directors and Executive Officers
Messrs.
Deng and Huang have informed us that Skywide plans to vote all shares of our
common stock owned by it (constituting approximately 40% of the shares of our
common stock outstanding as of the record date for the special meeting) in favor
of the approval of the merger, and the approval and adoption of the merger
agreement and the other transactions contemplated thereby, in connection with
the company shareholder approval. As of the record date, Abax Nai Xin A Ltd. and
Abax Jade Ltd., which are affiliates of Abax Lotus, owned a total of 34,750
shares. Mr. Xiang Dong (Donald) Yang, a director of the company, has sole voting
and dispositive power over these shares and may be deemed to beneficially own
such shares. Mr. Yang disclaims beneficial ownership of such
shares. Mr. Yang has advised the company that although Abax Nai Xin
and Abax Jade do not intend to convert their 3% convertible notes into common
stock, they do intend to vote all shares of common stock held directly by Abax
Nai Xin and Abax Jade in favor of approval of the merger. No other
officer or directors owned any shares of common stock on the record
date.
THE MERGER AGREEMENT (PROPOSAL
1)
The
summary of the material terms of the merger agreement below and elsewhere in
this proxy statement is qualified in its entirety by reference to the merger
agreement, a copy of which is attached to this proxy statement as Annex A and
which we incorporate by reference into this document. This summary does not
purport to be complete and may not contain all of the information about the
merger agreement that is important to you. We encourage you to read carefully
the merger agreement in its entirety. The merger agreement has been included to
provide you with information regarding its terms. It is not intended to provide
any other factual information about the company. Such information can be found
elsewhere in this proxy statement and in the other public filings the company
makes with the Securities and Exchange Commission, which are available without
charge at www.sec.gov.
The
merger agreement contains representations and warranties the company, Skywide
and Merger Sub made to each other as of specific dates. The assertions embodied
in those representations and warranties were made solely for purposes of the
contract among the company, Skywide and Merger Sub, and may be subject to
important qualifications and limitations agreed by the company, Skywide and
Merger Sub in connection with negotiating its terms. Moreover, certain
representations and warranties may not be accurate or complete as of any
specified date because they are subject to a contractual standard of materiality
different from those generally applicable to shareholders or were used for the
purpose of allocating risk among the company, Skywide and Merger Sub rather than
establishing matters as facts. For the foregoing reasons, you should not rely on
the representations and warranties as statements of factual
information.
Effective
Time
The
effective time of the merger will occur at the time that the company files the
articles of merger with the Secretary of State of the State of Nevada on the
closing date of the merger or such later time as provided in the articles of
merger and agreed to by Skywide and the company. The closing date will occur as
soon as practicable after the special meeting, but in no event later than on the
second business day after all of the conditions to the merger set forth in the
merger agreement have been satisfied or waived, or such other date as Skywide
and the company may agree.
Structure
At the
effective time of the merger, Merger Sub will be merged with and into
Sinoenergy, which will be the surviving company and will be privately owned
directly by Skywide, and indirectly through Skywide by its sole shareholders,
Messrs. Deng and Huang. As the surviving company, all of the company’s
properties, assets, rights, privileges, immunities, powers and franchises, and
all of their debts, liabilities, and duties upon and after completion of the
merger, will remain as they were immediately prior to the merger.
Treatment
of Stock and Options/Warrants
Company
Common Stock
At the
effective time of the merger, each share of our common stock issued and
outstanding immediately prior to the effective time of the merger will
automatically be cancelled and will cease to exist and will be converted into
the right to receive $1.90 in cash, without interest, other than shares of
company common stock:
·
|
held
in the company’s treasury or by any wholly-owned subsidiary of the company
immediately prior to the effective time of the merger, which shares will
be cancelled without conversion or
consideration;
|
·
|
owned
by Skywide or Merger Sub, any shareholder of Skywide or any other
wholly-owned subsidiary of Skywide, immediately prior to the effective
time of the merger, which shares will be cancelled without conversion or
consideration.
|
After the
effective time of the merger, each of our outstanding stock certificates
representing shares of common stock converted in the merger will represent only
the right to receive the $1.90 merger consideration. The merger consideration
will be paid in full upon surrender of each certificate in full satisfaction of
all rights pertaining to the shares of our common stock represented by that
certificate.
Company
Stock Options and Company Stock Purchase Warrants
At the
effective time of the merger, each outstanding option or warrant, whether or not
vested or exercisable, to acquire our common stock will be cancelled, and the
holder of each stock option or warrant, other than stock options held by Messrs.
Deng and Huang, will be entitled to receive from the surviving company as
promptly as practicable thereafter an amount in cash, without interest and less
applicable withholding taxes, equal to the product of:
·
|
the
number of shares of our common stock subject to each option or warrant, as
applicable, as of the effective time of the merger, multiplied
by
|
·
|
the
excess, if any, of $1.90, over the exercise price per share of common
stock subject to such option or warrant, as
applicable.
|
If the
amount of such product is zero, no payment will be made.
The
amount of cash payable with respect to options or warrants (“option
consideration”) will be reduced by the amount of any applicable taxes required
to be withheld. Stock options held by Messrs. Deng and Huang will be
cancelled in connection with the completion of the merger, and they will not
receive any option consideration.
Exchange
and Payment Procedures
At or
prior to the effective time of the merger, Skywide will deposit in trust an
amount of cash sufficient to pay the merger consideration to each holder of
shares of our common stock with Continental Stock Transfer & Trust Company
(the “exchange agent”). Promptly after the effective time of the merger, the
exchange agent will mail a letter of transmittal and instructions to you and the
other shareholders of record on the effective date of the merger. The letter of
transmittal and instructions will tell you how to surrender your common stock
certificates, stock options or stock purchase warrants in exchange for the
merger or option consideration.
You
should not return your stock certificates, stock options or stock purchase
warrants with the enclosed proxy card, and you should not forward your stock
certificates, stock options or stock purchase warrants to the exchange agent
without a letter of transmittal.
You will
not be entitled to receive the merger consideration or option consideration
until you surrender your stock certificate or certificates, stock options or
stock purchase warrants to the exchange agent, together with a duly completed
and executed letter of transmittal and any other documents as the exchange agent
may require. The merger consideration may be paid to a person other than the
person in whose name the corresponding certificate is registered if the
certificate is properly endorsed or is otherwise in the proper form for
transfer. In addition, the person who surrenders such certificate must either
pay any transfer or other applicable taxes or establish to the satisfaction of
the surviving company that such taxes have been paid or are not
applicable.
No
interest will be paid or will accrue on the cash payable upon surrender of the
certificates, stock options or stock purchase warrants. The exchange agent will
be entitled to deduct and withhold, and pay to the appropriate taxing
authorities, any applicable taxes from the merger consideration and/or the
option consideration. Any sum which is withheld and paid to a taxing authority
by the exchange agent will be deemed to have been paid to the person with regard
to whom it is withheld.
At the
effective time of the merger, our stock transfer books will be closed, and there
will be no further registration of transfers of outstanding shares of our common
stock. If, after the effective time of the merger, certificates are presented to
the surviving company for transfer, they will be cancelled and exchanged for the
merger consideration.
The
exchange agent and the surviving company will not be liable to any person for
any cash delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law. Any portion of the merger consideration and
option consideration deposited with the exchange agent that remains
undistributed to the holders of certificates evidencing shares of our common
stock or any options or warrants for 180 days after the effective time of the
merger, will be delivered, upon demand, to Skywide subject to the requirements
of applicable abandoned property laws. Holders of our shares of common stock or
options or warrants to purchase our common stock who have not surrendered their
certificates, options or warrants prior to the delivery of such funds to Skywide
may only look to Skywide for the payment of the merger consideration or option
consideration. Any portion of the merger consideration or option consideration
that remains unclaimed for one year after the effective time (or, if earlier,
the date that such amounts would otherwise escheat to or become property of any
governmental authority) will, to the extent permitted by applicable law, become
the property of Skywide free and clear of any claims or interest of any person
previously entitled to the merger consideration.
If you
have lost a share certificate, option or warrant, or if it has been stolen or
destroyed, then before you will be entitled to receive the merger consideration
or option consideration, you will have to comply with the replacement
requirements established by the exchange agent, including, if necessary, the
posting of a bond in a customary amount sufficient to protect the surviving
company against any claim that may be made against it with respect to that
certificate, option or warrant.
Representations
and Warranties
We make
various representations and warranties in the merger agreement that are subject,
in some cases, to specified exceptions and qualifications. Our representations
and warranties relate to, among other things:
·
|
our
and our subsidiaries’ proper organization, good standing and qualification
to do business;
|
·
|
our
certificate of incorporation and
bylaws;
|
·
|
our
capitalization, including in particular the number of shares of our common
stock and stock options and other rights to acquire our common stock,
including warrants and convertible
notes;
|
·
|
our
corporate power and authority to enter into the merger agreement and to
consummate the transactions contemplated by the merger
agreement;
|
·
|
the
absence of dissenter’s rights;
|
·
|
the
approval and recommendation by our board of directors of the merger
agreement, the merger and the other transactions contemplated by the
merger agreement;
|
·
|
the
absence of violations of or conflicts with our and our subsidiaries’
governing documents, applicable law or certain agreements as a result of
entering into the merger agreement and consummating the
merger;
|
·
|
the
required consents and approvals of governmental entities in connection
with the transactions contemplated by the merger
agreement;
|
·
|
the
required vote of our shareholders in connection with the approval of the
merger agreement;
|
·
|
our
SEC filings since June 1, 2006, including the financial statements
contained in those filings;
|
·
|
the
absence of undisclosed liabilities;
|
·
|
the
absence of a “company material adverse effect” and certain other changes
or events related to us or our subsidiaries since September 30,
2009;
|
·
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material
contracts and any contracts with government
entities;
|
·
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litigation
and products liability;
|
·
|
compliance
with applicable legal requirements;
|
·
|
the
receipt by us of a fairness opinion from Brean
Murray;
|
·
|
the
absence of undisclosed broker’s
fees;
|
·
|
the
inapplicability of anti
-
takeover
statutes to the merger;
|
·
|
the
absence of unlawful payments; and
|
·
|
affiliate
transactions.
|
For the
purposes of the merger agreement, a “company material adverse effect” means any
change, circumstance, event or effect that would be materially adverse to the
business, operations, assets, liabilities or condition (financial or otherwise)
of the company and our subsidiaries taken as a whole.
A
“company material adverse effect” will not have occurred, however, as a result
of any change, circumstance, event or effect resulting from:
·
|
changes
in general economic conditions or in the securities markets in general
that do not affect us and our subsidiaries in a materially
disproportionate manner relative to other companies in the same
industry;
|
·
|
changes
in the industries in which we or our subsidiaries operate (including legal
and regulatory changes) that do not specifically relate to us and our
subsidiaries and that do not affect us and our subsidiaries in a
materially disproportionate manner relative to other companies in such
industry;
|
·
|
acts
taken in accordance with the merger agreement at the request of
Skywide;
|
·
|
acts
of terrorism or war (whether or not declared);
or
|
·
|
the
continuation of losses and the continuation of matters described in the
explanatory paragraph of the company’s financial statements for the year
ended September 30, 2009 and the three months ended December 31,
2009.
|
The
merger agreement also contains various representations and warranties made by
Skywide and Merger Sub that are subject, in some cases, to specified exceptions
and qualifications. The representations and warranties relate to, among other
things:
·
|
their
organization, valid existence and good
standing;
|
·
|
their
corporate or other power and authority to enter into the merger agreement
and to consummate the transactions contemplated by the merger
agreement;
|
·
|
the
absence of any violation of or conflict with their governing documents,
applicable law or certain agreements as a result of entering into the
merger agreement and consummating the
merger;
|
·
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Skywide’s
agreement that, during the 12 month period commencing on the effective
time of the merger, it not:
|
▪
|
sell,
assign, transfer or otherwise dispose of more than 19.9% of Sinoenergy’s
outstanding shares of capital
stock;
|
▪
|
cause
Sinoenergy to merge with an into any corporation or other entity or
liquidate; or
|
▪
|
cause
Sinoenergy or any of its subsidiaries to sell or otherwise dispose of all
or substantially all of its assets, other than in the ordinary course of
its business;
|
·
|
the
required consents and approvals of governmental entities in connection
with the transactions contemplated by the merger
agreement;
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·
|
the
absence of any materially false or misleading statements in materials
supplied for SEC filings or this proxy
statement;
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·
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Skywide’s
possession of, or access through existing lines of credit to, sufficient
funds to consummate the transactions contemplated by the merger
agreement;
|
·
|
the
absence of undisclosed broker’s fees;
and
|
·
|
the
application of the term “interested shareholder” of the company as defined
under Nevada law to Skywide or Merger
Sub.
|
Conduct
of Our Business Pending the Merger
Under the
merger agreement, we have agreed that, subject to certain exceptions and unless
Skywide gives its prior written consent, between the execution of the merger
agreement and the completion of the merger:
·
|
we
and our subsidiaries will conduct our businesses in substantially the same
manner as previously conducted; and
|
·
|
we
will use best efforts, consistent with past practices, to preserve
substantially intact our business organization, assets and properties,
keep available the services of our present officers and employees and
preserve our current relationships with suppliers, strategic partners,
customers, distributors and other persons with which we have significant
business relations so that our goodwill and ongoing business is
unimpaired.
|
We have
also agreed that during the same time period, and, subject to certain exceptions
or unless Skywide gives its prior written consent, we and our subsidiaries will
not:
·
|
amend
or otherwise change our or their respective certificates of incorporation
or bylaws;
|
·
|
issue,
deliver, sell, pledge, transfer, convey, dispose of or encumber any of our
or their respective equity
interests;
|
·
|
issue,
reissue or sell, or authorize the issuance, reissuance or sale of shares
of capital stock of any class, or securities convertible into capital
stock of any class, or any rights, warrants or options to acquire any
convertible securities or capital stock, other than the issuance by us of
common stock pursuant to the exercise of stock options, stock purchase
warrants or convertible securities, or make any other changes in our
capital structure;
|
·
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declare,
set aside, make or pay dividends or make any other distribution payable in
cash, stock, property or otherwise;
|
·
|
reclassify,
combine, split, subdivide, redeem, purchase or otherwise acquire any of
our or their respective equity
interests;
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·
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acquire,
lease or license from any person or sell, dispose of, encumber, pledge,
lease or license any businesses, any equity interests or
assets;
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·
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incur,
guarantee or materially modify any indebtedness or make any loans,
advances or capital contributions to, or investments in, any other person
(other than any of our
subsidiaries);
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·
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sublease
or grant an easement to, or transfer any interest in any land use
rights;
|
·
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except
as contemplated by the merger agreement or as required by applicable
law:
|
§
|
increase
or decrease the compensation or benefits of, or pay any bonus to, any of
our or our subsidiaries’ respective current or former directors, officers,
employees or consultants,
|
§
|
adopt
or enter into a new employee benefit plan;
or
|
§
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hire
or terminate any officer, other than for
cause;
|
·
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enter
into any transaction or agreement between the company and our
subsidiaries, on the one hand, and any of our affiliates, on the other,
that would be required to be disclosed under applicable SEC
rules;
|
·
|
settle
any pending or threatened litigation where the company would be prohibited
from operating as it has historically done
so;
|
·
|
surrender
any right to claim a material tax
refund;
|
·
|
make
any changes in accounting policies or procedures other than as required by
U.S. generally accepted accounting principles or a governmental authority,
unless such change is recommended by the company’s registered independent
accounting firm; or
|
·
|
agree
to take any of the actions described
above.
|
No
Solicitation of Transactions
We have
agreed that we, our directors and officers, and our subsidiaries will not, and
we are required to use our reasonable best efforts to cause our and our
subsidiaries’ representatives not to, directly or indirectly:
·
|
initiate,
solicit, encourage, or facilitate any inquiries or the making, submission,
or reaffirmation of any acquisition
proposal;
|
·
|
engage
in any negotiations or discussions concerning, or furnish information or
data to, any person relating to an acquisition proposal;
or
|
·
|
make
any statement, solicitation, or recommendation in support of any
acquisition proposal.
|
If the
company receives a bona fide unsolicited acquisition proposal prior to the
approval of the merger agreement by the company’s shareholders, we or our board
of directors are permitted to provide access to our properties, books and
records and provide other information and data in response to a request for such
information or data (if we receive an executed confidentiality agreement from
the person requesting the information). We and our board of directors
are further permitted to engage in discussions or negotiations with, or provide
any information to any person making a bona fide unsolicited acquisition
proposal. Before taking these actions, however, the following must
happen:
·
|
we
must promptly advise Skywide no later than 48 hours after receiving notice
of an unsolicited proposal of the identity of the person making the
proposal and its material terms and conditions;
and
|
·
|
our
board of directors must determine in its good faith judgment, after
consultation with its outside legal counsel and financial advisors, that
such action is necessary for our board of directors to comply with its
fiduciary duties under applicable law and that the applicable acquisition
proposal will result in, or could reasonably be expected to constitute or
result in, a “superior proposal” from the party that has made the
proposal.
|
·
|
If
our board of directors determines that such an unsolicited bona fide
written acquisition proposal is a superior proposal and that terminating
the merger agreement to accept the superior proposal is necessary in order
for our board of directors to comply with its fiduciary duties under
applicable law, we may terminate the merger agreement and/or our board of
directors may approve or recommend the superior proposal to our
shareholders. Immediately prior to or concurrently with the
termination of the merger agreement, we may enter into an agreement with
respect to such superior proposal, but only if we concurrently pay to
Skywide a termination fee equal to the lesser
of:
|
§
|
the
aggregate amount of the reasonable out-of-pocket expenses (including,
without limitation, all fees and expenses of counsel, accountants,
investment bankers, experts and consultants) actually incurred by Skywide
in connection with or related to the authorization, preparation,
negotiation, execution and performance of the merger agreement and the
merger, or
|
§
|
3%
of the total value of the merger transaction, which is
$552,861.
|
Additional
Agreements
Proxy
Statement
The
company agreed to prepare and file this proxy statement with the
SEC. The company and Skywide agreed to respond to any comments from
the SEC concerning this proxy statement, and to promptly make any security
filings required by state blue sky laws.
Listing
of Shares
We intend
to continue to list our shares on the Nasdaq Capital Market prior to the closing
of the merger agreement. On October 9, 2009, the company received a
notice from The Nasdaq Stock Market stating that, because of the company’s
failure to hold an annual meeting of shareholders at which proxies were
solicited, the company is in violation of Nasdaq’s rule requiring Nasdaq-listed
issuers to hold an annual meeting of shareholders, to solicit proxies and to
provide proxy statements to Nasdaq. The company filed an appeal of
the Nasdaq Stock Market’s determination. Pursuant to the hearing that
was held on that appeal, the Nasdaq Stock Market granted the company’s appeal
subject to the condition that it hold a meeting not later than January 19, 2010
at which directors of the company shall be elected. On January 19,
2010 the company held its annual meeting of shareholders at which all of its
directors were reelected.
Access
to Information
We will
allow representatives of Skywide to have access to the company’s property,
files, and business records. Skywide will hold all such information
in confidence.
Agreement
to Take Further Action and to Use Reasonable Best Efforts
Subject
to the terms and conditions of the merger agreement, each party has agreed to
use its reasonable best efforts to do all things necessary, proper or advisable
to consummate the transactions contemplated by that agreement.
Public
Disclosure
Each of
the company, Merger Sub and Skywide has agreed to refrain from making public
statements regarding the merger agreement or the proposed merger without the
consent of the other parties, except for any public statements or disclosures
that are required by law or stock market regulations.
Shareholder
Litigation
We have
agreed to allow Skywide to participate in the defense or settlement of any
shareholder litigation initiated in connection with the merger agreement prior
to the effective time of the merger. See “Special Factors –
Litigation Related to the Merger” at page [ ].
Directors’
and Officers’ Indemnification and Insurance
Skywide has agreed to indemnify and
hold harmless each present and former director and officer of the company or its
subsidiaries in the manner and to the extent described above under “The
Merger—Interests of the company’s Directors and Executive Officers in the
Merger—Indemnification and Insurance.”
Takeover
Statutes and Laws
The
company and its board of directors have agreed to grant any approvals, to the
extent it may legally do so, needed to satisfy the requirements of any
applicable state takeover statutes and laws.
Standstill
Agreements; Confidentiality Agreements
The
company has agreed to refrain from terminating or modifying and will use its
best efforts to enforce the provisions of any confidentiality or standstill
agreement.
Conditions
to the Merger
The
obligations of the parties to complete the merger are subject to the
satisfaction of the following mutual conditions:
·
|
Shareholder
Approval
. Our shareholders must approve the merger
proposal contained in this proxy
statement.
|
·
|
Regulatory
Approvals
. Other than the filing of the articles of
merger, all requisite regulatory approvals from any governmental entity
must have been obtained.
|
·
|
Proxy
Statement.
No stop order suspending, or similar
proceeding relating to, the proxy statement shall have been initiated or
threatened by the SEC.
|
·
|
No
Injunctions
. There must be no pending action, suit,
proceeding or decision instituted by any governmental entity seeking to
prohibit, restrain, enjoin or challenge the completion of the
merger.
|
The
obligations of Skywide and Merger Sub to complete the merger are subject to the
satisfaction or waiver of the following additional conditions:
·
|
Representations and Warranties
Regarding Capitalization, Authority, Conflicts, Filings, Consents,
Brokers, and Certain Approvals
. Our representations and
warranties regarding certain matters relating to our capitalization,
authority, conflicts, filings, consents, brokers and certain approvals
must be materially true and correct as though made on and as of the
closing date of the merger, except to the extent that a representation or
warranty expressly speaks as of a specific date, in which case it need be
true only as of that date.
|
·
|
Other Representations and
Warranties.
Our other representations and warranties
made in the merger agreement shall be true and correct as though made on
and as of the closing date, except:
|
§
|
to
the extent that a representation or warranty expressly speaks as of a
specific date, in which case it need be true only as of that date;
and
|
§
|
in
the case where the failure of a representation or warranty to be true and
correct has not had a company material adverse
effect.
|
·
|
Performance of Obligations of
the Company
. The performance, in all material respects, by us of
our covenants and agreements in the merger
agreement.
|
·
|
Governmental
Approvals.
Other than the filing of the articles of
merger, all authorizations, consents, notices, filings, or expiration of
waiting periods will have been granted or filed, or have occurred prior to
or on the closing date, except where, in the aggregate, the failure of
such events or actions to have occurred have not had and could not
reasonably be expected to have a material adverse effect on Skywide or
us.
|
·
|
Third Party Consents
.
The company shall have obtained any required third party
consents.
|
·
|
No
Restraints
. There shall be no pending actions by any
governmental entity seeking to:
|
§
|
restrain,
prohibit or otherwise interfere with the ownership or operation by Skywide
or any of its subsidiaries of all or any portion of the business of the
company or any of its Subsidiaries or of Skywide or any of its
subsidiaries;
|
§
|
compel
Skywide or any of its subsidiaries to dispose of or hold separate all or
any portion of the business or assets of the company or any of its
subsidiaries or of Skywide or any of its
subsidiaries;
|
§
|
impose
or confirm limitations on the ability of Skywide or any of its
subsidiaries effectively to exercise full rights of ownership of the
shares of the company’s common stock (or shares of stock of Skywide),
including the right to vote any such shares on any matters properly
presented to shareholders;
|
§
|
require
divestiture by Skywide or any of its subsidiaries of any such shares;
or
|
§
|
obtain
from the company or Skywide any material
damages.
|
·
|
Absence of a Company Material
Adverse Effect
. The absence of a company material adverse effect or
any event, condition, change or development or worsening of any existing
event, condition, change or development that would reasonably be expected
to have a company material adverse
effect.
|
·
|
Resignations
. Skywide
shall have received copies of the resignations, effective as of the
effective time of the merger, of each director of the company and its
subsidiaries.
|
Our
obligation to complete the merger is subject to the following additional
conditions:
·
|
Representations and
Warranties
. The truth and correctness in all material respects of
Skywide’s representations and warranties when the merger agreement was
entered into and as of the date the merger is completed,
except:
|
§
|
to
the extent that a representation or warranty expressly speaks as of a
specific date, in which case it need be true only as of that date;
and
|
§
|
where
failure to be true and correct has not and is not reasonably expected to
have, individually or in the aggregate, a material adverse effect on
Skywide.
|
·
|
Performance of Obligations of
Skywide
. The performance, in all material respects, by Skywide of
their covenants and agreements in the merger
agreement.
|
·
|
Government
Approvals.
Other than the filing of articles of merger,
all authorizations, consents, notices, filings, or expiration of waiting
periods will have been granted or filed, or have occurred prior to or on
the closing date, except where, in the aggregate, the failure of such
events or actions to have occurred have not had and could not reasonably
be expected to have a material adverse effect on Skywide or
us.
|
·
|
Merger
Consideration.
Skywide shall have provided for the
delivery, by wire transfer to the exchange agent, of the merger
consideration and option
consideration.
|
·
|
Absence of a Buyer Material
Adverse Effect
. The absence of a Buyer material adverse effect or
any event, condition, change or development or worsening of any existing
event, condition, change or development that would reasonably be expected
to have a Buyer material adverse
effect.
|
For the
purposes of the merger agreement, a “Buyer material adverse effect” means any
material adverse change, event, circumstance or development with respect to, or
any material adverse effect on, (i) the business, assets, liabilities,
capitalization, prospects, condition (financial or otherwise), or results of
operations of Skywide, taken as a whole or (ii) the ability of the Skywide to
consummate the transactions contemplated by this Agreement.
Changes
in the Company’s Senior Note Obligations
In
September 2007, we issued our 12% senior notes due 2012 in the principal amount
of $16,000,000 and 3.0% senior convertible notes due 2012 in the principal
amount of $14,000,000. The indentures relating to these notes
included financial covenants, which were amended on May 19, 2009. We
were not in compliance with these covenants at June 30, 2009 or September 30,
2009, and the note holders waived compliance with the covenants at both of these
dates. In October 2009, we entered into an agreement with the holders
of the 12% senior notes and the 3% convertible notes, which included a
requirement that we pay the 12% senior notes in full by November 30,
2009. At November 30, 2009, we had paid approximately $14,000,000 of
the amount due, and the remaining amount of approximately $2,000,000 remained
outstanding on December 17, 2009. The October agreement also provided
that we would amend the indenture relating to the 3.0% senior convertible notes
in a manner acceptable to the note holders. On December 17, 2009, we
entered into an agreement with the note holders pursuant to which:
·
|
the
remaining balance of approximately $2,000,000 of the 12% senior notes had
to be, and was, paid by December 31,
2009;
|
·
|
the
$14,000,000 principal amount of the 3% convertible notes, together with
interest providing the holders with a 13.8% yield to maturity, after
giving effect to current interest payments made at the annual rate of 3.0%
per annum, must be paid in two installments following completion of the
merger with Skywide, with the first payment of $5,000,000 being due ten
days after the effectiveness of the merger and the balance 30 days
thereafter;
|
·
|
the
requirement that we meet certain net income levels for 2008 and 2009 were
eliminated;
|
·
|
the
provisions that would have resulted in a reduction in the conversion price
of the convertible notes if we sold common stock or securities convertible
into common stock were eliminated;
and
|
·
|
the
liquidated damages due for failing to register the shares of common stock
issuable upon conversion of the notes were reduced to $280,000, and we
became obligated to pay, and did pay, that amount by December 31,
2009.
|
Termination
The
merger agreement may be terminated and the merger may be abandoned at any time
prior to the effective time of the merger, whether before or after shareholder
approval has been obtained, as follows:
·
|
by
mutual written consent of the
parties;
|
·
|
by
either Skywide or the company, if:
|
§
|
the
closing has not occurred on or before May 31, 2010, so long as the failure
to complete the merger is not the result of the failure of the terminating
party to comply with the terms of the merger agreement, and provided, that
if the closing conditions relating to the absence of actions or suits by
governmental authorities have not been satisfied, then either we or
Skywide may unilaterally extend such date until June 30,
2010;
|
§
|
a
governmental entity has issued a nonappealable final order, decree or
ruling or taken any other final action permanently restraining, enjoining
or otherwise prohibiting the
merger;
|
§
|
the
company’s shareholders do not approve the merger agreement at the special
meeting or any postponement or adjournment
thereof;
|
§
|
there
is a material breach of a representation or warranty by the
company;
|
§
|
the
company’s board of directors withdraws, modifies, or changes its approval
of the merger agreement in a way adverse to Skywide;
or
|
§
|
the
company’s board of directors recommends another acquisition
proposal.
|
§
|
there
is a material breach of a representation or warranty by Skywide;
or
|
§
|
prior
to approval of the merger agreement by the company’s shareholders in
accordance with the merger agreement, we receive a superior proposal in
accordance with the terms of the merger agreement described under “–No
Solicitation of Transactions” above, but only after we have provided
notice to Skywide regarding our intent to terminate the merger agreement
and/or recommend the superior proposal and provided Skywide at least a
three business day period, during which time we must negotiate in good
faith with Skywide to make such adjustments to the terms and conditions of
the merger agreement so that the superior proposal would no longer be
considered as such, and only if we concurrently pay to Skywide the
termination fee described below under “–Termination Fees and
Expenses.”
|
Effect
of Termination
In the
event of termination of the merger agreement, it will become void and there will
be no liability or obligation on the part of any party, except liability
resulting from a willful breach. Provisions regarding fees and
expenses and certain other matters such as dispute resolution will remain in
effect and survive such a termination.
Termination
Fees and Expenses
Each
party shall pay for the fees and expenses that it has incurred in connection
with the merger agreement, whether or not the merger is consummated, with the
following exceptions:
·
|
if
the company or Skywide terminates the merger agreement because our board
has withdrawn or modified its approval of the merger agreement, or because
it has recommended another acquisition offer, we will be required to pay a
termination fee to Skywide equal to the lesser
of:
|
§
|
the
aggregate amount of the reasonable out-of-pocket expenses
(including, without limitation, all fees and expenses of counsel,
accountants, investment bankers, experts and consultants) actually
incurred by Skywide in connection with or related to the authorization,
preparation, negotiation, execution and performance of the merger
agreement and the merger; or
|
§
|
$552,861
(which is 3% of the of the total value of the merger
transaction);
|
·
|
if
the company terminates the merger agreement resulting from a material
breach of any representation, warranty, covenant or agreement on the part
of Skywide or Merger Sub contained in the merger agreement,
such that certain conditions have not been satisfied and have not been
timely cured, Skywide will be required to pay a termination fee to us in
the aggregate amount of the reasonable out-of-pocket expenses
(including, without limitation, all fees and expenses of counsel,
accountants, investment bankers, experts and consultants) actually
incurred by us in connection with or related to the authorization,
preparation, negotiation, execution and performance of the merger
agreement and the merger;
|
·
|
if
Skywide terminates the merger agreement resulting from a material breach
of any representation, warranty, covenant or agreement on the part of the
company contained in the merger agreement, such that certain conditions
have not been satisfied and have not been timely cured, the company will
be required to pay the above-described termination fee to reimburse
Skywide for its actually incurred
expenses;
|
·
|
if
Skywide or the company terminates the merger agreement because the
company’s shareholders did not approve the merger agreement proposal at
the special meeting, and at or prior to the time of the termination of the
merger agreement an acquisition offer has been disclosed, announced,
commenced, submitted or made and within 12 months after the date of
termination of this Agreement, either an acquisition offer has been
consummated or a definitive agreement with respect to an acquisition offer
has been entered into by the company, then, prior to the consummation of
such acquisition offer, the company will be required to pay the
above-described termination fee to reimburse Skywide for its actually
incurred expenses.
|
·
|
if
either party fails to pay the termination fee when due, then such party is
liable for that fee, plus interest, and shall reimburse the other party
for all reasonable costs and expenses actually incurred or accrued by such
other party (including reasonable fees and expenses of counsel) in
connection with any action taken to collect payment of the termination fee
arising from such a failure to pay.
|
Amendment
and Waiver
Subject
to applicable law, the merger agreement may be amended by the written agreement
of the parties at any time prior to the closing date of the merger, whether
before or after the approval of the merger agreement by our shareholders,
provided that after the shareholders approve the merger agreement, no amendment
shall be made that by law requires further approval of the shareholders without
such further approval.
The
merger agreement also provides that, at any time prior to the effective time of
the merger, any party may, by written agreement:
·
|
extend
the time for the performance of any of the obligations or other acts of
the other parties to the merger
agreement;
|
·
|
waive
any inaccuracies in the representations and warranties contained in the
merger agreement or in any document delivered pursuant to the merger
agreement; or
|
·
|
waive
compliance with any of the agreements or conditions contained in the
merger agreement which may be legally
waived.
|
NO RIGHTS OF APPRAISAL
Under
Nevada law, you do not have any appraisal or other rights of objection in
connection with the merger.
IMPORTANT INFORMATION REGARDING
SINOENERGY
We are a
Nevada corporation organized in 1999 under the name Franklyn Resources III, Inc.
On September 28, 2006, our corporate name was changed to Sinoenergy Corporation.
On June 2, 2006, we acquired the stock of Sinoenergy Holding Limited, a British
Virgin Island corporation. We and Sinoenergy Holding are holding companies and
our business is operated by our subsidiaries.
At the
time of our acquisition of Sinoenergy Holding:
·
|
we
were a blank check corporation which was not engaged in any business
activities;
|
·
|
Sinoenergy
Holding Limited was the sole shareholder of Qingdao Sinogas General
Machinery Limited Corporation (“Sinogas”), a Chinese
company;
|
·
|
Sinoenergy
Holding had no business other than its ownership of Sinogas;
and
|
·
|
as
a result of that 2006 transaction, Sinoenergy Holding and its subsidiary,
Sinogas, became subsidiaries of the company and the business of Sinogas
became our business.
|
Through
our subsidiaries, we are engaged in four business segments:
·
|
The
manufacture of customized pressure containers and compressed natural gas,
or CNG, facilities and equipment, which has until recently been our
principal business. In this segment, we design and manufacture
pressure containers which are used in a number of industries, including
the petroleum and chemical, metallurgy and electricity generation, and the
brewing industries using technology acquired from a former related
party.
|
·
|
The
manufacture of CNG storage and transportation products and the
construction of CNG stations for third parties. We also
design and construct CNG stations and install CNG station equipment and
related systems.
|
·
|
The
operation of CNG filling stations, which involves the design, construction
and operation of CNG
stations.
|
·
|
Vehicle
fuel conversion equipment, which involves the manufacture of kits which
are used to enable a gasoline-powered vehicle to operate using
CNG.
|
CNG is
gas, principally methane, that has been compressed. Natural gas is compressed
during transportation and storage and, thus, requires pressurized
containers.
For a
complete description of our business, see our Annual Report on Form 10-K for the
fiscal year ended September 30, 2009, filed with the SEC on December 29,
2009, which is attached as Annex C to this proxy statement, and our Quarterly
Report on Form 10-Q for the quarterly period ended December 31, 2009, filed with
the SEC on February 16, 2010, which is attached as Annex D to this proxy
statement. We refer to such reports as the “Form 10-K,” and the “First Quarter
Form 10-Q.” The Form 10-K and the First Quarter Form 10-Q attached to
this proxy statement do not include the exhibits originally filed with such
reports.
Description
of Property
For a
description of our properties, see the Form 10-K at page D-14.
Legal
Proceedings
For a
description of our legal proceedings, see ““Special Factors – Litigation
Related to the Merger.”
Financial
Statements
Our
audited financial statements for the years ended September 30, 2009 and 2008 are
included in the Form 10-K beginning at page F-1. Our unaudited financial
statements for the quarter ended December 31, 2010 are included in the First
Quarter Form 10-Q beginning at page 1.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Our
management’s discussion and analysis of financial condition and results of
operations are included in the Form 10-K and the First Quarter Form 10-Q
beginning at pages 20 and 25, respectively.
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Quantitative
and Qualitative Disclosures about Market Risk
We are a
small reporting company as defined by Rule 12b-2 of the Securities Exchange Act
of 1934 and are not required to provide the information under this
Item.
Selected
Historical Financial Data
Set forth
below is certain selected historical consolidated financial data relating to the
company and its subsidiaries, which should be read in conjunction with, and is
qualified in its entirety by reference to, Sinoenergy’s historical financial
statements, the notes to those statements and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” set forth in the
Form 10-K. The selected financial data set forth below as of
September 30, 2009 and 2008 has been derived from the audited consolidated
financial statements contained in the Form 10-K. The selected
financial data set forth below as of and for the three months ended
December 31, 2009 and 2008 has been derived from Sinoenergy’s unaudited
financial statements contained in the First Quarter Form 10-Q. The unaudited
financial statements have been prepared on the same basis as Sinoenergy’s
audited financial statements and include all adjustments consisting of normal
recurring adjustments that we consider necessary for a fair presentation of the
financial information set forth in those statements. The information set forth
below is not necessarily indicative of the results of future operations. More
comprehensive financial information is included in the Form 10-K and the
First Quarter Form 10-Q, and other documents filed by Sinoenergy with the
SEC, and the following summary is qualified in its entirety by reference to such
reports and other documents and all of the financial information and notes
contained in those documents. See “Where You Can Find Additional
Information.”
No
separate financial information is provided for Merger Sub because Merger Sub is
a newly formed entity formed in connection with the merger and has no
independent operations. No pro forma data giving effect to the merger has been
provided. Sinoenergy does not believe that such information is
material to shareholders in evaluating the proposed merger and merger agreement
because (i) the proposed merger consideration is all cash, and (ii) if
the merger is completed, Sinoenergy’s common stock will cease to be publicly
traded.
|
|
Three
Months Ended
December 31,
|
|
|
Year
Ended
September 30,
|
|
Statement
of Operations Data:
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
Thousands of United States Dollars)
|
|
Net
sales
|
|
$
|
12,528
|
|
|
$
|
15,928
|
|
|
$
|
41,800
|
|
|
$
|
40,940
|
|
Gross
profit
|
|
|
1,846
|
|
|
|
4,802
|
|
|
|
9,450
|
|
|
|
15,351
|
|
Income
(loss) before income taxes and non-controlling interest
|
|
|
(3,900
|
)
|
|
|
3,221
|
|
|
|
(12,601
|
)
|
|
|
18,447
|
|
Net
income (loss)
|
|
|
(4,246
|
)
|
|
|
2,653
|
|
|
|
(13,012
|
)
|
|
|
16,056
|
|
Comprehensive
income (loss)
|
|
$
|
(4,676
|
)
|
|
$
|
1,537
|
|
|
$
|
(13,103
|
)
|
|
$
|
19,606
|
|
|
|
As
of
December 31,
|
|
|
As
of
September 30,
|
|
Balance
Sheet Data:
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
Thousands of United States Dollars)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
16,936
|
|
|
$
|
4,049
|
|
|
$
|
18,237
|
|
|
$
|
8,871
|
|
Accounts receivable,
net
|
|
|
28,283
|
|
|
|
27,308
|
|
|
|
29,756
|
|
|
|
22,008
|
|
Other receivable,
net
|
|
|
14,360
|
|
|
|
16,108
|
|
|
|
17,644
|
|
|
|
16,939
|
|
Inventories
|
|
|
4,797
|
|
|
|
4,058
|
|
|
|
4,619
|
|
|
|
7,303
|
|
Total
Current Assets
|
|
|
73,546
|
|
|
|
60,980
|
|
|
|
80,787
|
|
|
|
63,697
|
|
Total
Non-Current Assets
|
|
|
108,956
|
|
|
|
74,881
|
|
|
|
99,859
|
|
|
|
68,650
|
|
Total
Assets
|
|
$
|
182,502
|
|
|
$
|
135,861
|
|
|
$
|
180,646
|
|
|
$
|
132,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term bank
loan
|
|
$
|
47,480
|
|
|
$
|
12,627
|
|
|
$
|
44,223
|
|
|
$
|
11,953
|
|
Due
to related parties
|
|
|
20,208
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Current portion of
long-term
notes payable
|
|
|
10,934
|
|
|
|
–
|
|
|
|
26,667
|
|
|
|
–
|
|
Total
Current Liabilities
|
|
|
96,225
|
|
|
|
28,556
|
|
|
|
89,790
|
|
|
|
28,713
|
|
Long-term
notes payable, net of current portion
|
|
|
–
|
|
|
|
29,229
|
|
|
|
–
|
|
|
|
29,251
|
|
Long-term
bank loan
|
|
|
26,361
|
|
|
|
4,389
|
|
|
|
26,358
|
|
|
|
3,667
|
|
Total
Liabilities
|
|
$
|
123,681
|
|
|
$
|
63,269
|
|
|
$
|
27,453
|
|
|
$
|
62,726
|
|
Total
Shareholders Equity
|
|
$
|
63,313
|
|
|
$
|
55,227
|
|
|
$
|
58,821
|
|
|
$
|
56,847
|
|
Non-controlling
Interest
|
|
$
|
18,227
|
|
|
$
|
5,745
|
|
|
$
|
17,132
|
|
|
$
|
14,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of Earnings to Fixed Charges
The ratio
of earnings to fixed charges means the ratio of income before fixed charges and
income taxes to fixed charges, where fixed charges are the aggregate of interest
expense, including amortization of debt issuance costs, and an allocation of
rental charges to approximate equivalent interest. Because we
incurred a loss for the year ended September 30, 2009 and the three months ended
December 31, 2009, no information relating to a ratio of earnings to fixed
charges is included for those periods.
The
following presents our ratio of earnings to fixed charges for the years ended
September 30, 2009 and 2008, and the three months ended December 31, 2009,
which should be read in conjunction with our consolidated financial statements
included in our Annual Reports on Form 10-K for the years ended
September 30, 2009 and 2008, and our Quarterly Report on Form 10-Q for
the quarter ended December 31, 2009, which are incorporated herein by
reference.
|
|
Year Ended September 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Three
Months Ended December
31, 2009
|
|
(In
thousands, except ratios)
|
|
|
|
|
|
|
|
|
|
Pre-tax
income
|
|
$
|
(12,692
|
)
|
|
$
|
17,138
|
|
|
$
|
(3,900
|
)
|
Plus: fixed
charges
|
|
|
9.073
|
|
|
|
3,686
|
|
|
|
2,941
|
|
Plus:amortization of capital-ized
interest
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Plus:distributed income of equity
investees
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Plus:Company’s share of pretax
losses of equity investees arising from guarantees that are included in
fixed charges
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Minus: Interest
capitalized
|
|
|
144
|
|
|
|
1,792
|
|
|
|
32
|
|
Minus: noncontrolling interest in
pre-tax income of subsidiaries that have not incurred fixed
charges
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Earnings
|
|
$
|
(3,763
|
)
|
|
$
|
19,032
|
|
|
$
|
(991
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expensed
|
|
$
|
1,298
|
|
|
$
|
1,783
|
|
|
|
2,076
|
|
Plus: Interest
capitalized
|
|
|
144
|
|
|
|
111
|
|
|
|
833
|
|
Plus:amortized premiums,
discounts and capitalized expenses related to
in-debtedness
|
|
|
1,631
|
|
|
|
1,792
|
|
|
|
32
|
|
Fixed
Charges
|
|
$
|
9,073
|
|
|
$
|
3,686
|
|
|
$
|
2,941
|
|
Ratio
of Earnings to Fixed Charges
|
|
|
*
|
|
|
|
5.16
|
|
|
|
*
|
|
* Earnings
for the fiscal year ended September 30, 2009 and the quarter ended December 31,
2009 were insufficient to cover fixed charges by $12,386,000 and $3,932,000,
respectively.
Because
we have no preferred stock issued (and have not had any issued during the fiscal
years shown above), a ratio of earnings to combined fixed charges and preferred
dividends is not presented.
Book
Value Per Share
Our
net book value per share as of December 31, 2009 was $3.69. Net book
value per share was computed by dividing total shareholders’ equity at December
31, 2009 by the weighted average number of shares of common stock outstanding on
that date. There was no difference between the weighted average
number of shares of common stock outstanding on that date and the weighted
average number of our shares that would have been outstanding upon exercise or
conversion of the options, warrants and convertible notes outstanding on that
date because all of such exercise or conversion transactions would have been
anti-dilutive.
Market
Price of the Company’s Stock and Dividend Information
Our
common stock has been traded on the NASDAQ Capital Market under the symbol
“SNEN” since July 28, 2008. Prior to February 6, 2007, there was no market for
our common stock. From February 6, 2007 until July 25, 2008, our stock was
traded on the OTC Bulletin Board. The following table sets forth the high and
low bid price of our stock on the OTC Bulletin Board for the periods
indicated. The high and low bid prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions. The table also sets forth
the high and low sales prices per share of our common stock on the NASDAQ
Capital Market for the periods indicated. The prices indicated for
the period prior to July 9, 2008 have not been adjusted to reflect the 1:2 stock
split that occurred on that day.
|
|
|
|
Bid
Prices
|
|
|
|
|
|
|
Fiscal
Year Ended September 30, 2008
|
|
|
|
|
|
|
1
st
Quarter
|
|
$
|
10.50
|
|
|
$
|
6.22
|
|
2
nd
Quarter
|
|
$
|
8.80
|
|
|
$
|
4.10
|
|
3
rd
Quarter
|
|
$
|
6.06
|
|
|
$
|
4.80
|
|
4
th
Quarter (through July 25, 2008)
|
|
$
|
6.90
|
|
|
$
|
4.80
|
|
|
|
|
|
|
|
|
|
|
Sales
Prices
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended September 30, 2008
|
|
|
|
|
|
|
|
|
4
th
Quarter (commencing on July 28, 2008)
|
|
$
|
7.26
|
|
|
$
|
4.36
|
|
Fiscal
Year Ended September 30, 2009
|
|
|
|
|
|
|
|
|
1
st
Quarter
|
|
$
|
5.05
|
|
|
$
|
1.80
|
|
2
nd
Quarter
|
|
$
|
2.73
|
|
|
$
|
0.81
|
|
3
rd
Quarter
|
|
$
|
1.85
|
|
|
$
|
1.12
|
|
4
th
Quarter
|
|
$
|
2.63
|
|
|
$
|
0.80
|
|
Fiscal
Year Ending September 30, 2010
|
|
|
|
|
|
|
|
|
1
st
Quarter
|
|
$
|
1.98
|
|
|
$
|
1.12
|
|
The
closing sale price of our common stock on the Nasdaq Capital Market on October
9, 2009, which was the last trading day before we announced the merger, was
$1.28. On [ ],
2010, the last trading day before this proxy statement was printed, the closing
price for the company’s common stock on the Nasdaq Capital Market was
$[ ]. You are encouraged to
obtain current market quotations for the company’s common stock in connection
with voting your shares.
We have
not paid any cash dividends on our common stock. Our indentures relating to the
notes issued in our September 2007 financing have restrictions on our use of
funds. The merger agreement provides, among other things, that we may
not pay any dividends on our common stock without the consent of
Skywide.
On
[ ], 2010, we had
[ ] holders of record of our common
stock.
Prior
Public Offerings and Stock Purchases
The company has not made
an underwritten public offering of its common stock for cash during the past
three years that was registered under the Securities Act of 1933 or exempt from
registration under Regulation A. The company has not purchased any shares
of its common stock during the past two years.
Recent
Transactions
No
transactions in the common stock of the company have been effected during the
period which commenced 60 days prior to date of announcement of the merger
through the date of this proxy statement by (i) the company, (ii) any
director or executive officer of the company or any affiliate of such persons,
(iii) any subsidiary of the company, and (iv) any pension,
profit-sharing or similar plan of the company or any affiliate of the
company.
Section 16(a)
of the Exchange Act requires our directors and certain of our officers and
persons who beneficially own more than 10% of our common stock to file initial
reports of ownership and reports of changes in ownership of Sinoenergy common
stock with the SEC. Officers, directors and 10% beneficial owners are also
required by SEC rules to furnish us with copies of all Section 16(a) forms
they file. Based solely on our review of the forms filed with the SEC and
furnished to us, we believe that none of our only directors, officers and 10%
beneficial owners have effected transactions in our common stock since
60 days prior to the date of the merger agreement.
Security
Ownership of Certain Beneficial Owners and Management
The
following table shows information regarding the beneficial ownership of our
common shares as of the date of this proxy statement for:
·
|
each
executive officer named in the summary compensation
table;
|
·
|
all
directors and executive officers as a
group;
|
·
|
each
person known to us to be the beneficial owner of more than 5% of our
outstanding shares of common stock;
and
|
·
|
each
person who is a member of a group that includes any person in any of the
foregoing categories.
|
For
purposes of the following table, “beneficial ownership” means the sole or shared
power to vote, or to direct the voting of, a security, or sole or shared
investment power with respect to a security, or any combination thereof, and the
right to acquire such power (for example, through the exercise of employee stock
options granted by the company) within 60 days. Unless otherwise noted, the
business address of each of our directors and officers is 1603-1604, Tower B
Fortune Centre Ao City, Beiyuan Road, Chaoyang District, Beijing, People’s
Republic of China 100107 and each person’s business telephone number is
86-10-84928149.
|
|
Shares
of Common
Stock
Beneficially
Owned
|
|
|
|
Number
of
|
|
|
|
|
Name and Address of Beneficial
Owner
|
|
Shares
|
|
|
Percent
(1)
|
|
Tianzhou
Deng (2)
|
|
|
3,188,551
|
|
|
|
20.0
|
|
Bo
Huang (2)
|
|
|
3,188,551
|
|
|
|
20.0
|
|
Chongjun
Duan (3)
|
|
|
2,080,699
|
|
|
|
13.1
|
|
Xiang
Dong (Donald) Yang (4)
|
|
|
2,249,036
|
|
|
|
12.4
|
|
Abax
Nai Xin A Ltd. (4)
|
|
|
1,741,405
|
|
|
|
9.9
|
|
CCIF
Petrol Limited (5)
|
|
|
1,119,048
|
|
|
|
6.6
|
|
Robert
I. Adler (6)
|
|
|
25,000
|
|
|
|
*
|
|
Greg
Marcinkowski (6)
|
|
|
25,000
|
|
|
|
*
|
|
Renjie
Lu (6)
|
|
|
25,000
|
|
|
|
*
|
|
Baoheng
Shi (6)
|
|
|
25,000
|
|
|
|
*
|
|
Anlin
Xiong
|
|
|
0
|
|
|
|
0
|
|
Shiao
Ming Sheng
|
|
|
0
|
|
|
|
0
|
|
Cindy
Ye
|
|
|
0
|
|
|
|
0
|
|
All
directors and executive officers as a group (10 persons)
|
|
|
8,726,138
|
|
|
|
47.6
|
|
_________________
|
|
|
|
|
|
|
|
|
*
Represents less than 1% of the shares outstanding
|
|
|
|
|
|
|
|
|
(1) Based
upon 15,922,391 shares of common stock outstanding on the date of this proxy
statement.
(2) Does
not include 50,000 shares of common stock which each of Mr. Deng and Mr., Huang
have the right to acquire pursuant to options exercisable within 60 days of the
date of this proxy statement. Mr. Deng and Mr. Huang each owns a 50%
interest in Skywide, which owns 6,277,102 shares of common stock. Thus, Mr. Deng
and Mr. Huang are deemed to beneficially own 50% of the shares owned by Skywide.
As the sole owners of Skywide, they have joint voting and dispositive power with
respect to the shares owned by Skywide. In addition, Mr. Deng and Mr. Huang each
hold an option to purchase 50,000 shares of common stock.
(3) The
business address of Chongjun Duan is 26 Huangsi Street, Building 1, F1 11,
Xicheng District, Beijing, Peoples Republic of China. The foregoing information
was derived from a Schedule 13G filed with the SEC on March 17,
2009.
(4) Mr.
Yang is a director, and he may be deemed a controlling person with respect to
Abax Lotus, Ltd., Abax Nai Xin and Abax Jade. The shares deemed to be
beneficially owned by Mr. Yang represent the shares of common stock directly and
beneficially owned by Abax Nai Xin and Abax Jade. In September 2007,
Abax Lotus purchased from us 12% senior notes and 3% senior convertible notes in
the principal amount of $9,300,000, which are convertible into 2,214,286 shares
of common stock at the current conversion rate, and Abax Lotus subsequently
purchased 34,750 shares of common stock in the open market. On May 1,
2009, Abax Lotus transferred to its affiliates, Abax Nai Xin and Abax Jade, for
no consideration, the notes and shares of common stock. As a result
of that transfer Abax Nai Xin owns 27,119 shares of common stock and $7,200,000
principal amount of 12% senior and 3% convertible notes, which are convertible
into 1,714,286 shares of common stock, and Abax Jade owns 7,631 shares of common
stock and $2,100,000 principal amount of 12% senior and 3% convertible notes
which are convertible into 500,000 shares of common stock. Mr. Yang
has sole voting and dispositive power with respect to the securities owned by
Abax Lotus, Abax Nai Xin and Abax Jade. Mr. Yang disclaims beneficial ownership
of these securities, except to the extent of his pecuniary interest
therein. Mr. Yang does not have any direct interest in the Sinoenergy
securities owned by Abax Nai Xin and Abax Jade. Mr. Yang is an equity
holder in the management company that acts as advisor to Abax Nai Xin and Abax
Jade, of which Sinoenergy is a portfolio company. The business
address of Mr. Yang and Abax Nai Xin A Ltd. is Suite 6708, 67/F Two Int’l
Finance Center, Hong Kong.
(5) The
shares beneficially owned by CCIF Petrol Limited represent shares of common
stock issuable upon conversion of our 3.0% convertible notes in the principal
amount of $4,700,000. CCIF Petrol Limited is wholly owned by China Century
Investment Fund Limited, a Cayman Islands company, whose sole corporate director
is China Renaissance Capital Investment Inc., a Cayman Islands company. Voting
and investment powers of securities held by CCIF Petrol Limited is exercised by
the board of directors of China Renaissance Capital Investment Inc. which
consists of Mark Qiu, Hung Shih, Li Zhenzhi, Charles Pieper and Nicole
Arnaboldi. The business address of CCIF Petrol Limited is c/o China
Renaissance Capital Investment Inc., M&C Corporate Services, Ltd., P.O. Box
309GT, Ugland House, South Church Street, George Town, Grand Cayman, Cayman
Islands.
(6) The
shares beneficially owned by Mr. Adler, Mr. Marcinkowski, Mr. Lu, and Mr. Shi
represent shares issuable upon exercise of options held by each of
them.
Directors
and Executive Officers
Set forth
below for each of our directors and executive officers is his or her respective
present principal occupation or employment, the name and principal business of
the corporation or other organization in which such occupation or employment is
conducted and the five-year employment history of each such director and
executive officer. All of the directors and officers identified below
are citizens of the People’s Republic of China except for Messrs. Adler and
Marcinkowski, who are United States citizens.
During
the last five years, none of our directors or our executive officers has been
(a) convicted in a criminal proceeding (excluding traffic violations or
similar misdemeanors) or (b) a party to any judicial or administrative
proceeding (except for matters that were dismissed without sanction or
settlement) that resulted in a judgment or decree or final order enjoining the
person from future violations of, or prohibiting activities subject to, federal
or state securities laws, or a finding of any violation of federal or state
securities laws.
The
following table sets forth certain information with respect to our directors and
executive officers.
Name
|
|
Age
|
|
Position
|
Bo
Huang
|
|
39
|
|
Chief
executive officer and director
|
Tianzhou
Deng
|
|
53
|
|
Chairman
and director
|
Shiao
Ming Sheng
|
|
60
|
|
Chief
financial officer
|
Anlin
Xiong
|
|
30
|
|
Vice
president and secretary
|
Cindy
Ye
|
|
34
|
|
Financial
controller
|
Robert
I. Adler
|
|
75
|
|
Director
|
Renjie
Lu
|
|
75
|
|
Director
|
Greg
Marcinkowski
|
|
49
|
|
Director
|
Baoheng
Shi
|
|
71
|
|
Director
|
Xiang
Dong (Donald) Yang
|
|
43
|
|
Director
|
Bo Huang
has been our chief executive officer and a director since the completion of the
reverse acquisition in June 2006. Mr. Huang is also a director of Skywide and
has served in that capacity since 2006. He has been chief executive
officer and chairman of Sinogas since its organization in 2005. He and Mr. Deng
are the founders of Sinogas. He was president of Beijing Tricycle Technology
Development Co., Ltd., a company engaged in the development of natural gas
conversion kits from 2003 to 2005, and vice president of Chengchen Group, an
investment and trading company from 1997 to 2003. Mr. Huang graduated from
Renmin University of China in Beijing in 1993 with a bachelor’s degree in
international finance.
Tianzhou
Deng has been our chairman and a director since the completion of the reverse
acquisition in June 2006. Mr. Deng is also a director of Skywide and has served
in that capacity since 2006. He is also a founder of Sinogas. He has
been the chief executive officer and chairman of Beijing Sinogas Co., Ltd ., a
company engaged in research and development with respect to CNG stations from
2001 to 2005, chairman of Shanghai CNPC Group Co., Ltd., an investment and
trading company from 2003 to 2005, president and director of Beijing Tricycle
Technology Development Co., Ltd., a company engaged in the development of
natural gas conversion kits from 1999 to 2001, president and director
of Natural Gas Vehicle Development Center, from 1997 to 1999. Mr. Deng
graduated from University of Petroleum, China in 1982 with a chemical bachelor
degree, and received a master of management degree from China Science &
Technology University. Mr. Deng holds a senior engineer certificate with
professor rank issued by the Chinese government. Mr. Deng is recognized as a
leader in the CNG/LPG industry in China.
Robert I.
Adler is a private investor. He retired in 2003 from a position as investment
advisor with UBS Financial Services, where he had been employed for the prior
year. Mr. Adler’s prior experience includes terms as a managing director for ING
Furman Selz Asset Management, vice president and senior investment officer
of BHF Securities Corp and DG Bank, New York Branch and vice president of Kuhn,
Loeb & Co. Recently he taught financial English for a semester in Shanghai
University of Finance and Economics. Mr. Adler obtained a B.A. degree from
Swarthmore College and studied at New York University School of Business
Administration. He is a member of Institute of Chartered Financial Analysts and
the New York Society of Security Analysts. Mr. Adler is also a director and
audit committee member of China Medicine Corporation, a company that markets and
distributes medicine products in the PRC, and Precision Aerospace Components,
Inc., a stocking distributor of precision fasteners based in New York
City. Mr. Adler is a citizen of the United States of
America.
Renjie Lu
has been a director since July 2006. Mr. Lu has more than 40 years of
working experience in the energy industry in China. As an industry veteran, he
currently is a senior member of the Advisory Council Committee of Shengli
Administration Bureau, SINOPEC (China Petroleum & Chemical Corp, a
NYSE-listed company). Mr. Lu was chief executive officer and director of Shengli
Administration Bureau, SINOPEC from 1989 to 1996, where he managed about 500,000
employees; he was chief executive officer and director of Jianghan
Administration Bureau, SINOPEC from 1987 to 1989; and executive vice president
of Zhongyuan Exploration Bureau, SINOPEC from 1975 to 1987. Mr. Lu graduated
from University of Petroleum, China in 1963 with a BSc.
Greg
Marcinkowski has been a director since July 2006. Mr. Marcinkowski
has been a vice president of operations at WorldStrides since 2000. WorldStrides
is a U.S. provider of student educational and performing arts tours in a variety
of programs and destinations throughout the world. From 1999 to 2000, Mr.
Marcinkowski was the vice president of purchasing at Solo Cup Corporation, which
is a manufacturer of packaging products for retail food industries. Mr.
Marcinkowski has a MBA and a BSc in mechanical engineering from Northwestern
University. Mr. Marcinkowski is a citizen of the United States of
America.
Baoheng
Shi has been a director since July 2006. Mr. Shi is a pioneer and a
top scientist/researcher in the Chinese clean energy area. Mr. Shi is a
professor at Beijing University, University of Petroleum, China, and China
Geology University. He is deputy director of natural resource, China National
Science & Technology Development Committee. Since 1993, Mr. Shi has
initiated natural gas vehicle usage in China, and is recognized as a pioneer in
the industry in China. He published “Natural Gas Vehicle Development” in 1999
and “Technology of Natural Gas Vehicle” in 2000. Mr. Shi has been director of
New Technology Development Center, China National Petroleum Corp, a NYSE-listed
company from 1993 to 2000; president of China National Petroleum’s Science &
Technology Bureau from 1978 to 1993. Mr. Shi has a B.Sc. from Beijing
University.
Xiang
Dong (Donald) Yang has been a director since May 2008. Mr. Yang has
been president of Abax Global Capital, a Hong Kong based asset management firm
of which Mr. Yang is a founding partner, focused on Pan-Asian public and private
investments with a particular emphasis on Greater China and South East
Asia. From 2000 to 2007, Mr. Yang was a managing director and head of Hong
Kong and China Debt Capital Market at Merrill Lynch. Mr. Yang holds an MBA
degree from the Wharton School of Business and a BA degree from Nankai
University in China. Abax Lotus Ltd., an affiliate of Abax Global
Capital, was the lead investor in our $30,000,000 note financing which closed in
September 2007, having purchased $10,700,000 principal amount of our 12%
guaranteed senior notes due 2012 and $9,300,000 principal amount of our 3%
guaranteed senior convertible note due 2012. On May 1, 2009, Abax Lotus
transferred all of its shares of common stock, 12% guaranteed senior notes and
3% guaranteed senior convertible notes for no consideration to Abax Nai Xin A
Ltd. and Abax Jade Ltd. Mr. Yang was elected as director following
Abax Lotus’s nomination of him to the board of directors. Pursuant to
an investor rights agreement, Abax Lotus had (and after May 1, 2009, Abax Nai
Xin and Abax Jade have) the right to appoint up to 20% of the members of our
board of directors and Mr. Tianzhou Deng, our chairman of the board of
directors, and Mr. Bo Huang, our chief executive officer, have agreed to vote
the shares of common stock beneficially owned by them in favor of the election
of the Abax Nai Xin and Abax Jade nominees for director at each annual or annual
meeting of shareholders at which an election of directors is held or pursuant to
any written consent of the shareholders.
Shiao
Ming Sheng has been chief financial officer since October 2008. From 2003 until
October 2008, Mr. Sheng served as a principal of Intelligent Genesis, which was
engaged in corporate consulting and venture formation. Mr. Sheng received a
degree in biochemistry from Dartmouth College and has authored numerous
scientific papers and editorial articles for trade journals and
magazines.
Anlin
Xiong has been vice president in charge of financing and investment activities
since February 2008 and secretary since June 2008. Mr. Xiong was a senior
manager at BOE Technology Group Co., Ltd., a leading Chinese LCD (Liquid Crystal
Display) manufacturer listed on Shenzhen Stock Exchange, from October 2005 until
February 2008. From May 2005 until October 2005, Mr. Xiong was a senior engineer
at Alpha & Omega Semiconductor (Shanghai) Co. Ltd. in China. Mr. Xiong
received a MS in Electrical Engineering from the University of Illinois at
Urbana-Champaign in 2004, a MS in Physics from West Virginia University in 2003,
and a BS in Electronic Engineering from Tsinghua University in China in 2000.
Mr. Xiong also holds a Certificate of China Legal Professional, which is the
lawyer qualification certificate in China.
Cindy Ye
has been financial controller since June 2008. Ms. Ye was vice president in
charge of accounting activities from January to June 2008. Ms. Ye was
a senior manager at Beijing Yongtuo Certified Public Accountants Co., Ltd. from
September 2001 until December 2007. Ms. Ye received an MS in international trade
from the Capital University of Economics and Business in China in 2001, and a BS
in material science from the Northwest Institute of Light Industry in China in
1998.
IMPORTANT
INFORMATION REGARDING SKYWIDE CAPITAL MANAGEMENT
LIMITED,
SNEN ACQUISITION CORP., TIANZHOU DENG AND BO HUANG
Skywide
Capital Management Limited
Skywide
is a corporation with limited liability incorporated under the laws of the
British Virgin Islands. Messrs. Deng Tianzhou and Huang Bo each own a
50% interest in Skywide, and therefore, control Skywide. It does not
actively engage in any business, other than as the vehicle through which Messrs.
Deng and Huang have held their ownership interests in the
company. Upon completion of the merger, all of the company’s assets
and liabilities, as well as all of its business operations will become, by
operation of law, the assets, liabilities and business operations of
Skywide.
Merger
Sub is a Nevada corporation and a wholly owned subsidiary of Skywide. Merger Sub
was organized solely for the purpose of entering into the merger agreement and
consummating the transactions contemplated by the merger agreement. It has not
conducted any activities to date other than activities incidental to its
formation and in connection with the transactions contemplated by the merger
agreement.
Skywide’s
and Merger Sub’s directors are Messrs. Deng and Huang. They are
citizens of the People’s Republic of China. They can be reached
c/o Skywide Capital Management Limited, P.O. Box 3444, Road
Town, Tortola BVI. Skywide does not have any officers. Mr. Deng
is the president of Merger Sub. During
the last five years, none of Skywide, Merger Sub or their
respective directors has been (a) convicted in a criminal
proceeding (excluding traffic violations or similar misdemeanors) or (b) a
party to any judicial or administrative proceeding (except for matters that were
dismissed without sanction or settlement) that resulted in a judgment or decree
or final order enjoining the person from future violations of, or prohibiting
activities subject to, federal or state securities laws, or a finding of any
violation of federal or state securities laws.
Prior
Public Offerings and Securities Purchases
None of
Skywide, Merger Sub or either of Messrs. Deng or Huang has made an underwritten
public offering of Sinoenergy’s common stock for cash during the past three
years that was registered under the Securities Act of 1933 or exempt from
registration under Regulation A. None of Skywide, Merger Sub or either of
Messrs. Deng or Huang has purchased any common stock of Skywide during the past
two years.
Recent
Transactions
There
have been no transactions in the common stock of Sinoenergy effected during the
period which commenced 60 days prior to the announcement of the merger
through the date fo this proxy statement by (i) Skywide, any subsidiary of
Skywide, Mr. Deng or Mr. Huang; (ii) any executive officer, director, affiliate
or associate of Skywide, Merger Sub, Mr. Deng or Mr. Huang;; (iii) any
subsidiary of Skywide or Merger Sub, and (iv) any pension, profit-sharing
or similar plan of Skywide or any subsidiary of Skywide.
See
information provided for Messrs. Deng and Huang under “
Important Information Regarding
Sinoenergy – Directors and Executive Officer
s” and
“– Security Ownership of Certain
Beneficial Owners and Management.”
ADJOURNMENT
OR POSTPONEMENT
OF
THE SPECIAL MEETING (PROPOSAL 2)
If there
are insufficient votes at the time of the special meeting to approve the merger
agreement, we may propose to adjourn or postpone the special meeting, if a
quorum is present, for the purpose of soliciting additional proxies to approve
the merger agreement. We currently do not intend to propose
adjournment or postponement at our annual meeting if there are sufficient votes
to approve the merger agreement. If approval of the proposal to
adjourn or postpone the special meeting for the purpose of soliciting additional
proxies is submitted to our shareholders for approval, such approval requires
the affirmative vote of the holders of a majority of the shares of our common
stock present or represented by proxy.
SUBMISSION OF SHAREHOLDER
PROPOSALS
If the merger is completed, we will
have no public shareholders and there will be no public participation in any of
Sinoenergy’s future shareholder meetings. If the proposed merger is not
completed, Sinoenergy’s shareholders will continue to be entitled to attend and
participate in Sinoenergy’s shareholder meetings. If the proposed merger is not
completed, we will inform our shareholders, by press release or other means
determined reasonable by us, of the date by which shareholder proposals must be
received by us for inclusion in the proxy materials relating to the 2011 annual
meeting, which proposals must comply with the rules and regulations of the SEC
then in effect.
