As filed with the Securities and Exchange Commission on November 13, 2007
Registration No.
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ON
FORM S-4
ASCEND ACQUISITION CORP.
(Exact Name of Each Registrant as Specified in its Charter)
Delaware
6770
20-3881465
(State or other jurisdiction of
incorporation or organization)
(Primary standard industrial
classification code number)
(I.R.S. Employer
Identification Number)
435 Devon Park Drive, Bldg. 400,
Wayne, Pennsylvania 19087
(610) 519-1336
(Address,
including zip code, and telephone number, including area code, of each registrant’s principal executive offices)
Don K. Rice
Chairman
435
Devon Park Drive, Bldg. 400,
Wayne, Pennsylvania 19087
(610) 519-1336
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
David Alan Miller, Esq.
Graubard Miller
The Chrysler
Building
405 Lexington Avenue
New York, New York 10174
Telephone: (212) 818-8800
Fax: (212) 818-8881
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement
becomes effective and all other conditions to the merger contemplated by the merger agreement described in the included proxy statement/prospectus have been satisfied or waived.
If any of the securities being registered on this form are to be offered in connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box:
¨
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering.
¨
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering.
¨
CALCULATION OF
REGISTRATION FEE
Title of each Class of Security being registered
Amount being
Registered(1)(4)
Proposed Maximum
Offering Price Per
Security(2)
Proposed Maximum
Aggregate Offering
Price(2)
Amount of
Registration
Fee
Common stock
8,566,667 shares
$5.64
$48,316,002
$1,483
Common stock purchase warrants (“warrants”)(3)
14,133,334 warrants
$0.56
$7,914,667
$243
Common stock underlying the warrants(3)
14,133,334 shares
$5.00
$70,666,670
$2,169
Representative’s unit purchase option (“UPO”)
1
$100
$100.00
—(2)
Common stock issuable on exercise of the UPO(3)
300,000 shares
$7.50
$2,250,000
$69
Warrants issuable on exercise of the UPO(3)
600,000 warrants
—
—
—(2)
Common stock underlying the warrants included in the UPO(3)
600,000 shares
$5.00
$3,000,000
$92
Total
$132,147,439
$4,056
(1)
In connection with the redomestication merger described in the proxy statement/prospectus forming part of this registration statement, Ascend Acquisition Corp. (“Ascend”)
and Ascend’s wholly owned subsidiary, Ascend Company Limited (“ACL”), will merge for purposes of redomesticating Ascend’s jurisdiction of formation from Delaware to Bermuda. Under Bermuda law, Ascend and ACL will amalgamate, with
a single company resulting from the amalgamation (“Continuing Pubco”). The name of Continuing Pubco following the amalgamation will be “ePAK International Limited.” These securities represent the securities to be issued by
Continuing Pubco in exchange for the outstanding securities of Ascend Acquisition Corp. (“Ascend”).
(2)
Based on the market prices on November 6, 2007 of the common stock and warrants of Ascend Acquisition Corp. (the company to which ePAK International Limited will succeed after
the merger and resultant redomestication to Bermuda described in this registration statement and enclosed proxy statement) or the exercise price of such warrants for the purpose of calculating the registration fee pursuant to Rule 457(f)(1) and Rule
457(g)(1).
(3)
No fee pursuant to Rule 457(g).
(4)
There are also being registered such indeterminable additional securities as may be issued pursuant to Rule 416 to prevent dilution resulting from stock splits, stock dividends or
similar transactions under the provisions contained in the warrants.
The registrant hereby amends this registration statement
on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
Ascend Acquisition Corp.
435 Devon Park Drive, Building 400
Wayne, Pennsylvania 19087
(610) 519-1336
NOTICE OF SPECIAL
MEETING OF STOCKHOLDERS
TO BE HELD ON
, 2008
TO ALL STOCKHOLDERS OF ASCEND ACQUISITION CORP.:
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders of Ascend Acquisition Corp., a
Delaware corporation (“Ascend”), will be held at 10:00 a.m., Eastern time, on , 2008, at the offices of our
general counsel, Graubard Miller, located at The Chrysler Building, 405 Lexington Avenue, 19
th
Floor, New York, New York 10174.
The purpose of the special meeting will be to consider and vote upon proposals relating to Ascend’s reincorporation and redomestication to Bermuda
via a merger with a wholly owned subsidiary, Ascend Company Limited, a Bermuda exempted company (“ACL”), with the continuing company after the merger (“Continuing Pubco” or “ePAK International”) acquiring, concurrently
with the merger, all of the outstanding capital stock of e.PAK Resources (S) Pte. Ltd., a Singapore limited company (“ePAK”). ePAK is a leading full-service designer, manufacturer and supplier of precision engineered products and
solutions for the automated transport and handling of semiconductor and electronics devices.
Holders of Ascend’s outstanding common
stock and warrants will receive in exchange therefor, on a one-for-one basis, shares of common stock and warrants of Continuing Pubco. Continuing Pubco will be a reporting company under the Securities Exchange Act of 1934, as amended. Continuing
Pubco will apply to have its common stock and warrants listed on the Nasdaq Global Market or Nasdaq Capital Market concurrently with the closing of the merger and acquisition of ePAK.
At the meeting, you will be asked to consider and vote upon the following proposals:
1. To approve an agreement and plan of reorganization, dated as of July 30, 2007 (the “acquisition agreement”), among
Ascend, ACL, ePAK, and ePAK’s parent company and sole stockholder, ePAK Holdings Limited (“EHL”), and the transactions contemplated thereby, including the acquisition (the “acquisition”) of ePAK by Continuing Pubco. We refer
to this as the “acquisition proposal.”
2. To approve the merger (the “redomestication merger”) of
Ascend and ACL for the purposes of (a) moving the domicile of our public company from Delaware to Bermuda and (b) concurrently with the redomestication merger acquiring ePAK in the acquisition. We refer to this as the “redomestication
proposal.”
3. To approve the 2007 Equity Incentive Plan (“2007 incentive plan”) on behalf of Continuing
Pubco. We refer to this as the “2007 incentive plan proposal.”
Stockholders also would be asked to consider and vote upon a
proposal to adjourn the special meeting to a later date or dates to permit further solicitation and voting of proxies if, based upon the tabulated vote at the time of the special meeting, the vote necessary to approve the above proposals has not
been obtained. We refer to this as the “adjournment proposal.”
The board of directors has fixed the close of business on
, 200 (“record date”) as the date for which Ascend’s stockholders are entitled to receive
notice of, and to vote at, the special meeting. Only the
1
holders of record of Ascend common stock on that date are entitled to have their votes counted at the special meeting. Ascend will not transact any other
business at the special meeting, except for business properly brought before the special meeting.
We will not consummate the transactions
described in proposals 1, 2 and 3, above, unless all of those proposals are approved. Accordingly, the approval of each such proposal is a condition to the adoption of each other proposal. Approval of the acquisition proposal will require the
affirmative vote of the holders of a majority of the shares of Ascend common stock issued in its initial public offering (“Public Shares”), including holders who purchase Public Shares subsequent to the initial public offering
(“IPO”), and voted on the matter. Approval of the redomestication proposal will require the affirmative vote of the holders of a majority of the outstanding shares of Ascend common stock. Approval of the 2007 incentive plan proposal will
require the affirmative vote of holders of a majority of the shares of Ascend’s common stock present in person or by proxy at meeting.
Each holder of Public Shares has the right to vote against the acquisition proposal and at the same time demand that Ascend convert such stockholder’s Public Shares into cash equal to a pro rata portion of the funds held in the trust
account into which a substantial portion of the net proceeds of Ascend’s IPO was deposited. These Public Shares will be converted into cash only if the acquisition is consummated. However, if the holders of 20% or more of the Public Shares
(
i.e.,
1,380,000 shares or more) vote against the acquisition proposal and demand conversion of their Public Shares, then Ascend will not consummate the redomestication merger or the acquisition or adopt the 2007 incentive plan. Ascend’s
initial stockholders who purchased their shares of common stock prior to its IPO and presently own an aggregate of 1,666,667 shares of common stock, or approximately 19.5% of the outstanding shares of Ascend, have agreed to vote all of their shares
on the acquisition proposal as the majority of the Public Shares are voted, and have indicated that they intend to vote “for” the redomestication proposal and 2007 incentive plan proposal.
Enclosed is a proxy statement/prospectus containing detailed information concerning the acquisition agreement and the transactions contemplated thereby,
the redomestication merger and the 2007 incentive plan. Whether or not you plan to attend the special meeting, we urge you to read this material carefully.
Your vote is important. Whether or not you plan on attending the special meeting, please sign, date and return your proxy card as soon as possible to make sure that your shares are represented at the special
meeting.
If you are a stockholder of record of Ascend common stock as of the record date, you may also cast your vote in person at the special meeting. If your shares are held in an account at a brokerage firm or bank, you must instruct your
broker or bank on how to vote your shares. If you do not vote or do not instruct your broker or bank how to vote, it will have the same effect as voting against the acquisition and redomestication merger proposals. Only an affirmative vote against
the acquisition proposal will permit a stockholder to pursue its conversion rights. A non-vote is not sufficient to permit conversion rights to be exercised.
The board of directors of Ascend unanimously recommends that you vote
“
FOR
”
the approval of each of the acquisition proposal, the redomestication proposal and the 2007 incentive plan
proposal. A proxy card that is returned without an indication of how to vote on a particular matter will be voted “FOR” each such proposal.
Very truly yours,
Don K. Rice
Chairman of the Board
2
SEE THE SECTION ENTITLED “RISK FACTORS,” IMMEDIATELY FOLLOWING THE SECTION ENTITLED
“SUMMARY,” FOR A DISCUSSION OF VARIOUS FACTORS THAT YOU SHOULD CONSIDER IN CONNECTION WITH THE PROPOSALS AND THE TRANSACTIONS CONTEMPLATED THEREBY.
The information in this proxy statement/prospectus is not complete and may be changed. We may not issue these
securities until the registration statement filed with the Securities and Exchange Commissions is effective. This proxy statement/prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED NOVEMBER 13, 2007
PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS OF
ASCEND ACQUISITION CORP.
PROSPECTUS FOR UP TO 23,600,001 SHARES OF COMMON STOCK AND
14,733,334 WARRANTS OF ePAK INTERNATIONAL LIMITED
AND ONE PURCHASE OPTION
EXERCISABLE FOR 300,000 SHARES OF COMMON STOCK AND 600,000 WARRANTS OF ePAK INTERNATIONAL LIMITED
The board of directors of each of Ascend Acquisition Corp., a Delaware corporation (“Ascend”), and Ascend’s wholly owned subsidiary, Ascend
Company Limited, a Bermuda exempted company (“ACL”), has unanimously approved the merger of Ascend and ACL (“redomestication merger”), with the company continuing after the redomestication merger being a Bermuda exempted company
(“Continuing Pubco” or “ePAK International”). In the redomestication merger, Continuing Pubco will issue its common stock and warrants in exchange for the outstanding common stock and warrants of Ascend on a one-for-one basis.
This prospectus covers an aggregate of 23,600,001 shares of common stock, 14,733,334 warrants and one purchase option to be issued or issuable by Continuing Pubco as part of the exchange. The aforementioned shares to be issued include 8,566,667
shares issuable in exchange for all of the outstanding shares of common stock of Ascend, 14,133,334 shares that may be issued on exercise of warrants to be issued hereby, 300,000 shares that may be issued on exercise of the purchase option to be
issued hereby and 600,000 shares that may be issued on exercise of warrants that may be issued on exercise of the purchase option to be issued hereby. The warrants to be issued hereby include 14,133,334 warrants to be issued in exchange for a like
number of outstanding warrants of Ascend and 600,000 warrants that may be issued on exercise of the purchase option to be issued hereby. The purchase option will be issued in exchange for the outstanding underwriter’s unit purchase option that
was issued in connection with the May 2006 initial public offering by Ascend. The warrants and purchase option issued by Continuing Pubco hereby will have substantially identical terms to those of Ascend for which they are exchanged.
The board of directors of each of Ascend and ACL also has approved the acquisition (the “acquisition”) by Continuing Pubco, concurrently with
the consummation of the redomestication merger, of all of the outstanding capital stock of e.PAK Resources (S) Pte. Ltd., a Singapore limited company (“ePAK” or the “Company”), pursuant to an agreement and plan of
reorganization, dated July 30, 2007 (“acquisition agreement”), by and among Ascend, ACL, ePAK and ePAK’s sole shareholder, ePAK Holdings Limited, a Hong Kong limited company (“EHL”). The acquisition will result in ePAK
being a wholly owned subsidiary of Continuing Pubco.
