As
filed with the Securities and Exchange Commission on August 12,
2008
Registration
No. 333-150250
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
PRE-EFFECTIVE
AMENDMENT NO. 2 TO
Form
S-3
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
China
Automotive Systems, Inc.
(Exact
name of Registrant as specified in its charter)
Delaware
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33-0885775
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
Identification
Number)
|
No.
1 Henglong Road, Yu Qiao Development Zone
Shashi
District, Jing Zhou City
Hubei
Province
People’s
Republic of China
(86)
27-5981-8527
(Address,
including zip code, and telephone number,
including
area code, of Registrant’s principal executive offices)
Chief
Financial Officer
China
Automotive Systems, Inc.
No.
1 Henglong Road, Yu Qiao Development Zone
Shashi
District, Jing Zhou City
Hubei
Province
People’s
Republic of China
(86)
27-5981-8527
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
to:
Hayden
J. Trubitt
Heller
Ehrman LLP
4350
La Jolla Village Drive, Seventh Floor
San
Diego, California 92122
Approximate
date of commencement of proposed sale to the public:
From
time to time after the effective date of this Registration Statement, as
determined by the selling security holders.
If
the
only securities being registered on this form are being offered pursuant to
dividend or interest reinvestment plans, please check the following box.
£
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or reinvestment plans,
check the following box. T
If
this
form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. £
If
this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. £
If
this
form is a registration statement pursuant to General Instruction I.D. or a
post-effective amendment thereto that shall become effective upon filing with
the Commission pursuant to Rule 462(e) under the Securities Act, check the
following box. £
If
this
form is a post-effective amendment to a registration statement filed pursuant
to
General Instruction I.D. filed to register additional securities or additional
classes of securities pursuant to Rule 413(b) under the Securities Act, check
the following box. £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer £
Accelerated
filer £
Non-accelerated
filer £
Smaller
reporting company T
CALCULATION
OF REGISTRATION FEE
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Title
of Each Class of
Securities
to be Registered
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Amount to be
Registered(1)
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Proposed
Maximum
Offering Price
Per Security
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Proposed
Maximum
Aggregate
Offering Price
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Amount of
Registration Fee
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Senior
Convertible Notes maturing February 15, 2013 (“Closing
Notes”)
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$557,286
principal amount
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$
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557,286
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$
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21.90
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(1)
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Senior
Convertible Notes maturing February 15, 2013 (“Henglong
Notes”)
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$417,963
principal amount
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$
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417,963
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$
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16.43
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(1)
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Senior
Convertible Notes maturing February 15, 2013 (“Escrow
Notes”)
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$975,258
principal amount
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$
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975,258
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$
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38.33
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(1)
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Closing
Warrants to purchase shares of Common Stock, with an expiration date
of
February 15, 2009
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warrants
to purchase 658,932 shares of common stock
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-0-
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(2)
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Escrow
Warrants to purchase shares of Common Stock, with an expiration date
of
February 15, 2009
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warrants
to purchase 658,932 shares of common stock
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-0-
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Common
Stock, par value $0.0001 per share (3)(4)
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220,329
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$
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8.8527
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$
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1,950,507
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-0-
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(1)
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Common
Stock, par value $0.0001 per share (3)(5)
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1,317,864
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$
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8.8527
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$
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11,666,655
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$
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458.50
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(2)
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Common
Stock, par value $0.0001 per share (3)(6)
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44,065
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$
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8.8527
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$
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390,094
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$
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1.73
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Total
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$
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536.89
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(7)
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(1) |
Pursuant
to Rule 457(i) under the Securities Act, a registration fee is payable
based on the proposed offering price of the convertible securities
(the
Senior Convertible Notes) alone, and no separate registration fee
is
payable with regard to the underlying shares of common stock which
are
also being registered for distribution in this same registration
statement.
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(2) |
Calculation
is indicated based upon the exercise price per share of the Warrants,
in
accordance with Rule 457(g)(1) under the Securities Act. However,
pursuant
to the final sentence of Rule 457(g) under the Securities Act, as
applied,
no registration fee is required with respect to the Warrants, because
the
Warrants are currently out-of-the-money and the underlying shares
of
common stock are also being registered for distribution in this same
registration statement.
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(3) |
Pursuant
to Rule 416 under the Securities Act, this Registration Statement
also
covers such additional shares as may hereafter be offered or issued
to
prevent dilution resulting from stock splits, stock dividends or
similar
transactions. The Registrant confirms that Rule 416 is not to be
used to
cover increases resulting from any other adjustment provisions
contained
in the Senior Convertible Notes, such as the conversion price reset
and/or
weighted-average antidilution provisions referred to in Footnote
6 of this
table.
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(4) |
Represents
shares of common stock issuable upon conversion of various Senior
Convertible Notes dated February 15, 2008 at a conversion price of
$8.8527
per share (subject to possible future adjustment), issued under the
Securities Purchase Agreement dated February 1,
2008.
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(5) |
Represents
shares of common stock issuable upon exercise of various Closing
Warrants
and Escrow Warrants dated February 15, 2008 to purchase common stock
at an
exercise price of $8.8527 per share (subject to possible future
adjustment), issued under the Securities Purchase Agreement dated
February
1, 2008.
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(6) |
Represents
additional shares of common stock issuable upon conversion of the
various
Senior Convertible Notes and/or exercise of the various Closing Warrants
and Escrow Warrants upon potential future conversion price reset
and/or
weighted-average antidilution
adjustments.
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(7) |
Fee
of $2,200.80 previously paid.
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The
Registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a),
may
determine.
PROSPECTUS
CHINA
AUTOMOTIVE SYSTEMS, INC.
$557,286
principal amount of Senior Convertible Notes maturing February 15, 2013
(“Closing Notes”)
$417,963
principal amount of Senior Convertible Notes maturing February 15, 2013
(“Henglong Notes”)
$975,258
principal amount of Senior Convertible Notes maturing February 15, 2013 (“Escrow
Notes”)
Closing
Warrants to purchase an aggregate of 658,932 shares of Common Stock, with an
expiration date of February 15, 2009
Escrow
Warrants to purchase an aggregate of 658,932 shares of Common Stock, with an
expiration date of February 15, 2009
1,582,258
shares of Common Stock
This
prospectus relates to the resale, and offer for resale, of up to $557,286
principal amount of Senior Convertible Notes maturing February 15, 2013
(“Closing
Notes”),
$417,963 principal amount of Senior Convertible Notes maturing February 15,
2013 (“Henglong
Notes”),
and
$975,258 principal amount of Senior Convertible Notes maturing February 15,
2013 (“Escrow
Notes”);
Closing Warrants to purchase an aggregate of 658,392 shares of common stock,
with an expiration date of February 15, 2009, and Escrow Warrants to
purchase an aggregate of 658,392 shares of common stock, with an expiration
date
of February 15, 2009; and 1,538,193 shares (plus up to 44,095 additional
shares upon potential future conversion price reset or weighted-average
antidilution adjustments) of common stock, $0.0001 par value per share, of
China
Automotive Systems, Inc. (“we,”
“China
Automotive”
or
the
“Company”)
that
may be offered from time to time by the selling securityholders identified
on
page 31 of this prospectus.
The
Closing Notes, the Henglong Notes and the Escrow Notes, which are collectively
referred to as the “Senior
Convertible Notes,”
are
identical except that the Henglong Notes and the Escrow Notes were subject
to
early redemption at the holders’ option if we did not consummate the acquisition
of a further equity interest in Jingzhou Henglong Automotive Parts Co., Ltd.
(the “Henglong
Transaction”)
by
April 15, 2008. The Closing Warrants and the Escrow Warrants, which are
collectively referred to as the “Warrants,”
are
identical except that the Escrow Warrants had to be surrendered back to us
if
the holders of the Escrow Notes elected early redemption of the Escrow Notes
as
a result of us not consummating the Henglong Transaction by April 15, 2008.
In fact, the Henglong Transaction was consummated on April 3, 2008. Therefore,
as a practical matter there is no further distinction among any of the Senior
Convertible Notes and no further distinction among any of the
Warrants.
We
are
registering these securities for resale by the selling securityholders named
in
this prospectus or their pledges, donees, assigns, transferees or other
successors in interest. These securities are being registered to permit the
selling securityholders to sell securities from time to time in the public
market or otherwise, in amounts, at prices and on terms determined at the time
of offering. The selling securityholders may sell these securities through
ordinary brokerage transactions or through any other means described in the
section entitled “Plan of Distribution” beginning on page 39. We will not
receive any of the proceeds from this offering. We will receive proceeds from
any exercise of the Warrants, if the exercise price is paid in cash instead
of
via “net exercise.” All costs associated with this registration will be borne by
us.
Our
common stock is listed on the NASDAQ Capital Market under the symbol “CAAS.” On
April 11, 2008, the last reported sale price of our common stock was $5.66
per share. The Senior Convertible Notes and the Warrants are not listed on
any
exchange or known to be quoted in any interdealer quotation system.
Investing
in our securities involves a high degree of risk.
See
“Risk Factors” beginning on page 6.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is August 13, 2008.
TABLE
OF CONTENTS
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4
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Risk
Factors
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6
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Special
Note Regarding Forward-Looking Statements
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15
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Use
of Proceeds
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16
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Ratio
of Earnings to Fixed Charges
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17
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Private
Placement of and Description of Senior Convertible Notes and
Warrants
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18
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Selling
Securityholders
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30
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Additional
Disclosures
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32
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Plan
of Distribution
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39
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Certain
U.S. Federal Income Tax Considerations
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42
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Legal
Matters
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47
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Experts
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47
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Where
You Can Find More Information
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48
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Documents
Incorporated by Reference
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49
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Prospectus
Summary
This
summary highlights selected information appearing elsewhere in, or incorporated
by reference in, this prospectus. While this summary highlights important
information about us, you should carefully read this prospectus (including
the
documents incorporated by reference into this prospectus) and the registration
statement of which this prospectus is a part in their entirety before investing
in our securities, especially the risks of investing in our securities which
we
discuss later in “Risk Factors.” Unless the context requires otherwise, the
words “we,” the “Company,” “us” and “our” refer to China Automotive Systems,
Inc.
ABOUT
CHINA AUTOMOTIVE SYSTEMS, INC.
Business
and History
China
Automotive Systems, Inc. manufactures power steering components and systems
for
passenger automobiles and commercial vehicles, primarily through seven
indirectly-owned Sino-foreign joint ventures. Its current customer base includes
several leading Chinese auto manufacturers.
We
were
incorporated in the State of Delaware on June 29, 1999 under the name
Visions-In-Glass, Inc., which was principally engaged in the business of
designing, marketing and selling custom-designed stained glass, leaded glass
artifacts and leaded glass windows through a web site. From August 23, 2002
to
March 2003, we had no business operations.
Pursuant
to a Share Exchange Agreement dated as of March 5, 2003, among Yarek Bartosz,
Guofu Dong, Liping Xie, Qizhou Wu, Andy Yiu Wong Tse and Hanlin Chen and Great
Genesis Holding Limited, a corporation organized under the laws of the Hong
Kong
Special Administrative Region, China (“Genesis”),
we
acquired all of the issued and outstanding equity interests of Genesis. As
consideration for these Genesis shares, we issued 20,914,250 shares of common
stock to the former stockholders of Genesis.
Genesis
currently owns interests in the seven Sino-foreign power steering joint ventures
and also has one wholly-owned power steering subsidiary.
In
connection with the acquisition of Genesis, we changed our name from
Visions-In-Glass, Inc. to China Automotive Systems, Inc.
Our
principal executive offices are located at No. 1 Henglong Road, Yu Qiao
Development Zone, Shashi District, Jing Zhou City, Hubei Province, People’s
Republic of China. Our telephone number is (86) 27-5981-8527.
Recent
Developments
On
February 1, 2008, we entered into a Securities Purchase Agreement with two
institutional investors (the “Securities
Purchase Agreement”).
At the
February 15, 2008 closing pursuant to the Securities Purchase Agreement, we
issued and sold to the two institutional investors senior convertible notes
with
an aggregate original principal amount of $35,000,000 plus warrants to purchase
an aggregate of 1,317,684 shares of our common stock. A portion of these
senior convertible notes and all of these warrants, and a corresponding portion
of the shares of common stock issuable upon conversion or exercise of them,
are
the securities being offered for resale pursuant to this prospectus. In
consideration for the issuance of the senior convertible notes and warrants,
we
received $35,000,000 in cash from the institutional investors — $17,500,000
directly at the closing, and $17,500,000 which was delivered to us from an
escrow account on April 11, 2008 following the consummation of the Henglong
Transaction described below.
On
April
3, 2008, Genesis consummated the acquisition of a 35.5% minority interest in
Jingzhou Henglong Automotive Parts Co., Ltd., pursuant to an Equity Transfer
Agreement dated March 31, 2008 (the “Henglong
Transaction”).
After
the Henglong Transaction, Genesis holds 80% of the shares of Jingzhou Henglong
Automotive Parts Co., Ltd. In the Henglong Transaction, we transferred to
Wiselink Holdings Limited, the seller of the shares, $10,000,000 cash and
3,023,542 shares of our common stock — 1,170,000 shares on April 22, 2008,
and an additional 1,853,542 shares on June 30, 2008 after we obtained approval
of our stockholders for the Henglong Transaction.
SUMMARY
OF THE OFFERING
This
offering relates to the resale by the selling securityholders named in this
prospectus, or their pledges, donees, assigns, transferees or other successors
in interest, of certain derivative securities issued by us pursuant to the
Securities Purchase Agreement and of our common stock underlying such derivative
securities. The derivative securities offered for resale consist of an aggregate
of $1,950,507 original principal amount of senior convertible notes dated
February 15, 2008, which were issued in series which we refer to as the
“Closing
Notes,”
the
“Henglong
Notes”
and the
“Escrow
Notes,”
and
warrants to purchase 1,317,864 shares of common stock dated February 15, 2008,
which were issued in series which we refer to as the “Closing
Warrants”
and“Escrow
Warrants.”
The
resale offering also includes 1,538,193 shares of common stock issuable upon
conversion and exercise of such derivative securities, plus up to 44,065
additional shares of common stock upon potential future conversion price reset
or weighted-average antidilution adjustments.
The
Closing Notes, the Henglong Notes and the Escrow Notes, which are collectively
referred to as the “Senior
Convertible Notes,”
are
identical except that the Henglong Notes and the Escrow Notes were subject
to
early redemption at the holders’ option if we did not consummate the Henglong
Transaction by April 15, 2008. The Closing Warrants and the Escrow
Warrants, which are collectively referred to as the “Warrants,”
are
identical except that the Escrow Warrants had to be surrendered back to us
if
the holders of the Escrow Notes elected early redemption of the Escrow Notes
as
a result of us not consummating the Henglong Transaction by April 15, 2008.
In fact, the Henglong Transaction was consummated on April 3, 2008. Therefore,
as a practical matter there is no further distinction among any of the Senior
Convertible Notes and no further distinction among any of the
Warrants.
Senior
Convertible Notes Offered
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The
resale of Senior Convertible Notes with an aggregate original principal
amount of up to $1,950,507.
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Warrants
Offered
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The
resale of Warrants to purchase up to 1,317,864 shares of our common
stock.
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Common
Stock Offered
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The
resale of up to 1,582,258 shares of common stock issuable to the
selling
securityholders (including 44,065 additional shares upon potential
future
conversion price resets or weighted-average antidilution
adjustments).
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Common
Stock Outstanding Before the Offering
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23,959,702
shares (not including any of the shares issued pursuant to the Henglong
Transaction); 26,983,244 shares (including the shares issued pursuant
to
the Henglong Transaction).
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Use
of Proceeds
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We
will not receive any proceeds of the securities offered by the selling
securityholders. However, we may receive proceeds from the exercise
of the
Warrants if the exercise price of the Warrants is paid in cash instead
of
via “net exercise.” We would plan to use all such proceeds for capital
expenditures, possible future acquisitions, and general corporate
and
working capital purposes. See “Use of Proceeds.” We have already received
$35 million from the issuance of these and other Senior Convertible
Notes and the Warrants under the Securities Purchase Agreement.
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Risk
Factors
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The
securities offered hereby involve a high degree of risk. See “Risk
Factors.”
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NASDAQ
Capital Market symbol of Common Stock
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CAAS
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Risk
Factors
Any
investment in our securities involves a high degree of risk. You should
carefully consider the risks described below, together with the information
contained elsewhere in this prospectus or incorporated by reference in this
prospectus, before you make a decision to invest in our company. Our business,
financial conditions and results of operations could be materially and adversely
affected by many risk factors. Because of these risk factors, actual
results might differ significantly from those projected in any forward-looking
statements. Factors that might cause such differences include, among
others, the following:
Risks
Related to our Business and Industry
Because
we are a holding company with substantially all of our operations conducted
through our subsidiaries, our performance will be affected by the performance
of
our subsidiaries.
We
have
no operations independent of those of Genesis and its subsidiaries, and our
principal assets are our investments in Genesis and its subsidiaries. As a
result, we are dependent upon the performance of Genesis and its subsidiaries
and will be subject to the financial, business and other factors affecting
Genesis as well as general economic and financial conditions. As
substantially all of our operations are and will be conducted through our
subsidiaries, we will be dependent on the cash flow of our subsidiaries to
meet
our obligations.
Because
virtually all of our assets are and will be held by operating subsidiaries,
the
claims of our stockholders will be structurally subordinate to all existing
and
future liabilities and obligations, and trade payables of such
subsidiaries. In the event of our bankruptcy, liquidation or
reorganization, our assets and those of our subsidiaries will be available
to
satisfy the claims of our stockholders only after all of our and our
subsidiaries’ liabilities and obligations have been paid in full.
The
Senior Convertible Notes are unsecured obligations of us, but are not
obligations of our subsidiaries. In addition, our secured commercial debt is
senior to the Senior Convertible Notes.
With
the automobile parts markets being highly competitive and many of our
competitors having greater resources than we do, we may not be able to compete
successfully.
The
automobile parts industry is a highly competitive business. Criteria
for our customers include:
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Quality;
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Price/cost
competitiveness;
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System
and product performance;
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Reliability
and timeliness of delivery;
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•
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New
product and technology development capability;
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•
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Excellence
and flexibility in operations;
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•
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Degree
of global and local presence;
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•
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Effectiveness
of customer service; and
|
•
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Overall
management capability.
|
Our
competitors include independent suppliers of parts, as well as suppliers formed
by spin-offs from our customers, who are becoming more aggressive in selling
parts to other vehicle manufacturers. Depending on the particular product,
the number of our competitors varies significantly. Many of our
competitors have substantially greater revenues and financial resources than
we
do, as well as stronger brand names, consumer recognition, business
relationships with vehicle manufacturers, and geographic presence than we
have. We may not be able to compete favorably and increased competition
may substantially harm our business, business prospects and results of
operations.
Internationally,
we face different market dynamics and competition. We may not be as
successful as our competitors in generating revenues in international markets
due to the lack of recognition of our products or other factors.
Developing product recognition overseas is expensive and time-consuming and
our
international expansion efforts may be more costly and less profitable than
we
expect. If we are not successful in our target markets, our sales could
decline, our margins could be negatively impacted and we could lose market
share, any of which could materially harm our business, results of operations
and profitability.
The
cyclical nature of automotive production and sales could result in a reduction
in automotive sales, which could adversely affect our business and results
of
operations.
Our
business relies on automotive vehicle production and sales by our customers,
which are highly cyclical and depend on general economic conditions and other
factors, including consumer spending and preferences and the price and
availability of gasoline. They also can be affected by labor relations
issues, regulatory requirements, and other factors. In addition, in the
last two years, the price of automobiles in China has generally declined.