HOUSEHOLDING
“Householding”
is a program, approved by the Securities and Exchange Commission which allows
companies and intermediaries (e.g., brokers) to satisfy the delivery
requirements for proxy statements and annual reports by delivering only one
package of shareholder proxy material to any household at which two or more
shareholders reside. If you and other residents at your mailing address own
shares of our common stock in street name, your broker or bank may have notified
you that your household will receive only one copy of our proxy materials. Once
you have received notice from your broker that they will be “householding”
materials to your address, “householding” will continue until you are notified
otherwise or until you revoke your consent. If, at any time, you no longer wish
to participate in “householding” and would prefer to receive a separate proxy
statement, or if you are receiving multiple copies of the proxy statement and
wish to receive only one, please notify your broker if your shares are held in a
brokerage account. If you hold shares of our common stock in your own name as a
holder of record, “householding” will not apply to your shares.
We will
deliver promptly upon written or oral request a separate copy of our annual
report and/or proxy statement to a shareholder at a shared address to which a
single copy of either document was delivered. For copies of either or both
documents, shareholders should write to us at Sinoenergy Corporation, Attention:
Investor Relations at 1603-1604, Tower B Fortune Centre Ao City, Beiyuan Road,
Chaoyang District, Beijing, People’s Republic of China 100107, phone number:
86-10-84928149.
WHERE YOU CAN FIND ADDITIONAL
INFORMATION
The
company files annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any reports, proxy statements or
other information that we file with the SEC at the following location of the
SEC:
Public
Reference Room
100 F
Street, N.E.
Washington,
D.C. 20549
Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. The company’s public filings are also available to the public from
document retrieval services and the Internet website maintained by the SEC at
www.sec.gov.
Any
person, including any beneficial owner, to whom this proxy statement is
delivered may request copies of reports, proxy statements or other information
that we have previously issued, without charge, by written or telephonic request
directed to us at Sinoenergy Corporation, Attention: Investor Relations,
1603-1604, Tower B Fortune Centre Ao City, Beiyuan Road, Chaoyang District,
Beijing, People’s Republic of China 100107, Phone number: 86-10-84928149. If you
would like to request documents, please do so by
[ ],
2009, in order to receive them before the special meeting.
If you
have questions about the special meeting or the merger after reading this proxy
statement, or if you would like additional copies of this proxy statement or the
proxy card, please contact:
Sinoenergy
Corporation
Attention:
Investor Relations
1603-1604,
Tower B Fortune Centre Ao City
Beiyuan
Road, Chaoyang District,
Beijing,
People’s Republic of China 100107
Phone
number: 86-10-84928149
OR
Georgeson,
Inc.
Banks and
Brokers Call: outside the United States, (212) 440-9800
All
Others Call Toll Free: (877) 278-4751
No
persons have been authorized to give any information or to make any
representations other than those contained in this proxy statement and, if given
or made, such information or representations must not be relied upon as having
been authorized by us or any other person. This proxy statement is dated
[ ], 2010. You
should not assume that the information contained in this proxy statement is
accurate as of any date other than that date, and the mailing of this proxy
statement to shareholders shall not create any implication to the
contrary.
SPECIAL MEETING OF SHAREHOLDERS
OF
SINOENERGY
CORPORATION
[ ],
2010
Please
date, sign and mail
your
proxy card in the
envelope
provided as soon
as
possible.
â
Please
detach along perforated line and mail in the envelope provided.
â
|
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” PROPOSAL 1.
PLEASE
SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
PLEASE
MARK
YOUR VOTE IN BLUE OR BLACK INK
AS SHOWN HERE
þ
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TO INCLUDE ANY COMMENTS, USE THE
COMMENTS BOX ON THE REVERSE SIDE OF THIS CARD.
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FOR
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AGAINST
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ABSTAIN
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1.
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Approval
of the Amended and Restated Agreement and Plan of Merger, dated as of
March 29, 2010, as the same may be amended, by and among Sinoenergy
Corporation (“Sinoenergy”), Skywide Capital Management Limited (“Skywide”)
and SNEN Acquisition Corp. (“Merger Sub”), which provides for the merger
of Merger Sub with and into Sinoenergy with Sinoenergy continuing as the
surviving company in the merger, and the conversion of each outstanding
share of common stock of Sinoenergy (other than shares held (i) as
treasury shares or by any wholly-owned subsidiary of Sinoenergy or
(ii) by Skywide or any wholly-owned subsidiary of Skywide) into the
right to receive $1.90 in cash, without interest.
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o
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o
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2.
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Approval
of adjournment or postponement of the special meeting, if necessary or
appropriate, to solicit additional proxies if there are insufficient votes
at the time of the meeting to approve the merger
agreement.
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o
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o
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The
undersigned acknowledges receipt from Sinoenergy Corporation prior to the
execution of this proxy of a Notice of special meeting and a proxy statement
dated [ ],
2010.
THIS
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. SHARES REPRESENTED BY
THIS PROXY WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THE SHARES
REPRESENTED WILL BE VOTED FOR THE PROPOSAL. IN THEIR DISCRETION, THE
PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME
BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.
Mark here
if you plan to attend the special meeting
o
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To
change the address on your account, please check the box at right and
indicate your new address in the address space above. Please note that
changes to the registered name(s) on the account may not be submitted via
this method.
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o
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Signature
of Shareholder
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Date:
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Signature
of Shareholder
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Date:
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Note:
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Please
sign exactly as your name or names appear on this Proxy. When shares are
held jointly, each holder should sign. When signing as executor,
administrator, attorney, trustee or guardian, please give full title as
such. If the signer is a corporation, please sign full corporate name by
duly authorized officer, giving full title as such. If signer is a
partnership, please sign in partnership name by authorized
person.
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SINOENERGY
CORPORATION
PROXY
FOR SPECIAL MEETING OF SHAREHOLDERS
[ ],
2010
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS
The
undersigned shareholder of Sinoenergy Corporation hereby appoints
[ ]
and
[ ]
and each of them, with full power of substitution, proxies to vote the shares of
stock which the undersigned could vote if personally present at the special
meeting of Shareholders of Sinoenergy Corporation to be held on
[ ], 2010, at 10:00 AM,
local time, at
[ ], and
at any adjournments thereof. You can revoke your proxy at any time before it is
voted at the special meeting by: (i) submitting another properly completed
proxy bearing a later date; (ii) giving written notice of revocation to any
of the persons named as proxies or to the Secretary of Sinoenergy Corporation;
or (iii) voting in person at the special meeting. If the undersigned holds
any of the shares of common stock in a fiduciary, custodial or joint capacity or
capacities, this proxy is signed by the undersigned in every such capacity as
well as individually.
(Continued and to be signed on the
reverse side)
COMMENTS:
SPECIAL
MEETING OF SHAREHOLDERS OF
SINOENERGY
CORPORATION
[ ],
2010
PROXY
VOTING INSTRUCTIONS
MAIL —
Date, sign and mail
your proxy card in the envelope provided as soon as possible.
- OR -
TELEPHONE —
Call toll-free
[
1-800-PROXIES
(1-800-776-9437)] from any touch-tone telephone and follow the instructions.
Have your proxy card available when you call.
- OR -
INTERNET —
Access [“
www.voteproxy.com
”] and follow
the on-screen instructions. Have your proxy card available when you access the
web page.
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COMPANY
NUMBER
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ACCOUNT
NUMBER
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You may
enter your voting instructions at [1-800-PROXIES or www.voteproxy.com] up until
11:59 PM Eastern Time the day before the cut-off or meeting date.
â
Please detach
along perforated line and mail in the envelope provided
IF
you are not voting
via telephone or the Internet.
â
THE BOARD OF DIRECTORS
RECOMMENDS A VOTE “FOR” PROPOSAL 1.
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE.
PLEASE MARK YOUR VOTE IN BLUE
OR BLACK INK AS SHOWN
HERE þ
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TO INCLUDE ANY COMMENTS, USE THE
COMMENTS BOX ON THE REVERSE SIDE OF THIS CARD.
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FOR
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AGAINST
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ABSTAIN
|
1.
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Approval
of the Amended and Restated Agreement and Plan of Merger, dated as of
March 29, 2010, as the same may be amended, by and among Sinoenergy
Corporation (“Sinoenergy”), Skywide Capital Management Limited (“Skywide”)
and SNEN Acquisition Corp. (“Merger Sub”), which provides for the merger
of Merger Sub with and into Sinoenergy with Sinoenergy continuing as the
surviving company in the merger, and the conversion of each outstanding
share of common stock of Sinoenergy (other than shares held (i) as
treasury shares or by any wholly-owned subsidiary of Sinoenergy or
(ii) by Skywide or any wholly-owned subsidiary of Skywide) into the
right to receive $1.90 in cash, without interest.
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2.
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Approval
of adjournment or postponement of the special meeting, if necessary or
appropriate, to solicit additional proxies if there are insufficient votes
at the time of the meeting to approve the merger
agreement.
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The
undersigned acknowledges receipt from Sinoenergy Corporation prior to the
execution of this proxy of a Notice of special meeting and a proxy statement
dated
[ ],
2010.
THIS
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. SHARES REPRESENTED BY
THIS PROXY WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THE SHARES
REPRESENTED WILL BE VOTED FOR THE PROPOSAL. IN THEIR DISCRETION, THE
PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME
BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.
Mark here
if you plan to attend the special meeting
o
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To
change the address on your account, please check the box at right and
indicate your new address in the address space above. Please note that
changes to the registered name(s) on the account may not be submitted via
this method.
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o
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Signature
of Shareholder
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Date:
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Signature
of Shareholder
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Date:
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Note:
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Please
sign exactly as your name or names appear on this Proxy. When shares are
held jointly, each holder should sign. When signing as executor,
administrator, attorney, trustee or guardian, please give full title as
such. If the signer is a corporation, please sign full corporate name by
duly authorized officer, giving full title as such. If signer is a
partnership, please sign in partnership name by authorized
person.
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ANNEX
A
AMENDED
AND RESTATED
AGREEMENT
AND PLAN OF MERGER
BY
AND AMONG
SKYWIDE
CAPITAL MANAGEMENT LIMITED,
SNEN
ACQUISITION CORP.
AND
SINOENERGY
CORPORATION
DATED
AS OF MARCH 29, 2010
TABLE
OF CONTENTS
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Page
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ARTICLE
I
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1
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1.1
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Certain Defined Terms
.
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1
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1.2
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Other Defined Terms
.
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6
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ARTICLE
II THE MERGER
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7
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2.1
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Effective Time of the
Merger
..
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7
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2.2
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Closing
.
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7
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2.3
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Effects of the Merger
.
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7
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2.4
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Directors and Officers
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7
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ARTICLE
III CONVERSION OF SECURITIES
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8
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3.1
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Conversion of Capital
Stock
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8
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3.2
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Exchange of Certificates, Company Stock Options
and Company Stock Purchase Warrants
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8
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ARTICLE
IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY
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10
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4.1
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Organization, Standing and Power;
Subsidiaries
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11
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4.2
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Capitalization
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11
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4.3
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Authority; No Conflict; Required Filings and
Consents
.
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13
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4.4
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SEC Filings; Financial Statements; Reporting
Requirements
.
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15
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4.5
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No Undisclosed Liabilities;
Indebtedness
.
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17
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4.6
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Absence of Certain Changes or
Events
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17
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4.7
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Taxes
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17
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4.8
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Owned and Occupied Real
Properties
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18
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4.9
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Intellectual Property
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18
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4.1
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Agreements, Contracts and Commitments; Government
Contracts
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18
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4.11
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Litigation; Product Liability; Product
Recalls
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18
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4.12
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Environmental Matters
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18
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4.13
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Employee Benefit Plans
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18
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4.14
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Compliance With Laws
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19
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4.15
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Labor Matters
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19
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4.16
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Opinions of Financial
Advisors
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19
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4.17
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Insurance
.
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19
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4.18
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Brokers
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19
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4.19
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Certain Approvals
..
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19
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4.2
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Unlawful Payments
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19
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4.21
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Affiliate Transactions
.
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20
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4.22
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Guaranteed Senior Notes
.
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20
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4.23
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No Other Representations or
Warranties
.
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20
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ARTICLE
VREPRESENTATIONS AND WARRANTIES OF THE BUYER AND THE BUYER
SUBSIDIARY
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20
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5.1
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Organization, Standing and
Power
..
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20
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TABLE OF
CONTENTS
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Page
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5.2
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Authority; No Conflict; Required Filings and
Consents
.
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20
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5.3
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Information Provided
.
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21
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5.4
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Operations of the Buyer
Subsidiary
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22
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5.5
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Financing
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22
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5.6
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Brokers
.
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22
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5.7
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Shares
..
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22
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5.8
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Tax Matters
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22
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ARTICLE
VI CONDUCT OF BUSINESS
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22
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6.1
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Covenants of the Company
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22
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ARTICLE
VII ADDITIONAL AGREEMENTS
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24
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7.1
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No Solicitation
.
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24
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7.2
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Proxy Statement
.
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27
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7.3
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Nasdaq Quotation
.
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27
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7.4
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Access to Information
.
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27
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7.5
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Shareholders Meeting
.
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28
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7.6
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Cooperation; Further
Action
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28
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7.7
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Public Disclosure
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29
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7.8
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Company Stock Plans
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29
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7.9
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Shareholder Litigation
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30
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7.1
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Notification of Certain
Matters
.
|
30
|
7.11
|
Directors’ and Officers’ Indemnification and
Insurance
.
|
30
|
7.12
|
Loans to Company Employees, Officers and
Directors
.
|
31
|
7.13
|
Takeover Statutes and Laws
.
|
32
|
7.14
|
Standstill Agreements; Confidentiality
Agreements
.
|
32
|
|
|
|
ARTICLE
VIII CONDITIONS TO MERGER
|
32
|
8.1
|
Conditions to Each Party’s Obligation To Effect
the Merger
.
|
32
|
8.2
|
Additional Conditions to Obligations of the Buyer
and the Buyer Subsidiary
.
|
33
|
8.3
|
Additional Conditions to Obligations of the
Company
.
|
34
|
|
|
|
ARTICLE
IX TERMINATION AND AMENDMENT
|
35
|
9.1
|
Termination
.
|
35
|
9.2
|
Effect of Termination
.
|
36
|
9.3
|
Fees and Expenses
.
|
36
|
|
|
|
ARTICLE
X MISCELLANEOUS
|
38
|
10.1
|
Amendment
.
|
38
|
10.2
|
Extension; Waiver
..
|
38
|
10.3
|
Non−Survival of Representations, Warranties and
Agreements
.
|
38
|
10.4
|
Notices
.
|
38
|
10.5
|
Entire Agreement
.
|
39
|
10.6
|
No Third Party
Beneficiaries
.
|
40
|
10.7
|
Assignment
.
|
40
|
TABLE OF
CONTENTS
|
|
Page
|
10.8
|
Severability
.
|
40
|
10.9
|
Counterparts and Signature
.
|
40
|
10.1
|
Interpretation
.
|
40
|
10.11
|
Governing Law
.
|
41
|
10.12
|
Remedies
.
|
41
|
10.13
|
Submission to Jurisdiction
.
|
41
|
10.14
|
Waiver Of Jury Trial
.
|
41
|
AMENDED
AND RESTATED
AGREEMENT
AND PLAN OF MERGER
THIS
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this “
Agreement
”), dated as
of March 29, 2010, is by and among Skywide Capital Management Limited, a company
incorporated with limited liability under the laws of the British Virgin Islands
(the “
Buyer
”),
SNEN Acquisition Corp., a corporation organized under the laws of the state of
Nevada and a wholly-owned subsidiary of the Buyer (the “
Buyer Subsidiary
”)
and Sinoenergy Corporation, a corporation organized under the laws of the state
of Nevada (the “
Company
”).
WHEREAS,
the Board of Directors and members of Buyer and the Board of Directors of the
Company deem it advisable and in the best interests of each party and their
respective members and shareholders that the Buyer acquire the Company in order
to advance the long-term business interests of the Buyer and the
Company;
WHEREAS, the Company and the Buyer are
parties to an Agreement and Plan of Merger dated as of October 12, 2009 (the
“Original Agreement”) which provides for the merger of the Company with and into
the Buyer in accordance with the terms of the Original Agreement;
WHEREAS, the Company and the Buyer deem
it advisable and in the best interests of each party and their respective
members and shareholders to restructure the merger so that the Company is the
surviving party and, in that connection, to add Buyer Subsidiary as a party and
to amend and restate the Original Agreement, as described in this
Agreement;
WHEREAS,
the acquisition of the Company shall be effected through a merger (the “
Merger
”) of the Buyer
Subsidiary with and into the Company in accordance with the terms of this
Agreement and the NGCL, as a result of which, the Company shall become a
wholly-owned subsidiary of the Buyer.
NOW,
THEREFORE, in consideration of the foregoing and the respective representations,
warranties, covenants and agreements set forth below, the Buyer, the Buyer
Subsidiary and the Company agree as follows:
ARTICLE
I
DEFINITIONS
1.1
Certain Defined
Terms
. As used in this Agreement, the following terms have the
meanings ascribed thereto in this Article:
Action
means any
claim, action, suit, arbitration, mediation, inquiry, proceeding or
investigation by or before any Governmental Entity, arbitrator or
mediator.
Affiliate
when used
with respect to any party shall mean any person who is an “affiliate” of that
party within the meaning of Rule 405 promulgated under the Securities Act;
provided
, that for
purposes of this Agreement, Buyer and Buyer Subsidiary shall not be deemed an
Affiliate of the Company and the Company shall not be deemed an Affiliate of
Buyer and Buyer Subsidiary.
Amended
and Restated Agreement and Plan of Merger – Page 2
Agreement
has the
meaning attributed thereto in the Preamble.
Business Day
means
any day that is not a Saturday, a Sunday or other day on which banks are
required or authorized by Law to be closed in The City of New York.
Buyer
has the meaning
attributed thereto in the Preamble.
Buyer Material Adverse
Effect
means any material adverse change, event, circumstance
or development with respect to, or any material adverse effect on, (i) the
business, assets, liabilities, capitalization, prospects, condition (financial
or otherwise), or results of operations of the Buyer and its Subsidiaries, taken
as a whole or (ii) the ability of the Buyer or the Buyer Subsidiary to
consummate the transactions contemplated by this Agreement. For the
avoidance of doubt, the parties agree that the terms “material”, “materially” or
“materiality” as used in this Agreement with an initial lower case “m” shall
have their respective customary and ordinary meanings, without regard to the
meanings ascribed to Buyer Material Adverse Effect or Company Material Adverse
Effect.
Buyer Subsidiary
has
the meaning attributed thereto in the Preamble.
Company
has the
meaning attributed thereto in the Preamble.
Company Balance Sheet
means the consolidated, audited balance sheet of the Company as of September 30,
2009.
Company Board
means
the Board of Directors of the Company.
Company Disclosure
Schedule
has the meaning attributable thereto in the first paragraph of
Article IV.
Company Material Adverse
Effect
means any change in, or effect on, the business, operations,
assets, liabilities or condition (financial or otherwise) of the Company and its
Subsidiaries which, when considered either individually or in the aggregate
together with all other adverse changes or effects with respect to which such
phrase is used in this Agreement, is, or is reasonably likely to be, materially
adverse to the business, operations, assets, liabilities or condition (financial
or otherwise) of the Company and its Subsidiaries, taken as a whole, excluding
effects resulting from (i) changes in general economic conditions or in the
securities markets in general that do not affect the Company and its
Subsidiaries in a materially disproportionate manner relative to other companies
in the same industry, (ii) changes in the industries in which the Company and
its Subsidiaries operate (including legal and regulatory changes) that do not
specifically relate to the Company and its Subsidiaries and that do not affect
the Company and its Subsidiaries in a materially disproportionate manner
relative to other companies in such industry, (iii) acts taken pursuant to or in
accordance with this Agreement at the request of the Buyer, or (iv) acts of
terrorism or war (whether or not declared);
provided
,
however
, that the
Buyer recognizes that the Company has incurred net losses for the year ended
September 30, 2009 and the three months ended December 31, 2009; and that the
report of the Company’s independent registered public accounting firm includes
an explanatory paragraph stating that the financial statements have been
prepared on a going concern basis and do not include any adjustments that might
result from the uncertainties and the continuation of losses substantially
consistent with such losses and the continuation of the matters described under
“Going Concern” in Note 2 of Notes to the Company’s Consolidated Financial
Statements for the year ended September 30, 2009 and the continuation of
litigation (or the commencement of similar litigation) described under Item 3 in
the Company’s Form 10-K for the year ended September 30, 2009 shall not be
deemed a Company Material Adverse Effect.
Amended
and Restated Agreement and Plan of Merger – Page 3
Encumbrance
means any
security interest, pledge, mortgage, lien, charge, hypothecation, option to
purchase or lease or otherwise acquire any interest, conditional sales
agreement, claim, restriction, covenant, easement, right of way, title defect,
adverse claim of ownership or use, transfer restriction, voting agreement, proxy
or other limitation on voting rights, or other encumbrance of any kind, other
than any obligation to accept returns of inventory in the ordinary course of
business and other than those arising by reason of restrictions on transfers
under federal, state and foreign securities Laws.
Exchange Act
means
the Securities Exchange Act of 1934, as amended.
Governmental Entity
means any court, arbitrational tribunal, administrative agency or commission or
other governmental or regulatory authority, agency or instrumentality of any
nation, state or other political subdivision thereof, or any stock market or
stock exchange on which the Shares are listed for trading.
Governmental Order
means any order, writ, judgment, injunction, decree, stipulation, determination
or award entered by or with any Governmental Entity.
Indebtedness
means,
with respect to any Person, without duplication, (A) all obligations of such
Person for borrowed money, or with respect to deposits or advances of any kind
to such Person, (B) all obligations of such Person evidenced by bonds,
debentures, notes or similar instruments, (C) all obligations of such Person
upon which interest charges are customarily paid, (D) all obligations of such
Person under conditional sale or other title retention agreements relating to
property purchased by such Person, (E) all obligations of such Person issued or
assumed as the deferred purchase price of property or services (excluding
obligations of such Person or creditors for raw materials, inventory, services
and supplies incurred in the Ordinary Course of Business), (F) all capitalized
lease obligations of such Person, (G) all obligations of others secured by any
lien on property or assets owned or acquired by such Person, whether or not the
obligations secured thereby have been assumed, (H) all obligations of such
Person under interest rate or currency hedging transactions (valued at the
termination value thereof), (I) all letters of credit issued for the account of
such Person and (J) all guarantees and arrangements having the economic effect
of a guarantee by such Person of any Indebtedness of any other
Person.
Amended
and Restated Agreement and Plan of Merger – Page 4
Intellectual Property
means the rights associated with or arising out of any of the
following: (i) domestic and foreign patents and patent applications,
together with all reissuances, divisionals, continuations,
continuations-in-part, revisions, renewals, extensions, and reexaminations
thereof, and any identified invention disclosures (“
Patents
”); (ii) trade
secret rights and corresponding rights in confidential information and other
non-public information (whether or not patentable), including ideas, formulas,
compositions, inventor’s notes, discoveries and improvements, know-how,
manufacturing and production processes and techniques, testing information,
research and development information, inventions, invention disclosures,
unpatented blueprints, drawings, specifications, designs, plans, proposals and
technical data, business and marketing plans, market surveys, market know-how
and customer lists and information (“
Trade Secrets
”);
(iii) all copyrights, copyrightable works, rights in databases, data
collections, “moral” rights, mask works, copyright registrations and
applications therefore and corresponding rights in works of authorship (“
Copyrights
”); (iv)
all trademarks, service marks, logos, trade dress and trade names and domain
names indicating the source of goods or services, and other indicia of
commercial source or origin (whether registered, common law, statutory or
otherwise), all registrations and applications to register the foregoing
anywhere in the world and all goodwill associated therewith (“
Trademarks
”); (v) all
computer software and code, including assemblers, applets, compilers, source
code, object code, development tools, design tools, user interfaces and data, in
any form or format, however fixed (“
Software
”); and (vi)
all Internet electronic addresses, uniform resource locators and alphanumeric
designations associated therewith and all registrations for any of the foregoing
(“
Domain
Names
”).
Knowledge
means, with
respect to any particular matter pertaining to the Company or any Subsidiary,
the actual knowledge of the chief executive officer, the executive vice
president or the chief financial officer of the Company regarding such matter;
provided
that
such officers shall be deemed to have made due and diligent inquiry of those
employees, agents, consultants or other Persons whom such officers reasonably
believe would have knowledge of the matters represented.
Law
means any
statute, law, ordinance, regulation, rule, code, principle of common law and
equity or other requirement of law of a Governmental Entity or any Governmental
Order.
Merger
has the
meaning attributed thereto in the Preamble.
NGCL
means the Nevada
General Corporation Law (NRS §§ 78.010,
et seq.
and NRS
§§ 92A.005,
et
seq.
), as amended.
Ordinary Course of
Business
, with respect to any action, means such action is:
(i) consistent
with the recent past practices of such Person and is taken in the ordinary
course of the normal day-to-day operations of such Person; and
(ii) not
required to be authorized by the board of directors of such Person.
Person
means any
individual, partnership, firm, corporation, association, trust, unincorporated
organization, Governmental Authority, joint venture, limited liability company
or other entity.
SEC
means the United
States Securities and Exchange Commission.
Securities
Act
means the Securities Act of 1933, as amended.
Amended
and Restated Agreement and Plan of Merger – Page 5
Shares
means the
$.001 par value common stock of the Company.
Subsidiary
means,
with respect to a party, any corporation, partnership, joint venture, limited
liability company or other business association or entity, whether incorporated
or unincorporated, of which (i) such party or any other Subsidiary of such
party is a general partner or a managing member (excluding partnerships, the
general partnership interests of which held by such party and/or one or more of
its Subsidiaries do not have a majority of the voting interest in such
partnership), (ii) such party and/or one or more of its Subsidiaries holds
voting power to elect a majority of the board of directors or other governing
body performing similar functions, or (iii) such party and/or one or more of its
Subsidiaries, directly or indirectly, owns or controls more than 50% of the
equity, membership, partnership or similar interests.
Taxes
means all
taxes, charges, fees, levies or other similar assessments or liabilities,
including income, gross receipts, ad valorem, premium, value-added, excise, real
property, personal property, sales, use, services, transfer, withholding,
employment, payroll and franchise taxes imposed by the United States of America
or any state, local or foreign government, or any agency thereof, or other
political subdivision of the United States of America or any such government,
and any interest, fines, penalties, assessments or additions to tax resulting
from, attributable to or incurred in connection with any tax or any contest or
dispute thereof.
Tax Returns
means all
reports, returns, declarations, statements or other information required to be
supplied to a taxing authority in connection with Taxes.
A
Triggering Event
shall be deemed to have occurred if: (a) the Company Board shall have
failed to recommend that the Company’s shareholders vote to approve the
Agreement, or shall have withdrawn or modified (without the consent of the
Buyer) in a manner adverse to the Buyer or Buyer Subsidiary the Company Board
Recommendation (it being understood and agreed that any “stop-look-and-listen”
communication by the Company Board to the shareholders of the Company pursuant
to Rule 14d-9(f) of the Exchange Act shall not be deemed to constitute a
withdrawal, modification or change of its recommendation of this Agreement); (b)
the Company shall have failed to include in the Proxy Statement the Company
Board Recommendation; (c) the Company Board fails to reaffirm the Company Board
Recommendation, or fails to reaffirm its determination that the Merger is fair
to and in the best interests of the Company’s shareholders, in a press release
if so requested by the Buyer, within 10 days after the Buyer requests in writing
that such recommendation or determination be reaffirmed; (d) the Company Board
shall have approved, endorsed or recommended any Acquisition Proposal; (e) the
Company shall have entered into any letter of intent or similar document or any
Contract relating to any Acquisition Proposal, other than confidentiality
agreements that the Company is required or permitted to enter into pursuant
Section 7.1 of the Agreement; (f) a tender or exchange offer relating to
securities of the Company shall have been commenced and the Company shall not
have sent to its security holders, or filed with the SEC, within 10 Business
Days after the commencement of such tender or exchange offer, a statement
disclosing that the Company recommends rejection of such tender or exchange
offer; or (g) the Company or any Representative of the Company shall have
breached in any material respect any material obligations set forth in Section
7.1 of this Agreement.
Amended
and Restated Agreement and Plan of Merger – Page 6
1.2
Other Defined
Terms
. The following terms have the meanings defined for such
terms in the Sections set forth below:
Term
|
Section
|
Acquisition
Proposal
|
7.1(d)
|
Articles
of Merger
|
2.1
|
BMC
|
4.15
|
Certificates
|
3.2(a)
|
Closing
|
2.2
|
Closing
Date
|
2.2
|
Code
|
3.2(g)
|
Company
Board Recommendation
|
7.5
|
Company
Convertible Notes
|
4.2(b)
|
Company
Material Contracts
|
4.10(a)
|
Company
SEC Reports
|
4.4(a)
|
Company
Shareholder Approval
|
4.3(a)
|
Company
Shareholders Meeting
|
4.4(d)
|
Company
Stock Options
|
4.2(b)
|
Company
Stock Plans
|
4.2(b)
|
Company
Stock Purchase Warrants
|
4.2(b)
|
Company
Voting Proposal
|
4.3(a)
|
Costs
|
7.11(a)
|
Effective
Time
|
2.1
|
Exchange
Agent
|
3.2(a)
|
Exchange
Fund
|
3.2(a)
|
Expenses
|
9.3(a)
|
GAAP
|
4.4(b)
|
Indemnified
Directors and Officers
|
7.11(a)
|
Instruments
of Indebtedness
|
4.10(a)
|
Material
Contract
|
4.10(a)
|
Merger
Consideration
|
3.1(a)
|
Option
Consideration
|
7.8(b)
|
Outside
Date
|
9.1(b)
|
Proxy
Statement
|
4.4(d)
|
Regulation
M-A Filing
|
4.4(d)
|
Representatives
|
7.1(a)
|
Requisite
Regulatory Approvals
|
8.1(b)
|
Regulation
M-A Filing
|
4.4(d)
|
Reverse
Termination Fee
|
9.3(c)
|
Superior
Proposal
|
7.1(d)
|
Surviving
Company
|
2.3
|
Termination
Fee
|
9.3(b)
|
|
|
Amended
and Restated Agreement and Plan of Merger – Page 7
ARTICLE
II
THE
MERGER
2.1
Effective Time of the
Merger
. Subject to the provisions of this Agreement, prior to
the Closing, the Buyer shall prepare, and on the Closing Date or as soon as
practicable thereafter the Buyer shall cause to be filed with the Secretary of
State of the State of Nevada, articles of merger (the “
Articles of Merger
”)
in such form as is required by, and executed by the Surviving Company in
accordance with, the relevant provisions of the NGCL and shall make all other
filings or recordings required under the NGCL. The Merger shall
become effective upon the filing of the Articles of Merger with the Secretary of
State of the State of Nevada, or at such later time as is established by the
Buyer and the Company and set forth in the Articles of Merger (the “
Effective
Time
”).
2.2
Closing
. The
closing of the Merger (the “
Closing
”) shall take
place at 10:00 a.m., Eastern time, on a date to be specified by the Buyer
and the Company (the “
Closing Date
”), which
shall be no later than the second Business Day after satisfaction or waiver of
the conditions set forth in Article VII (other than delivery of items to be
delivered at the Closing and other than satisfaction of those conditions that by
their nature are to be satisfied at the Closing, it being understood that the
occurrence of the Closing shall remain subject to the delivery of such items and
the satisfaction or waiver of such conditions at the Closing), at the offices of
Arent Fox LLP, 1675 Broadway, New York, New York 10019, unless
another date, place or time is agreed to in writing by the Buyer and the
Company.
2.3
Effects of the
Merger
. At the Effective Time (i) the separate existence
of the Buyer Subsidiary shall cease and the Buyer Subsidiary shall be merged
with and into the Company (the Company following the Merger is sometimes
referred to herein as the “
Surviving Company
”)
and (ii) the restated articles of incorporation of the Company as in effect
immediately prior to the Effective Time shall be amended to change the name of
the Surviving Company from Sinoenergy Corporation to Skywide Capital Management
Limited and to reduce the authorized capital stock of the Company to 100,000
shares of common stock, par value $0.001 per share, and as so amended, shall be
the articles of incorporation of the Surviving Company, until further amended in
accordance with the NGCL. The Merger shall have the effects set forth
in Section 92A.250 of the NGCL.
2.4
Directors and
Officers
. The directors of the Buyer Subsidiary immediately
prior to the Effective Time shall be the initial directors of the Surviving
Company and officers of the Company immediately prior to the Effective Time
shall be the officers of the Surviving Company, each to hold office in
accordance with the articles incorporation of the Surviving
Company.
Amended
and Restated Agreement and Plan of Merger – Page 8
ARTICLE
III
CONVERSION
OF SECURITIES
3.1
Conversion of Capital
Stock
. As of the Effective Time, by virtue of the Merger and
without any action on the part of the holder of any shares of the capital stock
of the Company or capital stock of the Buyer Subsidiary:
(a)
Each of
the Shares issued and outstanding immediately prior to the Effective Time (other
than Shares held in the Company’s treasury or by any wholly-owned Subsidiary of
the Company and Shares owned beneficially by the Buyer, Buyer Subsidiary or any
other wholly-owned Subsidiary of the Buyer) shall be converted into and
represent the right to receive $1.90 in cash per share of the Shares, without
any interest thereon (the “
Merger
Consideration
”).
(b)
Cancellation of Stock Owned
by the Parties and Their Subsidiaries
. All of the Shares that
are owned by the Company as treasury stock or by any wholly-owned Subsidiary of
the Company and any Shares owned by the Buyer, any shareholder of the Buyer,
Buyer Subsidiary or any other wholly-owned Subsidiary of the Buyer immediately
prior to the Effective Time shall be cancelled and shall cease to exist and no
shares of the Buyer or other consideration shall be delivered in exchange
therefor.
(c)
Capital Stock of the Buyer
Subsidiary.
Each share of the capital stock of the Buyer
Subsidiary issued and outstanding immediately prior to the Effective Time shall
be converted into and become one fully paid and nonassessable share of common
stock, $.001 par value per share, of the Surviving Company.
(d)
Treatment of Company Stock
Options and Common Stock Purchase Warrants
. Prior to the
Effective Time, the Company Board (and/or, if appropriate, the Compensation
Committee thereof) shall adopt appropriate resolutions and take all other
actions necessary to provide that each Company Stock Option and each Company
Stock Purchase Warrant, whether or not then vested or exercisable, shall, at the
Effective Time, be cancelled, and each holder thereof, other than the Buyer,
Buyer Subsidiary, any shareholder of the Buyer or any other wholly-owned
Subsidiary of the Buyer, shall be entitled to receive a payment in cash as
provided in Section 7.8(b) hereof (subject to any applicable withholding
taxes). As provided herein, unless otherwise determined by the Buyer,
the Company Stock Plans (and any feature of any other Benefit Plans or other
plan, program or arrangement providing for the issuance or grant of any other
interest in respect of the capital stock of the Company) shall terminate as of
the Effective Time. After the date hereof, the Company will not issue
any Company Stock Options, Company Stock Purchase Warrants or other options,
warrants, rights or agreements which would entitle any person to acquire any
capital stock of the Company or, except as otherwise provided in this Section
3.1(d) or in Section 7.8, to receive any payment in respect
thereof.
3.2
Exchange of Certificates,
Company Stock Options and Company Stock Purchase Warrants
. The
procedures for exchanging outstanding Shares for Merger Consideration, and
outstanding Company Stock Options and Company Stock Purchase Warrants for Option
Consideration, pursuant to the Merger are as follows:
Amended
and Restated Agreement and Plan of Merger – Page 9
(a)
Exchange
Agent
. As of the Effective Time, the Buyer shall deposit with
the Company’s transfer agent or another bank or trust company designated by the
Buyer and reasonably acceptable to the Company (the “
Exchange Agent
”), for
the benefit of the holders of Shares, Company Stock Options and Company Stock
Purchase Warrants, for exchange in accordance with this Section 3.2,
through the Exchange Agent, cash in an amount sufficient to pay the aggregate
Merger Consideration and the aggregate Option Consideration (such aggregate
consideration being hereinafter referred to as the “
Exchange Fund
”),
payable pursuant to Section 3.1 to holders of certificates which
immediately prior to the Effective Time represented outstanding Shares (the
“
Certificates
”), and
pursuant to Sections 3.1(d) and 7.8(b) to the holders of Company Stock Options
and Company Stock Purchase Warrants.
(b)
Exchange
Procedures
. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
Certificate, Company Stock Option and Company Stock Purchase Warrant (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates, Company Stock Options and Company
Stock Purchase Warrants shall pass, only upon delivery of the Certificates,
Company Stock Options and Company Stock Purchase Warrants to the Exchange Agent
and shall be in such form and have such other provisions as the Buyer may
reasonably specify) and (ii) instructions for effecting the surrender of
the Certificates, Company Stock Options and Company Stock Purchase Warrants in
exchange for each holder’s respective Merger Consideration or Option
Consideration. Upon surrender of a Certificate, Company Stock Option
or Company Stock Purchase Warrant for cancellation to the Exchange Agent or to
such other agent or agents as may be appointed by the Buyer, together with such
letter of transmittal, duly executed, and such other documents as may reasonably
be required by the Exchange Agent, the holder of each Certificate, Company Stock
Option and Company Stock Purchase Warrant shall be entitled to receive in
exchange therefor cash representing (i) that number of whole Shares evidenced by
such Certificate multiplied by the Merger Consideration, and the Certificate so
surrendered shall immediately be cancelled; and/or (ii) the Option Consideration
payable with respect to the surrendered Company Stock Option or Company Stock
Purchase Warrant. In the event of a transfer of ownership of Shares
which is not registered in the transfer records of the Company, the payment
representing the Merger Consideration payable to the registered holder may be
paid to a person other than the person in whose name the Certificate so
surrendered is registered, if such Certificate is presented to the Exchange
Agent, accompanied by all documents required to evidence and effect such
transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 3.2,
each Certificate, Company Stock Option and Company Stock Purchase Warrant shall
be deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the payment contemplated by this Section 3.2 or
Section 7.8(b), as the case may be.
(c)
No Further Ownership Rights
in Shares
. All payments upon the surrender for exchange of
Certificates in accordance with the terms hereof shall be deemed to have been
paid in full satisfaction of all rights pertaining to such Shares, and from and
after the Effective Time there shall be no further registration of transfers on
the share transfer books or register of members of the Surviving Company of the
Shares which were outstanding immediately prior to the Effective
Time. If, after the Effective Time, Certificates are presented to the
Surviving Company or the Exchange Agent for any reason, they shall be cancelled
and exchanged as provided in this Article III.
Amended
and Restated Agreement and Plan of Merger – Page 10
(d)
Termination of Exchange
Fund
. Subject to any applicable escheat or similar Law, any
portion of the Exchange Fund which remains undistributed to the holders of
Shares 180 days after the Effective Time shall be delivered to the Buyer, upon
demand, and any holder of Shares who has not previously complied with this
Section 3.2 shall thereafter look only to the Buyer, as a general unsecured
creditor, for payment of his, her or its claim for Merger
Consideration.
(e)
Investment of Exchange
Fund
The Exchange Agent shall invest cash included in the
Exchange Fund, as directed by the Buyer, on a daily basis,
provided
that no such
investment or loss thereon shall affect the amounts payable pursuant to the
provisions of this Article III. Any interest and other income
resulting from such investments shall be paid to the Buyer.
(f)
No
Liability
. To the extent permitted by applicable Law, none of
the Buyer, the Buyer Subsidiary, the Company, the Surviving Company or the
Exchange Agent shall be liable to any holder of Shares delivered to a public
official pursuant to any applicable abandoned property, escheat or similar
Law. If any Certificate shall not have been surrendered prior to one
year after the Effective Time (or immediately prior to such earlier date on
which any cash payable to the holder of such Certificate pursuant to this
Article III would otherwise escheat to or become the property of any
Governmental Entity), any such cash in respect of such Certificate shall, to the
extent permitted by applicable Law, become the property of the Surviving
Company, free and clear of all claims or interest of any person previously
entitled thereto.
(g)
Withholding
Rights
. Each of the Buyer and the Surviving Company shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of Shares such amounts as it reasonably
determines that it is required to deduct and withhold with respect to the making
of such payment under the Internal Revenue Code of 1986, as amended (the “
Code
”), or any other
applicable provision of Law. To the extent that amounts are so
withheld by the Surviving Company or the Buyer, as the case may be, such
withheld amounts shall be treated for all purposes of this Agreement as having
been paid to the holder of the Shares in respect of which such deduction and
withholding was made by the Surviving Company or the Buyer, as the case may
be.
(h)
Lost
Certificates
. If any Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Surviving Company, the posting by such person of a bond in such reasonable
amount as the Surviving Company may direct as indemnity against any claim that
may be made against it with respect to such Certificate, the Exchange Agent
shall issue in exchange for such lost, stolen or destroyed Certificate, the
Merger Consideration deliverable in respect thereof pursuant to this
Agreement.
ARTICLE
IV
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
The
Company represents and warrants to the Buyer and Buyer Subsidiary that the
statements contained in this Article IV are true and correct, subject to
the exceptions set forth in the disclosure schedule delivered by the Company to
the Buyer and Buyer Subsidiary on or before the execution and delivery of this
Agreement (the “
Company Disclosure
Schedule
”). The Company Disclosure Schedule shall be arranged
in paragraphs corresponding to the numbered and lettered paragraphs contained in
this Article IV that contain references to such Company Disclosure
Schedule;
provided
,
however
, that any
information contained in response to any numbered or lettered section of this
Article IV shall constitute disclosure pursuant to this Article
IV. For purposes of this Agreement, each statement or other item of
information set forth in the Company Disclosure Schedule shall be deemed to be a
representation and warranty made by the Company in Article IV.
Amended
and Restated Agreement and Plan of Merger – Page 11
4.1
Organization, Standing and
Power; Subsidiaries
.
(a)
Each of
the Company and its Subsidiaries is a corporation duly organized, validly
existing and in good standing under the Laws of the jurisdiction of its
incorporation, has all requisite corporate power and authority to own, lease and
operate its properties and assets and to carry on its business as now being
conducted, except for such failures to be so organized, qualified or in good
standing, individually or in the aggregate, that have not had, and could not
reasonably be expected to have a Company Material Adverse
Effect. There is no jurisdiction in the United States in which the
nature of the business conducted by the Company or property owned by it requires
qualification as a foreign corporation.
(b)
The
Company SEC Reports set forth a complete and accurate list of (i) all of the
Company’s Subsidiaries and the Company’s direct or indirect equity interest
therein and (ii) the Company’s interest in any Person which is not a Subsidiary,
including any Person in which the Company has a non-controlling equity
interest.
(c)
The
Company has delivered to the Buyer complete and accurate copies of the articles
of incorporation and by-laws of the Company and of the charter, by-laws or other
organizational documents of each Subsidiary of the Company, in each case as
amended to date. The Company is not in default under, or in violation
of, its articles of incorporation or by-laws, and each of its Subsidiaries is
not in violation of its comparable organizational documents.
4.2
Capitalization
.
(a)
The
authorized capital stock of the Company consists of 10,000,000 shares of
preferred stock, par value $0.001 per share, none of which are outstanding or
authorized for issuance, and 50,000,000 Shares. The rights and
privileges of each class of the Company’s capital stock are as set forth in the
Company’s articles of incorporation. As of the date of this
Agreement, 15,922,391 Shares were issued and outstanding, and no Shares were
held in the treasury of the Company or by Subsidiaries of the
Company.
Amended
and Restated Agreement and Plan of Merger – Page 12
(b)
Section
4.2(b) of the Company Disclosure Schedule lists the number of Shares reserved
for issuance pursuant to outstanding convertible notes, stock options and stock
purchase warrants, as of the date of the Original Agreement (subject to any
exercises and conversions reflected in the Company’s annual report on SEC Form
10-K for the year ended September 30, 2009) and any plans or other arrangements
under which additional notes, options and warrants may be issued or granted
(collectively, the “
Company Stock Plans
”)
and sets forth a complete and accurate list of all holders of outstanding notes
convertible into, and options and warrants to purchase, Shares (such outstanding
notes, options and warrants, respectively, the “
Company Convertible
Notes
,” “
Company Stock
Options
” and the “
Company Stock Purchase
Warrants
”), whether or not granted under the Company Stock Plans, and the
number of Shares issuable pursuant to each Company Convertible Note, each
Company Stock Option and each Company Stock Purchase Warrant, and the
conversion, exercise or purchase price, the date of grant or issuance, the
repurchase price payable per unvested Share, and the expiration date thereof.
The Company has provided to the Buyer accurate and complete copies of all
Company Stock Plans, and the forms of all convertible note, stock option and
common stock warrant agreements evidencing Company Convertible Notes, Company
Stock Options and Company Stock Purchase Warrants, and there are no agreements,
understandings or commitments to amend, modify or supplement such documents,
which documents include any applicable provisions relating to adjustments in the
number of Shares which may be issued pursuant thereto.
(c)
Except
(x) as set forth in this Section 4.2, and (y) as reserved for future grants
under Company Stock Plans, (i) there are no equity securities of any class of
the Company or any of its Subsidiaries (other than equity securities of any such
Subsidiary that are directly or indirectly owned by the Company), or any
security exchangeable into or exercisable for such equity securities, issued,
reserved for issuance or outstanding and (ii) there are no options, warrants,
equity securities, calls, rights, commitments or agreements of any character to
which the Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries is bound obligating the Company or any of its
Subsidiaries to issue, exchange, transfer, deliver or sell, or cause to be
issued, exchanged, transferred, delivered or sold, additional shares of capital
stock or other equity interests of the Company or any of its Subsidiaries or any
security or rights convertible into or exchangeable or exercisable for any such
shares or other equity interests, or obligating the Company or any of its
Subsidiaries to grant, extend, accelerate the vesting of, otherwise modify or
amend or enter into any such option, warrant, equity security, call, right,
commitment or agreement. Neither the Company nor any of its
Subsidiaries has outstanding any stock appreciation rights, phantom stock,
performance-based rights or similar rights or obligations. There are
no obligations, contingent or otherwise, of the Company or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of the
capital stock of the Company or any of its Subsidiaries or to provide funds to
or make any investment (in the form of a loan, capital contribution or
otherwise) in the Company or any Subsidiary of the Company or any other entity,
other than guarantees of bank obligations of Subsidiaries of the Company entered
into in the Ordinary Course of Business or as disclosed in the Company SEC
Reports. Neither the Company nor any of its Affiliates is a party to
or is bound by any, and to the Knowledge of the Company, there are no,
agreements or understandings with respect to the voting (including voting trusts
and proxies) or sale or transfer (including agreements imposing transfer
restrictions) of any shares of capital stock or other equity interests of the
Company or any of its Subsidiaries not disclosed in the Company SEC Reports.
There are no registration rights, and there is no rights agreement, “poison
pill” anti-takeover plan or other agreement or understanding to which the
Company or any of its Subsidiaries is a party or by which it or they are bound
with respect to any equity security of any class of the Company or any of its
Subsidiaries or with respect to any equity security, partnership interest or
similar ownership interest of any class of any of its Subsidiaries not disclosed
in the Company SEC Reports.
Amended
and Restated Agreement and Plan of Merger – Page 13
(d)
Shareholders
of the Company are not entitled to dissenters’ or appraisal rights under
applicable state Law in connection with the Merger.
(e)
All
outstanding Shares are, and all Shares subject to issuance as specified in
Section 4.2(b) above, upon issuance on the terms and conditions specified in the
instruments pursuant to which they are issuable, will be, duly authorized,
validly issued, fully paid and non-assessable and not subject to or issued in
violation of any Encumbrance, purchase option, call option, right of first
refusal, preemptive right, subscription right or any similar right under any
provision of the NGCL, the Company’s articles of incorporation or by-laws or any
agreement to which the Company is a party.
(f)
All of
the outstanding shares of the Capital Stock of each of the Company’s
Subsidiaries are owned as set forth in Note 1(c) of the Notes to Consolidated
Financial Statements in the Company’s Form 10-K for the year ended September 30,
2009 and have been issued in accordance with applicable law and the governing
instruments of the Subsidiary, and are owned free and clear of any Encumbrances,
except as disclosed in the Company SEC Reports. There are no outstanding
options, warrants, calls, stock appreciation rights, or other rights or
commitments or any other agreements of any character relating to the sale,
issuance or voting of, or the granting of rights to acquire any shares of the
capital stock of any of the Company’s Subsidiaries, or any securities or other
instruments convertible into, exchangeable for or evidencing the right to
purchase any shares of the capital stock of any of the Company’s Subsidiaries
except as disclosed in the Company SEC Reports.
(g)
All
Company Stock Options, all Company Stock Purchase Warrants and all issued and
outstanding Shares have been issued in compliance with the Securities Act and
any applicable state blue sky Laws. Any consents of the holders of
Company Stock Options and Company Stock Purchase Warrants which are required in
connection with the actions contemplated by Section 7.8 have been obtained,
and such actions so contemplated comport with the requirements of the documents
underlying any such derivative securities.
4.3
Authority; No Conflict;
Required Filings and Consents
.
(a)
The
Company has all requisite corporate power and authority to enter into this
Agreement and, subject only to the adoption of this Agreement and the approval
of the Merger (the “
Company Voting
Proposal
”) by the Company’s shareholders under the NGCL (the “
Company Shareholder
Approval
”), to consummate the transactions contemplated by this
Agreement. Without limiting the generality of the foregoing, the
Company Board, at a meeting duly called and held, by the unanimous vote of all
directors (with Messrs.Tianzhou Deng and Bo Huang abstaining) and upon the
approval and recommendation of a special committee of the Company Board
comprised solely of four independent directors (i) determined that the Merger is
fair and in the best interests of the Company and its unaffiliated shareholders,
(ii) adopted this Agreement in accordance with the provisions of the NGCL, (iii)
directed that this Agreement and the Merger be submitted to the shareholders of
the Company for their adoption and approval and resolved to recommend that the
shareholders of the Company vote in favor of the adoption of this Agreement and
the approval of the Merger and (iv) to the extent necessary, adopted a
resolution having the effect of causing the Company not to be subject to any
provision of the NGCL relating to a merger with interested stockholders
(including, without limitation, a “fair price,” “moratorium,” or “control share
acquisition” statute) that might otherwise apply to the Merger and any other
transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
by this Agreement by the Company have been duly authorized by all necessary
corporate action on the part of the Company, subject only to the required
receipt of the Company Shareholder Approval. This Agreement has been
duly executed and delivered by the Company and constitutes the valid and binding
obligation of the Company, enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors’ rights and remedies generally
and to general principles of equity.
Amended
and Restated Agreement and Plan of Merger – Page 14
(b)
The
execution and delivery of this Agreement by the Company do not, and the
consummation by the Company of the transactions contemplated by this Agreement
shall not, (i) conflict with, or result in any violation or breach of, any
provision of the articles of incorporation or by-laws of the Company or of the
charter, by-laws, or other organizational document of any Subsidiary of the
Company, (ii) conflict with, or result in any violation or breach of, or
constitute (with or without notice or lapse of time, or both) a default (or give
rise to a right of termination, cancellation or acceleration of any obligation
or loss of any benefit) under, or require a consent or waiver under, constitute
a change in control under, require the payment of a penalty under or result in
the imposition of any Encumbrance on the Company’s or any of its Subsidiaries’
assets under, any of the terms, conditions or provisions of any material note,
bond, mortgage, indenture, lease, license, contract or other agreement,
instrument or obligation to which the Company or any of its Subsidiaries is a
party or by which any of them or any of their properties or assets may be bound,
(iii) subject to obtaining the Company Shareholder Approval and compliance
with the requirements specified in clauses (i) through (iv) of Section 4.3(c)
below, conflict with or violate any permit, concession, franchise, license,
judgment, injunction, order, decree or Law applicable to the Company or any of
its Subsidiaries or any of its or their properties or assets, or
(iv) result in the creation of a material lien on any of the material
properties or assets of the Company or any of its Subsidiaries, except in the
case of clauses (ii) and (iii) of this Section 4.3(b) for any such
conflicts, violations, breaches, defaults, terminations, cancellations,
accelerations or losses that, individually or in the aggregate, could not
constitute or could not reasonably be expected to constitute a Company Material
Adverse Effect. There are no consents, waivers or approvals under any
of the Company’s or any of its Subsidiaries’ agreements, licenses or leases
required to be obtained in connection with the consummation of the transactions
contemplated hereby.
(c)
No
consent, approval, license, permit, order or authorization of, or registration,
declaration, notice or filing with any Governmental Entity is required by or
with respect to the Company or any of its Subsidiaries in connection with the
execution and delivery of this Agreement by the Company or the consummation by
the Company of the transactions contemplated by this Agreement, except for (i)
the filing of Articles of Merger with the Secretary of State of the State of
Nevada, (ii) the filing of the Proxy Statement with the SEC in accordance with
the Exchange Act, (iii) the filing of such reports, schedules or materials under
Section 13, Rule 14a-12 or other relevant sections under the Exchange Act as may
be required in connection with this Agreement and the transactions contemplated
hereby and (iv) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable state securities
Laws and the securities Laws of any foreign country.
Amended
and Restated Agreement and Plan of Merger – Page 15
(d)
The
affirmative vote of the holders of a majority of the outstanding Shares on the
record date for the Company Shareholders Meeting is the only vote of the holders
of any class or series of the Company’s capital stock or other securities
necessary for the adoption of this Agreement and for the consummation by the
Company of the Merger and the other transactions contemplated by this
Agreement. There are no bonds, debentures, notes or other
indebtedness of the Company having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
shareholders of the Company may vote.
4.4
SEC Filings; Financial
Statements; Reporting Requirements
.
(a)
The
Company has filed all registration statements, forms, reports and other
documents required to be filed by the Company with the SEC and/or the Nasdaq
Stock Market since June 1, 2006 pursuant to the Exchange Act (the “
Company SEC
Reports
”), all of which are publicly available on the SEC’s EDGAR system;
provided
,
however
, that the
Company has not filed a proxy statement relating to the election of directors on
Schedule 14A or an information statement on Schedule 14C from September 8, 2006
until December 29, 2009. Prior to the Closing, the Company will have
furnished to the Buyer a true, correct and complete copy of any additional
Company SEC Reports filed with the SEC or the Nasdaq Stock Market on or after
the date hereof but prior to the Closing. The Company SEC Reports (i)
were or will be filed on a timely basis,
provided
,
however
, that no
representation is made that each current report on Form 8-K was filed on a
timely basis, (ii) at the time filed, were, to the Company’s Knowledge at the
time of such filing, or will be prepared in compliance in all material respects
with the applicable requirements of the Exchange Act, and the rules and
regulations of the SEC thereunder applicable to such Company SEC Reports
including the provision of all statements and certifications required by (x)
Rule 13a-14 or 15d-14 under the Exchange Act or (y) 18 U.S.C. §1350 (Section 906
of the Sarbanes-Oxley Act of 2002), and (iii) did not or will not at the time
they were or are filed contain any untrue statement of a material fact or omit
to state a material fact required to be stated in such Company SEC Report or
necessary in order to make the statements in such Company SEC Report, in the
light of the circumstances under which they were made, not
misleading. No Subsidiary of the Company is subject to the reporting
requirements of Section 13(a) or Section 15(d) of the Exchange
Act. There are no off-balance sheet or securitization structures or
transactions with respect to the Company or any of its Subsidiaries that would
be required to be reported or set forth in the Company SEC Reports and were not
reflected therein. As used in this Section 4.4, the term “file” and
variations thereof shall be broadly construed to include any manner in which a
document or information is furnished, supplied or otherwise made available to
the SEC.
(b)
Each of
the consolidated financial statements (including, in each case, any related
notes and schedules) contained or to be contained in or incorporated by
reference in the Company SEC Reports at the time filed (i) complied or will
comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto and (ii) were or will be prepared in accordance with United States
generally accepted accounting principles (“
GAAP
”) applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes to such financial statements or as otherwise reflected in the Company
SEC Reports or, in the case of unaudited interim financial statements, as
permitted by the SEC on Form 10-QSB or Form 10-Q under the Exchange
Act). Each of the consolidated balance sheets (including, in each
case, any related notes and schedules) contained or to be contained or
incorporated by reference in the Company SEC Reports at the time filed fairly
presented or will fairly present the consolidated financial position of the
Company and its Subsidiaries as of the dates indicated and each of the
consolidated statements of operations, shareholders’ equity and cash flows
contained or to be contained or incorporated by reference in the Company SEC
Reports (including, in each case, any related notes and schedules) fairly
presents, or will fairly present, the results of operations, changes in
shareholders’ equity and cash flows, as the case may be, of the Company and its
Subsidiaries for the periods set forth therein, except that the unaudited
interim financial statements were or are subject to normal and recurring
year-end adjustments which were not or are not expected to be material in
amount.
Amended
and Restated Agreement and Plan of Merger – Page 16
(c)
The
business, property, management and financial condition of the Company is
disclosed in the Company SEC Reports. The Company SEC Reports, taken
together, do not contain any statement which, at such time and in light of the
circumstances under which it was made, is false or misleading with respect to
any material fact, or omit to state any material fact necessary in order to make
the statements made in the Company SEC Reports, taken together, not false or
misleading.
(d)
The
information to be supplied by or on behalf of the Company for inclusion in any
filing pursuant to Rule 14a-12 under the Exchange Act (each a “
Regulation M-A
Filing
”), shall not at the time any Regulation M-A Filing is filed with
the SEC, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. The Proxy Statement will comply as
to form in all material respects with the requirements of the Exchange Act and
the rules and regulations thereunder, except that no representation or warranty
is made by the Company with respect to statements made based on information
supplied by the Buyer or the Buyer Subsidiary specifically for inclusion
therein. The information to be supplied by or on behalf of the
Company for inclusion in the proxy statement (the “
Proxy Statement
”) to
be sent to the shareholders of the Company in connection with the meeting of the
Company’s shareholders to consider the Company Voting Proposal (the “
Company Shareholders
Meeting
”), which shall be deemed to include all information about or
relating to the Company, the Company Voting Proposal and the Company Shareholder
Meeting, shall not, on the date the Proxy Statement is first mailed to
shareholders of the Company, or at the time of the Company Shareholders Meeting
or at the Effective Time, contain any statement which, at such time and in light
of the circumstances under which it shall be made, is false or misleading with
respect to any material fact, or omit to state any material fact necessary in
order to make the statements made in the Proxy Statement not false or
misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the Company Shareholders Meeting which has become false or
misleading. If at any time prior to the Effective Time any fact or
event relating to the Company or any of its Affiliates which should be set forth
in an amendment or supplement to the Proxy Statement should be discovered by the
Company or should occur, the Company shall promptly inform the Buyer of such
fact or event.
(e)
Except as
otherwise disclosed in the Company SEC Reports, during the periods subsequent to
June 1, 2006 that the Company was subject to such requirements, the Company has
been and is in compliance in all material respects with (i) the applicable
provisions of the Sarbanes-Oxley Act of 2002 and (ii) the applicable listing and
corporate governance rules and regulations of The Nasdaq Stock Market
LLC.
Amended
and Restated Agreement and Plan of Merger – Page 17
(f)
The
Company has designed disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated Company
Subsidiaries, is made known to the chief executive officer and the chief
financial officer of the Company by others within those entities.
(g)
The
Company has disclosed in the Company SEC Reports any significant deficiencies
and material weaknesses in the design or operation of internal controls over
financial reporting which are reasonably likely to adversely affect in any
material respect the Company’s ability to record, process, summarize and report
financial information. The Company knows of no fraud or allegation of
fraud, whether or not material, that involves management or other employees who
have a significant role in the Company’s internal controls over financial
reporting.
(h)
As of the
date hereof, to the Knowledge of the Company, the Company has not identified any
material weaknesses in the design or operation of internal controls over
financial reporting not disclosed in the Company SEC Reports. To the
Knowledge of the Company, there is no reason to believe that chief executive
officer and chief financial officer will not be able to give the certifications
and attestations required pursuant to the rules and regulations adopted pursuant
to Section 404 of the Sarbanes−Oxley Act of 2002 when next due. Buyer
understands that the attestation by the Company’s registered independent public
accounting firm is not required.
(i)
None of
the Company’s Subsidiaries is subject to the reporting requirements of Sections
13(a) or 15(d) under the Exchange Act.
4.5
No Undisclosed Liabilities;
Indebtedness
. Neither the Company nor any of its Subsidiaries
has any liabilities or obligations of any nature, whether or not accrued,
contingent or otherwise, except for (i) liabilities and obligations that are
specifically disclosed in type and amount on the Company Balance Sheet or in the
notes thereto and (ii) liabilities and obligations incurred in the Ordinary
Course of Business since September 30, 2009, that are not and could not,
individually or in the aggregate with all other liabilities and obligations of
the Company and its Subsidiaries, reasonably be expected to have a Company
Material Adverse Effect.
4.6
Absence of Certain Changes
or Events
. Since the date of the Company Balance Sheet, the
Company and its Subsidiaries have conducted their respective businesses only in
the Ordinary Course of Business and, since such date, there has not been (i) any
change, event, circumstance, development or effect (whether or not covered by
insurance) that, individually or in the aggregate, has had, or could reasonably
be expected to have, a Company Material Adverse Effect or (ii) any other action
or event that would have required the consent of the Buyer pursuant to
Section 6.1 of this Agreement had such action or event occurred after the
date of this Agreement.
4.7
Taxes
. Due
to the Buyer’s familiarity with the Company’s operations, the Company makes no
warranties or representations with regard to Taxes.
Amended
and Restated Agreement and Plan of Merger – Page 18
4.8
Owned and Occupied Real
Properties
. Due to the Buyer’s familiarity with the Company’s
operations, the Company makes no warranties or representations with regard to
the premises owned and/or occupied by the Company.
4.9
Intellectual
Property
. Due to the Buyer’s familiarity with the Company’s
operations, the Company makes no warranties or representations with regard to
Intellectual Property.
4.10
Agreements, Contracts and
Commitments; Government Contracts
.
(a)
Except as
set forth in the exhibit indices for the Company’s Company SEC Reports, neither
the Company nor any of its Subsidiaries is a party to or bound by (i) any
agreement relating to the incurring of Indebtedness by the Company or any of its
Subsidiaries in an amount in excess in the aggregate of $50,000, including any
such agreement which contains provisions that restrict, or may restrict, the
conduct of business of the issuer thereof as currently conducted (collectively,
“
Instruments of
Indebtedness
”), or (ii) any “
Material Contract
”
(as such term is defined in Item 601(b)(10) of Regulation S-K of the
SEC). The contracts and agreements described in this Section 4.10(a)
are referred to as “
Company Material
Contracts
.”
(b)
Each
Company Material Contract is valid and binding on the Company (or, to the extent
a Subsidiary of the Company is a party, such Subsidiary) and, to the Knowledge
of the Company, any other party thereto, and each Company Material Contract is
in written form and in full force and effect. Neither the Company nor
any of its Subsidiaries is in breach or default under any Company Material
Contract or is aware of any condition that with the passage of time or the
giving of notice or both could result in such a breach or default, except in
each case where any such breaches or defaults could not, except as disclosed in
the Company SEC Reports, individually or in the aggregate, reasonably be
expected to result in a Company Material Adverse Effect. Neither the
Company nor any Subsidiary of the Company knows of, or has received written
notice of, any breach or default under any Company Material Contract by any
other party thereto. Prior to the date hereof, the Company has made
available to the Buyer true and complete copies of all Company Material
Contracts.
4.11
Litigation; Product
Liability; Product Recalls
. Except as disclosed in the Company
SEC Reports filed prior to the date of this Agreement, there is no Action
pending or, to the Knowledge of the Company, threatened against or affecting the
Company or any of its Subsidiaries that: (i) individually or in the
aggregate, constitute or could reasonably be expected to constitute a Company
Material Adverse Effect; or (ii) seek to delay, alter or prevent the
consummation of the transactions contemplated hereby.
4.12
Environmental
Matters
. Due to the Buyer’s familiarity with the Company’s
operations, the Company makes no warranties or representations with regard to
the Company’s compliance with and/or obligations pursuant to applicable Laws
pertaining to environmental regulation.
4.13
Employee Benefit
Plans
. Due to the Buyer’s familiarity with the Company’s
operations, the Company makes no warranties or representations with regard to
the Company’s compliance with and/or obligations pursuant to applicable Laws
pertaining to employee benefits.
Amended
and Restated Agreement and Plan of Merger – Page 19
4.14
Compliance With
Laws
. Except for the de-listing notice and proceedings
disclosed in the Company SEC Reports, the Company, each of its Subsidiaries and
their respective businesses as previously conducted and as now, to the Knowledge
of the Company, being conducted have complied and do comply with, were not and
are not in violation of, and have not received any notice alleging any violation
with respect to, any applicable provisions of any Law with respect to the
conduct of its business, or the ownership or operation of its properties or
assets, except for failures to comply or violations that, individually or in the
aggregate, have not had a Company Material Adverse Effect.
4.15
Labor
Matters
. Due to the Buyer’s familiarity with the Company’s
operations, the Company makes no warranties or representations with regard to
the Company’s compliance with and/or obligations pursuant to applicable Laws
pertaining to employment and employment practices.
4.16
Opinions of Financial
Advisors
. Brean Murray, Carret & Co., LLC. (“
BMC
”) has delivered
to the Company Board its written opinion (or oral opinion to be confirmed in
writing), that, as of the date upon which it was issued, the Merger
Consideration is fair, from a financial point of view, to the unaffiliated
holders of the Shares, and such opinion has not been withdrawn or
modified. The Company has made available to the Buyer accurate and
complete copies of all agreements under which fees, commissions or other amounts
have been paid or may become payable and all indemnification and other
agreements related to the engagement of BMC.
4.17
Insurance
. Due
to the Buyer’s familiarity with the Company’s operations, the Company makes no
warranties or representations with regard to matters pertaining to property,
casualty and other insurance.
4.18
Brokers
. No
agent, broker, investment banker, financial advisor or other Person is or shall
be entitled, as a result of any action, agreement or commitment of the Company
or any of its Affiliates, to any broker’s, finder’s, financial advisor’s or
other similar fee or commission in connection with any of the transactions
contemplated by this Agreement.
4.19
Certain
Approvals
. The Company has taken all necessary action to
ensure that no provisions of the NGCL relating to transactions with control
parties would adversely affect the ability of the Company (assuming the Merger
receives stockholder approval) to consummate the transactions contemplated by
this Agreement, including the Merger.
4.20
Unlawful
Payments
. Neither the Company, any of its Subsidiaries, any
director, officer, employee, shareholder, agent or representative of the Company
or any of its Subsidiaries, nor any Person associated with or acting for or on
behalf of the Company or any of its Subsidiaries, has directly or indirectly
made any contribution, gift, bribe, rebate, payoff, influence payment, kickback,
or other payment to any Person, private or public, regardless of what form,
whether in money, property, or services (i) to obtain favorable treatment for
the Company or any of its Subsidiaries or to secure contracts, (ii) to pay for
favorable treatment for the Company or any of its Subsidiaries or for contracts
secured, (iii) to obtain special concessions for the Company or any of its
Subsidiaries or for special concessions already obtained or (iv) in violation of
any legal requirement.
Amended
and Restated Agreement and Plan of Merger – Page 20
4.21
Affiliate
Transactions
. Other than this Agreement and the transactions
disclosed in the Company SEC Reports, there are no transactions, agreements,
arrangements or understandings between (i) the Company or any of its
Subsidiaries, on the one hand, and (ii) any Affiliate of the Company (other than
the Company Subsidiaries), on the other hand, of the type that would be required
to be disclosed under Item 404 of Regulation S−K under the Securities
Act.