Ascend’s units, common stock and warrants are currently listed on the
Over-the-Counter Bulletin Board under the symbols ASAQU, ASAQ and ASAQW, respectively. Ascend’s units will be separated into their component securities immediately prior to the redomestication merger and the units will cease to exist as a
separate security. Continuing Pubco will apply for listing, to be effective at the time of the redomestication merger and acquisition, of its common stock and warrants on the Nasdaq Global Market or Nasdaq Capital Market under the proposed symbols
and , respectively. Such listing is a condition of the consummation of the redomestication merger and
acquisition, although there can be no assurance such listing will be obtained. If such listing is not obtained, these transactions will not be consummated unless the Nasdaq listing condition set forth in the acquisition agreement is waived by EHL.
The board of directors of Ascend also is requesting that stockholders vote in favor of adopting Continuing Pubco’s 2007 Equity
Incentive Plan (the “2007 incentive plan”). Upon consummation of the redomestication merger and acquisition, the 2007 incentive plan will be utilized by Continuing Pubco with respect to the officers, directors and employees of and
consultants to Continuing Pubco and ePAK. The approval of the 2007 incentive plan requires the affirmative vote of a majority of the votes cast on the proposal at the Annual Meeting.
shares of Continuing Pubco’s common stock will be available pursuant to awards that may be granted under the 2007 incentive plan.
This proxy statement/prospectus provides you with detailed information about the redomestication merger and acquisition and other matters to be considered
at the special meeting of Ascend’s stockholders. We encourage you to carefully read this entire document and the documents incorporated by reference. You should also carefully consider the risk factors described in “
Risk
Factors
.”
These securities have not been approved or disapproved by the Securities and Exchange Commission or any state
securities commission nor has the Securities and Exchange Commission or any state securities commission passed upon the accuracy or adequacy of this proxy statement/prospectus. Any representation to the contrary is a criminal offense.
This proxy statement/prospectus is dated
, 200 , and is first being mailed to Ascend stockholders on or about
, 200 .
Restated Certificate of Incorporation and By-laws of Continuing Pubco*
Annex E
-
2007 Equity Incentive Plan*
Annex F
-
Form of Tax Opinion to be issued by Graubard Miller*
Annex G
-
Escrow Agreement
Annex H
-
Registration Rights Agreement
Annex I
-
Form of Employment Agreement between the Continuing Pubco and each of Steve Dezso, Mao Shi Khoo, Don K. Rice, Chok Chun Weng, James Thomas and Jeffrey Blaine
Annex J
-
Employment Agreement between the Continuing Pubco and Richard Brook
Annex P
-
Section 262 of the Delaware General Corporate Law (Appraisal Rights)*
Note: Under the law of Bermuda, Continuing Pubco (ePAK International Limited) will be authorized to
issue “ordinary shares” and holders of such ordinary shares are typically referred to as “members.” Ordinary shares are the equivalent of the common stock issued by U.S. companies and members are the equivalent of stockholders of
U.S. companies. Under the law of Bermuda, an “amalgamation” is substantially similar to a “merger” under laws of the states of the U.S. A company is formed under the law of Bermuda utilizing a certificate of incorporation, which
is the functional equivalent of a U.S. company’s certificate of incorporation. In this proxy statement/prospectus, the terms “ordinary shares,” “members,” “amalgamation” and “certificate of incorporation”
have been referenced herein as “common stock,” “stockholders,” “merger” and “certificate of incorporation,” respectively, which are terms more familiar to U.S. persons, which Ascend believes are the majority
of its stockholders.
This proxy statement/prospectus incorporates important business and financial information about Ascend and
ePAK and its subsidiaries that is not included in or delivered with the document. This information is available without charge to security holders upon written or oral request. To make this request, or if you would like additional copies of this
proxy statement/prospectus or have questions about the acquisition, you should contact:
Mr. Don K. Rice
Ascend Acquisition Corp.
435 Devon
Park Drive
Building 400
Wayne, Pennsylvania 19087
(610) 519 1336
To obtain timely delivery of requested materials, security holders must request the information no later than five business days before the date they
submit their proxies or attend the special meeting. The latest date to request the information to be received timely is ,
200 .
3
SUMMARY
This summary highlights selected information from this proxy statement/prospectus and does not contain
all of the information that is important to you. To better understand the acquisition and the redomestication merger, you should read this entire document carefully, including the acquisition agreement attached as
Annex A
. The acquisition
agreement is the legal document that governs the acquisition and the acquisition agreement, the articles of merger and Continuing Pubco’s restated certificate of incorporation and by-laws are the legal documents governing the redomestication
merger and the corporation surviving the redomestication merger. These documents are described elsewhere in this proxy statement/prospectus and attached as annexes hereto.
The Parties
•
The parties to the acquisition agreement are Ascend Acquisition Corp. (“Ascend”), Ascend’s wholly owned subsidiary, Ascend Company Limited
(“ACL”), e.PAK Resources (S) Pte. Ltd. (“ePAK” or “the Company”), and ePAK’s sole shareholder, ePAK Holdings Limited (“EHL”). Its principal offices are located at 121 Genting Lane, #04-00, Singapore
349572 and its phone number is 011-(65)-6846-9908.
•
Ascend is a blank check company formed to serve as a vehicle for the acquisition of an operating business. Ascend was incorporated in Delaware on December 5,
2005 and consummated its initial public offering (“IPO) on May 17, 2006. Its principal offices are located at 435 Devon Park Drive, Building 400, Wayne, Pennsylvania 19087 and its phone number is (610) 519-1336. See the section
entitled “
Other Information Related to Ascend.
”
•
ePAK is a leading full-service designer, manufacturer and supplier of precision engineered products and solutions for the automated transport and handling of
semiconductor and electronics devices. The Company and its subsidiaries operate a large scale design and manufacturing facility in Shenzhen, Peoples Republic of China (the “PRC”), with additional sales, design and applications engineering
operations located in a number of offices servicing North America, Europe and Asia. ePAK’s precision manufactured handling solutions provide the Company’s customers with the automated means of manufacturing, handling, and transporting
their critical semiconductor and electronic devices with a high degree of reliability and efficiency. See the section entitled “
Business of ePAK.
”
Transactions
•
Under the terms of the acquisition agreement, among other things:
•
Ascend and ACL will be combined in the redomestication merger, with the continuing entity, Continuing Pubco, existing as an exempted company under the law of
Bermuda;
•
each outstanding share of Ascend’s common stock will be exchanged for one share of Continuing Pubco’s common stock;
•
each outstanding warrant to purchase a share of Ascend’s common stock will be exchanged for a warrant to purchase one share of Continuing Pubco’s common
stock, with each new warrant having substantially the same terms as the Ascend warrant for which it is exchanged;
•
concurrently with the redomestication merger, Continuing Pubco will acquire all of ePAK’s outstanding capital stock from EHL in the acquisition;
•
all of the outstanding options to purchase common stock of EHL will be assumed by Continuing Pubco and such options (“Assumed Options”) shall entitle the
holders thereof to purchase common stock of Continuing Pubco;
•
all of the current security holders of Ascend, together with EHL and holders of the EHL Options, will become the initial security holders of Continuing Pubco;
4
•
Continuing Pubco will be a publicly reporting company, registered under the United States federal securities laws;
•
Continuing Pubco’s common stock and the warrants will be traded on the Nasdaq Capital Market or Nasdaq Global Market;
•
ePAK will continue its operations as a wholly owned subsidiary of Continuing Pubco;
•
Continuing Pubco will change its name to “ePAK International Limited;” and
•
EHL will liquidate within 12 months after the acquisition and distribute the common stock of Continuing Pubco in pursuance of a plan of reorganization with respect
to EHL.
•
The board of directors of each of Ascend and ACL, and the board of directors of each of ePAK and EHL, have approved the acquisition agreement and the transactions
contemplated thereby in accordance with the applicable company laws of their respective jurisdictions of formation.
Acquisition
Consideration
•
In consideration of the acquisition, EHL will receive, at closing, the aggregate number of shares of Continuing Pubco’s common stock (the “Transaction
Shares”) determined by a formula set forth in the acquisition agreement that effectively allocates to EHL a post-issuance ownership of the outstanding common stock of Continuing Pubco based on a comparison of (1) 5.72 times ePAK’s
twelve month trailing EBITDA at June 30, 2007, as adjusted for various expenses and liabilities of ePAK (“Subject Adjusted EBITDA,”), plus the aggregate exercise price of the Assumed Options and (2) the value of Ascend’s
trust at closing as adjusted for various liabilities of Ascend (“Adjusted Ascend Trust Value”), less the number of ordinary shares issuable upon the exercise of the Assumed Options. Notwithstanding the foregoing, the number of shares
issued to EHL, excluding those underlying the Assumed Options, will not be less than 50.1% of the outstanding shares of Continuing Pubco immediately following the acquisition. The acquisition agreement provides for a grace range on Subject Adjusted
EBITDA, such that if it is within 5% of $6,675,000, it will be deemed to be $6,675,000 for purposes of calculating the number of Transaction Shares to be issued. Similarly, the acquisition agreement provides for a grace range on Adjusted Ascend
Trust Value, such that if it is within 5% of $38,200,000, it will be deemed to be $38,200,000 for purposes of calculating the number of Transaction Shares to be issued. The minimum and maximum percentage ownership by EHL in the outstanding common
stock of Continuing Pubco immediately following the closing is effectively limited under the terms of the acquisition agreement to a low of 50.1% and a high of 54.5%. See the section entitled “
The Acquisition Agreement—Acquisition
Consideration.
”
•
As of the date hereof, based on (a) information and projections currently available to the parties, including Subject Adjusted EBITDA of $6.7 million
(resulting in a 5.72 multiple result of $38.3 million) and estimated Adjusted Ascend Trust Value of $38.2 million, and (b) 8,566,666 shares of Ascend common stock currently outstanding, the aggregate number of Transaction Shares that will be
issued at closing to EHL, excluding those underlying the Assumed Options, will be 8,601,002 shares, or 50.1% of the outstanding common stock of Continuing Pubco immediately following the closing. The foregoing figures give no effect to any
additional shares that may be issued to EHL post-closing, as described below, and assume none of Ascend’s currently outstanding common stock is converted into cash as permitted by Ascend’s certificate of incorporation.
•
As additional consideration, EHL also will be entitled to receive the following after closing:
•
up to an aggregate of 442,625 additional shares of Continuing Pubco’s common stock if the market price of Continuing Pubco’s common stock exceed certain
levels ranging from $6.00 to $8.00 during the period from the closing of the acquisition until the 180th day thereafter;
5
•
an aggregate of 442,625 additional shares of Continuing Pubco’s common stock upon redemption of Continuing Pubco’s publicly traded warrants; and
•
up to three tranches of 88,525 additional shares of Continuing Pubco’s common stock if Continuing Pubco generates consolidated annual EBITDA (as defined in the
acquisition agreement) for the years ending December 31, 2008, 2009 and/or 2010 in excess of $14,727,000, $24,268,000 and $37,935,000, respectively, for a total additional issuance of up to 265,575 shares.
See the section entitled “
The Acquisition Agreement—Acquisition Consideration.
”
Indemnification
•
The acquisition agreement provides for the obligation of Continuing Pubco to indemnify EHL and its officers, directors and shareholders for breaches of
representations and warranties made and covenants undertaken by Ascend and ACL in the acquisition agreement. The payment of any indemnity obligations of Continuing Pubco shall be satisfied by the issuance by Continuing Pubco to EHL of additional
shares of common stock as determined in accordance with the acquisition agreement.
•
The acquisition agreement also provides the obligation of EHL (and any other recipient of Continuing Pubco shares issued in the acquisition) to indemnify Continuing
Pubco for breaches of representations and warranties made and covenants undertaken by ePAK and EHL in the acquisition agreement.