As a result, the volume of automotive production in China has fluctuated from
year to year, which gives rise to fluctuations in the demand for our
products. Any significant economic decline that results in a reduction in
automotive production and sales by our customers would have a material adverse
effect on our results of operations. Moreover, if the prices of automobiles
do
not remain low, then demand for automobile parts could fall and result in lower
revenues and profitability.
Increasing
costs for manufactured components and raw materials may adversely affect our
profitability.
We
use a
broad range of manufactured components and raw materials in our products,
including castings, electronic components, finished sub-components, molded
plastic parts, fabricated metal, aluminum and steel, and resins. Because
it may be difficult to pass increased prices for these items on to our
customers, a significant increase in the prices of our components and materials
could materially increase our operating costs and adversely affect our profit
margins and profitability.
Pricing
pressure by automobile manufacturers on their suppliers may adversely affect
our
business and results of operations.
Recently,
pricing pressure from automobile manufacturers has been prevalent in the
automotive parts industry in China. Virtually all vehicle manufacturers
seek price reductions each year, including requiring suppliers to pay a “3-R
Guarantees” service charge for repair, replacement and refund in an amount equal
to one percent of the total amount of parts supplied. Although we have
tried to reduce costs and resist price reductions, these reductions have
impacted our sales and profit margins. If we cannot offset continued price
reductions through improved operating efficiencies and reduced expenditures,
price reductions will have a material adverse effect on our results of
operations.
Our
business, revenues and profitability would be materially and adversely affected
if we lose any of our large customers.
For
the
year ended December 31, 2007, approximately 16.4% of our sales were to Chery
Automobile Co., Ltd., approximately 13.7% were to Brilliance China Automotive
Holdings Limited, approximately 11.5% were to Beiqi Foton Motor Co., Ltd.,
and
approximately 10.6% were to Zhejiang Geely Holding Co., Ltd. The loss of,
or significant reduction in purchases by, one or more of these major customers
could disrupt our business.
We
may be subject to product liability and warranty and recall claims, which may
increase the costs of doing business and adversely affect our financial
condition and liquidity.
We
may be
exposed to product liability and warranty claims if our products actually or
allegedly fail to perform as expected or the use of our products results, or
is
alleged to result, in bodily injury and/or property damage. We started to
pay some of our customers’ increased after-sales service expenses due to
consumer rights protection policies of “recall” issued by the Chinese Government
in 2004, such as the recalling flawed vehicles policy. Beginning in 2004,
automobile manufacturers unilaterally required their suppliers to pay a “3-R
Guarantees” service charge for repair, replacement and refund in an amount equal
to one percent of the total amount of parts supplied. Accordingly, we have
experienced and will continue to experience higher after sales service
expenses. Product liability, warranty and recall costs may have a material
adverse effect on our financial condition.
We
are subject to environmental and safety regulations, which may increase our
compliance costs and may adversely affect our results of operation.
We
are
subject to the requirements of environmental and occupational safety and health
laws and regulations in China. We cannot provide assurance that we have
been or will be at all times in full compliance with all of these requirements,
or that we will not incur material costs or liabilities in connection with
these
requirements. Additionally, these regulations may change in a manner that
could have a material adverse effect on our business, results of operations
and
financial condition. The capital requirements and other expenditures that
may be necessary to comply with environmental requirements could increase and
become a material expense of doing business.
Non-performance
by our suppliers may adversely affect our operations
by delaying delivery or causing delivery failures, which may negatively affect
demand, sales and profitability.
We
purchase various types of equipment, raw materials and manufactured component
parts from our suppliers. We would be materially and adversely affected by
the failure of our suppliers to perform as expected. We could experience
delivery delays or failures caused by production issues or delivery of
non-conforming products if our suppliers failed to perform, and we also face
these risks in the event any of our suppliers becomes insolvent or bankrupt.
Our
business and growth may suffer if we fail to attract and retain key personnel.
Our
ability to operate our business and implement our strategies effectively depends
on the efforts of our executive officers and other key employees. We
depends on the continued contributions of our senior management and other key
personnel. Our future success also depends on our ability to identify,
attract and retain highly skilled technical staff, particularly engineers and
other employees with electronics expertise, and managerial, finance and
marketing personnel. We does not maintain a key person life insurance
policy on Mr. Hanlin Chen or Mr. Qizhou Wu. The loss of the services of
any of our key employees or the failure to attract or retain other qualified
personnel could substantially harm our business.
Our
management controls approximately 80% of our outstanding common stock and may
have conflicts of interest with our minority stockholders.
Members
of our management beneficially own approximately 80% of the outstanding shares
of our common stock. As a result, these majority stockholders have control
over decisions to enter into any corporate transaction and have the ability
to
prevent any transaction that requires the approval of stockholders, which could
result in the approval of transactions that might not maximize stockholders’
value. Additionally, these stockholders control the election of members of
our board, have the ability to appoint new members to our management team and
control the outcome of matters submitted to a vote of the holders of our common
stock. The interests of these majority stockholders may at times conflict
with the interests of our other stockholders. We regularly engage in
transactions with our non-wholly-owned subsidiaries, entities controlled by
one
of more of our officers and directors, and/or other entities
with
which we have directors in common, and/or in which one or more of our directors
or officers has a significant ownership interest. These transactions have in
the
past included, and might in the future include, product sales, material
purchases and purchases of equipment and technology; purchase/sale of capital
stock of joint ventures; sale of property, plant and equipment; and demand
loans. The Henglong Transaction was a related-party transaction.
We
substantially increased our outstanding indebtedness with the sale of the Senior
Convertible Notes and we may not be able to pay our debt and other
obligations.
On
February 15, 2008, we issued and sold an aggregate $35,000,000 principal amount
of our Senior Convertible Notes pursuant to the Securities Purchase
Agreement.
An
event
of default may be triggered under the Senior Convertible Notes for a number
of
reasons, including our failure to pay any principal, interest or late charges
on
the Senior Convertible Notes when due and any default under other indebtedness
when due. Upon any event of default under the Senior Convertible Notes, the
interest rate will be increased by 2% above the then applicable interest rate
until the event of default has been cured. The issuance of the Senior
Convertible Notes may:
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make
it more difficult for us to obtain any necessary financing in the
future
for working capital, capital expenditures or other purposes;
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make
it more difficult for us to be acquired;
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require
us to dedicate a substantial portion of our cash flow from operations
and
other capital resources to debt service;
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magnify
the consequences of any other adverse development affecting our
business;
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limit
our flexibility in planning for, or reacting to, changes in our business;
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make
us more vulnerable in the event of a downturn in our business or
industry
conditions; and
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place
us at a competitive disadvantage to any of our competitors that have
less
debt.
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If
we are
unable to satisfy our payment obligations under the Senior Convertible Notes
or
otherwise are obliged to repay the Senior Convertible Notes before the maturity
date, we could default on the Senior Convertible Notes, in which case our
available cash could be depleted, and our ability to fund operations could
be
materially harmed.
The
Senior Convertible Notes contain various restrictive covenants that limit
management’s discretion in operating our business.
In
particular, these covenants limit our ability to, among other things:
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incur
additional debt, including secured debt;
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make
certain investments or pay dividends or distributions on our capital
stock
or purchase or redeem or retire capital stock;
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sell
assets, including capital stock of our restricted subsidiaries;
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restrict
dividends or other payments by restricted subsidiaries;
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create
liens; and
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enter
into transactions with affiliates.
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These
covenants could materially and adversely affect our ability to finance our
future operations or capital needs. Furthermore, they may restrict our ability
to expand, to pursue our business strategies and otherwise to conduct our
business. Our ability to comply with these covenants may be affected by
circumstances and events beyond our control, such as prevailing economic
conditions and changes in regulations, and we cannot assure you that we will
be
able to comply with them. A breach of these covenants could result in a default
under the Senior Convertible Notes. If there were an event of default under
the
Senior Convertible Notes, the selling securityholders could cause all amounts
borrowed under the Senior Convertible Notes to be due and payable
immediately.
These
covenants cannot be waived without the consent of Lehman Brothers Commercial
Corporation Asia Limited, or Lehman.
We
may incur penalties for late registration of the Senior Convertible Notes,
Warrants and the shares of common stock underlying them.
Under
the
terms of the registration rights agreement we entered into with the selling
securityholders on February 15, 2008, we are obligated to register the Senior
Convertible Notes, Warrants and the common stock underlying the Senior
Convertible Notes and Warrants. The registration rights carry penalties in
the
event we do not meet these registration obligations. If sales of all of the
securities covered by the registration statement may not be made, whether
because of our failure to keep the registration statement effective, our failure
to provide sufficient disclosure, our failure to register a sufficient number
of
shares of common stock or our failure to maintain the listing of our common
stock, then we must pay liquidated damages in cash to the holders in the amount
of 1% of the aggregate purchase price of the Senior Convertible Notes and
Warrants not included in and still unsold under the registration statement,
for
every 30-day period, pro-rated for lesser periods, that the registration
statement has not been maintained effective. As we have reduced the amount
of
the Senior Convertible Notes, Warrants and the common stock underlying the
Senior Convertible Notes and Warrants to be registered, there may be a possible
penalty. While we do not believe any penalty should apply, in the event there
is
one, we believe the maximum penalty should be $320,000. We are negotiating
with
the selling securityholders about the applicability of any penalty as a result
of this event. If the Company and selling securityholders cannot reach agreement
on any penalty, the selling securityholders may attempt to declare a default
under the Notes, while the Company does not believe it would be in default,
if
the selling securityholders successfully asserted the Company had breached
its
obligations under the Notes, such a default could have a material adverse effect
on the Company.
There
is a limited public float of our common stock, which can result in our stock
price being volatile and prevent the realization of a profit on resale of our
common stock or derivative securities.
There
is
a limited public float of our common stock. Of our outstanding common
stock, approximately 20% is considered part of the public float. The term
“public float” refers to shares freely and actively tradable on the NASDAQ
Capital Market and not owned by officers, directors or affiliates, as such
term
is defined under the Securities Act. As a result of the limited public
float and the limited trading volume on some days, the market price of our
common stock can be volatile, and relatively small changes in the demand for
or
supply of our common stock can have a disproportionate effect on the market
price for our common stock. This stock price volatility could prevent a
securityholder seeking to sell our common stock or derivative
securities from
being able to sell them at or above the price at which the stock or derivative
securities were bought, or at a price which a fully liquid market would
report.
Provisions
in our certificate of incorporation and bylaws and the General Corporation
Law
of Delaware may discourage a takeover attempt.
Provisions
in our certificate of incorporation and bylaws and the General Corporation
Law
of Delaware, the state in which we are organized, could make it difficult for
a
third party to acquire us, even if doing so might be beneficial to our
stockholders. Provisions of our certificate of incorporation and bylaws
impose various procedural and other requirements, which could make it difficult
for stockholders to effect certain corporate actions and possibly prevent
transactions that would maximize stockholders’ value.
We
do
not pay cash dividends on our common stock.
We
have
never paid common stock cash dividends and do not anticipate doing so in the
foreseeable future. In addition, the Senior Convertible Notes prohibit us from
paying cash dividends on common stock.
Risks
Related to Doing Business in China and Other Countries Besides the United
States
Because
our operations are all located outside of the United States and are subject
to
Chinese laws, any change of Chinese laws may adversely affect our business.
All
of
our operations are outside the United States and in China, which exposes us
to
risks, such as exchange controls and currency restrictions, currency
fluctuations and devaluations, changes in local economic conditions, changes
in
Chinese laws and regulations, exposure to possible expropriation or other
Chinese government actions, and unsettled political conditions. These
factors may have a material adverse effect on our operations or on our business,
results of operations and financial condition.
Our
international expansion plans subject us to risks inherent in doing business
internationally.
Our
long-term business strategy relies on the expansion of our international sales
outside China by targeting markets, such as the United States. Risks
affecting our international expansion include challenges caused by distance,
language and cultural differences, conflicting and changing laws and
regulations, foreign laws, international import and export legislation, trading
and investment policies, foreign currency fluctuations, the burdens of complying
with a wide variety of laws and regulations, protectionist laws and business
practices that favor local businesses in some countries, foreign tax
consequences, higher costs associated with doing business internationally,
restrictions on the export or import of technology, difficulties in staffing
and
managing international operations, trade and tariff restrictions, and variations
in tariffs, quotas, taxes and other market barriers. These risks could
harm our international expansion efforts, which could in turn materially and
adversely affect our business, operating results and financial condition.
We
face risks associated with currency exchange rate fluctuations; any adverse
fluctuation may adversely affect our operating margins.
Although
we are incorporated in the United States (Delaware), the majority of our current
revenues are in Chinese currency. Conducting business in currencies other
than US dollars subjects us to fluctuations in currency exchange rates that
could have a negative impact on our reported operating results.
Fluctuations in the value of the US dollar relative to other currencies impact
our revenues, cost of revenues and operating margins and result in foreign
currency translation gains and losses. Historically, we have not engaged
in exchange rate hedging activities. Although we may implement hedging
strategies to mitigate this risk, these strategies may not eliminate our
exposure to foreign exchange rate fluctuations and involve costs and risks
of
their own, such as ongoing management time and expertise requirements, external
costs to implement the strategy and potential accounting implications.
If
relations between the United States and China worsen, our stock price may
decrease and we may have difficulty accessing the U.S. capital markets.
At
various times during recent years, the United States and China have had
disagreements over political and economic issues. Controversies may arise
in the future between these two countries. Any political or trade
controversies between the United States and China could adversely affect the
market price of our common stock and our ability to access US capital markets.
The
Chinese Government could change its policies toward private enterprises, which
could adversely affect our business.
Our
business is subject to political and economic uncertainties in China and may
be
adversely affected by China’s political, economic and social developments.
Over the past several years, the Chinese Government has pursued economic reform
policies including the encouragement of private economic activity and greater
economic decentralization. The Chinese Government may not continue to
pursue these policies or may alter them to our detriment from time to
time. Changes in policies, laws and regulations, or in their
interpretation or the imposition of confiscatory taxation, restrictions on
currency conversion, restrictions or prohibitions on dividend payments to
stockholders, devaluations of currency or the nationalization or other
expropriation of private enterprises could have a material adverse effect on
our
business. Nationalization or expropriation could result in the total loss
of our investment in China.
The
economic, political and social conditions in China could affect our business.
All
of
our business, assets and operations are located in China. The economy of
China differs from the economies of most developed countries in many respects,
including government involvement, level of development, growth rate, control
of
foreign exchange, and allocation of resources. The economy of China has
been transitioning from a planned economy to a more market-oriented
economy. Although the Chinese Government has implemented measures recently
emphasizing the utilization of market forces for economic reform, the reduction
of state ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of productive assets
in China is still owned by the Chinese Government. In addition, the
Chinese Government continues to play a significant role in regulating industry
by imposing industrial policies. It also exercises significant control
over China’s economic growth through the allocation of resources, controlling
payment of foreign currency-denominated obligations, setting monetary policy
and
providing preferential treatment to particular industries or companies.
Therefore, the Chinese Government’s involvement in the economy could adversely
affect our business operations, results of operations and/or financial
condition.
The
Chinese Government’s macroeconomic policies could have a negative effect on our
business and results of operations.
The
Chinese Government has implemented various measures from time to time to control
the rate of economic growth. Some of these measures benefit the overall
economy of China, but may have a negative effect on us.
Government
control of currency conversion and future movements in exchange rates may
adversely affect our operations and financial results.
We
receive substantially all of our revenues in Renminbi, the currency of
China. A portion of such revenues will be converted into other currencies
to meet our foreign currency obligations. Foreign exchange transactions
under our capital account, including principal payments in respect of foreign
currency-denominated obligations, continue to be subject to significant foreign
exchange controls and require the approval of the State Administration of
Foreign Exchange in China. These limitations could affect our ability to
obtain foreign exchange through debt or equity financing, or to obtain foreign
exchange for capital expenditures.
The
Chinese Government controls its foreign currency reserves through restrictions
on imports and conversion of Renminbi into foreign currency. Although the
exchange rate of the Renminbi to the US dollar has been stable since January
1,
1994, and the Chinese Government has stated its intention to maintain the
stability of the value of Renminbi, there can be no assurance that exchange
rates will remain stable. The Renminbi could devalue against the US
dollar. Our financial condition and results of operations may also be
affected by changes in the value of certain currencies other than the Renminbi
in which our earnings and obligations are denominated. In particular, a
devaluation of the Renminbi is likely to increase the portion of our cash flow
required to satisfy our foreign currency-denominated obligations.
Because
the Chinese legal system is not fully developed, our and securityholders’ legal
protections may be limited.
The
Chinese legal system is based on written statutes and their interpretation
by
the Supreme People’s Court. Although the Chinese government introduced new laws
and regulations to modernize its business, securities and tax systems on January
1, 1994, China does not yet possess a comprehensive body of business law.
Because Chinese laws and regulations are relatively new, interpretation,
implementation and enforcement of these laws and regulations involve
uncertainties and inconsistencies and it may be difficult to enforce
contracts. In addition, as the Chinese legal system develops, changes in
such laws and regulations, their interpretation or their enforcement may have
a
material adverse effect on our business operations. Moreover,
interpretative case law does not have the same precedential value in China
as in
the United States, so legal compliance in China may be more difficult or
expensive.
It
may be difficult to serve us with legal process or enforce judgments against
our
management or us.
All
of
our assets are located in China and all but two of our directors and officers
are non-residents of the United States, and all or substantial portions of
the
assets of such non-residents are located outside the United States. As a
result, it may not be possible to effect service of process within the United
States upon such persons to originate an action in the United States.
Moreover, there is uncertainty that the courts of China would enforce judgments
of U.S. courts against us, our directors or officers based on the civil
liability provisions of the securities laws of the United States or any state,
or an original action brought in China based upon the securities laws of the
United States or any state.
Risks
Related to this Offering
The
Senior Convertible Notes are unsecured and are structurally subordinated to
our
subsidiaries’ debt.
The
Senior Convertible Notes are unsecured, and we retain certain rights to maintain
or refinance our existing secured indebtedness or to incur certain new secured
indebtedness. Secured debt would have, as to the secured collateral, a senior
position vis-à-vis the Senior Convertible Notes. The Senior Convertible Notes
are on a parity with our other unsecured indebtedness and obligations. In
addition, our business is conducted through various subsidiaries, which also
incur indebtedness and other obligations in their own names. The Senior
Convertible Notes, which are parent-level obligations, are structurally
subordinated to the subsidiaries’ secured and unsecured indebtedness and other
obligations.
There
is no public trading market for the Senior Convertible Notes or the Warrants
and
there may never be one.
The
Senior Convertible Notes and the Warrants are not listed on any stock exchange
and there is no known trading market for them at this time. This results in
an
absence of liquidity which could make it difficult to ascertain, or to obtain,
a
fair market price for any resale of any Senior Convertible Note or any
Warrant.
The
price you pay in this offering will fluctuate and may be higher or lower than
the prices paid by other people participating in this
offering.
The
price
of the securities in this offering may fluctuate based on, among other possible
factors, the prevailing market price of our common stock on Nasdaq. (Because
the
Senior Convertible Notes and the Warrants are convertible into or exercisable
for our common stock, their value could be anticipated to have a correlation
with the market price of our common stock.) Accordingly, the price you pay
in
this offering may be higher or lower than the prices paid by other people
participating in the offering.