4.22
Guaranteed Senior
Notes
. The indentures governing the Company’s 12% Guaranteed
Senior Notes Due 2012 in the aggregate principal amount of $16,000,000 and the
Company’s 3.0% guaranteed senior convertible notes due 2012 in the principal
amount of $14,000,000 contain provisions entitling the holders thereof to
accelerate the maturity of such notes upon consummation of a transaction such as
the Merger. The 12% Guaranteed Senior Notes Due 2012 have been paid
in full, and the Company has entered into an agreement with the holders of 3.0%
guaranteed senior convertible notes due 2012 providing for full payment thereof
in two installments, the first of which, in the amount of $5,000,000, must be
made ten days after the Effective Time and the second of which, in the amount of
the unpaid principal balance plus accrued but unpaid interest, must be paid
within 30 days after the date of the first payment.
4.23
No Other Representations or
Warranties
. Except for the representations and warranties
contained in this Article IV of this Agreement, in the Company Disclosure
Schedule or any certificate or instrument furnished by the Company or any of its
Subsidiaries pursuant to this Agreement or the disclosures in the Company SEC
Reports, the Buyer acknowledges that neither the Company nor any other Person on
behalf of the Company makes any other express or implied representation or
warranty with respect to the Company with respect to any other information
provided to the Buyer.
ARTICLE
V
REPRESENTATIONS
AND WARRANTIES OF THE BUYER AND THE BUYER SUBSIDIARY
The Buyer
and the Buyer Subsidiary represent and warrant to the Company that the
statements contained in this Article V are true and correct.
5.1
Organization, Standing and
Power
. Each of the Buyer and Buyer Subsidiary is a corporation
duly organized, validly existing and in good standing under the Laws of the
jurisdiction of its incorporation, has all requisite corporate power and
authority to own, lease and operate its properties and assets and to carry on
its business as now being conducted and as proposed to be conducted, and is duly
qualified to do business and is in good standing as a foreign corporation in
each jurisdiction in which the character of the properties it owns, operates or
leases or the nature of its activities makes such qualification necessary,
except for such failures to be so organized, qualified or in good standing,
individually or in the aggregate, that have not had, and could not reasonably be
expected to have, a Buyer Material Adverse Effect.
Amended
and Restated Agreement and Plan of Merger – Page 21
5.2
Authority; No Conflict;
Required Filings and Consents
.
(a)
Each of
the Buyer and the Buyer Subsidiary has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated by this Agreement. The execution and delivery of this
Agreement and the consummation of the transactions contemplated by this
Agreement by the Buyer and the Buyer Subsidiary have been duly authorized by all
necessary corporate action on the part of each of the Buyer and Buyer Subsidiary
(including the approval of the Merger by the Buyer in its capacity as the sole
shareholder of the Buyer Subsidiary). This Agreement has been duly
executed and delivered by each of the Buyer and the Buyer Subsidiary and
constitutes the valid and binding obligation of each of the Buyer and the Buyer
Subsidiary, enforceable in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors’ rights and remedies generally and to general
principles of equity.
(b)
The
execution and delivery of this Agreement by each of the Buyer and Buyer
Subsidiary does not, and the consummation by the Buyer and the Buyer Subsidiary
of the transactions contemplated by this Agreement shall not, (i) conflict
with, or result in any violation or breach of, any provision of the memorandum
or articles of association of the Buyer or the articles of incorporation of the
Buyer Subsidiary, (ii) impair or threaten to impair in any manner the
ability of the Buyer or Buyer Subsidiary to provide the Merger Consideration
required by this Agreement or otherwise perform its obligation under this
Agreement, or (iii) subject to compliance with the requirements specified
in clause (i), (ii), (iii) and (iv) of Section 5.2(c), conflict with or violate
any permit, concession, franchise, license, judgment, injunction, order, decree,
statute, Law, ordinance, rule or regulation applicable to the Buyer or the Buyer
Subsidiary or any of its or their properties or assets, except in the case of
clause (iii) of this Section 5.2(b) for any such conflicts, violations,
breaches, defaults, terminations, cancellations, accelerations or losses that,
individually or in the aggregate, could not reasonably be expected to have a
Buyer Material Adverse Effect.
(c)
No
consent, approval, license, permit, order or authorization of, or registration,
declaration, notice or filing with, any Governmental Entity is required by or
with respect to the Buyer or Buyer Subsidiary in connection with the execution
and delivery of this Agreement by the Buyer or the Buyer Subsidiary or the
consummation by the Buyer or the Buyer Subsidiary of the transactions
contemplated by this Agreement, except for (i) the filing of the Articles of
Merger with the Secretary of State of the State of Nevada, (ii) the filings of
such reports, schedules or materials under the Exchange Act as may be required
in connection with this Agreement and the transactions contemplated hereby and
(iii) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable state securities
Laws and the securities Laws of any foreign country.
5.3
Information
Provided
. None of the information supplied or to be supplied
by the Buyer in writing specifically for inclusion in any Regulation M-A Filing
or the Proxy Statement shall at the time the Regulation M-A Filing is filed with
the SEC or the Proxy Statement is sent to shareholders of the Company to
consider the Company Voting Proposal (as applicable), contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. If at any time prior to the Effective Time any fact or
event relating to the Buyer or any of its Affiliates which should be set forth
in an amendment or supplement to the Proxy Statement should be discovered by the
Buyer or should occur, the Buyer shall promptly inform the Company of such fact
or event.
Amended
and Restated Agreement and Plan of Merger – Page 22
5.4
Operations of the Buyer
Subsidiary
. The Buyer Subsidiary was formed solely for
the purpose of engaging in the transactions contemplated by this Agreement, has
engaged in no other business activities and has conducted its operations only as
contemplated by this Agreement.
5.5
Financing
. The
Buyer has possession of, or has available to it under existing lines of credit,
sufficient funds to consummate the transactions contemplated by this
Agreement.
5.6
Brokers
. No agent,
broker, finder or investment banker is entitled to any brokerage, finder’s or
other fee or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of the Buyer or Buyer
Subsidiary for which the Company could have any liability if the Closing does
not occur.
5.7
Shares
. The Buyer is
an “interested stockholder” of the Company as defined in Section 78.3787 of the
NGCL, assuming that the Company is an issuing corporation as defined in Section
78.3787 of the NGCL. The Buyer is not a party to any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing of, in each case, any shares of capital stock of the Company (other
than as contemplated by this Agreement or as disclosed in the Company SEC
Reports).
5.8
Tax
Matters
. During the 12 month period commencing on the
Effective Time, Skywide shall not: (a) sell, assign, transfer or otherwise
dispose of more than 19.9% of the Company’s outstanding shares of capital stock;
(b) cause the Company to merge with or into any corporation or other entity or
liquidate; or (c) cause the Company or any of the Company’s Subsidiaries to sell
or otherwise dispose of all or substantially all of their assets.
Notwithstanding the previous sentence, an operating Subsidiary of the Company
may sell or dispose of its assets so long as such sale would
not be considered under US federal tax principles to be a sale of all or
substantially all of the Company’s assets.
ARTICLE
VI
CONDUCT
OF BUSINESS
6.1
Covenants of the
Company
. Except as expressly provided herein or as consented
to in writing by the Buyer, from and after the date of this Agreement until the
earlier of the termination of this Agreement in accordance with its terms or the
Effective Time, the Company shall, and shall cause each of its Subsidiaries to,
act and carry on its business in the usual, regular and ordinary course in
substantially the same manner as previously conducted, pay its debts and Taxes
and perform its other obligations when due (subject to good faith disputes over
such debts, Taxes or obligations, and the continuation subsequent to September
30, 2009 of defaults in financial covenants as described in Note 17 of the Notes
to Consolidated Financial Statements included in the Company’s Form 10-K for the
year ended September 30, 2009), comply with all applicable Laws, rules and
regulations, and use best efforts, consistent with past practices, to maintain
and preserve its and each Subsidiary’s business organization, assets and
properties, keep available the services of its present officers and employees
and preserve its advantageous business relationships with customers, strategic
partners, suppliers, distributors and others having business dealings with it to
the end that its goodwill and ongoing business shall be unimpaired at the
Effective Time. Without limiting the generality of the foregoing, and
except as otherwise expressly required by this Agreement or in the Ordinary
Course of Business, the Company will not, and will not permit any of its
Subsidiaries to, prior to the Effective Time, without the prior written consent
of the Buyer:
Amended
and Restated Agreement and Plan of Merger – Page 23
(a)
adopt any
amendment to its articles of incorporation or by-laws or comparable charter or
organizational documents;
(b)
sell,
transfer, dispose of, pledge, hypothecate, grant a security interest in or
otherwise encumber any capital stock owned by it in any of its
Subsidiaries;
(c)
(i)
issue, reissue or sell, or authorize the issuance, reissuance or sale of
(A) shares of capital stock of any class, or securities convertible into
capital stock of any class, or any rights, warrants or options to acquire any
convertible securities or capital stock, of such Person other than the issuance
by the Company of Shares pursuant to the exercise of Company Stock Options or
Company Stock Purchase Warrants or Company Convertible Securities outstanding on
the date hereof in accordance with the terms of such instruments or (B) any
other securities in respect of, in lieu of, or in substitution for, capital
stock outstanding on the date hereof, or (ii) make any other changes in its
capital structure; it being understood that the issuance of certificates for
Shares upon the transfer of outstanding Shares shall not be deemed to be a
reissuance prohibited by this Section 6.1(c);
(d)
declare,
set aside or pay any dividend or other distribution (whether in cash, securities
or property or any combination thereof) in respect of any class or series of its
capital stock except for dividends by any wholly-owned Subsidiary of the Company
to the Company or another wholly-owned Subsidiary of the Company;
(e)
split,
combine, subdivide, reclassify or redeem, purchase or otherwise acquire, or
propose to redeem or purchase or otherwise acquire, any capital stock, or any of
its other securities;
(f)
sell,
transfer, lease, mortgage, encumber, license, pledge, abandon, cancel,
surrender, allow to lapse or expire, or otherwise dispose of, encumber or
subject to any material Lien, any assets or property (including Intellectual
Property);
(g)
acquire
(whether by merger, consolidation, acquisition of stock or assets or any other
form of transaction) any corporation, partnership or other business organization
or division thereof or any assets;
(h)
incur,
guarantee, or modify in any material respect, any Indebtedness or make any
loans, advances or capital contributions to, or investments in, any other Person
(other than a Subsidiary of the Company), enter into, renew or amend in any
material respect any contract or agreement which is or would be a Material
Contract or would be material to the Company and its Subsidiaries taken as a
whole, authorize any material new capital expenditures, or take any actions to
materially change in a manner adverse to the Company or its Subsidiaries,
relationships with material product vendors and suppliers;
Amended
and Restated Agreement and Plan of Merger – Page 24
(i)
sublease,
license, grant any material easement affecting and/or transfer any interest in
any land use rights, or materially amend or terminate any leasehold interest in
any land use rights;
(j)
except
(i) as contemplated by this Agreement, or (ii) as required by applicable Law,
(A) increase or decrease the compensation or fringe benefits of, or pay any
bonus to, any current or former director, officer, employee or consultant of the
Company or any of its Subsidiaries, (B) adopt or enter into any new employee
benefit plan, arrangement or employment contract or (C) hire or terminate any
officer other than termination for cause;
(k)
enter
into any transaction, agreement, arrangement or understanding between (i) the
Company or any Subsidiary of the Company, on the one hand, and (ii) any
Affiliate of the Company (other than the Company Subsidiaries), on the other
hand, of the type that would be required to be disclosed under Item 404 of
Regulation S−K;
(l)
settle or
dismiss any Action threatened against, relating to or involving the Company or
any of its Subsidiaries in connection with any business, asset or property of
the Company and any of its Subsidiaries, but not in a manner that would prohibit
or materially restrict the Company from operating as it has
historically;
(m)
surrender
any right to claim a material Tax refund;
(n)
make any
changes in accounting policies or procedures other than as required by GAAP or a
Governmental Entity unless such change is recommended by the Company’s
registered independent accounting firm;
(o)
agree to
take, make any commitment to take, or adopt any resolutions of the Company Board
or any board of directors or similar body of any Subsidiary in support of, any
of the actions prohibited by this Section 6.1.
ARTICLE
VII
ADDITIONAL
AGREEMENTS
7.1
No
Solicitation
.
(a)
No Solicitation or
Negotiation
. Except as expressly permitted in this Section
7.1, the Company shall not, nor shall it authorize or permit any of its
Subsidiaries or any of its or their directors, officers, employees, investment
bankers, attorneys, accountants or other advisors or representatives (such
directors, officers, employees, investment bankers, attorneys, accountants,
other advisors and representatives, collectively, “
Representatives
”) to
directly or indirectly:
(i)
solicit,
initiate, encourage or take any other action to facilitate any inquiries or the
making of any proposal or offer that constitutes, or could reasonably be
expected to lead to, any Acquisition Proposal, including without limitation,
amending or granting any waiver or release under any standstill or similar
agreement with respect to any Shares;
Amended
and Restated Agreement and Plan of Merger – Page 25
(ii)
enter
into, continue or otherwise participate in any discussions or negotiations
regarding, furnish to any Person any information with respect to, assist or
participate in any effort or attempt by any Person with respect to, or otherwise
cooperate in any way with, any Acquisition Proposal; or
(iii)
make or
authorize any statement, recommendation or solicitation in support of any
Acquisition Proposal.
The
Company shall use its reasonable best efforts to take the necessary steps
promptly to inform the Persons described in the first sentence of this Section
7.1(a) of the obligations undertaken under this Section.
Notwithstanding
the foregoing, nothing contained in this Agreement shall prevent the Company or
the Company Board from (i) taking and disclosing to its shareholders a position
contemplated by Rule 14d-9 and Rule 14e-2(a) promulgated under the Exchange Act
(or any similar communication to shareholders in connection with the making or
amendment of a tender offer or exchange offer) or from making any legally
required disclosure to shareholders with regard to an Acquisition Proposal
(
provided
that
neither the Company nor its Company Board may recommend any Acquisition Proposal
unless permitted by Section 7.1(b) below and the Company may not fail to make or
withdraw, modify or change in a manner adverse to the Buyer all or any portion
of the Company Board Recommendation unless permitted by Section 7.5 (in which
case the Buyer shall have the right to terminate this Agreement as set forth in
Section 7.1(b)(ii)), and
provided
further
that,
notwithstanding anything herein to the contrary, any “stop-look-and-listen”
communication by the Company or the Company Board to the shareholders of the
Company pursuant to Rule 14d-9(f) promulgated under the Exchange Act shall not
be considered a failure to make, or a withdrawal, modification or change in any
manner adverse to the Buyer of, all or a portion of the Company Board
Recommendation) or (ii) prior to the adoption of this Agreement by the Company’s
shareholders in accordance with this Agreement, (A) providing access to its
properties, books and records and providing information or data in response to a
request therefor by a Person who has made an unsolicited bona fide written
Acquisition Proposal if the Company Board receives from the Person so requesting
such information an executed confidentiality agreement, or (B) engaging in any
negotiations or discussions with any Person who has made an unsolicited bona
fide written Acquisition Proposal, if and only to the extent that prior to
taking any of the actions set forth in clauses (A) or (B) of clause (ii), (x)
the Company Board shall have determined in good faith, after consultation with
its outside legal counsel and financial advisors, that such action is necessary
in order for the Company Board to comply with its fiduciary duties under
applicable Law and that such Acquisition Proposal will, or would reasonably be
expected to, result in, a Superior Proposal, and (y) the Company shall have
informed the Buyer promptly following (and in no event later than 24 hours
after) the taking by it of any such action.
(b)
Receipt of an Unsolicited
Acquisition Proposal
. Notwithstanding anything in this Section
7.1 to the contrary, if, at any time prior to the approval of this Agreement by
the Company’s shareholders in accordance with this Agreement, the Company, the
Company Board or any of the Representatives receives a bona fide written
Acquisition Proposal that was unsolicited and that did not otherwise result from
a material breach of Section 7.1(a):
Amended
and Restated Agreement and Plan of Merger – Page 26
(i)
the
Company shall (A) promptly (and in no event later than 48 hours after receipt of
an Acquisition Proposal) notify (which notice shall be provided orally and in
writing and shall identify the Person making the Acquisition Proposal and set
forth in reasonable detail its material terms and conditions) the Buyer that it
has received an Acquisition Proposal and thereafter shall keep the Buyer
reasonably informed of the status and material terms and conditions of any
proposals or offers; and (B) make available to the Buyer (to the extent it has
not already done so) all material non-public information made available to any
Person making an Acquisition Proposal at substantially the same time as it
provides it to such other Person; and
(ii)
if the
Company Board determines in good faith, after consultation with its financial
advisors and outside legal counsel, in response to such bona fide written
Acquisition Proposal, that such proposal is a Superior Proposal and that
terminating this Agreement to accept such Superior Proposal and/or recommending
such Superior Proposal to the shareholders of the Company is necessary in order
for the Company Board to comply with its fiduciary duties under applicable Law,
the Company may terminate this Agreement and/or the Company Board may approve or
recommend such Superior Proposal to its shareholders, and immediately prior to
or concurrently with the termination of this Agreement, enter into any
agreement, understanding, letter of intent or arrangement with respect to such
Superior Proposal, as applicable;
provided
,
however
, that the
Company shall not terminate this Agreement pursuant to this sentence, and any
purported termination pursuant to this sentence shall be void and of no force or
effect, unless concurrently with such termination pursuant to this Section
7.1(b)(ii) the Company pays to the Buyer the Termination Fee payable pursuant to
Section 9.3(b).
(c)
Termination of All Pending
Discussions
. The Company shall immediately cease and cause to
be terminated any existing activities, discussions or negotiations with any
Persons conducted heretofore with respect to any Acquisition Proposal. The
Company also shall, if it has not already done so, promptly request, to the
extent it has a contractual right to do so, that each Person, if any, that has
heretofore executed a confidentiality agreement within the 12 months prior to
the date of this Agreement in connection with its consideration of any
Acquisition Proposal shall return or destroy all confidential information or
data heretofore furnished to any Person by or on behalf of it or any of its
Subsidiaries.
(d)
Definitions
. For
purposes of this Agreement:
(i)
“
Acquisition Proposal
”
means any inquiry, proposal or offer from any Person (other than from the Buyer
and its Affiliates) relating to a tender offer or exchange offer, merger,
reorganization, share exchange, consolidation or other business combination
involving the Company and its Subsidiaries (or any of them) or any proposal or
offer to acquire in any manner an equity interest representing a 20% or greater
economic or voting interest in the Company, or the assets, securities or other
ownership interests of or in the Company or any of its Subsidiaries representing
20% or more of the consolidated assets, revenues or earnings of the Company and
its Subsidiaries, other than the transactions contemplated by this
Agreement.
(ii)
“
Superior Proposal
”
means an Acquisition Proposal (
provided
that for
purposes of the definition of Superior Proposal, the term Acquisition Proposal
shall have the meaning set forth in Section 7.1(d)(i), except that references to
“20% or greater” and “20% or more” shall be deemed to be references to “90% or
greater” and “90% or more,” respectively) that is reasonably capable of being
consummated, taking into account all legal, financial, regulatory, timing, and
similar aspects of, and conditions to, the proposal, the likelihood of obtaining
necessary financing and the Person making the proposal, and, if consummated,
would result in a transaction more favorable to the Company’s shareholders from
a financial point of view than the transactions contemplated by this Agreement
(after giving effect to any adjustments to the terms and provisions of this
Agreements committed to in writing by the Buyer in response to such Acquisition
Proposal).
Amended
and Restated Agreement and Plan of Merger – Page 27
7.2
Proxy
Statement
.
(a)
As
promptly as practicable after the execution of this Agreement, the Company shall
prepare and file Amendment No. 1 to the Proxy Statement with the
SEC.
(b)
Each of
the Buyer and the Company shall respond to any comments of the SEC, if any, and
the Company shall use its best efforts to cause the Proxy Statement to be
cleared under the Exchange Act and, as promptly as practicable after such
filing, mailed to its shareholders at the earliest practicable time
thereafter. Each of the Buyer and the Company shall notify the other
promptly upon the receipt of any comments from the SEC or its staff or any other
government officials and of any request by the SEC or its staff or any other
government officials for amendments or supplements to the Proxy Statement or any
filing pursuant to this Section or for additional information and shall supply
the other with copies of all correspondence between such party or any of its
representatives, on the one hand, and the SEC, or its staff or any other
government officials, on the other hand, with respect to the Proxy Statement,
the Merger or any filing pursuant to this Section. The Company shall
use its best efforts to cause all documents that it is responsible for filing
with the SEC or other regulatory authorities under this Section to comply
in all material respects with all applicable requirements of Law and the rules
and regulations promulgated thereunder. Whenever any event occurs
which is required to be set forth in an amendment or supplement to the Proxy
Statement or any filing pursuant to this Section, the Buyer or the Company, as
the case may be, shall promptly inform the other of such occurrence and
cooperate in filing with the SEC or its staff or any other government officials,
and/or mailing to shareholders of the Company, such amendment or
supplement.
(c)
The Buyer
and the Company shall promptly make all necessary filings with respect to the
Merger under the Securities Act, the Exchange Act, applicable state blue sky
Laws and the rules and regulations thereunder.
7.3
Nasdaq
Quotation
. The Company agrees not to take or permit to be
taken on its behalf any action which would result in the quotation of the Shares
no longer being continued on The Nasdaq Capital Market during the term of this
Agreement.
7.4
Access to
Information
. Subject to applicable Law, the Company shall (and
shall cause each of its Subsidiaries to) afford to the Buyer’s officers,
employees, accountants, counsel and other representatives, full access, during
normal business hours during the period prior to the Effective Time, to all its
properties, books, contracts, commitments, personnel and records and, during
such period, the Company shall (and shall cause each of its Subsidiaries to)
furnish promptly to the Buyer (a) a copy of each report, schedule,
registration statement and other document filed or received by it during such
period pursuant to the requirements of federal or state securities Laws,
(b) the internal or external reports prepared by it or its Subsidiaries in
the Ordinary Course of Business that are reasonably required by the Buyer
promptly after such reports are made available to the Company’s personnel, and
(c) all other information concerning its business, properties, assets and
personnel as the Buyer may reasonably request. The Buyer will hold
any such information which is nonpublic in confidence. No information
or knowledge obtained in any investigation pursuant to this Section or otherwise
shall affect or be deemed to modify any representation or warranty contained in
this Agreement or the conditions to the obligations of the parties to consummate
the Merger.
Amended
and Restated Agreement and Plan of Merger – Page 28
7.5
Shareholders
Meeting
. As soon as reasonably practicable following the date
of this Agreement, the Company, acting through the Company Board, and in
accordance with applicable Law, shall (i) duly call, give notice of, convene and
hold the Shareholders Meeting and (ii) (A) include in the Proxy Statement the
recommendation of the Company Board that the terms of this Agreement are fair to
and in the best interest of the shareholders of the Company, declaring this
Agreement advisable and that the shareholders of the Company vote in favor of
the adoption of this Agreement (the “
Company Board
Recommendation
”) and (B) use its reasonable best efforts to obtain the
necessary approval of the transactions contemplated by this Agreement by the
shareholders of the Company;
provided
, that the
Company Board may fail to make or may withdraw, modify or change in a manner
adverse to the Buyer all or any portion of the Company Board Recommendation
and/or may fail to use such efforts if it shall have determined in good faith,
after consultation with outside counsel to the Company, that such action is
necessary in order for the Company Board to comply with its fiduciary duties
under applicable Law.
7.6
Cooperation; Further
Action
.
(a)
The
Company and the Buyer shall each use its reasonable best efforts (subject to,
and in accordance with applicable Laws) to (i) take, or cause to be taken, all
actions, and do, or cause to be done, and to assist and cooperate with the other
parties in doing, all things necessary, proper or advisable to consummate and
make effective the transactions contemplated hereby as promptly as practicable,
(ii) as promptly as practicable, obtain from any Governmental Entity or any
other third party any consents, licenses, permits, waivers, approvals,
authorizations, actions or non-actions, or orders required to be obtained or
made by the Company or the Buyer or any of their Subsidiaries in connection with
the authorization, execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby, (iii) as promptly as practicable, make
all necessary filings, and thereafter make any other required submissions, with
respect to this Agreement and the Merger required under (A) the Securities Act
and the Exchange Act, and any other applicable federal or state securities Laws,
and (B) any other applicable Law, (iv) defend any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of the transactions contemplated hereby, (v) publicly support
this Agreement and the Merger and (vi) execute or deliver any additional
instruments necessary to consummate the transactions contemplated by, and to
fully carry out the purposes of, this Agreement. The Company and the
Buyer shall consult and cooperate with each other in connection with obtaining
such consents, licenses, permits, waivers, approvals, authorizations, or orders,
including, without limitation, keeping the other apprised of the status of
matters relating to the completion of the transactions contemplated hereby and
providing copies of written notices or other communications received by such
party
Amended
and Restated Agreement and Plan of Merger – Page 29
or any of
its respective Subsidiaries with respect to the transactions contemplated hereby
and, subject to applicable Laws relating to the sharing of information,
providing copies in advance of any proposed filing to the non-filing party and
its advisors prior to filing and, if requested, accepting all reasonable
additions, deletions or changes suggested in connection
therewith. The Company and the Buyer shall use their respective
reasonable best efforts to furnish to each other all information required for
any application or other filing to be made pursuant to the rules and regulations
of any applicable Law (including all information required to be included in the
Proxy Statement) in connection with the transactions contemplated by this
Agreement. The Company shall not permit any of its officers or any
other representatives or agents to participate in any meeting or proceeding with
any Governmental Entity in respect of any filings, investigation or other
inquiry in connection with the transactions contemplated by this Agreement
unless it consults with the Buyer in advance and, to the extent permitted by
such Governmental Entity, gives the Buyer and its outside counsel the
opportunity to attend and participate at such meeting or proceeding;
provided
,
however
, that this
Section 7.6(a) shall not be construed to prohibit the Company from discussing
with the SEC staff any comments raised by the staff in its review of the Proxy
Statement.
(b)
Each of
the Company and the Buyer shall give (or shall cause their respective
Subsidiaries to give) any notices to third parties, and use, and cause their
respective Subsidiaries to use, their reasonable best efforts to obtain any
third party consents related to or required in connection with the Merger that
are (A) necessary to consummate the transactions contemplated hereby, (B)
disclosed or required to be disclosed in the Company Disclosure Schedule or (C)
required to prevent the occurrence of an event that has had or may have a
Company Material Adverse Effect or a Buyer Material Adverse Effect prior to or
after the Effective Time.
7.7
Public
Disclosure
. Except as may be required by Law or stock market
regulations, (i) the press release announcing the execution of this Agreement
shall be issued only in such form as shall be mutually agreed upon by the
Company and the Buyer and (ii) the Buyer and the Company shall consult with and
obtain the consent of the other party before issuing any other press release or
otherwise making any public statement with respect to the Merger or this
Agreement.
7.8
Company Stock
Plans
.
(a)
Prior to
the Effective Time, the Company Board (or, if appropriate, any committee
administering the Company Stock Plans) shall adopt such resolutions or take such
other actions as are required to effect the transactions contemplated by Section
3.1(d) in respect of all outstanding Company Stock Options and Company Stock
Purchase Warrants, and thereafter the Company Board (or any such committee)
shall adopt any such additional resolutions and take such additional actions as
are required in furtherance of the foregoing.
(b)
Payments in Respect of
Company Stock Options and Company Stock Purchase
Warrants
. Each Company Stock Option and Company Stock Purchase
Warrant cancelled pursuant to Section 3.1(d) shall, upon cancellation, be
converted into the right to receive an amount in cash equal to the product of
(i) the number of Shares subject to such Company Stock Option, whether or not
then exercisable, and (ii) the excess, if any, of the Merger Consideration over
the exercise price per share subject or related to such Company Stock Option or
Company Stock Purchase Warrant (the “
Option
Consideration
”),
provided
,
however
, that none of
the Buyer, Buyer Subsidiary, any shareholder of the Buyer or any other
wholly-owned Subsidiary of the Buyer, shall be entitled to receive payment of
any Option Consideration with respect to any Company Stock Option and/or Company
Stock Purchase Warrant which any of them may hold.
Amended
and Restated Agreement and Plan of Merger – Page 30
(c)
Time of
Payment
. The cash amount described in paragraph (b) of this
Section 7.8 shall be paid as promptly as is practicable after the Effective
Time.
(d)
Withholding
. All
amounts payable pursuant to Section 3.1(d) and Section 7.8(b) and (c) shall be
subject to any required withholding of taxes and shall be paid without
interest.
7.9
Shareholder
Litigation
. Until the earlier of the termination of this
Agreement in accordance with its terms or the Effective Time, the Company shall
give the Buyer the opportunity to participate in the defense or settlement of
any shareholder litigation against the Company or the Company Board relating to
this Agreement or any of the transactions contemplated by this Agreement, and
shall not settle any such litigation without the Buyer’s prior written consent,
which will not be unreasonably withheld or delayed.
7.10
Notification of Certain
Matters
. The Buyer shall give prompt notice to the Company,
and the Company shall give prompt notice to the Buyer, of (a) the occurrence, or
failure to occur, of any event, which occurrence or failure to occur could be
reasonably likely to cause (i) (x) any representation or warranty of such party
contained in this Agreement that is qualified as to materiality to be untrue or
inaccurate in any respect or (y) any other representation or warranty of such
party contained in this Agreement to be untrue or inaccurate in any material
respect, in each case at any time from and after the date of this Agreement
until the Effective Time, (ii) any failure of the Buyer and the Buyer Subsidiary
or the Company, as the case may be, or of any officer, director, employee or
agent thereof, to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it under this Agreement or (iii) any actions,
suits, claims, investigations or proceedings commenced or threatened in writing
against, relating to or involving such party or any of its Subsidiaries that
relate to the consummation of the Merger, or (b) any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with the transactions contemplated by this
Agreement. Notwithstanding the above, the delivery of any notice
pursuant to this Section will not limit or otherwise affect the remedies
available hereunder to the party receiving such notice or the conditions to such
party’s obligation to consummate the Merger.
Amended
and Restated Agreement and Plan of Merger – Page 31
7.11
Directors’ and Officers’
Indemnification and Insurance
.
(a)
Without
limiting any additional rights that any employee, officer or director may have
under any employment agreement or Benefit Plan or under the Company’s articles
of incorporation or bylaws, after the Effective Time, the Buyer shall, and shall
cause the Surviving Company to, indemnify and hold harmless each present (as of
the Effective Time) and each former officer or director of the Company and its
Subsidiaries (the “
Indemnified Directors and
Officers
”), against all Actions, losses, liabilities, damages, judgments,
inquiries, fines and reasonable fees, costs and expenses, including, attorneys’
fees and disbursements (collectively, “
Costs
”), incurred in
connection with any Action, whether civil, criminal, administrative or
investigative, arising out of actions taken by them in their capacity as
officers or directors at or prior to the Effective Time (including this
Agreement and the transactions and actions contemplated hereby), or taken by
them at the request of the Company or any of its Subsidiaries,
whether asserted or claimed prior to, at or after the Effective Time, to the
fullest extent permitted under applicable Law for a period of six years from the
Effective Time. Each Indemnified Director and Officer will be entitled to
advancement of expenses incurred in the defense of any Action from the Surviving
Company within ten Business Days of receipt by the Surviving Company from the
Indemnified Director or Officer of a request therefor;
provided
that any Person to whom
expenses are advanced provides an undertaking, if and only to the extent
required by the NGCL, to repay such advances if it is ultimately determined that
such person is not entitled to indemnification. The Surviving Company shall not
settle, compromise or consent to the entry of any judgment in any proceeding or
threatened Action (and in which indemnification could be sought by such
Indemnified Director or Officer hereunder), unless such settlement, compromise
or consent includes an unconditional release of such Indemnified Director or
Officer from all liability arising out of such Action or such Indemnified
Director or Officer otherwise consents.
(b)
Prior to
the Effective Time, the Company shall endeavor to (and if it is unable to, the
Buyer shall cause the Surviving Company to after the Effective Time) obtain and
fully pay in one payment for “tail” insurance policies (providing only for the
Side A coverage for Indemnified Directors and Officers where the existing
policies also include coverage for the Company) with a claims period of at least
six years from the Effective Time from an insurance carrier with the same or
better credit rating as the Company’s current insurance carrier with respect to
directors’ and officers’ liability insurance in an amount and scope at least as
favorable as the Company’s existing policies with respect to matters existing or
occurring at or prior to the Effective Time. The Buyer shall, and shall cause
the Surviving Company to, honor and perform under all indemnification agreements
entered into by the Company or any Company Subsidiary set forth in the Company
SEC Reports.
(c)
Notwithstanding
anything herein to the contrary, if any Action (whether arising before, at or
after the Closing Date) is made against any Indemnified Director or Officer or
any other party covered by directors’ and officers’ liability insurance, on or
prior to the sixth anniversary of the Effective Time, the provisions of this
Section 7.11 shall continue in effect until the final disposition of such
Action.
(d)
The
covenants contained in this Section 7.11 are intended to be for the benefit of,
and shall be enforceable by, each of the Indemnified Directors and Officers and
their respective heirs and legal representatives. The indemnification provided
for herein shall not be deemed exclusive of any other rights to which an
Indemnified Director or Officer is entitled, whether pursuant to Law, contract
or otherwise.
7.12
Loans to Company Employees,
Officers and Directors
. Prior to the Effective Time, all loans
by the Company or any of its Subsidiaries to any of their employees, officers or
directors shall have been repaid in full by the applicable
borrowers.
Amended
and Restated Agreement and Plan of Merger – Page 32
7.13
Takeover Statutes and
Laws
. If any anti-takeover Law (including, without limitation,
a “fair price,” “moratorium,” or “control share acquisition” statute) becomes
applicable to the Merger, or any of the other transactions contemplated by
hereby or thereby, the Company and the Company Board shall, to the extent it may
legally do so at such time, grant such approvals and take such actions as are
necessary so that such transactions may be consummated as promptly as
practicable on the terms contemplated by this Agreement or by the Merger and
otherwise act to eliminate or minimize the effects of such Law on such
transactions.
7.14
Standstill Agreements;
Confidentiality Agreements
. During the period from the date of
this Agreement through the Effective Time, the Company shall not terminate,
amend, modify or waive any provision of any confidentiality or standstill
agreement to which it or any of its respective Subsidiaries is a party and which
relates to the confidentiality or information regarding the Company or its
Subsidiaries or which relate to securities of the Company, other than client and
customer agreements entered into by the Company or its Subsidiaries in the
Ordinary Course of Business. During such period, the Company shall
use reasonable best efforts to enforce, to the fullest extent permitted under
applicable Law, the provisions of any such agreement, including by using
reasonable best efforts to obtain injunctions to prevent any breaches of such
agreements and to enforce specifically the terms and provisions thereof in any
court having jurisdiction.
ARTICLE
VIII
CONDITIONS
TO MERGER
8.1
Conditions to Each Party’s
Obligation To Effect the Merger
. The respective obligations of
each party to this Agreement to effect the Merger shall be subject to the
satisfaction on or prior to the Closing Date of the following
conditions:
(a)
Shareholder
Approval
. The Company Voting Proposal shall have been duly
approved and adopted at the Company Shareholders Meeting, at which a quorum is
present, by the requisite vote of the shareholders of the Company under
applicable Law and the Company’s articles of incorporation and
by-laws.
(b)
Governmental
Approvals
. Other than the filing of the Articles of Merger,
all authorizations, consents, orders or approvals of, or declarations, notices
or filings with, or expirations of waiting periods imposed by, any Governmental
Entity in connection with the Merger and the consummation of the other
transactions contemplated by this Agreement, the failure of which to file,
obtain or occur would proscribe or prohibit the consummation of the transactions
contemplated hereby (all such authorizations, consents, orders or approvals of,
or declarations, notices or filings with, or expirations of waiting periods
imposed by, collectively, the “
Requisite Regulatory
Approvals
”) shall have been filed, obtained or occurred.
(c)
Proxy
Statement
. No stop order suspending, or similar proceeding
relating to, the Proxy Statement shall have been initiated or threatened in
writing by the SEC or its staff.
(d)
No
Injunctions
. No Governmental Entity of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any order,
executive order, stay, decree, judgment or injunction (preliminary or permanent)
or statute, rule or regulation which is in effect and which has the effect of
making the Merger illegal or otherwise prohibiting consummation of the Merger or
the other transactions contemplated by this Agreement.
Amended
and Restated Agreement and Plan of Merger – Page 33
8.2
Additional Conditions to
Obligations of the Buyer and the Buyer Subsidiary
. The
obligations of the Buyer and the Buyer Subsidiary to effect the Merger shall be
subject to the satisfaction on or prior to the Closing Date of each of the
following additional conditions, any of which may be waived, in writing,
exclusively by the Buyer and the Buyer Subsidiary:
(a)
Representations and
Warranties
. (i) The representations and warranties of the
Company set forth in Sections 4.2(c), (e) and (f), 4.3, 4.18 and 4.19 shall be
true and correct in all material respects as of the Closing Date as though made
on and as of such date (unless any such representation or warranty is made only
as of a specific date, in which event such representation and warranty shall be
true and correct as of such specified date), (ii) the representations and
warranties of the Company set forth in Section 4.2(a) shall be true and correct
as of the Closing Date as though made on and as of such date (unless any such
representation or warranty is made only as of a specific date, in which event
such representation and warranty shall be true and correct as of such specified
date), and (ii) the other representations and warranties of the Company
contained in this Agreement (disregarding any Company Material Adverse Effect
qualifiers therein) shall be true and correct as of the Closing Date as though
made on and as of such date (unless any such representation or warranty is made
only as of a specific date, in which event such representation and warranty
shall be true and correct as of such specified date), except in the case of this
clause (ii) where the failure of any such representations and warranties to be
so true and correct, in the aggregate, has not had a Company Material Adverse
Effect; and the Buyer shall have received a certificate signed on behalf of the
Company by the chief executive officer and the chief financial officer of the
Company to such effect.
(b)
Performance of Obligations
of the Company
. The Company shall have performed in all
material respects all obligations required to be performed by it under this
Agreement on or prior to the Closing Date; and the Buyer shall have received a
certificate signed on behalf of the Company by the chief executive officer and
the chief financial officer of the Company to such effect.
(c)
Governmental
Approvals
. Other than the filing of the Articles of Merger,
all authorizations, consents, orders or approvals of, or declarations, notices
or filings with, or expirations of waiting periods imposed by, any Governmental
Entity required on the part of the Buyer or any of its Subsidiaries in
connection with the Merger and the consummation of the other transactions
contemplated by this Agreement, the failure of which to file, obtain or occur,
individually or in the aggregate, could reasonably be expected to have, directly
or indirectly, a Buyer Material Adverse Effect or a Company Material Adverse
Effect, shall have been filed, been obtained or occurred on terms and conditions
which, individually or in the aggregate, could not reasonably be expected to
have a Buyer Material Adverse Effect or a Company Material Adverse
Effect.
(d)
Third Party
Consents
. The Company shall have obtained any required consent
or approval of any third party (other than a Governmental Entity) listed or
described on Section 8.2(d) of the Company Disclosure Schedule which section of
the Disclosure Schedule shall be updated to reflect any Company Material
Agreements entered into between the date of this Agreement and the Closing
Date.
Amended
and Restated Agreement and Plan of Merger – Page 34
(e)
No
Restraints
. There shall not be instituted or pending any
action or proceeding by any Governmental Entity (i) seeking to restrain,
prohibit or otherwise interfere with the ownership or operation by the Buyer or
any of its Subsidiaries of all or any portion of the business of the Company or
any of its Subsidiaries or of the Buyer or any of its Subsidiaries or to compel
the Buyer or any of its Subsidiaries to dispose of or hold separate all or any
portion of the business or assets of the Company or any of its Subsidiaries or
of the Buyer or any of its Subsidiaries, (ii) seeking to impose or confirm
limitations on the ability of the Buyer or any of its Subsidiaries effectively
to exercise full rights of ownership of the Shares (or shares of stock of the
Surviving Company) including the right to vote any such shares on any matters
properly presented to shareholders, (iii) seeking to require divestiture by the
Buyer or any of its Subsidiaries of any such shares or (iv) seeking to obtain
from the Company, the Buyer or the Buyer Subsidiary any material
damages.
(f)
Absence of Company Material
Adverse Effect
. No Company Material Adverse Effect shall have
occurred, and there shall exist no change, event, circumstance, development or
effect that could, individually or in the aggregate, reasonably be expected to
have, a Company Material Adverse Effect.
(g)
Resignations
. Unless
otherwise specified in a notice given by the Buyer to the Company not less than
three Business Days prior to the Closing, the Buyer shall have received copies
of the resignations, effective as of the Effective Time, of each director of the
Company and its Subsidiaries;
provided
,
however
, that the
failure of the Company to obtain the resignation of any of such directors shall
not affect the provisions of Section 2.4 of this Agreement, and the term of any
director of the Company or any Subsidiary whose position as a director does not
continue pursuant to said Section 2.4 shall expire on and as of the
Closing.
8.3
Additional Conditions to
Obligations of the Company
. The obligation of the Company to
effect the Merger shall be subject to the satisfaction on or prior to the
Closing Date of each of the following additional conditions, any of which may be
waived, in writing, exclusively by the Company:
(a)
Representations and
Warranties
. The representations and warranties of the Buyer
and the Buyer Subsidiary set forth in this Agreement and in any certificate or
other writing delivered by the Buyer or the Buyer Subsidiary pursuant hereto
shall be true and correct (i) as of the date of this Agreement (except in the
case of this clause (i), to the extent such representations and warranties are
specifically made as of a particular date, in which case such representations
and warranties shall be true and correct as of such date) and (ii) as of the
Closing Date as though made on and as of the Closing Date (except in the case of
this clause (ii), (x) to the extent such representations and warranties are
specifically made as of a particular date, in which case such representations
and warranties shall be true and correct as of such date, and (y) where the
failure to be true and correct (without regard to any materiality, Buyer
Material Adverse Effect qualifications contained therein), individually or in
the aggregate, has not had, and could not reasonably be expected to have, a
Buyer Material Adverse Effect); and the Company shall have received a
certificate signed on behalf of the Buyer by the chief executive officer or the
chief financial officer of the Buyer to such effect.
Amended
and Restated Agreement and Plan of Merger – Page 35
(b)
Performance of Obligations
of the Buyer and the Buyer Subsidiary
. The Buyer and the Buyer
Subsidiary shall have performed in all material respects all obligations
required to be performed by them under this Agreement on or prior to the Closing
Date; and the Company shall have received a certificate signed on behalf of the
Buyer by the chief executive officer or the chief financial officer of the Buyer
to such effect.
(c)
Governmental
Approvals
. Other than the filing of the Articles of Merger,
all authorizations, consents, orders or approvals of, or declarations, notices
or filings with, or expirations of waiting periods imposed by, any Governmental
Entity required on the part of the Buyer or the Buyer Subsidiary in connection
with the Merger and the consummation of the other transactions contemplated by
this Agreement, the failure of which to file, obtain or occur, individually or
in the aggregate, could reasonably be expected to have, directly or indirectly,
a Buyer Material Adverse Effect or a Company Material Adverse Effect, shall have
been filed, shall have been obtained or shall have occurred on terms and
conditions which, individually or in the aggregate, could not reasonably be
expected to have a Buyer Material Adverse Effect or a Company Material Adverse
Effect.
(d)
Merger
Consideration
. The Buyer shall have provided for the delivery,
by wire transfer to the Exchange Agent, of the Merger Consideration and the
Option Consideration.
(e)
Absence of Buyer Material
Adverse Effect
. No Buyer Material Adverse Effect shall have
occurred, and there shall exist no change, event, circumstance, development or
effect that could, individually or in the aggregate, reasonably be expected to
have, a Buyer Material Adverse Effect.
ARTICLE
IX
TERMINATION
AND AMENDMENT
9.1
Termination
. This
Agreement may be terminated at any time prior to the Effective Time (with
respect to Sections 9.1(b) through 9.1(f), by written notice by the
terminating party to the other parties, specifying the provision of this
Agreement pursuant to which such termination is effected), whether before or,
subject to the terms hereof, after adoption of this Agreement by the
shareholders of the Company and the sole shareholder of the Buyer
Subsidiary:
(a)
by mutual
written consent of the Buyer, the Buyer Subsidiary and the Company;
or
(b)
by either
the Buyer or the Company if the Merger shall not have been consummated by May
31, 2010 (the “
Outside
Date
”),
provided
that the right to
terminate this Agreement under this Section 9.1(b) shall not be available to any
party whose failure to fulfill its obligations under this Agreement in any
material respect has been a principal cause of or resulted in the failure of the
Merger to occur on or before the Outside Date) and,
provided
further
that, in the
event that the conditions set forth in Sections 8.1(d) or
8.2(c) above shall not have been satisfied by the Outside Date,
either the Buyer or the Company may unilaterally extend the Outside Date until
June 30, 2010 upon written notice to the other by the Outside Date, in which
case the Outside Date shall be deemed for all purposes to be June 30, 2010;
or
Amended
and Restated Agreement and Plan of Merger – Page 36
(c)
by either
the Buyer or the Company if (i) a Governmental Entity of competent jurisdiction
shall have issued a nonappealable final order, decree or ruling or taken any
other nonappealable final action, in each case having any of the effects set
forth in Section 8.1(d) or (ii) a Governmental Entity that must grant a
Requisite Regulatory Approval has denied the applicable Requisite Regulatory
Approval and such denial has become final and nonappealable,
provided
that in the
case of clause (i) or (ii) the party seeking to terminate this Agreement has
complied with its obligations in Section 7.6; or
(d)
by either
the Buyer or the Company if at the Company Shareholders Meeting (including any
adjournment or postponement thereof permitted by this Agreement) at which a vote
on the Company Voting Proposal is taken, the requisite vote of the shareholders
of the Company in favor of the Company Voting Proposal shall not have been
obtained; or
(e)
by the
Buyer (i) if there shall have been a material breach of any representation,
warranty, covenant or agreement on the part of the Company contained in this
Agreement such that the conditions set forth in Section 8.2(a) or 8.2(b) would
not be satisfied and which shall not have been cured prior to the earlier of (A)
10 business days following notice of such breach and (B) the Termination Date;
provided
that Buyer shall not
have the right to terminate this Agreement pursuant to this Section 9.1(e) if
the Buyer or the Buyer Subsidiary is then in material breach of any of its
covenants or agreements contained in this Agreement, or (ii) if a Triggering
Event shall have occurred; or
(f)
by the
Company (i) if there shall have been a material breach of any representation,
warranty, covenant or agreement on the part of the Buyer or the Buyer Subsidiary
contained in this Agreement such that the condition set forth in Section 8.3(a)
or 8.3(b) would not be satisfied and which shall not have been cured prior to
the earlier of (A) 10 Business Days following notice of such breach and (B) the
Outside Date;
provided
that the Company shall
not have the right to terminate this Agreement pursuant to this Section 9.1(f)
if the Company is then in material breach of any of its covenants or
agreements contained in this Agreement, or (ii) prior to the approval of the
transactions contemplated by this Agreement by the shareholders of the Company
in accordance with this Agreement, pursuant to, and subject to the terms and
conditions of, Section 7.1(b)(ii).
9.2
Effect of
Termination
. In the event of termination of this Agreement as
provided in Section 9.1, this Agreement shall immediately become void and there
shall be no liability or obligation on the part of the Buyer, the Company or
their respective officers, directors, shareholders or Affiliates;
provided
that (i) any
such termination shall not relieve any party from liability for any willful
breach of this Agreement (which includes, without limitation, the making of any
representation or warranty by a party in this Agreement that the party knew was
not true and accurate when made) and (ii) the provisions of Section 9.3, this
Section 9.2 and Article X shall remain in full force and effect and survive any
termination of this Agreement.
Amended
and Restated Agreement and Plan of Merger – Page 37
9.3
Fees and
Expenses
.
(a)
Except as
set forth in this Section 9.3, all Expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such fees and expenses, whether or not the Merger is consummated;
provided
,
however
, that the
Company and the Buyer shall share equally all fees paid under the applicable
Antitrust Laws of other jurisdictions which impose pre-merger notification
requirements upon parties to a merger or acquisition transaction. For
purposes of this Agreement, “
Expenses
” shall mean
all reasonable out-of-pocket expenses (including, without limitation, all fees
and expenses of counsel, accountants, investment bankers, experts and
consultants to a party hereto and its Affiliates) incurred by a party or on its
behalf in connection with or related to the authorization, preparation,
negotiation, execution and performance of this Agreement and the transactions
contemplated hereby.
(b)
In the
event that this Agreement is terminated by the Buyer pursuant to clause (i) or
(ii) of Section 9.1(e) or by the Company pursuant to clause (i) or (ii) of
Section 9.1(f), then the Company shall pay to the Buyer an amount equal to the
lesser of (x) the aggregate dollar amount of Buyer’s actual Expenses; or (y) 3%
of the sum of 1) the maximum amount of the Merger Consideration plus
2) the maximum amount of the Option Consideration which, but for such
termination, would have been payable pursuant to Sections 3.1(a) and 7.8(b)
hereof (the “
Termination Fee
”), at
or prior to the time of, and as a pre-condition to the effectiveness of,
termination in the case of a termination pursuant to Section 9.1(f) or as
promptly as practicable.
(c)
In the
event that this Agreement is terminated by the Company pursuant to Section
9.1(f)(i) (if at the time of such termination there is no state of facts or
circumstances (other than a state of facts or circumstances caused by or arising
out of a breach of Buyer’s representations, warranties, covenants or other
agreements set forth in this Agreement) that would reasonably be expected to
cause the conditions set forth in Section 8.3(a) and Section 8.3(b) not to be
satisfied on or prior to the Outside Date), Buyer shall pay an amount equal to
the Company’s Expenses (the “
Reverse Termination
Fee
”) to, or as directed by, the Company, as promptly as reasonably
practicable.
(d)
If: (i)
this Agreement is terminated by the Buyer or the Company pursuant to Section
9.1(d); (ii) at or prior to the time of the termination of this Agreement an
Acquisition Proposal shall have been disclosed, announced, commenced, submitted
or made; and (iii) on or prior to the date 12 months after the date of
termination of this Agreement, either: (A) an Acquisition Proposal is
consummated; or (B) a definitive agreement with respect to an Acquisition
Proposal is entered into by the Company (or any other Acquisition Proposal among
or involving the parties to such definitive agreement or any of such parties’
controlled or controlling Affiliates) is consummated, then, prior to the
consummation of such Acquisition Proposal, the Company shall pay to the Buyer
the Termination Fee as promptly as practicable.
(e)
The
parties acknowledge that the agreements contained in this Section 9.3 are an
integral part of the transactions contemplated by this Agreement, and that,
without these agreements, the parties would not enter into this
Agreement. In the event that the Company shall fail to pay the
Termination Fee when due or Buyer shall fail to pay the Reverse Termination Fee
when due, the Company or Buyer, as the case may be, shall reimburse the other
party for all reasonable costs and expenses actually incurred or accrued by such
other party (including reasonable fees and expenses of counsel) in connection
with any action (including the filing of any Action) taken to collect payment of
such amounts, together with interest on such unpaid amounts at the prime lending
rate prevailing during such period as published in The Wall Street Journal,
calculated on a daily basis from the date such amounts were required to be paid
to the date of actual payment.
Amended
and Restated Agreement and Plan of Merger – Page 38
ARTICLE
X
MISCELLANEOUS
10.1
Amendment
. This
Agreement may be amended by the parties hereto, by action taken or authorized by
their respective Boards of Directors, at any time before or after approval of
the matters presented in connection with the Merger by the shareholders of the
Company or the Buyer Subsidiary,
provided
,
however
, that, after
any such approval, no amendment shall be made which by Law requires further
approval by such shareholders without such further approval. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
10.2
Extension;
Waiver
. At any time prior to the Effective Time, the parties
hereto, by action taken or authorized by their respective boards of directors,
may, to the extent legally allowed, (i) extend the time for the performance
of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (iii) subject to the
proviso in Section 10.1, waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party. Such extension or
waiver shall not be deemed to apply to any time for performance, inaccuracy in
any representation or warranty, or noncompliance with any agreement or
condition, as the case may be, other than that which is specified in the
extension or waiver. The failure of any party to this Agreement to
assert any of its rights under this Agreement or otherwise shall not constitute
a waiver of such rights.
10.3
Non−Survival of
Representations, Warranties and Agreements
. None of the representations,
warranties, covenants and agreements in this Agreement or in any instrument
delivered pursuant to this Agreement, and the other agreements and documents
contemplated to be delivered in connection herewith, including any rights
arising out of any breach of such representations, warranties, covenants and
agreements, shall survive the Effective Time, except for (i) those
representations, warranties, covenants and agreements contained herein that by
their terms apply or are to be performed in whole or in part at or after the
Effective Time and (ii) this Article X.
10.4
Notices
. Any
and all notices or other communications or deliveries required or permitted to
be provided hereunder shall be in writing and shall be deemed given and
effective on the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section 10.4 prior to 5:00 p.m. (New York time) on a Business
Day, (ii) the Business Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Agreement later than 5:00 p.m. (New York time) on any date and
earlier than 11:59 p.m. (New York time) on such date, (iii) when received, if
sent by nationally recognized overnight courier service, or (iv) if delivered in
any other manner, upon actual receipt by the party to whom such notice is
required to be given. The address for such notices and communications shall be
as follows:
Amended
and Restated Agreement and Plan of Merger – Page 39
(a)
if to the
Buyer or the Buyer Subsidiary, to
Skywide
Capital Management Limited
1603-1604
Tower B Fortune Centre Ao City
Chaoyang
District
Beijing,
China 100107
Attn: Deng
Tianzhou, Director
Telephone: +86
10 849927035-808
Facsimile:
+86 10 84928665
with a
copy to:
Mintz
& Fraade, PC
488
Madison Avenue
New York
New York 10022
Attention: Alan
P. Fraade
Telephone
No: (212) 486-2500
Facsimile
No: (212) 486-0701
(b)
if to the
Company, to
Sinoenergy
Corporation.
1603-1604
Tower B Fortune Centre Ao City
Chaoyang
District
Beijing,
China 100107
Attn: Shiao
Ming Sheng, Chief Financial Officer
Telephone: +86
10 849927035-808
Facsimile:
+86 10 84928665
with a
copy to:
Arent Fox
LLP
1675
Broadway
New York,
NY 10019
Attn: Steven
D. Dreyer, Esq.
Telephone: (212)
484-3917
Facsimile:
(212) 484-3990
10.5
Entire
Agreement
. This Agreement (including the Schedules and
Exhibits hereto and the documents and instruments referred to herein that are to
be delivered at the Closing) constitutes the entire agreement among the parties
to this Agreement and supersedes any prior understandings, agreements or
representations by or among the parties hereto, or any of them, written or oral,
with respect to the subject matter hereof.
Amended
and Restated Agreement and Plan of Merger – Page 40
10.6
No Third Party
Beneficiaries
. Except for Section 7.11, this Agreement shall
be binding upon and inure solely to the benefit of the parties hereto and their
permitted assigns and nothing herein, express or implied, is intended to or
shall confer upon any other Person any legal or equitable right, benefit or
remedy of any nature whatsoever under or by reason of this Agreement, other
than, following the Effective Time, the right of each shareholder to receive the
Merger Consideration and the right of each holder of a Company Stock Option or
Company Stock Purchase Warrant to receive the Option Consideration.
10.7
Assignment
. No
party may assign any of its rights or delegate any of its performance
obligations under this Agreement, in whole or in part, by operation of Law or
otherwise without the prior written consent of the other parties, and any such
assignment without such prior written consent shall be null and void, except
that from and after the Effective time, this Agreement may be assigned (in whole
but not in part) to an Affiliate of a party hereto. Any purported
assignment of rights or delegation of performance obligations in violation of
this Section 10.7 is void.
10.8
Severability
. Any
term or provision of this Agreement that is invalid or unenforceable in any
situation in any jurisdiction shall not affect the validity or enforceability of
the remaining terms and provisions hereof or the validity or enforceability of
the offending term or provision in any other situation or in any other
jurisdiction. If the final judgment of a court of competent
jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the parties hereto agree that the court making such determination
shall have the power to limit the term or provision, to delete specific words or
phrases, or to replace any invalid or unenforceable term or provision with a
term or provision that is valid and enforceable and that comes closest to
expressing the intention of the invalid or unenforceable term or provision, and
this Agreement shall be enforceable as so modified. In the event such
court does not exercise the power granted to it in the prior sentence, the
parties hereto agree to replace such invalid or unenforceable term or provision
with a valid and enforceable term or provision that will achieve, to the extent
possible, the economic, business and other purposes of such invalid or
unenforceable term.
10.9
Counterparts and
Signature
. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each of the parties hereto and
delivered to the other parties, it being understood that all parties need not
sign the same counterpart. The exchange of a fully executed Agreement
(in counterparts or otherwise) by facsimile or by electronic delivery in PDF
format shall be sufficient to bind the parties to the terms and conditions of
this Agreement.
10.10
Interpretation
. When
reference is made in this Agreement to an Article or a Section, such reference
shall be to an Article or Section of this Agreement, unless otherwise
indicated. The table of contents and headings contained in this
Agreement are for convenience of reference only and shall not affect in any way
the meaning or interpretation of this Agreement. The language used in
this Agreement shall be deemed to be the language chosen by the parties hereto
to express their mutual intent, and no rule of strict construction shall be
applied against any party. Whenever the context may require, any
pronouns used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns and pronouns shall
include the plural, and vice versa. Any reference to any federal,
state, local or foreign statute or Law shall be deemed also to refer to all
rules and regulations promulgated thereunder, unless the context requires
otherwise. Whenever the words “include”, “includes” or “including”
are used in this Agreement, they shall be deemed to be followed by the words
“without limitation”. No summary of this Agreement prepared by any
party shall affect the meaning or interpretation of this Agreement.
Amended
and Restated Agreement and Plan of Merger – Page 41
10.11
Governing
Law
. All matters arising out of or relating to this Agreement
and the transactions contemplated hereby (including without limitation its
interpretation, construction, performance and enforcement) shall be governed by
and construed in accordance with the internal Laws of the State of New York
without giving effect to any choice or conflict of Law provision or rule
(whether of the State of New York or any other jurisdiction) that would cause
the application of Laws of any jurisdictions other than those of the State of
New York to be applied,
provided
,
however
, that the
NGCL shall govern the filing of the Articles of Merger in, and the effects of
the Merger in, Nevada.
10.12
Remedies
. Except
as otherwise provided herein, any and all remedies herein expressly conferred
upon a party will be deemed cumulative with and not exclusive of any other
remedy conferred hereby, or by Law or equity upon such party, and the exercise
by a party of any one remedy will not preclude the exercise of any other
remedy. The parties hereto agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement, this being in addition to any other
remedy to which they are entitled at Law or in equity.
10.13
Submission to
Jurisdiction
. Each of the parties to this Agreement
(a) consents to submit itself to the personal jurisdiction of any state or
federal court sitting in the State of New York in any action or proceeding
arising out of or relating to this Agreement or any of the transactions
contemplated by this Agreement, (b) agrees that all claims in respect of
such action or proceeding may be heard and determined in any such court, (c)
agrees that it shall not attempt to deny or defeat such personal jurisdiction by
motion or other request for leave from any such court, and (d) agrees not
to bring any action or proceeding arising out of or relating to this Agreement
or any of the transaction contemplated by this Agreement in any other
court. Each of the parties hereto waives any defense of inconvenient
forum to the maintenance of any action or proceeding so brought and waives any
bond, surety or other security that might be required of any other party with
respect thereto. Any party hereto may make service on another party
by sending or delivering a copy of the process to the party to be served at the
address and in the manner provided for the giving of notices in
Section 10.4. Nothing in this Section 10.13, however, shall
affect the right of any party to serve legal process in any other manner
permitted by Law.
Amended
and Restated Agreement and Plan of Merger – Page 42
10.14
Waiver Of Jury
Trial
. EACH OF THE BUYER, THE BUYER SUBSIDIARY AND THE COMPANY
HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING
OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THE
ACTIONS OF THE BUYER, THE BUYER SUBSIDIARY OR THE COMPANY IN THE NEGOTIATION,
ADMINISTRATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT.
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]
Amended
and Restated Agreement and Plan of Merger – Signature
Page
IN
WITNESS WHEREOF, the Buyer, the Buyer Subsidiary and the Company have caused
this Agreement to be signed by their respective officers thereunto duly
authorized as of the date first written above.
Skywide
Capital Management Limited
By:
Tianzhou Deng, Director
By:
Bo Huang, Director
SNEN
Acquisition Corp.
By:
Bo Huang, Chief Executive
Officer
Sinoenergy
Corporation
By:
Anlin Xiong, Vice
President
Amended
and Restated Agreement and Plan of Merger – Page 1
EXHIBIT
A
DISCLOSURE
SCHEDULE
TO
THE AMENDED AND RESTATED MERGER AGREEMENT
BETWEEN
SKYWIDE
CAPITAL MANAGEMENT LIMITED
AND
SINOENERGY
CORPORATION
Dated as
of March 29, 2010
The
information set forth below, dated as of March 29, 2010, has been given pursuant
to the Amended and Restated Merger Agreement dated March 29, 2010 (the “Merger
Agreement”) by and between Skywide Capital Management Limited, SNEN Acquisition
Corp. and Sinoenergy Corporation. The section numbers set forth
herein correspond to the section numbers in the Merger Agreement. Any
information disclosed in any section of this Schedule shall qualify only such
specifically enumerated section of the Merger Agreement and any other section
thereof to which an explicit and clear cross-reference has been
made.
Definitions
used in the Merger Agreement shall have the same meanings when used in this
Schedule as when used in the Merger Agreement unless the context otherwise
requires.
Section
4.2(b)
Set forth
below is information as to the number of shares of common stock issuable upon
conversion or exercise or outstanding Company Convertible Notes, Company Stock
Options and Company Stock Purchase Warrants.
A. Company
Convertible Notes
The
Company has outstanding 3.0% senior convertible notes due 2012 in the principal
amount of $14,000,000. If these notes are not converted prior to
maturity the Company is required to redeem the convertible notes at the amount
which results in a yield to maturity of 13.8% per annum, net of interest
previously received, plus any interest accrued on overdue principal (and, to the
extent lawful, on overdue interest) and premium, if any, at a rate which is 3%
per annum in excess of the rate of interest then in effect. At
present, 3,333,333 shares are issuable upon conversion of the
notes.
B. Company
Stock Options
The
following table sets forth information as to shares issuable pursuant to the
terms of options granted by the Company, whether or not pursuant to any option
plan.
Price
|
No. of Shares Subject to
Options
|
Expiration Date
|
$1.30
|
60,000
|
June
1, 2009
|
$4.06
|
10,000
|
April
1, 2012
|
$4.00
|
590,000
|
April
9, 2012
|
$8.20
|
60,000
|
January
9, 2013
|
$6.20
|
40,000
|
March
9, 2013
|
$5.80
|
10,000
|
April
1, 2013
|
C. Company
Stock Purchase Warrants
The
following table sets forth information as to shares issuable pursuant to the
terms of common stock purchase warrants issued by the Company.
Price
|
No. of Shares Subject to
Options
|
Expiration Date
|
$1.70
|
85,715
|
June
2, 2011
|
$2.40
|
369,644
|
June
2, 2011
|
$4.20
|
75,000
|
February
17, 2010
|
$8.00
|
25,000
|
March
1, 2012
|
|
BREAN
MURRAY, CARRET & CO.
570
Lexington Avenue
New
York, NY 10022-6822
212/702-6500
www.breanmurraycarret.com
|
March 29,
2010
The
Special Committee of the Board of Directors
Sinoenergy
Corp.
1603-1604
Tower B Fortune Center Ao City
Beiyuan
Road Chaoyang District
Beijing,
China 100107
Dear
Sirs:
You have
requested our opinion (the “Opinion”) as to the fairness, from a financial point
of view, to the holders of the common stock of Sinoenergy Corp., a Nevada
corporation (“Sinoenergy”), other than Messrs. TZ Deng and Bo Huang, principal
shareholders of Skywide Capital Management Ltd. (“Skywide”), a British Virgin
Islands company (the “Unaffiliated Shareholders”), of the Merger
Consideration (defined below) to be received as set forth in the Agreement
and Plan of Merger (the “Merger Agreement”) by and between Skywide
and Sinoenergy dated as of October 12, 2009. As more fully described
in the Merger Agreement, Sinoenergy will merge with and into Skywide
or a wholly owned subsidiary of Skywide, with the exact structure to be
determined based upon the advice of tax advisers to Skywide and Sinoenergy (the
“Merger”). In the Merger, the shareholders of Sinoenergy (other than
Messrs. Deng and Huang, who jointly own, directly or indirectly, approximately
40% of the issued and outstanding shares of Sinoenergy) shall receive payment in
cash of USD $1.90 for each share of the common stock of Sinoenergy common stock
held by such shareholders (the “Merger Consideration”). Concurrent
with the Merger, Sinoenergy will cancel or repurchase all outstanding “in the
money” options and warrants to purchase Sinoenergy common stock at a price per
share equal to the difference between the Merger Consideration and the exercise
price of each such option or warrant. Our Opinion addresses only the fairness,
from a financial point of view of the Merger Consideration, and we do not
express any views on any other terms of the Merger. Specifically, we
have not been requested to opine as to, and our Opinion does not in any manner
address, the Company’s underlying business decision to proceed with or effect
the Merger.
In
arriving at our Opinion, we have reviewed the Merger Agreement and held
discussions with certain senior officers and directors of Sinoenergy concerning
the businesses, operations and prospects of Sinoenergy. We examined
certain publicly available business and financial information relating to
Sinoenergy as well as certain other information and data provided by the
management of Sinoenergy. We reviewed the financial terms of the
Merger as set forth in the Merger Agreement in relation to, among other
things: current and historical market prices and trading volumes of
Sinoenergy’s Common Stock; the historical revenue, earnings and other operating
data of Sinoenergy; and the capitalization and financial condition of
Sinoenergy. We considered, to the extent publicly available, the
financial terms of certain other similar transactions recently effected which we
considered relevant in evaluating the Merger and analyzed certain financial,
stock market and other publicly available information relating to the businesses
of other companies whose operations we considered relevant in evaluating those
of Sinoenergy. In addition to the foregoing, we conducted such other
analyses and examinations and considered such other information and financial,
economic and market criteria as we deemed appropriate in arriving at our
Opinion.
The Special Committee of the Board of Directors
Sinoenergy Corp.
March 29, 2010
Page 2
In
rendering our Opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed by
or discussed with us. With respect to financial and other information
and data provided to or otherwise reviewed by or discussed with us, we have been
advised by the management of Sinoenergy that such financial and other
information and data were reasonably prepared on bases reflecting the best
currently available judgments of the management of Sinoenergy. We
have assumed, with your consent, that the Merger will be consummated in
accordance with the terms of the Merger Agreement. We also have
assumed, with your consent, that in the course of obtaining any necessary
regulatory or third party approvals for the Merger, no limitations, restrictions
or conditions will be imposed that would have an adverse effect on the
shareholders of Sinoenergy. Our Opinion, as set forth herein, relates
solely to the Merger Consideration to be received by the Unaffiliated
Shareholders of Sinoenergy. We are not expressing any opinion as to
what the value of Sinoenergy’s Common Stock actually will be subsequent to the
Merger or the price at which Sinoenergy’s Common Stock will trade prior to the
closing of the Merger. We have not made or been provided with an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of Sinoenergy or of the solvency of Sinoenergy, nor have we made an
extensive physical inspection of the properties or assets of
Sinoenergy. Our Opinion does not address the relative merits of the
Merger as compared to any alternative business strategies that might exist for
Sinoenergy or the effect of any other transaction in which Sinoenergy might
engage. Our Opinion is necessarily based upon information available
to us, and financial, stock market and other conditions and circumstances
existing and disclosed to us, as of the date hereof.