As the sole remedy for this indemnity obligation, Continuing
Pubco will have recourse against EHL and any recipients of Continuing Pubco shares issued in the acquisition solely during the period beginning on the closing date and ending on the one year anniversary thereof, and for such further period as may be
required pursuant to an indemnification agreement to be executed at closing. The aggregate amount of this indemnity obligation will be limited solely to the fair market value, as of the time an indemnity claim
is established, of the number of
shares of Continuing Pubco common stock equal to (X) 15% of the sum of the Transaction Shares plus the number of shares issuable upon exercise of the Assumed Options, minus (Y) the sum of the quotients obtained by dividing the dollar amount of each
previous indemnity claim by the fair market value, as of the time such previous indemnity claim
was established, of one share of Continuing Pubco common stock. EHL and any recipients of Continuing Pubco shares issued in the acquisition may
pay any indemnity claim in cash, or in its sole discretion, shares of Continuing Pubco common stock valued at a per share price equal to the fair market value thereof as determined in acquisition agreement.
Lock-ups and Registration Rights
•
The recipients of Continuing Pubco’s common stock in the acquisition and Ascend’s founding stockholders have agreed not to sell any of these shares until
after the six-month anniversary of the closing date.
•
Following the closing, the recipients of the common stock in the acquisition will have the right to demand on two occasions that Continuing Pubco cause a
registration statement to be filed and declared effective under the Securities Act of 1933 as well as certain piggyback registration rights.
See the section entitled “
The Acquisition Agreement—Lock-up and Registration Rights Agreement
s.”
6
Post-Transaction Management
•
The current executive officers of ePAK will continue in their positions with ePAK after the acquisition and also assume equivalent offices with Continuing Pubco.
Steve Dezso, ePAK’s current president and chief executive officer, also will become the president and chief executive officer of Continuing Pubco upon consummation of the acquisition. Don K. Rice, Ascend’s current chairman of the board,
will become chairman of the board of Continuing Pubco upon consummation of the acquisition. See the section entitled “
Directors and Executive Officers of Continuing Pubco Following the Acquisition—Employment Agreements
.”
•
Upon consummation of the acquisition, the board of directors of Continuing Pubco will be comprised of five members. The board will include three persons designated
by EHL, such designees initially being Mr. Dezso, Hock Voon Loo and Steve San Filippo, and two persons designated by certain stockholders of Ascend (“Founding Ascend Holders”), such designees initially being Mr. Rice and Warren
“Budd” Florkiewicz. The majority of the board shall be “independent directors” within the meaning of the Nasdaq rules. See the voting agreement attached to this proxy statement/prospectus as
Annex B
and the section hereof
entitled “
The Acquisition Agreement—Election of Directors; Voting Agreement
.”
U.S. Federal Income Tax
Consequences
Ascend expects that the redomestication merger will qualify as a reorganization for United States federal income tax
purposes, but there can be no assurances that this will be the case. If (i) not more than 50% of the outstanding shares of Continuing Pubco are issued in connection with the transactions to the Ascend stockholders that are U.S. persons
(treating any shares owned by a partnership or other entity or arrangement taxed as a partnership for U.S. federal income tax purposes as owned proportionately by its partners) and (ii) the fair market value of ePAK equals or exceeds the fair
market value of Ascend at the time of the transactions, gain or loss generally will not be recognized on the exchange of the securities of Ascend for the securities of Continuing Pubco by any holder of Ascend common stock that owns less than 5% of
the common stock of Continuing Pubco following the redomestication merger. If an Ascend stockholder owns 5% or more of the common stock of Continuing Pubco after the redomestication merger, that stockholder would be subject to tax on the difference
between the fair market value of the Continuing Pubco common stock and the tax basis of the Ascend common stock for which it is exchanged, unless such Ascend stockholder files a gain recognition agreement with the stockholder’s income tax
return. If (i) more than 50% of the outstanding shares of Continuing Pubco are issued in connection with the transactions to the Ascend stockholders that are U.S. persons (treating any shares owned by a partnership or other entity or
arrangement taxed as a partnership for U.S. federal income tax purposes as owned proportionately by its partners) or (ii) the fair market value of ePak is less than the fair market value of Ascend at the time of the transactions, an Ascend
stockholder, regardless of the percentage of common stock owned, will recognize gain for U.S. federal income tax purposes equal to the difference between the fair market value of the Continuing Pubco common stock and the tax basis of the Ascend
common stock for which it is exchanged.
The percentage of Continuing Pubco common stock that will be issued to the Ascend stockholders in
the transactions will not be greater than 49.9% of the outstanding shares of Continuing Pubco common stock, including as outstanding certain shares that EHL or the other recipients of Transaction Shares may elect to return to Continuing Pubco to
satisfy indemnity claims, if any. Ascend believes that the fair market value of ePAK equals or exceeds the fair market value of Ascend. However, the determination of the relative fair market values of ePAK and Ascend is inherently factual and cannot
be made with precision. If the Internal Revenue Service were to successfully challenge either the percentage ownership of the Ascend stockholders or the relative fair market values of ePAK and Ascend, Ascend stockholders would recognize gain upon
the redomestication merger Stockholders of Ascend are strongly encouraged to consult their own tax advisors regarding the tax consequences to them of the transactions described herein.
7
Ascend also believes that Continuing Pubco will not recognize any material
gain or loss as a result of the acquisition or redomestication merger. An evaluation will be made to establish whether Ascend or ACL has any intangible assets which would be deemed transferred in the redomestication merger. If there are any such
intangible assets, it is not expected that they will be of a substantial amount and any U.S. federal income tax will not be of material significance. The Internal Revenue Service may not agree with this conclusion, in which event there may be a
significant tax obligation for Continuing Pubco to pay based on the value of its assets at the time of the redomestication merger.
See the
section entitled “
The Acquisition Proposal—Material Federal Income Tax Consequences of the Acquisition.
”
Accounting Treatment
The acquisition will be accounted for as a “reverse merger” and recapitalization at the date of the consummation of the
transaction since the stockholders of ePAK will own at least 50.1% of the outstanding shares of the common stock immediately following the completion of the acquisition, will have its current officers assuming all almost all corporate and day-to-day
management offices of Continuing Pubco other than chairman of the board, including chief executive officer, chief operating officer and chief financial officer and will have the sole right to appoint three of the five directors to the board.
Accordingly, ePAK will be deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of ePAK. Accordingly, the assets and liabilities and the historical operations that will be
reflected in the Ascend financial statements after consummation of the acquisition will be those of ePAK and will be recorded at the historical cost basis of ePAK. Ascend’s assets, liabilities and results of operations will be consolidated with
the assets, liabilities and results of operations of EPAK upon consummation of the acquisition.
Regulatory Matters
The redomestication merger and acquisition and the transactions contemplated by the acquisition agreement are not subject to any federal or state
regulatory requirement or approval, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”), except for filings necessary to effectuate the transactions contemplated by these transactions and the acquisition
agreement with the State of Delaware, Singapore, Bermuda and the Peoples Republic of China.
Fairness Opinion
In connection with the acquisition, Ascend’s board of directors received an opinion from Capitalink LC, as to (i) the fairness to the holders of
Ascend common stock from a financial point of view and as of the date of the opinion of the consideration to be paid by Ascend pursuant to the acquisition agreement, and (ii) whether the fair market value of ePAK as of the date of the opinion
was at least equal to 80% of Ascend’s net assets. The full text of the opinion is attached to this proxy statement as
Annex C
.
Reasons for
the Acquisition
Ascend believes that ePAK is positioned for continued growth in its markets and believes that a business combination
with ePAK will provide our stockholders with an opportunity to participate in an enterprise with significant growth potential.
ePAK’s
revenues were approximately $36.1 million for the year ended December 31, 2006, an increase of 33.7% as compared to approximately $27.0 million for the year ended December 31, 2005. ePAK’s unaudited revenues for the first six months
of 2007 were approximately $20.4 million, an increase of 22.2% as compared to unaudited revenues of approximately $16.7 million for the first six months of 2006. Net income for the year
8
ended December 31, 2006 was approximately $2.2 million, compared to approximately $0.1 million for the year ended December 31, 2005. Unaudited net
income for the first six months of 2007 was approximately $1.2 million, compared to unaudited net income for the first six months of 2006 of approximately $1.1 million.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) was approximately $5.2 million in the year ended December 31,
2006, an increase of 93% as compared to EBITDA of approximately $2.7 million in the year ended December 31, 2005. EBITDA for the first six months of 2007 was approximately $3.0 million, an increase of 25% as compared to EBITDA of
approximately $2.4 million for the first six months of 2006.
Reasons for the Redomestication Merger
Ascend is proposing to merge with its wholly owned subsidiary, ACL, which was formed under the laws of Bermuda specifically for the purpose of affecting
the redomestication merger and has no commercial operations. The purpose of the redomestication merger is to align the post-transaction companies’ income tax liabilities with the location of their business activities, thereby reducing the
overall impact of corporate income tax and tax on dividends paid by one company to another within the holding company structure of Continuing Pubco. Because ePAK’s business operations are principally outside of the United States, the
redomestication merger is intended to reduce the future income tax liability and tax on internal holding company dividend income under the United States tax law that might be assessed on Continuing Pubco if it had been incorporated in the United
States and to permit greater flexibility in structuring acquisitions or creating subsidiaries in China and other countries as the business of ePAK expands. By reincorporating in Bermuda, it is believed that Continuing Pubco will be taxed by the
jurisdictions in which its business and assets are located and undertaken, and will not be subject to additional income taxes merely by virtue of the location of its original place of incorporation.
Reasons for the 2007 Incentive Plan
Ascend is
proposing the 2007 Equity Incentive Plan (“2007 incentive plan”) to enable the company to attract, retain and reward Continuing Pubco’s and ePAK’s directors, officers, employees and consultants using equity-based incentives.
Recommendation of Ascend’s Board of Directors
Ascend’s board of directors:
•
has unanimously determined that each of the acquisition proposal, redomestication merger proposal and 2007 incentive plan proposal is fair to the stockholders of
Ascend and in the best interests of Ascend and its stockholders;
•
unanimously recommends that Ascend’s common stockholders vote “FOR” the acquisition proposal;
•
unanimously recommends that Ascend’s common stockholders vote “FOR” the redomestication proposal;
•
unanimously recommends that Ascend’s common stockholders vote “FOR” the 2007 incentive plan proposal; and
•
unanimously recommends that Ascend’s common stockholders vote “FOR” the adjournment proposal, if same is presented at the special meeting.
9
Ownership of Ascend Directors and Officers and Affiliates
Ascend’s initial stockholders who purchased their shares of common stock prior to Ascend’s initial public offering (“IPO”), and which
include all of Ascend’s directors and executive officers and their affiliates are referred to collectively in this proxy statement/prospectus as the “Ascend Inside Stockholders.” Each of the Ascend Inside Stockholders has agreed to
vote all of their shares on the acquisition proposal in accordance with the vote of the majority of the votes cast by the holders of shares issued in the IPO (“Public Shares”). Accordingly, their vote will have no effect on the outcome of
the acquisition proposal. The Ascend Inside Stockholders also have indicated that they intend to vote such shares in favor of all other proposals being presented at the special meeting. As of the record date, the Ascend Inside Stockholders own an
aggregate of 1,666,667 shares, or 19.5%, of Ascend’s outstanding common stock.
Appraisal Rights
Under Delaware corporate law, the redomestication merger of Ascend and ACL causes the stockholders of Ascend to have appraisal rights in connection
with the transactions for which approval is sought. This right is separate from the conversion rights of the holders of Public Shares with respect to the acquisition proposal. However, because the exercise of the appraisal right and the conversion
rights both require a tender by the holder of his or its Public Shares to Ascend, either appraisal rights or conversion rights, but not both, may be elected in respect of the Public Shares. See
“Redomestication Proposal—Appraisal
Rights”
for more information about appraisal rights.
Risk Factors
In analyzing the proposed acquisition, Ascend considered the risk factors identified in the section entitled “
Risk Factors.
” You should
carefully read these risks in connection with your analysis of the acquisition and the redomestication merger.
10
RISK FACTORS
You should carefully consider the following risk factors, together with all of the other
information included in this proxy statement/prospectus, before you decide whether to vote or instruct your vote to be cast to adopt the proposals.
Risks Related to ePAK’s Business and Operations Following the Acquisition
Following the acquisition and
redomestication merger, ePAK will be a wholly owned subsidiary of Continuing Pubco and our combined companies will face all the risks historically faced by ePAK in its operations, including the risks described below. The value of your investment in
Continuing Pubco will be subject to the significant risks inherent in ePAK’s operations, as well as risks that may arise in connection with the integration of the companies.