We
may force early conversion of the Senior Convertible Notes, which would deprive
the holders of the Senior Convertible Notes from some of the benefits of debt
interests generally and the Senior Convertible Notes in particular.
We
are
entitled to force conversion of the Senior Convertible Notes in certain
situations. If we become entitled to and do force such conversion, the holders
will no longer be entitled to return of principal, payment of interest and
premium, and other attributes of debt interests generally and the Senior
Convertible Notes in particular.
If
you hold Senior Convertible Notes
or Warrants, you will not be entitled to rights with respect to our common
stock, but you will be subject to all changes made with respect to our common
stock.
If
you
hold Senior Convertible Notes or Warrants, you will not be entitled (with
respect to them) to certain standard rights of common stock (including, without
limitation, voting rights), but if you subsequently convert your Senior
Convertible Notes or exercise your Warrants and receive common stock upon such
conversion or exercise, you will be subject to all changes affecting the common
stock. For example, in the event that an amendment is proposed to our
certificate of incorporation or bylaws requiring stockholder approval and the
record date for determining the stockholders of record entitled to vote on
the
amendment occurs before you convert your Senior Convertible Notes or exercise
your Warrants, you will not be entitled to vote on the amendment; but
nevertheless your common stock will be subject to any changes in the powers
or
rights of our common stock that result from such amendment.
One
securityholder controls decisions as to amendments of and waivers and consents
under the Senior Convertible Notes and the Warrants.
Each
Senior Convertible Note can be amended by, and only by, joint action of us
and
the “Required Holders.” The terms of the Senior Convertible Notes and Warrants
provide that the Required Holders must include Lehman and must also include
a
majority in interest of the Senior Convertible Notes or Warrants, as applicable.
Lehman currently holds a substantial majority of the Senior Convertible Notes
and Warrants. In addition, various consents contemplated by the Senior
Convertible Notes and Warrants can be given by, and only by, the Required
Holders. Amendments and waivers of Warrants can be made by a two-thirds
supermajority in interest of the Warrant holders (although no holder’s own
Warrant’s number of warrant shares or exercise price can be amended without such
holder’s own written consent). Therefore, Lehman currently has the power, if
acting together with us, to effect any amendments of or waivers or consents
under the Senior Convertible Notes and certain amendments and any waivers or
consents under the Warrants, and Lehman currently has the power to prevent
any
amendment of or waiver or consent under the Senior Convertible Notes and
Warrants. Lehman’s interests may be different from yours, and Lehman’s exercise
of judgment as to amendment, waivers and consents may be contrary to your
wishes.
The
issuance of shares upon conversion of the Senior Convertible Notes and Warrants
may cause substantial additional dilution to our existing stockholders and
may
depress the market price of our common stock. Also, sales of already-outstanding
stock may depress the market price of our common stock.
The
issuance of shares upon conversion of the Senior Convertible Notes and exercise
of the Warrants may result in substantial dilution to the interests of other
stockholders. The holders may ultimately sell the full amount of our common
stock issuable on conversion or exercise, thereby resulting in an imbalance
of
supply of and demand for our common stock and causing a stock price decline.
Although the holders may not convert their Senior Convertible Notes or exercise
their Warrants if the conversion or exercise would cause them to own more than
4.99% of our outstanding common stock, this restriction does not prevent the
holders of the Senior Convertible Notes from converting a portion of their
Senior Convertible Notes or exercising a portion of their Warrants, selling
the
shares of common stock issued upon conversion or exercise and subsequently
converting their remaining Senior Convertible Notes or exercising their
remaining Warrants. As a result, the holders of the Senior Convertible Notes
and
Warrants could sell more than this 4.99% limit while never holding more than
this limit.
Of
the
23,959,702 shares of common stock outstanding as of April 11, 2008, all
such shares are freely tradable without restriction, unless held by our
“affiliates.” Some of the shares held by our affiliates may be resold under
Rule 144. The 3,023,542 shares of common stock issued to Wiselink Holdings
Limited under the Henglong Transaction are not immediately
resalable.
Actual
or anticipated dilution from conversion of the Senior Convertible Notes and/or
exercise of the Warrants could depress our stock price.
Any
conversion of the Senior Convertible Notes or exercise of the Warrants would
result in dilution of the ownership interests of our existing stockholders.
The
conversion of the Senior Convertible Notes or the exercise of the Warrants
could
have a dilutive effect on our earnings per share. Any sales in the public market
of our common stock issuable upon such conversion or exercise could adversely
affect prevailing market prices of our common stock. In addition, the
anticipated conversion of the Senior Convertible Notes into or exercise of
the
Warrants for shares of our common stock could depress the price of our common
stock.
If
we
cannot repay the Senior Convertible Notes when they become due, we will be
materially adversely affected.
The
Securities Purchase Agreement transaction has made us significantly more
leveraged, and accordingly a significantly riskier investment. To the extent
that a greater percentage of our operating revenues must now be allocated to
interest and/or premium payments on the Senior Convertible Notes, all the risks
highlighted above will be magnified. If we cannot repay the Senior Convertible
Notes when they come due, our operations will be materially adversely
affected.
Special
Note Regarding Forward-Looking Statements
This
prospectus, including the sections titled “Prospectus Summary” and “Risk
Factors,” contains forward-looking statements. Forward-looking statements convey
our current expectations or forecasts of future events. All statements contained
in this prospectus other than statements of historical fact are forward-looking
statements. Forward-looking statements include statements regarding our future
financial position, business strategy, budgets, projected costs, plans and
objectives of management for future operations. The words “may,” “continue,”
“estimate,” “intend,” “plan,” “will,” “believe,” “project,” “expect,” “could,”
“would,” “anticipate” and similar expressions may identify forward-looking
statements, but the absence of these words does not necessarily mean that a
statement is not forward-looking.
Any
or
all of our forward-looking statements in this prospectus may turn out to be
inaccurate. We have based these forward-looking statements largely on our
current expectations and projections about future events and financial trends
that we believe may affect our financial condition, results of operations,
business strategy and financial needs. They may be affected by inaccurate
assumptions we might make or by known or unknown risks and uncertainties,
including the risks, uncertainties and assumptions described in “Risk Factors.”
In light of these risks, uncertainties and assumptions, the forward-looking
events and circumstances discussed in this prospectus may not occur as
contemplated, and actual results could differ materially from those anticipated
or implied by the forward-looking statements.
These
forward-looking statements speak only as of the date of this prospectus. Unless
required by law, we undertake no obligation to publicly update or revise any
forward-looking statements to reflect new information or future events or
otherwise. You should, however, review the factors and risks we describe in
the
reports we will file from time to time with the Securities and Exchange
Commission (“SEC”)
after
the date of this prospectus. See “Where You Can Find More
Information.”
As
described in “Documents Incorporated by Reference” below, certain documents
filed by us in the future with the SEC are automatically deemed to be
incorporated by reference into this prospectus. Such documents may include
forward-looking statements. To the extent they do, the previous three paragraphs
apply to such forward-looking statements as well, except that such other
documents’ forward-looking statements shall be deemed to speak only as of the
filing date of the applicable other document.
Use
of
Proceeds
This
prospectus relates to securities issued by us that may be offered and sold
from
time to time by the selling securityholders. There will be no proceeds to us
from the sale of shares of securities in this offering.
The
shares of common stock offered under this prospectus include 1,317,864 shares
of
common stock underlying the Warrants at an initial exercise price $8.8527 per
share. The holders of the Warrants are not obligated to exercise the Warrants.
Assuming the exercise of all of the Warrants, and further assuming that the
exercise price of the Warrants is paid in cash and not via the “net exercise”
method, we would receive from the exercise of Warrants up to $11,666,655, which
we would use for capital expenditures, possible future acquisitions, and general
corporate and working capital purposes. We have already received $35,000,000
in
cash from the initial purchasers for issuing all of the Senior Convertible
Notes
and the Warrants under the Securities Purchase Agreement.
Ratio
of
Earnings to Fixed Charges
Our
ratio
of earnings to fixed charges for each of the periods indicated is as
follows:
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Year
Ended December 31,
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2007
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2006
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2005
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2004
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2003
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Ratio
of earnings to fixed charges (1)
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37.6
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15.4
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7.3
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17.0
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34.7
|
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(1) For
the
purposes of computing the ratio of earnings to fixed charges, earnings consist
of income before provision for income taxes plus fixed charges. Fixed charges
consist of interest charges and that portion of rental payments under operating
leases we believe to be representative of interest.
Private
Placement of and Description of Senior Convertible Notes and
Warrants
The
following information contains a description of the securities to be sold in
this offering, and how the selling securityholders acquired the securities
to be
sold in this offering. No selling securityholder has held any position or
office, or had any other material relationship, with us, except as described
in
the text following the table in “Selling Securityholders”
below:
On
February 15, 2008, we issued all of the Senior Convertible Notes and the
Warrants in favor of two institutional investors, against $35,000,000 cash
paid
by them. This private-placement issuance was made pursuant to the Securities
Purchase Agreement.
Summary
descriptions of the terms and conditions of the Senior Convertible Notes and
the
Warrants follow below. The three series of Senior Convertible Notes (the Closing
Notes, the Henglong Notes and the Escrow Notes), and the two series of Warrants
(the Closing Warrants and the Escrow Warrants) are identical to each other
except for special provisions pertaining to the possible nonoccurrence or
delayed occurrence of the Henglong Transaction. The Henglong Transaction was
successfully consummated on April 3, 2008, and all those special provisions
thereupon ceased to have any further applicability. As a practical matter,
there
is no further distinction among any of the Senior Convertible Notes and no
distinction among any of the Warrants.
Senior
Convertible Notes
General
The
Senior Convertible Notes:
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were
issued in aggregate principal amount of $35,000,000 (the offered
Senior
Convertible Notes were issued in aggregate principal amount of
$1,950,507)
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are
our senior unsecured debt and are structurally subordinated to any
secured
debt, rank on parity with all of our existing and future senior unsecured
debt and are senior to all future subordinated
debt
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mature
on February 15, 2013, unless earlier converted or redeemed by us
at our
option or the option of the holder, or extended if there is an event
of
default or a change of control
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bear
interest at the annual rate of 3.0% for 2008, 3.5% for 2009, 4.0%
for
2010, 4.5% for 2011 and 5.0% for 2012, which will be payable on January
15
and July 15 of each year beginning on July 15, 2008; interest is
computed
on the basis of a 360-day year and will be increased by 2% if there
is an
event of default
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if
held to maturity, entitle the holder to a make-whole amount sufficient
to
(including interest already paid) provide the holder a 13% annual
return
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entitle
the holder to receive, on an as-if-fully-converted basis, any dividends
or
distributions paid on our common
stock
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are
convertible into our common stock initially at $8.8527 per share,
under
the conditions and subject to such adjustments as are described under
“Conversion Rights” and “Adjustments to Conversion Price”
below
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are
convertible at the option of the holder into our common stock at
the
then-effective conversion price, under the conditions and subject
to such
adjustments as are described under “Conversion Rights” and “Adjustments to
Conversion Price” below
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are
represented physically by definitive notes in registered
form
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are
convertible at our option into our common stock at the then-effective
conversion price if the weighted average closing price of our common
stock
for a period of 30 trading days during any six-month period exceeds
125%
of the initial conversion price for the first year, 135% of the initial
conversion price for the second year, 145% of the initial conversion
price
for the third year, and 155% of the initial conversion price for
the
fourth year, subject to other conditions set forth in “Conversion Rights –
Mandatory Conversion” below
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are
subject to redemption (via conversion) at the option of the holder
into
our common stock at an adjusted conversion price if there is an event
of
default, which adjustments are described under “Redemption Rights –
Redemption Rights upon Event of Default”
below
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are
subject to redemption (via conversion) at the option of the holder
into
our common stock at an adjusted conversion price if there is a change
in
control of the Company, which adjustments are described under “Redemption
Rights – Redemption Rights upon Change of Control” below
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provide
that holders are entitled to weighted-average antidilution rights
and
certain other rights if we issue common stock, options, warrants
or other
convertible securities, or engage in a merger, sale of all or
substantially all of our assets or other change of control transaction,
subject to other conditions as described under “Other Rights”
below
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are
subject to redemption at the option of the holder on February 15,
2010 and
February 15, 2011, or in the event our common stock is no longer
authorized for quotation or listing on The Nasdaq Capital Market,
or in
the event that, after February 15, 2009, the weighted-average closing
price of our common stock for a period of 20 trading days is less
than 45%
of the initial conversion price, subject to other conditions described
under “Redemption Rights – Mandatory Redemption Rights of the Holder”
below
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are
subject to redemption at our option in the event that less than 10%
of the
original principal amount of all Senior Convertible Notes remain
outstanding, subject to other conditions described under “Redemption
Rights – Optional Redemption Rights of the Company”
below
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Conversion
Rights
Optional
Conversion of the Holder
A
holder
of Senior Convertible Notes may convert any outstanding Senior Convertible
Notes
at any time after March 16, 2008 and before 30 business days before maturity
into shares of our common stock at an initial conversion price of $8.8527 per
share of common stock. The conversion price is subject to adjustment as
described below. We will not issue any fraction of a share of common stock
upon
any conversion. Instead, we will round such fraction of a share of common stock
up to the nearest whole share. We will pay any and all transfer, stamp and
similar taxes that may be payable with respect to the issuance and delivery
of
common stock upon conversion of the Senior Convertible Notes. In general,
conversion will result in the holder not receiving any make-whole payment (in
the nature of additional interest) of the sort which the holder could receive
if
it holds the Senior Convertible Notes to maturity or redemption.
Mandatory
Conversion
If
at any
time during a six-month period ending on the six-month anniversary of February
15, 2008:
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the
arithmetic average of the weighted average closing price of our common
stock for a period of at
least 30 consecutive trading days following
the starting date of such six-month period equals or exceeds 125%
for the
first 12 months, 135% for the next 12 months, 145% for the next 12
months
and 155% for the next 12 months,
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the
registration statement is effective, or all shares of our common
stock
issuable upon conversion of the Senior Convertible Notes will be
eligible
for sale without restriction and without the need for registration
under
any applicable federal or state securities laws,
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our
common stock is designated for quotation on The Nasdaq Capital Market
or
The New York Stock Exchange, Inc., the American Stock Exchange, The
Nasdaq
Global Select Market or The Nasdaq Global Market and our common stock
have
not been suspended from trading or delisted or
suspended
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we
have delivered shares of our common stock upon conversion of the
Senior
Convertible Notes to the holders on a timely basis if and as required
during the six-month period
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we
have made all payments within five business days of when any payment
is
due under the Senior Convertible Note and no other event of default
exists, and
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we
have no knowledge of any fact that would cause the registration statement
not to be effective or any shares of our common stock issuable upon
conversion of the Senior Convertible Notes not to be eligible for
sale
without restriction pursuant to any applicable securities laws (assuming
proper prospectus delivery)
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we
will
have the right to require the holder to convert all or any portion of the
conversion amount then remaining under the Senior Convertible Notes; provided,
that we cannot exercise this right as to more than 12% of the original principal
amount of the Senior Convertible Notes in any six-month period or as to more
than 24% of the original principal amount of the Senior Convertible Notes in
any
12-month period. If we effect the mandatory conversion, we will deliver a notice
of mandatory conversion to the holders of Senior Convertible Notes at least
two
trading days following the end of any such six-month period, including a
certification that the conditions set forth above are satisfied. No make-whole
payment would apply in the case of such mandatory conversion.
Conversion
Mechanics
To
convert any portion of the Senior Convertible Notes, the holder must deliver
a
conversion notice to the Company and, if required, surrender the Senior
Convertible Note to the Company as soon as practicable. Within one trading
day
following the date of receipt of a conversion notice, we will send a
confirmation of receipt of the conversion notice to the holder of the Senior
Convertible Note and our transfer agent and, within three trading days following
the receipt of the conversion notice, we will:
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credit
an aggregate number of shares of our common stock to which the holder
will
be entitled to the holder’s or its designee’s balance account with DTC
through its Deposit Withdrawal Agent Commission system if there is
an
effective registration statement and the transfer agent is participating
in DTC’s Fast Automated Securities Transfer Program, or
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issue
and deliver to the address as specified in the conversion notice,
a
certificate, registered in the name of the holder or its designee,
for the
number of shares of our common stock that the holder will be entitled
to,
if there is no effective registration statement or if the transfer
agent
is not participating in the DTC’s Fast Automated Securities Transfer
Program.
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If
a
Senior Convertible Note is physically surrendered for conversion and the
outstanding principal of the Senior Convertible Note is greater than the
principal portion of the conversion amount being converted, then we will, within
three trading days after receipt of the Senior Convertible Note and at our
own
expense, issue and deliver to the holder a new Senior Convertible Note
representing the outstanding principal not converted. The person or persons
entitled to receive the shares of our common stock issuable upon a conversion
of
the Senior Convertible Note will be treated for all purposes as the record
holder or holders of shares of our common stock on the conversion
date.
We
provide certain buy-in rights to a holder if we fail to deliver the conversion
shares by the third business day after the date on which delivery of such stock
certificate is required by the Senior Convertible Note. The buy-in rights apply
if after such third business day, but before cure by us, the holder purchases
(in an open market transaction or otherwise) shares of our common stock to
deliver in satisfaction of a sale by the holder of the conversion shares that
the holder anticipated receiving from us upon conversion of the Senior
Convertible Notes. In this event, at the request of and in the holder’s
discretion, we will either:
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pay
cash to the holder in an amount equal to the buy-in price, meaning
the
holder’s total purchase price (including brokerage commissions, if any)
for the shares of common stock so purchased less the aggregate conversion
price, at which point our obligation to deliver such stock certificate
(and to issue such conversion shares) terminates;
or
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deliver
to the holder a certificate or certificates representing the conversion
shares and pay cash to the holder in an amount equal to the excess
(if
any) of the buy-in price over the product of (A) such number of
shares of common stock, times (B) the weighted average price of our
common stock on the date of
conversion.
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Conversion
Price Reset
On
each
six month anniversary of the issuance date of the Senior Convertible Notes,
beginning August 15, 2008, the conversion price will be adjusted downward if
the
weighted average closing price of our common stock for the 20 consecutive
trading days immediately before the applicable six month anniversary is less
than 95% of the conversion price in effect as of such applicable six month
anniversary date, subject to further adjustments described under “Antidilution
Adjustments” below. However, the conversion price will not be reduced to less
than 80% of the initial conversion price (i.e., to less than $7.0822) by this
method.
Antidilution
Adjustments
If
and
whenever on or after February 15, 2008, we issue or sell, or are deemed to
have
issued or sold, any shares of our common stock for a consideration per share
less than the conversion price in effect immediately before such issue or sale,
then immediately after such issuance the conversion price then in effect will
be
an amount equal to the following:
NCP
= AP x
[
(OCP
x
OS) + (C) ]
[ (AP x
NS)
]
where:
NCP = new
conversion price (immediately after such issuance)
OCP =
old
conversion price (immediately before such issuance)
AP =
the
applicable sale price per share of such issuance
NS = new
shares of common stock deemed outstanding (immediately after such
issuance)
OS = old
shares of common stock deemed outstanding (immediately before such
issuance)
C =
the
consideration, if any, received by us upon such issuance
However,
in no event will the conversion price be reduced to less than $6.7417, by this
method. In addition, such weighted-average antidilution adjustment shall not
occur as a result of issuances under approved stock option or stock issuance
incentive plans, strategic partnering, licensing or acquisition transactions
(including the Henglong Transaction), or warrants issued in straight-debt
financing transactions where the warrant coverage was less than 5%.