Brean
Murray, Carret & Co., LLC has not acted as financial advisor to the Special
Committee or Sinoenergy in connection with the proposed Merger. The
Special Committee has agreed to indemnify us for certain liabilities which may
arise out of the rendering of this Opinion. In the ordinary course of
our business, we and our affiliates may actively trade or hold the securities of
Sinonergy for our own account or for the account of our customers and,
accordingly, may at any time hold a long or short position in such
securities. In addition, we and our affiliates may maintain other
business relationships with Sinoenergy and its respective
affiliates.
The
Opinion expressed herein is provided solely for the information of the Special
Committee in its evaluation of the proposed Merger Consideration, and our
Opinion is not intended to be and does not constitute a recommendation to any
stockholder as to how such stockholder should vote on any matters relating to
the proposed Merger.
This
Opinion is not to be reprinted reproduced or disseminated without our prior
written consent, and is not to be quoted or referred to, in whole or in part, in
connection with the Merger or any other matter; provided that we understand and
agree that if this Opinion is required pursuant to any applicable statute or
regulation to be included in any materials to be filed with the Securities and
Exchange Commission or mailed to the shareholders of Sinoenergy in connection
with the Merger, the Opinion may be reproduced in such materials only in its
entirety; provided, further, that any description of or reference to us or any
summary of this Opinion in such materials will be in a form acceptable to and
consented to in advance by us, such consent not to be unreasonably
withheld.
The Special Committee of the Board of Directors
Sinoenergy Corp.
March 29, 2010
Page 3
Based
upon and subject to the foregoing, our experience as investment bankers, our
work as described above and other factors we deemed relevant, we are of the
Opinion that, as of the date hereof, the Merger Consideration is fair, from a
financial point of view, to the Unaffiliated Shareholders of Sinoenergy’s Common
Stock.
Respectfully
submitted,
/s/ Brean
Murray, Carret & Co., LLC
Brean
Murray, Carret & Co., LLC
U.S.
Securities and Exchange Commission
Washington,
DC 20549
Form
10-K
x
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the
fiscal year ended September 30, 2009
o
TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition
period from ________ to _________
Commission
File Number 000-30017
Sinoenergy
Corporation
(Name of
small business issuer as specified in its charter)
Nevada
|
|
84-1491682
|
(State
or other jurisdiction of incorporation)
|
|
(I.R.S.
Employer Identification No.)
|
1603-1604,
Tower B Fortune Centre Ao City, Beiyuan Road, Chaoyang District,
Beijing
China, 100107
(Address
of principal executive offices)
Issuer’s
telephone number: 011 86-10-84928149
Securities
registered pursuant to Section 12(b) of the Exchange Act:
Title of
Each Class: Common Stock, $ 0.001 par value.
Securities
registered pursuant to Section 12(g) of the Exchange Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
o
No
x
Indicated
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
o
No
x
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
past 90 days. Yes
x
No
o
Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by referenced in Part III of this Form 10-K or any amendment to
this Form 10-K.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer
o
Accelerated Filer
o
Non-Accelerated Filer
o
Smaller
Reporting Company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
As of
December 23, 2009, there were 15,922,391 shares of Common Stock
outstanding.
Documents
incorporated by reference
Part
III (Items 10, 11, 12, 13 and 14) is incorporated by reference from the Issuer’s
definitive proxy statement to be filed pursuant to Regulation 14A.
INDEX
SIGNATURES
FINANCIAL
STATEMENTS
Forward-Looking
Statements
This
annual report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements include, but are not
limited to, statements that express our intentions, beliefs, expectations,
strategies, predictions or any other statements relating to our future
activities or other future events or conditions. These statements are based on
current expectations, estimates and projections about our business based, in
part, on assumptions made by management. These statements are not guarantees of
future performance and involve risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcomes and results may, and are likely
to, differ materially from what is expressed or forecasted in the
forward-looking statements due to numerous factors, including those described
above and those risks discussed from time to time in this prospectus, including
the risks described under “Risk Factors,” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in this annual
report. In addition, such statements could be affected by risks and
uncertainties related to the ability to conduct business in the PRC, product
demand, including the demand for CNG and our conversion kits, our ability to
develop, construct and operate a CNG station business, our ability to raise any
financing which we may require for our operations, competition, government
regulations and requirements, pricing and development difficulties, our ability
to make acquisitions and successfully integrate those acquisitions with our
business, as well as general industry and market conditions and growth rates,
and general economic conditions as well as economic conditions that affect the
natural gas industry. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Our expectations are as of the
date this annual report is filed, and we do not intend to update any of the
forward-looking statements after the date this annual report is filed to conform
these statements to actual results, unless required by law.
Availability
of SEC Filings
We file
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and proxy and information statements and amendments to reports filed or
furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of
1934, as amended. The public may read and copy these materials at the Securities
and Exchange Commission’s (“SEC”) Public Reference Room at 100 F Street, NE,
Washington, D.C. 20549. The public may obtain information on the operation of
the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a website (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding the Company and other
companies that file materials with the SEC electronically. These reports are
also available on our website at
http://www.sinoenergycorporation.com/c2465/c2721/default.html
.
Currency
References
Our
business is conducted in China, using RMB, the currency of China, and our
financial statements are presented in United States dollars. In this
annual report, we refer to obligations, commitments and liabilities, as well as
items from our financial statements in United States dollars. These
dollar references are based on the exchange rate of RMB to United States
dollars, determined as of a specific date. Changes in the exchange
rate will affect the amount of our obligations and the value of our assets in
terms of United States dollars which may result in an increase or decrease in
the amount of our obligations (expressed in dollars) and the value of our
assets, including accounts receivable (expressed in dollars). Our
balance sheet accounts are translated using the closing exchange rate in effect
at the balance sheet date and operating accounts are translated using the
average exchange rate prevailing during the year. Equity accounts are
translated using the historical rate as incurred.
PART
I
ITEM 1. BUSINESS.
Summary
We are
engaged in four operating segments:
• The
manufacture of customized pressure containers and compressed natural gas (CNG)
facilities and equipment, which has until recently been our principal
business. In this segment, we design and manufacture pressure
containers which are used in a number of industries, including the petroleum and
chemical, metallurgy and electricity generation, and the brewing industries
using technology acquired from a former related party.
• The
manufacture of CNG storage and transportation products and the construction of
CNG stations for third parties. In this segment we manufacture and install CNG
trailers, which are used to transport CNG to a filling station, CNG deposit
systems for use in CNG gas stations, and other products used in the CNG
business. We also design and construct CNG stations and install
CNG station equipment and related systems.
• The
operation of CNG filling stations, which involves the design, construction and
operation of CNG stations. As of December 10, 2009, we were operating
twenty-one CNG stations, of which sixteen are located in Wuhan, two in
Pingdingshan and three in Xuancheng. An additional four stations are
in the final stages of construction located in Wuhan, and four
were in the preliminary
planning stage in Wuhan.
• Vehicle
fuel conversion equipment, which involves the manufacture of kits which are used
to enable a gasoline-powered vehicle to operate using CNG.
CNG is
gas, principally methane, which has been compressed. Natural gas is compressed
during transportation and storage and, thus, requires pressurized
containers.
Organization
We are a
Nevada corporation organized in 1999 under the name Franklyn Resources III, Inc.
On September 28, 2006, our corporate name was changed to Sinoenergy Corporation.
On June 2, 2006, we acquired the stock of Sinoenergy Holding Limited, a British
Virgin Islands corporation. We and Sinoenergy Holding are holding companies and
our business is operated by our subsidiaries. At the time of our
acquisition of Sinoenergy Holding, we were a blank check corporation which was
not engaged in any business activities. Sinoenergy Holding Limited
was the sole stockholder Qingdao Sinogas General Machinery Limited Corporation
(“Sinogas”), a wholly foreign-owned enterprise (“WFOE”) registered under laws of
the People’s Republic of China (“China” or the “PRC”). Sinoenergy Holding had no
business other than its ownership of Sinogas. As a result of this transaction,
Sinoenergy Holding and its subsidiary, Sinogas, became subsidiaries of the
Company and the business of Sinogas became the business of the Company. The
transaction was treated as a reverse acquisition, with Sinogas being treated as
the acquiring party for accounting purposes.
During
2008, we sold a 24.95% interest in Sinogas to third parties. Sinogas
operates the customized pressure container and CNG station facilities and
construction and owns 75% of Jiaxing Lixun, the subsidiary that operates the
vehicle conversion kit segment. The only segment that is wholly-owned
by us is the CNG station operation.
During
2009, in conjunction with a long-term strategy of
further
developing these operating segments and exploiting growth
potential,
we transferred our interest in Qingdao Sinoenergy to Sinogas.
The
transaction resulted in a significant loss during fiscal year
2009.
All of
our operations are conducted in China. Our executive offices are
located at 1603-1604, Tower B Fortune Centre Ao City, Beiyuan Road, Chaoyang
District, Beijing China, 100107, telephone 011-86-10-84928149. Our
website is located at www. Sinoenergycorporation.com. Information on our website
and any other website does not constitute a portion of this annual
report.
References
to “we,” “us,” “our” and words of like import refer to Sinoenergy Corporation
and its subsidiaries. The following table sets forth information as
to our subsidiaries and the equity ownership of each subsidiary at September 30,
2009.
Company
|
|
Ownership
%
|
|
Business
activities
|
Sinoenergy
Holding Limited
|
|
|
|
|
Qingdao
Sinogas General
Machinery
Limited Corporation (“Sinogas”)
|
|
|
|
Production
of compressed natural gas (CNG) facilities, technical consulting in CNG
filling station construction, manufacturing of CNG vehicle conversion
kit
|
Qingdao
Sinogas Yuhan
Chemical
Equipment Company Limited (“Yuhan”)
|
|
|
|
Manufacturing
of customized pressure containers
|
Wuhan
Sinoenergy Gas Company Limited (“Wuhan Sinoenergy”)
|
|
|
|
Construction
and operating of CNG stations and the manufacturing and sales of
automobile conversion kits
|
Pingdingshan
Sinoenergy Gas
Company
Limited (“Pingdingshan Sinoenergy”)
|
|
|
|
Construction
and operating of CNG stations and the manufacturing and sales of
automobile conversion kits
|
Jiaxing
Lixun Automotive
Electronic
Company Limited (“Lixun”)
|
|
|
|
Design
and manufacturing of electric control devices for alternative
fuel
|
Hubei
Gather Energy
Company
Limited (“Hubei Gather”)
|
|
|
|
Construction
and operating of natural gas processing plants
|
Xuancheng
Sinoenergy
Vehicle
Gas Company Limited
(“Xuancheng
Sinoenegy”)
|
|
|
|
Construction
and operating of CNG stations and the manufacturing and sales of
automobile conversion kits
|
Qingdao
Jingrun General
Machinery
Company Limited (“Jingrun”)
|
|
|
|
Design
and manufacturing of petroleum refinery equipment and petroleum
machinery
|
Qingdao
Sinoenergy General
Machinery
Company Limited
(“Qingdao
Sinoenergy”)
|
|
|
|
Manufacturing
and installation of general machinery equipment
|
Nanjing
Sinoenergy Gas Company Limited (“Nanjing
Sinoenergy”)
|
|
|
|
Construction
and operating of CNG stations and the manufacturing and sales of
automobile conversion kits
|
Qingdao
Sinoenergy General Gas Company Limited (“Sinoenergy
Gas”)
|
|
|
|
Construction
and operating of CNG and LNG stations and the manufacturing and sales of
automobile conversion kits
|
Wuhan
Sinoenergy Changfeng Gas Company Limited
|
|
|
|
Operation
of CNG stations and the sales of automobile conversion
kits
|
* This
subsidiary is owned 75% by Sinogas and 25% by Sinoenergy.
** This
subsidiary is owned 40% by Sinogas and 60% by Sinoenergy.
*** This
subsidiary is owned 51% by Wuhan Sinoenergy, which is owned 90% by
Sinoenergy.
Reverse
Split
On July
9, 2008, we effected a one-for-two reverse split of the common stock and reduced
our authorized shares of common stock from 100,000,000 shares to 50,000,000
shares without changing the par value. All share and per share information in
this annual report retroactively reflects the reverse split for all periods
presented.
Merger
Agreement with Related Party
On
October 12, 2009, we entered into an agreement and plan of merger with and into
Skywide Capital Management Limited, a corporation which is wholly owned by Mr.
Tianzhou Deng, our chairman, and Mr. Bo Huang, our chief executive officer, both
of whom are also directors. Pursuant to the merger agreement, at the effective
time of the merger, we will be merged into Skywide, with Skywide being the
surviving entity, and each shares of common stock, other than shares owned by
us, Skywide, Mr. Deng and Mr. Huang, will become and be converted into the right
to receive, upon presentation of the certificates for their common stock, the
sum of $1.90. The merger is subject to shareholder approval.
Our
Business
The
government of the PRC is now encouraging the use of CNG as a method of combating
air pollution, which is increasingly viewed as a major problem throughout the
PRC. We believe that the need to reduce air pollution, among other factors, is
creating a growing demand and increasing market for CNG powered vehicles,
notwithstanding the recent decline in the worldwide price of oil. Since June
2006, we have been developing our CNG wholesale and retail business by building
our own natural gas processing plants and CNG filling stations in Central and
East China to meet this need, and are engaged in the construction and
equipping of CNG stations that are both Company owned and operated as well as
owned and operated by third parties. In addition, since the second
quarter of 2007, we have been manufacturing and selling electronic devices to
enable a vehicle to use CNG, which allow a standard gasoline powered vehicle to
operate using natural gas.
We are
engaged in four business segments:
(i)
Customized pressure containers
Historically,
our business has been the manufacture of pressure containers and compressed
natural gas (CNG) facilities and equipment. Our customized equipment
and pressure container business is the business originally conducted by our
subsidiary, Qingdao Sinogas General Machinery Limited Corporation (“Sinogas”),
prior to the reverse acquisition in June 2006. This business includes
design and manufacturing of various types of pressure containers.
(ii)
CNG storage, transportation products and CNG station service construction (“CNG
Station Facilities and Construction”)
Our CNG
station construction business includes:
• The
manufacture, sale and installation of CNG vehicle and gas station equipment,
which we provide to other companies that operate CNG station; and
• The
construction of CNG stations, for which we design the CNG station construction
plans, construct CNG stations, and install CNG station equipment and related
systems.
(iii)
CNG station operations
In 2006,
we entered the CNG station business, which involves the design, construction and
equipping of CNG stations and the operation of those stations. We opened our
first CNG filling station in October 2007. As of December 10, 2009, we were
operating twenty-one CNG stations, of which sixteen are located in Wuhan, two in
Pingdingshan and three in Xuancheng. An additional four stations in Wuhan are in
the final stages of construction, and four more stations in Wuhan were in the
preliminary planning stage.
(iv)
Vehicle fuel conversion equipment
We
manufacture CNG vehicle conversion kits and electronic control devices that
enable vehicles manufactured for gasoline to operate on CNG.
These
segment operations are further explained below.
Customized
pressure containers
We
manufacture and sell customized pressure containers to companies in a wide range
of industries, including the petroleum, chemical, metallurgy, electricity
generation, beverage and other industries requiring customized
containers. We do not maintain an inventory of these products;
rather, we manufacture products pursuant to purchase orders which set forth the
customers’ specifications.
The
principal raw materials for customized containers are steel and steel
vessels. In the past, we have purchased the steel vessels
principally from an Italian supplier. Commencing in May 2007, we also began
purchasing steel tubes in the PRC domestic market and engaged a Korean company
to manufacture the bottles from the steel tubes, and in August 2007, we engaged
a PRC company to manufacture these bottles. We believe we have adequate supply
sources, both domestic and foreign, to fulfill our production needs for the
foreseeable future. We are not dependent upon any single supplier, although the
steel vessels are available from a small number of suppliers.
Since our
products are, in general, designed and manufactured pursuant to purchase orders
for a specific product to be manufactured in accordance with the customer’s
specification, our revenue from this segment is dependent upon our developing a
continuing stream of business so that we will not incur a significant lag
between the time we complete one contract and start another. Further,
because those products have a relatively long useful life, and are not
consumables, once we fulfill our customer’s orders, there is generally little
ongoing business from one period to the next with any customer.
In
marketing our pressure containers, we rely primarily on an internal sales force,
that directly contacts and builds relationship with end user customers, and we
sell to the end users. We market our products through business connections,
trade shows and conferences. We believe that the advanced equipment that we
offer, our technology and our ability to produce high value added pressure
containers help us market our products in the Chinese market.
CNG
Station Facilities and Construction
In this
segment, we manufacture, sell and install CNG vehicle and gas station equipment,
including the following:
•
|
CNG
trailers for mobile distribution
|
•
|
CNG
deposited system for gas station usage
|
•
|
CNG
compressor skid
|
•
|
CNG
dispenser (retail measurement
system)
|
We
provide these products for third party companies that operate fixed and/or
mobile CNG filling stations.
The
second aspect of this business is the CNG station construction service
business. We design the CNG station construction plans, construct CNG
stations, and install CNG station equipment and related systems for our
clients.
In order
to provide for a supply of raw materials, Sinogas signed a joint venture
agreement with LuXi Chemical Group, a Chinese chemical company, to set up a
company, Sinogas General Luxi Natural Gas Equipment Co., Ltd. (“Sinogas Luxi”),
located in Liaocheng City, Shandong province. Sinogas has a 40%
interest in Sinogas Luxi, which has a proposed annual production capacity of
4,000 steel bottles for use in CNG trailer manufacturing. The
registered capital is RMB 50 million (equivalent to $7.32 million based on the
exchange rate on September 30, 2009). Sinogas Luxi commenced
operation in July 2009. At September 30, 2009, Sinogas had contributed $2.93
million in full satisfaction of its obligations to this enterprise.
Our
products and services are designed to meet the customer
specifications. Our revenue in this segment is dependent upon our
developing a continuing stream of business so that we will not incur a
significant lag between the time we complete one contract and start
another. Although we do not have a long history of operations in this
business, we anticipate that our major customers will vary from period to
period. In the year ended September 30, 2009, one customer of our
station facilities and construction segment accounted for more than 10% of our
total sales, and in the year ended September 30, 2008, two customers of our
station facilities and construction segment each accounted for more than 10% of
our total sales. These customers, who purchased CNG truck trailers,
accounted for approximately 19.2% and 32.0% of total sales in the year ended
September 30, 2009 and 2008, which, in each year, represented most of our
revenue from this division. At September 30, 2009 and 2008,
approximately 55.7% and 71.0%, respectively, of our accounts receivable were
from these customers. The following table sets forth information as
to the revenue generated from each of these customers for the year ended
September 30, 2009 and 2008 (dollars in thousands):
Name
|
|
Year
Ended September 30, 2009
|
|
|
Year
Ended September 30, 2008
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
Wuhan
Lvneng Gas Transportation Co.,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xuancheng
Anjie Gas Transportation Co.,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Less
than 10%
In
marketing these services, we rely primarily on our internal salesmen, who
directly contact and build relationships with customers. We market our products
through personal contact, as well as business connections, trade shows and
conferences.
We are
aware of two companies which may be considered as competitors of us in the
manufacture of CNG deposit and transportation equipment – Shijiazhuang Enric Gas
Equipment and Handan Xinxing Petrochemical Equipment.
CNG
station operations
In 2006,
we entered the CNG station business, which involves the design, construction and
equipping CNG stations and operating those stations. As of December
10, 2009, we were operating twenty-one CNG stations, of which sixteen are
located in Wuhan, two in Pingdingshan and three in Xuancheng. An
additional four stations in Wuhan are in the final stages of
construction. We anticipate that these stations could be operational
by the end of March 2010. We have an additional four stations in
Wuhan which are in the preliminary stage. However, we need government approval
before we can open a station, and the procedure for obtaining government
approval may delay the opening of one or more of these stations. In
the past, we have not opened stations on schedule because additional time was
required for us to obtain government approval. Each of our stations
has four filling outlets, and is open 24 hours a day, seven days a
week.
We
believe that there is a large and expanding market for CNG in
Wuhan. Wuhan is the capital of Hubei Province and the biggest city in
Central China, with a population of more than 9 million people.
We formed
two joint ventures with China New Energy Development Investment Co., Inc., an
unaffiliated party, to operate natural gas processing plants. These
plants are the mother stations that supply CNG to our stations. At
September 30, 2009, we had an 80% interest in the joint venture for Wuhan and a
20% interest in the joint venture that is located in
Wuhu City.
Natural
gas is available from a limited number of suppliers, principally China Petroleum
and Chemical Corporation, known as Sinopec and PetroChina or affiliated
companies of PetroChina. These companies supply the natural gas and operate the
pipeline which is the only commercially reasonable way to deliver the natural
gas.
Each of
the joint ventures for Wuhan and Wuhu City has an agreement with Sinopec. The
agreements provide for an initial annual volume of 50 million cubic meters per
year, increasing to not more than 200 million cubic meters per
year. The service is subject to the completion of a natural gas
pipeline between Sichuan and Shanghai. The pipeline was completed in December
2009 and is in the trial stage to satisfy the applicable authorities that it is
able to supply natural gas. The sales volume is subject to annual natural gas
purchase agreements and the price is subject to future determination. We also
have a supply agreement with PetroChina, which provides us with 88 million cubic
meters of natural gas per year. We will continue to purchase our
natural gas from PetroChina until Sinogas’ Sichuan – Shanghai pipeline is
operational. The success of our CNG station business is dependent
upon our ability to have a continuous supply of natural gas at our
stations. We are dependent upon Sinogas and PetroChina to provide us
with sufficient CNG to enable us to operate our CNG filling
stations. If, for any reason, we are unable to obtain a reliable
supply of natural gas, we will be unable to generate revenue from this
business.
The
construction of the CNG filling stations and the storage, transportation and
distribution of CNG, are subject to PRC regulations, and the price at which we
both buy and sell CNG is subject to government price controls, and the suppliers
of CNG are government-owned companies.
The price controls over
the purchase and sale of CNG limits our potential profit from the sale of CNG as
our gross margin is effectively dependent upon the government’s pricing
policies.
The
procedure for obtaining the land use rights as well as the right to use the land
for the construction and operation of a CNG station involves a lengthy and labor
intensive process, involving numerous steps through the municipal government,
including satisfying environmental, hazardous chemical, noise abatement, soil
suitability, health and other regulations. Most of these processes
involve an application, an on-site inspection and the performance of any
necessary remediation before a permit is granted, which can take nine to
twelve months. Most recently, as a result of both our experience
in navigating through the regulatory procedure and our record in successfully
opening CNG stations in accordance with the terms of our applications, we have
been able to reduce the time to between six and nine
months. While
the need to meet all the required regulations can be considered a barrier to
entry into the CNG station business, we believe that our success in meeting our
obligations will help us as we compete with other potential competitors in
seeking locations and permits for new stations.
The two
largest state-owned energy companies, CNPC China National Petroleum Corporation,
referred to as CNPC Group, and Sinopec are engaged in the sale and supply of
energy and are major companies in exploration and transportation of oil and gas.
They build much of the PRC’s high pressure pipeline infrastructure. Natural gas
is distributed to smaller regional firms that redistribute the gas to the end
user. Although these major companies supply natural gas rather than sell the
natural gas to end users, they have the capability of establishing their own
natural gas distribution networks.
We are
aware of two companies which may be considered to be direct competitors in the
business of CNG station business: Xin’ao Gas Field Ltd. and China Natural Gas.
Xin’ao Gas Field distributes natural gas via pipeline, doing business in 13
provinces and municipalities that have a combined population of 31 million.
China Natural Gas distributes natural gas to commercial, industrial and
residential customers of Xi’an City, and distributes CNG as a vehicular fuel to
retail end users of Xi’an City. We believe that neither of the two companies is
approved to supply natural gas to any area in which we are constructing or plan
to construct CNG stations.
We have
two direct competitors in Wuhan – Jiang Han Petro Drill Corp., which has eight
stations, and Da Long Investment Corp, which has two stations. In
Pingdingshan, one gas company has one station. There are no other
companies that sell CNG in Xuancheng. None of these companies are
considered major companies, and we believe that we are considered the leading
CNG company in the three cities in which we have stations.
Our CNG
stations compete with gasoline stations as well as other CNG stations. The
ability of CNG stations to operate profitably is largely dependent upon the
acceptance of CNG by individual drivers as well as taxis and buses. We expect
that our principal customers, at least initially, will be taxis and bus
companies, which are presently the largest users of CNG. As more
companies seek to fill the need for CNG stations, our competition will
increase. Since the prices that we charge are fixed by the
government, competition is based on factors other than price, including the
location and appearance of the stations, the reliability of the stations and the
quality of service provided by our employees. We believe that our
stations are located in well-traveled roads so that drivers can have easy access
to our stations.
PetroChina,
China’s largest oil and gas producer by capacity and our present supplier of
natural gas, has recently announced its intention to enter the CNG distribution
business in the next couple of years. These plans may present a
competitive threat to companies such as us. We cannot assure you that
we will be able to compete successfully with PetroChina if PetroChina enters the
markets in which we operate CNG stations. PetroChina presently
delivers natural gas to the cities, and companies, such as ours, purchase the
natural gas from PetroChina or another supplier, such as Sinopec, and sell the
natural gas in the city. Because of PetroChina’s size, it may be in a
better position than we to enter into contacts with the city governments to
supply natural gas to those cities.
Vehicle
fuel conversion equipment
We
believe that, with the government of the PRC encouraging the use of CNG as a
method of reducing pollution, there is a market for a device that enables a
vehicle to use CNG. In March 2007, we purchased a 60% interest in
Jiaxing Lixun Automotive Electronic Co, Ltd. (“Lixun”) from its
stockholders for $390,000. In July 2007, we paid an additional $400,000 to
increase our equity ownership in Lixun to 70%, and in April 2008 we acquired the
remaining 30%. Our interest in Lixun is owned 75% by Sinogas, a
75.05% owned subsidiary, and 25% by us. Through Lixun, we design and
manufacture electric control devices for alternative fuel, such as compressed
natural gas and liquefied petroleum gas vehicles, as well as a full range of
electric devices, such as computer controllers, conversion switches, spark
advancers, tolerance sensors and emulators for use in multi-powered
vehicles.
We sell
these conversion kits primarily to manufacturers in the PRC who use the kits on
an OEM basis and to companies that market these products for sale in the
aftermarket. We develop and service those customers by our internal salesmen who
market the products through business connections, trade show and
conferences. We also plan to market the conversion kits at our
CNG stations. As a result of the recent worldwide economic downturn and the
lower price of oil, which has affected the CNG market generally, the demand for
conversion equipment has decreased.
We are
aware of three Italian companies that are our competitors in vehicle gas
conversion business -- Lovato Spa, LANDI Spa, and OMVL Spa. Because those
companies are not Chinese companies, we believe that our familiarity with the
Chinese markets gives us a competitive advantage.
Intellectual
Property
Although
we hold certain patent rights relating to the manufacture of pressure
containers, our CNG station construction service business is more dependent upon
our know-how than on any patent rights that we have.
We have
an agreement with Beijing Sanhuan pursuant to which Beijing Sanhuan granted us
the right to use Beijing Sanhuan’s technology and software relating to the
integration, installation and maintenance of CNG station
systems. Under this agreement, we pay Beijing Sanhuan for the
technology and software at the rate of $12,800 for each CNG substation and
$23,051 for each CNG mother station. The license agreement has a ten-year term
commencing January 1, 2006. We also pay Beijing Sanhuan $64 per hour for
engineers provided by Beijing Sanhuan.
As the
designer and manufacturer of automotive alternate fuel (CNG/LPG) electronic
devices, Lixun has applied for a series of Chinese patents for the technical
know-how relating to these products, however, we cannot assure you that the
patents will be granted or, if granted, that we will be able to enforce our
rights against an alleged infringer.
Research
and Development
We do not
engage in research and development. We have worked from time to time with our
customers to design a product, typically a pressure container for the customer’s
product. However, those services are included in the service for the customer’s
product, and the cost of the services is included in cost of sales.
Employees
On
September 30, 2009, we had 857 full-time employees, of whom 172 are in executive
and administrative positions, 40 employees are in marketing and sales, 163 are
technical engineers in pressure container and CNG deposit and transportation
manufacturing, quality control as well as CNG station construction, 280
persons are manufacturing personnel and 202 are operating our retail CNG station
business. We believe that our employee relations are good.
Executive
Officers of the Registrant
Name
|
|
Age
|
|
Position
|
Bo
Huang
|
|
39
|
|
Chief
executive officer and director
|
Shiao
Ming Sheng
|
|
60
|
|
Chief
financial officer
|
Anlin
Xiong
|
|
30
|
|
Vice
president and secretary
|
Cindy
Ye
|
|
34
|
|
Financial
controller
|
Bo Huang
has been our chief executive officer and a director since the completion of the
reverse acquisition in June 2006. He has been chief executive officer and
chairman of Sinogas since its organization in 2005. He and Mr. Deng are the
founders of Sinogas. He was president of Beijing Tricycle Technology Development
Co., Ltd., a company engaged in the development of natural gas conversion kits
from 2003 to 2005, and vice president of Chengchen Group, an investment and
trading company from 1997 to 2003. Mr. Huang graduated from Renmin University of
China in Beijing in 1993 with a bachelor’s degree in international
finance.
Shiao
Ming Sheng has been chief financial officer since October 2008. From 2003 until
October 2008, Mr. Sheng served as a principal of Intelligent Genesis, which was
engaged in corporate consulting and venture formation, and from 1996 until 2002,
Mr. Sheng was founder and chief executive officer of Intelligent Paradigm, a
computer video technology developer. Mr. Sheng received a degree in biochemistry
from Dartmouth College and has authored numerous scientific papers and editorial
articles for trade journals and magazines.
Anlin
Xiong has been vice president in charge of financing and investment activities
since February 2008 and secretary since June 2008. Mr. Xiong was a senior
manager at BOE Technology Group Co., Ltd., a leading Chinese LCD (Liquid Crystal
Display) manufacturer listed on Shenzhen Stock Exchange, from October 2005 until
February 2008. From May 2005 until October 2005, Mr. Xiong was a senior engineer
at Alpha & Omega Semiconductor (Shanghai) Co. Ltd. in China. Mr. Xiong
received a MS in Electrical Engineering from the University of Illinois at
Urbana-Champaign in 2004, a MS in Physics from West Virginia University in 2003,
and a BS in Electronic Engineering from Tsinghua University in China in 2000.
Mr. Xiong also holds a Certificate of China Legal Professional, which is the
lawyer qualification certificate in China.
Cindy Ye
has been financial controller since June 2008. Ms. Ye was vice president in
charge of accounting activities from January to June 2008. Ms. Ye was
a senior manager at Beijing Yongtuo Certified Public Accountants Co., Ltd. from
September 2001 until December 2007. Ms. Ye received an MS in international trade
from the Capital University of Economics and Business in China in 2001, and a BS
in material science from the Northwest Institute of Light Industry in China in
1998.
ITEM 1A. RISK FACTORS
An
investment in our securities involves a high degree of risk. In determining
whether to purchase our securities, you should carefully consider all of the
material risks described below, together with the other information contained in
this annual report before making a decision to purchase our securities. You
should only purchase our securities if you can afford to suffer the loss of your
entire investment.
RISKS
ASSOCIATED WITH OUR BUSINESS
The
Merger agreement with Skywide will limit your ability to participate in any
improvement in our business and operations.
The
merger agreement with Skywide, which is wholly owned by Mr. Tianzhou Deng, our
chairman, and Mr. Bo Huang, our chief executive officer, both of whom are also
directors, provides that, subject to shareholder approval, we will be merged
with and into Skywide, and all shareholders, other than Skywide, Mr. Deng and
Mr. Huang, will receive in respect to each share owned at the effective time of
the merger the right to receive $1.90 per share. As a result, upon
completion of the merger, you will cease to have any interest in us other than
the right to receive $1.90 per share upon delivery of the certificates for your
common stock. We cannot assure you that the merger will be completed
or that, if the merger is not completed, the price of our common stock will not
decline significantly.
Because
we have a deficiency in working capital and sustained a significant loss for the
year ended September 30, 2009, and our losses are continuing, we cannot assure
you that we will continue as a going concern or operate profitably in the
future.
At
September 30, 2009, we had a deficiency in working capital of approximately $9.1
million, and for the year ended September 30, 2009, we sustained a loss of
approximately $13.1 million on sales of $41.8 million, as compared with net
income of approximately $16.1 million on sales of $40.9 million for the year
ended September 30, 2008, and our losses have continued subsequent to September
30, 2009. Our working capital deficiency resulted from our loss and the
reclassification of notes from long-term to short term as a result of amendments
to the underlying instruments. Our loss resulted from a significantly
lower gross margin and significantly higher operating expenses and
interest. These factors are continuing to affect our operations and
we cannot assure you that we will be able to operate profitably in the future.
As of September 30, 2009, we have limited financial resources with which to
achieve our objectives and obtain profitability and positive cash flows.
Achievement of our objectives will be dependent upon our ability to obtain
additional financial, to generate revenue from our current and planned business
operations, and control costs. However, there is no assurance that we will be
able to achieve these objectives.
Our
independent auditors have included a going concern qualification in their report
on our financial statements.
Because
of our recurring losses from operations and our working capital deficiency, our
auditors have included a going concern qualification in their report on our
financial statements. As a result, our financial statements do not
reflect any adjustment which would result from our failure to continue to
operate as a going concern. Any such adjustment, if necessary, would
materially affect the value of our assets.
We
may have difficulty collecting our receivables.
At
September 30, 2008, our accounts receivable were outstanding for an average of
124 days, and at September 30, 2009, our accounts receivable were
outstanding for an average of 225 days. A significant amount of
receivables that were outstanding at September 30, 2008 remained outstanding on
September 30, 2009. In addition, at September 30, 2008, we had a
rental receivable of $2.6 million pertaining to a land use sublease.
We established a $988,000 reserve for that uncollected note at September 30,
2009. Our failure to collect our trade and notes receivables in the
normal course of business could impair our ability to continue in
business.
We
are required to pay our convertible notes upon completion of the merger with
Skywide.
In
September 2007, we issued our 12% guaranteed senior notes due 2012 in the
principal amount of $16 million and 3.0% guaranteed senior convertible notes due
2012 in the principal amount of $14 million. The 12% senior notes
have been paid in full since September 30, 2009. Pursuant to a December 2009
agreement with the holders of the 3% convertible notes, we agreed to pay the $14
million principal amount of convertible notes in two installments following the
completion of the merger with Skywide, together with interest to generate a
yield to maturity of 13.8%, net of payments made on account. The Company may not
have the resources to repay the debt and the noteholders may exert certain
rights to the detriment of the Company.
Because
we are dependent upon a small number of customers in one or more of our
segments, which varies from year to year, the inability to generate new business
could impair our ability to operate profitably.
In
general, in our customized pressure container business and our CNG station
construction business, we do not have long-term contracts with our customers,
and major contracts with a small number of customers account for a significant
percentage of our revenue from these segments. Our contracts relate to specific
projects. As a result, a customer can account for significant revenue in one
year and little, if any, in the next. One customer of our station
facilities and construction segment accounted for approximately 19.2% of our
sales in the year ended September 30, 2009 and 21.6% of our sales in the year
ended September 30, 2008. Another customer from this segment
accounted for 10.4% of our sales in the year ended September 30,
2008. Our failure to develop new customers in this and our other
segments could materially impair our ability to operate these segments
profitably.
Our
CNG stations are dependent upon two government-owned suppliers.
We
purchase our CNG from one of two government-owned companies. The
failure or inability of these companies to provide us with CNG could materially
impair our ability to operate CNG stations.
Our
CNG station business has risks that are different from our manufacturing and
construction/installation business.
We have
commenced and are planning the expansion of our CNG service station business.
The operation of the CNG gas station business is subject to significant
additional risks which are not related to our other segments. In addition to the
normal risks associated with our business, there are additional risks that
relate to the CNG station business. These risks include, but are not limited
to:
We lack experience in operating CNG
stations
. Although we have manufactured and installed equipment for use
by CNG stations, we have limited experience in operating stations, and we cannot
assure you that we will be successful in operating CNG stations.
We require significant additional
funds to enable us to develop and expand the CNG station business.
The
construction of CNG stations is very capital intensive, and we will require
significant additional funds for this purpose. Although we raised $30,000,000
through the sale of our debt securities in September 2007, we may require
additional financing to equip and construct our proposed CNG stations, and we
cannot assure you that we will be able to obtain any financing which we may
require, either for our CNG station business or our equipment manufacture and
supply business.
The CNG station business is highly
regulated and is subject to price controls.
The storage, transportation
and distribution of CNG are subject to PRC regulations, including the price at
which we both buy and sell CNG.
The price controls
over the purchase and sale of CNG limits our potential profit from the sale of
CNG. In addition, before we construct a CNG station in many regions, we need to
obtain government approvals. Other regulations may result in increased costs in
order to comply with these regulations. Before we are able to open a
CNG filling, we must obtain government approval. In the past, we have
had to postpone the opening of our CNG stations because of delays in obtaining
government approval.
Because of the nature of CNG, we
could be exposed to liability from gas leaks or explosions.
Any leaks or
explosions from our CNG stations could cause severe property damage as well as
loss of life, which may not be covered by insurance. Any such loss could result
in a termination of our business and could subject us to regulatory
actions.
The market for CNG stations is
dependent upon the increased use of CNG powered vehicles.
CNG-powered
vehicles represent only a small fraction of motor vehicles in the PRC, and most
vehicles are powered by gasoline or diesel fuel. For us to be successful in the
CNG gas station business, a market for CNG must be developed in the area which
we propose to enter. Car and truck owners must either buy a CNG powered vehicle
or pay to have a gasoline or diesel powered vehicle converted for CNG use. The
current economic downturn has materially decreased the market for CNG vehicles,
and we cannot assure you that the market for CNG will improve in the near
future, if at all. In order for a market to develop for CNG vehicles, there must
be a network of CNG stations on major highways throughout the PRC. The failure
of such a network to develop could hinder the development of a market for CNG
vehicles which would in turn limit the market for our CNG stations.
We must secure enough CNG resources
to supply our filling stations in future.
Natural gas is limited in
China, especially in central and eastern China where we are operating and
developing our CNG retail business. Although we have agreements to provide us
with a fixed amount of natural gas, we cannot assure you that these agreements
will be sufficient to satisfy our CNG needs and we cannot assure that such CNG
will be delivered on a timely basis. These agreements are subject to annual
allocations and a major pipeline which is expected to provide us with
CNG. Although the construction of the pipeline has been completed,
the pipeline is undergoing completion testing, and we cannot assure you that we
will be able to receive significant gas from this pipeline in the near
future. Further, it is possible that we may experience shortages,
particularly in the winter months when gas demand peaks. We have no recourse
against any party in the event that the pipeline is not able to deliver the
natural gas that we may require.
We may not be able to meet our
scheduled station openings.
We have already encountered delays in opening
our stations, and we cannot assure you that we will not encounter delays in the
future. These delays can result from a range of factors, including adverse
weather conditions, delays in obtaining government approvals, delays in receipt
of materials for the construction of the stations, and other causes which may or
may not be within our control. Any delays may impair our ability to operate this
business profitably.
Competition is increasing for CNG
distribution
. Our CNG stations compete with gasoline stations as well as
other CNG stations. The ability of our CNG stations to operate profitably is
largely dependent upon the acceptance of CNG by individual drivers as well as
taxis and buses, which are presently the largest users of CNG. As more companies
seek to fill the need for CNG stations, our competition will increase.
PetroChina Co., China’s largest oil and gas producer by capacity and our present
supplier of natural gas, has recently announced its intention to enter the CNG
distribution business. These plans present a competitive threat to companies
such as us. Because of PetroChina’s size, it may be in a better position than we
to enter into contacts with the city governments to supply natural gas to those
cities. We cannot assure you that we will be able to compete successfully with
PetroChina if PetroChina enters the markets in which we operate CNG
stations.
We may face liability claims from
users of our products
.
As the
manufacturer of equipment that is used to store and transport CNG and other
products, including petroleum, chemicals and food products, we may be subject
both to liability in the event that any property damages or loss of life results
from our products. We may also be liable for damages in the event that our CNG
conversion kits do not function properly. Any liability which results could hurt
our reputation and result in the payment of damages which may not be covered by
insurance.
Our
CNG conversion kit business is subject to the development of a market for
products that can enable gasoline powered vehicles to operate on
CNG.
One
segment of our business is the manufacture and sale of conversion kits that
enable gasoline-powered vehicles to operate on CNG. The customers of these
products are both vehicle manufacturers and vehicle owners. Our ability to
operate this segment profitably is dependent upon a number of factors including
the development of a market for conversion kits, our ability to compete
successfully with other manufacturers or distributors of conversion kits, and
the ability of our products to work properly in a wide range of both old and new
vehicles. The current economic downturn together with the recent
decline in oil and gasoline prices may have an effect on the market for
conversion kits.
Because
we are dependent on our management, the loss of our key executive officers and
the failure to hire additional qualified key personnel could harm our
business.
Our
business is largely dependent upon the continued efforts of our chief executive
officer, Bo Huang, and our chairman, Tianzhou Deng, who are also directors. We
do not have employment contracts with either Mr. Huang or Mr. Deng. The loss of
either Mr. Huang, Mr. Deng or any of our other key employees could have a
material adverse effect upon our ability to operate profitably. Furthermore, we
require additional qualified management and other key personnel for our CNG
station business.
We
may not be able to continue to grow through acquisitions.
In
addition to our planned growth through the development of our CNG station
business, an important part of our growth strategy has been to expand our
business and to acquire other businesses in related industries or to form joint
ventures with other companies. Such acquisitions may be made with cash or our
securities or a combination of cash and securities. Any joint ventures may
require us to make significant capital contributions in order to develop the
business contemplated by the joint venture. To the extent that we require cash,
we may have to borrow the funds or sell equity securities. We anticipate that if
we acquire other Chinese businesses, the seller would expect to receive all or
substantially all of the sales price in cash, and we expect that we would have
to raise funds in order to consummate any such acquisition. Any issuance of
equity as a portion of the purchase price or any sale of equity, to the extent
that we are able to sell equity, to raise funds to enable us to pay the purchase
price would result in dilution to our stockholders. We have no commitments from
any financing source and we may not be able to raise any cash necessary to
complete an acquisition. If we fail to make any acquisitions, our future growth
may be limited. Further, any acquisition may be subject to government
regulations and approval in the PRC. Further, our recent results of
operations may affect the willingness of a business owner to sell his business
to us and the willingness of any debt or equity financing source to provide us
with acquisition funding.
If
we make any acquisitions, they may disrupt or have a negative impact on our
business.
If we
make acquisitions, we could have difficulty integrating the acquired companies’
personnel and operations with our own. In addition, the key personnel of the
acquired business may not be willing to work for us. We cannot predict the
effect expansion may have on our core business. Regardless of whether we are
successful in making an acquisition, the negotiations could disrupt our ongoing
business, distract our management and employees and increase our expenses. In
addition to the risks described above, acquisitions are accompanied by a number
of inherent risks, including, without limitation, the following:
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the
difficulty of integrating acquired products, services or
operations;
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the
potential disruption of the ongoing businesses and distraction of our
management and the management of acquired
companies;
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the
difficulty of incorporating acquired rights or products into our existing
business;
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difficulties
in disposing of the excess or idle facilities of an acquired company or
business and expenses in maintaining such
facilities;
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difficulties
in maintaining uniform standards, controls, procedures and
policies;
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the
potential impairment of relationships with employees and customers as a
result of any integration of new management
personnel;
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the
potential inability or failure to achieve additional sales and enhance our
customer base through cross-marketing of the products to new and existing
customers;
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the
effect of any government regulations which relate to the business
acquired, including government approval of the acquisition;
and
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potential
unknown liabilities associated with acquired businesses or product lines,
or the need to spend significant amounts to retool, reposition or modify
the marketing and sales of acquired products or the defense of any
litigation, whether or not successful, resulting from actions of the
acquired company prior to our
acquisition.
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Our
business could be severely impaired if and to the extent that we are unable to
succeed in addressing any of these risks or other problems encountered in
connection with these acquisitions, many of which cannot be presently
identified, these risks and problems could disrupt our ongoing business,
distract our management and employees, increase our expenses and adversely
affect our results of operations.
Our
operating results in future periods may vary from quarter to quarter, and, as a
result, we may fail to meet the expectations of our investors and analysts,
which may cause our stock price to fluctuate or decline.
We do not
manufacture our customized pressure containers for inventory, but pursuant to a
specific contract, and our contract flow is not predictable. Similarly, products
and services from our manufacture of CNG storage and transportation products and
the construction of CNG stations segment are also made pursuant to specific
contracts, and after the completion of a project our services may no longer be
required by our customers. To the extent that we do not generate new business,
our revenue from this segment of our business will decline. To the extent that
we expand our facilities to meet present or anticipated increases in sales or
expand our CNG station business and sell our CNG conversion kits, our failure to
generate business could have the effect of significantly reducing the
profitability of our business. Because of these factors, our revenue and
operating results have fluctuated from quarter to quarter. We expect that
fluctuations in both revenue and net income will continue due to a variety of
factors, many of which are outside of our control. Due to the risks discussed in
this annual report, you should not rely on period-to-period comparisons of our
results of operations as an indication of future performance.
Because
certain of our stockholders control a significant amount of our common stock,
they may have effective control over actions requiring stockholder
approval.
As of
December 18, 2009, approximately 40.0% of our outstanding common stock is owned
by Skywide (which is owned by our chairman, Mr. Deng, and our chief executive
officer, Mr. Huang ), which may provide Skywide with effective control over
actions taken by our stockholders.
We
may not be able to comply with the regulations relating to internal controls
over financial reporting.
The SEC
has adopted rules requiring public companies to include a report of management
on our internal controls over financial reporting in our annual reports on Form
10-K. In addition, commencing with the year ending September 30, 2010, our
independent registered public accounting firm must attest to and report on
management’s assessment of the effectiveness of our internal controls over
financial reporting. In connection with the periodic evaluation of our
disclosure controls our chief executive officer and chief financial officer
identified weaknesses related to our accounting personnel’s ability to identify
accounting and disclosure issues, calculate accounting entries, and prepare
financial statements and footnotes in accordance with U.S. GAAP. These officers
have concluded that our disclosure controls and procedures are not effective at
this time. We cannot assure you that we will be successful in addressing these
issues and any other issues which may be raised. If we are unable to address
these issues, unable to conclude that we have effective internal controls over
financial reporting or if our independent auditors are unable to provide us with
an unqualified report as to the effectiveness of our internal controls over
financial reporting as required by Section 404 of the Sarbanes-Oxley Act of
2002, investors could lose confidence in the reliability of our financial
statements, which could result in a decrease in the value of our securities. We
have not yet begun a formal process to evaluate our internal controls over
financial reporting. Given the status of our efforts, coupled with the fact that
guidance from regulatory authorities in the area of internal controls continues
to evolve, substantial uncertainty exists regarding our ability to comply by
applicable deadlines.
The
financing agreement gives the investors certain rights relating to our business
which may affect our ability to develop our business.
The
investors in our September 2007 financing have the right of approval with
respect to our budgets in accordance with a schedule set forth in an investor
rights agreement. We are also prohibited from dismissing the auditor without the
investor’s consent unless the dismissal is approved by an audit committee on
which a designee of the investor is a member. These rights may affect our
ability to develop our business and may have a negative impact on our stock
price.
RISKS
ASSOCIATED WITH COMPANIES CONDUCTING BUSINESS IN THE PRC
Because
the scope of our business license is limited and subject to review, we may need
government approval to continue or expand our business.
A
business in China can only conduct business within its approved business scope,
which appears on the business license. Our licenses permit us to engage in our
present businesses. Our licenses are subject to the inspection by the government
agencies of our facilities. The government has the power to withdraw a license
from those companies which may be disqualified as a result of these inspections
by the central government. Any change in the scope of our business requires
further application and government approval. Inevitably, there is a negotiation
with the authorities to approve as broad a business scope as is permitted, and
we cannot assure you that we will be able to obtain the necessary government
approval for any change or expansion of our business. We cannot
provide any assurance that we may be able to maintain our present licenses or
that we will be able to obtain any additional licenses that may be required if
we seek to expand the scope of our business.
If
the PRC enacts regulations which forbid or restrict foreign investment, our
ability to grow may be severely impaired.
We intend
to expand our business both by increasing our product range, operating CNG
stations. Many of the rules and regulations that we would face are not
explicitly communicated, and we may be subject to rules that would affect our
ability to grow, either internally or through acquisition of other Chinese or
foreign companies. There are also substantial uncertainties regarding the proper
interpretation of current laws and regulations of the PRC. New laws or
regulations that forbid foreign investment could severely impair our businesses
and prospects. Additionally, if the relevant authorities find us in violation of
PRC laws or regulations, they would have broad discretion in dealing with such a
violation, including, without limitation:
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revoking
our business and other licenses;
and
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requiring
that we restructure our ownership or
operations.
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Any
deterioration of political relations between the United States and the PRC could
impair our operations.
The
relationship between the United States and the PRC is subject to sudden
fluctuation and periodic tension. Changes in political conditions in the PRC and
changes in the state of Sino-U.S. relations are difficult to predict and could
adversely affect our operations or cause potential acquisition candidates or
their goods and services to become less attractive. Such a change could lead to
a decline in our profitability. Any weakening of relations between the United
States and the PRC could have a material adverse effect on our operations,
particularly in our efforts to raise capital to expand our CNG station and other
business activities.
Our
operations and assets in the PRC are subject to significant political and
economic uncertainties.
Government
policies are subject to rapid change and the government of the PRC may adopt
policies which have the effect of hindering private economic activity and
greater economic decentralization. There is no assurance that the government of
the PRC will not significantly alter its policies from time to time without
notice in a manner that reduces or eliminates any benefits from its present
policies of economic reform. The recent worldwide economic slowdown, which
affected China, may affect government policies as they relate to the industries
which we serve, which relate to the purchase or capital equipment and the
purchase and sale of natural gas. In addition, a substantial portion
of productive assets in the PRC remains government-owned. For instance, all land
is state-owned and leased to business entities or individuals through
governmental granting of state-owned land use rights. The granting process is
typically based on government policies at the time of granting, which could be
lengthy and complex. This process may adversely affect our future expansion,
especially as we are seeking both to expand manufacturing operations and to
expand our CNG business. The government of the PRC also exercises significant
control over China’s economic growth through the allocation of resources,
controlling payment of foreign currency and providing preferential treatment to
particular industries or companies. Uncertainties may arise with changing of
governmental policies and measures. In addition, changes in laws and
regulations, or their interpretation, or the imposition of confiscatory
taxation, restrictions on currency conversion, imports and sources of supply,
devaluations of currency, the nationalization or other expropriation of private
enterprises, as well as adverse changes in the political, economic or social
conditions in the PRC, could have a material adverse effect on our business,
results of operations and financial condition.
Price
controls may affect both our revenues and net income.
The laws
of the PRC provide for the government to fix and adjust prices. In connection
with our operation of CNG stations, the price at which we both purchase and sell
CNG is subject to government price controls. It is possible that other products
we sell or services that we provide may also become subject to price control. To
the extent that we are subject to price control, our revenue, gross profit,
gross margin and net income will be affected since the revenue we derive from
our sales will be limited and, unless there is also price control on the
products that we purchase from our suppliers, we may face no limitation on our
costs. Further, if price controls affect both our revenue and our costs, our
ability to be profitable and the extent of our profitability will be effectively
subject to determination by the applicable regulatory authorities in the
PRC. One aspect of the operation of CNG stations is the price
controls, whereby both the price at which we purchase CNG and the price at which
we sell CNG are subject to price controls by central government and municipal
government. As a result of these price controls, our gross margin is effectively
dependent upon the government’s pricing policies. We cannot assure you that one
of the government’s responses to the economic downturn will not be to increase
the adoption of price controls on other segments of our business.
Our
operations may not develop in the same way or at the same rate as might be
expected if the PRC economy were similar to the market-oriented economies of
OECD member countries.
The
economy of the PRC has historically been a nationalistic, “planned economy,”
meaning it functions and produces according to governmental plans and pre-set
targets or quotas. In certain aspects, the PRC’s economy has been making a
transition to a more market-oriented economy, although the government imposes
price controls on certain products and in certain industries. However, we cannot
predict the future direction of these economic reforms or the effects these
measures may have. The economy of the PRC also differs from the economies of
most countries belonging to the Organization for Economic Cooperation and
Development (the “OECD”), an international group of member countries sharing a
commitment to democratic government and market economy. For
instance:
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the
level of state-owned enterprises in the PRC, as well as the level of
governmental control over the allocation of resources is greater than in
most of the countries belonging to the
OECD;
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the
level of capital reinvestment is lower in the PRC than in other countries
that are members of the OECD;
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the
government of the PRC has a greater involvement in general in the economy
and the economic structure of industries within the PRC than other
countries belonging to the OECD;
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the
government of the PRC imposes price controls on certain products and our
products may become subject to additional price controls;
and
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the
PRC has various impediments in place that make it difficult for foreign
firms to obtain local currency, as opposed to other countries belonging to
the OECD where exchange of currencies is generally free from
restriction.
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As a
result of these differences, our business may not develop in the same way or at
the same rate as might be expected if the economy of the PRC were similar to
those of the OECD member countries.
Because
our officers and some of our directors reside outside of the United States, it
may be difficult for you to enforce your rights against them or enforce United
States court judgments against them in the PRC.
Most of
our directors and all of our executive officers reside in the PRC and
substantially all of our assets are located in the PRC. It may therefore be
difficult for United States investors to enforce their legal rights, to effect
service of process upon our directors or officers or to enforce judgments of
United States courts predicated upon civil liabilities and criminal penalties of
our directors and officers under federal securities laws. Further, it is unclear
if extradition treaties now in effect between the United States and the PRC
would permit effective enforcement of criminal penalties of the federal
securities laws.
We
may have limited legal recourse under Chinese law if disputes arise under
contracts with third parties.
Almost
all of our agreements with our employees and third parties, including our
supplier and customers, are governed by the laws of the PRC. The legal system in
the PRC is a civil law system based on written statutes. Unlike common law
systems, such as we have in the United States, it is a system in which decided
legal cases have little precedential value. The government of the PRC has
enacted some laws and regulations dealing with matters such as corporate
organization and governance, foreign investment, commerce, taxation and trade.
However, their experience in implementing, interpreting and enforcing these laws
and regulations is limited, and our ability to enforce commercial claims or to
resolve commercial disputes is unpredictable. The resolution of these matters
may be subject to the exercise of considerable discretion by agencies of the
PRC, and forces unrelated to the legal merits of a particular matter or dispute
may influence their determination. Any rights we may have to specific
performance or to seek an injunction under Chinese law are severely limited, and
without a means of recourse by virtue of the Chinese legal system, we may be
unable to prevent these situations from occurring. The occurrence of any such
events could have a material adverse effect on our business, financial condition
and results of operations.
Because
we have limited business insurance in the PRC, we may not be protected from
risks that are customarily covered by insurance in the United
States.
We have
and will continue to maintain property insurance for our CNG stations and
manufacturing facilities which are operational to protect us from any damages
caused by the failure or alleged failure of our products. However, business
insurance is not readily available in the PRC. To the extent that we suffer a
loss of a type which would normally be covered by insurance in the United
States, such as product liability and general liability insurance, we would
incur significant expenses in both defending any action and in paying any claims
that result from a settlement or judgment.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.
We are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are not
subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft
and other fraudulent practices occur from time-to-time in the PRC. We can make
no assurance, however, that our employees or other agents will not engage in
such conduct for which we might be held responsible. If our employees or other
agents are found to have engaged in such practices, we could suffer severe
penalties and other consequences that may have a material adverse effect on our
business, financial condition and results of operations.
Exchange
controls that exist in the PRC may limit our ability to utilize our cash flow
effectively.
We are
subject to the PRC’s rules and regulations affecting currency conversion. Any
restrictions on currency exchanges may limit our ability to use our cash flow
for the distribution of dividends to our stockholders or to fund operations we
may have outside of the PRC. Conversion of RMB, the currency of the PRC, for
capital account items, including direct investment and loans, is subject to
governmental approval in the PRC, and companies are required to open and
maintain separate foreign exchange accounts for capital account items. We cannot
be certain that the regulatory authorities of the PRC will not impose more
stringent restrictions on the convertibility of the RMB, especially with respect
to foreign exchange transactions. Because a significant component for many of
our customized pressure containers, the steel vessels, is manufactured outside
of the PRC, our inability to pay our foreign manufacturer may impair our ability
to manufacture our products.
Fluctuations
in the exchange rate could have a material adverse effect upon our
business.
We
conduct our business in RMB. To the extent our future revenue are denominated in
currencies other the United States dollars, we would be subject to increased
risks relating to foreign currency exchange rate fluctuations which could have a
material adverse affect on our financial condition and operating results since
our operating results are reported in United States dollars and significant
changes in the exchange rate could materially impact our reported
earnings.
The
downturn in the economy of the PRC may slow our growth and impair our ability to
generate profits.
The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. Following a period of general economic growth, China, like the
rest of the world, has recently been subject to an economic
downturn. During the year ended September 30, 2009, the business of
all of segments was negatively affected by the economic downturn, which resulted
in a decreased use of products such as ours or in pressure on us to lower our
prices. Our customized pressure container business and our CNG station
facilities and construction business are dependent upon our customers making
significant capital purchases, either for pressure containers or for new CNG
stations. The availability of financing to our customers as well as
the capital requirements of our customers could significantly reduce the need
for these products and services. Since our CNG station business is
dependent upon the development of a market for cars and trucks that run on CNG
rather than gasoline, any economic trends which have the effect of dampening the
market for CNG vehicles could affect our ability both to sell our CNG products
and to sell CNG at our proposed CNG stations. The recent sharp decline in oil
and gasoline prices may affect the need for CNG stations or for conversion kits
to enable gasoline-powered vehicles to operate on CNG.
If
certain tax exemptions within the PRC regarding withholding taxes are removed,
we may be required to deduct corporate withholding taxes from any dividends we
may pay in the future.
Under the
PRC’s current tax laws, regulations and rulings, companies are exempt from
paying withholding taxes with respect dividends paid to stockholders outside of
the PRC. However, if the foregoing exemption is removed, we may be required to
deduct certain amounts from any dividends we pay to our
stockholders.
If our favorable tax treatment is
overturned, we may be subject to significant penalties
.
On
March 16, 2007, the PRC’s National People’s Congress passed a new corporate
income tax law, which became effective January 1, 2008. This new income tax
unifies the corporate income tax rate of domestic enterprises and foreign
investment enterprises to 25%. Preferential tax treatments will continue to be
granted to entities that are classified as “high and new technology enterprises
strongly supported by the State” or that conduct business in sectors that are
encouraged by the PRC’s National People’s Congress. This new tax law, however,
does not clearly define the requirements or criteria for receiving these
preferential tax treatments. A significant portion of our net income is derived
from subsidiaries that presently benefit from full or 50% exemptions from
enterprise income tax for up to a total of five years. Because clear
implementation and requirement rules or guidelines for the new tax law have not
yet been promulgated, we cannot assure you that our subsidiaries will maintain
their preferential tax status or that we will not be assessed significant
penalties.
If
the PRC tax authorities dispute our method of paying value added taxes, we may
be subject to penalties under the tax laws of the PRC.
Under the
commercial practice of the PRC, we pay value added taxes (“VAT”) and business
tax based on tax invoices issued. We generally issue our tax invoice subsequent
to the date on which revenue is recognized, and there may be a considerable
delay between the date on which the revenue is recognized and the date on which
the tax invoice is issued. In the event that the PRC tax authorities dispute the
date of which revenue is recognized for tax purposes, the PRC tax office has the
right to assess a penalty which can range from zero to five times the tax which
is determined to have been improperly deferred. Although we believe that we are
paying VAT and business taxes in accordance with the common practice in PRC, we
cannot assure you that the PRC tax authorities would not reach a different
conclusion and determine that common practice is not in accordance with the tax
laws of the PRC. If a penalty is ultimately assessed against us, the penalty
could represent a material amount.
RISKS
ASSOCIATED WITH INVESTING IN OUR COMMON STOCK
Our
common stock may be delisted from the NASDAQ Capital Market because of our
failure to hold a meeting of shareholders during 2009.
The
NASDAQ Capital Markets requires us to hold an annual meeting of shareholders at
which proxies are solicited. Because we failed to hold a meeting
during the year ended September 30, 2009, NASDAQ advised us of its intention to
delist our common stock from the NASDAQ Capital Markets. As a result
of our appeal, NASDAQ advised us that it would continue the listing of our
common stock on the NASDAQ Capital Market subject to the condition that we hold
our annual shareholders meeting on or before January 19, 2010. We are
required to report any significant event, including any event which may call
into question our ability to meet this timetable, and NASDAQ may delist our
stock prior to January 19, 2010 if it questions our ability to meet the January
19, 2010 deadline. Accordingly, we cannot assure you that our common
stock will continue to be listed on the NASDAQ Capital Market, and the failure
to be listed on that market could materially and adversely affect both the
market for and the market price of our stock.
Shares
may be issued pursuant to our stock plans which may affect the market price of
our common stock.
We may
issue stock upon the exercise of options or pursuant to stock grants covering a
total of 1,000,000 shares of common stock pursuant to our 2006 long-term
incentive plan. The exercise of any options we may grant under this plan and the
sale of the underlying shares of common stock and the sale of stock issued
pursuant to stock grants may have an adverse effect upon the price of our stock.
If we issue all of the shares of common stock issuable pursuant to the plan,
these shares will represent approximately 5.9% of the outstanding common stock,
based on the presently outstanding shares of common stock.
Because
we have significant related party transactions, institutional and other
investors may be reluctant to purchase our stock which could affect both the
price and the market for our stock.
During
2005, we purchased land use rights from a former related party, Beijing Sanhuan
Technology Development Co., Ltd (“Beijing Sanhuan”) with an initial purchase
price of $12.3 million, which was increased to $18.6 million. As of September
30, 2009, the Company had paid the purchase price to Beijing Sanhuan in full. We
also license technology from Beijing Sanhuan for $322,000, the Company had paid
in full as of September 30, 2009, and we use Beijing Sanhuan’s services for our
subsidiaries. As a result, investors may be reluctant to invest in our common
stock, which would affect both the stock price and the trading volume in our
stock.
In
October 2009, we entered into the agreement of merger with Skywide pursuant to
which, upon the completion of the merger, our shareholders, other than Skywide,
Mr. Deng, Mr. Huang and their affiliates, would receive $1.90 in respect of each
shares of common stock outstanding. We believe that the terms of the
merger agreement has a effect upon the market price of our stock.
Because
of our cash requirements and restrictions in our financing we may be unable to
pay dividends.
If we
generate earnings, we expect to retain earnings to finance the growth of our
business, particularly, our proposed CNG station business, which is very capital
intensive. Further, the agreements relating to our $30 million September 2007
financing, of which convertible notes in the principal amount of $14 million are
outstanding as of December 28, 2009, restrict our use of our funds.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not
applicable to smaller reporting issuers.
ITEM 2. PROPERTIES
In China,
there is no private ownership of land. Rather, all real property is owned by the
government. The government issues a certificate of property right, which is
transferable, generally has a term of 50 years and permits the holder to use the
property. All of our properties are suitable and adequate for the
purposes for which they are used in our business. The following table
sets forth information relating to land use rights owned by the
Company.
|
|
Address
|
|
Size
(square meters)
|
|
Size
(square feet)
|
|
Expiration
|
Land
use right owned by Sinogas
|
|
45#
66# JinHua Road, Qingdao, Shandong
|
|
60,860
|
|
655,100
|
|
May
2057
|
Land
use right owned by Jingrun
|
|
HanNan
Community, Hongdao Street, Qingdao, Shandong
|
|
59,036
|
|
635,460
|
|
December
2056
|
Land
use right owned by Xuancheng Sinoenergy
|
|
XuanHu
Road, Xuancheng, Anhui
|
|
2,683
|
|
28,880
|
|
June
2058
|
Land
use right owned by Qingdao Sinoenergy
|
|
JiaoNan,
Qingdao, Shandong
|
|
100,000
|
|
1,076,400
|
|
June
2058
|
Land
use right owned by Lixun
|
|
North
BeiHuanSan Road, DaQiao County, Jiaxing, Zhejiang
|
|
8,130
|
|
87,511
|
|
June
2058
|
Land
use right owned by Hubei Gather
|
|
MaAn
Village, AnShan County, Jiangxia District, Wuhan, Hubei
|
|
20,069
|
|
215,796
|
|
June
2059
|
Except
for the land use right owned by Xuancheng Sinoenergy, we rent the land used by
our CNG stations. As of November 30, 2009, we lease thirteen parcels
of land in Wuhan City and two parcels of land in Pingdingshan City for an
aggregate annual rental of approximately $846,000. Except for one
lease that expires in 2010, one lease that expires in 2015 and one lease that
expires in 2017, all of the leases expire in 2027 or later.
In
addition to the land use rights that we own, as listed in the table, Wuhan
Sinoenergy has two agreements to purchase land use rights in Wuhan City from
different non-affiliated parties. One agreement provides for a purchase price of
approximately $1.58 million, of which approximately $1.32 million has been paid,
and the title transfer is in the process. The second provides for a purchase
price of approximately $1.32 million, of which approximately $732,000 has been
paid. The acquisition of the land requires government approval.
We
acquired the capital stock of two companies, Qingdao Jingrun General Machinery
Co. and Qingdao Sinoenergy General Machinery, for the sole purpose of acquiring
land use rights which were the only assets of these companies. We
acquired additional land as part of our plan to make more effective use of our
facilities. The land enabled us to sell the land in Qingdao City
where Yuheng and Sinogas are currently located, and provide us with larger
properties so that we can move these operations into expanded
facilities.
We
believe that our present facilities are sufficient to meet our current and near
term requirements. In connection with the development of our CNG
stations, we will require additional land use rights as we develop and open new
CNG filling stations.
ITEM 3. LEGAL PROCEEDINGS
We are a
defendant in an action filed in the Supreme Court of the State of New York,
Nassau County, by Stephen Trecaso and Linda Watts against the Company and its
directors which purports to be a class action asserting claims of breach of
fiduciary duty and aiding and abetting the breach of fiduciary
duty. The complaint was dated October 16, 2009 and an amended
complaint was dated November 18, 2009. Plaintiffs seek injunctive
relief and damages arising out of a potential sale of the company to Skywide by
means of an allegedly unfair process and unfair price. We believe
that this action is without merit, that we have valid defenses to the action,
and that we will vigorously defend the action.
We are a
defendant in four similar actions against us, our directors and Skywide in the
Eighth Judicial District Court of the State of Nevada in and for Clark
County. We have removed these four actions to the Federal District
Court for the District of Nevada. The plaintiffs in those actions are
(i) Robert Grabowski, (ii) Robert E. Guzman, (iii) Carol Karch and (iv) Johan L.