Attracting, retaining, and training skilled staff is critical to maintain ePAK’s operations and crucial to its continued growth.
ePAK’s success depends upon the skill and business execution of its employees and its ability to continue to attract, retain, and train qualified
personnel. Competition for staff with the particular skill sets that the Company requires is intense. ePAK also makes sizeable investments in the initial training of individuals over an extended period of time. There are no assurances that these
investments in staff will materialize into positive contributions to the Company. Failure to attract, retain, and train qualified personnel in the future could inhibit ePAK’s ability to operate and grow the Company successfully.
ePAK depends on the highly cyclical health of the semiconductor, electronic component, and electronic systems industries. A decline in production of
products in these industry segments could severely affect the Company’s sales and financial results.
ePAK’s business depends
on purchases from semiconductor manufacturers, electronic component manufacturers, and electronic end system manufacturers, which, in turn, depend on anticipated demand for semiconductors, electronic components, and electronic systems. Demand in
these industries for the types of products made by the Company has historically been highly cyclical and characterized by alternating periods of excess and insufficient inventory levels spanning multiple product segments. These inventory levels are
ultimately adjusted by modulating production levels of semiconductors, electronic components, and electronic systems. The resulting varying production levels among customers alters demand by customers for the products the Company supplies. ePAK
expects the semiconductor, electronic component, and electronic systems industries to continue to be cyclical. A severe downturn in the semiconductor, electronic component, or electronic systems industries, which is likely, given past history, could
cause the Company’s operating results to decline significantly from one period to the next.
Given the large fixed cost component
required to maintain manufacturing operations, decreases in manufacturing activity, in addition to adversely impacting sales, can serve to reduce gross margins due to greater fixed cost absorption in fewer units of production. ePAK believes that
period-to-period comparisons of its results of operations may not be meaningful in a cyclical underlying market environment and may not be indicators of future performance.
It is difficult to forecast near term demand for ePAK’s products.
ePAK operates its business, manages its production activity, and plans its inventory levels by considering a number of factors that include:
•
firm near term purchase orders from customers;
•
blanket customer purchase orders;
11
•
non-binding customer forecasts;
•
industry analysis; and
•
equipment, process and mold capacities.
Due to the variability in these factors, coupled with the fact that binding order backlogs are almost non-existent within the business segments that the Company operates, ePAK has failed to accurately forecast demand for its products in the
past, and this will likely occur again in the future. This may lead to delays in product shipments, increased risk of excess inventory, disappointment of customer expectations, inventory write-offs, or delayed capacity expansions resulting in loss
of market share. If ePAK fails to accurately forecast demand for its products, business, financial performance, and financial position may suffer.
If ePAK is unable to maintain service, delivery, and product performance expertise, it may be unable to successfully compete.
Service, delivery, and product performance requirements within the semiconductor and electronics industries are subject to rapid change resulting in a varying set of customer requirements and expectations. Because of this, it is important
for the Company to quickly adapt to varying market requirements. There are also certain combinations of requirements that ePAK may be unable, or slow, to adapt to. The Company believes that its future success will depend upon its ability to alter
its service, delivery, and product offerings to meet the changing needs of its customers. This requires that the Company successfully anticipate and respond to changes in a timely manner. Any inability to respond to changes in customer requirements
in a timely manner can adversely impact ePAK’s position and reputation in the markets it serves, cause its customers to seek out other suppliers, and reduce its market share.
Competitors could cause ePAK to experience downward pressure on prices, reduced order activity, or loss of market share.
The Company serves highly competitive markets. ePAK competes against many companies that have substantially greater manufacturing, research and
development, marketing and financial resources than it does. Some of ePAK’s competitors may have more developed relationships with the Company’s existing customers than the Company does and may have established relationships with
ePAK’s potential customers. This may inhibit ePAK’s ability to expand its sales to those existing customers or gain new customers. If the Company is unable to maintain its competitive position, it could experience downward pressure on
prices, diminished customer orders, reduced margins, the inability to take advantage of new business opportunities, and a loss of market share. The Company also may have to compete in the future with a number of companies that may enter the market
and with companies that may offer new or emerging technology that competes with its products.
ePAK incurs significant cash outlays over
long-term periods in order to research, develop, manufacture and market new products, which may never reach market or may have limited market acceptance.
ePAK makes significant cash expenditures to research, develop and market new product lines. For example, in calendar year 2006 the Company incurred $0.18 million of research and development expense. Similarly, the
Company incurred $0.16 million of research and development expense in calendar 2005 and $0.10 million in calendar 2004. The development period for a product line can be as long as 2 years. Following development, it may take an additional 2 to 3
years for the sales of that product line to reach a substantial level. ePAK cannot be certain of the success of a new product line. A product concept may never progress beyond the development stage or may only achieve limited acceptance in the
marketplace. If this occurs, the Company does not receive a direct return on its expenditures and may not even realize any indirect benefits. Additionally, capacity expansion may be necessary in order to manufacture a new product line. If sales
levels do not increase to offset the additional fixed operating expenses associated with any such expansion, ePAK’s revenue and profitability could decline and its prospects could be harmed.
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ePAK operates in a capital intensive industry.
ePAK assesses its liquidity based on its current expectations regarding sales, operating expenses, capital spending and debt service requirements. Based
on this assessment, we believe that, upon the completion of the acquisition, Continuing Pubco’s cash flow from operating activities, together with existing cash and cash equivalents and availability under its credit facilities, will be
sufficient to fund its working capital, capital expenditure and debt service requirements during the 12-month period following the acquisition. Thereafter, its liquidity will continue to be affected by, among other things, the performance of its
business, its capital expenditure levels and its ability to repay debt out of its operating cash flow or refinance the debt with the proceeds of debt or equity offerings at or prior to maturity. If ePAK’s performance or access to the capital
markets differs materially from Continuing Pubco’s expectations, its liquidity may be adversely impacted.
If the Company fails to
generate the necessary net income or operating cash flows to meet the funding needs of its business beyond the 12-month period following the acquisition due to a variety of factors, including the cyclical nature of the semiconductor industry and the
other factors discussed in this “Risk Factors” section, its liquidity would be adversely affected. In these circumstances, Continuing Pubco would consider taking a variety of actions, including: attempting to reduce ePAK’s high fixed
costs (for example, closing facilities and reducing the size of its work force), curtailing or reducing planned capital additions, raising additional equity, borrowing additional funds, refinancing existing indebtedness or taking other actions.
There can be no assurance, however, that ePAK will be able to successfully take any of these actions, including adjusting its expenses sufficiently or in a timely manner, or raising additional equity, increasing borrowings or completing refinancings
on any terms or on terms that are acceptable to the Company. ePAK’s inability to take these actions as and when necessary would materially adversely affect its liquidity, results of operations and financial condition.
ePAK believes it needs to make substantial capital additions, which may adversely affect its business if the business does not develop as the Company
expects.
ePAK believes that its business requires it to make significant capital additions in order to capitalize on what the Company
believes are growth opportunities. The amount of capital additions will depend on several factors, including the performance of ePAK’s business, its assessment of future industry and customer demand, its capacity utilization levels and
availability, its liquidity position and the availability of financing. ePAK’s ongoing capital addition requirements may strain its cash and short-term asset balances, and the Company expects that depreciation expense will put downward pressure
on its gross margin, at least over the near term.
Furthermore, if the Company cannot generate or borrow additional funds to pay for
capital additions as well as research and development activities, its growth prospects and future profitability may be adversely affected. ePAK’s ability to obtain external financing in the future is subject to a variety of uncertainties,
including its future financial condition, results of operations and cash flows, general market conditions for financing activities by semiconductor companies, and economic, political and other global conditions.
The lead time needed to order, install and put into service various capital additions is often significant, and as a result, the Company often needs to
commit to capital additions in advance of its receipt of firm orders or advance deposits based on its view of anticipated future demand with only very limited visibility. Although the Company seeks to limit its exposure in this regard, in the past,
ePAK has from time to time expended significant capital for additions for which the anticipated demand did not materialize for a variety of reasons, many of which were outside of its control. To the extent this occurs in the future, ePAK’s
margins, liquidity, results of operations and financial condition could be materially adversely affected.
ePAK may acquire other
businesses, form joint ventures or divest businesses that could negatively affect its profitability, increase its debt and dilute your ownership of the company.
As part of its business strategy, ePAK may address gaps in its product offerings, diversify into complementary product markets or pursue additional technology and customers through acquisitions, joint ventures or
other types of collaborations. ePAK expects to adjust its portfolio of businesses to meet its ongoing
13
strategic objectives. As a result, ePAK may enter markets in which its has no or limited prior experience and may encounter difficulties in divesting
businesses that no longer meet its objectives. Competition for acquiring attractive businesses in ePAK’s industry is substantial. In executing this part of its business strategy, ePAK may experience difficulty in identifying suitable
acquisition candidates or in completing selected transactions at appropriate valuations. Alternatively, ePAK may be required to undertake multiple transactions at the same time in order to take advantage of acquisition opportunities that do arise;
this could strain ePAK management’s ability to effectively execute and integrate these transactions. ePAK intends to pay for these acquisitions with cash and/or our common stock which could impair its liquidity and dilute shareholder ownership
of the company. Further, ePAK may not be able to successfully integrate any acquisitions that it does make into existing business operations and could assume unknown or contingent liabilities or experience negative effects on its results of
operations from dilutive results from operations and/or from future potential impairment of acquired assets including goodwill related to future acquisitions. ePAK may experience difficulties in operating in foreign countries or over significant
geographical distances and in retaining key employees or customers of an acquired business, and its management’s attention could be diverted from other business issues. ePAK may not identify or complete these transactions in a timely manner, on
a cost effective basis or at all, and it may not realize the benefits of any acquisition or joint venture.
EHL has an obligation at the
option of its shareholders to redeem its preferred stock if EHL’s shares are not listed on a public stock exchange on or before December 31, 2007. EHL is in the process of seeking the approval of its shareholders to amend its applicable charter
documents to remove this redemption obligation. However, if such approval is not obtained and if the acquisition is not consummated, EHL may not have sufficient cash reserves to satisfy the redemption obligation. These conditions raise substantial
doubt about ePAK’s ability, as a subsidiary of EHL, to continue as a going concern until the completion of the acquisition.
Any
impairment charges required under U.S. GAAP may have a material adverse effect on ePAK’s net income.
Under U.S. generally accepted
accounting principles, or U.S. GAAP, ePAK is required to review its long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. The Company may be required in the future to record a
significant charge to earnings in its financial statements during the period in which any impairment of its long-lived assets is determined. Such charges may have a significant adverse impact on ePAK’s results of operations and financial
condition.
Manufacturing Risks
ePAK’s dependence on a single or limited number of suppliers for certain raw materials could affect its ability to manufacture its products.
ePAK relies on single or limited source suppliers for certain raw materials critical to the manufacture of its products. At times, the Company has experienced a limited supply of certain raw materials critical to the
manufacture of certain products resulting in production delays or increased costs. Increased global demand for certain raw materials can result in increased costs or uncertainty with regards to availability, which could interrupt ePAK’s
manufacturing operations. Any of these situations can adversely impact the Company’s sales, margins, profitability, and its ability to attract and retain customers. In certain situations, ePAK may from time to time increase its raw materials
purchases or enter into longer term binding commitments in an effort to ensure supply or for price protection. These activities can adversely impact the Company’s financial position or subsequent financial performance.
Prices for polymer and other oil derived raw materials can vary widely in concert with the volatility of crude oil prices. If the cost of raw materials
increases and ePAK is unable to correspondingly increase the sales price of its products, its profit margins and financial performance will suffer.
14
Business disruptions could seriously harm ePAK’s future revenue and financial condition and
increase its costs and expenses.
ePAK’s worldwide operations could be subject to natural disasters and other business disruptions,
which could seriously harm its revenue and financial condition and increase its costs and expenses. Losses and interruptions could also be caused by earthquakes, power shortages, telecommunications failures, water shortages, tsunamis, floods,
typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters.
ePAK is dependent upon
continuous electric power supply in support of its production processes, and these processes will be disrupted if sufficient electric power supply is not provided.