Blocker
We
can
not effect any conversion of any Senior Convertible Note, and the holder of
any
Senior Convertible Note shall not have the right to convert any portion of
such
Senior Convertible Note, to the extent that after giving effect to such
conversion, the holder (together with the holder’s affiliates) would
beneficially own in excess of 4.99% of
the
number of shares of common stock outstanding immediately after giving effect
to
such conversion. For purposes of the foregoing sentence, the number of shares
of
common stock beneficially owned by the holder and its affiliates shall include
the number of shares of common stock issuable upon conversion of the Senior
Convertible Note with respect to which the determination of such sentence is
being made, but shall exclude the number of shares of common stock which would
be issuable upon (A) conversion of the remaining, nonconverted portion of the
Senior Convertible Note and (B) exercise or conversion of the unexercised or
nonconverted portion of any other securities issued by us and beneficially
owned
by the holder or any of its affiliates (including, without limitation the
Warrants and any other Senior Convertible Notes) subject to a limitation on
conversion or exercise analogous to such 4.99% limitation.
Redemption
Rights
Event
of Default
Each
of
the following events constitutes an event of default under the Senior
Convertible Notes:
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our
failure to cure a conversion failure by delivery of the required
number of
shares of our common stock within ten (10) trading days after the
applicable conversion date or our notice to any holder of our intention
not to comply with a request for conversion of any Senior Convertible
Notes into shares of our common stock that is tendered in accordance
with
the provisions of the Senior Convertible
Notes;
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our
failure to pay to the holder any amount of principal, interest, late
charges or other amounts when and as due under the Senior Convertible
Notes (including, without limitation, our failure to pay any redemption
amounts required under the Senior Convertible Notes) which failure
remains
uncured for a period of at least five business days after written
notice
of such failure is provided;
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any
material and continuing (past any cure period) default under, redemption
of (involuntarily on the part of us) or acceleration before maturity
of
any indebtedness of us or any of our subsidiaries in excess of $3
million
other than with respect to any other Senior Convertible Notes or
in
connection with a permitted refinancing of indebtedness at a lower
interest rate and an at-least-as-generous repayment
schedule;
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we
or any of our subsidiaries, pursuant to or within the meaning of
Title 11,
U.S. Code, or any similar federal, foreign or state law for the relief
of
debtors, commences a voluntary case, consents to the entry of an
order for
relief against us or it in an involuntary case, consents to the
appointment of a receiver, trustee, assignee, liquidator or similar
official, makes a general assignment for the benefit of our or its
creditors or admits in writing that we or it is generally unable
to pay
our or its debts as they become
due;
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a
court of competent jurisdiction enters an order or decree under any
bankruptcy law that is for relief against us or any of our subsidiaries
in
an involuntary case, appoints a custodian of us or any of our subsidiaries
or orders the liquidation of us or any of our
subsidiaries;
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a
final judgment or judgments for the payment of money aggregating
in excess
of $2 million are rendered against us or any of our subsidiaries
and which
judgments are not, within 60 days after the entry thereof, bonded,
discharged or stayed pending appeal, or are not discharged within
60 days
after the expiration of such stay; provided, that any judgment which
is
covered by insurance or an indemnity from a credit worthy party will
not
be included in calculating the $2 million amount set forth above
so long
as we provide the holder a written statement from such insurer or
indemnity provider (which written statement will be reasonably
satisfactory to the holder) to the effect that such judgment is covered
by
insurance or an indemnity and we will receive the proceeds of such
insurance or indemnity within 30 days of the issuance of such
judgment;
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we
materially breach and fail to cure within any allowable cure period
any
representation, warranty, covenant or other term or condition of
the
Senior Convertible Notes or any other related transaction document,
which
(if curable) is not cured for a period of at least 10 consecutive
business
days;
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any
breach or failure in any respect to comply with either the mandatory
redemption provisions or the covenant provisions of the Senior Convertible
Notes; and
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any
unwaived event of default occurs with respect to any other Senior
Convertible Notes.
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Redemption
Rights upon Event of Default
Upon
the
occurrence of an event of default with respect to any Senior Convertible Note,
we will within one business day deliver written notice to the holder. At any
time after the earlier of the holder’s receipt of an event of default notice and
the holder becoming aware of an event of default, the holder of the Senior
Convertible Note may require us to redeem all or any portion of the Senior
Convertible Note by delivering written notice to us. Each portion of the Senior
Convertible Note subject to redemption by us will be redeemed by us at a price
equal to the conversion amount to be redeemed plus an amount sufficient to
(including interest already paid) provide the holder a 13% annual return. To
the
extent these redemptions for events of default are deemed or determined by
a
court of competent jurisdiction to be prepayments of the Senior Convertible
Note
by us, such redemptions will be deemed to be voluntary prepayments.
Change
of Control
A
“change
of control” will be deemed to have occurred when any of the following has
occurred:
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we
consolidate or merge with or into (whether or not we are the surviving
corporation) another person or
persons;
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we
sell, assign, transfer, convey or otherwise dispose of all or
substantially all of our properties or assets to another
person;
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we
allow another person to make a purchase, tender or exchange offer
that is
accepted by the holders of more than 50% of the outstanding shares
of our
voting capital stock (not including any shares of voting capital
stock
held by the person or persons making or party to, or associated or
affiliated with the persons making or party to, such purchase, tender
or
exchange offer);
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we
consummate a stock purchase agreement or other business combination
(including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another person whereby such
other
person acquires more than the 50% of the outstanding shares of voting
capital stock (not including any shares of voting capital stock held
by
the other person or other persons making or party to, or associated
or
affiliated with the other persons making or party to, such stock
purchase
agreement or other business
combination);
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we
reorganize, recapitalize or reclassify our common stock;
or
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any
“person” or “group” (as these terms are used for purposes of Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended)
is or
shall become the “beneficial owner” (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended), directly or indirectly,
of
50% of the aggregate voting capital stock of the Company, other than
Mr.
Hanlin Chen and only to the extent of his ownership as of February
15,
2008.
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A
change
of control will not be deemed to have occurred for any
reorganization, recapitalization or reclassification of our common stock in
which holders of our voting power immediately before such reorganization,
recapitalization or reclassification continue after such reorganization,
recapitalization or reclassification to hold publicly traded securities and,
directly or indirectly, the voting power of the surviving entity or entities
necessary to elect a majority of the members of the board of directors (or
their
equivalent if other than a corporation) of such entity or entities, or migratory
mergers effected solely for the purpose of changing our jurisdiction of
incorporation.
Redemption
Rights upon Change of Control
At
least
15 days before and not later than 10 days before the consummation of a change
of
control transaction, but not before the public announcement of a change of
control transaction, we will deliver written notice to the holders. At any
time
and from time to time during the period beginning after the holder’s receipt of
a change of control notice and ending on the effective date of the change of
control transaction (provided there has been at least 10 trading days between
the two dates), the holder may require us to redeem all or any portion of the
Senior Convertible Notes by delivering written notice to us. Each
portion of the Senior Convertible Note subject to redemption will be redeemed
by
us in cash at a price equal to the conversion amount being redeemed plus
an
amount sufficient to (including interest already paid) provide the holder a
13%
annual return. To the extent these redemptions for change of control are deemed
or determined by a court of competent jurisdiction to be prepayments of the
Senior Convertible Note by us, such redemptions will be deemed to be voluntary
prepayments.
Mandatory
Redemption Right of the Holder
On
each
of February 15, 2010 and February 15, 2011, each holder will have the right
to
require that we redeem its Senior Convertible Note in whole but not in part,
by
delivering written notice to us.
If
the
shares of our common stock are, subject to any grace periods, terminated from
registration under the Securities Act of 1933, as amended, during the time
in
which we remain obligated under the Registration Rights Agreement to keep the
registration statement current, effective and free from any material
misstatement or omission to state a material fact or are delisted from The
Nasdaq Capital Market for more than 10 trading days, a holder will have the
right to require that we redeem all or any portion of its Senior Convertible
Notes by delivering written notice to us.
At
any
time following February 15, 2009, if the weighted average closing price for
our
common stock for 20 consecutive trading days is less than 45% of the initial
conversion price, as adjusted, a holder will have the right to require that
we
redeem all or any portion of its Senior Convertible Notes by delivering written
notice to us.
If
the
holder elects a mandatory redemption, then we will pay the applicable mandatory
redemption price to the holder, including an amount sufficient to (including
interest already paid) provide the holder a 13% annual return on the redeemed
portion. However, in the event of a February 15, 2010 or February 15, 2011
redemption there would be included only an amount sufficient to (including
interest already paid) provide the holder a 11% annual return.
Optional
Redemption Right of the Company
If
at any
time less than 10% of the original principal amount of all Senior Convertible
Notes remains outstanding, we will have the right to redeem all or any portion
of the conversion amount under the Senior Convertible Notes by delivering a
written notice to all of the holders. The portion of the Senior Convertible
Notes subject to optional redemption will be redeemed by us in cash at a price
equal to the conversion amount to be redeemed plus an amount sufficient to
(including interest already paid) provide the holder a 13% annual return on
such
portion. We may not effect more than one optional redemption.
Other
Rights
Rights
upon Pro Rata Issuances
If
at any
time we grant, issue or sell any options, convertible securities or rights
to
purchase stock, warrants, securities or other property pro rata to the record
holders of any class of our common stock, then the holders of the Senior
Convertible Notes will be entitled to acquire, upon the terms applicable to
such
purchase rights, the aggregate purchase rights which the holder could have
acquired if the holder had held the number of shares of our common stock
acquirable upon complete conversion of the Senior Convertible Note (without
taking into account any limitations or restrictions on the convertibility of
the
Senior Convertible Note) immediately before the date on which a record is taken
for the grant, issuance or sale of such purchase rights, or, if no such record
is taken, the date as of which the record holders of our common stock are to
be
determined for the grant, issue or sale of such purchase rights.
Change
of Control
In
addition, before the consummation of any change of control transaction pursuant
to which holders of shares of our common stock are entitled to receive
securities or other assets with respect to or in exchange for shares of our
common stock, we will make appropriate provision to insure that the holder
will
thereafter have the right to receive upon a conversion of the Senior Convertible
Notes, at the holder’s option, (i) in addition to the shares of our common stock
receivable upon such conversion, such securities or other assets to which the
holder would have been entitled with respect to such shares of our common stock
had such shares of our common stock been held by the holder upon the
consummation of such change of control transaction (without taking into account
any limitations or restrictions on the convertibility of the Senior Convertible
Notes) or (ii) in lieu of the shares of our common stock otherwise receivable
upon such conversion, such securities or other assets received by the holders
of
shares of our common stock in connection with the consummation of such change
of
control transaction in such amounts as the holder would have been entitled
to
receive had the Senior Convertible Notes initially been issued with conversion
rights for the form of such consideration (as opposed to shares of our common
stock) at a conversion rate for such consideration commensurate with the
conversion rate under the Senior Convertible Notes. However, where we are
acquired by another entity, the successor entity shall assume the Senior
Convertible Notes with the conversion right modified to conform to clause (ii)
of the previous sentence.
Covenants
and Restrictions
In
connection with the Senior Convertible Notes, we agreed to the following
covenants:
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we
shall maintain a total indebtedness to EBITDA ratio of not more than
3.00
to 1.00. For purposes of this calculation, total indebtedness and
EBITDA
for our subsidiaries shall be calculated as if every subsidiary was
wholly-owned and without regard to our true percentage ownership
of such
subsidiaries.
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we
and our subsidiaries shall not before February 15, 2010, directly
or
indirectly, incur or guarantee, assume or suffer to exist (i) any
new
indebtedness with lenders incorporated, organized under or primarily
domiciled outside the People’s Republic of China in excess of (A)
$5,000,000 before February 15, 2009 or (B) $10,000,000 before February
15,
2010 or (ii) any indebtedness with lenders which are incorporated
and
organized under the laws of the People’s Republic of China (A) in excess
of $10,000,000 before February 15, 2009 or (B) $15,000,000 before
February
15, 2010. Also, no new indebtedness shall be permitted if an event
of
default has occurred and remains uncured. However, we are allowed
to renew
any or all of our current bank loans of approximately $14,000,000
as they
mature, should we wish to do so, and we are allowed to incur indebtedness
to finance any Senior Convertible Note
redemptions.
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we
and our subsidiaries shall not collateralize any assets, except under
customary defined permitted liens and under approved inventory and
receivables credit facilities which are based on a customary borrowing
base.
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we
and our subsidiaries shall not repurchase or make any payments on
indebtedness, other than scheduled payments of interest or principal
or in
connection with a refinancing at a lower interest rate and
at-least-as-generous repayment
terms.
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we
and our subsidiaries shall not make any acquisitions unless the following
conditions are satisfied: (i) at the time of such acquisition and
immediately after giving effect thereto no event of default under
the
Senior Convertible Notes shall have occurred and be continuing, (ii)
the
aggregate cash consideration paid for all acquisitions before February
15,
2009 does not exceed $3,000,000 (with the Henglong Transaction not
counting against such $3,000,000 cap) and (iii) the aggregate cash
consideration paid for all acquisitions after February 15, 2009 but
before
February 15, 2010 does not exceed $10,000,000.
|
|
·
|
we
shall not, directly or indirectly, redeem, repurchase or declare
or pay
any cash dividend or distribution on our capital
stock.
|
|
·
|
we
shall not, in any manner, issue or sell any derivative securities
at a
price which varies or may vary with the market price of our common
stock,
including by way of one or more reset(s) to any fixed price, unless
the
conversion, exchange or exercise price of any such security cannot
be less
than the then applicable Conversion Price (as defined in the Senior
Convertible Notes) with respect to the Senior Convertible Note conversion
shares.
|
|
·
|
we
and our subsidiaries shall not enter into, renew, extend, amend or
be a
party to, any transaction or series of related transactions with
any
affiliate, (i) except in the ordinary course of business in a manner
and
to an extent consistent with past practice and necessary or desirable
for
the prudent operation of our business, for fair consideration and
on terms
no less favorable to us and our subsidiaries than would be obtainable
in a
comparable arm’s length transaction with a person that is not an
affiliate; and in no event shall we or any subsidiary enter into a
transaction or series of related transactions with an officer, director
or
employee of us or any subsidiary that results in an account receivable
due
after March 31, 2008 to us from such party (i) in excess of $100,000
and
(ii) with payment terms greater than 90
days.
|
Governing
Law
The
Senior Convertible Notes will be construed and enforced in accordance with,
and
all questions concerning the construction, validity, interpretation and
performance of the Senior Convertible Notes are governed by, the internal laws
of the State of New York, without giving effect to any choice of law or conflict
of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of New York.
Amendments,
Waivers and Consents
Each
Senior Convertible Note can be amended by, and only by, joint action of us
and
the “Required Holders.” The terms of the Senior Convertible Notes provide that
the Required Holders must include Lehman and must also include a majority in
interest of the Senior Convertible Notes. Lehman currently holds a substantial
majority of the Senior Convertible Notes. In addition, various consents
contemplated by the Senior Convertible Notes can be given by, and only by,
the
Required Holders.
Additional
Provisions
The
above
summary of certain terms and provisions of the Senior Convertible Notes is
qualified in its entirety by reference to the detailed provisions of the Senior
Convertible Notes, the forms of which are filed with the registration statement,
of which this prospectus is a part, as exhibits and incorporated herein by
reference.
Warrants
General
The
exercise price of the Warrants is $8.8527 per share, subject to possible
downward adjustments based on a weighted-average antidilution formula. The
Warrants will expire one year after the Closing Date.
Exercise
The
holders of the Warrants may exercise their Warrants, in whole or in any part,
at
any time before February 15, 2009 by delivering to us a notice of election
to
exercise the Warrants, and payment to us of the aggregate warrant exercise
price
within three trading days of the date the exercise notice is delivered to us.
The holders are also entitled to a “cashless exercise” or “net-exercise” option
if, at any time of exercise, there is no effective registration statement
registering, or no current prospectus available for, the issuance of the shares
of our common stock underlying the Warrants. The net number of shares of our
common stock in the event the holder elects net-exercise is calculated as
follows:
X
=
Y
(A -
B)
A
where:
X
=
The
number of shares of common stock to be issued to the holder pursuant to
such
net-exercise election;
Y
=
The
number of warrant shares in respect of which such net-exercise election is
made;
A
=
The
fair
market value of one share of common stock as determined by the terms
of
the
Warrant; and
B
=
The
warrant exercise price (as adjusted to the date of the
issuance).
We
provide certain buy-in rights to a holder if we fail to deliver the shares
of
our common stock underlying the Warrants by the third business day after the
date on which delivery of such stock certificate is required by the Warrant.
The
buy-in rights apply if after such third business day, but before cure by us,
the
holder purchases (in an open market transaction or otherwise) shares of our
common stock to deliver in satisfaction of a sale by the holder of the shares
of
common stock underlying the Warrants that the holder anticipated receiving
from
us upon exercise of the Warrants. In this event, at the request of and in the
holder’s discretion, we will either:
|
·
|
credit
an aggregate number of shares of our common stock to which the holder
will
be entitled to the holder’s or its designee’s balance account with DTC
through its Deposit Withdrawal Agent Commission system if there is
an
effective registration statement and that the transfer agent is
participating in DTC’s Fast Automated Securities Transfer Program, or
|
|
·
|
issue
and deliver to the address as specified in the conversion notice,
a
certificate, registered in the name of the holder or its designee,
for the
number of shares of our common stock that the holder will be entitled
if
there is no effective registration statement or if the transfer agent
is
not participating in the DTC’s Fast Automated Securities Transfer Program.
|
Fundamental
Transaction
If,
at
any time while a Warrant is outstanding, (i) we effect any merger or
consolidation with or into another person, (ii) we effect any sale of all or
substantially all of our assets in one or a series of related transactions,
(iii) any tender offer or exchange offer (whether by us or another person)
is
completed pursuant to which holders of a majority of the then outstanding common
stock are permitted to tender or exchange their shares for other securities,
cash or property, or (iv) we effect any reclassification of our common stock
or
any compulsory share exchange pursuant to which our common stock is effectively
converted into or exchanged for other securities, cash or property, then, upon
any subsequent exercise of the Warrant, the holder will have the right to
receive, for each warrant share that would have been issuable upon such exercise
immediately before the occurrence of such transaction, (a) if we are the
acquiring and surviving corporation, the number of shares of our common stock
and any additional consideration receivable upon or as a result of such
reorganization, reclassification, merger, consolidation or disposition of assets
by a holder of the number of shares of our common stock for which the Warrant
is
exercisable immediately before such event, (b) if we are not the acquiring
and
surviving entity and the transaction consideration is not all cash, then the
number of securities and any alternate consideration receivable by a holder
of
the number of shares of our common stock for which the Warrant is exercisable
immediately before such event or (c) if we are acquired in an all cash
transaction, cash equal to the value of the Warrant as determined by us in
good
faith in accordance with the Black-Scholes option pricing formula.
Adjustments
to Warrant Exercise Price
If
and
whenever on or after February 15, 2008 we issue or sell, or are deemed to have
issued or sold, any shares of our common stock for a consideration per share
less than the warrant exercise price in effect immediately before such issue
or
sale, then immediately after such issuance the warrant exercise price then
in
effect will be an amount equal to the following:
NWEP
=
AP
x
[
(OWEP
x OS) + (C) ]
[ (AP
x NS) ]
where:
NWEP
=
new
warrant exercise price (immediately after such issuance)
OWEP
=
old
warrant exercise price (immediately before such issuance)
AP
= the
applicable purchase price per share of such issuance
NS =
new
shares of common stock deemed outstanding (immediately after such
issuance)
OS
=
old
shares of common stock deemed outstanding (immediately before such
issuance)
C =
the
consideration, if any, received by us upon such
issuance.