Stoltz. The Guzman, Karch and Stoltz actions were filed on October
26, 2009 and the Grabowski action was filed on October 30,
2009. Plaintiffs allege causes of action that sound in breach of
fiduciary duty and aiding and abetting the breach of that fiduciary
duty. Plaintiffs seek injunctive relief and damages arising out of a
potential sale of the company to Skywide by means of an allegedly unfair process
and unfair price. We believe that these actions are without merit,
that we have valid defenses to the actions, and that we will vigorously
defend the action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITYHOLDERS
None
PART
II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market
Price of Common Stock
Our
common stock has been traded on the NASDAQ Capital Market under the symbol SNEN
since July 28, 2008. Prior to February 6, 2007, there was no market for our
common stock. From February 6, 2007 until July 25, 2008, our stock was traded on
the OTC Bulletin Board. The NASDAQ Capital Markets requires us to hold an annual
meeting of shareholders at which proxies are solicited. Because we
failed to hold a meeting during the year ended September 30, 2009, NASDAQ
advised us of its intention to delist our common stock from the NASDAQ Capital
Markets. As a result of our appeal, NASDAQ advised us that it would
continue the listing of our common stock on the NASDAQ Capital Market subject to
the condition that we hold our annual shareholders meeting on or before January
19, 2010. We intend to hold a shareholders’ meeting by January 19,
2010.
The
following table sets forth information as to the price of our stock by calendar
quarter since January 1, 2007. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions. The prices reflect the high and low
bid price of our stock during the period it was traded on the OCT Bulletin Board
and the high and low sales prices during the period it was listed on the NASDAQ
Capital Market. The information is provided by National Quotation
Bureau.
Quarter Ended
|
2009
|
2008
|
2007
|
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
March
31
|
$5.05
|
|
|
|
4.78
|
3.18
|
June
30
|
|
|
|
|
5.48
|
3.90
|
September
30
|
|
|
|
|
6.44
|
4.32
|
December
31
|
|
|
|
|
$10.16
|
$6.22
|
The
information for the fourth quarter of 2009 reflects prices through December 17,
2009.
On
December 17, 2009, we believe we had approximately 1,000 beneficial owners of
our common stock.
We have
not paid dividends since our inception. The indentures relating to our $14
million convertible notes prohibit or restricts our payment of
dividends.
Equity
Compensation Plan Information
The
following table summarizes the equity compensation plans under which our
securities may be issued as of September 30, 2009.
Plan
Category
|
|
Number
of securities to
be
issued upon exercise
of
outstanding options
and
warrants
|
|
|
Weighted-average
exercise
price of
outstanding
options and
warrants
|
|
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
|
|
Equity
compensation plans approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plan not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2006
long-term incentive plan is the equity compensation plan that was approved by
stockholders.
The
equity compensation plan that was not approved by stockholders was the grant of
warrants to purchase 100,000 shares which were granted to an investment
relations firm pursuant to its engagement agreement.
ITEM 6. SELECTED FINANCIAL DATA
Not
Applicable
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The
following discussion of the results of our operations and financial condition
should be read in conjunction with our financial statements and the related
notes, which appear elsewhere in this annual report. The following discussion
includes forward-looking statements. For a discussion of important factors that
could cause actual results to differ from results discussed in the
forward-looking statements, see “Forward Looking Statements.”
OVERVIEW
In
September 2007, we issued our 12% senior notes due 2012 in the principal amount
of $16,000,000 and 3.0% senior convertible notes due 2012 in the principal
amount of $14,000,000. The indentures relating to these notes
included financial covenants, which were amended on May 19, 2009. We
were not in compliance with these covenants at June 30, 2009 or September 30,
2009, and the note holders waived compliance with the covenants at both of these
dates. In October 2009, we entered into an agreement with the holders
of the 12% senior notes and the 3% convertible notes, which included a
requirement that we pay the 12% senior notes in full by November 30,
2009. At November 30, 2009, we had paid approximately $14,000,000 of
the amount due, and the remaining amount was paid on December 23,
2009. The October agreement also provided that we would amend the
indenture relating to the 3.0% senior convertible notes in a manner acceptable
to the note holders. On December 17, 2009, we entered into an
agreement with the note holders pursuant to which (i) the remaining payments of
approximately $2,000,000 of the 12% senior notes would be due by December 31,
2009, and this payment was made on December 23, 2009, (ii) the $14,000,000
convertible notes, including interest to provide the holders with a 13.8% yield
to maturity, after given effect to current interest payments made at the annual
rate of 3.0% per annum, would be paid in two installments following completion
of the merger with Skywide, with the first payment of $5,000,000 being due ten
days after the effectiveness of the merger and the balance 30 days thereafter,
(iii) the requirement that we meet certain net income levels for 2008 and 2009
were eliminated, (iv) the provisions that would have resulted in a reduction in
the conversion price of the convertible notes if we sold common stock or
securities convertible into common stock were eliminated and (v) the liquidated
damages due for failing to register the shares of common stock issuable upon
conversion of the notes was reduced to $280,000, which is due by December 31,
2009. Although the convertible notes have a stated interest rate of
3% per annum, if the notes are not converted prior to maturity, we are required
to pay the holders a yield to maturity of 13.8% per annum, less interest
previously paid. We have accrued interest at the rate of 13.8% per
annum, of which 3% is treated as current interest and 10.8% as deferred
interest. As a result of our agreement to pay the convertible notes
upon completion of the merger with Skywide, we have classified the deferred
interest as current at September 30, 2009.
Our
accounts receivable increased from $22.0 million at September 30, 2008 to $29.7
million at September 30, 2009. At September 30, 2008, our accounts
receivable were outstanding for an average of 124 days, and at September
30, 2009, our accounts receivable were outstanding for an average of 225
days. A significant amount of receivables that were outstanding at
September 30, 2008 remained outstanding on September 30, 2009. In
addition, at September 30, 2008, we had a note receivable of $2.6 million
resulting from the termination of a sublease for which no payments had been made
by the tenant. As of September 30, 2009, no payments had been made on
account of that note, and $659,000 was collected in December 2009. We
established a $988,000 reserve with respect to that receivable. Our
failure to collect our receivables in the normal course of business could impair
our ability to continue in business.
We
design, manufacture and market a range of pressurized containers for CNG.
Although our initial business involved the manufacturing of customized equipment
and pressure containers, our business has evolved as an increasing market is
developing in the PRC for the use of CNG. Our CNG vehicle and gas station
construction business consists of two divisions (i) the manufacturing of CNG
vehicle and gas station equipment, and (ii) the design of construction plans for
CNG stations, the construction of the CNG stations, and the installation of CNG
station equipment and related systems.
We
continue to manufacture a wide variety of pressure containers for use in
different industries, including the design and manufacture of various types of
pressure containers in the petroleum and chemical industries, the metallurgy and
electricity generation industries and the food and brewery industries and have
the capacity to design and manufacture various types of customized
equipment.
All of
our products and services are manufactured or performed pursuant to agreements
with our customers, which provide the specifications for the products and
services. As a result, our revenue is dependent upon the flow of contracts.
In any fiscal period, a small number of customers may represent a
disproportionately large percentage of our business in one period and a
significantly lower percentage, if any, in a subsequent period.
Commencing
in 2006, we began to construct CNG stations and, commencing in 2008 we began to
operate CNG stations. This aspect of our business is different from our other
business. The business of operating CNG stations requires a substantial capital
investment, and we raised approximately $30 million from the sale of our
convertible and fixed rate notes in September 2007. The indentures relating to
these notes have restrictions on our incurring additional debt. The nature of
the operation of the business and the risks associated with that business are
significantly different from the manufacturing of equipment or the construction
of CNG stations for third parties. One aspect of the operation of CNG stations
is the price controls, whereby both the price at which we purchase CNG and the
price at which we sell CNG are subject to price controls by central government
and municipal government. As a result of these price controls, our gross margin
is effectively dependent upon the government’s pricing policies. The operation
of CNG stations is reported as a separate segment.
In the
year ended September 30, 2009, one customer of our station facilities and
construction segment accounted for more than 10% of our total sales, and in the
year ended September 30, 2008, two customers of our station facilities and
construction segment each accounted for more than 10% of our total
sales. One of these customers accounted for approximately 19.2% of
our sales in the year ended September 30, 2009 and 21.6% of our sales in the
year ended September 30, 2008. The other customer accounted for 10.4%
of our sales in the year ended September 30, 2008. In each year,
these sales represented most of our revenue from this division. We are
continuing to make sales to these customers.
In early
2007, we established a division to sell and manufacture CNG vehicle conversion
kits to OEM and sale in the aftermarket. These kits are designed to enable a
gasoline powered vehicle to operate on CNG. We began to generate revenue from
this business segment in the second quarter of calendar 2007. In March 2007, we
purchased a 60% interest in Lixun from its stockholders for $390,000. In July
2007, we paid an additional $400,000 to increase our equity ownership in
Lixun to 70%, and in April 2008 we acquired the remaining 30% for $1,145,000.
Lixun designs and manufactures electric control devices for alternative fuel,
such as compressed natural gas and liquefied petroleum gas vehicles, as well as
a full range of electric devices, such as computer controllers, conversion
switches, spark advancers, tolerance sensors and emulators for use in
multi-powered vehicles. The business of manufacturing electronic parts for
vehicle conversion kits as well as producing conversion kits is reported as a
separate segment.
On March
31, 2008, Sinogas entered into an agreement to sublease certain parcels of land
to Qingdao Mingcheng Real Estate Co., Ltd. (“Qingdao Mingcheng”), a
non-affiliated third party, for a term of three years beginning in January 2008
and expiring on December 31, 2010, at an annual rental of RMB40 million,
equivalent to approximately $5.9 million based on the March 31, 2009
exchange rate. During the year ended September 30, 2008, we
recognized rental income of $3.8 million from this lease. As a result
of the failure of Qingdao Mingcheng to make the required rental payments, on
March 31, 2009, Sinogas signed a memorandum of understanding with Qingdao
Mingcheng pursuant to which Sinogas agreed to a termination of the
sublease, and reduced the rental receivable by approximately $1.8 million, which
was 40% of the outstanding balance. At September 30, 2009, we reserved an
additional approximately $1.0 million with respect to this
receivable. As a result, total reserves against these rentals of
approximately $2.8 million are reflected in general and administrative expenses
in the year ended September 30, 2009.
Our CNG
vehicle and gas station equipment business include two product
lines:
|
•
|
the
manufacture of equipment for CNG vehicles and gas stations,
and
|
|
•
|
the
design of CNG station and construction plans, construction of CNG stations
and installation of CNG station equipment and related
systems.
|
Our
original business was the manufacture and sale of nonstandard equipment and
pressure containers operated by our subsidiary, Qingdao Sinogas Yuhan Chemical
Equipment Co., Ltd. (“Yuhan”), which is owned 75% by Sinogas and a 25% ownership
by us through Sinoenergy Holdings.
Steel and
steel tubing are the major raw material used in manufacturing CNG facilities and
gas station equipment. We purchase steel plate from a Chinese domestic
manufacturer, and we believe that alternative suppliers are available. Prior to
May 2007, we purchased steel bottles, a key raw material for CNG truck trailers,
exclusively from an Italian supplier, which carried the risk of delays that
could interrupt our manufacturing process. Beginning in May 2007, we also began
to purchase steel tubes from the PRC domestic market and engaged a Korean
company to manufacture the bottles from the steel tubes. In August 2007, we
engaged a PRC company to manufacture these bottles. Although we believe that we
have reduced the risks of interruption of our manufacturing process, we cannot
eliminate the risk entirely.
Our
functional currency is RMB, which is the currency of the PRC, and our reporting
currency is United States dollars. In addition, our purchases from our Italian
supplier are in Euros. When we discuss the amount of our future obligations, we
convert RMB or Euros to dollars at the current exchange rate. However, since the
payment will be made in the future, the amount paid in United States dollars may
be different from the amount set forth in this annual report as a result of
fluctuations in the currency rates.
The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. Following a period of general economic growth, China, like the
rest of the world, has recently been subject to an economic
downturn. There can be no assurance that the downturn will not
continue to have a negative effect on our business especially if it results in
either a decreased use of products such as ours or in pressure on us to lower
our prices. Our customized pressure container business and our CNG station
facilities and construction business are dependent upon our customers making
significant capital purchases, either for pressure containers or for new CNG
stations. The availability of financing to our customers as well as
the capital requirements of our customers could significantly reduce the need
for these products and services. Since our CNG station business is
dependent upon the development of a market for cars and trucks that run on CNG
rather than gasoline, any economic trends which have the effect of dampening the
market for CNG vehicles could affect our ability both to sell our CNG products
and to sell CNG at our proposed CNG stations. The recent sharp decline in oil
and gasoline prices may affect the need for both CNG stations and conversion
kits that enable gasoline-powered vehicles to operate on
CNG. Although the government of China has encouraged the use of CNG
as part of its effort to reduce pollution in China, the factors described above
may affect the development of the CNG industry in China. We cannot
predict whether or how these factors will affect the market for CNG in the areas
in which we are constructing our CNG filling stations or the market for our
conversion kits. However, these factors were a significant reason for our
reduced gross margin and our net loss for the year ended September 30,
2009.
We
purchase CNG from government controlled entities. During 2007, we
entered into two joint ventures for the operation of natural gas process plants.
We have an 80% interest in one of these ventures and a 20% interest in the
other. At September 30, 2009, our total commitments under these agreements were
approximately $5.0 million, of which we had paid a total of approximately $2.4
million. These two facilities are in the early construction stage, and neither
of these ventures has commenced operations. We also have contracted for the
purchase of natural gas which is to be delivered through a
pipeline. The pipeline was completed in December 2009, and is
undergoing completion testing prior to being placed in commercial
operation. These contracts do not have specific delivery quantities
or prices, all of which are to be determined later.
During
2008, we sold a 24.95% interest in Sinogas. Sinogas operates the CNG
station facilities and construction and owns 75% of the subsidiaries that
operate the vehicle conversion kit segment and customized pressure container
segment. The only segment that is wholly-owned by us is the CNG station
operation.
RESULTS
OF OPERATIONS
We are
engaged in four business segments:
(i)
Customized pressure container business
Our
customized equipment and pressure container business is a traditional chemical
equipment manufacturing business with low profit margin. It includes design and
manufacturing of various types of pressure containers for industries such as the
petroleum and chemical, metallurgy, electricity generation and food and beverage
industries.
(ii)
CNG Station Facilities and Construction
Our CNG
station construction business represents:
▪
|
The
manufacture and installation of CNG vehicle and gas station equipment that
is used in the transportation and storage of CNG and the operation of a
CNG station. We provide these services for other companies that operate
CNG stations.
|
▪
|
CNG
station construction service, which includes the design of CNG station
construction plans, construction of CNG stations, and installation of CNG
station equipment and related systems. Because of our emergence into the
CNG filling station business in 2006, we did not receive any CNG station
construction service orders from the beginning of 2007. Our operating
results in this segment reflects contracts which we entered into during or
prior to the beginning of 2007. We anticipate that, at least in the near
term, we will devote most, if not all, of our CNG construction business to
the construction of our own CNG filling
stations.
|
(iii)
CNG station operations
In 2006,
we entered the CNG station business, which involves the design, construction and
equipping of CNG stations and the operation of those stations. As of
December 10, 2009, we were operating twenty-one CNG stations, of which sixteen
are located in Wuhan, two in Pingdingshan and three in Xuancheng. An
additional four stations in Wuhan are in the final stages of construction, and
four
stations in
Wuhan
were in the
preliminary planning stage.
(iv)
Vehicle fuel conversion equipment
We
manufacture conversion kits and electrical control devices that enable vehicles
that are designed to operate on gasoline to operate on CNG.
Years
ended September 30, 2008 and 2009
The
information set forth below has been derived from our audited financial
statements for the year ended September 30, 2009 and 2008.
Year
Ended September 30, 2009
($
`000)
|
|
Customized
pressure
containers
|
|
CNG
station
facilities
and
construction
|
|
CNG
station
operation
|
|
|
Vehicle
conversion
kits
|
|
|
Total
|
|
|
|
$
|
4,762
|
|
$
|
9,495
|
|
$
|
18,584
|
|
|
$
|
8,959
|
|
|
$
|
41,800
|
|
|
|
|
3,883
|
|
|
5,211
|
|
|
16,455
|
|
|
|
6,801
|
|
|
|
32,350
|
|
|
|
|
879
|
|
|
4,284
|
|
|
2,129
|
|
|
|
2,158
|
|
|
|
9,450
|
|
|
|
|
18
|
%
|
|
45
|
%
|
|
11
|
%
|
|
|
24
|
%
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180
|
|
|
84
|
|
|
568
|
|
|
|
559
|
|
|
|
1,391
|
|
General
and administrative expenses
|
|
|
2,275
|
|
|
6,497
|
|
|
3,
205
|
|
|
|
745
|
|
|
|
12,722
|
|
|
|
|
2,455
|
|
|
6,581
|
|
|
3,773
|
|
|
|
1,304
|
|
|
|
14,113
|
|
Income
(loss) from operations
|
|
$
|
(1,576
|
)
|
$
|
(2,297
|
)
|
$
|
(1,644
|
)
|
|
$
|
854
|
|
|
$
|
(4,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,448
|
|
$
|
58,073
|
|
$
|
48,134
|
|
|
$
|
11,991
|
|
|
$
|
180,646
|
|
Year
Ended September 30, 2008
($
`000)
|
|
Customized
pressure
containers
|
|
CNG
station
facilities
and
construction
|
|
CNG
station
operation
|
|
Vehicle
conversion
kits
|
|
Total
|
|
|
|
$
|
9,692
|
|
$
|
16,237
|
|
$
|
3,246
|
|
$
|
11,765
|
|
$
|
40,940
|
|
|
|
|
5,374
|
|
|
9,470
|
|
|
2,551
|
|
|
8,194
|
|
|
25,589
|
|
|
|
|
4,318
|
|
|
6,767
|
|
|
695
|
|
|
3,571
|
|
|
15,351
|
|
|
|
|
45
|
%
|
|
42
|
%
|
|
21
|
%
|
|
30
|
%
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275
|
|
|
52
|
|
|
150
|
|
|
404
|
|
|
881
|
|
General
and administrative expenses
|
|
|
943
|
|
|
1,591
|
|
|
1,533
|
|
|
822
|
|
|
4,889
|
|
|
|
|
1,218
|
|
|
1,643
|
|
|
1,683
|
|
|
1,226
|
|
|
5,770
|
|
Income
(loss) from operations
|
|
$
|
3,100
|
|
$
|
5,124
|
|
$
|
(988
|
)
|
$
|
2,345
|
|
$
|
9,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,075
|
|
$
|
45,441
|
|
$
|
28,654
|
|
$
|
17,177
|
|
$
|
132,347
|
|
Net Sales.
Net sales for the
year ended September 30, 2009 (“2009”) were approximately $41.8 million, an
increase of approximately $0.9 million, or 2.1%, from sales of approximately
$40.9 million for the year ended September 30, 2008 (“2008”). The
increase resulted from:
|
•
|
A
decrease of approximately $4.9 million, or 51%, in sales from customized
pressure containers, reflecting the decrease in demand for these products,
resulting from the effects of the economic downturn.
|
|
|
|
|
•
|
A
decrease of approximately $6.7 million, or 42%, in sales from the CNG
stations facilities and construction, resulting from the decrease in
demand for the construction and equipping of CNG stations and our change
in emphasis as we devoted significant efforts to the construction of our
own stations.
|
|
|
|
|
•
|
An
increase of approximately $15.3 million, or 473%, in sales from the CNG
station operation. We commenced operations in this business during fiscal
year 2008, opening our first station in October 2007. At September 30,
2009, we operated 21 stations. The increase in revenue is primarily
attributable to the increase in the number of stations in
operation.
|
|
|
|
|
•
|
A
decrease of approximately $2.8 million, or 24%, from the sales of
conversion kits. The decrease resulted from the global economic crisis,
which affected most of the exports of our
products.
|
During
2009, China experienced an economic downturn. Despite the government’s policy to
encourage the use of CNG, our business was affected by the economic downturn as
businesses were less likely to invest in conversion kits or CNG powered
vehicles. We cannot predict the effect of the economic downturn on our
business in the near future.
Cost of Sales; Gross Margin.
The cost of sales for the 2009 was approximately $32.4 million, an increase of
approximately 26% from approximately $25.6 million for the 2008. Our overall
gross margin decreased significantly from 37% in 2008 to 23% in 2009, because of
the following reasons:
|
•
|
Our
gross margin for the customized pressure containers decreased from 45% to
18%. Since these products are customized, with wide range of gross margin
because of the variety of the products. In addition, an additional charge
of $340,000 was recorded in cost of sales in 2009 reflecting a writedown
in the slow-moving inventory (raw materials and work in process) that we
had held for more than one year.
|
|
|
|
|
•
|
Our
gross margin for the CNG station facilities and construction includes was
reasonably consistent from 2008 to 2009. The gross margin for CNG gas
stations technical consulting service, which is a part of the CNG station
facilities and construction segment, was more than over 80%, as a result
of our know-how in CNG system design.
|
|
|
|
|
•
|
Our
gross margin for the operation of our CNG stations decreased from 21% to
11%. The cost of natural gas increased approximately 10% and the freight
costs, which are included in cost of sales, increased approximately 10%,
which significantly affected the gross margin in this segment. The gross
margin for this segment reflects the effects of price controls, which
cover both the price at which we buy and the price at which we sell
CNG.
|
|
|
|
|
•
|
As
the market for vehicle conversion kits matured and the demand for these
kits decreased as a result of the economic downturn, our gross margin in
this segment decreased from 30% to
24%.
|
Selling
Expenses
. Selling expenses increased approximately $510,000,
or approximately 58%, from 2008 to 2009. A significant portion of the
increase relates to the CNG station segment. The increase in rent resulting from
the increased number of stations contributed to this increase. In addition,
selling expenses for the vehicle conversion kits segment increased $155,000
because of the expansion of our marketing efforts.
General and Administrative
Expenses
. General and administrative expenses increased
approximately $7.8 million, or 160%. This increase includes
pre-operational expenses for the CNG station operation segment of $190,000, bad
debts provision of $1.9 million, expenses of $846,000 from the renovation of the
Sinogas plant in its new location, and writeoff of rental income receivable from
Mingcheng of $2,745,000 resulting from a reduction in the rent due under the
March 2009 termination agreement of $1,757,000 and the further reserve of
$988,000 at September 30, 2009. Our general and administrative expenses include,
in addition to the management expenses and depreciation related to the division,
an allocation of corporate expenses, including expenses
relating to our status
as a public company, such as legal, audit and investor relations
costs. Management overhead was allocated among the segments based on
the relative time devoted by management to the business of the
segments.
Interest
Expense
. Our interest expense for 2009 was approximately $7.3
million, as compared with $3.5 million for 2008. Although the stated
interest rate on the convertible notes in the principal amount of $14 million is
3% per annum, if the notes are not converted by maturity, we are required to pay
a yield to maturity of 13.8% per annum, less interest previously paid.
Accordingly, we accrue interest at the rate of 13.8% per annum, of which 3% is
treated as current interest and 10.8% as deferred interest. In connection with
the proposed merger with Skywide, we will be required to pay the convertible
notes in full following the merger, with the payments to include the yield to
maturity of 13.8%. As a result, we have classified interest at 13.8%
as current at September 30, 2009. The registration rights agreement relating to
the shares of common stock issuable upon conversion of the convertible notes
required the registration statement to be declared effective by March 28,
2008. The indenture relating to the convertible notes requires us to
pay additional interest of 1% (4% per annum) of the principal amount for each
90-day period (quarterly $140,000) thereafter during which we have failed to
have the registration statement declared effective. As a result of our failure
to have a registration statement relating to the shares issuance upon conversion
of the convertible notes declared effective, we incurred additional interest of
$140,000 in 2009. This amount reflects a reduced amount due under the
December 2009 agreement with the holders of the convertible notes. In
addition, in 2009, we increased our bank borrowings to expand our CNG station
operation and manufacturing plant, which also increased interest expense by
approximately $733,000. Furthermore, the conversion price of the convertible
notes in the principal amount of $14 million was reset in March 2008 to $5.125
and in March 2009 to $4.20, resulting in the recording of discounts to the
underlying notes, thereby creating non-cash interest charges of $1,519,000 in
2009 and $373,400 in 2008.
Other Income
. During 2009,
rental income was approximately $1.3 million, arising from the rental payment
for our land use rights for our former manufacturing facility. In March 2009,
this lease was terminated and we wrote off approximately $1.8 million of the
rent receivable, we reserved an additional $988,000 at September 30, 2009, as
disclosed in the discussion of general and administrative expenses. In July
2009, Sinoenergy Holding transferred its 100% equity in Qingdao Sinoenergy to
Sinogas. Since Sinogas is 75.05% owned by us, this equity transfer resulted in
other expense of $2.4 million representing the value of 24.95% of Qingdao
Sinoenergy’s equity which is no longer owned by us.
During
2008, we generated:
|
|
|
|
•
|
Rental
income of approximately $3.8 million, arising from the sublease of our
land use rights for our former manufacturing facility. However, the lease
was terminated in March 2009, and writeoffs of $2,745,000 relating to the
receivable generated from the rental income were taken in
2009.
|
|
|
|
|
•
|
Gain
of $5.8 million resulting from the sale by Sinogas, a subsidiary, of a
24.95% interest in Sinogas for RMB124,760,000 (equivalent to $18,297,816
at the balance sheet date exchange rate). In related transactions, Sinogas
acquired the remaining 30% interest in Lixun from the former stockholder
of Lixun and a company owned by the former stockholder of Lixun purchased
a 3.95% interest in Sinogas.
|
|
|
|
|
•
|
Gain
on the sale of a subsidiary of approximately $1.7 million. The subsidiary
was both acquired and sold during
2008.
|
Income Taxes.
Our income
taxes decreased from $1,309,000 of 2008 to $748,000 of 2009. Sinogas
and Yuhan were granted 50% enterprise income tax exemption for 2008 through
2010. Jiaxing Lixun was granted a 100% tax exemption from August 2007 through
December 2008 and a 50% enterprise income tax exemption for 2009 through 2011.
In January 2009, the Chinese tax authorities issued a ruling that a joint
venture enterprise incorporated after March 16, 2007 cannot enjoy the tax
preferences. Since Jiaxing Lixun is a joint venture incorporated in July 2007,
it cannot enjoy the tax preferences. Jiaxing Lixun was recognized as a high-tech
enterprise, and enjoyed the 15% tax rate from January 2008. Since Jiaxing Lixun
is a joint venture and therefore not eligible for the tax exemption, Jiaxing
Lixun incurred income tax of $207,369 based on its taxable income during the
last quarter of calendar 2008. Sinogas incurred income taxes of $132,189 as a
result of an adjustment relating to its 2008 income tax. The income tax for 2009
also reflects adjustments to taxable income required under the Chinese tax
regulations.
Minority
Interest
. The minority interest, of negative $337,000 in 2009
and $1,082,000 in 2008, represents the share of the income or loss of our
subsidiaries allocated to that portion of the subsidiaries’ equity owned by
third parties.
Net
Income(Loss)
. As a result of the foregoing, we had a net loss
of approximately $13,103,000 , or $0.82 per share (basic and diluted), for 2009,
as compared with net income of $16,056,000, or $1.02 per share (basic) and $0.97
(diluted) for 2008.
Comprehensive Income
(Loss)
. Our comprehensive loss for 2009 was $13,193,000 as
compared with comprehensive income of $19,606,000 for 2008.Other comprehensive
income (loss) items include foreign currency translation adjustments resulting
from changes in the currency rates between the RMB and the United States dollar,
or approximately ($90,000) in 2009 and $3,550,000 in 2008.
Liquidity
and Capital Resources
At
September 30, 2009, we had cash of approximately $19.7 million, an increase of
approximately $9.4 million (including restricted cash of $1.4 million), from
September 30, 2008. At September 30, 2009, we had a working capital deficiency
of approximately $9.1 million and shareholders’ equity of approximately $46.2
million, compared with positive working capital of approximately $35.0 million
and shareholders’ equity of approximately $55.2 million at September 30, 2008.
The following table sets forth information as to the principal changes in the
components of our working capital (dollars in thousands):
Category
|
30-Sep-09
|
|
30-Sep-08
|
|
|
|
Change
|
|
|
|
Percent
Change
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
$
|
18,237
|
|
|
|
$
|
8,871
|
|
|
|
|
|
9,366
|
|
|
|
105.58
|
%
|
Restricted
cash
|
|
|
|
1,413
|
|
|
|
|
523
|
|
|
|
|
|
890
|
|
|
|
170.17
|
%
|
Accounts
and notes receivable, net
|
|
|
|
29,756
|
|
|
|
|
22,008
|
|
|
|
|
|
7,748
|
|
|
|
35.21
|
%
|
Inventories
|
|
|
|
4,619
|
|
|
|
|
7,303
|
|
|
|
|
|
(2,684
|
)
|
|
|
(36.75
|
%)
|
Other
receivables, net
|
|
|
|
17,644
|
|
|
|
|
16,939
|
|
|
|
|
|
705
|
|
|
|
4.16
|
%
|
Deposits
and prepayments
|
|
|
|
8,629
|
|
|
|
|
7,918
|
|
|
|
|
|
711
|
|
|
|
8.98
|
%
|
Due
from related party
|
|
|
|
426
|
|
|
|
|
44
|
|
|
|
|
|
382
|
|
|
|
868.18
|
%
|
Deferred
expenses
|
|
|
|
63
|
|
|
|
|
91
|
|
|
|
|
|
(28
|
)
|
|
|
(30.77
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
|
$
|
44,223
|
|
|
|
$
|
11,953
|
|
|
|
|
$
|
32,270
|
|
|
|
269.97
|
%
|
Notes
payable
|
|
|
|
4,583
|
|
|
|
|
1,633
|
|
|
|
|
|
2,950
|
|
|
|
180.65
|
%
|
Accounts
payable
|
|
|
|
5,193
|
|
|
|
|
5,894
|
|
|
|
|
|
(701
|
)
|
|
|
(11.89
|
%)
|
Advances
from customers
|
|
|
|
2,100
|
|
|
|
|
2,409
|
|
|
|
|
|
(309
|
)
|
|
|
(12.83
|
%)
|
Additional
interest on notes
|
|
|
|
280
|
|
|
|
|
420
|
|
|
|
|
|
(140
|
)
|
|
|
(33.33
|
%)
|
Income
taxes payable
|
|
|
|
475
|
|
|
|
|
633
|
|
|
|
|
|
(158
|
)
|
|
|
(24.96
|
%)
|
Other
payables
|
|
|
|
5,783
|
|
|
|
|
5,341
|
|
|
|
|
|
442
|
|
|
|
8.28
|
%
|
Accrued
expenses
|
|
|
|
538
|
|
|
|
|
335
|
|
|
|
|
|
203
|
|
|
|
60.60
|
%
|
Deferred
income
|
|
|
|
38
|
|
|
|
|
95
|
|
|
|
|
|
(57
|
)
|
|
|
(60.00
|
%)
|
Long-term
Notes payable (current portion)
|
|
|
|
26,667
|
|
|
|
|
0
|
|
|
|
|
|
26,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
$
|
80,787
|
|
|
|
$
|
63,697
|
|
|
|
|
$
|
17,090
|
|
|
|
26.83
|
%
|
Less: total
current liabilities
|
|
|
|
89,880
|
|
|
|
|
28,713
|
|
|
|
|
|
61,167
|
|
|
|
213.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
working capital
|
|
|
|
(9,093
|
)
|
|
|
|
34,984
|
|
|
|
|
|
(44,077
|
)
|
|
|
(125.99
|
%)
|
At
September 30, 2009, we require substantial capital to meet the required payments
toward the $16 million senior notes, which were paid in full as of December 23,
2009, and $14 million convertible senior notes and to maintain the level of cash
flows needed for continuing operations. We can give no assurance that
we will be able to raise such capital. We have limited financial
resources until such time that we are able to generate additional financing or
cash flow from operations. Our ability to establish profitability and
positive cash flow is dependent upon our ability both to raise funds to finance
our immediate cash requirements and to market our products in anticipation of a
recovery in China of those industries we serve, including the CNG
market. If we are unable to raise adequate capital to meet the
payment required to pay the remaining principal and interest on the notes and
cash flows needed for operations, it is likely we would have to substantially
curtail, if not terminate, our business activity.
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. As reflected in the accompanying
consolidated financial statements we incurred substantial losses during the
fiscal year ended September 30, 2009 and are continuing to incur
losses. We are also liable for substantial repayment of senior notes
and convertible senior notes. These factors, among others, may indicate that we
will be unable to continue as a going concern for reasonable period of
time.
The
financial statements do not include any adjustments relating to the
recoverability and classification of assets and liabilities that might be
necessary should the Company be unable to continue as a going
concern. Our continuation as a going concern is dependent upon our
ability to obtain additional operating capital, and ultimately, to attain
profitability. There is no assurance that we will be successful in raising
additional funds or that, if we do raise additional funds, that we will be able
to attain profitability or even continue in business.
For the
year ended September 30, 2009, we used net cash of $6.5 million in operating
activities.
Working
capital decreased by approximately $44.1 million from 2008 to 2009 primarily as
a result of funding net losses and reclassifying long-term debt to current as a
result of restructuring agreements, as described below
At
September 30, 2009, we were not in compliance with the financial covenants in
the indentures relating to our 12% senior notes due 2012 in the principal amount
of $16,000,000 and 3.0% senior convertible notes due 2012 in the principal
amount of $14,000,000. These covenants had been amended on May 19,
2009. In October and December 2009, the Company entered into two
agreements that modified the terms of the notes, as follows.
·
|
The
noteholders waived compliance with the covenants at September 30, 2009 and
through March 31, 2010.
|
·
|
We
agreed to repay the 12% senior notes in the principal amount of $16
million. Initially the payments were due by November 30,
2009. We paid approximately $14 million by November 30,
2009. As a result of the December agreement, we were required
to pay the remaining balance of approximately $2 million, by December 31,
2009. This payment was made on December 23,
2009.
|
·
|
We
agreed to pay the convertible notes in the principal amount of $14 million
in two installments, with an initial payment of $5 million being due ten
days after the merger with Skywide becomes effective and the balance 30
days thereafter. Since the note holders would not be converting
the notes, we would pay interest to provide the note holders with a yield
to maturity of 13.8%, net of payments previously
made.
|
·
|
The
noteholders reduced our remaining obligation for liquidated damages for
failure to register the shares of common stock issuable upon conversion of
the convertible notes to $280,000, which is payable by December 31,
2009.
|
·
|
The
provision that would have resulted in a further decrease in the conversion
price of the convertible notes if we did not meet certain levels of net
income was eliminated.
|
·
|
The
provisions of the indenture relating to the reduction in the conversion
price of the convertible notes if we issue stock at a price, or issue
convertible securities with a conversion or exercise price, that is less
than the conversion price (presently $4.20 per share) were
eliminated.
|
As a
result of these agreements, these notes are classified as current liabilities at
September 30, 2009. A significant portion of the cash on hand at
September 30, 2009 was used to pay $16 million of the 12% senior
notes.
For the
year ended September 30, 2009, net cash used in operating activities was $6.5
million, primarily related to $8.8 million increase in accounts receivable, a
$3.8 million increase of other receivables, partially offset by a $2.2 million
increase in accounts payable and a $2.3 million decrease in inventories. The
increase in accounts receivable reflects the nature of the competition, with
customers seeking a longer period to make the payment.
We used
approximately $36.0 million in investing activities for the year ended September
30, 2009. This was due primarily to the expansion of our CNG station
operation segment, principally for purchase of property, plant and equipment
($27.5 million) and land use rights ($3.5 million).
Net cash
provided by financing activities was $50.8 million for the year ended September
30, 2009, primarily related to $66.9 million in new loans from domestic banks in
China, which were offset by the repayment of $12.0 million in short-term
borrowings from domestic banks in China.
For the
year ended September 30, 2008, net cash used in operating activities was $20.2
million, primarily related to $15.8 million increase in accounts receivable, a
$18.4 million increase of other receivables, a $4.4 million increase in
inventories, partially offset by a $3.6 million increase in accounts payable and
a $1.5 million increase in other liabilities. The increase in accounts
receivable reflects the nature of the competition, with customers seeking, and
obtaining, a longer period to make the payment.
We used
approximately $27.7 million in investing activities for the year ended September
30, 2008. This was due primarily to the expansion of our CNG station
operation segment, principally for purchase of property, plant and equipment
$16.5 million, purchase of minority interest in subsidiaries ($8 million) and
land use rights ($2.1 million).
Net cash
provided by financing activities was $48.8 million for the year ended September
30, 2008, primarily related to $29.8 million of net proceeds from note
subscription relating to the $16,000,000 principal amount of 12% senior notes
due 2012 and the $14,000,000 principal amount of 3% convertible notes due 2012,
$18.2 million from the sale by Sinogas of a minority equity interest, $15.6
million of new loans from domestic banks in China, which were offset by the
repayment of $14.8 million in short-term borrowings from domestic banks in
China.
We will
continue to incur capital expenditures for the CNG station segment in the
future. Because the CNG business in the PRC is a relatively new industry, it is
necessary for us to plan, construct and equip each CNG station before we can
generate any revenue.
Since
September 30, 2009, we have paid $14 million in principal to the holders of our
12% senior notes, with an additional approximately $2 million being due by
December 31, 2009, and we have agreed to pay the $14,000,000 plus interest on
the 3% convertible notes following the completion of the merger with Skywide. In
the event the merger with Skywide is not completed, we cannot assure you that
our lenders will not require us to accelerate payments of the 3% senior
convertible notes in the principal amount of $14 million. If we
prepay any of the convertible notes, interest would be due at the rate of 13.8%
per annum on the remaining balances.
Our
agreement relating to the issuance of $16 million principal amount of senior
notes and $14 million principal amount of senior convertible notes have
covenants which could impair our ability to raise additional funds. As of
December 24, 2009, we owed approximately $2 million with respect to the senior
notes and $14 million in the convertible notes. These covenants
include the following:
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|
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|
•
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We
cannot incur any debt unless, after giving effect to the borrowing, (i)
the fixed charge coverage ratio would be greater than 3.5 to 1.0, and (ii)
the leverage ratio would not exceed 3.75 to 1.00, provided, that Sinogas
continue to maintain debt under credit facilities of not more than
$10,000,000, and may incur purchase money indebtedness. The fixed charge
coverage ratio is the ratio of our earnings before interest, taxes,
depreciation and amortization, which is generally known as EBITDA, to
consolidated interest expense, as defined. Leverage ratio means the ratio
of outstanding debt to EBITDA, with the interest component being the
consolidated interest expense, as defined. At September 30, 2009, our
fixed charge coverage ratio was negative 0.08 to 1.00.
|
|
|
|
|
•
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We
must maintain, as of the last day of each fiscal quarter, (i) a fixed
charge coverage ratio of at least 2.00 to 1.00 through December 31, 2009
and 3.0 to 1.00 thereafter, (ii) a leverage ratio of not more than 6.0 to
1.00 through December 31, 2009 and 4.5 to 1.00 thereafter, and (iii) a
consolidated subsidiary debt to consolidated net tangible asset ratio of
not more than 0.35 thereafter. The noteholders agreed that they would not
take any action to declare an event of default as long as the Company is
in compliance with the modified covenants.
|
|
|
|
|
•
|
Sinogas
cannot incur debt under its credit facilities except to the extent that
such debt does not exceed $10.0 million.
|
|
|
|
|
•
|
We
are subject to restriction in paying dividends, purchasing its own
securities or those of our subsidiaries, prepaying subordinated debt, and
making any investment other any investments in itself and its subsidiaries
engaged in our business and certain other permitted
investments.
|
|
|
|
|
•
|
We
are subject to restrictions on incurring
liens.
|
As of
September 30, 2009, we were not in compliance with the financial covenants;
however, the note holders agreed to waive the covenants at September 30, 2009
and through March 31, 2010.
On
October 12, 2009, we entered into an agreement and plan of merger with Skywide,
which is owned by Mr. Deng, chairman and a director, and Mr. Huang, chief
executive officer and a director, pursuant to which, subject to shareholder
approval, we would be merged into Skywide and each share our common stock, other
than shares held by us, Skywide, Mr. Deng or Mr. Huang, would be converted into
the right to receive $1.90 per share.
Commitments
The
Company has the following material contractual obligations and capital
expenditure commitments:
The
Company and China New Energy formed Hubei Gather to construct and operate
natural gas processing plants with expected annual processing capacity of
100-300 million cubic meters in Hubei Province. The registered capital is $5
million of which the Company will contribute $4 million as 80% equity owner and
New Energy will contribute $1 million for a 20% interest. The term of the
business of Hubei Gather is from March 23, 2007 to March 22, 2027. As of
September 30, 2009, the Company’s commitment for future funding was
$2,625,000. In November 2009, the Company signed two agreements with
China New Energy pursuant to which we will transfer a 30% interest in Hubei
Gather to China New Energy for $1.5 million and China New Energy will transfer a
30% interest in Anhui Gather to us for $1.5 million. Upon completion of these
two equity transfers, we and China New Energy would each own 50% of both Hubei
Gather and Anhui Gather. The effect of these agreements is that the
Company will have exchanged a 30% interest in Hubei Gather for a 30% interest in
Anhui Gather. As a result of these transfers, our commitment for
future funding of these entities will remain $2,625,000.
Sinoenergy
Holding and Sinogas signed an agreement to set up Qingdao Sinoenergy Gas in
which Sinoenergy Holding would own 60% and Sinogas would own 40%. As
a result, Qingdao Sinoenergy Gas will be 90% owned by us. Sinoenergy
Holding’s commitment will be $2,636,000, and Sinogas’ commitment will be
$1,757,000. As of September 30, 2009, Sinogas had made its full contribution and
the Company’s commitment was $2,636,000.
Jiaxing
Lixun will contribute $58,574 to Yichang Liyuan Power Technology Company to own
40% equity. As of September 30, 2009, Lixun contributed $29,287. As of September
30, 2009, the Company’s commitment for future funding was $29,287.
Wuhan
Sinoenergy and Pingdingshan Sinoenergy, subsidiaries of the Company, have leased
13 parcels of land in Wuhan City and Pingdingshan City for their CNG stations
under operating lease agreements. The lease terms are from 7 year to 30 years
with annual rental fees of approximately $846,000. Based on land
rental agreements in effect at September 30, 2009, the Company will pay a total
of $5.73 million during through 2039.
Wuhan
Sinoenergy has two agreements to purchase land use rights in Wuhan City from
different non-affiliated parties. One agreement provides for a purchase price of
approximately $1.58 million, of which approximately $1.32 million has been paid,
and the title transfer is in the process. The second provides for a purchase
price of approximately $1.32 million, of which approximately $732,000 has been
paid. The acquisition of the land requires government approval.
Our
commitment for the construction of CNG stations, including stations being
constructed by Wuhan Sinoenergy and Hubei Gather, was $1,025,000 as of September
30, 2009. .
Our
commitment for the construction of a new plant in Jiaxing Lixun was $1,085,000
as of September 30, 2009.
Our
commitment for the purchase of property, plant and equipment, including property
for Wuhan Sinoenergy and Hubei Gather, was $5,901,000 as of September 30,
2009.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States.
Use of
Estimates.
In preparing financial statements in conformity
with accounting principles generally accepted in the United States of America,
we are required to make estimates, judgments and assumptions that affect the
reported amounts of assets, liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and revenues and
expenses during the reported periods. Significant estimates include depreciation
and the allowance for doubtful accounts and other receivables, asset impairment,
valuation of warrants and options and inventory valuation, and the determination
of revenue and costs for under the percentage of completion method of revenue
recognition. We base our estimates on historical experience and on
various other assumptions that we believe are 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 could differ from those estimates.
Revenue
Recognition
. We recognize revenue when the significant risks
and rewards of ownership have been transferred to the customer, including
factors such as when persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or determinable, and collectability is
reasonably assured. We recognize product sales upon delivery. CNG
station construction and revenue related to building technical consulting
service is recognized on the percentage of completion basis. The percentage of
completion method recognizes income as work on a contract (or group of closely
related contracts) progresses. The recognition of revenues and profit
is generally related to costs incurred in providing the services required under
the contract. Revenue is presented net of any sales tax and VAT.
Stock-Based
Compensation
. We grant stock options and stock grants to employees and
stock options or warrants to non-employees in non-capital raising transactions
for services and for financing costs. Share-based payment is
recognized at fair value measured at the grant date. The fair value is
determined using the Black-Scholes option pricing model. The resulting amount is
charged to expense on the straight-line basis over the period we expect to
receive benefit, which is generally the vesting period. In some cases, Skywide,
our principal stockholder, which is owned by our chief executive officer and our
chairman, both of whom are directors, provided or agreed to provide stock to
executive officers in connection with their employment. These shares
are treated as if the shares were contributed to us by Skywide and issued by
us.
Foreign Currency
Translation
. Our functional currency is RMB, and our
reporting currency is United States dollars. Our balance sheet accounts are
translated using the closing exchange rate in effect at the balance sheet date
and operating accounts are translated using the average exchange rate prevailing
during the year. Equity accounts are translated using the historical rate
as incurred. Translation gains and losses are deferred and accumulated as a
component of accumulated other comprehensive income in stockholders’ equity.
Transaction gains and losses that arise from exchange rate fluctuations from
transactions denominated in a currency other than the functional currency are
included in the statements of operations as incurred.
Capitalization of
Interest
. We capitalize interest incurred in connection with
the construction of assets, principally our CNG stations, during the
construction period. Capitalized interest is recorded as an increase
to construction in progress and, upon completion of the construction, to
property.
NEW
ACCOUNTING PRONOUNCEMENTS
Effective
July 1, 2009, the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ ASC”) became the single official source of
authoritative, nongovernmental U.S. GAAP. The historical U.S. GAAP hierarchy was
eliminated and the ASC became the only level of authoritative U.S. GAAP, other
than guidance issued by the SEC. The Company’s accounting policies were not
affected by the conversion to ASC. However, references to specific accounting
standards in the notes to our consolidated financial statements have been
changed to refer to the appropriate section of the ASC.
In
April 2008, the FASB issued a pronouncement on what now is codified as FASB
ASC Topic 350,
Intangibles —
Goodwill and Other
. This pronouncement amends the factors to be
considered in determining the useful life of intangible assets accounted for
pursuant to previous topic guidance. Its intent is to improve the consistency
between the useful life of an intangible asset and the period of expected cash
flows used to measure its fair value. This pronouncement is effective for fiscal
years beginning after December 15, 2008 and its adoption did not have a
material effect on the Company’s consolidated financial statements.
In June
2008, the FASB amended FASB Topic ASC 815, Sub-Topic 40, "Contracts in Entity’s
Own Equity” to clarify how to determine whether certain instruments or features
were indexed to an entity's own stock under ASC Topic 815. The amendment applies
to any freestanding financial instrument (or embedded feature) that has all of
the characteristics of a derivative, for purposes of determining whether that
instrument (or embedded feature) qualifies for the scope exception. It is also
applicable to any freestanding financial instrument (e.g., gross physically
settled warrants) that is potentially settled in an entity's own stock,
regardless of whether it has all of the characteristics of a derivative, for
purposes of determining whether to apply ASC 815.
In
November 2008, the FASB issued a pronouncement on what is now codified as
FASB ASC Topic 350,
Intangibles — Goodwill and
Other
. This pronouncement applies to defensive intangible assets, which
are acquired intangible assets that the acquirer does not intend to actively use
but intends to hold to prevent its competitors from obtaining access to them. As
these assets are separately identifiable, the pronouncement requires an
acquiring entity to account for defensive intangible assets as a separate unit
of accounting. Defensive intangible assets must now be recognized at fair value
in accordance with FASB ASC Topic 350. This pronouncement is effective for
intangible assets acquired on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008 and its adoption
did not have a material effect on the Company’s consolidated financial
statements.
In
April 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 805
, Business
Combinations
. This pronouncement provides new guidance that changes the
accounting treatment of contingent assets and liabilities in business
combinations under previous topic guidance and is effective for contingent
assets or liabilities acquired in business combinations for which the
acquisition date is on or after the first annual reporting period beginning on
or after December 15, 2008. The adoption of this pronouncement did not have
a material effect on the Company’s consolidated financial statements currently,
but its effects will depend on the nature of future acquisitions completed by
the Company.
In
April 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 825,
Financial
Instruments
. This pronouncement amends previous topic guidance to require
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies, as well as in annual financial statements.
The pronouncement was effective for interim reporting periods ending after
June 15, 2009 and its adoption resulted in additional disclosures in the
Company’s interim consolidated financial statements.
In
May 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 855,
Subsequent
Events
. This pronouncement establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
the financial statements are issued or are available to be issued. FASB ASC
Topic 855 provides guidance on the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements
and the disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. The pronouncement was effective for the
Company during the annual period ended September 30, 2009. The Company has
evaluated subsequent events for the period from September 30, 2009, the
date of these financial statements, through December 29, 2009, which represents
the date these financial statements are filed with the SEC. Pursuant to the
requirements of FASB ASC Topic 855, there were no events or transactions
occurring during this subsequent event reporting period that require recognition
or disclosure in the consolidated financial statements.
In June
2009, the FASB issued ASC Topic 860-20, "
Sales of Financial Assets, SFAS
166
" (“ASC 860-20”). ASC 820-20 is intended to improve the
relevance, representational faithfulness and comparability of the information
that a reporting entity provides in its financial statements regarding transfers
of financial assets, including the effects of a transfer on its financial
position, financial performance, and cash flows, and the transferor's continuing
involvement, if any, in the transferred financial assets. This statement must be
applied as of the beginning of the Company’s first annual reporting period that
begins after November 15, 2009. The Company does not expect the adoption of ASC
820-20 to have a material impact on its results of operations, financial
condition or cash flows.
In June
2009, the FASB issued ASC Topic 810-10, "
Amendments to FASB Interpretation
No. 46(R)
" (“ASC 810-10”). ASC 810-10 is intended to (1)
address the effects on certain provisions of FASB Interpretation No. 46 (revised
December 2003), “Consolidation of Variable Interest Entities,” as a result of
the elimination of the qualifying special-purpose entity concept in ASC 860-20,
and (2) constituent concerns about the application of certain key provisions of
Interpretation 46(R), including those in which the accounting and disclosures
under the Interpretation do not always provided timely and useful information
about an enterprise's involvement in a variable interest entity. This
statement must be applied as of the beginning of the Company’s first annual
reporting period that begins after November 15, 2009. The Company
does not expect the adoption of 810-10 to have a material impact on its results
of operations, financial condition or cash flows.
In June
2009, the FASB issued ASC Topic 105-10, "
The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles
" (“ASC 105-10”). ASC 105-10 will become the source
of authoritative U.S. generally accepted accounting principles (GAAP) recognized
by the FASB to be applied by non-governmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of Federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of this statement, the Codification will
supersede all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature
not included in the Codification will become non-authoritative. This
statement is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The Company does not expect
the adoption of ASC 105-10 to have a material impact on its results of
operations, financial condition or cash flows.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force)and the United States Securities and Exchange Commission did
not or are not believed to have a material impact on the Company's present or
future consolidated financial
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
Not
Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL
DATA
The
financial statements begin on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not
Applicable
ITEM 9A. CONTROLS AND PROCEDURES
Management,
including our chief executive officer and chief financial officer, does not
expect that our disclosure controls and procedures or our internal control over
financial reporting will prevent all errors and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected.
Conclusion
Regarding Effectiveness of Disclosure Controls and Procedures
Under the
supervision and with the participation of management, our chief executive
officer and chief financial officer have carried out an evaluation of the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended. Based upon that evaluation, our chief executive officer and
chief financial officer concluded that there were material weaknesses in our
internal controls over financial reporting as of the end of the period covered
by this report. In making this assessment, our management used the
criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the
Treadway Commission in Internal Control — Integrated Framework. Our management
concluded that, as of September 30, 2009, our internal control over financial
reporting was not effective based on these criteria. Our chief
executive officer and chief financial officer identified weaknesses related to
our accounting personnel’s ability to identify various accounting and disclosure
issues, account for transactions that include an equity-based component, and
prepare financial statements and footnotes in accordance with U.S.
GAAP. Until June 2006, we were a privately-owned company engaged with
all of our assets and operations located in China, and our financial statements
were prepared in accordance with PRC GAAP. Since we became a
publicly-traded company, we have significantly expanded the scope of our
business, so that we presently have four business segments. We have
also engaged in two financings, entered into joint ventures, acquired and
disposed of companies and assets, and granted equity-based
incentives. All of these events presented complex accounting issues
which were new to our financial staff. Furthermore, we do not have a
large accounting department and it has been difficult for us to hire qualified
personnel who understand English and Chinese and are familiar with both U.S.
GAAP and PRC GAAP. We are addressing these issues by reviewing and
revising our internal accounting policies and procedures, expanding the
resources allocated to our accounting department, and hiring outside accounting
advisors. We expect resolution of these matters may take several
months. Accordingly, based on the foregoing, the certifying officers
have concluded that our disclosure controls and procedures are not effective at
this time.
The
conclusion of chief executive officer and chief financial officer regarding our
disclosure controls and procedures is based solely on management’s conclusion
that our internal control over financial reporting was not
effective.
Our
material weaknesses related to:
|
•
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an
insufficient complement of personnel in our corporate accounting and
financial reporting function with an appropriate level of technical
accounting knowledge, experience, and training in the application of US
GAAP commensurate with our complex financial accounting and reporting
requirements and materiality thresholds.
|
|
|
|
|
•
|
Lack
of internal audit function - the monitoring function of internal control
is not well performed due to insufficient resources. In addition, the
scope and effectiveness of internal audit function have yet to be
developed.
|
|
|
|
|
•
|
Insufficient
or lack of written policies and procedures relating to periodic review of
current policies and procedures and their
implementation.
|
Remediation
and Changes in Internal Control over Financial Reporting
The
Company has discussed the material weaknesses in its internal control over
financial reporting with the audit committee of the board of directors and is in
the process of developing and implementing remediation plans to address the
material weaknesses. During the fiscal year ended September 30, 2009, management
conducted a program to plan the remediation of all identified deficiencies using
a risk-based approach based on the “Internal Control — Integrated
Framework” issued by COSO. These plans contemplate various changes in process,
procedures, policy, training and organizational design, and are currently being
implemented. In addition, the Company intends to hire and/or appoint new
managers in the accounting area and/or engage accounting professionals from
external resources to address internal control weaknesses related to technical
accounting.
The
following specific remedial actions are currently in process, to address the
material weaknesses in our internal control over financial reporting described
above:
|
•
|
Reorganize
and restructure our corporate accounting staff by:
|
|
|
|
|
|
|
|
|
•
|
revising
the reporting structure and establishing clear roles, responsibilities,
and accountability;
|
|
|
|
|
|
|
|
|
•
|
hiring
additional technical accounting personnel to address our complex
accounting and financial reporting requirements;
|
|
|
|
|
|
|
|
|
•
|
assessing
the technical accounting capabilities at our subsidiaries to ensure the
right complement of knowledge, skills, and training;
and
|
|
|
|
|
|
|
|
|
•
|
establishing
internal audit functions,
|
|
|
|
|
|
|
•
|
Improve
period-end closing procedures by:
|
|
|
|
|
|
|
|
|
•
|
ensuring
that account reconciliations and analyses for significant financial
statement accounts are reviewed for completeness and accuracy by qualified
accounting personnel;
|
|
|
|
|
|
|
|
|
•
|
implementing
a process that ensures the timely review and approval of complex
accounting estimates by qualified accounting personnel and subject matter
experts, where appropriate;
|
|
|
|
|
|
|
|
|
•
|
developing
better monitoring controls for corporate accounting and at our
subsidiaries,
|
|
|
|
|
|
|
|
|
•
|
documenting
and implementing antifraud programs and controls as well as comprehensive
risk assessment of procedures, programs and controls,
and
|
|
|
|
|
|
|
|
|
•
|
making
efforts to develop written policies and procedures, but the progress has
been slowed due to limited resources and personnel
changes.
|
During
2009, we hired an internal audit manager and, we will increase our efforts to
hire qualified personnel. We anticipate that we will be able to
complete the remediation before September 30, 2010.
Other
than as described above, management does not believe that there have been any
other changes in our internal control over financial reporting, which have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
PART III
Part III
is incorporated by reference from our proxy statement relating to our 2010
annual meeting of shareholders.
PART
IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
(1) Financial
Statements
See Index
to Consolidated Financial Statements on Page F-1
(2) Financial
Statement Schedules
All
financial statement schedules are omitted because they are not applicable, not
required under the instructions or all the information required is set forth in
the financial statements or notes thereto.
(3) Exhibits
2.1
|
|
Exchange
Agreement dated as of June 2, 2006, among the Registrant and the former
stockholders of Sinoenergy.
1
|
|
|
|
|
|
|
2.2
|
|
Agreement
and plan or merger dated as of October 12, 2009, among the Registrant and
Skywide Capital Management Limited
13
|
3.1
|
|
Restated
articles of incorporation .
2
|
3.2
|
|
By-laws
.
3
|
4.1
|
|
Form
of convertible note issued in June 2006 private placement.
1
|
4.2
|
|
Form
of “A” warrants issued to investors in June 2006 private placement.
1
|
4.3
|
|
Form
of “B” warrants issued to investors in the June 2006 private
placement.
1
|
4.4
|
|
Indenture
dated September 28, 2007, by and among the Company and DB Trustees (Hong
Kong) Limited, as trustee, relating to the 3.0% Guaranteed Senior
convertible notes due 2012.
4
|
4.5
|
|
Indenture
dated September 28, 2007, by and among the Company and DB Trustees (Hong
Kong) Limited, as trustee relating to the 12.0% Guaranteed senior notes
due 2012.
4
|
|
|
|
10.1
|
|
2006
Long-term incentive plan .
1
|
10.2
|
|
Agreement
dated June 6, 2006, among Sinoenergy Holding Limited, its wholly-owned
subsidiary, Qingdao Sinogas General Machinery Limited Corporation, Wuhan
Fukang Automotive Cleaning Energy Company and Wuhan Yixiang Industry Trade
Company (English translation).
6
|
10.3
|
|
Agreement
between Qingdao Sinogas General Machinery Co. Ltd. and Beijing Sanhuan
Technology Development Co. Ltd. (English Translation).
6
|
10.4
|
|
Agreement
dated July, 2006, among Sinoenergy Holding Limited, Qingdao Kangtai
Machinery Equipment Manufacture Co. Limited and Guili Shi (English
translation).
6
|
10.5
|
|
Agreement,
dated March 16, 2007, by and among Sinoenergy Corporation, the June 2006
Private Placement Investors and Skywide Capital Management Limited.
7
|
|
|
|
10.6
|
|
Agreement
dated March 26, 2007, between Beijing Sinogas Sanhuan Technology
Development Co., Ltd. and Qingdao Sinogas General Machinery Limited
Corporation (English translation).
2
|
10.7
|
|
Agreement
dated January 26, 2007, among People’s Government of Xuancheng City, Anhui
Province, China New Energy Development Investment Company Limited and the
Registrant (English translation)
.8
|
10.8
|
|
Agreement
dated February 1, 2007, among People’s Government of Huangmei County,
Hubei Province, China New Energy Development Investment Company Limited
and the Registrant (English translation) .
8
|
10.9
|
|
Letter
of Intent to secure the supply of 200 million cubic meters of natural gas
per year , dated May 14, 2007, among Hubei Gather Energy Gas Co, its 55%
equity owned subsidiary, Sinopec Shanghai Petrochemical Company
Limited (English translation).
4
|
10.10
|
|
Agreement
of Natural Gas Sale and Purchase dated June 7, 2007, among China Petroleum
and Chemical Corporation Natural Gas Branch and Anhui Gather Energy Gas
Co., Ltd. (English translation).
4
|
10.11
|
|
Composite
Note Purchase Agreement, dated September 1, 2007, among Sinoenergy
Corporation, Abax Lotus Ltd. and CCIF Petrol Limited.
4
|
10.12
|
|
Agreement
of Equity Interest Transfer dated August 28, 2007, among Junning
International Industry Co. Ltd., Sinoenergy Holding Limited and Qingdao
Guang An Industry Co. Ltd (English translation).
4
|
10.13
|
|
Equity
registration rights agreement dated September 28, 2007, by and among the
Company, Abax Lotus Ltd. and CCIF Petrol Limited.
4
|
10.14
|
|
Investor
rights agreement dated September 28, 2007, by and among the Company, its
subsidiaries, Mr. DENG Tianzhou and Mr. HUANG Bo, and Abax Lotus Ltd. and
CCIF Petrol Limited.
4
|
10.15
|
|
Information
rights agreement dated September 28, 2007, from the Company to Abax Lotus
Ltd. and CCIF Petrol Limited.
4
|
10.16
|
|
Charge
agreement over registered shares in Sinoenergy Holding Limited between the
Company and DB Trustees (Hong Kong) Limited, as security agent.
4
|
10.17
|
|
Composite
non-competition covenant and agreement by Mr. DENG Tianzhou and Mr. HUANG
Bo for the benefit of Abax Lotus Ltd. and CCIF Petrol Limited.
4
|
10.18
|
|
English
translation of Equity Transfer Agreement dated January 11, 2008, between
Sinoenergy Holding Limited, Zhenghong Wang, Hengfu Guo and Jie Shi.
9
|
10.19
|
|
English
translation of Equity Transfer Agreement dated December 17, 2007, between
Sinoenergy Holding Limited, Qingdao Qingqing Enviromental Industry Co.,
Ltd., Japan Chubu Daichi Yuso Co., Ltd., Japan Neverland and Sanix Co.,
Ltd.
10
|
10.20
|
|
English
translation of Supplementary Agreement of Equity Transfer dated December
24, 2007, between Sinoenergy Holding Limited,
Qingdao Qingqing
Enviromental Industry Co., Ltd. and Qingdao Jia Run He Trading Co.
Ltd.
11
|
10.21
|
|
English
translation of Land Agreement dated March 1, 2008, between Qingdao Sinogas
General Machinery Co., Ltd and Qingdao Mingchen Real Estate Co.,
Ltd.
12
|
10.22
|
|
Employment
Agreement dated October 20, 2008, between the Company and Shiao Ming
Sheng.
5
|
10.23
|
|
Letter
Agreement dated March 6, 2008, between Abax Lotus Ltd., CCIF Petrol
Limited, and Skywide Capital Management Limited., and Indenture Waiver
dated March 6, 2008, by Abax Lotus Ltd. and CCIF Petrol
Limited.
2
|
10.24
|
|
Letter
agreement dated February 23, 2009, by and between the Registrant and Abax
Lotus Ltd. And CCIF Petrol Limited
15
|
10.25
|
|
Amendment
and waiver agreement dated May 13, 2009, by and between the Company and
Abax Nai Xin A Ltd., Abax Jade Ltd., and CCIF Petrol Limited.
16
|
10.26
|
|
Amendment
and waiver agreement dated May 19, 2009, by and between the Company and
Abax Nai Xin A Ltd., Abax Jade Ltd., and CCIF Petrol
Limited.
16
|
10.27
|
|
Agreement
dated October 5, 2009, by and between the Company and Abax Nai Xin A Ltd.,
Abax Jade Ltd., and CCIF Petrol Limited.
13
|
10.28
|
|
Agreement
dated December 17, 2009 by and among the Company, and Abax Nai Xin A Ltd.,
Abax Jade Ltd., and CCIF Petrol Limited.
17
|
16.1
|
|
Letter
from Schwartz Levitsky Feldman LLP
12
|
16.2
|
|
Letter
from Grobstein Horwath & Company LLP
14
|
|
|
|
|
|
|
21.1
|
|
List
of Subsidiaries.
|
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act.
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act
|
32
|
Certification
of Chief Executive and Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act
|
|
|
1
|
Filed
as an exhibit to the Company’s current report on Form 8-K which was filed
with the Commission on June 15, 2006 and incorporated herein by
reference.
|
|
|
2
|
Filed
as an exhibit to the Company’s annual report on Form 10-K for the year
ended September 30, 2008 and incorporated herein by
reference.
|
|
|
3
|
Filed
as an exhibit to the General Form for Registration of Securities of Small
Business Issuers on Form 10-SB which was filed with the Commission on
March 27, 2000.
|
|
|
4
|
Filed
as an exhibit to the Company’s current report on Form 8-K/A which was
filed with the Commission on July 31, 2006 and incorporated herein by
reference.
|
5
|
Filed
as an exhibit to the Company’s Form 8-K report which was filed with the
Commission on October 24, 2008, and incorporated herein by
reference.
|
|
|
6
|
Filed
as an exhibit to the Company’s quarterly report on Form 10-QSB for the
quarter ended June 30, 2006, and incorporated herein by
reference.
|
|
|
7
|
Filed
as an exhibit to the Company’s Form 8-K report which was filed with the
Commission on March 21, 2007, and incorporated herein by
reference.
|
|
|
8
|
Filed
as an exhibit to the Company’s Form 10-K report which was filed with the
Commission on April 10, 2007, and incorporated herein by
reference.
|
|
|
9
|
Filed
as an exhibit to the Company’s Form 8-K report which was filed with the
Commission on January 28, 2008, and incorporated herein by
reference.
|
|
|
10
|
Filed
as an exhibit to the Company’s Form 8-K report which was filed with the
Commission on February 5, 2008, and incorporated herein by
reference.
|
|
|
11
|
Filed
as an exhibit to the Company’s Form 8-K report which was filed with the
Commission on April 2, 2008 (relating to item 1.01), and incorporated
herein by reference.
|
|
|
12
|
Filed
as an exhibit to the Company’s Form 8-K report which was filed with the
Commission on April 2, 2008 (relating to item 4.01), and incorporated
herein by reference.
|
|
|
13
|
Filed
as an exhibit to the Company’s Form 8-K report which was filed with the
Commission on October 14, 2009 (relating to item 1.01), and incorporated
herein by reference.
|
|
|
14
|
Filed
as an exhibit to the Company’s Form 8-K report which was filed with the
Commission on January 15, 2009 (relating to item 4.01), and incorporated
herein by reference.
|
|
|
15
|
Filed
as an exhibit to the Company’s quarterly report on Form 10-Q for the
quarter ended December 31, 2009, and incorporated herein by
reference.
|
|
|
16
|
Filed
as an exhibit to the Company’s Form 8-K report which was filed with the
Commission on May 20, 2009 (relating to item 1.01), and incorporated
herein by reference.
|
|
|
17
|
Filed
as an exhibit to the Company’s Form 8-K report which was filed with the
Commission on December 24, 2009 (relating to item 1.01), and incorporated
herein by reference.
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
SINOENERGY
CORPORATION.