All of the Company’s key manufacturing processes and infrastructure are powered by electricity. The People’s Republic of China, or PRC, electric power utilities face challenges in installing sufficient
incremental electric power generation and distribution infrastructure to keep pace with the PRC’s explosive demand. In the past, ePAK has been subject to managed load programs and power allocation programs at its manufacturing center. It is
likely that the Company will be subject to future programs of this nature. This can adversely impact its effective average manufacturing and processing capacity, increase costs, and can adversely impact the Company’s responsiveness to
customers. Ultimately, this could inhibit ePAK’s ability to attract and retain customers and have an adverse impact on its financial performance.
ePAK may lose sales if it is unable to acquire, repair, or replace production assets in a timely manner.
If the Company’s existing equipment, molds, or processing infrastructure fails, or ePAK is unable to acquire new factors of production in a timely manner, it may lose sales to competitors. In many of ePAK’s processes and molds, it
either does not maintain duplicates or has limited excess capacity. Delays caused by ePAK’s inability to acquire, repair, or replace production assets in a timely manner could result in a disruption of its manufacturing processes and prevent
the Company’s from meeting its customers’ requirements. In turn, this could adversely impact the Company’s financial performance.
The Company is subject to a variety of environmental laws which could cause it to incur significant expenses.
In addition
to other regulatory requirements affecting it business, ePAK is subject to a variety of foreign regulatory requirements relating to various environmental standards.
If the Company fails to comply with any present or future regulations, it
could be subject to future liabilities or the suspension of production. In addition, compliance with these or future laws could restrict ePAK’s ability to expand its facilities or build new facilities or require it to acquire costly equipment,
incur other significant expenses or modify its manufacturing processes.
International Risks
ePAK’s manufacturing center is located in the PRC, and it is subject to local laws and regulations as well as any PRC interpretations thereof.
ePAK’s manufacturing center along with the majority of its fixed assets and inventories are located in Shenzhen PRC. The largest
portion of the Company’s manufacturing operations operate pursuant to a Licensed Processing Entity (“LPE”) agreement with an unaffiliated, non-operating local PRC company, and the balance of ePAK’s manufacturing operations
operate as a Wholly Foreign Owned Entity (“WFOE”) at the same site in Shenzhen PRC. ePAK is dependent upon remaining in good standing with its local processing partner and local regulatory agencies in the PRC. The Company’s results of
operations are subject to the economic and political system in the PRC. The operations of ePAK’s PRC manufacturing center may be adversely impacted by changes in the laws and regulations of the PRC, changes in the interpretation of existing
laws and regulations, and the imposition of governmental controls. Matters including those related to environmental protection, taxation, foreign currency exchange, duties, tariffs, trade barriers and restrictions, import, export, licensing, and
property rights are among the areas where changes could adversely impact the Company’s operations.
15
The economy of the PRC differs from the economies of many countries in many respects such as structure,
government involvement, level of development, growth rate, capital reinvestment, allocation of resources, self-sufficiency, rate of inflation, and balance of payments position, among others. In the past, the economy of the PRC has been primarily a
planned economy subject to state plans. Since the entry of the PRC into the World Trade Organization in 2002, the PRC government has been reforming its economic and political systems. ePAK cannot assure you that the PRC government’s policies
for economic reforms will be consistent or effective. The Company’s results of operations and financial position may be harmed by changes in the PRC’s political, economic, or social conditions.
A significant portion of ePAK’s operating expenses are incurred in Chinese Yuan or RMB, whereas much of its sales revenue and raw materials
procurement costs are denominated in U.S. dollars. Expected ongoing RMB appreciation may increase the Company’s operating expenses.
The value of the Chinese Renminbi, or RMB, relative to the U.S. dollar has increased consistently in recent years and is expected to continue to do so in the future. ePAK’s RMB denominated revenues are limited and fall behind its RMB
denominated operating expenses. To the extent the Company is unable to increase RMB denominated sales revenue to match its RMB operating expense levels, future RMB appreciation will increase ePAK’s operating expenses and adversely impact its
financial performance.
ePAK may have exposure to tax rate and duty fluctuations and potentially increased tax liabilities, which would
adversely impact its financial performance and financial position.
As a corporation with operations and customers in a number of
countries around the world, ePAK is subject to various tax and duty structures in a diversity of jurisdictions. Changes in duty rates can adversely impact the Company’s competitiveness in certain jurisdictions or adversely impact its operating
expenses. ePAK’s effective tax rate is also subject to fluctuation along with changing geographic revenue mix, operating mix, and income tax mix. In addition, varying availability of operating loss carryforwards to offset taxes, tax
inducements, or deferred tax assets, along with changes in tax laws will impact the Company’s blended effective tax rate. This can drive fluctuations in financial performance from period to period. From time to time, the taxing authorities of
the relevant jurisdictions may conduct examinations of ePAK’s income tax returns and other regulatory filings. ePAK cannot assure you that the taxing authorities will agree with the Company’s interpretations. This may require the Company
to enter into settlements with the taxing authorities, which may require significant payments or otherwise adversely affect its business. ePAK may also appeal the taxing authorities’ determinations, but the Company may not prevail. This may
require significant payments or otherwise record charges (or reduce tax assets) that may adversely affect the Company’s business. Finally, ePAK cannot assure that its tax estimates will be accurate or that tax rates for previous periods will
not be adjusted in final determination through tax audits or tax dispute resolution.
Terrorist attacks, threats of further attacks,
acts of war, and threats of war may adversely impact all aspects of ePAK’s operations, revenues, costs, and stock price.
Terrorist
attacks, conflicts or wars, future events occurring in response or connection to the foregoing, including future terrorist attacks against U.S. targets, rumors or threats of war, actual conflicts involving the U.S. or its allies, conflicts between
China and Taiwan, or trade disruptions impacting ePAK’s domestic or foreign suppliers or its customers, may impact its operations. The occurrence of these events may also cause the Company to not meet customer expectations, and decrease sales
of its products. These events have affected, and are expected to continue to affect, the general economy and customer demand for products sold by ePAK’s customers. In addition, past events such as these have disrupted the global insurance and
reinsurance industries, which may cause the Company to not be able to obtain insurance at historical terms and levels for its facilities. There can be no assurance that these events will not occur in the future, and any of these events could have a
significant impact on ePAK’s operations, revenues, and costs.
16
Any recurrence of SARS, an outbreak of avian flu, or other contagious diseases may adversely impact
ePAK’s ability to operate and have an adverse affect on the economies and financial markets of certain Asian countries.
The
recurrence of severe acute respiratory syndrome, or SARS, avian flu, or other contagious diseases where epidemic or pandemic situations become a possibility may adversely affect the Company’s staff’s ability to travel, inhibit customer and
supplier travel, or otherwise inhibit ePAK’s ability to operate as it otherwise would in their absence. This may impact ePAK’s operations and could have an adverse impact on its operating and financial performance. There is no guarantee
that any such future outbreak of SARS, avian flu, or other contagious disease will not occur in the future.
Fluctuations in the value
of the U.S. dollar in relation to other currencies may lead to lower net income or may cause ePAK to raise prices, which could result in reduced net sales.
Foreign currency exchange rate fluctuations could have an adverse effect on the Company’s net sales and results of operations. Unfavorable foreign currency fluctuations against the U.S. dollar could require ePAK
to increase prices to foreign customers and could result in lower sales to such customers with a resulting decrease in its profitability. ePAK cannot predict whether these foreign currency exchange risks will have a material adverse effect on the
Company’s operations and financial results in the future.
Risks Relating to ePAK’s Intellectual Property
If ePAK is unable to protect its intellectual property rights, the Company’s business and business prospects could be harmed.
In part, ePAK’s future success depends upon its ability to obtain and maintain proprietary technology used in its products. The Company has obtained
patents relating to certain of its products and have filed applications for additional patents. ePAK cannot assure you that any of its pending patent applications will be approved, that it will develop additional proprietary technology that is
patentable, that any patents owned by or issued to the Company will provide it with advantages over its competition, that its patents will not be challenged by other parties, or that its proprietary information and technology will not be
independently developed by or become otherwise known to third parties. Competitors may misappropriate ePAK’s intellectual property, including those covered by existing or future patents. While the Company actively seeks to protect its
intellectual property and patents, there is no assurance that recourse will be available to ePAK in cases of infringement, or that attempts at recourse will prove cost effective. Also, many U.S. companies have encountered substantial infringement
problems in foreign countries, including countries in which ePAK manufactures its products. The law in these countries may not protect the Company proprietary rights as fully as do the laws of the U.S. Misappropriation of the Company’s
intellectual property and patents by other parties may limit its growth and future revenue. In addition, ePAK cannot assure you that third parties will not design around its patents.
If ePAK infringes on the proprietary technology of others, its business could be harmed.
ePAK’s success will depend, in part, on its ability to avoid infringing on patents of others. It is not uncommon to receive notices alleging
infringement of patents or other intellectual property rights. If it appears necessary or desirable, ePAK may seek licenses under patents that it is alleged to be infringing. However, there can be no assurance that a license will be offered or that
the terms of an offered license will be acceptable or favorable to the Company.
If ePAK is alleged to be infringing on a patent or
intellectual property right and is unable to obtain a license under a such patent or intellectual property right, the Company could incur substantial liabilities and be forced to suspend the manufacture of products utilizing the patent or
intellectual property right or attempt to develop non-infringing products, any of which could harm its business. Furthermore, ePAK may become involved in protracted litigation regarding the alleged infringement or litigation to assert and protect
its patents or other intellectual property rights. Any litigation related to patent infringement or other intellectual property matters could result in substantial cost and diversion of management times and resources, which could adversely impact
ePAK’s business.
17
Risks Related to the Securities Markets
ePAK has not been required to evaluate its internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002. The
adoption and implementation of Sarbanes-Oxley practices will increase the Company’s expenses and may adversely impact its operating results.
In the future, ePAK will be required to undertake certain actions pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, including the furnishing of reports by the Company’s management on its internal
control over financial reporting. Such reports must contain, among other matters, an assessment of the effectiveness of ePAK’s internal control over financial reporting as of the end of an applicable fiscal year, including a statement as to
whether its internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in the Company’s internal control over financial reporting identified by management. The report must also
contain a statement that the Company’s auditors have issued an attestation report on management’s assessment of its internal controls over financial reporting. Public Company Accounting Oversight Board Auditing Standards No. 2 and
No. 5 provide the professional standards and related performance guidance for auditors to attest to, and report on, management’s assessment of the effectiveness of internal control over financial reporting under Section 404.
Each year ePAK will need to create the system and process documentation and evaluation needed to comply with Section 404. During this
process, if the Company’s management identifies one or more material weaknesses in its internal control over financial reporting, ePAK will be unable to assert that its internal control over financial reporting is effective. If ePAK is unable
to assert that its internal control over financial reporting is effective in the future (or if its auditors are unable to attest that the Company’s management’s report is fairly stated or if they are unable to express an opinion on the
effectiveness of ePAK’s internal controls over financial reporting), the Company could lose investor confidence in the accuracy and completeness of its financial reports, which could have an adverse effect on its stock price.
There can be no assurance that ePAK will not have one or more material weaknesses. The costs of Sarbanes-Oxley compliance and maintenance are
indeterminate at this point and implementation may adversely impact the Company’s financial results.
Evaluation of disclosure
controls and procedures
ePAK has been a private company registered in Singapore with limited accounting personnel and other resources
to address its internal controls and procedures. During the audit of its financial statements for the three years ended December 31, 2006, ePAK and its independent registered public accounting firm identified a number of control deficiencies,
including seven material weaknesses, as defined in the Public Company Accounting Oversight Board’s Audit Standard No. 5. The material weaknesses identified by ePAK and its independent auditors are listed below:-
1)
Inadequate personnel resources, processes and documentation to address reporting and accounting requirements under U.S. GAAP;
2)
Lack of internal controls over ePAK’s consolidation process as well as the processes over judgments and estimates required under U.S. GAAP;
3)
Lack of internal controls over maintaining and tracking ePAK’s fixed asset register;
4)
Lack of internal controls, to adequately maintain, in sufficient order and detail, human resources information, to facilitate a timely audit;
5)
Lack of supporting documentation and internal controls regarding the accounting for income taxes:
6)
Lack of segregation of duties; and
7)
Lack of standardized policies and procedures governing the group’s accounting policies.