However,
such weighted-average antidilution adjustment shall not occur as a result of
issuances under approved stock option or stock issuance incentive plans,
strategic partnering, licensing or acquisition transactions (including the
Henglong Transaction), or warrants issued in straight-debt financing
transactions where the warrant coverage was less than 5%.
If
we
subdivide (by any stock dividend, stock split, recapitalization or otherwise)
one or more classes of outstanding shares of our common stock into a greater
number of shares, the warrant exercise price in effect immediately before such
subdivision will be proportionately reduced and upon exercise, the number of
warrant shares will be proportionately increased. If we combine (by combination,
reverse stock split or otherwise) one or more classes of outstanding shares
of
our common stock into a smaller number of shares, the warrant exercise price
in
effect immediately before such combination will be proportionately increased and
upon exercise, the number of warrant shares will be proportionately
reduced.
Blocker
We
can
not effect any exercise of any Warrant, and the holder of any Warrant shall
not
have the right to exercise any portion of the Warrant, to the extent that after
giving effect to such exercise, the holder (together with the holder’s
affiliates) would beneficially own in excess of 4.99% of
the
number of shares of common stock outstanding immediately after giving effect
to
such exercise. For purposes of the foregoing sentence, the number of shares
of
common stock beneficially owned by the holder and its affiliates shall include
the number of shares of common stock issuable upon exercise of the Warrant
with
respect to which the determination of such sentence is being made, but shall
exclude the number of shares of common stock which would be issuable upon (A)
exercise of the remaining, non-exercised portion of the Warrant and (B) exercise
or conversion of the unexercised or nonconverted portion of any other securities
issued by us and beneficially owned by the holder or any of its affiliates
(including, without limitation, the Senior Convertible Notes and any other
Warrants) subject to a limitation on conversion or exercise analogous to the
4.99% limitation. However, this 4.99% limitation shall be inapplicable to the
Warrants in the last 60 days before the Warrants’ expiration date, unless the
holder advises us otherwise.
Governing
Law
The
Warrants will be construed and enforced in accordance with, and all questions
concerning the construction, validity, interpretation and performance of the
Warrants are governed by, the internal laws of the State of New York, without
giving effect to any choice of law or conflict of law provision or rule (whether
of the State of New York or any other jurisdictions) that would cause the
application of the laws of any jurisdictions other than the State of New
York.
Amendments,
Waivers and Consents
Amendments
and waivers of Warrants can be made by a two-thirds supermajority in interest
of
the Warrant holders (although no holder’s own Warrant’s number of warrant shares
or exercise price can be amended without such holder’s own written consent). In
addition, various consents contemplated by the Warrants can be given by, and
only by, the “Required Holders.” The terms of the Warrants provide that the
Required Holders must include Lehman and must also include a majority in
interest of the Warrants. Lehman currently holds a substantial (over two-thirds)
supermajority of the Warrants.
Additional
Provisions
The
above
summary of certain terms and provisions of the Warrants is qualified in its
entirety by reference to the detailed provisions of the Warrants, the forms
of
which are filed with the registration statement, of which this prospectus is
a
part, as exhibits and incorporated herein by reference.
Securities
Transfer
The
transfer agent and registrar for our Senior Convertible Notes, Warrants and
common stock is Securities Transfer Corporation. Certain of the Senior
Convertible Notes and Warrants may be held with a common depositary in respect
of interests held through Euroclear and Clearstream. The ISIN numbers of the
Senior Convertible Notes and Warrants are as follows: Closing Notes
US16936RAA32; Henglong Notes US16936RAC97; Escrow Notes US16936RAE53; Closing
Warrants US16936R1133; Escrow Warrants US16936R1216.
We
are
not obliged to issue replacement Senior Convertible Notes for less than $100,000
principal amount.
Selling
Securityholders
The
shares of common stock being offered by the selling securityholders are issuable
upon conversion of the identified Senior Convertible Notes and the Warrants.
For
additional information regarding the issuance of those Senior Convertible Notes
and Warrants, see “Private Placement and Description of Senior Convertible Notes
and Warrants” above. We are registering a portion of the Senior Convertible
Notes and all of the Warrants and a corresponding number of underlying shares
of
common stock in order to permit the selling securityholders to offer such
portions of the Senior Convertible Notes, Warrants and shares for resale from
time to time. Except for (a) the ownership of the entire amount of Senior
Convertible Notes and Warrants issued pursuant to the Securities Purchase
Agreement and (b) in the case of YA Global Investments, L.P. (“Yorkville”)
(formerly known as Cornell Capital Partners, LP) pursuant to the terms of that
certain Standby Equity Distribution Agreement dated March 20, 2006 (which
expired in March 2008 in accordance with its terms) and the issuance of common
stock and warrants to Yorkville for $5,000,000 pursuant to a Securities Purchase
Agreement also dated on March 20, 2006, the selling securityholders have not
had
any material relationship with us within the past three years.
The
table
below lists the selling securityholders and other information regarding the
beneficial ownership of the Senior Convertible Notes, Warrants and shares of
common stock being registered for resale by each of the selling securityholders.
The second column lists the number of shares of common stock beneficially owned
by each selling securityholder, based on its ownership of the Senior Convertible
Notes and Warrants, as of April 11, 2008, assuming conversion of all Senior
Convertible Notes and exercise of all warrants held by the selling
securityholders on that date, without regard to any limitations on conversions
or exercises.
The
fourth column lists the maximum aggregate principal amount of Senior Convertible
Notes to be sold pursuant to the prospectus.
The
fifth
column lists the maximum quantity of Warrants, with size expressed by the number
of shares underlying the Warrants, to be sold pursuant to the
prospectus.
The
sixth
column lists the shares of common stock being offered by this prospectus by
the
selling securityholders.
In
accordance with the terms of a registration rights agreement with the selling
securityholders, this prospectus generally covers, to the maximum extent
allowed, the resale of the Senior Convertible Notes and Warrants and 120% of
the
number of shares of common stock issuable upon conversion of the Senior
Convertible Notes and exercise of the Warrants as of the trading day immediately
preceding the date the registration statement is initially filed with the SEC.
Because the conversion price of the Senior Convertible Notes and the exercise
price of the Warrants may be adjusted, the number of shares that will actually
be issued may be more or less than the number of shares being offered by this
prospectus. The sixth and seventh columns assume the sale of all of the shares
offered by the selling securityholders pursuant to this prospectus.
Under
the
terms of the Senior Convertible Notes and Warrants, a selling securityholder
may
not convert the Senior Convertible Notes and (during certain time periods)
exercise the Warrants to the extent such conversion would cause such selling
securityholder, together with its affiliates, to beneficially own a number
of
shares of common stock which would exceed 4.99% of our then outstanding shares
of common stock following such conversion/exercise, excluding for purposes
of
such determination shares of common stock issuable upon conversion/exercise
of
the Senior Convertible Notes and Warrants which have not been
converted/exercised. The number of shares in the second column does not reflect
this limitation. The selling securityholders may sell all, some or none of
their
registered Senior Convertible Notes, Warrants and shares of common stock in
this
offering. See “Plan of Distribution.”
Name
of Selling Securityholder
|
|
Number of
Shares of
Common Stock
Beneficially
Owned Prior to
Offering
|
|
Percentage
of Class
|
|
Maximum Aggregate
Principal Amount of
Senior Convertible
Notes to be Sold
Pursuant to the
Prospectus
|
|
Maximum
Number of
Warrants to be
Sold Pursuant to
the Prospectus
|
|
Maximum Number
of Shares of
Common Stock to
be Sold Pursuant to
the Prospectus
|
|
Number of
Shares of
Common Stock
Beneficially
Owned After
Offering
|
|
Percentage
of Class
|
|
Lehman
Brothers Commercial Corporation Asia Limited (1)
|
|
|
4,518,394
|
|
|
14.3
|
%
|
$
|
1,671,863
|
|
|
Warrants
overlying 1,129,598 shares
|
|
|
1,356,221
|
|
|
-0-
|
(2) |
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YA
Global Investments, L.P. (3)
|
|
|
909,315
(3
|
)
|
|
3.3
|
%
|
$
|
278,644
|
|
|
Warrants
overlying 188,266 shares
|
|
|
226,037
|
|
|
156,250
|
(4) |
|
0.6
|
%
|
(1) Lehman
Brothers Commercial Corporation Asia Limited is a Hong Kong incorporated company
and its ultimate holding company is Lehman Brothers Holdings Inc. The number
of
shares beneficially owned prior to this offering, and the indicated percentage,
are presented in this table as if the 4.99% “blocker” limitation provisions
contained in the Senior Convertible Notes and the Warrants did not
apply,
(2)
Assuming disposition of 3,162,173 shares under
Rule 144.
(3) Yorkville
Advisors, LLC, a Delaware limited liability company, is the investment manager
of Yorkville. Mark Angelo is the majority owner of Yorkville Advisors and,
as
such, makes all investment decisions on behalf of Yorkville.
(4)
Assuming disposition of 683,278 shares under
Rule 144.
(5) Includes,
in addition to its Senior Convertible Notes and Warrants and the shares of
common stock underlying them, 156,250 shares of common stock underlying warrants
issued under the 2006 Securities Purchase Agreement described
below.
Yorkville
(which was then known as Cornell Capital Partners LP) previously acquired
securities from us under a Standby Equity Distribution Agreement dated March
20,
2006 between us and Yorkville (the “SEDA”)
and
the Securities Purchase Agreement dated March 20, 2006 between us and Yorkville
(the “2006
Securities Purchase Agreement”).
Those
transactions are explained below:
|
·
|
Standby
Equity Distribution Agreement. On
March 20, 2006, we entered into the SEDA with Yorkville. Pursuant
to the
SEDA, we were entitled to, at our discretion, periodically sell to
Yorkville shares of common stock for a total purchase price of up
to $15
million. For each share of common stock purchased under the SEDA,
Yorkville was required to pay us 98.5% of, or a 1.5% discount to,
the
lowest daily VWAP of our common stock during the five consecutive
trading
day period immediately following the date we notified Yorkville that
we
desired to access the SEDA; provided, that the price per share paid
by
Yorkville would in no event be less than a minimum of 90% of the
closing
bid price for our common stock on the trading day immediately preceding
the date that we delivered an advance request. Further, Yorkville
would
retain 4.5% of each advance under the SEDA. In connection with the
SEDA,
we paid Yorkville a one-time commitment fee of $440,000 in the form
of
37,022 shares of common stock.
|
The
SEDA
expired on March 20, 2008 in accordance with its terms. During the term of
the
SEDA, we sold a total of 699,796 shares of common stock to Yorkville under
the
SEDA and received net proceeds of $6,778,000.
|
·
|
2006
Securities Purchase Agreement. On
March 20, 2006, we sold 625,000 shares of common stock, a warrant
to
purchase 86,806 shares of common stock, exercisable for three years
at an
exercise price of $14.40 per share, and a warrant to purchase 69,444
shares of common stock, exercisable for three years at an exercise
price
of $18.00 per share, to Yorkville pursuant to the 2006 Securities
Purchase
Agreement. In some circumstances the number of warrant shares can
be
increased, and the exercise price decreased, by the operation of
a
ratchet-type antidilution provision. In exchange for our issuing
the
625,000 shares and the warrants, Yorkville paid us $5,000,000 in
cash.
|
In
connection with the SEDA and the 2006 Securities Purchase Agreement, we also
paid a structuring fee of $17,500 in cash to an affiliate of Yorkville, and
a
due diligence fee of $10,000 in cash to Yorkville.
Additional
Disclosures
1. The
total
dollar value of the securities underlying the Senior Convertible Notes that
we
have registered for resale (using 220,329, the number of underlying securities
that we have registered for resale and the market price per share ($6.09) for
those securities on February 15, 2008, the date of the sale of the Senior
Convertible Notes), is $1,341,804.
The
number of common shares registered underlying the Senior Convertible Notes,
the
Warrants and the potential non-Rule 416 adjustment shares is 1,582,258. This
number multiplied by $6.09 equals $9,635,951.
2. A
tabular
disclosure of the dollar amount of each payment (including the value of any
payments to be made in common stock) in connection with the Securities Purchase
Agreement transaction that we have made or may be required to make to any
selling securityholder, any affiliate of a selling securityholder, or any person
with whom any selling securityholder has a contractual relationship regarding
the transaction (including any interest payments, liquidated damages, payments
made to “finders” or “placement agents,” and any other payments or potential
payments), follows below. We have not included any repayment of principal on
the
Senior Convertible Notes in this disclosure. In addition, we have not included
any payments related to our 2006 Standby Equity Distribution Agreement with
Yorkville; this “equity line of credit” relationship expired in March 2008 and
all payments under or in connection with it are disclosed elsewhere in this
prospectus.
Category of Payment
|
|
Maximum Total Amount
|
|
Interest
payments (excluding late fees, default interest rate, etc.)
(1)
|
|
$
|
7,000,000
|
|
Make-Whole
payments (excluding late fees, etc.)
|
|
$
|
15,750,000
|
|
Registration
maintenance failure penalties (3)
|
|
$
|
320,000
|
|
Finders,
placement agents, etc.
|
|
$
|
0
|
|
Investor
Legal Counsel fees
|
|
$
|
20,000
|
|
|
|
|
|
|
TOTAL
|
|
$
|
23,090,000
|
|
(1) |
Escalating
from 3% to 5% over five years.
|
(2) |
13%
per year less cash interest paid.
|
(3) |
1%
per month for 54 months. No such registration maintenance failures/penalties
are anticipated, however. While we do not believe any
penalty should accrue because of the reduced amount of securities
registered
under this Registration Statement, we believe the maximum penalty,
if
any, is $320,000. We are negotiating with the selling securityholders
about the
applicability and size of any
penalty.
|
The
net
proceeds to us from this Securities Purchase Agreement transaction were
$34,980,000. We interpret the term “net proceeds” here to mean gross proceeds
minus actual payments to the selling securityholders (i.e., not including our
own legal fees, SEC registration fee, etc.).
The
total
possible payments to all selling securityholders and any of their affiliates
by
February 15, 2009 (assuming effectiveness of registration in mid-August 2008,
for this purpose) is $1,390,000, based upon the assumption that no more than
$320,000 will be due in the nature of a penalty under the registration rights
agreement.
This
figure excludes any possible penalties for failure to issue common shares upon
conversion of Senior Convertible Notes and/or exercise of Warrants, as it would
be impossible to calculate a maximum total.
|
3.
|
Tabular
disclosure of the information below
follows:
|
|
· |
the
total possible profit the selling securityholders could realize as
a
result of the conversion discount for the securities underlying the
Senior
Convertible Notes, with the following information disclosed
separately:
|
|
· |
the
market price per share of the securities underlying the Senior Convertible
Notes on February 15, 2008, the date of the sale of the Senior Convertible
Notes;
|
|
· |
the
conversion price per share of the underlying securities on the date
of the
sale of the Senior Convertible
Notes;
|
|
· |
the
total possible shares underlying the Senior Convertible Notes (assuming
no
interest payments and complete conversion throughout the term of
the
Senior Convertible Notes);
|
|
· |
the
combined market price of the total number of shares underlying the
Senior
Convertible Notes, calculated by using the market price per share
on the
date of the sale of the Senior Convertible Notes and the total possible
shares underlying the Senior Convertible
Notes;
|
|
· |
the
total possible shares the selling securityholders may receive and
the
combined conversion price of the total number of shares underlying
the
Senior Convertible Notes calculated by using the conversion price
on the
date of the sale of the Senior Convertible Notes and the total possible
number of shares the selling securityholders may receive,
and
|
|
· |
the
total possible discount to the market price as of the date of the
sale of
the Senior Convertible Notes, calculated by subtracting the total
conversion price on the date of the sale of the Senior Convertible
Notes
from the combined market price of the total number of shares underlying
the Senior Convertible Notes on that
date.
|
A.
Market price on date the Senior Convertible Notes were
sold
|
|
$
|
6.09
|
|
|
|
|
|
|
B.
Conversion price on date the Senior Convertible Notes were
sold
|
|
$
|
8.8527
|
|
|
|
|
|
|
C.
Total possible shares underlying registered Senior Convertible
Notes
|
|
|
220,329
|
|
|
|
|
|
|
D.
Combined market price (total possible shares times market price on
date
the Senior Convertible Notes were sold)
|
|
$
|
1,341,804
|
|
|
|
|
|
|
E.
Combined market price (total possible shares times conversion price
on
date the Senior Convertible Notes were sold)
|
|
$
|
1,950,507
|
|
|
|
|
|
|
F.
Total possible discount to the market price (D minus
E)
|
|
|
-0-
|
|
Maximum Conversion Price Adjustment by Re-Set Provision to $7.0822
A.
Market price on date the Senior Convertible Notes were
sold
|
|
$
|
6.09
|
|
|
|
|
|
|
B.
Conversion price if re-set provision were applied to greatest possible
extent
|
|
$
|
7.0822
|
|
|
|
|
|
|
C.
Total possible shares underlying registered Senior Convertible Notes
(assuming conversion price adjusted to $7.0822)
|
|
|
275,410
|
|
|
|
|
|
|
D.
Combined market price (total possible shares times market price on
date
the Senior Convertible Notes were sold)
|
|
$
|
1,677,247
|
|
|
|
|
|
|
E.
Combined market price (total possible shares times conversion price
if
re-set provision were applied to greatest possible extent)
|
|
$
|
2,438,122
|
|
|
|
|
|
|
F.
Total possible discount to the market price (D minus
E)
|
|
|
-0-
|
|
Maximum Conversion Price Adjustment by Weighted-Average
Antidilution Provision to $6.7417
A.
Market price on date the Senior Convertible Notes were
sold
|
|
$
|
6.09
|
|
|
|
|
|
|
B.
Conversion price if weighted-average antidilution were applied to
greatest
possible extent
|
|
$
|
6.7417
|
|
|
|
|
|
|
C.
Total possible shares underlying registered Senior Convertible Notes
(assuming conversion price adjusted to $6.7417)
|
|
|
289,320
|
|
|
|
|
|
|
D.
Combined market price (total possible shares times market price on
date
the Senior Convertible Notes were sold)
|
|
$
|
1,761,959
|
|
|
|
|
|
|
E.
Combined market price (total possible shares times conversion price
if
weighted-average antidilution provision were applied to the greatest
extent possible)
|
|
$
|
2,561,263
|
|
|
|
|
|
|
F.
Total possible discount to the market price (D minus
E)
|
|
|
-0-
|
|
|
4.
|
Tabular
disclosure of the information below
follows:
|
|
·
|
the
total possible profit to be realized as a result of any conversion
discounts for securities underlying any other warrants, options,
notes, or
other securities issued by us that are held by the selling securityholders
or any affiliates of the selling securityholders, with the following
information disclosed separately:
|
|
· |
market
price per share of the underlying securities on the date of the sale
of
the other security;
|
|
·
|
the
conversion/exercise price per share as of the date of the sale of
that
other security;
|
|
·
|
the
total possible shares to be received under the particular securities
(assuming complete
conversion/exercise);
|
|
·
|
the
combined market price of the total number of underlying shares, calculated
by using the market price per share on the date of the sale of that
other
security and the total possible shares to be
received;
|
|
·
|
the
total possible shares to be received and the combined conversion
price of
the total number of shares underlying that other security calculated
by
using the conversion price on the date of the sale of that other
security
and the total possible number of underlying shares;
and
|
|
·
|
the
total possible discount to the market price as of the date of the
sale of
that other security, calculated by subtracting the total
conversion/exercise price on the date of the sale of that security
from
the combined market price of the total number of underlying shares
on that
date.
|
Warrants Sold With the 2008 Senior Convertible Notes
A.