(Registrant)
|
|
|
|
|
|
Dated: December 29,
2009
|
By:
|
/s/ Bo
Huang
|
|
|
|
Bo
Huang, Chief Executive Officer
|
|
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated. Each person whose
signature appears below hereby authorizes Bo Huang and Shiao Ming Sheng or
either of them acting in the absence of the other as his or her true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution
for him or her and in his or her name, place and stead, in any and all
capacities to sign any and all amendments to this report, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Bo Huang
|
|
Chief
Executive Officer
|
|
December 29,
2009
|
Bo
Huang
|
|
and
Director (Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/
Shiao Ming Sheng
|
|
Chief
Financial Officer
|
|
December 29,
2009
|
Shiao
Ming Sheng
|
|
(Principal
Financial and
|
|
|
|
|
Accounting
Officer)
|
|
|
|
|
|
|
|
/s/
Tianzhou Deng
|
|
Director
|
|
December 29,
2009
|
Tianzhou
Deng
|
|
|
|
|
|
|
|
|
|
/s/
Robert I. Adler
|
|
Director
|
|
December 29,
2009
|
Robert
I. Adler
|
|
|
|
|
|
|
|
|
|
/s/
Renjie Lu
|
|
Director
|
|
December 29,
2009
|
Renjie
Lu
|
|
|
|
|
|
|
|
|
|
/s/
Greg Marcinkowski
|
|
Director
|
|
December 29,
2009
|
Greg
Marcinkowski
|
|
|
|
|
|
|
|
|
|
/s/
Baoheng Shi
|
|
Director
|
|
December 29,
2009
|
Baoheng
Shi
|
|
|
|
|
|
|
|
|
|
/s/
Xiang Dong (Donald) Yang
|
|
Director
|
|
December 29,
2009
|
Xiang
Dong (Donald) Yang
|
|
|
|
|
SINOENERGY
CORPORATION AND SUBSIDIARIES
Index
to Consolidated Financial Statements
|
Page
|
Reports
of Independent Registered Public Accounting Firms
|
F-2
|
Consolidated
Balance Sheets as of September 30, 2009 and 2008
|
F-4
|
Consolidated
Statements of Operations and Comprehensive Income (Loss) for the Years
Ended September 30, 2009 and 2008
|
F-5
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended September 30, 2009
and 2008
|
F-6
|
Consolidated
Statements of Cash Flows for the Years Ended September 30, 2009 and
2008
|
F-7
|
Notes
to the Consolidated Financial Statements
|
F-8
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Sinoenergy
Corporation
We have
audited the accompanying consolidated balance sheet of Sinoenergy Corporation
and subsidiaries (the “Company”) as of September 30, 2009, and the related
consolidated statements of operations and comprehensive income (loss),
shareholders' equity, and cash flows for the year then ended. 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 audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such
opinion. An audit 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 audit 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 the Company as of September 30,
2009, and the results of its operations and its cash flows for the year then
ended, in conformity with U.S. generally accepted accounting
principles.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred a significant loss and negative
operating cash flows for the year ended September 30, 2009, and as of September
30, 2009 there is negative working capital of $9.1 million. These
matters, among others, raise substantial doubt about the Company’s ability to
continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/ Crowe
Horwath LLP
|
Sherman
Oaks, California
|
December
29, 2009
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Sinoenergy
Corporation
We have
audited the accompanying consolidated balance sheet of Sinoenergy Corporation
and subsidiaries (the “Company”) as of September 30, 2008, and the related
consolidated statements of operations and comprehensive income, shareholders’
equity, and cash flows for the year then ended. 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 audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such
opinion. An audit 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 audit provides a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Sinoenergy Corporation and
subsidiaries as of September 30, 2008, and the results of their operations and
cash flows for the year then ended, in conformity with U.S. generally accepted
accounting principles.
/s/
Grobstein, Horwath & Company LLP
|
|
|
Sherman
Oaks, California
|
December
23, 2008
|
Sinoenergy
Corporation and Subsidiaries
Consolidated
Balance Sheets
(In
thousands of United States dollars)
|
|
September
30, 2009
|
|
|
September
30, 2008
|
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Property,
plant and equipment, net
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Additional
interest payable under convertible note indenture
|
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Current
portion of long-term notes payable
|
|
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TOTAL
CURRENT LIABILITIES
|
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|
Long-term
notes payable, net of current portion
|
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Common
stock- par value $0.001 per share; Authorized - 50,000,000 shares; Issued
and outstanding- 15,922,391 shares at September 30, 2009 and
2008
|
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|
|
Additional
paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
Sinoenergy
Corporation and Subsidiaries
Consolidated
Statements of Operations and Comprehensive Income (Loss)
(In
thousands of United States dollars except per share information)
|
Year
Ended
September
30, 2009
|
|
|
Year
Ended
September
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
income, net of land use right amortization of $176
|
|
|
|
|
|
|
|
Gain
(loss) on sale (transfer) of equity of
subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net
|
|
|
|
|
|
|
|
Additional
interest payable under convertible note indenture
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES), NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income(loss):
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
|
|
|
|
Net
Income (Loss) Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
Sinoenergy
Corporation and Subsidiaries
Consolidated
Statement of Shareholders’ Equity
(In
thousands of United States dollars)
|
Number
of Common Shares Issued
|
|
Par
Value Common Stock
|
|
Additional
Paid in Capital
|
|
Retained
Earnings
|
|
Accumulated
Other Comprehensive Income
|
|
Total
Shareholder’s
Equity -
|
|
Balance,
September 30, 2007
|
15,709
|
|
$
|
16
|
|
$
|
23,175
|
|
$
|
8,217
|
|
$
|
1,312
|
|
$
|
32,720
|
|
Warrants
exercised to common stock
|
233
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants for services
|
-
|
|
|
-
|
|
|
83
|
|
|
-
|
|
|
-
|
|
|
83
|
|
|
-
|
|
|
-
|
|
|
552
|
|
|
|
|
|
|
|
|
552
|
|
Adjustment
to record reduction in conversion price of 3% senior convertible
notes
|
-
|
|
|
-
|
|
|
2,266
|
|
|
-
|
|
|
-
|
|
|
2,266
|
|
|
-
|
|
|
-
|
|
|
4,320
|
|
|
(4,320
|
)
|
|
|
|
|
-
|
|
Net
income for the period
|
|
|
|
|
|
|
|
|
|
16,056
|
|
|
-
|
|
|
16,056
|
|
Currency
translation adjustment
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,550
|
|
|
3,550
|
|
Balance,
September 30, 2008
|
15,922
|
|
|
16
|
|
|
30,396
|
|
|
19,953
|
|
|
4,862
|
|
|
55,227
|
|
Issuance
of warrants for services
|
-
|
|
|
-
|
|
|
27
|
|
|
-
|
|
|
-
|
|
|
27
|
|
|
-
|
|
|
-
|
|
|
258
|
|
|
-
|
|
|
-
|
|
|
258
|
|
Adjustment
to record reduction in conversion price of 3% senior convertible
notes
|
-
|
|
|
-
|
|
|
3,862
|
|
|
-
|
|
|
-
|
|
|
3,862
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(13,103
|
)
|
|
-
|
|
|
(13,103
|
)
|
Currency
translation adjustment
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(90
|
)
|
|
(90
|
)
|
Balance,
September 30, 2009
|
15,922
|
|
$
|
16
|
|
$
|
34,543
|
|
$
|
6,850
|
|
$
|
4,772
|
|
$
|
46,181
|
|
The
accompanying notes are an integral part of these financial
statements.
Sinoenergy
Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
(In thousands of United States
dollars)
|
|
Year
Ended
September
30, 2009
|
|
|
Year
Ended
September
30, 2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Equity
transfer (sale) of subsidiary
|
|
|
|
|
|
|
|
|
Warrants
and stock awards issued for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of note discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
portion of interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
|
|
|
|
|
|
|
Loss
on disposal of property, plant and equipment
|
|
|
|
|
|
|
|
|
Write
off of rental receivables
|
|
|
|
|
|
|
|
|
Provision
for obsolete inventories
|
|
|
|
|
|
|
|
|
Provision
for (recovery of) doubtful accounts
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
receivables, deposits and prepayments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
|
|
|
|
|
|
Prepayment
for long-term assets
|
|
|
|
|
|
|
|
|
Purchase
of land use right
|
|
|
|
|
|
|
|
|
Purchase
of long-term investments
|
|
|
|
|
|
|
|
|
Changing
in restricted cash
|
|
|
|
|
|
|
|
|
Net
proceeds related to sale of investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
proceeds received from note subscription receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
received from capital contribution in subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment
of bank borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
on cash of changes in exchange rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
Sinoenergy
Corporation and Subsidiaries
Notes
to the consolidated financial statements
(a)
Organization
Sinoenergy
Corporation (“Sinoenergy” or the “Company”) was incorporated in Nevada on March
2, 1999 under the name Franklyn Resources III, Inc. (“Franklyn”). The Company’s
corporate name was changed to Sinoenergy Corporation on September 28,
2006.
On June
2, 2006, the Company acquired Sinoenergy Holding Limited (“Sinoenergy Holding”),
a British Virgin Islands corporation. Sinoenergy Holding was the sole
stockholder of Qingdao Sinogas General Machinery Limited Corporation
(“Sinogas”), a wholly foreign-owned enterprise (“WFOE”) registered under laws of
the People’s Republic of China (the “PRC”). Sinoenergy Holding had no business
other than its ownership of Sinogas. As a result of this transaction, Sinoenergy
Holding and its subsidiary, Sinogas, became subsidiaries of the Company and the
business of Sinogas became the business of the Company.
(b)
Reverse Split of Common Stock
Effective
July 9, 2008, the Company effected a one-for-two reverse split on the common
stock and reduced the Company’s authorized common stock from 100,000,000 shares
to 50,000,000 shares without changing the par value. All share and per share
information in these financial statements retroactively reflects the reverse
split for all periods presented.
(c)
Subsidiaries of the Company
Set forth
below is a list of the Sinoenergy’s wholly-owned and majority-owned subsidiaries
at September 30, 2009, all of whose financial statements are consolidated with
Sinoenergy. References to the Company include the Company and its
consolidated subsidiaries unless the context indicates otherwise.
The percentage ownership
reflects the percentage ownership by Sinoenergy.
Company
|
|
Ownership
%
|
|
Business
activities
|
Sinoenergy
Holding Limited
|
|
|
|
|
Qingdao
Sinogas General
Machinery
Limited Corporation (“Sinogas”)
|
|
|
|
Production
of compressed natural gas (CNG) facilities, technical consulting in CNG
filling station construction, manufacturing of CNG vehicle conversion
kit
|
Qingdao
Sinogas Yuhan
Chemical
Equipment Company Limited (“Yuhan”)
|
|
|
|
Manufacturing
of customized pressure containers
|
Wuhan
Sinoenergy Gas Company Limited (“Wuhan Sinoenergy”)
|
|
|
|
Construction
and operating of CNG stations and the manufacturing and sales of
automobile conversion kits
|
Pingdingshan
Sinoenergy Gas
Company
Limited (“Pingdingshan Sinoenergy”)
|
|
|
|
Construction
and operating of CNG stations and the manufacturing and sales of
automobile conversion kits
|
Jiaxing
Lixun Automotive
Electronic
Company Limited (“Lixun”)
|
|
|
|
Design
and manufacturing of electric control devices for alternative
fuel
|
Hubei
Gather Energy
Company
Limited (“Hubei Gather”)
|
|
|
|
Construction
and operating of natural gas processing plants
|
Xuancheng
Sinoenergy
Vehicle
Gas Company Limited
(“Xuancheng
Sinoenegy”)
|
|
|
|
Construction
and operating of CNG stations and the manufacturing and sales of
automobile conversion kits
|
Qingdao
Jingrun General
Machinery
Company Limited (“Jingrun”)
|
|
|
|
Design
and manufacturing of petroleum refinery equipment and petroleum
machinery
|
Qingdao
Sinoenergy General
Machinery
Company Limited
(“Qingdao
Sinoenergy”)
|
|
|
|
Manufacturing
and installation of general machinery equipment
|
Nanjing
Sinoenergy Gas Company Limited(“Nanjing Sinoenergy”)
|
|
|
|
Construction
and operating of CNG stations and the manufacturing and sales of
automobile conversion kits
|
Qingdao
Sinoenergy General Gas Company Limited(“Sinoenergy
Gas”)
|
|
|
|
Construction
and operating of CNG and LNG stations and the manufacturing and sales of
automobile conversion kits
|
Wuhan
Sinoenergy Changfeng Gas Company Limited
|
|
|
|
Operation
of CNG stations and the sales of automobile conversion
kits
|
* This
subsidiary is owned 75% by Sinogas and 25% by Sinoenergy.
** This
subsidiary is owned 40% by Sinogas and 60% by Sinoenergy.
***
This subsidiary is owned 51% by Wuhan Sinoenergy, which is owned 90% by the
Company.
2.
Summary of Significant Accounting Policies
Basis of
Presentation
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. Certain
reclassifications have been made to the September 30, 2008 financial statements
to conform to the September 30, 2009 presentation. Such reclassifications are
not material.
Principles of
Consolidation
The
accompanying consolidated financial statements include the financial statements
of Sinoenergy Corporation and its wholly-owned subsidiaries and majority-owned
subsidiaries as to which it exercises control. Intercompany transactions and
balances have been eliminated in consolidation.
Going
Concern
As shown
in the accompanying financial statements, we incurred a substantial operating
and net loss during the fiscal year ended September 30, 2009, and as of
September 30, 2009, we have negative working capital of approximately $9.1
million. Furthermore, we have a substantial amount of bank debt and other term
debt that we are contractually obligated to pay in the near term, and our
ability to meet these obligations is dependent upon certain factors outside of
our control. We have limited financial resources to obtain and sustain
profitability and positive cash flows. Historically, we have been
highly dependent on external debt sources to fund our business growth and
operations. Achievement of our objectives will be dependent upon continued
external financing, to which there is no guarantee. Achievement of our
objectives will also be dependent upon our ability to obtain a larger and more
stable customer base, penetrating greater into markets for our higher margin
products, continuing to grow our CNG station operations to achieve economies of
scale in greater volume sales, and increasing profit margins and achieving other
benefits from the future operations of the new PetroChina pipeline. The Company
believes that it has borrowing capacity and will be able to borrow from major
banks in China to finance its working capital deficit and fund its daily
operations and other working capital needs. Management is pursuing a
number of activities to address the Company’s immediate liquidity needs,
including the following: discussions with its banks for the restructuring or
refinancing of loans, discussions with other debt or equity sources, cutting
costs and seeking other means to improve operating
efficiencies.
Use of
Estimates
In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, the Company makes estimates,
judgments and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and sales and expenses during the reported periods.
Significant estimates include depreciation and the allowance for doubtful
accounts and other receivables, asset impairment, valuation of warrants and
options, inventory valuation, and the determination of revenue and
costs. We base our estimates on historical experience and on various
other assumptions that we believe are 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 could differ from those estimates.
Goodwill
Goodwill
represents the excess of the purchase price of business combinations over the
fair value of the net assets acquired and is tested for impairment at least
annually. The impairment test requires allocating goodwill and all other assets
and liabilities to assigned reporting units. The fair value of each reporting
unit is estimated and compared to the net book value of the reporting unit. If
the estimated fair value of the reporting unit is less than the net book value,
including goodwill, then goodwill is written down to the implied fair value of
goodwill through a charge to operations. Because quoted market prices are not
available for the Company’s reporting units, the fair values of the reporting
units are estimated based upon several valuation analyses. The goodwill on the
Company’s financial statements was a result of the transactions pursuant to
which the Company acquired Yuhan, Jiaxing Lixun and Xuancheng Sinoenergy, and
relates to the pressure container, vehicle conversion kits, and CNG station
operation reporting segments.
Cash and Cash
Equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents. As of
September 30, 2009 and 2008, the Company did not have any cash
equivalents. The Company maintains its cash in bank deposit accounts
that, at times, may be very significant. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to any
significant credit risk on its cash balances.
Allowance for Doubtful
Accounts
An
allowance for doubtful accounts is maintained for customers (other than related
parties) based on a variety of factors, including the length of time the
receivables are past due, significant one-time events and historical experience.
An additional reserve for individual accounts is recorded when the Company
becomes aware of a customer’s inability to meet its financial obligations, such
as in the case of bankruptcy filings or deterioration in the customer’s
operating results or financial position. When circumstances related to customers
change, estimates of the recoverability of receivables are further
adjusted.
Inventories
Inventories
are comprised of raw materials, work in process, finished goods and low value
consumable articles. Amounts are stated at the lower of cost or market value.
Substantially all inventory costs are determined using the weighted average
basis. Costs of finished goods include direct labor, direct materials, and
production overhead before the goods are ready for sale. Inventory costs do not
exceed net realizable value.
Long-Term
Investments
Investments
in entities in which the Company owns more than 20% but less than 50% of the
equity and does not have the ability to control, but has the ability to exert
significant influence, are accounted for using the equity method, which includes
recognition of a percentage share of income or loss, dividends, and any
changes in the investment percentage in an investee by an investor.
Property, Plant and
Equipment
Property,
plant and equipment are stated at cost. Depreciation is provided principally by
use of the straight-line method over the useful lives of the related assets.
Expenditures for maintenance and repairs which do not improve or extend the
expected useful life of the assets are expensed to operations while major
repairs and improvements are capitalized.
The
estimated useful lives are as follows:
|
|
|
|
|
|
Office
equipment and others
|
|
Intangible
Assets
Intangible
assets, representing patents, technical know-how, are stated at cost less
accumulated amortization and impairment losses. Amortization is calculated on
the straight-line method over the estimated useful lives of the assets of 10
years.
Land Use
Rights
Land use
rights are stated at cost less accumulated amortization and impairment losses.
Amortization is calculated on the straight-line method over the contractual
useful lives of 50 years.
There is
no private ownership of land in the PRC. All land is owned by the government and
the government grants what is known as a land use right, which is a transferable
right to use the land.
Impairment of
Assets
Impairment
of assets is monitored on a periodic basis, and is assessed based on the
undiscounted cash flows expected to be generated by the underlying assets. In
the event that the carrying amount of assets exceeds the undiscounted future
cash flows (fair value), then the carrying amount of such assets is adjusted to
their fair value.
Capitalization of
Interest
The
Company capitalizes interest incurred in connection with the construction of
assets, principally its CNG stations, during the construction
period. Capitalized interest is recorded as an increase to
construction in progress and, upon completion of the construction, to property
and equipment. The Company capitalized $144,064 and $1,791,795 of
interest during the years ended September 30, 2009 and 2008.
Revenue
Recognition
The
Company recognizes revenue when the significant risks and rewards of ownership
have been transferred to the customer, including factors such as when persuasive
evidence that an arrangement exists, delivery has occurred, the sales price is
fixed or determinable and collectability is reasonably assured. The
Company recognizes product sales generally at the time the product is shipped.
CNG station construction and building technical consulting service revenue
related is recognized on the percentage of completion basis. The percentage of
completion method recognizes income as work on a contract (or group of closely
related contracts) progresses. The recognition of revenues and profit
is generally related to costs incurred in providing the services required under
the contract. The Company recognized minimal revenue for the year
ended September 30, 2008 and no revenue for the year ended September 30, 2009 on
the percentage of completion basis. Revenue is presented net of any
sales tax and value added tax.
Warranty
Reserves
Warranty
reserves represent the Company’s obligation to repair or replace defective
products under certain conditions. The estimate of the warranty reserves
is based on historical experience and industry practice. Based on
experience and industry practice, the Company has established a warranty reserve
rate of 0.2% of gross sales for customized pressure containers and CNG station
facilities and construction segments. The Company periodically reviews this rate
and revises it as necessary.
Income
Taxes
The
Company accounts for income taxes using an asset and liability approach whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
applicable to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
The
Company recognizes a tax benefit associated with an uncertain tax position when,
in management’s judgment, it is more likely than not that the position will be
sustained upon examination by a taxing authority. For a tax position that meets
the more-likely-than-not recognition threshold, the Company initially and
subsequently measures the tax benefit as the largest amount that it judges to
have a greater than 50% likelihood of being realized upon ultimate settlement
with a taxing authority. The liability associated with unrecognized tax benefits
is adjusted periodically due to changing circumstances, such as the progress of
tax audits, case law developments and new or emerging legislation. Such
adjustments are recognized entirely in the period in which they are identified.
The effective tax rate includes the net impact of changes in the liability for
unrecognized tax benefits and subsequent adjustments as considered appropriate
by management.
Foreign Currency
Translations
The
Company’s functional currency is Renminbi (“RMB”) and its reporting currency is
U.S. dollars. The Company’s balance sheet accounts are translated using the
closing exchange rate in effect at the balance sheet date and operating accounts
are translated using the average exchange rate prevailing during the year.
Equity accounts are translated using the historical rate as incurred.
Translation gains and losses are deferred and accumulated as a component of
accumulated other comprehensive income in shareholders’ equity. Transaction
gains and losses that arise from exchange rate fluctuations from transactions
denominated in a currency other than the functional currency are included in the
statement of operations as incurred.
Fair Value of Financial
Instruments
The fair
value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or
settlement.
For
certain financial instruments, including cash, accounts receivable, related
party and other receivables, accounts payable, other payables and accrued
expenses, the Company estimates that the carrying amounts approximate fair value
because of the nature of the assets and short- term maturities of the
obligations. The carrying value of short-term and long-term notes
approximate fair value due to the short time period to maturity (long-term notes
terms do not exceed five years.) The carrying value of the senior
notes and convertible notes, which are reclassified from long-term liability to
short-term liability due to the repayment arrangement discussed at Note 17 also
approximates fair value as the repayment was recently
negotiated.
Minority
Interest
Minority
interest refers to the portion of a consolidated subsidiary which is not
wholly-owned by the Company. The Company records the minority interest portion
of any related profits and losses in consolidation.
Stock-Based
Compensation
The
Company grants stock options to employees and stock options and warrants to
non-employees in non-capital raising transactions for services and for financing
costs. All grants are recorded at fair value at the grant date. The Company
utilizes the Black-Scholes option pricing model to determine fair value. The
resulting amount is charged to expense on the straight-line basis over the
period in which the Company expects to receive benefit, which is generally the
vesting period. In some cases, our principal stockholder, which is owned by our
chief executive officer and our chairman, both of whom are directors, provided
or agreed to provide stock to executive officers in connection with their
employment. These shares are treated as if the shares were
contributed to and issued by the Company.
Concentration of Credit
Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of trade accounts receivable. While there
are risks associated with any concentration of customers management believes
that the active monitoring system in place to monitor the creditworthiness
of customers will minimize such risks.
The
Company performs ongoing credit evaluations of its debtors, but does not require
collateral, in accordance with industry practice in China.
The
Company maintains its cash accounts with major banks in China. The Chinese
banks do not provide deposit insurance.
Earnings per
Share
Basic EPS
is measured as net income or loss divided by the weighted average common shares
outstanding for the period. Diluted EPS is similar to basic EPS but
presents the dilutive effect on a per share basis of potential common shares
(e.g., convertible securities, options and warrants) as if they had been
converted at the beginning of the periods presented, or issuance date, if
later. Potential common shares that have an anti-dilutive effect (i.e.,
those that increase income per share or decrease loss per share) are excluded
from the calculation of diluted EPS.
The
calculation of diluted weighted average common shares outstanding is based on
the average of the closing price of the Company’s common stock during the
reporting periods, and is applied to options and warrants using the treasury
stock method to determine if they are dilutive. The common stock issuable upon
conversion of convertible notes payable is included on an “as if converted”
basis when the preferred stock and convertible notes are dilutive.
Comprehensive Income or
Loss
Comprehensive
income or loss includes all changes in equity except those resulting from
investments by owners and distributions to owners, including adjustments to
minimum pension liabilities, accumulated foreign currency translation, and
unrealized gains or losses on marketable securities.
The
Company’s only component of other comprehensive income is foreign currency
translation loss of $90,000 for the year ended September 30, 2009 and gain of
$3,550,000 for the year ended September 30, 2008. Cumulative other
comprehensive income or loss is recorded as a separate component of
shareholders’ equity.
New Accounting
Pronouncements
Effective
July 1, 2009, the FASB ASC became the single official source of
authoritative, nongovernmental U.S. GAAP. The historical U.S. GAAP hierarchy was
eliminated and the ASC became the only level of authoritative U.S. GAAP, other
than guidance issued by the SEC. The Company’s accounting policies were not
affected by the conversion to ASC. However, references to specific accounting
standards in the notes to our consolidated financial statements have been
changed to refer to the appropriate section of the ASC.
In
April 2008, the FASB issued a pronouncement on what now is codified as FASB
ASC Topic 350,
Intangibles —
Goodwill and Other
. This pronouncement amends the factors to be
considered in determining the useful life of intangible assets accounted for
pursuant to previous topic guidance. Its intent is to improve the consistency
between the useful life of an intangible asset and the period of expected cash
flows used to measure its fair value. This Company will be required to adopt
this pronouncement on October 1, 2009. The adoption of this standard
is not expected to have a material effect on the Company’s consolidated
financial statements.
In June
2008, the FASB amended FASB Topic ASC 815, Sub-Topic 40, "Contracts in Entity’s
Own Equity” to clarify how to determine whether certain instruments or features
were indexed to an entity's own stock under ASC Topic 815. The amendment applies
to any freestanding financial instrument (or embedded feature) that has all of
the characteristics of a derivative, for purposes of determining whether that
instrument (or embedded feature) qualifies for the scope exception. It is also
applicable to any freestanding financial instrument (e.g., gross physically
settled warrants) that is potentially settled in an entity's own stock,
regardless of whether it has all of the characteristics of a derivative, for
purposes of determining whether to apply ASC 815. The Company will be
required to adopt this pronouncement on October 1, 2009. The Company
has not determined the extent that the adoption of this standard will have on
its financial statements for the quarter ending December 31, 2009 and
afterwards.
In
April 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 805
, Business
Combinations
. This pronouncement provides new guidance that changes the
accounting treatment of contingent assets and liabilities in business
combinations under previous topic guidance. This pronouncement will
be effective for the Company for any business combinations that occur on or
after October 1, 2009
In
April 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 825,
Financial
Instruments
. This pronouncement amends previous topic guidance to require
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies, as well as in annual financial statements.
The pronouncement was effective for interim reporting periods ending after
June 15, 2009 and its adoption did not have any significant effect on the
consolidated financial statements.
In
December 2007, the FASB issued ASC 805 “
Business Combinations
” and
810 “
Consolidation
”
(“ASC 810”), which require that ownership interests in subsidiaries held by
parties other than the parent, and the amount of consolidated net income, be
clearly identified, labeled and presented in the consolidated financial
statements. ASC 805 and ASC 810 also require that once a
subsidiary is deconsolidated, any retained non-controlling equity investment in
the former subsidiary be initially measured at fair value. Sufficient
disclosures are required to clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling
owners. ASC 805 and ASC 810 amend ASC 260 to provide that the
calculation of earnings per share amounts in the consolidated financial
statements will continue to be based on the amounts attributable to the parent.
ASC 805 and ASC 810 are effective for financial statements issued for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008, and require retroactive adoption of the presentation and
disclosure requirements for existing minority interests. All other
requirements are applied prospectively. The Company adopted ASC 805
and ASC 810 on January 1, 2009. The Company expects retrospective
modification in presentation and disclosure of noncontrolling interest on the
consolidated financial statements upon the adoption of ASC 805 and ASC
810.
In
May 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 855,
Subsequent
Events
. This pronouncement establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
the financial statements are issued or are available to be issued. FASB ASC
Topic 855 provides guidance on the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements
and the disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. The pronouncement was effective for the
Company during the annual period ended September 30, 2009. The Company has
evaluated subsequent events for the period from September 30, 2009, the
date of these financial statements, through December 29, 2009, which represents
the date these financial statements are filed with the SEC. The financial
statements at September 30, 2009 reflect the classification of long-term notes
as current liabilities as a result of the agreements with the noteholders
described in Note 26.
In June
2009, the FASB issued ASC Topic 810-10, "
Amendments to FASB Interpretation
No. 46(R)
" (“ASC 810-10”). ASC 810-10 is intended to (1)
address the effects on certain provisions of FASB Interpretation No. 46 (revised
December 2003), “Consolidation of Variable Interest Entities,” as a result of
the elimination of the qualifying special-purpose entity concept in ASC 860-20,
and (2) constituent concerns about the application of certain key provisions of
Interpretation 46(R), including those in which the accounting and disclosures
under the Interpretation do not always provided timely and useful information
about an enterprise's involvement in a variable interest entity. This
statement will be effective for the Company on October 1, 2010. The
Company does not expect the adoption of 810-10 to have a material impact on its
results of operations, financial condition or cash flows.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), and the United States Securities and Exchange Commission did
not or are not believed to have a material impact on the Company's present or
future consolidated financial statements.
3.
Restricted Cash
The
balances of restricted cash as at September 30, 2009 and 2008 represent a
deposit on a bill of exchange issued by the Company for the purchase of
materials.
4.
Accounts receivable
Accounts
receivable are as follows (dollars in thousands):
|
|
September
30, 2009
|
|
|
September
30, 2008
|
|
|
|
|
|
|
|
|
|
|
Notes
receivable-bank acceptance
|
|
|
|
|
|
|
|
|
Less:
allowance for doubtful receivables
|
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|
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5.
Other receivables
Other
receivable are as follows (dollars in thousands):
|
|
September
30, 2009
|
|
|
September
30, 2008
|
|
Unsecured
interest free receivables relating to projects
|
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|
|
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|
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|
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|
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|
|
|
|
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Less:
allowance for doubtful receivables
|
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|
On March
31, 2008, Sinogas entered into an agreement to sublease certain parcels of land
to Qingdao Mingcheng Real Estate Co., Ltd. (“Qingdao Mingcheng”), a
non-affiliated third party, for a term of three years beginning in January 2008
and expiring on December 31, 2010, at an annual rental of RMB40 million,
equivalent to approximately $5.9 million based on the March 31, 2009
exchange rate. During the year ended September 30, 2008, we
recognized rental income of $3.8 million from this lease. As a result
of the failure of Qingdao Mingcheng to make the required rental payments, on
March 31, 2009, Sinogas signed a memorandum of understanding with Qingdao
Mingcheng pursuant to which Sinogas agreed to a termination of the
sublease, reduced the rental receivable by $1.8 million, and established a note
bearing interest at 5.5755% per annum, due quarterly over a two year
period. At September 30, 2009, an impairment reserve of $988,000 was
established against the note receivable. Total charges of
approximately $2.8 million with respect to this lease/note receivable are
reflected in general and administrative expenses in the year ended September 30,
2009.
6.
Deposits and prepayments
Deposits
and prepayments are as follows (dollars in thousands):
|
|
September
30, 2009
|
|
|
September 30,
2008
|
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|
|
|
|
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7.
Inventories
Inventories
are as follows (dollars in thousands):
|
|
September
30, 2009
|
|
|
September 30,
2008
|
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8.
Long-term investments
Anhui
Gather and Hubei Gather
On March
23, 2007, the Company and Hong Kong China New Energy Development Investment Co.,
Ltd. (“China New Energy”) organized two companies to construct and operate
natural gas processing plants – Anhui Gather Energy Company (“Anhui Gather”),
which is based in Wuhu City, and Hubei Gather Energy Gas Co., Ltd. (“Hubei
Gather”), which is located in Wuhan.
Anhui
Gather was initially owned 55% by China New Energy and 45% by Tianjin Green
Fuel. On July 4, 2007, the Company purchased the 45% interest from
Tianjin Green Fuel for $2,750,000. Hubei Gather was initially owned
55% by the Company and 45% by China New Energy. The Company’s
capital obligation to Hubei Gather was $4,000,000, of which $1,375,000 was
paid as of September 30, 2009.
In
July
2008, the
Company entered into an agreement with China New Energy pursuant to which it
exchanged a 25% interest in Anhui Gather for a 25% interest in Hubei
Gather. As a result of the exchange, the Company owns an 80% interest
in Hubei Gather and a 20% interest in Anhui Gather. Neither Hubei
Gather nor Anhui Gather has commenced business activities. Since we have an 80%
interest in Hubei Gather, the results of Hubei Gather’s operations are included
in our consolidated financial statements
as of and
for the years ended September 30, 2009 and 2008.
Sinogas
General Luxi Natural Gas Equipment Co., Ltd.
On
October 31, 2008, in order to provide for a supply of raw materials, Sinogas
signed a joint venture agreement with LuXi Chemical Group, a Chinese chemical
company, to set up a company located in Liaocheng City, Shandong province, with
proposed annual production capacity of 4,000 steel bottles used in CNG trailer
manufacturing. The total registered capital is RMB 50 million
(equivalent to $7.32 million based on the exchange rate on September 30, 2009)
of which Sinogas has a 40% interest. This joint venture company commenced
operation in July 2009. At September 30, 2009, Sinogas had contributed $2.93
million, in full satisfaction of its obligations to this
enterprise.
9.
Property, Plant and Equipment
Property,
plant and equipment consist of the following (dollars in
thousands):
|
|
September
30, 2009
|
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|
September
30, 2008
|
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Office
equipment and other
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10.
Land use rights
|
|
September
30, 2009
|
|
|
September 30,
2008
|
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The land
use rights include six parcels of land purchased by the Company, which are held
by Sinogas, Jingrun, Xuancheng, Qingdao Sinoenergy, Jiaxing Lixun, and Hubei
Gather. The land use rights are being amortized over the following periods,
during which they are transferable and renewable, subject to government
approval.
Owner
|
Cost
|
|
Expiration
|
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Wuhan
Sinoenergy
|
|
1,138
|
|
<note
>
|
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|
|
|
<Note>
Wuhan
Sinoenergy has two agreements to purchase land use rights in Wuhan City from
different non-affiliated parties. One agreement provides for a purchase price of
approximately $1.58 million, of which approximately $1.32 million has been paid,
and the title transfer is in the process. The second provides for a purchase
price of approximately $1.32 million, of which approximately $732,000 has been
paid. The acquisition of the land requires government approval. The
amount paid under the purchase agreements is reflected on the balance sheet
under “land use rights.”
The land
use right owned by Sinogas represents two parcels of land located in the central
portion of Qingdao City, on which Sinogas and Yuhan’s offices and
manufacturing facilities are located. The land use right was purchased by the
Company from Beijing Sanhuan, a former shareholder of Sinogas, for a price of
RMB160 million, equivalent to US$23.47 million based on the current exchange
rate. The land is being amortized from May 2007 over a 50-year
term.
On
December 15, 2007, the Company purchased all of the equity of Jingrun, whose
sole asset is the land use right and construction in progress, for approximately
RMB60 million ($8.8 million based on the September 30, 2009 exchange rate).
The cost of the land use right paid by the Company was approximately $4.1
million based on the September 30, 2009 exchange rate.
The land
use right owned by Xuancheng was purchased by the Company from Shanghai CNPC
Enterprises Group for $874,000 based on the September 30, 2009 exchange
rate.
On
January 4, 2008, the Company purchased all of the equity of Qingdao Shan Yang
Tai Chemistry Resources Development Co., Ltd. (“QDSY”), whose sole asset is the
land use right and construction in progress, for approximately RMB43
million. The cost of the land use right paid by the Company was approximately
$1.9 million based on the September 30, 2009 exchange rate.
In June
2008, Jiaxing Lixun acquired a land use right for $368,000, which was used for
construction of a new plant.
In June
2009, Hubei Gather acquired a land use right for $535,000. The land is being
used to construct a mother CNG station in Wuhan which will be used to store CNG
and provide CNG to the Company’s stations.
The
Company made additional payments of approximately $2.9 million with respect to
land use rights owned by the Company.
11.
Goodwill
Goodwill
is as follows (dollars in thousands):
Transactions
|
|
September
30, 2009
|
|
|
September 30,
2008
|
|
|
|
|
|
|
|
|
Purchase
of an additional 80% equity interest in Yuhan
|
|
|
|
|
|
|
|
|
Purchase
of 90% equity in Jiaxing Lixun
|
|
|
|
|
|
|
|
|
Purchase
of a 70% equity in Xuancheng Sinoenergy
|
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The
Company monitors the impairment of goodwill at least annually. As of
September 30, 2009, there were no indications that the carrying amount of the
goodwill was impaired.
12.
Other long-term assets
Other
long-term assets are as follows (dollars in thousands):
|
|
September
30, 2009
|
|
|
September 30,
2008
|
|
|
|
|
|
|
|
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|
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Plant
construction in progress
|
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|
|
|
|
|
|
|
Related
to deferred income
|
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|
|
|
|
|
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CNG
station equipment on order from overseas
|
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13.
Short Term Bank Loan
The
following table summarizes the contractual short-term borrowings between various
banks and the Company as of September 30, 2009 (dollars in
thousands):
Bank
Name
|
|
Purpose
|
|
Borrowing
Date
|
|
Borrowing
Term
|
|
Annual
Interest Rate
|
|
|
Amount
|
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Industrial
Bank Co., Ltd.
|
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Industrial
Bank Co., Ltd.
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The
following table summarizes the contractual short-term borrowings between the
banks and the Company as of September 30, 2008 (dollars in
thousands):
Bank
Name
|
|
Purpose
|
|
Borrowing
Date
|
|
Borrowing
Term
|
|
Annual
Interest Rate
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
|
|
14.
Notes payable
The
balances of notes payable as at September 30, 2009 and 2008 represent the
obligations in the form of promissory notes with maturity dates of less than 12
months for the purchase of raw materials.
15.
Advances from Customers
Advances
from customers at September 30, 2009 and 2008 consist of advances received for
routine sales orders according to the Company’s sales policy.
16.
Income Taxes Payable
Pursuant
to the PRC income tax laws, the Company’s PRC subsidiaries are generally subject
to enterprise income tax at a statutory rate of 33%, which comprises 30%
national income tax and 3% local income tax. Beginning January 1, 2008, the
Company’s PRC subsidiaries are generally subject to enterprise income tax at a
statutory rate of 25%. The Company pays its enterprise tax based on its taxable
income determined in accordance with the tax laws of the
PRC. Enterprise tax for the fiscal year ended September
30, 2008 reflects a 33% rate for the quarter ended December 31, 2007 and a 25%
rate for the balance of the fiscal year and 25% for the fiscal year ended
September 30, 2009.
As PRC
subsidiaries that qualify as wholly foreign owned manufacturing enterprises,
Sinogas, Yuhan and Jiaxing Lixun were granted tax preferences. Sinogas and Yuhan
were granted a 100% enterprise income tax exemption for calendar years 2006 and
2007 and a 50% enterprise income tax exemption for 2008 through 2010. Jiaxing
Lixun was granted a 100% tax exemption from August 2007 through
2008 and a 50% enterprise income tax exemption for the calendar years 2009
through 2011.
Under the
current tax laws of the PRC, Wuhan Sinoenergy will be entitled to a two-year
100% tax exemption followed by three years of a 50%
tax exemption once it become profitable. Wuhan Sinoenergy did not achieve
profitability for the year ended September 30, 2009.
No
provision for other overseas tax is made as Sinoenergy Holding Limited, which is
an investment holding company, and has no taxable income in the British Virgin
Islands or the United States.
The
reconciliation between the income tax provision (benefit) computed at the PRC
statutory tax rate and the Company’s provision (benefit) for income tax is as
follows:
|
|
2009
|
|
|
2008
|
|
Statutory
Rate
|
|
|
-25.0
|
%
|
|
|
27.0
|
%
|
Permanent
Differences
|
|
|
25.1
|
%
|
|
|
-
|
|
Valuation
Allowance
|
|
|
8.5
|
%
|
|
|
6.1
|
%
|
Tax
Holiday
|
|
|
-2.7
|
%
|
|
|
-26.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
5.9
|
%
|
|
|
7.1
|
%
|
At
September 30, 2009 and 2008, deferred tax assets and liabilities are comprised
of the following items:
|
|
2009
|
|
|
2008
|
|
Deferred
tax assets, current
|
|
|
|
|
|
|
Accrued
expenses and reserve
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards and other
|
|
|
|
|
|
|
|
|
Total deferred tax assets, current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets, non-current
|
|
|
|
|
|
|
|
|
Accrued
expenses and reserve
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, non-current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities, non-current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2009, the Company had federal United States net operating loss
(NOL) carryforwards of approximately $2.2 million available to offset future
regular and alternative minimum taxable income. The NOL carryforwards will begin
to expire in 2027. The Company has fully reserved the deferred tax
asset related to the NOL benefit due to the uncertainty that it will be
realized.
The
Company files PRC tax returns. For PRC tax purposes, all periods
subsequent to September 30, 2008 are subject to examination by the PRC tax
authority. The Company believes that its income tax filing positions
and deductions will be sustained on audit and does not anticipate any
adjustments that will result in a material change. Therefore, no
reserves for uncertain income tax positions have been recorded pursuant to FASB
ASC Topic 740 INCOME TAXES. In addition, the Company does not
anticipate that the total amount of unrecognized tax benefit related to any
particular tax position will change significantly within the next twelve months.
The Company's policy for recording interest and penalties, if any, associated
with PRC tax authority audits is to record such items as a component of income
taxes.
17. Long
term notes payable
On
September 28, 2007, the Company issued 12% guaranteed senior notes due 2012 in
the principal amount of $16,000,000 and 3.0% guaranteed senior convertible notes
due 2012 in the principal amount of $14,000,000. The convertible
notes were initially convertible into common stock at an initial conversion
price of $6.34 per share. The conversion price has been reduced to $4.20 as
described below, and, at September 30, 2009, was subject to further reduction
based on the Company’s net income for the years ended December 31, 2008 and
2009.
In
connection with the issuance of the notes, the Company’s chief executive officer
and its chairman, both of whom are directors, executed non-competition
agreements with the Company, and the Company paid the investors an arrangement
fee of $160,000, which was deducted from the proceeds of the notes.
The
convertible notes were issued pursuant to an indenture between the Company and
DB Trustees (Hong Kong) Limited, as trustee. The convertible notes are due in
September 2012 and bear interest at the stated interest rate of 3% per annum.
Although the stated interest rate is 3% per annum, if the convertible notes are
not redeemed, converted or purchased and cancelled by the maturity date, the
Company is required to redeem the convertible notes at the amount which results
in a yield to maturity of 13.8% per annum, less interest previously paid, plus
any interest accrued on overdue principal (and, to the extent lawful, on overdue
interest) and premium, if any, at a rate which is 3% per annum in excess of the
rate of interest then in effect. As a result, the Company is accruing interest
at the rate of 13.8% per annum. Since the Company is only required to pay
interest currently at the rate of 3%, the remaining 10.8% interest rate is
accrued and treated as deferred interest payable. If the convertible notes are
converted, the deferred interest payable will be credited to additional paid in
capital. Because of the agreement relating to payment of the convertible notes
described in Note 26, the deferred interest is classified as a current liability
at September 30, 2009.
The
convertible note indenture requires the Company to offer to purchase the Notes
at a price which would generate a 13.8% yield if either of the following events
shall occur:
|
•
|
The
failure of the Company’s common stock to be listed on The NASDAQ Stock
Market.
|
|
|
|
|
•
|
Trading
in the Company’s common stock on any exchange or market has been suspended
for ten or more consecutive trading
days.
|
Subject
to certain conditions, and in connection with the proposed merger agreement
between the Company and Skywide (see Note 26), the holders of the convertible
notes have waived default resulting from the failure of the Company’s common
stock to be listed on the NASDAQ Stock Market.
The
indenture also requires the Company to pay additional interest as
follows:
|
•
|
At
the rate of 3.0% per annum if the Company has not obtained a listing of
its common stock on the NASDAQ Global Market or the NASDAQ Capital Market
by September 19, 2008 and maintained such listing continuously thereafter
as long as the Notes are outstanding. At September 30, 2009, the Company
had met this listing requirement.
|
|
|
|
|
•
|
At
the rate of 1.0% for each 90-day period in which the Company has failed to
comply with the registration obligations under the registration rights
agreement. As of September 30, 2009, the Company had accrued additional
interest totaling $560,000 pursuant to this provision, of which
$280,000 has been paid. The noteholders have waived the right to require
the additional interest from March 31, 2009 through September 30,
2009.
|
At
September 30, 2009, the holders of the convertible notes have the right to
convert their notes into common stock at a conversion price of $4.20 per share,
reflecting a reduction in the conversion price to $5.125 per share pursuant to a
supplemental indenture dated as of June 23, 2008 and a further adjustment to
$4.20 per share as of March 28, 2009 based on the market price of the Company’s
common stock. The provisions for adjustment in the conversion price include
adjustments for the following.
|
•
|
A
stock distribution or dividend, a reverse split or combination of shares
and the distribution of shares, warrants, assets or indebtedness to our
stockholders;
|
|
|
|
|
•
|
A
sale of common stock at a price, or the issuance of options, warrants or
other convertible securities with an exercise or conversion price, which
is less than the conversion price at the time, subject to limitations
provided in the investor rights agreement; and
|
|
|
|
|
•
|
An
adjustment based on the Company’s failure to have consolidated net income,
as defined in the indenture, of $14.0 million for 2008 and $22.5 million
for 2009, or the equivalent in RMB. In December 2009, the note holders
waived the right to any adjustment based on 2008 and 2009 net income (see
Note 26).
|
The
indentures, as amended, for both the convertible notes and the senior notes have
certain covenants, including the following,:
•
|
If
the Company sells assets and does not reinvest the proceeds in its
business within 180 days (270 days in the case of a sale of real
property), to the extent that such proceeds not so reinvested exceed
$5,000,000, the Company is required to offer the holders of the notes the
right to have the Company use such excess proceed to purchase their notes
at the principal amount plus accrued interest..
|
|
|
•
|
If
there is a change of control, the Company is required to offer to
repurchase the notes at 103% of the principal of the note, plus accrued
interest. A change of control will occur if Bo Huang or Tianzhou Deng own
less than 25% of the voting power of the Company’s voting stock or, with
certain exceptions, a merger or consolidation or sale of substantially all
of the Company’s and its subsidiaries’ assets.
|
|
|
•
|
The
Company is restricted from incurring additional debt unless, after giving
effect to the borrowing, (i) the fixed charge coverage ratio would be
greater than 2.0 to 1.0 through December 31, 2009 and 3.0 to 1.0 if the
debt is incurred thereafter, and (ii) the leverage ratio would not exceed
6.0 to 1.0 through December 31, 2009 and 4.5 to 1.0 if the debt is
incurred thereafter, provided, that Sinogas may continue to maintain debt
under credit facilities of not more than $10,000,000, and may incur
purchase money indebtedness. The fixed charge coverage ratio is the ratio
of the Company’s earnings before interest, taxes, depreciation and
amortization, which is generally known as EBITDA, to consolidated interest
expense, as defined. Leverage ratio means the ratio of outstanding debt to
EBITDA, with the interest component being the consolidated interest
expense, as defined.
|
|
|
•
|
The
Company is subject to restriction in paying dividends, purchasing its own
securities or those of its subsidiaries, prepaying subordinated debt, and
making any investment other than any investments in itself and its
subsidiaries engaged in the Company’s business and certain other permitted
investments.
|
|
|
•
|
The
Company is subject to restrictions on incurring liens.
|
|
|
•
|
The
Company cannot enter into, or permit its subsidiaries to enter into,
transactions with affiliates unless it is in writing, in the Company’s
best interest and not less favorable to the Company than it could obtain
from a non-affiliate in an arms’ length transaction, with any transaction
involving more than $1,000,000 requiring audit committee approval and any
transaction involving more than $5,000,000 requiring a written opinion
from an independent financial advisor.
|
|
|
•
|
The
Company shall maintain, as of the last day of each fiscal quarter, (i) a
fixed charge coverage ratio of at least 2.00 to 1.00 through December 31,
2009 and 3.0 to 1.0 thereafter, (ii) a leverage ratio of not more than 6.0
to 1.00 through December 31, 2009 and 4.5 to 1.0 thereafter, and (iii) a
consolidated subsidiary debt to consolidated net tangible asset ratio of
not more than 0.35. The noteholders agreed that they would not take any
action to declare an event of default as long as the Company is in
compliance with the modified covenants.
|
|
|
•
|
The
Company shall make all payments of principal, interest and premium, if
any, without withholding or deduction for taxes, and must offer to
repurchase the notes if they are adversely affected by changes in tax laws
that affect the payments to the
holders.
|
At
September 30, 2009, the Company was not in compliance with the required
financial covenants. In December 2009, the noteholders have waived the
requirement on the financial ratio at September 30, 2009 through March 31, 2010
as long as the Company makes the payments required under the December 2009
agreement. See Note 26.
The
indentures provide for an event of default should the Company fails to comply
with its obligations under the indentures and certain events of bankruptcy or
similar relief.
The
Company’s obligations are guaranteed by its subsidiaries and are secured by a
lien on the stock of Sinoenergy Holding.
At the
time of the September 2007 financing, the Company also entered into an investor
rights agreement, as clarified, pursuant to which, as long as an investor holds
at least $2,000,000 principal amount of notes or at least 3% of the issued and
outstanding stock:
|
|
|
|
•
|
The
investor has the right to approve the Company’s annual budget, and the
Company cannot deviate by more than 15% of the amount in the approved
budget.
|
|
|
|
|
•
|
The
Company and its subsidiaries cannot replace or change the substantive
responsibilities of the chief executive officer except in the event of his
incapacity, resignation or retirement.
|
|
|
|
|
•
|
The
Company and its subsidiaries cannot take any action that would result in a
change of control, as defined in the indentures.
|
|
|
|
|
•
|
The
Company and its subsidiaries cannot change the number of board members or
the composition or structure of the board or board committees or delegate
powers to a committee or change the responsibilities and powers of any
committee.
|
|
|
|
|
•
|
The
Company shall, by April 1, 2008, have appointed an independent public
accountant from a list of 16 firms provided by the investors, failing
which the Company shall pay the investors the sum of $2,500,000 on April 1
of each year in which this condition is not met, and the Company shall not
terminate the engagement of such auditor without prior investor approval.
The Company has complied with this condition.
|
|
|
|
|
•
|
The
investors have a right of first refusal on future financings by us and
proposed transfers, with limited exceptions, by Mr. Huang and Mr. Deng.
The investors also have a tag-along right in connection with proposed
sales of stocks by Mr. Huang and Mr.
Deng.
|
The
investor rights agreement, as clarified, also provides that (i) the Company will
not sell shares of its common stock or grant options or warrants or issue
convertible securities with an exercise or conversion price that is less than
$0.80 per share, (ii) the minimum conversion price for the convertible debenture
would be $0.80 per share, (iii) the holders of the convertible notes may call an
event of default if the Company breaches its covenant not to issue shares at a
price which is less than $0.40 per share. If the Company increases its
authorized common stock, the conversion price would decrease to an amount not
less than $0.05 per share. The Company and the investors agreed to use their
commercially reasonable efforts to modify the indenture for the convertible
notes to reflect these provisions of the investor rights agreement.
Management
reviewed the accounting for these transactions and concluded that the conversion
option did not constitute an embedded derivative However, the initial
transaction included a beneficial conversion feature of $176,656 which was
charged to additional paid in capital and is being amortized over the life of
the notes commencing October 1, 2007.
As a
result of the reduction in the conversion price from $6.34 to $5.125, the
Company recorded an additional beneficial conversion feature of $3,360,905 as a
discount to the notes and additional paid in capital, which is being amortized
as interest expense over the remaining term of the notes commencing April 1,
2008. As a result of the further reduction in the conversion price
from $5.125 to $4.20, the Company recorded an additional beneficial conversion
feature of $3,862,439 as a discount to the notes and additional paid in capital,
which is being amortized as interest expense over the remaining term of the
notes commencing January 1, 2009. Upon prepayment of the convertible
notes, the unamortized portion of the beneficial conversion feature will be
recognized.
Mr. Huang
and Mr. Deng are also prohibited from transferring any shares, with limited
exceptions, until the investors shall have sold, singly or in the aggregate,
more than 5% of the Company’s total outstanding equity on a fully-diluted
basis.
From the
closing date and as long as long as Abax continues to hold more than 5% of the
outstanding shares of common stock on an as-converted basis, (i) Abax shall be
entitled to appoint up to 20% of the voting members (or the next higher whole
number if such percentage does not yield a whole number) of the Company’s board
of directors, and (ii) if the Company fails to meet the net income requirements
under the indenture for the convertible notes, Abax has the right to appoint an
additional director. The Abax director shall be entitled to serve on each
committee of the board, except that, the Abax director shall not serve on the
audit committee unless he or she is an independent director. Mr. Huang and Mr.
Deng have agreed to vote their shares for the election of the Abax directors.
The Company is required to amend its by-laws to provide that a quorum for action
by the board shall include at least one Abax director.
The
Company is required to prepare and file a registration statement covering the
sales of all of the shares of common stock issuable upon conversion of the
convertible notes, subject to any limitation required by Rule 415 of the SEC
pursuant to the Securities Act of 1933 and to have the registration statement
declared effective by March 28, 2008. In the event that the registration
statement has not been declared effective by the SEC on or before March 28, 2008
or if effectiveness of the Registration Statement is suspended at any time other
than pursuant to a suspension notice, for each 90-day period during which the
registration default remains uncured, the Company is required to pay additional
interest at the rate of one percent 1% of the convertible notes, as described
above. As of September 30, 2009, the common stock issuable upon conversion
of the notes had not been registered under the Securities Act of 1933, as
amended. Accordingly, the Company recorded $420,000 and $140,000 as liquidated
damages payable under registration rights agreements for the years ended
September 30, 2008 and 2009. The Company will review and adjust this accrual at
each subsequent period end.
A
reconciliation of the original principal amount of the 12% senior notes to the
amounts shown on the balance sheet at September 30, 2009 and September 30, 2008
is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2007
|
|
|
|
|
|
|
|
|
|
Amortization
of beneficial conversion feature
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2008
|
|
|
|
|
|
|
|
|
|
Amortization
of beneficial conversion feature
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2009
|
|
|
|
|
A
reconciliation of the original principal amount of the 3% senior convertible
notes to the amounts shown on the balance sheet at September 30, 2009 and 2008
is as follows (amounts in thousands):
|
|
|
|
|
Beneficial
conversion feature
|
|
|
|
|
Balance,
September 30, 2007
|
|
|
|
|
Amortization
of beneficial conversion feature
|
|
|
|
|
|
|
|
|
|
Interest
accrued for guaranteed 13.8% return
|
|
|
|
|
Discount
resulting from reset adjustment effective March 28,
2008
|
|
|
|
|
Amortization
of discount resulting from reset
|
|
|
|
|
Balance,
September 30, 2008
|
|
|
|
|
Interest
accrued for guaranteed 13.8% return
|
|
|
|
|
Amortization
of beneficial conversion feature
|
|
|
|
|
Amortization
of discount resulting from reset
|
|
|
|
|
Discount
resulting from reset adjustment effective March 28,
2009
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2009
|
|
|
|
|
As
further detailed in Note 26, in October and December 2009, the Company and the
noteholders agreed to modifications to and accelerated settlement of the senior
and convertible notes.
18.
Long-term bank loan
The
following table summarizes the contractual long-term borrowings between various
banks and the Company as of September 30, 2009 (dollars in
thousands):
Bank
Name
|
|
Purpose
|
|
Borrowing
Date
|
|
Borrowing
Term
|
|
Annual
Interest Rate
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the contractual long-term borrowings between the
banks and the Company as of September 30, 2008 (dollars in
thousands):
Bank
Name
|
|
Purpose
|
|
Borrowing
Date
|
|
Borrowing
Term
|
|
Annual
Interest Rate
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.
Related Party Relationships and
Transactions
The
related parties with which the Company had transactions in the years ended
September 30, 2009 and 2008, are as follows:
Name
of related party
|
|
Relationship
|
|
|
Joint
venture entity with China New Energy in which the Company has a 20%
interest
|
|
|
80%
shareholder of Anhui Gather and 20% shareolder of Hubei
Gather
|
Significant
transactions between the Company and its related parties during the year ended
September 30, 2009 and 2008 are as follows:
Related
party receivables
Name
of the Company
|
|
September
30, 2009
|
|
September
30, 2008
|
|
|
|
|
|
|
|
$382,000
(current accounts)
|
|
$500,000
(current accounts)
|
|
|
$44,000
(current accounts)
|
|
$44,000
(current accounts)
|
20.
Segment Information
Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the Company in
deciding how to allocate resources and in assessing performance.
As all
businesses of the Company are carried out in the PRC, the Company is deemed to
operate in one geographical area.
The
segment information set forth below has been derived from our audited financial
statements for the years ended September 30, 2009 and 2008.
Year
Ended September 30, 2009
($
`000)
|
|
Customized
pressure
containers
|
|
CNG
station
facilities
and
construction
|
|
CNG
station
operation
|
|
Vehicle
conversion
kits
|
|
Total
|
|
|
|
$
|
4,762
|
|
$
|
9,495
|
|
$
|
18,584
|
|
$
|
8,959
|
|
|
$
|
41,800
|
|
|
|
|
3,883
|
|
|
5,211
|
|
|
16,455
|
|
|
6,801
|
|
|
|
32,350
|
|
|
|
|
879
|
|
|
4,284
|
|
|
2,129
|
|
|
2,158
|
|
|
|
9,450
|
|
|
|
|
18
|
%
|
|
45
|
%
|
|
|
|
24
|
%
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180
|
|
|
84
|
|
|
568
|
|
|
559
|
|
|
|
1,391
|
|
General
and administrative expenses
|
|
|
2,275
|
|
|
6,497
|
|
|
3,
205
|
|
|
745
|
|
|
|
12,722
|
|
|
|
|
2,455
|
|
|
6,581
|
|
|
3,773
|
|
|
1,304
|
|
|
|
14,113
|
|
Income
(loss) from operations
|
|
$
|
(1,576
|
)
|
$
|
(2,297
|
)
|
$
|
(1,644
|
)
|
$
|
854
|
|
|
$
|
(4,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,448
|
|
$
|
58,073
|
|
$
|
48,134
|
|
$
|
11,991
|
|
|
$
|
180,646
|
|
Year
Ended September 30, 2008
($
`000)
|
|
Customized
pressure
containers
|
|
CNG
station
facilities
and
construction
|
|
CNG
station
operation
|
|
Vehicle
conversion
kits
|
|
Total
|
|
|
|
$
|
9,692
|
|
$
|
16,237
|
|
$
|
3,246
|
|
$
|
11,765
|
|
$
|
40,940
|
|
|
|
|
5,374
|
|
|
9,470
|
|
|
2,551
|
|
|
8,194
|
|
|
25,589
|
|
|
|
|
4,318
|
|
|
6,767
|
|
|
695
|
|
|
3,571
|
|
|
15,351
|
|
|
|
|
45
|
%
|
|
42
|
%
|
|
21
|
%
|
|
30
|
%
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275
|
|
|
52
|
|
|
150
|
|
|
404
|
|
|
881
|
|
General
and administrative expenses
|
|
|
943
|
|
|
1,591
|
|
|
1,533
|
|
|
822
|
|
|
4,889
|
|
|
|
|
1,218
|
|
|
1,643
|
|
|
1,683
|
|
|
1,226
|
|
|
5,770
|
|
Income
(loss) from operations
|
|
$
|
3,100
|
|
$
|
5,124
|
|
$
|
(988
|
)
|
$
|
2,345
|
|
$
|
9,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,075
|
|
$
|
45,441
|
|
$
|
28,654
|
|
$
|
17,177
|
|
$
|
132,347
|
|
21.
Capital Stock
As of
September 30, 2009, the Company had the following shares of common stock
reserved for issuance:
|
•
|
555,359
shares issuable upon exercise of warrants;
|
|
|
|
|
•
|
3,333,334
shares issuable upon conversion of 3% senior convertible
notes;
|
|
|
|
|
•
|
1,000,000
shares issuable upon exercise of stock options or other equity-based
incentives pursuant to the Company’s 2006 long-term incentive plan, of
which options to purchase 790,000 shares were
outstanding.
|
|
|
Number
of shares issuable on exercise of warrants
|
|
|
|
$1.70
Warrants
|
|
$2.40
Warrants
|
|
$4.20
Warrants
|
|
$8.00
Warrants
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at
September 30, 2009, the weighted average exercise price for all warrants is
$2.79. None of the outstanding warrants is subject to reset provisions other
than as a result of a stock distribution, split or dividend, a reverse split or
combination of shares or other recapitalization, and, in the case of the
warrants to purchase 455,360 shares of common stock issued in the June 2006
private placement, sales of common stock at prices below the exercise
price.
Stock
options
Pursuant
to the 2006 long-term incentive plan, each newly-elected independent director
receives, at the time of his or her election, a five-year option to purchase
15,000 shares of common stock at the fair market value on the date of his or her
election. The plan provides for the annual grant to each independent director of
an option to purchase 2,500 shares of common stock on the first trading day
in April of each calendar year, at market price, subject to stockholder approval
of the plan, commencing in 2007. Pursuant to the automatic grant provisions of
the plan, in June 2006, the Company issued to its independent directors, options
to purchase an aggregate of 60,000 shares of common stock at $1.30 per share,
being the fair market value on the date of grant.
Pursuant
to the 2006 long-term incentive plan, each independent director is to be
granted an option to purchase 2,500 shares of common stock on
the first trading day in April of each calendar year at market price. On
April 1, 2007, the four independent directors were granted stock options to
purchase a total of 10,000 shares of common stock at an exercise price of $4.06
per share, being the fair market value on the date of grant. On April
1, 2008, the four independent directors were granted stock options to purchase a
total of 10,000 shares of common stock at an exercise price of $5.80 per share,
being the fair market value on the date of grant. On April 1, 2009, the
four independent directors were granted stock options to purchase a total of
20,000 shares of common stock at an exercise price of $1.32 per share, being the
fair market value on the date of grant. All of the options granted to the
independent directors become exercisable cumulatively as to 50% of the shares
subject thereto six months from the date of grant and as to the remaining 50%,
eighteen months from the date of grant, and expire on the earlier of (i) five
years from the date of grant, or (ii) seven months from the date such
independent director ceases to be a director if such independent director ceases
to be a director other than as a result of his death or
disability.
On April
9, 2007, pursuant to 2006 long-term incentive plan, the stock option committee
of the board of directors granted five year options to its senior managers and
key management to acquire 590,000 shares of common stock at $4.00 per
share, being the fair market value on the date of grant. These options vest as
to 50% of the underlying shares of common stock on August 3, 2007 and as to the
remaining 50% on August 3, 2008.
On
January 9, 2008, pursuant to 2006 long-term incentive plan, the stock option
committee of the board of directors granted five year options to its senior
managers and key management to acquire 60,000 shares of common stock at $8.20
per share, being the fair market value on the date of grant. These options vest
as to 50% of the underlying shares of common stock on January 9, 2009 and as to
the remaining 50% on January 9, 2010.
On March
10, 2008, pursuant to 2006 long-term incentive plan, the stock option committee
of the board of directors granted five year options to its senior managers and
key management to acquire 40,000 shares of common stock at $6.20 per share,
being the fair market value on the date of grant. The options vest as to 42% of
the underlying shares of common stock on December 31, 2008, 50% on December 31,
2009 and as to the remaining 8% on March 9, 2010.
On June
1, 2008, pursuant to 2006 long-term incentive plan, the stock option committee
of the board of directors granted five year options to the former chief
financial officer to acquire 75,000 shares of common stock at $5.72 per share,
being the fair market value on the date of grant. On October 18, 2008, the chief
financial officer resigned from the Company and the options were
forfeited.
|
|
Shares subject
to
options
|
|
|
Weighted
Average
exercise price scope
|
|
|
Remaining Contractual
life(years)
|
|
Options
outstanding at September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted during the period (independent directors)
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
forfeited during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair
value of options granted is estimated on the date of grant using the
Black-Scholes option-pricing model utilizing the assumptions shown in the
following table:
Stock
Options Granted On
|
|
Grant
Date
|
|
April
1, 2009
|
|
|
June
1, 2008
|
|
|
March
10, 2008
|
|
|
January
9, 2008
|
|
|
April
9, 2007
|
|
|
April
1, 2007
|
|
|
June
2, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46.1
|
%
|
|
|
46.1
|
%
|
|
|
68.32
|
%
|
|
|
80.06
|
%
|
|
|
26.39
|
%
|
|
|
35.16
|
%
|
|
|
50
|
%
|
|
|
|
2.93
|
%
|
|
|
2.93
|
%
|
|
|
4.64
|
%
|
|
|
4.64
|
%
|
|
|
4.64
|
%
|
|
|
4.64
|
%
|
|
|
4.64
|
%
|
|
|
|
5
|
|
|
|
3
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
3
|
|
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
$
|
0.58
|
|
|
$
|
1.94
|
|
|
$
|
3.56
|
|
|
$
|
5.16
|
|
|
$
|
1.24
|
|
|
$
|
1.2
|
|
|
$
|
0.5
|
|
The fair
value of stock options issued during the years ended September 30, 2009 and 2008
totaled $11,600 and $435,907, respectively.
22. Basic
and Diluted Earnings Per Share
Basic
earnings per share is based upon the weighted average number of shares of common
stock outstanding during the period. Diluted earnings per share is based on the
assumption that all dilutive convertible shares, stock options and warrants
were converted or exercised. The number of shares included in determining
diluted earnings per share is computed by applying the treasury stock method.
Under this method, options and warrants are assumed to be exercised at the
beginning of the period (or at the time of issuance, if later), with the funds
obtained thereby being used to purchase common stock at the average market price
during the period.
The
details for the fully diluted outstanding shares for the years ended September
30, 2009 and 2008 are as follows:
|
|
|
Year
ended
September
30, 2009
|
|
Year
ended
September
30, 2008
|
Weighted
average common stock outstanding during period
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issuable pursuant to warrants
|
|
|
|
|
|
Common
stock issuable upon conversion of notes
|
|
|
|
|
|
Common
stock issuable upon exercise of stock options
|
|
|
|
|
|
Total
diluted outstanding shares
|
|
|
|
|
|
For the
purpose of computing EPS for the year ended September 30, 2009 and 2008,
earnings are as follows:
|
|
Year
ended
September
30, 2009
|
|
Year
ended
September
30, 2008
|
|
|
|
|
|
|
Add
back interest on convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common shareholders
|
|
|
|
|
|
Because
the Company sustained a loss for the year ended September 30, 2009, the share
issuable upon exercise of options and warrants and upon conversion of
convertible notes would be anti-dilutive.
Cancellation
of Shares
As part
of the Company’s June 2006 private placement, the Company issued warrants which
provided for a reduction in the exercise price of the warrants if certain
earnings levels were not reached. Pursuant to an agreement with the
holders of outstanding warrants, in consideration for the elimination of this
provision, in July 2008, Skywide sold to the warrant holders a total of 79,822
shares of common stock and Skywide returned 20,000 shares of common stock to the
Company for cancellation.
23.
Commitments and Contingencies
The
Company has the following material contractual obligations and capital
expenditure commitments:
The
Company and China New Energy formed Hubei Gather to construct and operate
natural gas processing plants with expected annual processing capacity of
100-300 million cubic meters in Hubei Province. The registered capital is $5
million of which the Company will contribute $4 million as 80% equity owner and
New Energy will contribute $1 million for a 20% interest. The term of the
business of Hubei Gather is from March 23, 2007 to March 22, 2027. As of
September 30, 2009, the Company’s commitment for future funding was
$2,625,000. In November 2009, the Company signed two agreements with
China New Energy pursuant to which we will transfer a 30% interest in Hubei
Gather to China New Energy for $1.5 million and China New Energy will transfer a
30% interest in Anhui Gather to us for $1.5 million. Upon completion of these
two equity transfers, we and China New Energy would each own 50% of both Hubei
Gather and Anhui Gather. The effect of these agreements is that the
Company will have exchanged a 30% interest in Hubei Gather for a 30% interest in
Anhui Gather. As a result of these transfers, our commitment for
future funding of these entities will remain $2,625,000.
The
results of Hubei Gather’s operations are included in our consolidated financial
statements as of and for the year ended September 30, 2009 and
2008.
Sinoenergy
Holding and Sinogas signed an agreement to set up Qingdao Sinoenergy Gas in
which Sinoenergy Holding would own 60% and Sinogas would own 40%. As
a result, Qingdao Sinoenergy Gas will be 90% owned by us. Sinoenergy
Holding’s commitment will be $2,636,000, and Sinogas’ commitment will be
$1,757,000. As of September 30, 2009, Sinogas had made its full contribution and
the Company’s commitment was $2,636,000.
Jiaxing
Lixun will contribute $58,574 to Yichang Liyuan Power Technology Company to own
40% equity. As of September 30, 2009, Lixun contributed $29,287. As of September
30, 2009, the Company’s commitment for future funding was $29,287.
Wuhan
Sinoenergy and Pingdingshan Sinoenergy, subsidiaries of the Company, have leased
13 parcels of land in Wuhan City and Pingdingshan City for their CNG stations
under operating lease agreements. The lease terms are from 7 year to 30 years
with annual rental fees of approximately $846,000. Based on land
rental agreements in effect at September 30, 2009, the Company will pay a total
of $5.73 million during through 2039.