18
Management is committed to remediate these deficiencies and has planned to implement the following
measures, including:
(1)
Additional training to ePAK’s accounting personnel on applicable U.S. GAAP standards to increase their familiarity with the U.S. reporting environment and standards. In
addition, ePAK is also looking into the expansion of its finance function by recruiting additional qualified accountants as well as the reassessment of its existing finance and accounting policies and procedures;
(2)
To hire an external, independent and internationally recognized consulting firm with the necessary U.S. GAAP expertise to assist ePAK in establishing effective internal control
procedures over its consolidation process and controls surrounding its accounting estimates and judgments;
(3)
The purchase of software for maintaining and tracking ePAK’s fixed assets;
(4)
To establish an effective human resources information system and procedures to help ensure accurate and reliable recording of information pertaining to staff costs;
(5)
To engage an internationally recognized tax consulting firm with expertise in U.S. taxation to assist with the documentation of ePAK’s tax positions ;
(6)
To establish effective segregation of duties among staff and departments within ePAK;
(7)
To establish a group accounting manual and policies for ePAK and its subsidiaries which will help ensure that the appropriate accounting standards are applied consistently
throughout the group; and
(8)
ePAK is in the process of establishing an independent audit committee and is committed to identifying individuals with the appropriate experience to serve on the audit committee.
While ePAK is implementing steps to improve the effectiveness of its internal control over financial reporting, failure to
implement measures to remediate these material weaknesses and other control deficiencies in time to meet the deadline imposed by Section 404 of the Sarbanes-Oxley Act, including establishing an audit committee in the near future, may result in ePAK
not being able to conclude, on an ongoing basis, that it has effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition and
other significant accounting processes are necessary for ePAK to produce reliable financial reports and are important to help prevent fraud. Any failure to achieve and maintain effective internal control over financial reporting could result in
ePAK’s inability to conclude that each has effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act.
Changes to financial accounting standards may affect ePAK’s results of operations and cause it to change its business practices.
ePAK prepares financial statements in accordance with U.S. GAAP. These accounting principles are subject to interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public
Accountants, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting policies. A change in these policies can have a significant effect on the Company’s reported results and may affect its
reporting of transactions completed before a change is announced. Changes to these rules or the questioning of current practices may adversely affect the Company’s reported financial results or the way it conducts its business.
19
Risks Related to the Acquisition and Redomestication Merger
Continuing Pubco’s working capital will be reduced if Ascend stockholders exercise their right to convert their shares into cash. This would
reduce Continuing Pubco’s cash reserve after the acquisition.
Pursuant to Ascend’s certificate of incorporation, holders of
Public Shares may vote against the acquisition and demand that we convert their Public Shares, calculated as of two business days prior to the anticipated date of the consummation of the acquisition, into a pro rata share of the trust account where
a substantial portion of the net proceeds of the IPO are held. Ascend and ePAK will not consummate the acquisition if holders of 20% or more of the Public Shares (
i.e.,
1,380,000 shares or more) exercise these conversion rights. To the extent
the acquisition is consummated and holders have demanded to convert their shares, there will be a corresponding reduction in the amount of funds available to Continuing Pubco following the acquisition. As of
, 200 , the record date, assuming the acquisition proposal is adopted, the maximum amount of funds that
could be disbursed to Ascend’s stockholders upon the exercise of their conversion rights is approximately $ , or approximately 20% of the funds then held in the trust
account. Any payment upon exercise of conversion rights will reduce Continuing Pubco’s cash after the acquisition, which may limit the ability of Continuing Pubco to implement ePAK’s business plan.
Continuing Pubco’s warrants and options may be exercised in the future, which would increase the number of shares eligible for future resale in
the public market and result in dilution to Continuing Pubco’s stockholders.
The warrants of Continuing Pubco to be issued in
exchange for all of Ascend’s outstanding warrants will be exercisable immediately after the consummation of the acquisition and redomestication merger for up to an aggregate of 14,133,334 shares of Continuing Pubco’s common stock. These
warrants will be exercised only if the $5.00 per share exercise price is below the market price of Continuing Pubco’s common stock. As of the record date, the last sale price of a share of Ascend common stock was
$ . In addition, in the redomestication merger, Continuing Pubco will issue an option in exchange for Ascend’s existing underwriter option, which will entitle the holders
thereof to purchase 300,000 shares of Continuing Pubco’s common stock and 600,000 warrants exercisable into 600,000 shares of Continuing Pubco’s common stock. In the acquisition, Continuing Pubco also will assume the Assumed Options, which
will be exercisable into shares of Continuing Pubco common stock. At the closing of the acquisition and redomestication merger, assuming no conversions, and assuming Subject Adjusted EBITDA of $6.7 million and estimated Adjusted Ascend Trust Value
of $38.2 million, resulting in approximately 8.6 million shares being issued by Continuing Pubco to EHL, Continuing Pubco will have approximately 17.2 million shares of common stock outstanding. Giving effect to the foregoing assumptions,
as well as the exercise of all of Continuing Pubco warrants and options to be outstanding immediately following closing (and warrants underlying certain of such options), there would be approximately 32.2 million shares of Continuing Pubco’s
common stock outstanding immediately after closing of the acquisition. Sales of substantial numbers of such shares in the public market could adversely affect the market price of such shares.
There will be a substantial number of shares of Continuing Pubco’s common stock available for sale in the future in the open market, which may
cause a decline in the market price of Continuing Pubco’s common stock.
Assuming Subject Adjusted EBITDA of $6.7 million and
estimated Adjusted Ascend Trust Value of $38.2 million, approximately 8.6 million shares of common stock will be issued by Continuing Pubco to EHL at the closing of the acquisition. These shares are initially not being registered and will be
restricted from public sale under the securities laws. All of these shares will be subject to the lock-up agreement and cannot be sold publicly until the expiration of the restricted period under the lock-up agreements and until effectiveness of a
registration statement or until such shares are otherwise saleable under exemptions provided under Rule 144 of the Securities Act. The presence of this additional number of shares for potential trading in the public market may have an adverse effect
on the market price of Continuing Pubco’s common stock.
20
If Ascend stockholders fail to vote or abstain from voting on the acquisition proposal, they may not
exercise their conversion rights to convert their Public Shares into a pro rata portion of the trust account as of the record date.
Ascend stockholders holding Public Shares who affirmatively vote against the acquisition proposal may, at the same time, demand that we convert their shares into a pro rata portion of the trust account, calculated as of two business days
prior to the anticipated date of the consummation of the acquisition. Ascend stockholders who seek to exercise this conversion right must affirmatively vote against the acquisition and tender their shares (either physically or electronically) to
Ascend’s transfer agent after the special meeting. Any Ascend stockholder who fails to vote or who abstains from voting on the acquisition proposal or who fails to tender their shares as required may not exercise his or her conversion rights
and will not receive a pro rata portion of the trust account for conversion of his or her shares. See the section entitled “
Special Meeting of Ascend Stockholders—Conversion Rights
” for the procedures to be followed if you wish
to convert your shares to cash.
If we are unable to maintain listing of Continuing Pubco’s securities on the Nasdaq Global Market
or another stock exchange, it may be more difficult for Continuing Pubco’s shareholders to sell their securities.
It is a
condition to consummation of the acquisition, that Continuing Pubco’s common stock and warrants be listed on either the Nasdaq Global Market or the Nasdaq Capital Market at the time of consummation of the acquisition. Thereafter, we will be
required to meet Nasdaq’s various continued listing requirements to maintain such listing. We cannot assure you that Continuing Pubco will be able to meet the continued listing requirements at all times in the future. If the Nasdaq Global
Market or the Nasdaq Capital Market should delist Continuing Pubco’s securities from trading, and Continuing Pubco is unable to obtain listing on another exchange, there could be significant material adverse consequences, including:
•
a limited availability of market quotations for the company’s securities;
•
reduced liquidity;
•
a diminished or no active trading market;
•
a determination that our common stock is a “penny stock” which will require brokers trading in our common stock to adhere to more stringent rules and
possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock;
•
a limited amount of news and analyst coverage for Continuing Pubco; and
•
a decreased ability to issue additional securities or obtain additional financing in the future.
Our ability to request indemnification from ePAK’s stockholders for damages arising out of the acquisition is limited to those claims where
damages exceed $250,000, are only indemnifiable to the extent that damages exceed $250,000.
The obligation of the ePAK shareholders to
indemnify and hold harmless Continuing Pubco for any damages, whether as a result of any third party claim or otherwise, and which arise as a result of or in connection with the breach of representations and warranties and agreements and covenants
of ePAK will be limited solely to the fair market value, as of the time the indemnity claim is established
, of the number of shares of Continuing Pubco common stock equal to (X) 15% of the sum of the Transaction Shares plus the number of
shares issuable upon exercise of the Assumed Options, minus (Y) the sum of the quotients obtained by dividing the dollar amount of each previous indemnity claim by the fair market value, as of the time of such previous indemnity claim
was
established, of one share of Continuing Pubco common stock. Claims for indemnification may only be asserted by Continuing Pubco once the damages exceed $250,000 in the aggregate and are indemnifiable only to the extent that damages exceed $250,000.
Accordingly, it is possible that Continuing Pubco will not be entitled to indemnification even if ePAK is found to have breached its representations and warranties and agreements and covenants contained in the
21
acquisition agreement if such breach would only result in damages to Ascend of less than $250,000. Additionally, to the extent the amount of any
indemnification obligation exceeds the maximum obligation under these indemnity provisions, Continuing Pubco would not be indemnified.
Ascend’s current directors and executive officers own shares of common stock and warrants that will become worthless if the acquisition is not approved. Consequently, they may have a conflict of interest in determining whether
particular changes to the terms of the business combination with ePAK or waivers of conditions are appropriate.
All of Ascend’s
officers and directors or their affiliates beneficially own stock in Ascend. Ascend’s executives and directors and their affiliates are not entitled to receive any of the cash proceeds that may be distributed upon Ascend’s liquidation with
respect to shares they acquired prior to Ascend’s IPO. Therefore, if the acquisition is not approved and Ascend is forced to liquidate, such shares held by such persons will be worthless, as will all of the warrants. In addition, if Ascend
liquidates prior to the consummation of a business combination, Don K. Rice, our chairman of the board and chief executive officer, will be personally liable to pay the debts and obligations, if any, to vendors and other entities that are owed money
by Ascend for services rendered or products sold to Ascend, or to any target business, to the extent such creditors bring claims that would otherwise require payment from moneys in the trust account. These personal and financial interests of
Ascend’s directors and officers may have influenced their decision to approve the business combination with ePAK. In considering the recommendations of Ascend’s board of directors to vote for the acquisition proposal and other proposals,
you should consider these interests. Additionally, the exercise of Ascend’s directors’ and executive officers’ discretion in agreeing to changes or waivers in the terms of the business combination may result in a conflict of interest
when determining whether such changes to the terms of the business combination or waivers of conditions are appropriate and in Ascend’s stockholders’ best interest.
If we do not consummate the business combination with ePAK by May 17, 2008 and are forced to dissolve and liquidate, payments from the trust
account to Ascend’s public stockholders may be delayed.
If we do not consummate the business combination with ePAK by May 17,
2008, we will dissolve and liquidate. We anticipate that, promptly after such date, the following will occur:
•
Ascend’s board of directors will convene and adopt a specific plan of dissolution and liquidation, which it will then vote to recommend to Ascend’s
stockholders; at such time it will also cause to be prepared a preliminary proxy statement/prospectus setting out such plan of dissolution and liquidation as well as the board’s recommendation of such plan;
•
we will promptly file Ascend’s preliminary proxy statement/prospectus with the Securities and Exchange Commission;
•
if the Securities and Exchange Commission does not review the preliminary proxy statement/prospectus, then, 10 days following the filing of such preliminary proxy
statement/prospectus, we will mail the definitive proxy statement/prospectus to Ascend’s stockholders, and 10 to 20 days following the mailing of such definitive proxy statement/prospectus, we will convene a meeting of Ascend’s
stockholders, at which they will vote on Ascend’s plan of dissolution and liquidation; and
•
if the Securities and Exchange Commission does review the preliminary proxy statement/prospectus, we currently estimate that we will receive their comments 30 days
after the filing of such proxy statement/prospectus. We would then mail the definite proxy statement/prospectus to Ascend’s stockholders following the conclusion of the comment and review process (the length of which we cannot predict with any
certainty, and which may be substantial) and we will convene a meeting of Ascend’s stockholders at which they will vote on Ascend’s plan of dissolution and liquidation.