Market price on date the Warrants were sold
|
|
$
|
6.09
|
|
|
|
|
|
|
B.
Exercise price on date the Warrants were sold
|
|
$
|
8.8527
|
|
|
|
|
|
|
C.
Total possible shares underlying Warrants
|
|
|
1,317,864
|
|
|
|
|
|
|
D.
Combined market price (total possible shares times market price on
date
the Warrants were sold)
|
|
$
|
8,025,792
|
|
|
|
|
|
|
E.
Combined market price (total possible shares times exercise price
on date
the Warrants were sold)
|
|
$
|
11,666,655
|
|
|
|
|
|
|
F.
Total possible discount to the market price (D minus
E)
|
|
|
-0-
|
|
A.
Market price on date the Warrants were sold
|
|
$
|
11.25
|
|
|
|
|
|
|
B.
Exercise price on date the Warrants were sold
|
|
$14.40
(as to 86,806 warrant
shares)or
$18.00 (as to 69,444
warrant shares)
|
|
|
|
|
|
|
C.
Total possible shares underlying Warrants (assuming conversion price
adjusted to $6.7417)
|
|
|
156,250
|
|
|
|
|
|
|
D.
Combined market price (total possible shares times market price on
date
the Warrants were sold)
|
|
$
|
1,757,812
|
|
|
|
|
|
|
E.
Combined market price (total possible shares times exercise price
on date
the Warrants were sold)
|
|
$
|
2,500,000
|
|
|
|
|
|
|
F.
Total possible discount to the market price (D minus
E)
|
|
|
-0-
|
|
|
5.
|
Tabular
disclosure of the following information appears
below:
|
|
·
|
the
gross proceeds paid or payable to us in the Senior Convertible Notes
transaction;
|
|
·
|
all
payments that have been made or that may be required to be made by
us that
are disclosed in response to item 2 of this section of the
prospectus;
|
|
·
|
the
resulting net proceeds to us; and
|
|
·
|
the
combined total possible profit to be realized as a result of any
conversion discounts regarding the securities underlying the Senior
Convertible Notes and any other warrants, options, notes, or other
securities issued by us that are held by the selling securityholders
or
any affiliates of the selling securityholders that is disclosed in
items 3
and 4 of this section of the
prospectus.
|
Following
the table, we further provide disclosure – as a percentage – of the total amount
of all possible payments as disclosed in item 2 of this section of the
prospectus and the total possible discount to the market price of the shares
underlying the Senior Convertible Notes as disclosed in item 3 of this section
of the prospectus divided by the net proceeds to us from the sale of the Senior
Convertible Notes, as well as the amount of that resulting percentage averaged
over the term of the Senior Convertible Notes.
Gross
proceeds
|
|
$
|
35,000,000
|
|
|
|
|
|
|
Item
2 payments
|
|
$
|
23,090,000
|
|
|
|
|
|
|
“Resulting
net proceeds”
|
|
$
|
11,910,000
|
|
|
|
|
|
|
Total
possible profit from conversion discounts
|
|
$
|
0
|
|
The
item
2 possible payments totaled $23,090,000. The item 3 total possible discount
was
zero. Dividing the sum of the item 2 possible payments and the item 3 total
possible discount by the $34,980,000 net proceeds equals a percentage of 66%.
(We use here the “real” $34,980,000 net proceeds figure, rather than the
artificial “resulting net proceeds” figure which would be a negative number.)
Averaging that percentage over the scheduled five-year term of the Senior
Convertible Notes results in a percentage of 13.2% per year.
We
believe the item 2 figure is distorted by the requirement to include the
possible registration maintenance failure penalties. Omitting those, the
five-year percentage would be 65.1% and the average of that would be 13.0%
per
year.
|
6.
|
Tabular
disclosure of all prior securities transactions between us and the
selling
securityholders, any affiliates of the selling securityholders, or
any
person with whom any selling securityholder has a contractual relationship
regarding the transaction (or any predecessors of those persons),
with the
table including the following information disclosed separately for
each
transaction, follows below:
|
|
·
|
the
date of the transaction;
|
|
·
|
the
number of shares of the class of securities subject to the transaction
that were outstanding prior to the transaction and held by persons
other
than the selling securityholders, affiliates of us, or affiliates
of the
selling securityholders;
|
|
·
|
the
number of shares of the class of securities subject to the transaction
that were issued or issuable in connection with the
transaction;
|
|
·
|
the
percentage of total issued and outstanding securities that were issued
or
issuable in the transaction (assuming full issuance), with the percentage
calculated by taking the number of shares issued and outstanding
prior to
the applicable transaction and held by persons other than the selling
securityholders, affiliates of us, or affiliates of the selling
securityholders, and dividing that number by the number of shares
issued
or issuable in connection with the applicable
transaction;
|
|
·
|
the
market price per share of the class of securities subject to the
transaction immediately prior to the transaction;
and
|
|
·
|
the
current market price per share of the class of securities subject
to the
transaction.
|
It
is
noted that the pre-transactions shares figures and the percentages are distorted
because so many of our shares were, and still are, owned by persons who were/are
affiliates of us (although not affiliates of the selling
securityholders).
SEDA
Transaction With Yorkville
Date
of transaction
|
|
|
March
20, 2006 (sales occurred May 22, 2006 through
January 17, 2007)
|
|
|
|
|
|
|
Pre-transaction
shares (excluding shares owned by selling
securityholders/affiliates)
|
|
|
1,711,793
|
|
|
|
|
|
|
Shares
issued under SEDA
|
|
|
699,796
|
|
|
|
|
|
|
Percentage
|
|
|
40.88
|
%
|
|
|
|
|
|
Pre-transaction
market price
|
|
$
|
11.25
|
|
PIPE
Transaction with Yorkville
Date
of transaction
|
|
|
March 20, 2006
|
|
|
|
|
|
|
Pre-transaction
shares (excluding shares owned by selling
securityholders/affiliates)
|
|
|
1,711,793
|
|
|
|
|
|
|
Shares
issuable in transaction
|
|
|
781,250
|
|
|
|
|
|
|
Percentage
|
|
|
45.64
|
%
|
|
|
|
|
|
Pre-transaction
market price
|
|
$
|
11.25
|
|
|
7.
|
Tabular
disclosure of the following information appears
below:
|
|
·
|
the
number of shares outstanding prior to the Senior Convertible Notes
transaction that are held by persons other than the selling
securityholders, affiliates of us, and affiliates of the selling
securityholders;
|
|
·
|
the
number of shares registered for resale by the selling securityholders
or
affiliates of the selling securityholders in prior registration
statements;
|
|
·
|
the
number of shares registered for resale by the selling securityholders
or
affiliates of the selling securityholders that continue to be held
by the
selling securityholders or affiliates of the selling
securityholders;
|
|
·
|
the
number of shares that have been sold in registered resale transactions
by
the selling securityholders or affiliates of the selling securityholders;
and
|
|
·
|
the
number of shares registered for resale on behalf of the selling
securityholders or affiliates of the selling securityholders in the
current transaction.
|
In
this
analysis, the calculation of the number of outstanding shares do not include
any
securities underlying any outstanding convertible securities, options, or
warrants.
A.
Pre-transaction shares outstanding (excluding shares owned by selling
stockholders/affiliates)
|
|
|
4,751,528
|
|
|
|
|
|
|
B.
Shares previously registered for resale by selling
stockholders
|
|
|
2,397,188
|
|
|
|
|
|
|
C.
Shares previously registered for resale by selling stockholders and
still
held (1)
|
|
|
156,250
|
|
|
|
|
|
|
D.
Shares previously registered for resale by selling stockholders that
were
resold by them
|
|
|
1,361,818
|
|
|
|
|
|
|
E.
Shares registered for resale in current transaction
|
|
|
1,582,258
|
|
(1)
The
156,250 shares underlie warrants still held by Yorkville.
8. We
have
the intention, and a reasonable basis to believe that we will have the financial
ability, to make all payments on the Senior Convertible Notes.
9. Based
on
information obtained from the selling securityholders, neither selling
securityholder currently has an existing short position in our common
stock.
10. The
method by which we determined the number of shares being registered for resale
hereunder (bearing in mind a 1,582,258-share cap which is applicable as it
is
one-third of our public float) is explained as follows:
Common Shares Source
|
|
Number of Shares to Register
|
|
|
|
|
|
Registered
Senior Convertible Notes ($1,950,507 divided by initial $8.8527 conversion
price):
|
|
|
220,329
|
|
|
|
|
|
|
Warrants:
|
|
|
1,317,864
|
|
|
|
|
|
|
Additional
shares under registered Senior Convertible Notes if conversion price
is
adjusted to $7.3773 pursuant to the re-set and/or weighted-average
antidilution provisions
|
|
|
44,065
|
|
|
|
|
|
|
TOTAL
|
|
|
1,582,258
|
|
We
consider $7.3773 to be at or near the boundary of reasonable expectations
regarding possible future reset and/or weighted-average antidilution
adjustments. In no event can the conversion price be adjusted pursuant to the
re-set provisions to below $7.0822. In no event can the conversion price be
adjusted pursuant to the weighted-average antidilution provisions to below
$6.7417.
Plan
of
Distribution
We
are
registering a portion of the Senior Convertible Notes, all of the Warrants
and
the corresponding portion of the shares of common stock issuable upon conversion
of such Senior Convertible Notes and Warrants to permit the resale of these
Senior Convertible Notes and Warrants and the resale of these shares of common
stock by the holders of the Senior Convertible Notes, Warrants and underlying
shares from time to time after the date of this prospectus. We will not receive
any of the proceeds from the sale by the selling securityholders of the Senior
Convertible Notes, Warrants and shares of common stock. We will bear all fees
and expenses incident to our obligation to register the Senior Convertible
Notes, Warrants and shares of common stock.
The
selling securityholders may sell all or a portion of the registered Senior
Convertible Notes, Warrants and shares of common stock beneficially owned by
them and offered hereby from time to time directly or through one or more
underwriters, broker-dealers or agents. If the registered Senior Convertible
Notes, Warrants and shares of common stock are sold through underwriters or
broker-dealers, the selling securityholders will be responsible for underwriting
discounts or commissions or agent’s commissions. The registered Senior
Convertible Notes, Warrants and shares of common stock may be sold in one or
more transactions at fixed prices, at prevailing market prices at the time
of
the sale, at varying prices determined at the time of sale, or at negotiated
prices. These sales may be effected in transactions, which may involve crosses
or block transactions,
|
· |
on
any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of
sale;
|
|
· |
in
the over-the-counter market;
|
|
· |
in
transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
|
|
· |
through
the writing of options, whether such options are listed on an options
exchange or otherwise;
|
|
· |
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
· |
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
· |
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
|
· |
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
· |
privately
negotiated transactions;
|
|
· |
broker-dealers
may agree with the selling securityholders to sell a specified number
of
such shares or other security at a stipulated price per share or
per
unit;
|
|
· |
a
combination of any such methods of sale;
and
|
|
· |
any
other method permitted pursuant to applicable
law.
|
If
the
selling securityholders effect such transactions by selling registered Senior
Convertible Notes, Warrants and shares of common stock to or through
underwriters, broker-dealers or agents, such underwriters, broker-dealers or
agents may receive commissions in the form of discounts, concessions or
commissions from the selling securityholders or commissions from purchasers
of
the registered Senior Convertible Notes, Warrants and shares of common stock
for
whom they may act as agent or to whom they may sell as principal (which
discounts, concessions or commissions as to particular underwriters,
broker-dealers or agents may be in excess of those customary in the types of
transactions involved). In connection with sales of the registered Senior
Convertible Notes, Warrants and shares of common stock or otherwise, the selling
securityholders may enter into hedging transactions with broker-dealers, which
may in turn engage in short sales of the registered Senior Convertible Notes,
Warrants and shares of common stock in the course of hedging in positions they
assume. The selling securityholders may also sell registered Senior Convertible
Notes, Warrants and shares of common stock short and deliver registered Senior
Convertible Notes, Warrants and shares of common stock covered by this
prospectus to close out short positions and to return borrowed shares in
connection with such short sales. The selling securityholders may also loan
or
pledge registered Senior Convertible Notes, Warrants and shares of common stock
to broker-dealers that in turn may sell such registered Senior Convertible
Notes, Warrants and shares.
The
selling securityholders may pledge or grant a security interest in some or
all
of the registered Senior Convertible Notes, Warrants, or shares of common stock
owned by them and, if they default in the performance of their secured
obligations, the pledgees or secured parties may offer and sell the registered
Senior Convertible Notes, Warrants and shares of common stock from time to
time
pursuant to this prospectus or any supplement or amendment to this prospectus
under Rule 424(b)(3) or other applicable provision of the Securities Act of
1933, as amended, amending, if necessary, the list of selling securityholders
to
include the pledgee, transferee or other successors in interest as selling
securityholders under this prospectus. The selling securityholders also may
transfer and donate the registered Senior Convertible Notes, Warrants and shares
of common stock in other circumstances in which case the transferees, donees,
pledgees or other successors in interest will be the selling beneficial owners
for purposes of this prospectus.
The
selling securityholders and any broker-dealer participating in the distribution
of the securities may be deemed to be “underwriters” within the meaning of the
Securities Act, and any commission paid, or any discounts or concessions allowed
to, any such broker-dealer may be deemed to be underwriting commissions or
discounts under the Securities Act. At the time a particular offering of the
registered Senior Convertible Notes, Warrants and shares of common stock is
made, a prospectus supplement, if required, will be distributed to set forth
the
aggregate principal amount of the registered Senior Convertible Notes, the
aggregate amount of Warrants and aggregate amount of shares of common stock
being offered and the terms of the offering, including the name or names of
any
broker-dealers or agents, any discounts, commissions and other terms
constituting compensation from the selling securityholders and any discounts,
commissions or concessions allowed or reallowed or paid to
broker-dealers.
Under
the
securities laws of some states, the registered Senior Convertible Notes,
Warrants and shares of common stock may be sold in such states only through
registered or licensed brokers or dealers. In addition, in some states the
registered Senior Convertible Notes, Warrants and shares of common stock may
not
be sold unless such shares have been registered or qualified for sale in such
state or an exemption from registration or qualification is available and is
complied with.
There
can
be no assurance that any selling securityholder will sell any or all of the
registered Senior Convertible Notes, Warrants and shares of common stock
registered pursuant to the registration statement, of which this prospectus
forms a part.
The
selling securityholders and any other person participating in such distribution
will be subject to applicable provisions of the Securities Exchange Act of
1934,
as amended, and the rules and regulations thereunder, including, without
limitation, Regulation M of the Exchange Act, which may limit the timing of
purchases and sales of any of the registered Senior Convertible Notes, Warrants
and shares of common stock by the selling securityholders and any other
participating person. Regulation M may also restrict the ability of any person
engaged in the distribution of the registered Senior Convertible Notes, Warrants
and shares of common stock to engage in market-making activities with respect
to
the registered Senior Convertible Notes, Warrants and shares of common stock.
All of the foregoing may affect the marketability of the registered Senior
Convertible Notes, Warrants and shares of common stock and the ability of any
person or entity to engage in market-making activities with respect to the
registered Senior Convertible Notes, Warrants and shares of common
stock.
We
will
pay all expenses of the registration of the registered Senior Convertible Notes,
Warrants and shares of common stock pursuant to the registration rights
agreement, estimated to be $60,000 in total, including, without limitation,
SEC
filing fees and expenses of compliance with state securities or “blue sky” laws;
provided,
however,
that a
selling securityholder will pay all underwriting discounts and selling
commissions, if any. We will indemnify the selling securityholders against
liabilities, including some liabilities under the Securities Act, in accordance
with the registration rights agreements, or the selling securityholders will
be
entitled to contribution. We may be indemnified by the selling securityholders
against civil liabilities, including liabilities under the Securities Act,
that
may arise from any written information furnished to us by the selling
securityholder specifically for use in this prospectus, in accordance with
the
related registration rights agreement, or we may be entitled to
contribution.
Once
sold
under the registration statement, of which this prospectus forms a part, the
registered Senior Convertible Notes, Warrants and shares of common stock will
be
freely tradable in the hands of persons other than our affiliates.
Certain
U.S. Federal Income Tax Considerations
The
following is a general discussion of certain United States federal income tax
considerations relevant to holders of the Senior Convertible Notes, Warrants
and
common stock underlying the Senior Convertible Notes and Warrants. This
discussion is based upon the Internal Revenue Code of 1986, as amended
(the“Code”),
Treasury Regulations, Internal Revenue Service (“IRS”)
rulings
and judicial decisions now in effect, all of which are subject to change
(possibly, with retroactive effect) or different interpretations. There can
be
no assurance that the IRS will not challenge one or more of the tax consequences
described herein, and we have not obtained, nor do we intend to obtain, a ruling
from the IRS with respect to the United States federal income tax consequences
of acquiring or holding Senior Convertible Notes, Warrants or common stock.
This
discussion does not purport to deal with all aspects of United States federal
income taxation that may be relevant to a particular holder in light of the
holder’s circumstances (for example, persons subject to the alternative minimum
tax provisions of the Code or a holder whose “functional currency” is not the
United States dollar). Also, it is not intended to be wholly applicable to
all
categories of investors, some of which (such as dealers in securities or
currencies, traders in securities that elect to use a mark-to-market method
of
accounting, banks, thrifts, regulated investment companies, insurance companies,
tax-exempt organizations, and persons holding Senior Convertible Notes, Warrants
or common stock as part of a hedging or conversion transaction or straddle
or
persons deemed to sell Senior Convertible Notes, Warrants or common stock under
the constructive sale provisions of the Code) may be subject to special rules.
The discussion also does not discuss any aspect of state, local or foreign
law,
or United States federal estate and gift tax law as applicable to the holders
of
the Senior Convertible Notes, Warrants and underlying common stock. In addition,
this discussion is limited to purchasers of Senior Convertible Notes, Warrants
and common stock who hold the Senior Convertible Notes, Warrants and common
stock as “capital assets” within the meaning of Section 1221 of the Code
(generally, for investment). This summary also assumes that the IRS will respect
the classification of the Senior Convertible Notes as indebtedness for federal
income tax purposes.
All
purchasers of the Senior Convertible Notes, Warrants and common
stock are
advised to consult their own tax advisors regarding the federal, state, local
and foreign tax consequences of the purchase, ownership and disposition of
the
Senior Convertible Notes, Warrants and common stock in their particular
situations.
As
used
herein, the term “U.S.
Holder”
means a
beneficial holder of a Senior Convertible Note, Warrant or common stock that
for
United States federal income tax purposes is (i) a citizen or resident (as
defined in Section 7701 (b) of the Code) of the United States (unless
such person is not treated as a resident of the United States under an
applicable income tax treaty), (ii) a corporation created or organized
under the laws of the United States or any political subdivision thereof or
other entity treated as a corporation for United States federal income tax
purposes, (iii) an estate the income of which is subject to United States
federal income taxation regardless of its source and (iv) in general, a
trust subject to the primary supervision of a court within the United States
and
the control of a United States person as described in Section 7701(a)(30)
of the Code. A “Non-U.S. Holder” is any beneficial holder of a Senior
Convertible Note, Warrant or common stock which is neither a U.S. Holder nor
an
entity treated as a partnership for United States tax purposes.