Wuhan
Sinoenergy has two agreements to purchase land use rights in Wuhan City from
different non-affiliated parties. One agreement provides for a purchase price of
approximately $1.58 million, of which approximately $1.32 million has been paid,
and the title transfer is in the process. The second provides for a purchase
price of approximately $1.32 million, of which approximately $732,000 has been
paid. The acquisition of the land requires government approval.
Our
commitment for the construction of CNG stations, including stations being
constructed by Wuhan Sinoenergy and Hubei Gather, was $1,025,000 as of September
30, 2009. .
Our
commitment for the construction of a new plant in Jiaxing Lixun was $1,085,000
as of September 30, 2009.
Our
commitment for the purchase of property, plant and equipment, including property
for Wuhan Sinoenergy and Hubei Gather, was $5,901,000 as of September 30,
2009.
24.
Retirement Benefits
The
full-time contracted employees of the Company are entitled to welfare benefits,
including medical care, labor injury insurance, housing benefits, education
benefits, unemployment insurance and pension benefits through a Chinese
government-mandated multi-employer defined contribution plan. The
Company is required to accrue the employer-portion for these benefits based on
certain percentages of the employees’ salaries. The total provision
for such employee benefits was $523,135 and $346,774 for the year ended
September 30, 2009 and 2008, respectively. The PRC government is responsible for
the staff welfare benefits including medical care, casualty, housing benefits,
unemployment insurance and pension benefits to be paid to these employees. The
Company is responsible for the education benefits to be paid.
From time
to time, the Company may hire some part time workers or short term workers to
satisfy the peak season labor requirement. Those workers have the right to
terminate their work to the Company at any time. For those part time
non-contracted workers, it is difficult for the Company to accurately record the
working time, total wages and then accrue welfare benefits. So based on the
common practice in the PRC, the Company treats those workers as probationers,
and does not accrue welfare benefits for them. Although the Company believes the
common treatment is acceptable under these circumstances, there exists a
possibility that the government may require the Company to accrue the welfare
benefit and may assess a penalty for the under accrual. The Company
does not believe an assessment by the PRC government, if any, would be
significant.
25.
Significant Concentrations
The
Company grants credit to its customers, generally on an open account basis. The
Company’s customers are all located in the PRC.
In the
year ended September 30, 2009, one customer of the station facilities and
construction segment accounted for more than 10% of total sales, and in the year
ended September 30, 2008, two customers of the station facilities and
construction segment each accounted for more than 10% of our total
sales. These customers, who purchased CNG truck trailers, accounted
for approximately 19.2% and 32.0% of total sales in the year ended September 30,
2009 and 2008, which, in each year, represented most of the revenue from this
division. At September 30, 2009 and 2008, approximately 55.7% and
71.0%, respectively, of the Company’s accounts receivable were from these
customers.
26.
Subsequent Events
Merger
Agreement
On
October 12, 2009, the Company entered into an agreement and plan of merger with
Skywide, a corporation which is wholly owned by the Company’s chairman and chief
executive officer, both of whom are also directors. Pursuant to the agreement,
the Company will be merged into Skywide, with Skywide being the surviving
entity, and each shares of common stock of the Company(other than shares owned
by the Company, Skywide, or the two shareholders of Skywide), will be converted
into the right to receive, upon presentation of the certificates for their
common stock, the sum of $1.90. The merger is subject to shareholder
approval.
Litigation
The
Company is a defendant in an action filed in the Supreme Court of the State of
New York, Nassau County, by Stephen Trecaso and Linda Watts against the Company
and its directors which purports to be a class action asserting claims of breach
of fiduciary duty and aiding and abetting the breach of fiduciary
duty. The complaint was dated October 16, 2009 and an amended
complaint was dated November 18, 2009. Plaintiffs seek injunctive
relief and damages arising out of a potential sale of the company to Skywide by
means of an allegedly unfair process and unfair price. The Company
believes that this action is without merit, that it has valid defenses to the
action, and that it will vigorously defend the action.
The
Company, its directors, and Skywide are defendants in four similar actions
commenced in the Eighth Judicial District Court of the State of Nevada in and
for Clark County. The Company removed these four actions to the
Federal District Court for the District of Nevada. The plaintiffs in
those actions are (i) Robert Grabowski, (ii) Robert E. Guzman, (iii) Carol Karch
and (iv) Johan L. Stoltz. The Guzman, Karch and Stoltz actions were
filed on October 26, 2009 and the Grabowski action was filed on October 30,
2009. Plaintiffs allege causes of action that sound in breach of
fiduciary duty and aiding and abetting the breach of that fiduciary
duty. Plaintiffs seek injunctive relief and damages arising out of a
potential sale of the company to Skywide by means of an allegedly unfair process
and unfair price. The Company believes that these actions are without
merit, that it has valid defenses to the actions, and that it will vigorously
defend the action.
Modification
and Waiver under Debt Agreements
On
October 5, 2009 and December 17, 2009, the Company entered into agreements with
the holders of its $16,000,000, 12% senior notes and its $14,000,000, 3%
convertible notes. Pursuant to these agreements:
·
|
The
noteholders agreed to waive default of the provisions that require the
Company’s common stock to be publicly traded, that require the Company to
repurchase the notes upon a change of control, and that require the
Company’s common stock to be traded on the NASDAQ Capital Market or the
NASDAQ Global Market.
|
·
|
The
noteholders waived covenant compliance requirements at September 30, 2009
and through March 31, 2010.
|
·
|
The
Company agreed to repay the 12% senior notes in the principal amount of
$16 million. Initially the payments were due by November 30,
2009. The Company paid approximately $14 million by November
30, 2009. As a result of the December agreement, the Company
must pay the remaining balance of approximately $2 million by December 31,
2009. The balance due on these notes was paid on December 23,
2009.
|
·
|
The
Company agreed to pay the convertible notes in the principal amount of $14
million in two installments, with an initial payment of $5 million being
due ten days after the merger with Skywide becomes effective and the
balance 30 days thereafter. The conversion feature of the notes
will be eliminated. The Company will be required to pay interest to
provide the note holders with a yield to maturity of 13.8% per
annum.
|
·
|
The
noteholders reduced the remaining obligation for liquidated damages for
failure to register the shares of common stock issuable upon conversion of
the convertible notes to $280,000, which is to be paid by December 31,
2009.
|
·
|
The
provision requiring an adjustment to the conversion price of the notes
based on stated annual earnings of the Company was
eliminated.
|
·
|
The
provisions of the indenture relating to the reduction in the conversion
price of the convertible notes if the Company issues stock at a price, or
issue convertible securities with a conversion or exercise price that is
less than the conversion price (presently $4.20 per share) were
eliminated.
|
Equity
transfer
On
November 27, 2009, the Company signed agreement with China New Energy pursuant
to which the Company will transfer a 30% interest in Hubei Gather to China New
Energy for $1.5 million.
On
November 23, 2009, the Company signed an agreement with China New Energy
pursuant to which China New Energy will transfer a 30% interest Anhui Gather to
the Company for $1.5 million.
Upon
completion of these two equity transfers, the Company and China New Energy will
each own 50% of both Hubei Gather and Anhui Gather. The effect of
these agreements is that the Company will have exchanged a 30% interest in Hubei
Gather for a 30% interest in Anhui Gather.
ANNEX D
U.S.
Securities and Exchange Commission
Washington,
DC 20549
Form
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE
QUARTERLY PERIOD ENDED
December
31, 2009
Commission
File Number: 1-34131
Sinoenergy
Corporation
(Name of
small business issuer as specified in its charter)
Nevada
|
|
84-1491682
|
(State
or other jurisdiction
of
incorporation)
|
|
(I.R.S.
Employer
Identification
Number)
|
1603-1604,
Tower B Fortune Centre Ao City
Beiyuan
Road, Chaoyang District,
Beijing,
People’s Republic of China 100107
|
(Address
of principal executive offices)
|
Issuer’s
telephone number, including area code:
86-10-84928149
|
Check
whether the issuer (1) has filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
|
o
|
Accelerated
filer
|
o
|
Non-accelerated
filer
(Do
not check if smaller reporting company)
|
o
|
Smaller
reporting company
|
x
|
Indicate
by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
o
No
x
As of
February 13, 2010, the Registrant had 15,922,391 shares of common stock,
par value $0.001 per share, issued and outstanding.
Transitional
Small Business Disclosure Format: Yes
o
No
x
SINOENERGY
CORPORATION AND SUBSIDIARIES
|
Page
|
|
Part
I. Financial Information
|
|
|
|
|
|
|
|
Item
1. Consolidated Financial Statements
|
|
|
|
|
|
|
|
Consolidated Balance Sheets
as of December 31, 2009 (Unaudited) and September 30,
2009
|
|
|
|
|
|
|
|
Consolidated Statements of
Operations and Comprehensive Income for the Three Months Ended December
31,
2009
and 2008 (Unaudited)
|
|
|
|
|
|
|
|
Consolidated Statement of
Stockholders’ Equity for the Three Months Ended December 31, 2009
(Unaudited)
|
|
|
|
|
|
|
|
Consolidated Statements of
Cash Flows for the Three Months Ended December 31, 2009 and 2008
(Unaudited)
|
|
|
|
|
|
|
|
Notes to Consolidated
Financial Statements for the Three Months Ended December 31, 2009 and 2008
(Unaudited)
|
|
|
|
|
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
|
|
|
|
|
|
|
Item
4. Controls and Procedures
|
|
|
|
|
|
|
|
Part
II. Other Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
Sinoenergy
Corporation and Subsidiaries
Consolidated
Balance Sheets
(In
thousands of United States dollars)
|
|
December
31, 2009
|
|
|
September
30, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
16,936
|
|
|
$
|
18,237
|
|
Restricted
cash
|
|
|
1,504
|
|
|
|
1,413
|
|
Accounts
receivable, net
|
|
|
28,283
|
|
|
|
29,756
|
|
Inventories
|
|
|
4,797
|
|
|
|
4,619
|
|
Other
receivable, net
|
|
|
14,360
|
|
|
|
17,644
|
|
Due
from related party
|
|
|
44
|
|
|
|
426
|
|
Deposits
and prepayments
|
|
|
7,593
|
|
|
|
8,629
|
|
Deferred
expenses
|
|
|
29
|
|
|
|
63
|
|
TOTAL
CURRENT ASSETS
|
|
|
73,546
|
|
|
|
80,787
|
|
|
|
|
|
|
|
|
|
|
Long-term
investments
|
|
|
4,839
|
|
|
|
4,905
|
|
Property,
plant and equipment, net
|
|
|
58,054
|
|
|
|
54,870
|
|
Intangible
assets
|
|
|
100
|
|
|
|
116
|
|
Land
use rights
|
|
|
30,249
|
|
|
|
30,370
|
|
Other
long term assets
|
|
|
13,784
|
|
|
|
7,672
|
|
Goodwill
|
|
|
1,906
|
|
|
|
1,906
|
|
Deferred
tax asset
|
|
|
24
|
|
|
|
20
|
|
TOTAL
NON-CURRENT ASSETS
|
|
|
108,956
|
|
|
|
99,859
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
182,502
|
|
|
$
|
180,646
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Short-term
bank loan
|
|
$
|
47,480
|
|
|
$
|
44,223
|
|
Notes
payable
|
|
|
4,760
|
|
|
|
4,583
|
|
Accounts
payable
|
|
|
5,501
|
|
|
|
5,193
|
|
Advances
from customers
|
|
|
814
|
|
|
|
2,100
|
|
Additional
interest payable under convertible note indenture
|
|
|
280
|
|
|
|
280
|
|
Income
taxes payable
|
|
|
713
|
|
|
|
475
|
|
Construction
payables
|
|
|
901
|
|
|
|
2,982
|
|
Other
payables
|
|
|
587
|
|
|
|
2,801
|
|
Due
to related party
|
|
|
20,208
|
|
|
|
-
|
|
Accrued
expenses
|
|
|
430
|
|
|
|
538
|
|
Deferred
income
|
|
|
26
|
|
|
|
38
|
|
Derivative
liability
|
|
|
3,591
|
|
|
|
-
|
|
Current
portion of long-term notes payable
|
|
|
10,934
|
|
|
|
26,667
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
96,225
|
|
|
|
89,880
|
|
|
|
|
|
|
|
|
|
|
Long-term
bank loan
|
|
|
26,361
|
|
|
|
26,358
|
|
Deferred
tax liabilities
|
|
|
1,095
|
|
|
|
1,095
|
|
TOTAL
LIABILITIES
|
|
|
123,681
|
|
|
|
117,333
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock- par value $0.001 per share; Authorized - 50,000,000 shares; Issued
and outstanding- 15,922,391 shares at December 31, 2009 and September 30,
2009
|
|
|
16
|
|
|
|
16
|
|
Additional
paid-in capital
|
|
|
27,207
|
|
|
|
34,543
|
|
Retained
earnings
|
|
|
8,594
|
|
|
|
6,850
|
|
Accumulated
other comprehensive income
|
|
|
4,777
|
|
|
|
4,772
|
|
Total
Parent shareholders’ equity
|
|
|
40,594
|
|
|
|
46,181
|
|
Non-controlling
interest
|
|
|
18,227
|
|
|
|
17,132
|
|
|
|
|
|
|
|
|
|
|
TOTAL
SHAREHOLDERS’ EQUITY
|
|
|
58,821
|
|
|
|
63,313
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
182,502
|
|
|
$
|
180,646
|
|
The
accompanying notes are an integral part of these financial
statements.
Sinoenergy
Corporation and Subsidiaries
Consolidated
Statements of Operations and Comprehensive Income (Unaudited)
(In
thousands of United States dollars except per share information)
|
|
Three Months Ended December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
income, net of land use right amortization of $61
|
|
|
|
|
|
|
|
|
Change
in fair value of derivative liability
|
|
|
|
|
|
|
|
|
Loss
from unconsolidated entity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES), NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE INCOME TAXES AND NONCONTROLLING
INTEREST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
NET INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME(LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
CONSOLIDATED
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
Net
(Loss) Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
Sinoenergy
Corporation and Subsidiaries
Consolidated
Statements of Cash Flows (Unaudited)
(In thousands of United States
dollars)
|
|
Three Months Ended December
31,
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
2009
|
|
|
2008
|
|
Consolidated
net income (loss)
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of derivative liability
|
|
|
|
|
|
|
|
|
Amortization
of note discount
|
|
|
|
|
|
|
|
|
Deferred
portion of interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
|
|
|
|
|
|
|
Recovery
of doubtful accounts
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
and notes receivable
|
|
|
|
|
|
|
|
|
Other
receivables, deposits and prepayments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash(used) provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
|
|
|
|
|
|
Prepayment
related to the other long-term assets
|
|
|
|
|
|
|
|
|
Purchase
of land use right
|
|
|
|
|
|
|
|
|
Investment
in unconsolidated entities
|
|
|
|
|
|
|
|
|
Changes
in restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
from related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
on cash of changes in exchange rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
Sinoenergy
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
December
31, 2009
(a)
Organization
Sinoenergy
Corporation (“Sinoenergy” or the “Company”) was incorporated in Nevada on March
2, 1999 under the name Franklyn Resources III, Inc. (“Franklyn”). The Company’s
corporate name was changed to Sinoenergy Corporation on September 28,
2006.
On June
2, 2006, the Company acquired Sinoenergy Holding Limited (“Sinoenergy Holding”),
a British Virgin Islands corporation. Sinoenergy Holding was the sole
stockholder of Qingdao Sinogas General Machinery Limited Corporation
(“Sinogas”), a wholly foreign-owned enterprise (“WFOE”) registered under laws of
the People’s Republic of China (the “PRC”). Sinoenergy Holding had no business
other than its ownership of Sinogas. As a result of this transaction, Sinoenergy
Holding and its subsidiary, Sinogas, became subsidiaries of the Company and the
business of Sinogas became the business of the Company.
(b)
Subsidiaries of the Company
Set forth
below is a list of the Sinoenergy’s wholly-owned and majority-owned subsidiaries
at December 31, 2009, all of whose financial statements are consolidated with
Sinoenergy. References to the Company include the Company and its
consolidated subsidiaries unless the context indicates otherwise.
The percentage ownership
reflects the percentage ownership by Sinoenergy.
Company
|
|
Ownership
%
|
|
Business
activities
|
Sinoenergy
Holding Limited
|
|
100%
|
|
Holding
company
|
Qingdao
Sinogas General
Machinery
Limited Corporation (“Sinogas”)
|
|
75.05%
|
|
Production
of compressed natural gas (CNG) facilities, technical consulting in CNG
filling station construction, manufacturing of CNG vehicle conversion
kit
|
Qingdao
Sinogas Yuhan
Chemical
Equipment Company Limited (“Yuhan”)
|
|
81%*
|
|
Manufacturing
of customized pressure containers
|
Wuhan
Sinoenergy Gas Company Limited (“Wuhan Sinoenergy”)
|
|
90%
|
|
Construction
and operating of CNG stations and the manufacturing and sales of
automobile conversion kits
|
Pingdingshan
Sinoenergy Gas
Company
Limited (“Pingdingshan Sinoenergy”)
|
|
90%
|
|
Construction
and operating of CNG stations and the manufacturing and sales of
automobile conversion kits
|
Jiaxing
Lixun Automotive
Electronic
Company Limited (“ Jiaxing Lixun”)
|
|
81%*
|
|
Design
and manufacturing of electric control devices for alternative
fuel
|
Hubei
Gather Energy
Company
Limited (“Hubei Gather”)
|
|
80%
|
|
Construction
and operating of natural gas processing plants
|
Xuancheng
Sinoenergy
Vehicle
Gas Company Limited
(“Xuancheng
Sinoenegy”)
|
|
100%
|
|
Construction
and operating of CNG stations and the manufacturing and sales of
automobile conversion kits
|
Qingdao
Jingrun General
Machinery
Company Limited (“Jingrun”)
|
|
100%
|
|
Design
and manufacturing of petroleum refinery equipment and petroleum
machinery
|
Qingdao
Sinoenergy General
Machinery
Company Limited
(“Qingdao
Sinoenergy”)
|
|
75.05%
|
|
Manufacturing
and installation of general machinery equipment
|
Nanjing
Sinoenergy Gas Company Limited(“Nanjing Sinoenergy”)
|
|
90%
|
|
Construction
and operating of CNG stations and the manufacturing and sales of
automobile conversion kits
|
Qingdao
Sinoenergy General Gas Company Limited(“Sinoenergy Gas”)
|
|
90%**
|
|
Construction
and operating of CNG and LNG stations and the manufacturing and sales of
automobile conversion kits
|
* This
subsidiary is owned 75% by Sinogas and 25% by Sinoenergy.
** This
subsidiary is owned 40% by Sinogas and 60% by Sinoenergy.
2.
Summary of Significant Accounting Policies
Management’s
Responsibility
Management
acknowledges its responsibility for the preparation of the accompanying interim
consolidated financial statements, which reflect all adjustments, consisting of
normal recurring adjustments, considered necessary in its opinion for a fair
statement of results for the interim period presented. These consolidated
financial statements should be read in conjunction with the summary of
significant accounting policies and notes to consolidated financial statements
included in the Company’s Form 10-K annual report for the fiscal year ended
September 30, 2009. These financial statements have been prepared assuming that
the Company will continue as a going concern. Results for the first quarter of
2010 are not necessarily indicative of results to be expected for the
year.
Basis of
Presentation
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States.
Principles of
Consolidation
The
accompanying consolidated financial statements include the financial statements
of Sinoenergy Corporation and its wholly-owned subsidiaries and majority-owned
subsidiaries as to which it exercises control. Intercompany transactions and
balances have been eliminated in consolidation.
Use of
Estimates
In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, the Company makes estimates,
judgments and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and sales and expenses during the reported periods.
Significant estimates include depreciation and the allowance for doubtful
accounts and other receivables, asset impairment, valuation of warrants and
options, inventory valuation, and the determination of revenue and
costs. We base our estimates on historical experience and on various
other assumptions that we believe are 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 could differ from those estimates.
Goodwill
Goodwill
represents the excess of the purchase price of business combinations over the
fair value of the net assets acquired and is tested for impairment at least
annually. The impairment test requires allocating goodwill and all other assets
and liabilities to assigned reporting units. The fair value of each reporting
unit is estimated and compared to the net book value of the reporting unit. If
the estimated fair value of the reporting unit is less than the net book value,
including goodwill, then goodwill is written down to the implied fair value of
goodwill through a charge to operations. Because quoted market prices are not
available for the Company’s reporting units, the fair values of the reporting
units are estimated based upon several valuation analyses. The goodwill on the
Company’s financial statements was a result of the transactions pursuant to
which the Company acquired Yuhan, Lixun and Xuancheng Sinoenergy, and relates to
the pressure container, vehicle conversion kits, and CNG station operation
reporting segments.
Cash and Cash
Equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents. As of
December 31, 2009 and September 30, 2009, the Company did not have any cash
equivalents. The Company maintains its cash in bank deposit accounts
that, at times, may be very significant. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to any
significant credit risk on its cash balances.
Allowance for Doubtful
Accounts
An
allowance for doubtful accounts is maintained for customers (other than related
parties) based on a variety of factors, including the length of time the
receivables are past due, significant one-time events and historical experience.
When circumstances related to customers change, estimates of the recoverability
of receivables are further adjusted.
Inventories
Inventories
are comprised of raw materials, work in process, finished goods and low value
consumable articles. Amounts are stated at the lower of cost or market value.
Substantially all inventory costs are determined using the weighted average
basis. Costs of finished goods include direct labor, direct materials, and
production overhead before the goods are ready for sale. Inventory costs do not
exceed net realizable value.
Long-Term
Investments
Investments
in entities in which the Company owns more than 20% but less than 50% of the
equity and does not have the ability to control, but has the ability to exert
significant influence, are accounted for using the equity method, which includes
recognition of a percentage share of income or loss, dividends, and any
changes in the investment percentage in an investee by an investor.
Property, Plant and
Equipment
Property,
plant and equipment are stated at cost. Depreciation is provided principally by
use of the straight-line method over the useful lives of the related assets.
Expenditures for maintenance and repairs which do not improve or extend the
expected useful life of the assets are expensed to operations while major
repairs and improvements are capitalized.
The
estimated useful lives are as follows:
Buildings
and facilities
|
15-20
years
|
Machinery
and equipment
|
5-20
years
|
Motor
vehicles
|
10-20
years
|
Office
equipment and others
|
5
to 10 years
|
Intangible
Assets
Intangible
assets, including patents and technical know-how, are stated at cost less
accumulated amortization and impairment losses. Amortization is calculated on
the straight-line method over the estimated useful lives of the assets of 10
years.
Land Use
Rights
Land use
rights are stated at cost less accumulated amortization and impairment losses.
Amortization is calculated on the straight-line method over the contractual
useful lives of 50 years.
There is
no private ownership of land in the PRC. All land is owned by the government and
the government grants what is known as a land use right, which is a transferable
right to use the land.
Impairment of
Assets
Impairment
of assets is monitored on a periodic basis, and is assessed based on the
undiscounted cash flows expected to be generated by the underlying assets. In
the event that the carrying amount of assets exceeds the undiscounted future
cash flows (fair value), then the carrying amount of such assets is adjusted to
their fair value.
Capitalization of
Interest
The
Company capitalizes interest incurred in connection with the construction of
assets, principally its CNG stations, during the construction
period. Capitalized interest is recorded as an increase to
construction in progress and, upon completion of the construction, to property
and equipment. The Company capitalized $31,783 and $102,373 of
interest during the three months ended December 31, 2009 and 2008.
Revenue
Recognition
The
Company recognizes revenue when the significant risks and rewards of ownership
have been transferred to the customer, including factors such as when persuasive
evidence that an arrangement exists, delivery has occurred, the sales price is
fixed or determinable and collectability is reasonably assured. The
Company recognizes product sales generally at the time the product is shipped.
CNG station construction and building technical consulting service revenue
related is recognized on the percentage of completion basis. The percentage of
completion method recognizes income as work on a contract (or group of closely
related contracts) progresses. The recognition of revenues and profit
is generally related to costs incurred in providing the services required under
the contract. Revenue is presented net of any sales tax and value
added tax.
Warranty
Reserves
Warranty
reserves represent the Company’s obligation to repair or replace defective
products under certain conditions. The estimate of the warranty reserves
is based on historical experience and industry practice. Based on
experience and industry practice, the Company has established a warranty reserve
rate of 0.2% of gross sales for customized pressure containers and CNG station
facilities and construction segments. The Company periodically reviews this rate
and revises it as necessary.
The
following tables show a reconciliation of the changes in the Company’s product
warranty liability (dollars in thousands).
|
|
Three
months ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Product
warranty liability, beginning of period
|
|
|
|
|
|
|
|
|
Reductions
for payments made (in cash or kind) during period
|
|
|
|
|
|
|
|
|
Changes
in liability for warranties issued during the period
|
|
|
|
|
|
|
|
|
Foreign
exchange gain/loss
|
|
|
|
|
|
|
|
|
Product
warranties, end of period
|
|
|
|
|
|
|
|
|
Income
Taxes
The
Company accounts for income taxes using an asset and liability approach whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
applicable to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
The
Company recognizes a tax benefit associated with an uncertain tax position when,
in management’s judgment, it is more likely than not that the position will be
sustained upon examination by a taxing authority. For a tax position that meets
the more-likely-than-not recognition threshold, the Company initially and
subsequently measures the tax benefit as the largest amount that it judges to
have a greater than 50% likelihood of being realized upon ultimate settlement
with a taxing authority. The liability associated with unrecognized tax benefits
is adjusted periodically due to changing circumstances, such as the progress of
tax audits, case law developments and new or emerging legislation. Such
adjustments are recognized entirely in the period in which they are identified.
The effective tax rate includes the net impact of changes in the liability for
unrecognized tax benefits and subsequent adjustments as considered appropriate
by management.
Foreign Currency
Translations
The
Company’s functional currency is Renminbi (“RMB”) and its reporting currency is
U.S. dollars. The Company’s balance sheet accounts are translated using the
closing exchange rate in effect at the balance sheet date and operating accounts
are translated using the average exchange rate prevailing during the year.
Equity accounts are translated using the historical rate as incurred.
Translation gains and losses are deferred and accumulated as a component of
accumulated other comprehensive income in shareholders’ equity. Transaction
gains and losses that arise from exchange rate fluctuations from transactions
denominated in a currency other than the functional currency are included in the
statement of operations as incurred.
Fair Value of Financial
Instruments
US GAAP
requires certain disclosures about the fair value of financial instruments. The
Company defines fair value, using the required three-level valuation hierarchy
for disclosures of fair value measurement the enhanced disclosures requirements
for fair value measures. Current assets and current liabilities qualified as
financial instruments and management believes their carrying amounts are a
reasonable estimate of fair value because of the short period of time between
the origination of such instruments and their expected realization and if
applicable, their current interest rate is equivalent to interest rates
currently available. The three levels are defined as
follow:
Level 1—Quoted
prices in active markets for identical assets or liabilities.
Level 2—Inputs,
other than the quoted prices in active markets, are observable either directly
or indirectly.
Level 3—Unobservable
inputs based on the Company's assumptions.
US GAAP
requires the use of observable market data if such data is available without
undue cost and effort.
The
following table presents certain investments and liabilities of the Company’s
financial assets measured and recorded at fair value on the Company’s condensed
consolidated balance sheets on a recurring basis and their level within the fair
value hierarchy as of December 31, 2009 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
Fair
value of embedded derivatives
|
|
|
-
|
|
|
|
-
|
|
|
$
|
3,590,783
|
|
|
$
|
3,590,783
|
Derivative financial
instruments
The
Company does not use derivative instruments to hedge exposures to cash flow,
market or foreign currency risks. The Company evaluates all of its financial
instruments to determine if such instruments are derivatives or contain features
that qualify as embedded derivatives. For derivative financial instruments that
are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date, with
changes in the fair value reported in the condensed consolidated statements of
operations. For stock-based derivative financial instruments, the
Company uses both the Black-Scholes-Merton and Binomial option pricing models to
value the derivative instruments at inception and on subsequent valuation
dates. The classification of derivative instruments, including
whether such instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative instrument
liabilities are classified in the balance sheet as current or non-current based
on whether or not net-cash settlement of the derivative instrument could be
required within 12 months of the balance sheet date.
Change in accounting
principle
On
October 1, 2009, the Company adopted a new accounting principle effective for
the 2010 fiscal year. The new principle results from a new interpretation of an
existing pronouncement that redefined when an embedded conversion feature is
indexed to an entity’s own stock. The Company’s convertible debt initially had a
conversion feature that requires a reset to the conversion price based on
certain events and the conversion feature is denominated in US currency rather
than the functional currency of the Company (RMB). At December 31, 2009, the
provisions which provided for a reset of the conversion price based on certain
events had been terminated. The newly adopted accounting principles define both
those factors as reasons the conversion feature is no longer indexed to the
company stock. The effect of the change is to cause the conversion feature to
change its classification from equity based to a derivative liability. The
cumulative change to this new accounting has been reflected on October 1 as an
adjustment to additional paid in capital and retained earnings.
The
derivative liabilities were valued using both the probability model using
Black-Scholes-Merton valuation techniques with the following
assumptions:
|
|
December
31,
2009
|
|
|
September
30,
2009
|
|
|
Date
of issuance
September
30,
2007
|
|
Conversion
feature:
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
1.48
|
%
|
|
|
1.38
|
%
|
|
|
4.23%
|
%
|
Expected
volatility
|
|
|
109.51
|
%
|
|
|
109.51
|
%
|
|
|
79.64
|
%
|
Expected
life (in years)
|
|
0.25
years
|
﹡
|
|
3.0
years
|
|
5.0
years
|
|
Expected
dividend yield
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
feature
|
|
$
|
3,590,783
|
|
|
$
|
2,705,232
|
|
|
$
|
11,946,000
|
|
﹡
At December 31,
2009, the expected life of the convertible debt was less than three
months.
The
risk-free interest rate was based on rates established by the United States
Federal Reserve Bank. The volatility was based on the volatility of
the Company’s common stock since its common stock became publicly
traded. The expected life of the conversion feature of the notes was
based on the term of the notes, including an agreement to repay the notes
following the occurrence of the merger between the Company and Skywide (See Note
17). The expected dividend yield was based on the fact that the Company has not
paid dividends to common shareholders in the past and does not expect to pay
dividends to common shareholders in the future.
The
accounting principle was implemented in the first quarter of 2010 and is
reported as a cumulative change in accounting principle. The
cumulative effect on the accounting for the conversion feature of the notes at
October 1, 2009 is as follows (dollars in thousands):
Derivative
Instrument:
|
|
Additional
Paid-in Capital
|
|
|
Retained
Earnings
|
|
|
Derivative
Liability
|
|
Conversion
feature
|
|
$
|
(7,400)
|
|
|
$
|
6,425
|
|
|
$
|
2,705
|
|
The total
cumulative effect of $975,000 in the statement of shareholders’ equity reflects
the fair value of the derivative liability of $2,705,000 less the net effect of
the associated discount of the convertible note in the amount of
$1,730,000.
On
December 31, 2009, the Company measured the fair value of the conversion feature
and recorded $885,550 as a change in fair value of the liabilities in the
accompanying condensed consolidated financial statements for the three months
ended December 31, 2009.
Noncontrolling
Interest
Noncontrolling
interest refers to the portion of a consolidated subsidiary which is not
wholly-owned by the Company. The Company records the noncontrolling interest
portion of any related profits and losses in consolidation. Other
comprehensive income related to the noncontrolling interest for the three months
ended December 31, 2009 was $0. Noncontrolling interest represented
$18,227 of the total shareholders’ equity at December 31, 2009.
Stock-Based
Compensation
The
Company grants stock options to employees and stock options and warrants to
non-employees in non-capital raising transactions for services and for financing
costs. All grants are recorded at fair value at the grant date. The Company
utilizes the Black-Scholes option pricing model to determine fair value. The
resulting amount is charged to expense on the straight-line basis over the
period in which the Company expects to receive benefit, which is generally the
vesting period. In some cases, our principal stockholder, which is owned by our
chief executive officer and our chairman, both of whom are directors, provided
or agreed to provide stock to executive officers in connection with their
employment. These shares are treated as if the shares were
contributed to and issued by the Company.
Concentration of Credit
Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of trade accounts receivable. While there
are risks associated with any concentration of customers, management believes
that the active system in place to monitor the creditworthiness
of customers will minimize such risks.
The
Company performs ongoing credit evaluations of its debtors, but does not require
collateral, in accordance with industry practice in China.
The
Company maintains its cash accounts with major banks in China. The Chinese
banks do not provide deposit insurance.
Earnings per
Share
Basic EPS
is measured as net income or loss divided by the weighted average common shares
outstanding for the period. Diluted EPS is similar to basic EPS but
presents the dilutive effect on a per share basis of potential common shares
(e.g., convertible securities, options and warrants) as if they had been
converted at the beginning of the periods presented, or issuance date, if
later. Potential common shares that have an anti-dilutive effect (i.e.,
those that increase income per share or decrease loss per share) are excluded
from the calculation of diluted EPS.
The
calculation of diluted weighted average common shares outstanding is based on
the average of the closing price of the Company’s common stock during the
reporting periods, and is applied to options and warrants using the treasury
stock method to determine if they are dilutive. The common stock issuable upon
conversion of convertible notes payable is included on an “if converted” basis
when the preferred stock and convertible notes are dilutive.
Comprehensive Income or
Loss
Comprehensive
income or loss includes all changes in equity except those resulting from
investments by owners and distributions to owners, including adjustments to
minimum pension liabilities, accumulated foreign currency translation, and
unrealized gains or losses on marketable securities.
The
Company’s only component of other comprehensive income is foreign currency
translation gain of $5,000 and $161,000 for the three months ended December 31,
2009 and 2008, respectively. Cumulative other comprehensive income or
loss is recorded as a separate component of shareholders’ equity.
New Accounting
Pronouncements
Effective
July 1, 2009, the FASB ASC became the single official source of
authoritative, nongovernmental U.S. GAAP. The historical U.S. GAAP hierarchy was
eliminated and the ASC became the only level of authoritative U.S. GAAP, other
than guidance issued by the SEC. The Company’s accounting policies were not
affected by the conversion to ASC. However, references to specific accounting
standards in the notes to our consolidated financial statements have been
changed to refer to the appropriate section of the ASC.
In
April 2008, the FASB issued a pronouncement on what now is codified as FASB
ASC Topic 350,
Intangibles —
Goodwill and Other
. This pronouncement amends the factors to be
considered in determining the useful life of intangible assets accounted for
pursuant to previous topic guidance. Its intent is to improve the consistency
between the useful life of an intangible asset and the period of expected cash
flows used to measure its fair value. The adoption of this standard
on October 1, 2009 did not have a material effect on the Company’s consolidated
financial statements.
In June
2008, the FASB amended FASB Topic ASC 815, Sub-Topic 40, “Contracts in Entity’s
Own Equity” to clarify how to determine whether certain instruments or features
were indexed to an entity's own stock under ASC Topic 815. The amendment applies
to any freestanding financial instrument (or embedded feature) that has all of
the characteristics of a derivative, for purposes of determining whether that
instrument (or embedded feature) qualifies for the scope exception. It is also
applicable to any freestanding financial instrument (e.g., gross physically
settled warrants) that is potentially settled in an entity's own stock,
regardless of whether it has all of the characteristics of a derivative, for
purposes of determining whether to apply ASC 815. The Company was
required to adopt this pronouncement on October 1, 2009. The
Company’s financial statements for the three months ended December 31, 2009 and
afterwards reflect the effect of this pronouncement.
In
April 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 805
, Business
Combinations
. This pronouncement provides new guidance that changes the
accounting treatment of contingent assets and liabilities in business
combinations under previous topic guidance. This pronouncement will
be effective for the Company for any business combinations that occur on or
after October 1, 2009.
In
April 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 825,
Financial
Instruments
. This pronouncement amends previous topic guidance to require
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies, as well as in annual financial statements.
The pronouncement was effective for interim reporting periods ending after
June 15, 2009 and its adoption did not have any significant effect on the
consolidated financial statements.
In
December 2007, the FASB issued pronouncements which are now codified as ASC 805
“
Business Combinations
”
and 810 “
Consolidation
”
(“ASC 810”), which require that ownership interests in subsidiaries held by
parties other than the parent, and the amount of consolidated net income, be
clearly identified, labeled and presented in the consolidated financial
statements. ASC 805 and ASC 810 also require that once a
subsidiary is deconsolidated, any retained non-controlling equity investment in
the former subsidiary be initially measured at fair value. Sufficient
disclosures are required to clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling
owners. ASC 805 and ASC 810 amend ASC 260 to provide that the
calculation of earnings per share amounts in the consolidated financial
statements will continue to be based on the amounts attributable to the parent.
ASC 805 and ASC 810 are effective for financial statements issued for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008, and require retrospective adoption of the presentation and
disclosure requirements for existing minority interests. All other
requirements are applied prospectively. The Company adopted ASC 805
and ASC 810 on January 1, 2009.
In
May 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 855,
Subsequent
Events
. This pronouncement establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
the financial statements are issued or are available to be issued. FASB ASC
Topic 855 provides guidance on the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements
and the disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. The pronouncement was effective for the
Company during the annual period ended September 30, 2009. The Company has
evaluated subsequent events for the period from December 31, 2009, the date of
these financial statements, through February 10, 2010, which represents the date
these financial statements are available for filing with the SEC.
In June
2009, the FASB issued ASC Topic 810-10, "
Amendments to FASB Interpretation
No. 46(R)
" (“ASC 810-10”). ASC 810-10 is intended to (1)
address the effects on certain provisions of FASB Interpretation No. 46 (revised
December 2003), “Consolidation of Variable Interest Entities,” as a result of
the elimination of the qualifying special-purpose entity concept in ASC 860-20,
and (2) constituent concerns about the application of certain key provisions of
Interpretation 46(R), including those in which the accounting and disclosures
under the Interpretation do not always provided timely and useful information
about an enterprise's involvement in a variable interest entity. This
statement will be effective for the Company on October 1, 2010. The
Company does not expect the adoption of ASC 810-10 to have a material impact on
its results of operations, financial condition or cash flows.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), and the United States Securities and Exchange Commission did
not or are not believed to have a material impact on the Company's present or
future consolidated financial statements.
3.
Restricted Cash
The
balances of restricted cash as at December 31, 2009 and September 30, 2009
represent deposits on a bill of exchange issued by the Company for the purchase
of materials.
4.
Accounts and notes receivable
Accounts
receivable are as follows (dollars in thousands):
|
|
December
31, 2009
|
|
|
September
30, 2009
|
|
Accounts
receivable
|
|
$
|
29,244
|
|
|
$
|
30,903
|
|
Notes
receivable-bank acceptance
|
|
|
251
|
|
|
|
74
|
|
Less:
allowance for doubtful receivables
|
|
|
(1,212
|
)
|
|
|
(1,221)
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,283
|
|
|
$
|
29,756
|
|
5.
Other receivable
Other
receivable are as follows (dollars in thousands):
|
|
December
31, 2009
|
|
|
September
30, 2009
|
|
Rental
receivable
|
|
$
|
2,636
|
|
|
$
|
2,636
|
|
Due
from third parties
|
|
|
8,331
|
|
|
|
9,734
|
|
Others
current accounts
|
|
|
4,291
|
|
|
|
7,133
|
|
Less:
allowance for doubtful receivables
|
|
|
(898
|
)
|
|
|
(1,859)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,360
|
|
|
$
|
17,644
|
|
6.
Deposits and prepayments
Deposits
and prepayments are as follows (dollars in thousands):
|
|
December
31, 2009
|
|
|
September 30,
2009
|
|
|
|
|
|
|
Related
to construction
|
|
$
|
1,960
|
|
|
$
|
1,681
|
Raw
materials
|
|
|
2,698
|
|
|
|
3,000
|
Related
to equipment
|
|
|
390
|
|
|
|
1,303
|
Natural
gas
|
|
|
1,319
|
|
|
|
2,303
|
Others
|
|
|
1,226
|
|
|
|
342
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,593
|
|
|
$
|
8,629
|
7.
Inventories
Inventories
are as follows (dollars in thousands):
|
|
December
31, 2009
|
|
|
September 30,
2009
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
1,978
|
|
|
$
|
2,153
|
|
Work
in progress
|
|
|
946
|
|
|
|
288
|
|
Finished
goods
|
|
|
1,830
|
|
|
|
2,159
|
|
Low
value consumables
|
|
|
43
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,797
|
|
|
$
|
4,619
|
|
8.
Long-term investments
Sinogas
General Luxi Natural Gas Equipment Co., Ltd.
On
October 31, 2008, in order to provide for a supply of raw materials, Sinogas
signed a joint venture agreement with LuXi Chemical Group, a Chinese chemical
company, to set up a company located in Liaocheng City, Shandong province, with
proposed annual production capacity of 4,000 steel bottles used in CNG trailer
manufacturing. The total registered capital is RMB 50 million
(equivalent to $7.32 million based on the exchange rate on December 31, 2009) of
which Sinogas has a 40% interest. This joint venture company commenced operation
in July 2009. At December 31, 2009, Sinogas had contributed $2.93 million, in
full satisfaction of its obligations to this enterprise. For the three months
ended December 31, the joint venture incurred loss at $126,464, of which
$50,586 is allocated to the Company.
9.
Property, Plant and Equipment
Property,
plant and equipment consist of the following (dollars in
thousands):
|
|
December
31, 2009
|
|
|
September
30, 2009
|
|
|
|
|
|
|
|
|
|
|
Buildings
and facility
|
|
$
|
16,975
|
|
|
$
|
15,637
|
|
Machinery
equipment
|
|
|
15,348
|
|
|
|
15,616
|
|
Motor
vehicles
|
|
|
2,751
|
|
|
|
2,241
|
|
Office
equipment and other
|
|
|
328
|
|
|
|
596
|
|
Total
|
|
|
35,442
|
|
|
|
34,090
|
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation
|
|
|
(2,391
|
)
|
|
|
(2,308)
|
|
|
|
|
33,051
|
|
|
|
31,782
|
|
|
|
|
|
|
|
|
|
|
Construction
in process
|
|
|
25,003
|
|
|
|
23,088
|
|
|
|
|
|
|
|
|
|
|
Net
book value
|
|
$
|
58,054
|
|
|
$
|
54,870
|
|
10.
Land use rights
|
|
December
31, 2009
|
|
|
September 30,
2009
|
|
|
|
|
|
|
|
|
Land
use rights
|
|
|
31,486
|
|
|
|
31,495
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
(1,237
|
)
|
|
|
(1,125)
|
|
|
|
|
|
|
|
|
|
|
Net
book value
|
|
$
|
30,249
|
|
|
$
|
30,370
|
|
The land
use rights include six parcels of land purchased by the Company, which are held
by Sinogas, Jingrun, Xuancheng, Qingdao Sinoenergy, Jiaxing Lixun, and Hubei
Gather. The land use rights are being amortized over the following periods,
during which they are transferable and renewable, subject to government
approval.
Owner
|
Cost
|
|
Expiration
|
Sinogas
|
$
|
20,741
|
|
May
2057
|
Jingrun
|
|
4,124
|
|
December
2056
|
Xuancheng
Sinoenergy
|
|
1,015
|
|
June
2058
|
Qingdao
Sinoenergy
|
|
3,385
|
|
June
2058
|
Jiaxing
Lixun
|
|
368
|
|
June
2058
|
Hubei
Gather
|
|
535
|
|
June
2059
|
Total
|
$
|
31,486
|
|
|
Wuhan
Sinoenergy
|
|
1,318
|
|
*
|
﹡
Wuhan Sinoenergy
has two agreements to purchase land use rights in Wuhan City from different
non-affiliated parties. One agreement provides for a purchase price of
approximately $1.58 million, of which approximately $1.32 million has been paid,
and the title transfer is in the process. The second provides for a purchase
price of approximately $1.32 million, of which approximately $732,000 has been
paid. The acquisition of the land requires government approval. The
amount paid under the purchase agreements is reflected on the balance sheet
under “land use rights.”
The land
use right owned by Sinogas represents two parcels of land located in the central
portion of Qingdao City, on which Sinogas and Yuhan’s offices and
manufacturing facilities are located. The land use right was purchased by the
Company from Beijing Sanhuan, a former shareholder of Sinogas, for a price of
RMB160 million, equivalent to US$23.47 million based on the current exchange
rate. The land is being amortized from May 2007 over a 50-year
term.
On
December 15, 2007, the Company purchased all of the equity of Jingrun, whose
sole asset is the land use right and construction in progress, for approximately
RMB60 million ($8.8 million based on the September 30, 2009 exchange rate).
The cost of the land use right paid by the Company was approximately $4.1
million based on the September 30, 2009 exchange rate.
The land
use right owned by Xuancheng was purchased by the Company from Shanghai CNPC
Enterprises Group for $874,000 based on the September 30, 2009 exchange
rate.
On
January 4, 2008, the Company purchased all of the equity of Qingdao Shan Yang
Tai Chemistry Resources Development Co., Ltd. (“QDSY”), whose sole asset is the
land use right and construction in progress, for approximately RMB43
million. The cost of the land use right paid by the Company was approximately
$1.9 million based on the September 30, 2009 exchange rate.
In June
2008, Jiaxing Lixun acquired a land use right for $368,000, which was used for
construction of a new plant.
In June
2009, Hubei Gather acquired a land use right for $535,000. The land is being
used to construct a mother CNG station in Wuhan which will be used to store CNG
and provide CNG to the Company’s stations.
The
Company made additional payments of approximately $2.9 million with respect to
land use rights owned by the Company.
11.
Goodwill
Goodwill
is as follows (dollars in thousands):
Transactions
|
|
December
31, 2009
|
|
|
September 30,
2009
|
|
|
|
|
|
|
|
|
Purchase
of an additional 80% equity interest in Yuhan
|
|
$
|
995
|
|
|
$
|
995
|
|
Purchase
of 90% equity in Jiaxing Lixun
|
|
|
619
|
|
|
|
619
|
|
Purchase
of a 70% equity in Xuancheng Sinoenergy
|
|
|
258
|
|
|
|
258
|
|
Purchase
of Jingrun
|
|
|
34
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,906
|
|
|
$
|
1,906
|
|
The
Company monitors the impairment of goodwill at least annually. As of
December 31, 2009, there were no indications that the carrying amount of the
goodwill was impaired.
12.
Other long-term assets
Other
long-term assets are as follows (dollars in thousands):
|
|
December
31, 2009
|
|
|
September
30, 2009
|
|
|
|
|
|
|
|
|
Prepaid
CNG land rental
|
|
$
|
3,046
|
|
|
$
|
2,937
|
|
Plant
construction in progress
|
|
|
9,027
|
|
|
|
3,096
|
|
CNG
station equipment on order from overseas
|
|
|
-
|
|
|
|
342
|
|
Others
|
|
|
1,711
|
|
|
|
1,297
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,784
|
|
|
$
|
7,672
|
|
13.
Short Term Bank Loan
The
following table summarizes the contractual short-term borrowings between the
banks and the Company as of December 31, 2009 (dollars in
thousands):
Bank
Name
|
|
Purpose
|
|
Borrowing
Date
|
|
Borrowing
Term
|
|
Annual
Interest Rate
|
|
|
Amount
|
|
Bank
of Communication
|
|
Working
Capital
|
|
April
27, 2009
|
|
Eight
months
|
|
|
5.31
|
%
|
|
$
|
4,980
|
|
China
Construction Bank
|
|
Working
Capital
|
|
March
18, 2009
|
|
One
year
|
|
|
5.31
|
%
|
|
|
21,967
|
|
China
Construction Bank
|
|
Working
Capital
|
|
April
20, 2009
|
|
One
year
|
|
|
5.5775
|
%
|
|
|
7,323
|
|
China
Citic Bank
|
|
Working
Capital
|
|
February
6, 2009
|
|
One
year
|
|
|
5.841
|
%
|
|
|
73
|
|
China
Citic Bank
|
|
Working
Capital
|
|
January
4, 2009
|
|
One
year
|
|
|
5.841
|
%
|
|
|
220
|
|
Industrial
Bank Co., Ltd.
|
|
Working
Capital
|
|
May
25, 2009
|
|
One
year
|
|
|
5.841
|
%
|
|
|
381
|
|
Industrial
Bank Co., Ltd.
|
|
Working
Capital
|
|
June
2, 2009
|
|
One
year
|
|
|
5.841
|
%
|
|
|
644
|
|
Bank
of Communication
|
|
Working
Capital
|
|
July
3, 2009
|
|
One
year
|
|
|
5.5755
|
%
|
|
|
146
|
|
China
Merchants Bank
|
|
Working
Capital
|
|
January
19, 2009
|
|
One
year
|
|
|
5.5755
|
%
|
|
|
1,464
|
|
China
Merchants Bank
|
|
Working
Capital
|
|
March
5, 2009
|
|
One
year
|
|
|
5.5755
|
%
|
|
|
439
|
|
China
Merchants Bank
|
|
Working
Capital
|
|
May
8, 2009
|
|
One
year
|
|
|
5.5755
|
%
|
|
|
1,025
|
|
Hankou
Bank
|
|
Working
Capital
|
|
July
21, 2009
|
|
One
year
|
|
|
5.841
|
%
|
|
|
2,930
|
|
CITIC
Bank
|
|
Working
Capital
|
|
August
26, 2009
|
|
One
year
|
|
|
6.372
|
%
|
|
|
2,637
|
|
Bank
of Communication
|
|
Working
Capital
|
|
October
9, 2009
|
|
One
year
|
|
|
5.841
|
%
|
|
|
2,372
|
|
Bank
of Communication
|
|
Working
Capital
|
|
October
26, 2009
|
|
Half
year
|
|
|
5.346
|
%
|
|
|
293
|
|
Bank
of Communication
|
|
Working
Capital
|
|
October
29, 2009
|
|
Half
year
|
|
|
5.346
|
%
|
|
|
586
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$
|
47,480
|
|
The
following table summarizes the contractual short-term borrowings between various
banks and the Company as of September 30, 2009 (dollars in
thousands):
Bank
Name
|
|
Purpose
|
|
Borrowing
Date
|
|
Borrowing
Term
|
|
Annual
Interest Rate
|
|
|
Amount
|
|
Bank
of Communication
|
|
Working
Capital
|
|
April
27, 2009
|
|
Eight
months
|
|
|
5.31
|
%
|
|
$
|
4,979
|
|
China
Construction Bank
|
|
Working
Capital
|
|
March
18, 2009
|
|
One
year
|
|
|
5.31
|
%
|
|
|
21,965
|
|
China
Construction Bank
|
|
Working
Capital
|
|
April
20, 2009
|
|
One
year
|
|
|
5.5775
|
%
|
|
|
7,322
|
|
China
Citic Bank
|
|
Working
Capital
|
|
February
6, 2009
|
|
One
year
|
|
|
5.841
|
%
|
|
|
73
|
|
China
Citic Bank
|
|
Working
Capital
|
|
January
4, 2009
|
|
One
year
|
|
|
5.841
|
%
|
|
|
220
|
|
Industrial
Bank Co., Ltd.
|
|
Working
Capital
|
|
May
25, 2009
|
|
One
year
|
|
|
5.841
|
%
|
|
|
381
|
|
Industrial
Bank Co., Ltd.
|
|
Working
Capital
|
|
June
2, 2009
|
|
One
year
|
|
|
5.841
|
%
|
|
|
644
|
|
Bank
of Communication
|
|
Working
Capital
|
|
July
3, 2009
|
|
One
year
|
|
|
5.5755
|
%
|
|
|
146
|
|
China
Merchants Bank
|
|
Working
Capital
|
|
January
19, 2009
|
|
One
year
|
|
|
5.5755
|
%
|
|
|
1,464
|
|
China
Merchants Bank
|
|
Working
Capital
|
|
March
5, 2009
|
|
One
year
|
|
|
5.5755
|
%
|
|
|
439
|
|
China
Merchants Bank
|
|
Working
Capital
|
|
May
8, 2009
|
|
One
year
|
|
|
5.5755
|
%
|
|
|
1,025
|
|
Hankou
Bank
|
|
Working
Capital
|
|
July
21, 2009
|
|
One
year
|
|
|
5.841
|
%
|
|
|
2,929
|
|
CITIC
Bank
|
|
Working
Capital
|
|
August
26, 2009
|
|
One
year
|
|
|
6.372
|
%
|
|
|
2,636
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,223
|
|
14.
Notes payable
The
balances of notes payable as at December 31, 2009 and September 30, 2009
represent the obligations in the form of promissory notes with maturity dates of
less than 12 months for the purchase of raw materials.
15.
Advances from Customers
Advances
from customers at December 31, 2009 and September 30, 2009 consist of advances
received for routine sales orders according to the Company’s sales
policy.
16.
Income Taxes Payable
Pursuant
to the PRC income tax laws, the Company’s PRC subsidiaries are generally subject
to enterprise income tax at a statutory rate of 25%. The Company pays its
enterprise tax based on its taxable income determined in accordance with the tax
laws of the PRC. Enterprise tax for the three months
ended December 31, 2009 and 2008 were 25%.
As PRC
subsidiaries that qualify as wholly foreign owned manufacturing enterprises,
Sinogas, Yuhan and Jiaxing Lixun were granted tax preferences. Sinogas and Yuhan
were granted a 100% enterprise income tax exemption for calendar years 2006 and
2007 and a 50% enterprise income tax exemption for 2008 through 2010. Jiaxing
Lixun was granted a 100% tax exemption from August 2007 through
2008 and a 50% enterprise income tax exemption for the calendar years 2009
through 2011.
Under the
current tax laws of the PRC, Wuhan Sinoenergy will be entitled to a two-year
100% tax exemption followed by three years of a 50%
tax exemption once it become profitable. Wuhan Sinoenergy did not achieve
profitability for the year ended September 30, 2009.
No
provision for other overseas tax is made as Sinoenergy Holding Limited, which is
an investment holding company, and has no taxable income in the British Virgin
Islands or the United States.
17. Long
term notes payable
On
September 28, 2007, the Company issued 12% guaranteed senior notes due 2012 in
the principal amount of $16,000,000 and 3.0% guaranteed senior convertible notes
due 2012 in the principal amount of $14,000,000. At December 31,
2009, the 12% guaranteed senior notes had been paid in full. The convertible
notes were initially convertible into common stock at an initial conversion
price of $6.34 per share. The conversion price has been reduced to $4.20 as
described below at December 31, 2009.
In
connection with the issuance of the notes, the Company’s chief executive officer
and its chairman, both of whom are directors, executed non-competition
agreements with the Company, and the Company paid the investors an arrangement
fee of $160,000, which was deducted from the proceeds of the notes.
The
convertible notes were issued pursuant to an indenture between the Company and
DB Trustees (Hong Kong) Limited, as trustee. The convertible notes are due in
September 2012 and bear interest at the stated interest rate of 3% per annum.
Although the stated interest rate is 3% per annum, if the convertible notes are
not redeemed, converted or purchased and cancelled by the maturity date, the
Company is required to redeem the convertible notes at the amount which results
in a yield to maturity of 13.8% per annum, less interest previously paid, plus
any interest accrued on overdue principal (and, to the extent lawful, on overdue
interest) and premium, if any, at a rate which is 3% per annum in excess of the
rate of interest then in effect. As a result, the Company is accruing interest
at the rate of 13.8% per annum. Since the Company is only required to pay
interest currently at the rate of 3%, the remaining 10.8% interest rate is
accrued and treated as deferred interest payable. If the convertible notes are
converted, the deferred interest payable will be credited to additional paid in
capital. Because of the agreement relating to payment of the convertible notes
described below, the principal amount of the notes and the deferred interest are
classified as current liabilities at December 31, 2009.
The
convertible note indenture requires the Company to offer to purchase the Notes
at a price which would generate a 13.8% yield if either of the following events
shall occur:
|
•
|
The
failure of the Company’s common stock to be listed on The NASDAQ Stock
Market.
|
|
|
|
|
•
|
Trading
in the Company’s common stock on any exchange or market has been suspended
for ten or more consecutive trading
days.
|
The
indenture also requires the Company to pay additional interest as
follows:
|
•
|
At
the rate of 3.0% per annum if the Company has not obtained a listing of
its common stock on the NASDAQ Global Market or the NASDAQ Capital Market
by September 19, 2008 and maintained such listing continuously thereafter
as long as the Notes are outstanding. At December 31, 2009, the Company
had met this listing requirement.
|
|
|
|
|
•
|
At
the rate of 1.0% for each 90-day period in which the Company has failed to
comply with the registration obligations under the registration rights
agreement. As of September 30, 2009, the Company had accrued additional
interest totaling $560,000 pursuant to this provision, of which
$280,000 has been paid. The noteholders have waived the right to require
the additional interest from March 31, 2009 through September 30, 2009 and
afterwards.
|
At
December 31, 2009, the holders of the convertible notes have the right to
convert their notes into common stock at a conversion price of $4.20 per share,
reflecting a reduction in the conversion price to $5.125 per share pursuant to a
supplemental indenture dated as of June 23, 2008 and a further adjustment to
$4.20 per share as of March 28, 2009 based on the market price of the Company’s
common stock. As December 31, 2009, the conversion price was subject to
adjustment in the event of a stock distribution or dividend, a reverse split or
combination of shares and the distribution of shares, warrants, assets or
indebtedness to our stockholders. Other adjustment provisions had
been terminated as of December 31, 2009.
The
indenture relating to the convertible notes including the
following:
•
|
If
the Company sells assets and does not reinvest the proceeds in its
business within 180 days (270 days in the case of a sale of real
property), to the extent that such proceeds not so reinvested exceed
$5,000,000, the Company is required to offer the holders of the notes the
right to have the Company use such excess proceed to purchase their notes
at the principal amount plus accrued interest..
|
|
|
•
|
If
there is a change of control, the Company is required to offer to
repurchase the notes at 103% of the principal of the note, plus accrued
interest. A change of control will occur if Bo Huang or Tianzhou Deng own
less than 25% of the voting power of the Company’s voting stock or, with
certain exceptions, a merger or consolidation or sale of substantially all
of the Company’s and its subsidiaries’ assets.
|
|
|
•
|
The
Company is restricted from incurring additional debt unless, after giving
effect to the borrowing, (i) the fixed charge coverage ratio would be
greater than 2.0 to 1.0 through December 31, 2009 and 3.0 to 1.0 if the
debt is incurred thereafter, and (ii) the leverage ratio would not exceed
6.0 to 1.0 through December 31, 2009 and 4.5 to 1.0 if the debt is
incurred thereafter, provided, that Sinogas may continue to maintain debt
under credit facilities of not more than $10,000,000, and may incur
purchase money indebtedness. The fixed charge coverage ratio is the ratio
of the Company’s earnings before interest, taxes, depreciation and
amortization, which is generally known as EBITDA, to consolidated interest
expense, as defined. Leverage ratio means the ratio of outstanding debt to
EBITDA, with the interest component being the consolidated interest
expense, as defined.
|
•
|
The
Company is subject to restriction in paying dividends, purchasing its own
securities or those of its subsidiaries, prepaying subordinated debt, and
making any investment other than any investments in itself and its
subsidiaries engaged in the Company’s business and certain other permitted
investments.
|
|
|
•
|
The
Company is subject to restrictions on incurring liens.
|
|
|
•
|
The
Company cannot enter into, or permit its subsidiaries to enter into,
transactions with affiliates unless it is in writing, in the Company’s
best interest and not less favorable to the Company than it could obtain
from a non-affiliate in an arms’ length transaction, with any transaction
involving more than $1,000,000 requiring audit committee approval and any
transaction involving more than $5,000,000 requiring a written opinion
from an independent financial advisor.
|
|
|
•
|
The
Company shall maintain, as of the last day of each fiscal quarter, (i) a
fixed charge coverage ratio of at least 2.00 to 1.00 through December 31,
2009 and 3.0 to 1.0 thereafter, (ii) a leverage ratio of not more than 6.0
to 1.00 through December 31, 2009 and 4.5 to 1.0 thereafter, and (iii) a
consolidated subsidiary debt to consolidated net tangible asset ratio of
not more than 0.35. The noteholders agreed that they would not take any
action to declare an event of default as long as the Company is in
compliance with the modified covenants.
|
|
|
•
|
The
Company shall make all payments of principal, interest and premium, if
any, without withholding or deduction for taxes, and must offer to
repurchase the notes if they are adversely affected by changes in tax laws
that affect the payments to the
holders.
|
At
December 31, 2009, the Company was not in compliance with the required financial
covenants. In December 2009, the noteholders have waived the requirement on the
financial ratio at September 30, 2009 through March 31,
2010.
The
indentures provide for an event of default should the Company fails to comply
with its obligations under the indentures and certain events of bankruptcy or
similar relief.
The
Company’s obligations are guaranteed by its subsidiaries and are secured by a
lien on the stock of Sinoenergy Holding.
Subject
to certain conditions, and in connection with the proposed merger agreement
between the Company and Skywide Capital Management Limited (“Skywide”), which is
described in Note 19, the holders of the convertible notes have waived default
resulting from the failure of the Company’s common stock to be listed on the
NASDAQ Stock Market.
At the
time of the September 2007 financing, the Company also entered into an investor
rights agreement, as clarified, pursuant to which, as long as an investor holds
at least $2,000,000 principal amount of notes or at least 3% of the issued and
outstanding stock:
|
|
|
|
•
|
The
investor has the right to approve the Company’s annual budget, and the
Company cannot deviate by more than 15% of the amount in the approved
budget.
|
|
|
|
|
•
|
The
Company and its subsidiaries cannot replace or change the substantive
responsibilities of the chief executive officer except in the event of his
incapacity, resignation or retirement.
|
|
|
|
|
•
|
The
Company and its subsidiaries cannot take any action that would result in a
change of control, as defined in the indentures.
|
|
|
|
|
•
|
The
Company and its subsidiaries cannot change the number of board members or
the composition or structure of the board or board committees or delegate
powers to a committee or change the responsibilities and powers of any
committee.
|
|
|
|
|
•
|
The
Company shall, by April 1, 2008, have appointed an independent public
accountant from a list of 16 firms provided by the investors, failing
which the Company shall pay the investors the sum of $2,500,000 on April 1
of each year in which this condition is not met, and the Company shall not
terminate the engagement of such auditor without prior investor approval.
The Company has complied with this condition.
|
|
|
|
|
•
|
The
investors have a right of first refusal on future financings by us and
proposed transfers, with limited exceptions, by Mr. Huang and Mr. Deng.
The investors also have a tag-along right in connection with proposed
sales of stocks by Mr. Huang and Mr.
Deng.
|
The
investor rights agreement, as clarified, also provides that (i) the Company will
not sell shares of its common stock or grant options or warrants or issue
convertible securities with an exercise or conversion price that is less than
$0.80 per share, (ii) the minimum conversion price for the convertible debenture
would be $0.80 per share, (iii) the holders of the convertible notes may call an
event of default if the Company breaches its covenant not to issue shares at a
price which is less than $0.40 per share. If the Company increases its
authorized common stock, the conversion price would decrease to an amount not
less than $0.05 per share. The Company and the investors agreed to use their
commercially reasonable efforts to modify the indenture for the convertible
notes to reflect these provisions of the investor rights agreement.
As a
result of the reduction in the conversion price from $6.34 to $5.125, the
Company recorded an additional beneficial conversion feature of $3,360,905 as a
discount to the notes and additional paid in capital, which is being amortized
as interest expense over the remaining term of the notes commencing April 1,
2008. As a result of the further reduction in the conversion price
from $5.125 to $4.20, the Company recorded an additional beneficial conversion
feature of $3,862,439 as a discount to the notes and additional paid in capital,
which is being amortized as interest expense over the remaining term of the
notes commencing January 1, 2009. Upon prepayment of the convertible
notes, the unamortized portion of the beneficial conversion feature will be
recognized.
Mr. Huang
and Mr. Deng are also prohibited from transferring any shares, with limited
exceptions, until the investors shall have sold, singly or in the aggregate,
more than 5% of the Company’s total outstanding equity on a fully-diluted
basis.
As long
as long as Abax continues to hold more than 5% of the outstanding shares of
common stock on an as-converted basis, (i) Abax shall be entitled to appoint up
to 20% of the voting members (or the next higher whole number if such percentage
does not yield a whole number) of the Company’s board of directors, and (ii) if
the Company fails to meet the net income requirements under the indenture for
the convertible notes, Abax has the right to appoint an additional director. The
Abax director shall be entitled to serve on each committee of the board, except
that, the Abax director shall not serve on the audit committee unless he or she
is an independent director. Mr. Huang and Mr. Deng have agreed to vote their
shares for the election of the Abax directors. The Company is required to amend
its by-laws to provide that a quorum for action by the board shall include at
least one Abax director.
The
Company is required to prepare and file a registration statement covering the
sales of all of the shares of common stock issuable upon conversion of the
convertible notes, subject to any limitation required by Rule 415 of the SEC
pursuant to the Securities Act of 1933 and to have the registration statement
declared effective by March 28, 2008. In the event that the registration
statement has not been declared effective by the SEC on or before March 28, 2008
or if effectiveness of the Registration Statement is suspended at any time other
than pursuant to a suspension notice, for each 90-day period during which the
registration default remains uncured, the Company is required to pay additional
interest at the rate of one percent 1% of the convertible notes, as described
above. As of September 30, 2009, the common stock issuable upon conversion
of the notes had not been registered under the Securities Act of 1933, as
amended. The noteholders have waived the right to require the additional
interest from March 31, 2009 through September 30, 2009.
On
October 5, 2009 and December 17, 2009, the Company entered into agreements with
the holders of its $16,000,000, 12% senior notes and its $14,000,000, 3%
convertible notes. Pursuant to these agreements:
·
|
The
noteholders agreed to waive default of the provisions that require the
Company’s common stock to be publicly traded, that require the Company to
repurchase the notes upon a change of control, and that require the
Company’s common stock to be traded on the NASDAQ Capital Market or the
NASDAQ Global Market.
|
·
|
The
noteholders waived covenant compliance requirements at September 30, 2009
and through March 31, 2010.
|
·
|
The
Company agreed to repay the 12% senior notes in the principal amount of
$16 million. Initially the payments were due by November 30,
2009. The Company paid approximately $14 million by November
30, 2009. As a result of the December agreement, the Company
must pay the remaining balance of approximately $2 million by December 31,
2009. The balance due on these notes was paid on December 23,
2009.
|
·
|
The
Company agreed to pay the convertible notes in the principal amount of $14
million in two installments, with an initial payment of $5 million being
due ten days after the merger with Skywide becomes effective and the
balance 30 days thereafter. The conversion feature of the notes
will be eliminated. The Company will be required to pay interest to
provide the note holders with a yield to maturity of 13.8% per
annum.
|
·
|
The
noteholders reduced the remaining obligation for liquidated damages for
failure to register the shares of common stock issuable upon conversion of
the convertible notes to $280,000, which is to be paid by December 31,
2009. This payment was made on January 7, 2010 with the consent
of the noteholders.
|
·
|
The
provision requiring an adjustment to the conversion price of the notes
based on stated annual earnings of the Company was
eliminated.
|
·
|
The
provisions of the indenture relating to the reduction in the conversion
price of the convertible notes if the Company issues stock at a price, or
issue convertible securities with a conversion or exercise price that is
less than the conversion price (presently $4.20 per share) were
eliminated.
|
A
reconciliation of the original principal amount of the 3% senior convertible
notes to the amounts shown on the balance sheet at December 31, 2009 and
September 30, 2009:
Original
amount
|
|
$
|
14,000
|
|
Beneficial
conversion feature
|
|
|
(177
|
)
|
Balance,
September 30, 2007
|
|
$
|
13,823
|
|
Amortization
of beneficial conversion feature
|
|
|
35
|
|
Interest
paid
|
|
|
(211
|
)
|
Interest
accrued for guaranteed 13.8% return
|
|
|
1,934
|
|
Discount
resulting from reset adjustment effective March 28, 2008
|
|
|
(3,361
|
)
|
Amortization
of discount resulting from reset
|
|
|
373
|
|
Balance,
September 30, 2008
|
|
$
|
12,593
|
|
Interest
accrued for guaranteed 13.8% return
|
|
|
1,932
|
|
Amortization
of beneficial conversion feature
|
|
|
35
|
|
Amortization
of discount resulting from reset
|
|
|
1,519
|
|
Discount
resulting from reset adjustment effective March 28, 2009
|
|
|
(3,862
|
)
|
Interest
paid
|
|
|
(1,804
|
)
|
Balance,
September 30, 2009
|
|
$
|
10,413
|
|
Interest
accrued for guaranteed 13.8% return
|
|
|
483
|
|
Amortization
of beneficial conversion feature
|
|
|
9
|
|
Adjustment-interest
paid
|
|
|
1,376
|
|
Cumulative
change in accounting for conversion feature
|
|
|
(1,730
|
)
|
Amortization
of original discount
|
|
|
597
|
|
Interest
paid
|
|
|
(214
|
)
|
Balance,
December 31, 2009
|
|
$
|
10,934
|
|
18.