We expect that all costs associated with the implementation and completion of Ascend’s plan of dissolution and liquidation will be funded by any
remaining net assets not held in the trust account, although we cannot
22
assure you that there will be sufficient funds for such purpose. If such funds are insufficient, we anticipate that Ascend’s management will advance us
the funds necessary to complete such dissolution and liquidation (currently anticipated to be no more than $50,000) and not seek reimbursements thereof.
We will not liquidate the trust account unless and until Ascend’s stockholders approve Ascend’s plan of dissolution and liquidation. Accordingly, the foregoing procedures may result in substantial delays in
Ascend’s liquidation and the distribution to Ascend’s public stockholders of the funds in Ascend’s trust account and any remaining net assets as part of Ascend’s plan of dissolution and liquidation.
Ascend’s stockholders may be held liable for claims by third parties against us to the extent of distributions received by them.
If we are unable to complete the business combination with ePAK, we will dissolve and liquidate pursuant to Section 275 of the DGCL. Under
Sections 280 through 282 of the DGCL, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in dissolution. Pursuant to Section 280, if the corporation complies with
certain procedures intended to ensure that it makes reasonable provisions for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the
corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of a stockholder with respect to a liquidating distribution is limited to the lesser of
such stockholder’s pro rata share of the claim or the amount distributed to the stockholder, and any liability of stockholder would be barred after the third anniversary of the dissolution. Although we will seek stockholder approval to
liquidate the trust account to Ascend’s public stockholders as part of Ascend’s plan of dissolution and liquidation, we will seek to conclude this process as soon as possible and as a result do not intend to comply with those procedures.
Because we will not be complying with those procedures, we are required, pursuant to Section 281 of the DGCL, to adopt a plan that will provide for Ascend’s payment, based on facts known to us at such time, of (i) all existing claims,
(ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any creditors known to us at that time or those that we believe could
be potentially brought against us within the subsequent 10 years prior to distributing the funds held in the trust to stockholders. We cannot assure you that we will properly assess all claims that may be potentially brought against us. As such,
Ascend’s stockholders could potentially be liable for any claims to the extent of distributions received by them in dissolution (but no more) and any liability of Ascend’s stockholders may extend well beyond the third anniversary of such
dissolution. Accordingly, we cannot assure you that third parties will not seek to recover from Ascend’s stockholders amounts owed to them by us.
Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us that are not dismissed, any distributions received by stockholders in Ascend’s dissolution might be
viewed under applicable debtor/creditor or bankruptcy laws as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy court could seek to recover all amounts received by Ascend’s stockholders
in Ascend’s dissolution. Furthermore, because we intend to distribute the proceeds held in the trust account to Ascend’s public stockholders as soon as possible after Ascend’s dissolution, this may be viewed or interpreted as giving
preference to Ascend’s public stockholders over any potential creditors with respect to access to or distributions from Ascend’s assets. Furthermore, Ascend’s board of directors may be viewed as having breached their fiduciary duties
to Ascend’s creditors or may have acted in bad faith, and thereby exposing itself and Ascend’s company to claims of punitive damages, by paying public stockholders from the trust account prior to addressing the claims of creditors or
complying with certain provisions of the DGCL with respect to Ascend’s dissolution and liquidation. We cannot assure you that claims will not be brought against us for these reasons.
Voting control by Continuing Pubco’s executive officers, directors and other affiliates may limit your ability to influence the outcome of
director elections and other matters requiring stockholder approval.
Upon consummation of the acquisition, the persons who are parties
to the voting agreement, which are EHL, on the one hand, and our current directors, Don K. Rice, Russell C. Ball, III and Stephen L. Brown, and our
23
board advisor, Arthur Spector, on the other hand, will collectively own approximately 59.7% of Continuing Pubco’s voting stock, assuming maximum
conversion of the Public Shares. These persons have agreed to vote for each other’s designees to Continuing Pubco’s board of directors through director elections in 2010. Accordingly, they will be able to control the election of directors
and, therefore, Continuing Pubco’s policies and direction during the term of the voting agreement. In addition, Continuing Pubco’s board of directors will be staggered in three classes, with only one class up for election in any given
year. This concentration of ownership, the voting agreement and the classified board would likely have the effect of delaying or preventing a change in Continuing Pubco’s control or discouraging a potential acquirer from attempting to obtain
control of us, which in turn could have a material adverse effect on the market price of Continuing Pubco’s common stock or prevent Continuing Pubco’s stockholders from realizing a premium over the market price for their shares of common
stock.
Since Continuing Pubco will be a foreign company with substantially all of its assets outside of the United States, it could be
difficult to enforce legal rights against us.
ePAK is a company formed under the law of Singapore and Continuing Pubco will be a
company formed under the law of Bermuda. Both of these companies will principally operate outside of the United States. The substantial majority of their assets will be located outside of the United States, including in the PRC. Certain of
Continuing Pubco and ePAK’s directors and officers and experts named in this proxy statement/prospectus are citizens of, or resident in, countries other than the United States. Although the PRC, Singapore and the United States are signatories
to the 1965 Hague Convention on the Service Abroad of Judicial and Extra Judicial Documents in Civil and Commercial Matters, service under this treaty is cumbersome and time consuming and may not result in adequate notice, such that any judgment
based on service thereunder may be reopened, relitigated and overturned. Therefore, it may not be possible for investors to effect service of process within the United States upon them, or to enforce against them any judgments obtained in United
States courts, including judgments predicated upon the civil liability provisions of the federal securities laws of the United States or of the United States securities laws of any State of the United States.
The difficulty of enforcing a judgment of a United States court in the PRC, Singapore or Bermuda, where most of the assets of ePAK are, and Continuing
Pubco will be, stems from the lack of any official arrangement providing for judicial assistance to the enforcement of judgments of courts of the United States in the PRC, Singapore and Bermuda. The PRC, Singapore and Bermuda do not have treaties
providing for the reciprocal recognition and enforcement of judgments of courts within the United States. In the absence of such a treaty, judgments of United States courts will not be enforced in the PRC, Singapore or Bermuda without review of the
merits of the claims, and the claims brought in the Continuing Pubco action in the United States court will have to be re-litigated on their merits. Likewise, administrative actions brought by regulatory authorities, such as the SEC, and other
actions, which result in foreign court judgments, could (assuming such actions are not required by PRC, Singapore or Bermuda law to be arbitrated) only be enforced in the PRC, Singapore or Bermuda if such judgments or rulings do not violate the
basic principles of the laws of the PRC, Singapore or Bermuda, as determined by the appropriate courts of those countries that have jurisdiction for recognition and enforcement of judgments. There also is doubt as to the enforceability in these
jurisdictions of any actions to enforce judgments of United States courts arising out of or based on the ownership of the securities of Continuing Pubco, including judgments arising out of or based on the civil liability provisions of United States
federal or state securities laws, and whether such courts would enforce, in original actions, judgments against Continuing Pubco, its directors and officers and assets in the PRC, Singapore or Bermuda predicated solely upon the federal securities
laws of the United States. An original action may be brought in the PRC, Singapore or Bermuda against Continuing Pubco or its subsidiaries or its directors and officers and experts named in this prospectus/proxy statement only if the actions are not
required to be arbitrated by PRC, Singapore or Bermuda law and only if the facts alleged in the complaint give rise to a cause of action under PRC or Singapore law. In connection with such an original action, a PRC, Singapore or Bermuda court may
award civil liability, including monetary damages.
24
As a result of the redomestication merger, Ascend stockholders have appraisal rights, the exercise of
which would reduce the amount of cash assets available to us following the acquisition.
Ascend stockholders have appraisal rights under
Delaware law in connection with the redomestication merger. If exercised, these persons are entitled to a cash payment for the fair value of their shares at the time of the redomestication merger. Any payment will reduce the cash assets of
Continuing Pubco, which may limit its ability to implement ePAK’s business plan.
An effective registration statement may not be in
place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise his, her or its warrants and causing such warrants to be practically worthless.
No warrant of Continuing Pubco will be exercisable and the company will not be obligated to issue shares of common stock unless at the time a holder seeks
to exercise such warrant, a prospectus relating to the common stock issuable upon exercise of the warrant is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of
the holder of the warrants. Under the terms of the warrant agreement, Continuing Pubco will be obligated to use its best efforts to meet these conditions and to maintain a current prospectus relating to the common stock issuable upon exercise of the
warrants until the expiration of the warrants. However, we cannot assure you that the company will be able to do so, and if the company does not maintain a current prospectus related to the common stock issuable upon exercise of the warrants,
holders will be unable to exercise their warrants and the Company will not be required to settle any such warrant exercise. If the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the common
stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, the warrants may have no value, the market for the warrants may be limited and the warrants may expire worthless.
United States persons who own Continuing Pubco’s common stock may have different interests than when they owned Ascend’s common stock and
more difficulty in protecting their interests than United States persons who are stockholders of a United States corporation.
The
Companies Act 1981, as amended, which will apply to Continuing Pubco as a Bermuda company, differs in certain material respects from laws generally applicable to United States corporations and their shareholders. As a result of these differences,
United States persons who own our common shares may have different interests than when they owned Ascend’s common stock and more difficulty protecting their interests than would United States persons who own common shares of a United States
corporation. See
“Redomestication Proposal—Comparison of Corporate Governance and Stockholders Rights”
for more information on the differences between Bermuda and Delaware corporate laws.
In certain circumstances, the redomestication merger could be taxable to U.S. federal income tax purposes.
Under certain circumstances, the redomestication merger could be taxable for U.S. federal income tax purposes. Specifically, if (i) more than 50% of
the outstanding shares of Continuing Pubco are issued in connection with the transactions to the Ascend stockholders that are U.S. persons (treating any shares owned by a partnership or other entity or arrangement taxed as a partnership for U.S.
federal income tax purposes as owned proportionately by its partners) or (ii) the fair market value of ePak is less than the fair market value of Ascend at the time of the transactions, an Ascend stockholder will recognize gain for U.S. federal
income tax purposes equal to the difference between the fair market value of the Continuing Pubco common stock and the tax basis of the Ascend common stock for which it is exchanged. The percentage of Continuing Pubco common stock that will be
issued to the Ascend stockholders in the transactions will not exceed 49.9% of the outstanding shares of Continuing Pubco common stock, including as outstanding certain shares that EHL or the other recipients of Transaction Shares may elect to
return to Continuing Pubco to satisfy indemnity claims, if any. Ascend believes that the fair market value of ePak equals or exceeds the fair market value of Ascend. However, the determination
25
of the relative fair market values of ePak and Ascend is inherently factual and cannot be made with precision. If, Internal Revenue Service were to
successfully challenge either the percentage ownership of the Ascend stockholders or the relative fair market values of ePak and Ascend, Ascend stockholders would recognize gain upon the redomestication merger. Stockholders of Ascend are strongly
encouraged to consult their own tax advisors regarding the tax consequences to them of the transactions described herein.
Risks if the Adjournment
Proposal is Not Approved
If any of the principal proposals put to Ascend’s stockholders for a vote are not approved, and a
sufficient number of votes have not been obtained to approve the adjournment proposal, Ascend’s board of directors will not have the ability to adjourn the special meeting to a later date in order to solicit further votes, and, therefore, the
acquisition will not be approved and Ascend will be required to liquidate.
26
FORWARD-LOOKING STATEMENTS
We believe that some of the information in this proxy statement/prospectus and
incorporated by reference herein constitutes forward-looking statements within the definition of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as “may,”
“expect,” “anticipate,” “contemplate,” “believe,” “estimate,” “intends,” and “continue” or similar words. You should read statements that contain these words carefully because
they:
•
discuss future expectations;
•
contain projections of future results of operations or financial condition; or
•
state other “forward-looking” information.
We believe it is important to communicate expectations to our stockholders. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risk factors and
cautionary language discussed in this proxy statement/prospectus provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described in such forward-looking statements. You are
cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this proxy statement/prospectus.
All forward-looking statements included herein attributable to any of Ascend, ePAK or any person acting on either party’s behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this
section. Except to the extent required by applicable laws and regulations, Ascend and ePAK undertake no obligations to update these forward-looking statements to reflect events or circumstances after the date of this proxy statement/prospectus or to
reflect the occurrence of unanticipated events.
Before you grant your proxy or instruct how your vote should be cast or vote on the
adoption of the proposals, you should be aware that the occurrence of the events described in the “Risk Factors” section and elsewhere in this proxy statement/prospectus could have a material adverse effect on Ascend and ePAK.