If
a
partnership (including for this purpose any entity, domestic or foreign, treated
as a partnership for United States tax purposes) is a beneficial owner of the
Senior Convertible Notes, Warrants or underlying common stock, the United States
tax treatment of a partner in the partnership generally will depend on the
status of the partner and the activities of the partnership. As a general
matter, income earned through a foreign or domestic partnership is attributed
to
its owners. A holder of the Senior Convertible Notes, Warrants or underlying
common stock that is a partnership, and partners in such partnership, should
consult their individual tax advisors about the United States federal income
tax
consequences of holding and disposing of the Senior Convertible Notes, Warrants
and underlying common stock.
U.S.
Holders
Original
Issue Discount
U.S.
Holders are subject to the original issue discount rules. Original issue
discount is equal to (a) a Senior Convertible Note’s redemption price at
scheduled maturity plus all other payments to be made on the Senior Convertible
Note, through scheduled maturity, other than qualified stated interest, minus
(b) the original issue price of the Senor Convertible Note. The original issue
discount will be amortized into interest income on a straight-line basis over
the life of the Senior Convertible Note, and the actual receipt of interest
(other than qualified stated interest) would not result in additional interest
income.
The
scheduled interest payments on each Senior Convertible Note will not be
qualified stated interest, because the interest rate escalates on a
predetermined basis. In addition, the make-whole payment which would be paid
upon redemption at scheduled maturity will not be qualified stated
interest.
The
Senior Convertible Notes and Warrants were issued to each Securities Purchase
Agreement investor for a combined purchase price equal to the aggregate
principal amount of the investor’s Senior Convertible Notes. Therefore, the
original issue price of the Senior Convertible Notes is less than the aggregate
principal amount of such Senior Convertible Notes, by an amount equal to the
original-issuance fair market value of the Warrants; and this shortfall will
increase the total amount of original issue discount. We have not yet
established the respective original issue prices of the Senior Convertible
Notes
and Warrants.
We
believe the Senior Convertible Notes do not constitute contingent debt, because
the likelihood that dividends will be paid on the Senior Convertible Notes
is
considered to be remote and incidental.
Market
Discount
If
a U.S.
Holder acquires a Senior Convertible Note other than in connection with its
original issue at a price that is less than its issue price, the amount of
such
difference is treated as “market discount” for United States federal income tax
purposes, unless such difference is less than ¼ of 1% of the principal amount at
maturity multiplied by the number of complete years to maturity from the date
of
acquisition. Under the market discount rules, a U.S. Holder is required to
treat
any gain on the sale, exchange, retirement or other disposition of a Senior
Convertible Note as ordinary income to the extent of the accrued market discount
that has not previously been included in income. If a U.S. Holder disposes
of a
Senior Convertible Note which has accrued market discount in a nonrecognition
transaction in which the U.S. Holder receives property the basis of which is
determined in whole or in part by reference to the basis of the Senior
Convertible Note, the accrued market discount is generally not includible in
income at the time of such transaction. Instead, the accrued market discount
attaches to the property received in the nonrecognition transaction and is
recognized as ordinary income upon the disposition of such property. Such
nonrecognition transaction should include the conversion of a Senior Convertible
Note for our shares of common stock. In general, the amount of market discount
that has accrued is determined on a ratable basis, by allocating an equal amount
of market discount to each day of every accrual period. A U.S. Holder may,
however, elect to determine the amount of accrued market discount allocable
to
any accrual period under the constant yield method. A U.S. holder may elect
to
include market discount in income currently as it accrues, on either a ratable
or constant interest rate method. Any such election applies to all debt
instruments acquired by the U.S. Holder on or after the first day of the first
taxable year to which the election applies, and is irrevocable without the
consent of the IRS. If such an election is made, the U.S. Holder’s tax basis in
the Senior Convertible Notes will be increased by the amount of market discount
included in income. Unless a U.S. Holder elects to include market discount
in
income as it accrues, such U.S. Holder may not be allowed to deduct on a current
basis a portion of the interest expense on any indebtedness incurred or
continued to purchase or carry Senior Convertible Notes with market discount.
Amortizable
Bond Premium
If
a U.S.
Holder purchases a Senior Convertible Note at a price that exceeds the principal
amount of the Senior Convertible Note, the amount of the difference is referred
to as “bond premium” for United States federal income tax purposes. The U.S.
Holder may elect to amortize the bond premium against interest payable on the
Senior Convertible Note, except to the extent that the bond premium is
attributable to the conversion feature of the Senior Convertible Note. In
addition, any bond premium in excess of the interest payable on the Senior
Convertible Note may be deductible over the term of the Senior Convertible
Note.
If a U.S. Holder elects to amortize bond premium, the amount of bond premium
allocable to each period will be based on a constant yield to maturity over
the
period the Senior Convertible Note is held. The amortized bond premium would
reduce the U.S. Holder’s tax basis in the Senior Convertible Note. Any such
election applies to all fully taxable bonds held by the U.S. Holder at the
beginning of the first taxable year to which the election applies, and all
fully
taxable bonds acquired thereafter, and is irrevocable without the consent of
the
IRS. If the election is not made, a U.S. Holder must include the full amount
of
each interest payment in income as it accrues or is paid, and premium will
not
be taken into account until principal payments are received on the Senior
Convertible Note or the Senior Convertible Note is sold or otherwise disposed
of.
Conversion
of Senior Convertible Notes Into Our Common Stock
A
U.S.
Holder generally will not recognize any income, gain or loss upon conversion
of
a Senior Convertible Note into our common stock except (i) with respect to
cash received in lieu of a fractional share of our common stock or (ii) in
payment of accrued interest, which will be taxable as such. Cash received in
lieu of a fractional share of common stock should generally be treated as a
payment in exchange for such fractional share. The adjusted basis of shares
of
common stock received on conversion will equal the adjusted basis of the Senior
Convertible Note converted (reduced by the portion of adjusted basis allocated
to any fractional share of common stock exchanged for cash). The holding period
of such common stock received on conversion will generally include the period
during which the converted Senior Convertible Notes were held prior to
conversion.
The
conversion rate of the Senior Convertible Notes is subject to adjustment under
certain circumstances. Section 305 of the Code and the Treasury Regulations
issued thereunder may treat the holders of the Senior Convertible Notes as
having received a constructive distribution, resulting in a taxable dividend
(subject to a possible dividends received deduction in the case of corporate
holders) to the extent of our current and/or accumulated earnings and profits,
if, and to the extent that certain adjustments in the conversion rate, which
may
occur in limited circumstances, increase the proportionate interest of a holder
of Senior Convertible Notes in our assets or earnings and profits, whether
or
not such holder ever exercises its conversion privilege. Therefore, U.S. Holders
may recognize dividend income in the event of a deemed distribution even though
they may not receive any cash or property. Adjustments to the conversion rate
made pursuant to a bona fide reasonable adjustment formula which has the effect
of preventing dilution in the interest of the holders of the debt instruments,
however, will generally not be considered to result in a constructive dividend
distribution.
Sale,
Exchange, Retirement or Repurchase of the Senior Convertible Notes
Each
U.S.
Holder generally will recognize gain or loss upon the sale, exchange (other
than
by exercise of the conversion privilege), retirement, repurchase, or other
disposition of Senior Convertible Notes measured by the difference (if any)
between (i) the amount of cash and the fair market value of any property
received and (ii) such holder’s adjusted tax basis in the Senior
Convertible Notes. A U.S. Holder’s adjusted tax basis in a Senior Convertible
Note generally will equal the cost of the Senior Convertible Note to such holder
plus any amounts paid in connection with a conversion representing interest
at
the time of such conversion less any principal payments received by such holder
(increased by the amount of market discount, if any, previously included in
income or decreased by the amount of amortized bond premium, if any). Subject
to
the market discount rules discussed above, any such gain or loss recognized
on
the sale, exchange, retirement, repurchase or other disposition of a Senior
Convertible Note should be capital gain or loss and will generally be long-term
capital gain or loss if the Senior Convertible Note has been held for more
than
12 months at the time of the sale or exchange. Generally, long term capital
gain
for individuals is eligible for a reduced rate of taxation. Capital gain that
is
not long term capital gain is taxed at ordinary income rates. The deductibility
of capital losses is subject to certain limitations.
Warrants
Upon
the
exercise of a Warrant for cash, a holder will not recognize gain or loss and
will have a tax basis in the common stock received equal to the tax basis in
such holder’s Warrant plus the exercise price of the Warrant. The holding period
for the common stock purchased pursuant to the exercise of a Warrant for cash
will begin on the day following the date of exercise and will not include the
period that the holder held the Warrant.
Upon
the
net-exercise of a Warrant, a holder will not recognize gain or loss and will
have a tax basis in the common stock received equal to the tax basis in such
holder’s Warrant. The holding period for the common stock purchased pursuant to
the net-exercise of a Warrant will begin on the day that the holder acquired
the
Warrant.
Upon
a
sale or other disposition (other than exercise) of a Warrant, a holder will
recognize capital gain or loss in an amount equal to the difference between
the
amount realized and the holder’s tax basis in the Warrant. Such a gain or loss
will be long term if the holding period is more than one year. In the event
that
a Warrant lapses unexercised, a holder will recognize a capital loss in an
amount equal to its tax basis in the Warrant. Such loss will be long term if
the
Warrant has been held for more than one year.
The
Common Stock
Distributions
(including constructive distributions), if any, paid on our common stock to
a
U.S. Holder generally will constitute a taxable dividend, to the extent made
from our current and/or accumulated earnings and profits, as determined under
United States federal income tax principles. Any distribution in excess of
our
current and accumulated earnings and profits will be treated first as a tax-free
return of capital, which will reduce the U.S. Holder’s adjusted tax basis in the
shares (but not below zero). To the extent such a distribution exceeds the
U.S.
Holder’s adjusted tax basis in the shares, the distribution will generally be
taxable as capital gain. Dividends received by a corporate U.S. Holder may
be
eligible for a dividends received deduction. For taxable years beginning after
December 31, 2002 and before January 1, 2009, subject to certain
exceptions, dividends received by non-corporate shareholders (including
individuals) from domestic corporations generally are taxed at the same
preferential rates that apply to long-term capital gain.
Gain
or
loss realized on the sale or exchange of common stock will equal the difference
between the amount realized on such sale or exchange and the U.S. Holder’s
adjusted tax basis in such common stock. Such gain or loss will generally be
long-term capital gain or loss if the holder has held or is deemed to have
held
the common stock for more than twelve months. Generally, long-term capital
gain
of non-corporate shareholders is eligible for a reduced rate of taxation. The
deductibility of capital losses is subject to certain limitations.
Non-U.S.
Holders
For
purposes of the following discussion, dividends and gain on the sale, exchange
or other disposition of a Senior Convertible Note, Warrant or common stock
will
be considered to be “U.S. trade or business income” if such income or gain is
(i) effectively connected with the conduct of a United States trade or
business and (ii) in the case of a Non-U.S. Holder eligible for the
benefits of an applicable United States bilateral income tax treaty,
attributable to a permanent establishment (or, in the case of an individual,
a
fixed base) in the United States.
Taxation
of Interest
Payments
of interest to Non-U.S. Holders are generally subject to U.S. federal income
tax
at a rate of 30%, collected by means of withholding. Payments of interest on
the
Senior Convertible Notes to most Non-U.S. Holders, however, will qualify as
“portfolio interest,” and thus will be exempt from the withholding tax, if the
holders certify their nonresident status as described below. The portfolio
interest exception will not apply to payments of interest to a Non-U.S. Holder
that:
|
· |
Owns,
actually or constructively, at least 10% of the total combined voting
power of all classes of our stock entitled to vote within the meaning
of
section 871(h)(3) of the Code, or
|
|
· |
Is
a “controlled foreign corporation” that is related, directly or
indirectly, to us.
|
Even
if
the portfolio interest exception does not apply, payments of interest to a
nonresident person or entity might not be subject to withholding tax at a 30%
rate, or might be subject to withholding tax at a reduced rate, under the terms
of a tax treaty between the U.S. and the Non-U.S. Holder’s country of residence.
The
portfolio interest exception, entitlement to treaty benefits and several of
the
special rules for Non-U.S. Holders described below apply only if the holder
certifies its nonresident status. A Non-U.S. Holder can generally meet this
certification requirement by providing an accurate and complete Form W-8BEN
or
appropriate substitute or successor form under penalties of perjury to us or
our
paying agent. The portfolio interest exception, described above, may not apply
to Non-U.S. Holders holding the Senior Convertible Notes in connection with
the
conduct of a U.S. trade or business (through a U.S. permanent establishment,
in
the case of a Non-U.S. Holder entitled to the benefits of an applicable tax
treaty and such tax treaty so requires as a condition for taxation) on a net
income basis generally in the same manner as if such holder were a U.S. person
as defined under the Code, and, if the Non-U.S. Holder is a corporation, a
U.S.
branch profile tax equal to 30% of its “effectively connected earnings and
profits,” subject to adjustments, unless the holder qualifies for an exemption
from such tax or a lower tax rate under an applicable treaty.
Dividends
In
general, dividends paid to a Non-U.S. Holder of common stock will be subject
to
withholding of United States federal income tax at a 30% rate unless such rate
is reduced by an applicable income tax treaty. Dividends that are U.S. trade
or
business income are generally subject to United States federal income tax at
regular income tax rates, but are not generally subject to the 30% withholding
tax or treaty-reduced rate if the Non-U.S. Holder files a properly executed
Form
W-8ECI (or appropriate substitute form), as applicable with the payor. Any
U.S.
trade or business income received by a Non-U.S. Holder that is a corporation
may
also, under certain circumstances, be subject to an additional “branch profits
tax” at a 30% rate or such lower rate as may be applicable under an income tax
treaty. A Non-U.S. Holder of common stock who wishes to claim the benefit of
an
applicable treaty rate must provide a properly executed IRS Form W-8BEN (or
appropriate substitute form), as applicable. In addition, a Non-U.S. Holder
may
under certain circumstances be required to obtain a United States taxpayer
identification number and make certain certifications to us. Special procedures
are provided for payments through qualified intermediaries. A Non-U.S. Holder
of
common stock that is eligible for a reduced rate of United States withholding
tax pursuant to an income treaty may obtain a refund of amounts withheld at
a
higher rate by filing an appropriate claim for a refund with the IRS.
Conversion
Into/Exercise for Our Common Stock
A
Non-U.S. Holder generally will not be subject to United States federal income
tax on the conversion of Senior Convertible Notes into our common stock or
on
the exercise of Warrants for our common stock.
Sale,
Exchange, Retirement or Redemption of Senior Convertible Notes, Warrants or
Common Stock
Except
as
described below and subject to the discussion concerning backup withholding,
any
gain realized by a Non-U.S. Holder on the sale, exchange (other than by exercise
of the conversion or exercise privilege for our common stock), retirement or
redemption of a Senior Convertible Note, Warrant or common stock generally
will
not be subject to United States federal income tax, unless (i) such gain is
U.S. trade or business income, (ii) subject to certain exceptions, the
Non-U.S. Holder is an individual who holds the Senior Convertible Note, Warrant
or common stock as a capital asset and is present in the United States for
183
days or more in the taxable year of the disposition, (iii) the Non-U.S.
Holder is subject to tax pursuant to the provisions of United States tax law
applicable to certain United States expatriates (including certain former
citizens or residents of the United States), or (iv) we are a United States
real property holding corporation within the meaning of Section 897 of the
Code. We do not believe that we are currently a “United States real property
holding corporation” within the meaning of Section 897 of the Code, or that
we will become one in the future.
Backup
Withholding and Information Reporting
The
Code
and the Treasury Regulations require those who make specified payments to report
the payments to the IRS. Among the specified payments are interest, dividends
and proceeds paid by brokers to their customers. The required information
returns enable the IRS to determine whether the recipient properly included
the
payments in income. This reporting regime is reinforced by “backup withholding”
rules. These rules require the payors to withhold tax from payments subject
to
information reporting if the recipient fails to cooperate with the reporting
regime by failing to provide his taxpayer identification number to the payor,
furnishing an incorrect identification number, or repeatedly failing to report
interest or dividends on his returns. The backup withholding rate is currently
28%. The information reporting and backup withholding rules do not apply to
payments to corporations, whether domestic or foreign.
Payments
of interest on our Senior Convertible Notes or dividends on our common stock
to
individual U.S. Holders of Senior Convertible Notes or common stock will
generally be subject to information reporting, and will be subject to backup
withholding unless the holder provides us or our paying agent with a correct
taxpayer identification number and complies with certain certification
procedures.
The
information reporting and backup withholding rules do not apply to payments
that
are subject to the 30% withholding tax on interest or dividends paid to
nonresidents, or to payments that are exempt from that tax by application of
a
tax treaty or special exception. Therefore, payments to Non-U.S. Holders of
interest on our Senior Convertible Notes or dividends on our Senior Convertible
Notes or common stock will generally not be subject to information reporting
or
backup withholding. To avoid backup withholding, a Non-U.S. Holder will have
to
certify its nonresident status. Some of the common means of doing so are
described under “Certain U.S. Federal Income Tax Considerations—Non-U.S.
Holders—Dividends.”
Payments
made to U.S. Holders by a broker upon a sale or other disposition of Senior
Convertible Notes, Warrants or common stock will generally be subject to
information reporting and backup withholding. If the sale is made through a
foreign office of a foreign broker, the sale will generally not be subject
to
either information reporting or backup withholding. This exception may not
apply, however, if the foreign broker is owned or controlled by United States
persons, or is engaged in a United States trade or business.
Payments
made to Non-U.S. Holders by a broker upon a sale or other disposition of Senior
Convertible Notes, Warrants or common stock will generally not be subject to
information reporting or backup withholding as long as the Non-U.S. Holder
certifies its foreign status.
Any
amounts withheld from a payment to a holder of Senior Convertible Notes,
Warrants or common stock under the backup withholding rules can be credited
against any United States federal income tax liability of the holder and may
entitle the holder to a refund, provided that the required information is
furnished to the Internal Revenue Service.
The
preceding discussion of certain United States federal income tax consequences
is
for general information only and is not tax advice. Accordingly, each investor
should consult its own tax adviser as to particular tax consequences to it
of
purchasing, holding and disposing of the Senior Convertible Notes, Warrants
and
underlying common stock, including the applicability and effect of any state,
local or foreign tax laws, and of any proposed changes in applicable
laws.
Legal
Matters
The
validity of the securities offered hereby and the binding nature of the Senior
Convertible Notes and Warrants offered hereby have been passed upon for us
by
Heller Ehrman LLP, San Diego, California.
Experts
The
financial statements as of and for the fiscal years ended December 31, 2006
and
December 31, 2007 included, through incorporation by reference, in this
prospectus have been audited by Schwartz Levitsky Feldman LLP, an independent
registered public accounting firm, as stated in its report appearing herein,
and
have been so included upon the report of such firm given upon its authority
as
experts in accounting and auditing.
Where
You
Can Find More Information
We
have
filed with the SEC a registration statement on Form S-3 under the Securities
Act
of 1933 with respect to the common stock offered hereby. We also file periodic
and current reports pursuant to the Securities Exchange Act of 1934, proxy
statements and other information with the SEC. This prospectus, which
constitutes a part of the registration statement, does not contain all of the
information in the registration statement and the exhibits of the registration
statement. For further information with respect to us and the shares being
offered under this prospectus, we refer you to the registration statement,
including the exhibits and schedules thereto, and the documents incorporated
by
reference in this prospectus and the registration statement.