Long-term bank loan
The
following table summarizes the contractual long-term borrowings between various
banks and the Company as of December 31, 2009 (dollars in
thousands):
Bank
Name
|
|
Purpose
|
|
Borrowing
Date
|
|
Borrowing
Term
|
|
Annual
Interest Rate
|
|
|
Amount
|
|
Bank
of Communication
|
|
Construction
Capital
|
|
June
27, 2008
|
|
Three
years
|
|
|
8.316
|
%
|
|
$
|
4,394
|
|
China
Construction Bank
|
|
Construction
Capital
|
|
August
28, 2009
|
|
Five
years
|
|
|
5.76
|
%
|
|
|
21,967
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,361
|
|
The
following table summarizes the contractual long-term borrowings between various
banks and the Company as of September 30, 2009 (dollars in
thousands):
Bank
Name
|
|
Purpose
|
|
Borrowing
Date
|
|
Borrowing
Term
|
|
Annual
Interest Rate
|
|
|
Amount
|
|
Bank
of Communication
|
|
Construction
Capital
|
|
June
27, 2008
|
|
Three
years
|
|
|
8.316
|
%
|
|
$
|
4,393
|
|
China
Construction Bank
|
|
Construction
Capital
|
|
August
28, 2009
|
|
Five
years
|
|
|
5.76
|
%
|
|
|
21,965
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,358
|
|
19.
Merger Agreement with Skywide
On
October 12, 2009, the Company entered into an agreement and plan of merger with
Skywide, a corporation which is wholly owned by the Company’s chairman and chief
executive officer, both of whom are also directors. Pursuant to the agreement,
the Company will be merged into Skywide, with Skywide being the surviving
entity, and each shares of common stock of the Company (other than shares owned
by the Company, Skywide, or the two shareholders of Skywide), will be converted
into the right to receive, upon presentation of the certificates for their
common stock, the sum of $1.90. The merger is subject to shareholder
approval.
20.
Related Party Relationships and
Transactions
The
related parties with which the Company had transactions in the three months
ended December 31, 2009 and 2008, are as follows:
Name
of related party
|
|
Relationship
|
Anhui
Gather
|
|
Joint
venture entity with China New Energy in which the Company has a 20%
interest
|
China
New Energy
|
|
80%
shareholder of Anhui Gather and 20% shareolder of Hubei
Gather
|
Beijing
Shanglira Capital Co, Ltd.
|
|
Controlled
by Mr Tianzhou Deng and Mr Bo Huang
|
Skywide
|
|
Owned
by Mr Tianzhou Deng and Mr Bo Huang
|
Significant
transactions between the Company and its related parties during the three
months ended December 31, 2009 and 2008 are as follows:
(1)
Related party receivables (dollars in thousands)
Name
of the Company
|
|
December
31, 2009
|
|
September
30, 2009
|
|
|
|
|
|
China
New Energy
|
|
-None
|
|
$382
(current accounts)
|
Anhui
Gather
|
|
$44
(current accounts)
|
|
$44
(current accounts)
|
(2)
Related party payables (dollars in thousands)
Name
of the Company
|
|
December
31, 2009
|
|
September
30, 2009
|
|
|
|
|
|
Beijing
Shanglira Capital Co, Ltd.
|
|
-$17,208
(current accounts)
|
|
-None
|
Skywide
|
|
-$3,000
(current accounts)
|
|
-None
|
In
October 2009, Beijing Shanglira Capital Co., Ltd. advanced the Company
$17,208,000, and in December 2009, Skywide advanced the Company $3 million. The
loans are unsecured and are payable on demand. The proceeds of the
loans were used primarily to reimburse us for paying the Abax/CCIF senior debt
during the quarter ended December 31, 2009.
(3)
Related party transactions:
On
November 27, 2009, the Company signed agreement with China New Energy pursuant
to which the Company will transfer a 30% interest in Hubei Gather to China New
Energy for $1.5 million.
On
November 23, 2009, the Company signed an agreement with China New Energy
pursuant to which China New Energy will transfer a 30% interest Anhui Gather to
the Company for $1.5 million.
Upon
completion of these two equity transfers, the Company and China New Energy will
each own 50% of both Hubei Gather and Anhui Gather. The effect of
these agreements is that the Company will have exchanged a 30% interest in Hubei
Gather for a 30% interest in Anhui Gather.
21.
Segment Information
Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the Company in
deciding how to allocate resources and in assessing performance.
As all
businesses of the Company are carried out in the PRC, the Company is deemed to
operate in one geographical area.
The
segment information set forth below has been derived from our unaudited
financial statements for the three months ended December 31, 2009 and
2008.
Three
Months Ended December 31, 2009
(dollars
in thousands)
|
|
Customized
pressure
containers
|
|
CNG
station
facilities
and construction
|
|
CNG
station
Operation
|
|
Vehicle
conversion
kits
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended December 31, 2008
(dollars
in thousands)
|
|
Customized
pressure
containers
|
|
CNG
station
facilities
and construction
|
|
CNG
station
Operation
|
|
Vehicle
conversion
kits
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.
Capital Stock
As of
December 31, 2009, the Company had the following shares of common stock reserved
for issuance:
|
•
|
555,359
shares issuable upon exercise of warrants;
|
|
|
|
|
•
|
3,333,334
shares issuable upon conversion of 3% senior convertible
notes;
|
|
|
|
|
•
|
1,000,000
shares issuable upon exercise of stock options or other equity-based
incentives pursuant to the Company’s 2006 long-term incentive plan, of
which options to purchase 790,000 shares were
outstanding.
|
|
|
Number
of shares issuable on exercise of warrants
|
|
|
|
$1.70
Warrants
|
|
$2.40
Warrants
|
|
$4.20
Warrants
|
|
$8.00
Warrants
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2009
|
|
|
85,715
|
|
|
369,644
|
|
|
75,000
|
|
|
25,000
|
|
|
555,359
|
|
Issued
during the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
during the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance
at December 31, 2009
|
|
|
85,715
|
|
|
369,644
|
|
|
75,000
|
|
|
25,000
|
|
|
555,359
|
|
As at
December 31, 2009, the weighted average exercise price for all warrants is
$2.79. None of the outstanding warrants is subject to reset provisions other
than as a result of a stock distribution, split or dividend, a reverse split or
combination of shares or other recapitalization, and, in the case of the
warrants to purchase 455,360 shares of common stock issued in the June 2006
private placement, sales of common stock at prices below the exercise
price.
Stock
options
Pursuant
to the 2006 long-term incentive plan, each newly-elected independent director
receives, at the time of his or her election, a five-year option to purchase
15,000 shares of common stock at the fair market value on the date of his or her
election. The plan provides for the annual grant to each independent director of
an option to purchase 2,500 shares of common stock on the first trading day
in April of each calendar year, at market price, subject to stockholder approval
of the plan, commencing in 2007. Pursuant to the automatic grant provisions of
the plan, in June 2006, the Company issued to its independent directors, options
to purchase an aggregate of 60,000 shares of common stock at $1.30 per share,
being the fair market value on the date of grant.
Pursuant
to the 2006 long-term incentive plan, each independent director is to be
granted an option to purchase 2,500 shares of common stock on
the first trading day in April of each calendar year at market price. On
April 1, 2007, the four independent directors were granted stock options to
purchase a total of 10,000 shares of common stock at an exercise price of $4.06
per share, being the fair market value on the date of grant. On April
1, 2008, the four independent directors were granted stock options to purchase a
total of 10,000 shares of common stock at an exercise price of $5.80 per share,
being the fair market value on the date of grant. On April 1, 2009, the
four independent directors were granted stock options to purchase a total of
20,000 shares of common stock at an exercise price of $1.32 per share, being the
fair market value on the date of grant. All of the options granted to the
independent directors become exercisable cumulatively as to 50% of the shares
subject thereto six months from the date of grant and as to the remaining 50%,
eighteen months from the date of grant, and expire on the earlier of (i) five
years from the date of grant, or (ii) seven months from the date such
independent director ceases to be a director if such independent director ceases
to be a director other than as a result of his death or
disability.
On April
9, 2007, pursuant to 2006 long-term incentive plan, the stock option committee
of the board of directors granted five year options to its senior managers and
key management to acquire 590,000 shares of common stock at $4.00 per
share, being the fair market value on the date of grant. These options are fully
vested.
On
January 9, 2008, pursuant to 2006 long-term incentive plan, the stock option
committee of the board of directors granted five year options to its senior
managers and key management to acquire 60,000 shares of common stock at $8.20
per share, being the fair market value on the date of grant. These options vest
as to 50% of the underlying shares of common stock on January 9, 2009 and as to
the remaining 50% on January 9, 2010.
On March
10, 2008, pursuant to 2006 long-term incentive plan, the stock option committee
of the board of directors granted five year options to its senior managers and
key management to acquire 40,000 shares of common stock at $6.20 per share,
being the fair market value on the date of grant. The options vest as to 42% of
the underlying shares of common stock on December 31, 2008, 50% on December 31,
2009 and as to the remaining 8% on March 9, 2010.
On June
1, 2008, pursuant to 2006 long-term incentive plan, the stock option committee
of the board of directors granted five year options to the former chief
financial officer to acquire 75,000 shares of common stock at $5.72 per share,
being the fair market value on the date of grant. On October 18, 2008, the chief
financial officer resigned from the Company and the options were
forfeited.
|
|
Shares subject
to
options
|
|
|
Weighted
Average
exercise price scope
|
|
|
Remaining Contractual
life(years)
|
|
Options
outstanding at September 30, 2009
|
|
|
790,000
|
|
|
$
|
1.32-8.20
|
|
|
|
4.17
|
|
Options
granted during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options
outstanding at December 31, 2009
|
|
|
790,000
|
|
|
|
1.32-8.20
|
|
|
|
3.92
|
|
Options
exercisable at December 31, 2009
|
|
|
711,800
|
|
|
$
|
3.55
|
|
|
|
4.01
|
|
The fair
value of options granted is estimated on the date of grant using the
Black-Scholes option-pricing model utilizing the assumptions shown in the
following table:
Stock
Options Granted On
|
|
Grant
Date
|
|
April
1, 2009
|
|
|
June
1, 2008
|
|
|
March
10, 2008
|
|
|
January
9, 2008
|
|
|
April
9, 2007
|
|
|
April
1, 2007
|
|
|
June
2, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
46.1
|
%
|
|
|
46.1
|
%
|
|
|
68.32
|
%
|
|
|
80.06
|
%
|
|
|
26.39
|
%
|
|
|
35.16
|
%
|
|
|
50
|
%
|
Risk-free
rate
|
|
|
2.93
|
%
|
|
|
2.93
|
%
|
|
|
4.64
|
%
|
|
|
4.64
|
%
|
|
|
4.64
|
%
|
|
|
4.64
|
%
|
|
|
4.64
|
%
|
Expected
term (years)
|
|
|
5
|
|
|
|
3
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
3
|
|
Dividend
yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Fair
value per share
|
|
$
|
0.58
|
|
|
$
|
1.94
|
|
|
$
|
3.56
|
|
|
$
|
5.16
|
|
|
$
|
1.24
|
|
|
$
|
1.2
|
|
|
$
|
0.5
|
|
The
share-based compensation expense during the three months ended December 31, 2009
and 2008 was $64,000 and $83,000 respectively, which was charged to operations
as general and administrative expense.
23. Basic
and Diluted Earnings Per Share
Basic
earnings per share is based upon the weighted average number of shares of common
stock outstanding during the period. Diluted earnings per share is based on the
assumption that all dilutive convertible shares, stock options and warrants
were converted or exercised. The number of shares included in determining
diluted earnings per share is computed by applying the treasury stock method.
Under this method, options and warrants are assumed to be exercised at the
beginning of the period (or at the time of issuance, if later), with the funds
obtained thereby being used to purchase common stock at the average market price
during the period.
The
details for the fully diluted outstanding shares for the three months ended
December 31, 2009 and 2008 are as follows:
|
|
Three
months ended December 31, 2009
|
|
Three
months ended December 31, 2008
|
Weighted
average common stock outstanding during period
|
|
|
|
|
Common
stock issuable pursuant to warrants
|
|
Anti-dilutive
|
|
|
Common
stock issuable upon conversion of 3% convertible
notes
|
|
Anti-dilutive
|
|
|
Common
stock issuable upon exercise of options outstanding during the
period
|
|
Anti-dilutive
|
|
|
Total
diluted outstanding shares
|
|
|
|
|
Because
the Company sustained a loss for the three months ended December 31, 2009, the
shares issuable upon exercise of options and warrants and upon conversion of
convertible notes would be anti-dilutive.
24.
Commitments and Contingencies
Litigation
The
Company is a defendant in a class action commenced on October 16, 2009 in the
Supreme Court of the State of New York, Nassau County, by alleged class
representative plaintiffs Stephen Trecaso and Linda Watts against the Company
and its directors which alleges a claim for breach of fiduciary duty, and which
makes a demand for injunctive relief or alternatively, damages arising out of
the merger agreement. The complaint generally alleges that the
company and the board of directors engaged in a defective sales process which
will permit Skywide to buy the Company for an unfair price. The
Company believes that this action is without merit, that it has valid defenses
to the action, and it will vigorously defend the action. As of
February 1, 2010, none of the Company’s directors has been served with process
in this action, except Robert I. Adler. The Company and Mr. Adler
have made motions to dismiss this lawsuit on various grounds which include the
court’s lack of jurisdiction over the Company and the plaintiffs’ failure to
join necessary parties as defendants.
The
Company is a defendant in four other class actions that have been filed against
the Company, its directors and Skywide in the Eighth Judicial District Court of
the State of Nevada in and for Clark County which allege a claim for breach of
fiduciary duty and which also make a demand for injunctive relief for a
meaningful auction with third parties or alternatively, damages arising out of
the merger agreement. The alleged class representative plaintiffs in each of
those four actions and the respective dates of commencement of those actions are
(i) Johan L. Stoltz, October 26, 2009, (ii) Robert E. Guzman, October 27, 2009,
(iii) Carol Karch, October 27, 2009 and (iv) Robert Grabowski, November 2,
2009. As of February 1, 2010, the Company and directors Robert I.
Adler and Greg Marcinkowski have been served in the four actions. The
complaints generally allege that the Company and the board of directors engaged
in a defective sales process which will permit Skywide to buy the Company for an
unfair price and permitted Skywide disclosure of material inside
information. The Company has removed each of those four actions to
the United States District Court for the District of
Nevada. Plaintiffs in those actions have filed motions seeking to
remand the actions back to the Nevada State Courts. The time within
which the company and Messrs. Adler and Marcinkowski must appear, answer or
otherwise move with respect to the complaints in those actions has been extended
to February 16, 2010. The Company believes that these actions are without merit,
that it has valid defenses to the actions and it will vigorously defend these
actions.
Contractual
Obligations
The
Company has the following material contractual obligations and capital
expenditure commitments:
Sinoenergy
Holding and Sinogas signed an agreement to set up Qingdao Sinoenergy Gas in
which Sinoenergy Holding would own 60% and Sinogas would own 40%. As
a result, Qingdao Sinoenergy Gas will be 90% owned by the
Company. Sinoenergy Holding’s commitment is $2,636,000, and Sinogas’
commitment is $1,757,000. As of December 31, 2009, Sinogas had made its full
contribution and the Company’s commitment was $2,636,000.
Lixun has
agreed to contribute $58,574 to Yichang Liyuan Power Technology Company for a
40% equity interest. As of December 31, 2009, Lixun contributed $29,290 and the
Company’s commitment for future funding was $29,290.
Wuhan
Sinoenergy and Pingdingshan Sinoenergy, subsidiaries of the Company, have leased
13 parcels of land in Wuhan City and Pingdingshan City for their CNG stations
under operating lease agreements. The lease terms are from 7 year to 30 years
with annual rental fees of approximately $846,000. Based on land
rental agreements in effect at December 31, 2009, the Company will pay a total
of $5.73 million during through 2039.
Wuhan
Sinoenergy has two agreements to purchase land use rights in Wuhan City from
different non-affiliated parties. One agreement provides for a purchase price of
approximately $1.58 million, of which approximately $1.32 million has been paid,
and the title transfer is in the process. The second provides for a purchase
price of approximately $1.32 million, of which approximately $732,000 has been
paid. The acquisition of the land requires government approval.
The
Company’s commitment for the construction of CNG stations, including stations
being constructed by Wuhan Sinoenergy and Hubei Gather, was $797,000 as of
December 31, 2009.
The
Company’s commitment for the construction of a new plant for Jiaxing Lixun was
$624,000 as of December 31, 2009.
The
Company’s commitment for the purchase of property, plant and equipment,
including property for Wuhan Sinoenergy and Hubei Gather, was $5,794,000 as of
December 31, 2009.
25.
Retirement Benefits
The
full-time contracted employees of the Company are entitled to welfare benefits,
including medical care, labor injury insurance, housing benefits, education
benefits, unemployment insurance and pension benefits through a Chinese
government-mandated multi-employer defined contribution plan. The
Company is required to accrue the employer-portion for these benefits based on
certain percentages of the employees’ salaries. The total provision
for such employee benefits was $76,179 and $101,094 for the three months ended
December 31, 2009 and 2008, respectively, and was recorded as other payables.
The PRC government is responsible for the staff welfare benefits including
medical care, casualty, housing benefits, unemployment insurance and pension
benefits to be paid to these employees. The Company is responsible for the
education benefits to be paid.
From time
to time, the Company may hire some part time workers or short term workers to
satisfy the peak season labor requirement. Those workers have the right to
terminate their work to the Company at any time. For those part time
non-contracted workers, it is difficult for the Company to accurately record the
working time, total wages and then accrue welfare benefits. Based on the common
practice in the PRC, the Company treats those workers as probationary employees,
and does not accrue welfare benefits for them. Although the Company believes
that it is treating these employees in accordance with applicable law, it is
possible that the government may require the Company to accrue the welfare
benefit and may assess a penalty for the underaccrual.
26.
Significant Concentrations
In the
CNG station facilities and construction segment, the Company manufactures, sells
and installs CNG vehicle and gas station equipment. The Company provides
products for third party companies that operate fixed and/or mobile CNG filling
stations and it designs the CNG station construction plans, constructs CNG
stations, and installs CNG station equipment and related systems.
These
products and services are designed to meet the customer
specifications. Sales in this segment are dependent upon the Company
developing a continuing stream of business so that we will not incur a
significant lag between the time we complete one contract and start
another. Although we do not have a long history of operations in this
business, we anticipate that our major customers will vary from period to
period.
In the
three months ended December 31, 2009, two customers of the station facilities
and construction segment each accounted for more than 10% of the total
sales. These customers, who purchased CNG truck trailers, accounted
for approximately 25.8% of total sales. At December 31, 2009, approximately
52.0% of our accounts receivable were from these customers
And in
the three months ended December 31, 2008, one customer of the station facilities
and construction segment accounted for 27.8% of the total sales and at December
31, 2008, approximately 19.5% of the accounts receivable was from this
customer.
The
following table sets forth information as to the sales generated from each of
these customers for the three months ended December 31, 2009 (dollars in
thousands):
Name
|
|
Three
Months Ended
December
31, 2009
|
|
|
Three
Months Ended
December
31, 2008
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
Wuhan
Lvneng Gas Transportation Co.,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Less
than 10%
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion of the results of our operations and financial condition
should be read in conjunction with our financial statements and the related
notes, which appear elsewhere in this quarterly report. The following
discussion includes forward-looking statements. For a discussion of important
factors that could cause actual results to differ from results discussed in the
forward-looking statements, see “Forward Looking Statements.”
FORWARD-LOOKING
STATEMENTS
This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements include, but are not
limited to, statements that express our intentions, beliefs, expectations,
strategies, predictions or any other statements relating to our future
activities or other future events or conditions. These statements are based on
current expectations, estimates and projections about our business based, in
part, on assumptions made by management. These statements are not guarantees of
future performance and involve risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcomes and results may, and are likely
to, differ materially from what is expressed or forecasted in the
forward-looking statements due to numerous factors, including those described
above and those risks discussed from time to time in this prospectus, including
the risks described under “Risk Factors,” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in our annual report
on Form 10-K for the year ended September 30, 2009 and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in this Form 10-Q
as well as any other filings we make with the SEC. In addition, such statements
could be affected by risks and uncertainties related to the ability to conduct
business in the PRC, product demand, including our ability to continue to be in
compliance with the financial covenants under the indentures relating to our
senior debt, our working capital deficiency, our ability to collect outstanding
accounts receivable, the demand for CNG and our conversion kits, the prices at
which we purchase and sell CNG at our stations, our ability to develop,
construct and operate a CNG station business, our ability to raise any financing
which we may require for our operations, competition, government regulations and
requirements, pricing and development difficulties, our ability to make
acquisitions and successfully integrate those acquisitions with our business, as
well as general industry and market conditions and growth rates, and general
economic conditions as well as economic conditions that affect the natural gas
industry. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Our expectations are as of the
date this annual report is filed, and we do not intend to update any of the
forward-looking statements after the date this quarterly report is filed to
conform these statements to actual results, unless required by law.
OVERVIEW
We
design, manufacture and market a range of pressurized containers for CNG.
Although our initial business involved the manufacturing of customized equipment
and pressure containers, our business has evolved as an increasing market is
developing in the PRC for the use of CNG. Our CNG vehicle and gas station
construction business consists of two divisions (i) the manufacturing of CNG
vehicle and gas station equipment, and (ii) the design of construction plans for
CNG stations, the construction of the CNG stations, and the installation of CNG
station equipment and related systems.
We
continue to manufacture a wide variety of pressure containers for use in
different industries, including the design and manufacture of various types of
pressure containers in the petroleum and chemical industries, the metallurgy and
electricity generation industries and the food and brewery industries and have
the capacity to design and manufacture various types of customized
equipment.
All of
our products and services are manufactured or performed pursuant to agreements
with our customers, which provide the specifications for the products and
services. As a result, our revenue is dependent upon the flow of contracts.
In any fiscal period, a small number of customers may represent a
disproportionately large percentage of our business in one period and a
significantly lower percentage, if any, in a subsequent period.
Commencing
in 2006, we began to construct CNG stations and, commencing in 2008 we began to
operate CNG stations. This aspect of our business is different from our other
business. The business of operating CNG stations requires a substantial capital
investment. For this purpose, we raised approximately $30 million
from the sale of our convertible and fixed rate notes in September 2007. The
indentures relating to these notes have restrictions on our incurring additional
debt. The nature of the operation of the business and the risks associated with
that business are significantly different from the manufacturing of equipment or
the construction of CNG stations for third parties. One aspect of the operation
of CNG stations is the price controls, whereby both the price at which we
purchase CNG and the price at which we sell CNG are subject to price controls by
central government and municipal government. As a result of these price
controls, our gross margin is effectively dependent upon the government’s
pricing policies. The operation of CNG stations is reported as a separate
segment.
In early
2007, we established a division to sell and manufacture CNG vehicle conversion
kits to OEM and sale in the aftermarket. These kits are designed to enable a
gasoline powered vehicle to operate on CNG. We began to generate revenue from
this business segment in the second quarter of calendar 2007. In March 2007, we
purchased a 60% interest in Lixun from its stockholders for $390,000. In July
2007, we paid an additional $400,000 to increase our equity ownership in
Lixun to 70%, and in April 2008 we acquired the remaining 30% for $1,145,000.
Lixun designs and manufactures electric control devices for alternative fuel,
such as compressed natural gas and liquefied petroleum gas vehicles, as well as
a full range of electric devices, such as computer controllers, conversion
switches, spark advancers, tolerance sensors and emulators for use in
multi-powered vehicles. The business of manufacturing electronic parts for
vehicle conversion kits as well as producing conversion kits is reported as a
separate segment.
Our CNG
vehicle and gas station equipment business include two product
lines:
|
•
|
the
manufacture of equipment for CNG vehicles and gas stations,
and
|
|
•
|
the
design of CNG station and construction plans, construction of CNG stations
and installation of CNG station equipment and related
systems.
|
Our
original business was the manufacture and sale of nonstandard equipment and
pressure containers operated by our subsidiary, Qingdao Sinogas Yuhan Chemical
Equipment Co., Ltd. (“Yuhan”), which is owned 75% by Sinogas and a 25% ownership
by us through Sinoenergy Holdings.
Steel and
steel tubing are the major raw materials used in manufacturing CNG facilities
and gas station equipment. We purchase steel plate from a Chinese domestic
manufacturer, and we believe that alternative suppliers are available. Prior to
May 2007, we purchased steel bottles, a key raw material for CNG truck trailers,
exclusively from an Italian supplier, which carried the risk of delays that
could interrupt our manufacturing process. Beginning in May 2007, we also began
to purchase steel tubes from the PRC domestic market and engaged a Korean
company to manufacture the bottles from the steel tubes. In August 2007, we
engaged a PRC company to manufacture these bottles. Although we believe that we
have reduced the risks of interruption of our manufacturing process, we cannot
eliminate the risk entirely.
Our
functional currency is RMB, which is the currency of the PRC, and our reporting
currency is United States dollars. In addition, our purchases from our Italian
supplier are in Euros. When we discuss the amount of our future obligations, we
convert RMB or Euros to dollars at the current exchange rate. However, since the
payment will be made in the future, the amount paid in United States dollars may
be different from the amount set forth in this annual report as a result of
fluctuations in the currency rates.
The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. Following a period of general economic growth, China, like the
rest of the world, has recently been subject to an economic
downturn. There can be no assurance that the downturn will not
continue to have a negative effect on our business especially if it results in
either a decreased use of products such as ours or in pressure on us to lower
our prices. Our customized pressure container business and our CNG station
facilities and construction business are dependent upon our customers making
significant capital purchases, either for pressure containers or for new CNG
stations. The availability of financing to our customers as well as
the capital requirements of our customers could significantly reduce the need
for these products and services. Since our CNG station business is
dependent upon the development of a market for cars and trucks that run on CNG
rather than gasoline, any economic trends which have the effect of dampening the
market for CNG vehicles could affect our ability both to sell our CNG products
and to sell CNG at our proposed CNG stations. The recent sharp decline in oil
and gasoline prices may affect the need for both CNG stations and conversion
kits that enable gasoline-powered vehicles to operate on
CNG. Although the government of China has encouraged the use of CNG
as part of its effort to reduce pollution in China, the factors described above
may affect the development of the CNG industry in China. We cannot
predict whether or how these factors will affect the market for CNG in the areas
in which we are constructing our CNG filling stations or the market for our
conversion kits. However, these factors were a significant reason for our
reduced gross margin and our net loss for the three months ended December 31,
2009.
We
purchase CNG from government controlled entities. During 2007, we
entered into two joint ventures for the operation of natural gas process plants.
We have an 80% interest in one of these ventures and a 20% interest in the
other. These two facilities are in the early construction stage, and neither of
these ventures has commenced operations. We also have contracted for the
purchase of natural gas which is to be delivered through a
pipeline. The pipeline was completed in December 2009, and is
undergoing completion testing prior to being placed in commercial
operation. These contracts do not have specific delivery quantities
or prices, all of which are to be determined later.
In
September 2007, we issued our 12% senior notes due 2012 in the principal amount
of $16,000,000 and 3.0% senior convertible notes due 2012 in the principal
amount of $14,000,000. The indentures relating to these notes
included financial covenants, which were amended on May 19, 2009. We
were not in compliance with these covenants at September 30, 2009 or December
30, 2009, and the note holders waived compliance with the covenants at both of
these dates. In October and December 2009, we entered into agreements
with the holders of the 12% senior notes and the 3% convertible
notes. Pursuant to these agreements, we paid the 12% senior notes in
full in December 2009. Pursuant to the December 17, 2009 agreement,
(i) we agreed to pay the $14,000,000 convertible notes, including interest to
provide the holders with a 13.8% yield to maturity, after giving effect to
current interest payments made at the annual rate of 3.0% per annum, would be
paid in two installments following completion of the merger with Skywide, with
the first payment of $5,000,000 being due ten days after the effectiveness of
the merger and the balance 30 days thereafter, (ii) the requirement that we meet
certain net income levels for 2008 and 2009 were eliminated, (iii) the
provisions that would have resulted in a reduction in the conversion price of
the convertible notes if we sold common stock or securities convertible into
common stock were eliminated and (v) the liquidated damages due for failing to
register the shares of common stock issuable upon conversion of the notes was
reduced to $280,000, which was due by December 31, 2009, and was paid on January
7, 2010. As a result of our agreement to pay the convertible notes
upon completion of the merger with Skywide, we have classified the principal and
the deferred interest as current at September 30, 2009 and December 31,
2009.
Our
accounts receivable decreased from $29.8 million at September 30, 2009 to $28.3
million at December 31, 2009. At September 30, 2009, our accounts
receivable were outstanding for an average of 225 days, as compared with 124
days at September 30, 2008. At December 31, 2009, our accounts
receivable were outstanding for an average of 211 days. A significant
amount of receivables that were outstanding at September 30, 2008 remained
outstanding on December 31, 2009. In addition, at December 31, 2009,
we had a note receivable of $2.0 million resulting from the termination of a
sublease for which no payments had been made by the tenant. Our
failure to collect our receivables in the normal course of business could impair
our ability to continue in business.
RESULTS
OF OPERATIONS
We are
engaged in four business segments:
(i)
Customized pressure container business
Our
customized equipment and pressure container business is a traditional chemical
equipment manufacturing business with low profit margin. It includes design and
manufacturing of various types of pressure containers for industries such as the
petroleum and chemical, metallurgy, electricity generation and food and beverage
industries.
(ii)
CNG Station Facilities and Construction
Our CNG
station construction business represents:
▪
|
The
manufacture and installation of CNG vehicle and gas station equipment that
is used in the transportation and storage of CNG and the operation of a
CNG station. We provide these services for other companies that operate
CNG stations.
|
▪
|
CNG
station construction service, which includes the design of CNG station
construction plans, construction of CNG stations, and installation of CNG
station equipment and related systems. Because of our emergence into the
CNG filling station business in 2006, we did not receive any CNG station
construction service orders from the beginning of 2007. Our operating
results in this segment reflects contracts which we entered into during or
prior to the beginning of 2007. We anticipate that, at least in the near
term, we will devote most, if not all, of our CNG construction business to
the construction of our own CNG filling
stations.
|
(iii)
CNG station operations
In 2006,
we entered the CNG station business, which involves the design, construction and
equipping of CNG stations and the operation of those stations. As of
February 10, 2010, we were operating twenty-one CNG stations, of which sixteen
are located in Wuhan, two in Pingdingshan and three in Xuancheng. An
additional four stations in Wuhan are in the final stages of construction, and
four
stations in
Wuhan
were in the
preliminary planning stage.
(iv)
Vehicle fuel conversion equipment
We
manufacture conversion kits and electrical control devices that enable vehicles
that are designed to operate on gasoline to operate on CNG.
The
information set forth below represents segment information for the three months
ended December 31, 2009 and 2008.
Three
Months Ended December 31, 2009
(dollars
in thousands)
|
|
Customized
pressure
containers
|
|
CNG
station
facilities
and construction
|
|
CNG
station
Operation
|
|
Vehicle
conversion
kits
|
|
Total
|
|
|
|
|
|
|
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|
General
and administrative expenses
|
|
|
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|
|
|
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Income
(loss) from operations
|
|
|
|
|
|
|
|
|
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|
|
|
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|
Three
Months Ended December 31, 2008
(dollars
in thousands)
|
|
Customized
pressure
containers
|
|
CNG
station
facilities
and construction
|
|
CNG
station
Operation
|
|
Vehicle
conversion
kits
|
|
Total
|
|
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|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
|
|
|
|
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|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales.
Net sales for the
three months ended December 31, 2009 (“December 2009 quarter”) were
approximately $12.5 million, a decrease of approximately $3.4 million, or 21%,
from sales of approximately $8.8 million for the three months ended December 31,
2008 (“December 2008 quarter”). This decrease resulted from the
segment of CNG stations facilities and construction, namely, a decrease of
approximately $3.7 million, or 64%, in sales from the CNG stations facilities
and construction, resulting from the decrease in demand for the construction and
equipping of CNG stations and our change in emphasis as we devoted significant
efforts to the construction of our own stations.
Cost of Sales; Gross Margin.
The cost of sales for the December 2009 quarter was approximately $10.7 million,
a decrease of approximately 4% from approximately $11.1 million for the December
2008 quarter. Our overall gross margin decreased from 30% to 15% from the
December 2008 quarter to the December 2009 quarter for the following
reasons:
|
•
|
Our
gross margin for the customized pressure containers decreased from 29% to
8%. Since these products are customized, with wide range of gross margin
because of the variety of the products. In the December 2009 quarter, we
had to reduce our prices to meet competition during a period of general
economic downturn without a reduction in our cost. As a result
we sustained a significantly lower gross margin in this
segment..
|
|
|
|
|
•
|
Our
gross margin for the CNG station facilities and construction decreased
from 39% to 29% because we had to reduce our prices to meet
competition.
|
|
|
|
|
•
|
Our
gross margin for the operation of our CNG stations decreased from 20% to
8%. The cost of natural gas increased approximately 10% and the freight
costs (the transmission of the CNG to our stations), which are included in
cost of sales, increased approximately 10%, which significantly affected
the gross margin in this segment. The gross margin for this segment
reflects the effects of price controls, which cover both the price at
which we buy and the price at which we sell CNG.
|
|
|
|
|
•
|
As
the market for vehicle conversion kits matured and the demand for these
kits decreased as a result of the economic downturn, our gross margin in
this segment decreased from 29% to
24%.
|
Selling
Expenses
. Selling expenses decreased approximately $182,000,
or approximately 35%, from the December 2008 quarter to the December 2009
quarter. Our selling expenses include land rental for the CNG
stations, and reflects land rented for this segment which was incurred for land
not used in the December 2009 quarter.
General and Administrative
Expenses
. General and administrative expenses increased
approximately $1,108,000, or 82%. This increase includes $600,000 for the
restructuring fee paid to Abax and CCIF in the December 2009 quarter. This
payment was part of our payment of approximately $16 million paid to the
noteholders in the December 2009 quarter. Our general and administrative
expenses include, in addition to the management expenses and depreciation
related to the division, an allocation of corporate expenses, including
expenses
relating
to our status as a public company, such as legal and audit
costs. Management overhead was allocated among the segments based on
the relative time devoted by management to the business of the
segments.
Interest
Expense
. Interest expense for the December 2009 quarter
was approximately $2.1 million, as compared with $1.2 million for the December
2008 quarter. In the December 2009 quarter, we increased our bank
borrowings to expand our CNG station operation and manufacturing plant, which
also increased interest expense. In addition, amortization of original issuance
discount from issuance of the convertible notes was $597,000 in the December
2009 quarter.
Other Income and Other
Expenses
. During the December 2008 quarter, we generated rental
income of approximately $1.3 million for the rental of the land use
rights for Sinogas’ former manufacturing facility. In March 2008,
Sinogas signed a lease agreement with Qingdao Mingcheng Real Estate Co., Ltd
(Qingdao Mingcheng), a non-related party, with a three-year term from January
2008 to December 2010, at a quarterly rental of RMB10 million (equivalent to
$1.46 million based on the exchange rate at December 31, 2008). This lease was
terminated in March 31, 2009. As a result of the failure of the
tenant to pay the rental due, during the year ended September 30, 2009, in
connection with the termination of the lease, we reduced the rental receivable
by approximately $1.8 million, which was 40% of the outstanding balance, and we
reserved an additional $1.0 million with respect to the
receivable. We did not generate any rental receivable in the December
2009 quarter.
At
September 30, 2009, our 3% convertible notes included a provision pursuant to
which the conversion price of the notes can be reduced as a result of our sales
of stock at a price below the conversion price or by our failure to meet certain
net income levels. In addition, the conversion price is reflected in
terms of U.S. dollars, which is our reporting currency, and not RMB, which is
our operating currency. Effective October 1, 2009, we are required to
change the conversion feature classification from equity based to a derivative
liability. The cumulative change to this new accounting has been reflected on
October 1 as an adjustment to additional paid in capital and retained earnings.
For the December 2009 quarter, we incurred a charge of $886,000, reflecting the
change in the value of the derivative liability from September 30, 2009 to
December 31, 2009. This charge is a non-cash charge that did not
affect our operations.
Income Taxes.
Our
income taxes decreased from $568,000 of December 2008 quarter to $346,000 of
December 2009 quarter. Sinogas and Yuhan were granted 50% enterprise
income tax exemption for 2008 through 2010. Lixun was granted a 100% tax
exemption from August 2007 through December 2008 and a 50% enterprise income tax
exemption for 2009 through 2011. In January 2009, the Chinese tax authorities
issued a ruling that a joint venture enterprise incorporated after March 16,
2007 cannot enjoy the tax preferences. Since Lixun is a joint venture
incorporated in July 2007, it cannot enjoy the tax preferences. Lixun was
recognized as a high-tech enterprise, and its tax rate is 15% from January
2008.
Non-controlling
Interest
. The minority interest, of negative $435,000 in
December 2009 quarter and a negative $955,000 in December 2008 quarter,
represents the share of the income of our majority-owned subsidiaries that is
allocated to the subsidiaries’ minority equity owners.
Net Income
(loss)
. As a result of the foregoing, we had a net loss of
approximately $4,681,000, or $0.29 per share (basic and diluted), for December
2009 quarter, as compared with net income of approximately $1,698,000, or $0.11
per share (basic and diluted) for the December 2008 quarter.
Comprehensive Income
(Loss)
. Our comprehensive loss for the December 2009 quarter
was $4,676,000 as compared with comprehensive income of $1,537,000 for the
December 2008 quarter. Other comprehensive income (loss) items include foreign
currency translation adjustments resulting from changes in the currency rates
between the RMB and the United States dollar, or approximately $5,000 in
December 2009 quarter and ($161,000) in December 2008 quarter.
Liquidity
and Capital Resources
At
December 31, 2009, we had cash of approximately $18.4 million, a decrease of
approximately $1.2 million (including restricted cash of $1.5 million), from
September 30, 2009. At December 31, 2009, we had a working capital deficiency of
approximately $22.7 million and shareholders’ equity of approximately $40.6
million, compared with working capital deficiency of approximately $9.1 million
and shareholders’ equity of approximately $46.2 million at September 30, 2009.
The following table sets forth information as to the principal changes in the
components of our working capital (dollars in thousands):
|
31-Dec-09
|
|
30-Sep-09
|
Change
|
|
|
Category
|
Percent
Change
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
16,936
|
|
|
$
|
18,237
|
|
|
(1,301)
|
|
(7.1%)
|
Restricted
cash
|
|
|
1,504
|
|
|
|
1,413
|
|
|
91
|
|
6.4%
|
Accounts
and notes receivable, net
|
|
|
28,283
|
|
|
|
29,756
|
|
|
(1,473)
|
|
(5.0%)
|
Inventories
|
|
|
4,797
|
|
|
|
4,619
|
|
|
178
|
|
3.9%
|
Other
receivables, net
|
|
|
14,360
|
|
|
|
17,644
|
|
|
(3,284)
|
|
(18.6%)
|
Deposits
and prepayments
|
|
|
7,593
|
|
|
|
8,629
|
|
|
(1,036)
|
|
(12.0%)
|
Due
from related party
|
|
|
44
|
|
|
|
426
|
|
|
(382)
|
|
(89.7%)
|
Deferred
expenses
|
|
|
29
|
|
|
|
63
|
|
|
(34)
|
|
(54.0%)
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
$
|
47,480
|
|
|
$
|
44,223
|
|
$
|
3,257
|
|
7.4%
|
Notes
payable
|
|
|
4,760
|
|
|
|
4,583
|
|
|
177
|
|
3.9%
|
Accounts
payable
|
|
|
5,501
|
|
|
|
5,193
|
|
|
308
|
|
5.9%
|
Advances
from customers
|
|
|
814
|
|
|
|
2,100
|
|
|
(1,286)
|
|
(61.2%)
|
Additional
interest on notes
|
|
|
280
|
|
|
|
280
|
|
|
0
|
|
0.0%
|
Income
taxes payable
|
|
|
713
|
|
|
|
475
|
|
|
238
|
|
50.1%
|
Other
payables
|
|
|
1,488
|
|
|
|
5,783
|
|
|
(4,295)
|
|
(74.3%)
|
Due
to related party
|
|
|
20,208
|
|
|
|
0
|
|
|
20,208
|
|
﹡
|
Accrued
expenses
|
|
|
430
|
|
|
|
538
|
|
|
(108)
|
|
(20.1%)
|
Deferred
income
|
|
|
26
|
|
|
|
38
|
|
|
(12)
|
|
(31.6%)
|
Derivative
Liability
|
|
|
3,591
|
|
|
|
0
|
|
|
3,591
|
|
﹡
|
Long-term
Notes payable (current portion)
|
|
|
10,934
|
|
|
|
26,667
|
|
|
(15,733)
|
|
(59.0%)
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
$
|
73,546
|
|
|
$
|
80,787
|
|
$
|
(7,241)
|
|
(9.0%)
|
Less: total
current liabilities
|
|
|
96,225
|
|
|
|
89,880
|
|
|
6,345
|
|
7.1%
|
|
|
|
|
|
|
|
|
|
|
Net
working capital
|
|
|
(22,679)
|
|
|
|
(9,093)
|
|
|
(13,586)
|
|
149.4%
|
﹡
The percentage
was not included since it is not meaningful.
At
December 31, 2009, we required substantial capital to meet the required payments
toward the $14 million convertible senior notes and to maintain the level of
cash flows needed for continuing operations. We can give no assurance
that we will be able to raise such capital. We have limited financial
resources until such time that we are able to generate additional financing or
cash flow from operations. Our ability to establish profitability and
positive cash flow is dependent upon our ability both to raise
funds
to
finance our immediate cash requirements and to market our products in
anticipation of a recovery in China of those industries we serve, including the
CNG market. If we are unable to raise adequate capital to meet the
payment required to pay the remaining principal and interest on the notes and
cash flows needed for operations, it is likely we would have to substantially
curtail, if not terminate, our business activity.
Our
financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As reflected in our consolidated
financial statements we incurred substantial losses during the three months
ended December 31, 2009 and following our previously reported significant losses
for the year ended September 30, 2009, and we are continuing to incur
losses. We are also liable for substantial repayment of bank notes
and convertible senior notes and well as advance of $20.2 million from related
parties. These factors, among others, may indicate that we will be unable to
continue as a going concern for reasonable period of time.
The
financial statements do not include any adjustments relating to the
recoverability and classification of assets and liabilities that might be
necessary should the Company be unable to continue as a going
concern. Our continuation as a going concern is dependent upon our
ability to obtain additional operating capital, and ultimately, to attain
profitability. There is no assurance that we will be successful in raising
additional funds or that, if we do raise additional funds, that we will be able
to attain profitability or even continue in business.
For the
three months ended December 31, 2009, we used net cash of $720,000 in operating
activities. Working capital decreased by approximately $13.6 million from
September 30, 2009 to December 31, 2009 primarily as a result of funding net
losses and the $3.6 million derivative liability which did not exist at
September 30, 2009 as well as the advance from related parties and the purchase
of property, plant and equipment. The $3.6 million derivative
liability is a non-cash item resulting from the reclassification of our
convertible notes to reflect a derivative liability.
At
December 31, 2009, we were not in compliance with the financial covenants in the
indentures relating to our 3.0% senior convertible notes due 2012 in the
principal amount of $14 million. In October and December 2009, we entered into
two agreements that modified the terms of the notes, the cumulative effect of
which is as follows.
·
|
The
noteholders waived compliance with the covenants at September 30, 2009 and
through March 31, 2010.
|
·
|
We
repaid our 12% senior notes in the principal amount of $16 million prior
to December 31, 2009.
|
·
|
We
agreed to pay the convertible notes in the principal amount of $14 million
in two installments, with an initial payment of $5 million being due ten
days after the merger with Skywide becomes effective and the balance 30
days thereafter. Since the note holders would not be converting
the notes, we would pay interest to provide the note holders with a yield
to maturity of 13.8%, net of payments previously
made.
|
·
|
The
noteholders reduced our remaining obligation for liquidated damages for
failure to register the shares of common stock issuable upon conversion of
the convertible notes to $280,000, which is payable by December 31, 2009.
The payment was made on January 7,
2010.
|
·
|
The
provision that would have resulted in a further decrease in the conversion
price of the convertible notes if we did not meet certain levels of net
income was eliminated.
|
·
|
The
provisions of the indenture relating to the reduction in the conversion
price of the convertible notes if we issue stock at a price, or issue
convertible securities with a conversion or exercise price, that is less
than the conversion price (presently $4.20 per share) were
eliminated.
|
As a
result of these agreements, the $14 million convertible notes classified as
current liabilities at December 31, 2009.
For the
three months ended December 31, 2009, net cash used in operating activities was
$720,000, primarily related to a $1.3 million increase in accounts receivable, a
$5.7 million increase of other receivables, partially offset by a $1.3 million
decrease in advance from customers and $4.3 million decrease in other
payables.
We used
approximately $9.5 million in investing activities for the three months ended
December 31, 2009. This was due primarily to the expansion of our CNG
station operation segment, principally for purchase of property, plant and
equipment at $9.4 million.
Net cash
provided by financing activities was $8.1 million for the three months ended
December 31, 2009, primarily related to $3.2 million in new loans from domestic
banks in China, $20.2 million in the loan from related party, which were offset
by the repayment of $15.3 million in the 12% senior notes.
We will
continue to incur capital expenditures for the CNG station segment in the
future. It is necessary for us to plan, construct and equip each CNG station
before we can generate any revenue.
Our
agreement relating to the $14 million principal amount of convertible notes have
covenants which could impair our ability to raise additional funds. These
covenants include the following:
|
|
|
|
•
|
We
cannot incur any debt unless, after giving effect to the borrowing, (i)
the fixed charge coverage ratio would be greater than 3.5 to 1.0, and (ii)
the leverage ratio would not exceed 3.75 to 1.00, provided, that Sinogas
continue to maintain debt under credit facilities of not more than
$10,000,000, and may incur purchase money indebtedness. The fixed charge
coverage ratio is the ratio of our earnings before interest, taxes,
depreciation and amortization, which is generally known as EBITDA, to
consolidated interest expense, as defined. Leverage ratio means the ratio
of outstanding debt to EBITDA, with the interest component being the
consolidated interest expense, as defined. At December 31, 2009, our fixed
charge coverage ratio was negative 0.77 to 1.00, and our leverage ratio
was negative 13.32 to 1.00.
|
|
|
|
|
•
|
We
must maintain, as of the last day of each fiscal quarter, (i) a fixed
charge coverage ratio of at least 2.00 to 1.00 through December 31, 2009
and 3.0 to 1.00 thereafter, (ii) a leverage ratio of not more than 6.0 to
1.00 through December 31, 2009 and 4.5 to 1.00 thereafter, and (iii) a
consolidated subsidiary debt to consolidated net tangible asset ratio of
not more than 0.35 thereafter. The noteholders agreed that they would not
take any action to declare an event of default as long as the Company is
in compliance with the modified covenants. At December 31,
2009, our fixed charge coverage ratio was negative 0.77 to 1.00, our
leverage ratio was negative 13.32 to 1.00, and our consolidated subsidiary
debt to consolidated net tangible asset ratio was 0.33 to
1.00.
|
|
|
|
|
•
|
Sinogas
cannot incur debt under its credit facilities except to the extent that
such debt does not exceed $10.0 million.
|
|
|
|
|
•
|
We
are subject to restriction in paying dividends, purchasing its own
securities or those of our subsidiaries, prepaying subordinated debt, and
making any investment other any investments in itself and its subsidiaries
engaged in our business and certain other permitted
investments.
|
|
|
|
|
•
|
We
are subject to restrictions on incurring
liens.
|
As of
December 31, 2009, we were not in compliance with the financial covenants;
however, the note holders agreed to waive the covenants at September 30, 2009
and through March 31, 2010 as long as we comply with the covenants in the
December 17, 2009 agreement.
On
October 12, 2009, we entered into an agreement and plan of merger with Skywide,
which is owned by Mr. Deng, chairman and a director, and Mr. Huang, chief
executive officer and a director, pursuant to which, subject to shareholder
approval, we would be merged into Skywide and each share our common stock, other
than shares held by us, Skywide, Mr. Deng or Mr. Huang, would be converted into
the right to receive $1.90 per share.
For the
three months ended December 31, 2008, net cash provided by operating activities
was $0.3 million. The changes in working capital for the three months ended
December 31, 2008, were primarily related to a $5.3 million increase in accounts
receivable which resulted from the increase in our business and longer period
during which our accounts receivables (principally those generated by Sinogas)
are outstanding, a $363,000 decrease of accounts payable, a $314,000 decrease of
advance from customers and $642,000 decrease in other payables, partially offset
by a $3.2 million decrease of inventories because of the lower inventory as of
the calendar year end, and a $306,000 decrease in other receivables and
prepayments, and $1.2 million decrease of interest paid on our long-term
notes.
We used
approximately $6.8 million in investing activities for the three months ended
December 31, 2008. This was due primarily to the expansion of our CNG
station operation segment, principally for purchase of property, plant and
equipment of $4.9 million, and $1.4 million to invest in the unconsolidated
entities.
Net cash
provided by financing activities was $1.4 million for the three months ended
December 31, 2008, related to $1.4 million loans from domestic banks in
China.
Commitments
The
Company has the following material contractual obligations and capital
expenditure commitments:
Sinoenergy
Holding and Sinogas signed an agreement to set up Qingdao Sinoenergy Gas in
which Sinoenergy Holding would own 60% and Sinogas would own 40%. As
a result, Qingdao Sinoenergy Gas will be 90% owned by us. Sinoenergy
Holding’s commitment is $2,636,000, and Sinogas’ commitment is $1,757,000. As of
December 31, 2009, Sinogas had made its full contribution and the Company’s
commitment was $2,636,000.
Jixing
Lixun will contribute $58,574 to Yichang Liyuan Power Technology Company to own
40% equity. As of December 31, 2009, Jiaxing Lixun contributed $29,290, and the
Company’s commitment for future funding was $29,290.
Wuhan
Sinoenergy and Pingdingshan Sinoenergy, subsidiaries of the Company, have leased
13 parcels of land in Wuhan City and Pingdingshan City for their CNG stations
under operating lease agreements. The lease terms are from 7 year to 30 years
with annual rental fees of approximately $846,000. Based on land
rental agreements in effect at December 31, 2009, the Company will pay a total
of $5.73 million during through 2039.
Wuhan
Sinoenergy has two agreements to purchase land use rights in Wuhan City from
different non-affiliated parties. One agreement provides for a purchase price of
approximately $1.58 million, of which approximately $1.32 million has been paid,
and the title transfer is in the process. The second provides for a purchase
price of approximately $1.32 million, of which approximately $732,000 has been
paid. The acquisition of the land requires government approval.
Our
commitment for the construction of CNG stations, including stations being
constructed by Wuhan Sinoenergy and Hubei Gather, was $797,000 as of December
31, 2009.
Our
commitment for the construction of a new plant for Jiaxing Lixun was $624,000 as
of December 31, 2009.
Our
commitment for the purchase of property, plant and equipment, including property
for Wuhan Sinoenergy and Hubei Gather, was $5,794,000 as of December 31,
2009.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States.
Use of
Estimates.
In preparing financial statements in conformity
with accounting principles generally accepted in the United States of America,
we are required to make estimates, judgments and assumptions that affect the
reported amounts of assets, liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and revenues and
expenses during the reported periods. Significant estimates include depreciation
and the allowance for doubtful accounts and other receivables, asset impairment,
valuation of warrants and options and inventory valuation, and the determination
of revenue and costs for under the percentage of completion method of revenue
recognition. We base our estimates on historical experience and on
various other assumptions that we believe are 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 could differ from those estimates.
Revenue
Recognition
. We recognize revenue when the significant risks
and rewards of ownership have been transferred to the customer, including
factors such as when persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or determinable, and collectability is
reasonably assured. We recognize product sales upon delivery. CNG
station construction and revenue related to building technical consulting
service is recognized on the percentage of completion basis. The percentage of
completion method recognizes income as work on a contract (or group of closely
related contracts) progresses. The recognition of revenues and profit
is generally related to costs incurred in providing the services required under
the contract. Revenue is presented net of any sales tax and VAT.
Stock-Based
Compensation
. We grant stock options and stock grants to employees and
stock options or warrants to non-employees in non-capital raising transactions
for services and for financing costs. Share-based payment is
recognized at fair value measured at the grant date. The fair value is
determined using the Black-Scholes option pricing model. The resulting amount is
charged to expense on the straight-line basis over the period we expect to
receive benefit, which is generally the vesting period. In some cases, Skywide,
our principal stockholder, which is owned by our chief executive officer and our
chairman, both of whom are directors, provided or agreed to provide stock to
executive officers in connection with their employment. These shares
are treated as if the shares were contributed to us by Skywide and issued by
us.
Foreign Currency
Translation
. Our functional currency is RMB, and our
reporting currency is United States dollars. Our balance sheet accounts are
translated using the closing exchange rate in effect at the balance sheet date
and operating accounts are translated using the average exchange rate prevailing
during the year. Equity accounts are translated using the historical rate
as incurred. Translation gains and losses are deferred and accumulated as a
component of accumulated other comprehensive income in stockholders’ equity.
Transaction gains and losses that arise from exchange rate fluctuations from
transactions denominated in a currency other than the functional currency are
included in the statements of operations as incurred.
Capitalization of
Interest
. We capitalize interest incurred in connection with
the construction of assets, principally our CNG stations, during the
construction period. Capitalized interest is recorded as an increase
to construction in progress and, upon completion of the construction, to
property.
NEW
ACCOUNTING PRONOUNCEMENTS
Effective
July 1, 2009, the FASB ASC became the single official source of
authoritative, nongovernmental U.S. GAAP. The historical U.S. GAAP hierarchy was
eliminated and the ASC became the only level of authoritative U.S. GAAP, other
than guidance issued by the SEC. The Company’s accounting policies were not
affected by the conversion to ASC. However, references to specific accounting
standards in the notes to our consolidated financial statements have been
changed to refer to the appropriate section of the ASC.
In
April 2008, the FASB issued a pronouncement on what now is codified as FASB
ASC Topic 350,
Intangibles —
Goodwill and Other
. This pronouncement amends the factors to be
considered in determining the useful life of intangible assets accounted for
pursuant to previous topic guidance. Its intent is to improve the consistency
between the useful life of an intangible asset and the period of expected cash
flows used to measure its fair value. This adoption of this pronouncement on
October 1, 2009 did not have a material effect on the Company’s
consolidated financial statements.
In June
2008, the FASB amended FASB Topic ASC 815, Sub-Topic 40, "Contracts in Entity’s
Own Equity” to clarify how to determine whether certain instruments or features
were indexed to an entity's own stock under ASC Topic 815. The amendment applies
to any freestanding financial instrument (or embedded feature) that has all of
the characteristics of a derivative, for purposes of determining whether that
instrument (or embedded feature) qualifies for the scope exception. It is also
applicable to any freestanding financial instrument (e.g., gross physically
settled warrants) that is potentially settled in an entity's own stock,
regardless of whether it has all of the characteristics of a derivative, for
purposes of determining whether to apply ASC 815. The
Company adoptrd this pronouncement on October 1, 2009. The
Company’s financial statements for the three months ended December 31, 2009 and
afterwards reflect the effect of this pronouncement.
In
April 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 805
, Business
Combinations
. This pronouncement provides new guidance that changes the
accounting treatment of contingent assets and liabilities in business
combinations under previous topic guidance. This pronouncement will
be effective for the Company for any business combinations that occur on or
after October 1, 2009
In
April 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 825,
Financial
Instruments
. This pronouncement amends previous topic guidance to require
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies, as well as in annual financial statements.
The pronouncement was effective for interim reporting periods ending after
June 15, 2009 and its adoption did not have any significant effect on the
consolidated financial statements.
In
December 2007, the FASB issued pronouncements which are now codified as ASC 805
“
Business Combinations
”
and 810 “
Consolidation
”
(“ASC 810”), which require that ownership interests in subsidiaries held by
parties other than the parent, and the amount of consolidated net income, be
clearly identified, labeled and presented in the consolidated financial
statements. ASC 805 and ASC 810 also require that once a
subsidiary is deconsolidated, any retained non-controlling equity investment in
the former subsidiary be initially measured at fair value. Sufficient
disclosures are required to clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling
owners. ASC 805 and ASC 810 amend ASC 260 to provide that the
calculation of earnings per share amounts in the consolidated financial
statements will continue to be based on the amounts attributable to the parent.
ASC 805 and ASC 810 are effective for financial statements issued for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008, and require retrospective adoption of the presentation and
disclosure requirements for existing minority interests. All other
requirements are applied prospectively. The Company adopted ASC 805
and ASC 810 on January 1, 2009.
In
May 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 855,
Subsequent
Events
. This pronouncement establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
the financial statements are issued or are available to be issued. FASB ASC
Topic 855 provides guidance on the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements
and the disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. The pronouncement was effective for the
Company during the annual period ended September 30, 2009. The Company has
evaluated subsequent events for the period from September 30, 2009, the
date of these financial statements, through February 10, 2010, which represents
the date these financial statements are available for filing with the
SEC.
In June
2009, the FASB issued ASC Topic 810-10, "
Amendments to FASB Interpretation
No. 46(R)
" (“ASC 810-10”). ASC 810-10 is intended to (1)
address the effects on certain provisions of FASB Interpretation No. 46 (revised
December 2003), “Consolidation of Variable Interest Entities,” as a result of
the elimination of the qualifying special-purpose entity concept in ASC 860-20,
and (2) constituent concerns about the application of certain key provisions of
Interpretation 46(R), including those in which the accounting and disclosures
under the Interpretation do not always provided timely and useful information
about an enterprise's involvement in a variable interest entity. This
statement will be effective for the Company on October 1, 2010. The
Company does not expect the adoption of 810-10 to have a material impact on its
results of operations, financial condition or cash flows.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), and the United States Securities and Exchange Commission did
not or are not believed to have a material impact on the Company's present or
future consolidated financial statements.
Item
4. Controls and Procedures
Disclosure
Controls and Procedures
Under the
supervision and with the participation of management, our chief executive
officer and chief financial officer have carried out an evaluation of the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended.
Disclosure
controls and procedures refer to controls and other procedures designed to
ensure that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC and
that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance of achieving the
desired control objectives, and management is required to apply its judgment in
evaluating and implementing possible controls and procedures. It is our
management’s responsibility to establish and maintain adequate internal controls
over financial reporting. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected.
Management
conducted its evaluation of disclosure controls and procedures under the
supervision of our chief executive officer and our chief financial officer.
Based on that evaluation, our management, including our chief executive and
chief financial officers, concluded that because of the significant deficiencies
in internal control over financial reporting described below, our disclosure
controls and procedures were not effective as of December 31, 2009.
Based
upon that evaluation, our chief executive officer and chief financial officer
concluded that there were material weaknesses in our internal controls over
financial reporting as of the end of the period covered by this
report. In making this assessment, our management used the criteria
set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway
Commission in Internal Control — Integrated Framework. Our management concluded
that, as of September 30, 2009, our internal control over financial reporting
was not effective based on these criteria. Our chief executive
officer and chief financial officer identified weaknesses related to our
accounting personnel’s ability to identify various accounting and disclosure
issues, account for transactions that include an equity-based component, and
prepare financial statements and footnotes in accordance with U.S.
GAAP. Until June 2006, we were a privately-owned company engaged with
all of our assets and operations located in China, and our financial statements
were prepared in accordance with PRC GAAP. Since we became a
publicly-traded company, we have significantly expanded the scope of our
business, so that we presently have four business segments. We have
also engaged in two financings, entered into joint ventures, acquired and
disposed of companies and assets, and granted equity-based
incentives. All of these events presented complex accounting issues
which were new to our financial staff. Furthermore, we do not have a
large accounting department and it has been difficult for us to hire qualified
personnel who understand English and Chinese and are familiar with both U.S.
GAAP and PRC GAAP. We are addressing these issues by reviewing and
revising our internal accounting policies and procedures, expanding the
resources allocated to our accounting department, and hiring outside accounting
advisors. We expect resolution of these matters may take several
months. Accordingly, based on the foregoing, the certifying officers
have concluded that our disclosure controls and procedures are not effective at
this time.
The
conclusion of chief executive officer and chief financial officer regarding our
disclosure controls and procedures is based solely on management’s conclusion
that our internal control over financial reporting was not
effective.
Our
material weaknesses related to:
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•
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an
insufficient complement of personnel in our corporate accounting and
financial reporting function with an appropriate level of technical
accounting knowledge, experience, and training in the application of US
GAAP commensurate with our complex financial accounting and reporting
requirements and materiality thresholds.
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Lack
of internal audit function - the monitoring function of internal control
is not well performed due to insufficient resources. In addition, the
scope and effectiveness of internal audit function have yet to be
developed.
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Insufficient
or lack of written policies and procedures relating to periodic review of
current policies and procedures and their
implementation.
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Remediation
and Changes in Internal Control over Financial Reporting
The
Company has discussed the material weaknesses in its internal control over
financial reporting with the audit committee of the board of directors and is in
the process of developing and implementing remediation plans to address the
material weaknesses. During the fiscal year ended September 30, 2009, management
conducted a program to plan the remediation of all identified deficiencies using
a risk-based approach based on the “Internal Control — Integrated
Framework” issued by COSO. These plans contemplate various changes in process,
procedures, policy, training and organizational design, and are currently being
implemented. In addition, the Company intends to hire and/or appoint new
managers in the accounting area and/or engage accounting professionals from
external resources to address internal control weaknesses related to technical
accounting.
The
following specific remedial actions are currently in process, to address the
material weaknesses in our internal control over financial reporting described
above:
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Reorganize
and restructure our corporate accounting staff by:
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revising
the reporting structure and establishing clear roles, responsibilities,
and accountability;
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•
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hiring
additional technical accounting personnel to address our complex
accounting and financial reporting requirements;
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•
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assessing
the technical accounting capabilities at our subsidiaries to ensure the
right complement of knowledge, skills, and training;
and
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establishing
internal audit functions,
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Improve
period-end closing procedures by:
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•
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ensuring
that account reconciliations and analyses for significant financial
statement accounts are reviewed for completeness and accuracy by qualified
accounting personnel;
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•
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implementing
a process that ensures the timely review and approval of complex
accounting estimates by qualified accounting personnel and subject matter
experts, where appropriate;
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•
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developing
better monitoring controls for corporate accounting and at our
subsidiaries,
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documenting
and implementing antifraud programs and controls as well as comprehensive
risk assessment of procedures, programs and controls,
and
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making
efforts to develop written policies and procedures, but the progress has
been slowed due to limited resources and personnel
changes.
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During
2009, we hired an internal audit manager and, we will increase our efforts to
hire qualified personnel. We anticipate that we will be able to
complete the remediation before September 30, 2010.
Other
than as described above, management does not believe that there have been any
other changes in our internal control over financial reporting, which have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
We are a
defendant in a class action commenced on October 16, 2009 in the Supreme Court
of the State of New York, Nassau County, by alleged class representative
plaintiffs Stephen Trecaso and Linda Watts against us and our directors which
alleges a claim for breach of fiduciary duty, and which makes a demand for
injunctive relief or alternatively, damages arising out of the merger
agreement. The complaint generally, alleges that we and the board of
directors engaged in a defective sales process which will permit Skywide to buy
the company for an unfair price. We believe that this action is
without merit, that we have valid defenses to, and we will vigorously defend,
the action. As of February 1, 2010, none of our directors has been
served with process in this action, except Robert I. Adler. We and
Mr. Adler have made motions to dismiss this lawsuit on various grounds which
include the court’s lack of jurisdiction over the Company and the plaintiffs’
failure to join necessary parties as defendants.
We are a
defendant in four other class actions that have been filed against us, our
directors and Skywide in the Eighth Judicial District Court of the State of
Nevada in and for Clark County which allege a claim for breach of fiduciary duty
and which also make a demand for injunctive relief for a meaningful auction with
third parties or alternatively, damages arising out of the merger
agreement. Skywide has also been named in these
complaints. The alleged class representative plaintiffs in each of
those four actions and the respective dates of commencement of those actions are
(i) Johan L. Stoltz – October 26, 2009, (ii) Robert E. Guzman – October 27,
2009, (iii) Carol Karch – October 27, 2009 and (iv) Robert Grabowski – November
2, 2009. As of February 1, 2010, we and directors Robert I. Adler and
Greg Marcinkowski have been served in the four actions. The
complaints generally allege that we and the board of directors engaged in a
defective sales process which will permit Skywide to buy us for an unfair price
and permitted Skywide disclosure of material inside information. We
have removed each of those four actions to the United States District Court for
the District of Nevada. Plaintiffs in those actions have filed
motions seeking to remand the actions back to the Nevada State
Courts. The time within which we and Messrs. Adler and Marcinkowski
must appear, answer or otherwise move with respect to the complaints in those
actions has been extended to February 16, 2010. We believe that these actions
are without merit, that we have valid defenses to the actions and we will
vigorously defend these actions.
Item
2. Submission of Matters to a Vote of Security Holders.
On
January 19, 2010, we held our 2010 annual meeting of
shareholders. The only item on the agenda was the election of
directors. All of the incumbent directors were
reelected. The following table sets forth the number of shares voted
in favor of each of the directors.
Name
|
No. of Shares
|
Bo
Huang
|
8,492,938
|
Tianzhou
Deng
|
7,600,508
|
Robert
I. Adler
|
7,414,051
|
Renjie
Lu
|
7,414,051
|
Greg
Marcinkowski
|
7,414,051
|
Baoheng
Shi
|
7,414,051
|
Xiang
Dong (Donald) Yang
|
8,494,938
|
Item
3. Other Information
In
October 2009, Beijing Shanglira Capital Co., Ltd., a company controlled by Bo
Huang and Tianzhou Deng advanced us $17,208,000, and in December 2009, Skywide
advanced us $3,000,000. The loans are unsecured and are payable on
demand. The proceeds of the loans were used primarily to reimburse us
for paying the Abax/CCIF senior debt in the quarter ended December 31,
2009.
Item 6.
Exhibits
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act
|
32.1
|
Certification
of Chief Executive and Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act
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SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
SINOENERGY
CORPORATION.
|
|
(Registrant)
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|
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Dated:
February 12, 2010
|
s/
Bo Huang
|
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Bo
Huang, Chief Executive Officer
|
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|
s/
ShiaoMing Sheng
|
Dated:
February 12, 2010
|
Chief
Financial Officer
|
38