You
may
read and copy the registration statement of which this prospectus is a part
at
the SEC’s Public Reference Room, which is located at 100 F Street N.E.,
Washington, D.C. 20549. You can request copies of the registration statement
by
writing to the SEC and paying a fee for the copying cost. Please call the SEC
at
1-800-SEC-0330 for more information about the operation of the SEC’s Public
Reference Room. In addition, the SEC maintains an Internet web site, which
is
located at www.sec.gov,
which
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. You may access the
registration statement of which this prospectus is a part, as well as our
periodic and current reports filed pursuant to the Securities Exchange Act
of
1934, proxy statements and other information, at the SEC’s web
site.
We
maintain an Internet web site at www.caasauto.com.
We have
not incorporated by reference into this prospectus the information on our web
site, and you should not consider it to be a part of this
prospectus.
Documents
Incorporated by Reference
The
following documents filed by us with the SEC are incorporated into this
prospectus by reference:
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·
|
our
Annual Report on Form 10-K for the fiscal year ended December 31,
2007, as
filed on March 25, 2008;
|
|
·
|
our
Quarterly Reports on Form 10-Q for the fiscal quarters ended March
31,
2008 and June 30, 2008, as filed on May 14, 2008 and August 12,
2008,
respectively;
|
|
·
|
our
Current Reports on Form 8-K, as filed on February 4, 2008, February
21, 2008, April 2, 2008, April 9 (as amended May 8), 2008, May
14, 2008, July 1, 2008 and August 12, 2008;
and
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|
·
|
the
description of the our common stock contained in the Registration
Statement on Form 10-SB filed by our predecessor, Visions-In-Glass,
Inc.,
with the SEC under Section 12 of the Securities Exchange Act of 1934,
as
amended, on August 27, 2001, including any amendments or reports
filed for
the purpose of updating such
description.
|
All
documents subsequently filed by us with the SEC pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, and
before the termination of this offering shall be deemed to be incorporated
by
reference into this prospectus. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to
be modified or superseded for purposes of this prospectus to the extent that
a
statement contained herein, or in any other subsequently filed document that
also is or is deemed to be incorporated be reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this
prospectus.
We
will
provide, without charge, to each person, including any beneficial owner, to
whom
a copy of this prospectus is delivered, upon the written or oral request of
such
person, a copy of all or any of the documents that have been incorporated herein
by reference, but are not delivered with this prospectus, other than exhibits
to
such documents (unless such exhibits are specifically incorporated by reference
herein). Requests for such copies should be directed to:
China
Automotive Systems, Inc.
No.
1
Henglong Road, Yu Qiao Development Zone
Shashi
District, Jing Zhou City
Hubei
Province
People’s
Republic of China
Attn:
Jie
Li
*
*
*
You
may rely on the information contained in this prospectus. We have not authorized
anyone to provide information different from that contained in this prospectus.
Neither the delivery of this prospectus nor the sale of securities means that
information contained in this prospectus is correct after the date of this
prospectus. This prospectus is not an offer to sell or a solicitation of an
offer to buy securities in any circumstances under which the offer or
solicitation is unlawful.
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
14. Other Expenses of Issuance and Distribution
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, to be paid by the Registrant in connection with
the
issuance and distribution of the securities being registered. All amounts other
than the SEC registration fee are estimates.
|
|
Amount
to be paid
|
|
SEC
registration fee
|
|
$
|
2,200.80
|
|
Legal
fees and expenses
|
|
$
|
42,000.00
|
|
Accounting
fees and expenses
|
|
$
|
5,000.00
|
|
Printing
and engraving expenses
|
|
$
|
2,000.00
|
|
Miscellaneous
|
|
$
|
14,799.20
|
|
Total
|
|
$
|
66,000.00
|
|
Item
15. Indemnification of Directors and Officers
Section
145 of the Delaware General Corporation Law authorizes a court to award, or
a
corporation’s board of directors to grant, indemnity to directors and officers
in terms sufficiently broad to permit such indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933, as amended (the “Securities
Act”).
There
are no specific provisions relating to indemnification of directors and officers
in our certificate of incorporation or bylaws.
Item
16. Exhibits and Financial Statement Schedules
Exhibit
|
|
Description
|
4.1
|
|
Certificate
of Incorporation of Visions-In-Glass, Inc., now known as China
Automotive
Systems, Inc. (1)
|
|
|
|
4.1.1
|
|
Certificate
of Amendment to Certificate of Incorporation, filed May 19, 2003.
(2)
|
|
|
|
4.2
|
|
Bylaws.
(3)
|
|
|
|
4.3
|
|
Senior
Convertible Note (“Closing Note”) dated February 15, 2008 in the
original principal amount of $8,571,429 issued by us in favor of
TFINN
& CO. as nominee for Lehman Brothers Commercial Corporation Asia
Limited (4)
|
|
|
|
4.4
|
|
Senior
Convertible Note (“Henglong Note”) dated February 15, 2008 in the
original principal amount of $6,428,571 issued by us in favor of
TFINN
& CO. as nominee for Lehman Brothers Commercial Corporation Asia
Limited (5)
|
|
|
|
4.5
|
|
Senior
Convertible Note (“Escrow Note”) dated February 15, 2008 in the
original principal amount of $15,000,000 issued by us in favor
of TFINN
& CO. as nominee for Lehman Brothers Commercial Corporation Asia
Limited (6)
|
|
|
|
4.6
|
|
Closing
Warrant to purchase 564,799 shares of common stock at $8.8527 per
share,
dated February 15, 2008, issued by us in favor of TFINN & CO. as
nominee for Lehman Brothers Commercial Corporation Asia Limited.
(7)
|
|
|
|
4.7
|
|
Escrow
Warrant to purchase 564,799 shares of common stock at $8.8527 per
share,
dated February 15, 2008, issued by us in favor of TFINN & CO. as
nominee for Lehman Brothers Commercial Corporation Asia Limited.
(8)
|
|
|
|
4.8
|
|
Senior
Convertible Note (“Closing Note”) dated February 15, 2008 in the
original principal amount of $1,428,571 issued by us in favor of
YA Global
Investments, L.P.(9)
|
|
|
|
4.9
|
|
Senior
Convertible Note (“Henglong Note”) dated February 15, 2008 in the
original principal amount of $1,071,429 issued by us in favor of
YA Global
Investments, L.P. (10)
|
|
|
|
4.10
|
|
Senior
Convertible Note (“Escrow Note”) dated February 15, 2008 in the
original principal amount of $2,500,000 issued by us in favor of
YA Global
Investments, L.P. (11)
|
|
|
|
4.11
|
|
Closing
Warrant to purchase 94,133 shares of common stock at $8.8527 per
share,
dated February 15, 2008, issued by us in favor of YA Global
Investments, L.P. (12)
|
|
|
|
4.12
|
|
Escrow
Warrant to purchase 94,133 shares of common stock at $8.8527 per
share,
dated February 15, 2008, issued by us in favor of YA Global
Investments, L.P. (13)
|
|
|
|
5.1
|
|
Opinion
of Heller Ehrman LLP.
|
|
|
|
10.1
|
|
Securities
Purchase Agreement dated February 1, 2008 among us, Lehman Brothers
Commercial Corporation Asia Limited, and YA Global Investments,
L.P.
(14)
|
|
|
|
10.2
|
|
Escrow
Agreement dated February 15, 2008 among us, U.S. Bank National
Association, Lehman Brothers Commercial Corporation Asia Limited,
and YA
Global Investments, L.P. (15)
|
|
|
|
10.3
|
|
Registration
Rights Agreement dated February 15, 2008 among us, Lehman Brothers
Commercial Corporation Asia Limited, and YA Global Investments,
L.P.
(16)
|
|
|
|
12.1
|
|
Statement
regarding Computation of Ratio of Earnings to Fixed Charges.
(17)
|
|
|
|
23.1
|
|
Consent
of Independent Registered Public Accounting Firm.
(17)
|
23.2
|
|
Consent
of Heller Ehrman LLP (included in Exhibit 5.1).
|
|
|
|
24.1
|
|
Power
of Attorney (included on Signature
Page).
|
|
(1)
|
Incorporated
by reference to Exhibit 3(i) to the Registration Statement on Form
10-SB
filed by us with the Commission on August 27,
2001.
|
|
(2)
|
Incorporated
by reference to Exhibit 4.1.1 to the Registration Statement on Form
S-3
(file no. 333-133331) filed by us with the Commission on April 17,
2006.
|
|
(3)
|
Incorporated
by reference to Exhibit 3(ii) to the Registration Statement on Form
10-SB
filed by us with the Commission on August 27,
2001.
|
|
(4)
|
Incorporated
by reference to Exhibit 10.9 to the Annual Report on Form 10-K filed
by us
with the Commission on March 25, 2008.
|
|
(5)
|
Incorporated
by reference to Exhibit 10.10 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(6)
|
Incorporated
by reference to Exhibit 10.11 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(7)
|
Incorporated
by reference to Exhibit 10.12 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(8)
|
Incorporated
by reference to Exhibit 10.13 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(9)
|
Incorporated
by reference to Exhibit 10.14 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(10)
|
Incorporated
by reference to Exhibit 10.15 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(11)
|
Incorporated
by reference to Exhibit 10.16 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(12)
|
Incorporated
by reference to Exhibit 10.17 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(13)
|
Incorporated
by reference to Exhibit 10.18 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(14)
|
Incorporated
by reference to Exhibit 10.6 to the Annual Report on Form 10-K filed
by us
with the Commission on March 25,
2008.
|
|
(15)
|
Incorporated
by reference to Exhibit 10.7 to the Annual Report on Form 10-K filed
by us
with the Commission on March 25,
2008.
|
|
(16)
|
Incorporated
by reference to Exhibit 10.8 to the Annual Report on Form 10-K filed
by us
with the Commission on March 25,
2008.
|
Item
17. Undertakings
The
undersigned registrant hereby undertakes:
|
(1)
|
To
file, during any period in which offers or sales are being made pursuant
to this Registration Statement, a post-effective amendment to this
Registration Statement:
|
|
(i)
|
to
include any prospectus required by Section 10(a)(3) of the Securities
Act
of 1933;
|
|
(ii)
|
to
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent
a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease
in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant
to
Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the
effective registration; and
|
|
(iii)
|
to
include any material information with respect to the plan of distribution
not previously disclosed in this Registration Statement or any material
change to such information in this Registration
Statement;
|
provided,
however,
that
subparagraphs (i) and (ii) above do not apply if the information required to
be
included in a post-effective amendment by these subparagraphs is contained
in
periodic reports filed with or furnished to the Commission by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in this Registration Statement, or is
contained in a form of prospectus filed pursuant to Rule 424(b) that is part
of
the Registration Statement.
|
(2)
|
That,
for the purpose of determining any liability under the Securities
Act of
1933, each such post-effective amendment shall be deemed to be a
new
Registration Statement relating to the securities offered therein,
and the
offering of such securities at that time shall be deemed to be the
initial
bona
fide offering
thereof.
|
|
(3)
|
To
remove from registration by means of a post-effective amendment any
of the
securities being registered which remain unsold at the termination
of the
offering.
|
The
undersigned Registrant hereby undertakes that, for purposes of determining
any
liability under the Securities Act of 1933, each filing of the Registrant’s
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act
of 1934 (and, where applicable, each filing of an employee benefit plan’s annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that
is
incorporated by reference in the registration statement shall be deemed to
be a
new registration statement relating to the securities offered therein, and
the
offering of such securities at that time shall be deemed to be the initial
bona
fide offering thereof.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions described in Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Signatures
Pursuant
to the requirements of the Securities Act of 1933 the Registrant has duly
caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Hubei, People’s Republic of China, on this
12th day of August, 2008.
CHINA
AUTOMOTIVE SYSTEMS, INC.
|
|
|
By:
|
/s/
Hanlin Chen
|
|
Hanlin
Chen
|
|
Chairman
|
Power
of
Attorney
We,
the
undersigned directors and/or officers of China Automotive Systems, Inc. (the
“Registrant”), hereby severally constitute and appoint Hanlin Chen and Jie Li,
and each of them individually, with full powers of substitution and
resubstitution, our true and lawful attorneys, with full powers to them and
each
of them to sign for us, in our names and in the capacities indicated below,
the
Registration Statement on Form S-3 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement (including
post-effective amendments), and any registration statement filed pursuant to
Rule 462(b) under the Securities Act of 1933 in connection with the
registration under the Securities Act of 1933 of the Registrant’s equity
securities, and to file or cause to be filed the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as
each
of them might or could do in person, and hereby ratifying and confirming all
that said attorneys, and each of them, or their substitute or substitutes,
shall
do or cause to be done by virtue of this Power of Attorney.
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated below.
Signature
|
|
Title(s)
|
|
Date
|
|
|
|
|
|
/s/
Hanlin Chen
|
|
Chairman
of the Board of Directors
|
|
August
12, 2008
|
Hanlin
Chen
|
|
|
|
|
|
|
|
|
|
/s/
Qizhou Wu*
|
|
Chief
Executive Officer and Director
|
|
|
Qizhou
Wu
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
Jie Li
|
|
Chief
Financial Officer
|
|
|
Jie
Li
|
|
(Principal
Financial Officer)
|
|
|
|
|
|
|
|
/s/
Daming Hu*
|
|
Chief
Accounting Officer
|
|
|
Daming
Hu
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Robert Tung*
|
|
|
|
|
Robert
Tung
|
|
Director
|
|
|
|
|
|
|
|
/s/
Dr. Haimian Cai*
|
|
|
|
|
Dr.
Haimian Cai
|
|
Director
|
|
|
|
|
|
|
|
/s/
William E. Thomson*
|
|
|
|
|
William
E. Thomson
|
|
Director
|
|
|
|
|
|
|
|
*
Signed
on the person’s behalf by Hanlin Chen as his attorney-in-fact.
Exhibit
Index
Exhibit
|
|
Description
|
4.1
|
|
Certificate
of Incorporation of Visions-In-Glass, Inc., now known as China
Automotive
Systems, Inc. (1)
|
|
|
|
4.1.1
|
|
Certificate
of Amendment to Certificate of Incorporation, filed May 19, 2003.
(2)
|
|
|
|
4.2
|
|
Bylaws.
(3)
|
|
|
|
4.3
|
|
Senior
Convertible Note (“Closing Note”) dated February 15, 2008 in the
original principal amount of $8,571,429 issued by us in favor of
TFINN
& CO. as nominee for Lehman Brothers Commercial Corporation Asia
Limited. (4)
|
|
|
|
4.4
|
|
Senior
Convertible Note (“Henglong Note”) dated February 15, 2008 in the
original principal amount of $6,428,571 issued by us in favor of
TFINN
& CO. as nominee for Lehman Brothers Commercial Corporation Asia
Limited. (5)
|
|
|
|
4.5
|
|
Senior
Convertible Note (“Escrow Note”) dated February 15, 2008 in the
original principal amount of $15,000,000 issued by us in favor
of TFINN
& CO. as nominee for Lehman Brothers Commercial Corporation Asia
Limited. (6)
|
|
|
|
4.6
|
|
Closing
Warrant to purchase 564,799 shares of common stock at $8.8527 per
share,
dated February 15, 2008, issued by us in favor of TFINN & CO. as
nominee for Lehman Brothers Commercial Corporation Asia Limited.
(7)
|
|
|
|
4.7
|
|
Escrow
Warrant to purchase 564,799 shares of common stock at $8.8527 per
share,
dated February 15, 2008, issued by us in favor of TFINN & CO. as
nominee for Lehman Brothers Commercial Corporation Asia Limited.
(8)
|
|
|
|
4.8
|
|
Senior
Convertible Note (“Closing Note”) dated February 15, 2008 in the
original principal amount of $1,428,571 issued by us in favor of
YA Global
Investments, L.P. (9)
|
|
|
|
4.9
|
|
Senior
Convertible Note (“Henglong Note”) dated February 15, 2008 in the
original principal amount of $1,071,429 issued by us in favor of
YA Global
Investments, L.P. (10)
|
|
|
|
4.10
|
|
Senior
Convertible Note (“Escrow Note”) dated February 15, 2008 in the
original principal amount of $2,500,000 issued by us in favor of
YA Global
Investments, L.P. (11)
|
|
|
|
4.11
|
|
Closing
Warrant to purchase 94,133 shares of common stock at $8.8527 per
share,
dated February 15, 2008, issued by us in favor of YA Global
Investments, L.P. (12)
|
|
|
|
4.12
|
|
Escrow
Warrant to purchase 94,133 shares of common stock at $8.8527 per
share,
dated February 15, 2008, issued by us in favor of YA Global
Investments, L.P. (13)
|
|
|
|
5.1
|
|
Opinion
of Heller Ehrman LLP.
|
|
|
|
10.1
|
|
Securities
Purchase Agreement dated February 1, 2008 among us, Lehman Brothers
Commercial Corporation Asia Limited, and YA Global Investments,
L.P.
(14)
|
|
|
|
10.2
|
|
Escrow
Agreement dated February 15, 2008 among us, U.S. Bank National
Association, Lehman Brothers Commercial Corporation Asia Limited,
and YA
Global Investments, L.P. (15)
|
|
|
|
10.3
|
|
Registration
Rights Agreement dated February 15, 2008 among us, Lehman Brothers
Commercial Corporation Asia Limited, and YA Global Investments,
L.P.
(16)
|
|
|
|
12.1
|
|
Statement
regarding Computation of Ratio of Earnings to Fixed Charges.
(17)
|
|
|
|
23.1
|
|
Consent
of Independent Registered Public Accounting Firm.
(17)
|
23.2
|
|
Consent
of Heller Ehrman LLP (included in Exhibit 5.1).
|
|
|
|
24.1
|
|
Power
of Attorney (included on Signature
Page).
|
|
(1)
|
Incorporated
by reference to Exhibit 3(i) to the Registration Statement on Form
10-SB
filed by us with the Commission on August 27,
2001.
|
|
(2)
|
Incorporated
by reference to Exhibit 4.1.1 to the Registration Statement on Form
S-3
(file no. 333-133331) filed by us with the Commission on April 17,
2006.
|
|
(3)
|
Incorporated
by reference to Exhibit 3(ii) to the Registration Statement on Form
10-SB
filed by us with the Commission on August 27,
2001.
|
|
(4)
|
Incorporated
by reference to Exhibit 10.9 to the Annual Report on Form 10-K filed
by us
with the Commission on March 25, 2008.
|
|
(5)
|
Incorporated
by reference to Exhibit 10.10 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(6)
|
Incorporated
by reference to Exhibit 10.11 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(7)
|
Incorporated
by reference to Exhibit 10.12 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(8)
|
Incorporated
by reference to Exhibit 10.13 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(9)
|
Incorporated
by reference to Exhibit 10.14 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(10)
|
Incorporated
by reference to Exhibit 10.15 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(11)
|
Incorporated
by reference to Exhibit 10.16 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(12)
|
Incorporated
by reference to Exhibit 10.17 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(13)
|
Incorporated
by reference to Exhibit 10.18 to the Annual Report on Form 10-K filed
by
us with the Commission on March 25,
2008.
|
|
(14)
|
Incorporated
by reference to Exhibit 10.6 to the Annual Report on Form 10-K filed
by us
with the Commission on March 25,
2008.
|
|
(15)
|
Incorporated
by reference to Exhibit 10.7 to the Annual Report on Form 10-K filed
by us
with the Commission on March 25,
2008.
|
|
(16)
|
Incorporated
by reference to Exhibit 10.8 to the Annual Report on Form 10-K filed
by us
with the Commission on March 25,
2008.
|