27
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING
Q. Why am I receiving this proxy statement/prospectus?
A
. Ascend and ePAK have agreed to a business combination under the
terms of the acquisition agreement, dated as of July 30, 2007, as described in this proxy statement/prospectus. A copy of the acquisition agreement is attached to this proxy statement/prospectus as Annex A, which we encourage you to
read.
You are being asked to consider and vote upon a proposal to approve the acquisition agreement, which among other things, provides for the acquisition of ePAK by Continuing Pubco. You
also are being asked to consider and vote upon a proposal to approve the redomestication merger by which Ascend and ACL will be merged or combined for the purposes of (a) moving the domicile of our public company from Delaware to Bermuda and (b)
concurrently with the redomestication merger, acquiring ePAK in the acquisition. The certificate of incorporation and by-laws of Continuing Pubco will be those of ACL (as same will be restated and amended immediately prior to consummation of the
redomestication merger). A copy of the proposed restated certificate of incorporation and by-laws are attached to this proxy statement/prospectus as
Annex D,
which we encourage you to read. You also are being asked to consider and vote upon a
proposal to approve the 2007 incentive plan. A copy of the 2007 incentive plan is attached to this proxy statement/prospectus as
Annex E
, which we encourage you to read.
The
acquisition agreement and the transactions contemplated thereby have been approved by the board of directors of each of EHL and ePAK.
The redomestication merger and the 2007 incentive plan have been approved
by the board of directors of Ascend and ACL.
We will not consummate the transactions described above unless all of the proposals, other than the adjournment proposal, are approved by the Ascend stockholders. Accordingly, the
approval of each proposal is a condition to the adoption of each other proposal. Ascend will hold a special meeting of its stockholders to obtain these approvals.
This proxy statement/prospectus contains important information about the
proposed acquisition, the other proposals and the special meeting of Ascend stockholders. You should read it carefully.
Your vote is important. We encourage you to vote by submitting your
proxy as soon as possible after carefully reviewing this proxy statement/prospectus.
Q. What vote is required to adopt the acquisition proposal?
A
. Approval of the acquisition proposal will require the affirmative vote by the holders of majority of
the shares of Ascend common stock issued in its IPO (“Public Shares”), including holders who purchase Public Shares subsequent to the IPO, and voted on the matter.
28
Q. What vote is required to adopt the Redemption Merger Proposal?
A
. Approval of the redomestication proposal will require the affirmative vote of the holders of a majority
of the outstanding shares of Ascend common stock.
Q. What vote is required to adopt the 2007 incentive plan proposal?
A
. Approval of the 2007 incentive plan proposal will require the affirmative vote of holders of a majority
of the shares of Ascend’s common stock present in person or by proxy at meeting.
Q. What vote is required to adopt the adjournment proposal?
A
. Adoption of the adjournment proposal requires the affirmative vote of a majority of the issued and
outstanding shares of Ascend’s common stock represented in person or by proxy at the meeting.
Q. What will I receive in the redomestication merger?
A
. Ascend stockholders will receive an equal number of shares of Continuing Pubco’s common stock in
exchange for their Ascend common stock. Ascend warrant holders will receive an equal number of warrants of Continuing Pubco in exchange for their Ascend warrants, the terms and conditions of which will not change, except that on exercise, they will
receive common stock of Continuing Pubco.
Q. How will the redomestication merger be accomplished?
A
. Ascend will amalgamate with ACL, a wholly owned subsidiary which was formed under the law of Bermuda on
July , 2007 specifically for the purpose of affecting the redomestication merger. As a result of the redomestication merger, each outstanding share of common stock of Ascend will automatically convert into one share of common
stock of Continuing Pubco. This procedure will result in you becoming a shareholder of Continuing Pubco, which will be renamed “ePAK International Limited” immediately after the redomestication merger and acquisition are
consummated.
Q. Do I have conversion rights?
A
. If you hold Public Shares, then you have the right to vote against the acquisition proposal and demand
that Ascend convert such shares into a pro rata portion of the trust account in which a substantial portion of the net proceeds of Ascend’s IPO are held. We sometimes refer to these rights to vote against the acquisition and demand conversion
of the shares into a pro rata portion of the trust account as “conversion rights.”
Q. How do I exercise my conversion rights?
A
. If you wish to exercise your conversion rights, you must (i) vote
against the acquisition proposal, (ii) demand that Ascend convert your shares into cash, (iii) continue to hold your Public Shares through the closing of the acquisition and (iv) then deliver your Public Shares to our transfer agent within the
period specified in a notice you will receive from Continuing Pubco, which period will be not less than 20 days from the date of such notice. In lieu of delivering your stock certificate, you may deliver your shares to the transfer agent
electronically using Depository Trust Company’s DWAC (Deposit Withdrawal at Custodian) System.
Any action that does not include an affirmative vote against the
acquisition will prevent you from exercising your conversion rights. Your vote on any proposal other than the acquisition proposal will have no impact on your right to seek conversion.
29
You may exercise your conversion rights either by
checking the box on the proxy card or by submitting your request in writing to Ascend at the address listed at the end of this section. If you (i) initially vote for the acquisition proposal but then wish to vote against it and exercise your
conversion rights or (ii) initially vote against the acquisition proposal and wish to exercise your conversion rights but do not check the box on the proxy card providing for the exercise of your conversion rights or do not send a written request to
Ascend to exercise your conversion rights, or (iii) initially vote against the acquisition but later wish to vote for it, you may request Ascend to send you another proxy card on which you may indicate your intended vote and, if that vote is
against the acquisition proposal, exercise your conversion rights by checking the box provided for such purpose on the proxy card. You may make such request by contacting Ascend at the phone number or address listed at the end of this
section.
Any corrected or changed proxy card or written demand of conversion rights must be received by Ascend prior to the special meeting. No demand for conversion will be honored unless the
holder’s stock certificate has been delivered (either physically or electronically) to the transfer agent after the special meeting.
If, notwithstanding your negative vote, the acquisition is completed, then
you will be entitled to receive a pro rata portion of the trust account, including any interest earned thereon, calculated as of two business days prior to the anticipated date of the consummation of the acquisition. As of the record date, there was
approximately $ in the trust account, which would amount to approximately $ per share upon
conversion. Amounts payable to persons converting will not be affected by any deferred underwriting commissions due and payable to the underwriter in Ascend’s IPO.
If you exercise your conversion rights, then you will be exchanging your
shares of Ascend common stock for cash and will no longer own these shares.
Exercise of your conversion rights does not result in either the conversion or a loss of your Ascend warrants. Your warrants will be exchanged for the warrants of
Continuing Pubco and will be exercisable following a conversion of your common stock unless we do not consummate the acquisition. A registration statement must be in effect to allow you to exercise any warrants you may hold or to allow Continuing
Pubco to call the warrants for redemption if the redemption conditions are satisfied.
Q. Do I have appraisal rights if I object to the acquisition?
A
. Under Delaware corporate law, the redomestication merger of Ascend and ACL causes the stockholders
of Ascend to have appraisal rights in connection with the transactions for which approval is sought. This right is separate from the conversion rights of the holders of Public Shares with respect to the acquisition proposal. However, because the
exercise of the appraisal right and the conversion rights both require a tender by the holder of his or its Public Shares to Ascend, either appraisal rights or conversion rights, but not both, may be elected in respect of the Public Shares. See
“Redomestication Proposal—Appraisal Rights”
for more information about appraisal rights.
30
Q. What happens to the funds deposited in the trust account after consummation of the
acquisition?
A
. After consummation of the acquisition, Ascend stockholders properly electing to exercise their
conversion rights will receive their pro rata portion of the funds in the trust account. The balance of the funds in the trust account will be released to Continuing Pubco to be used for the working capital requirements of Continuing Pubco and ePAK
and to pay expenses incurred in connection with the transactions contemplated by the acquisition agreement.
Q. What happens if the acquisition is not consummated?
A
. Ascend must liquidate if it does not consummate a business combination by May 17, 2008. In any
liquidation, the funds held in the trust account, plus any interest earned thereon, together with any remaining out-of-trust net assets, will be distributed pro rata to the holders of Ascend’s common stock acquired in Ascend’s IPO. Holders
of Ascend common stock acquired prior to the IPO, including all of Ascend’s officers and directors, have waived any right to any liquidation distribution with respect to those shares.
Q. When do you expect the acquisition to be completed?
A
. It is currently anticipated that the acquisition will be consummated promptly following the Ascend
special meeting on , 2008. For a description of the conditions to completion of the acquisition, see the sections entitled
“
The Acquisition Agreement—Conditions to the Closing of the Acquisition
.”
Q. What do I need to do now?
A
. Ascend urges you to read carefully and consider the information contained in this proxy
statement/prospectus, including the annexes, and to consider how the acquisition will affect you as a stockholder of Ascend. You should then vote as soon as possible in accordance with the instructions provided in this proxy statement/prospectus and
on the enclosed proxy card.
Q. How do I vote?
A
. If you are a holder of record of Ascend common stock, you may vote in person at the special meeting or
by submitting a proxy for the special meeting. You may submit your proxy by completing, signing, dating and returning the enclosed proxy card in the accompanying pre-addressed postage paid envelope. If you hold your shares in “street
name,” which means your shares are held of record by a broker, bank or nominee, you must provide the record holder of your shares with instructions on how to vote your shares or, if you wish to attend the meeting and vote in person, obtain a
proxy from your broker, bank or nominee.
Q. If my shares are held in “street name,” will my broker, bank or nominee automatically vote my
shares for me?
A
. No. Your broker, bank or nominee cannot vote your shares on any proposal unless you provide
instructions on how to vote in accordance with the information and procedures provided to you by your broker, bank or nominee.
Q. Can I change my vote after I have mailed my signed proxy or direction form?
A
. Yes. Send a later-dated, signed proxy card to Ascend’s secretary at the address of Ascend’s
corporate headquarters prior to the date of the special meeting or attend the special meeting in person and vote. You also may revoke your proxy by sending a notice of revocation to Ascend’s secretary, which must be received by Ascend’s
secretary prior to the special meeting.
31
Q. Do I need to send in my stock certificates?
A
. No. If you are not electing conversion in connection with your vote
on the acquisition proposal and hold your securities in Ascend in certificate form, as opposed to holding your securities through your broker, you do not need to exchange your existing certificates for certificates issued by Continuing Pubco. Your
current Ascend certificates will automatically represent your rights in Continuing Pubco’s securities. You may, however, exchange your certificates if you choose, by contacting Continuing Pubco’s transfer agent, Continental Stock Transfer
& Trust Company (Reorganization Department), after the consummation of the acquisition and following their requirements for reissuance.
If you elect conversion in connection with your vote against the
acquisition proposal, you will need to deliver you Ascend certificates to Continuing Pubco as described in this proxy statement/prospectus.
Q. What should I do if I receive more than one set of voting materials?
A
. You may receive more than one set of voting materials, including multiple copies of this proxy
statement/prospectus and multiple proxy cards or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold
shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction card that you receive in order to
cast a vote with respect to all of your Ascend shares.
Q. Who can help answer my questions?
A
. If you have questions about the acquisition, the redomestication
merger or the 2007 incentive plan, or if you need additional copies of the proxy statement/prospectus or the enclosed proxy card you should contact:
Don K. Rice
Ascend Acquisition Corp.
435 Devon Park Drive, Building 400
Wayne,
Pennsylvania 19087
Tel: (610) 519-1336
You may also obtain additional information about Ascend from documents
filed with the SEC by following the instructions in the section entitled “
Where You Can Find More Information
.”
If you intend to vote against the acquisition and seek conversion of your
shares, you will need to deliver your stock certificate (either physically or electronically) to Ascend’s transfer agent at the address below after the meeting. If you have questions regarding the certification of your position or delivery of
your shares, please contact:
Mark Zimkind
Continental Stock Transfer & Trust Company
17 Battery Place, 8
th
Floor
New
York, New York 10004
Telephone: (212) 845-3287
32
SELECTED SUMMARY HISTORICAL FINANCIAL INFORMATION
We are providing the following selected financial
information to assist you in your analysis of the acquisition. We derived the ePAK historical information from the audited consolidated financial statements of ePAK as of December 31, 2006 and 2005 and for each of the three years in the period ended
December 31, 2006, the unaudited consolidated financial statements as of June 30, 2007 and for the six months ended June 30, 2007 and June 30, 2006. We derived the Ascend historical information from the audited financial
statements of Ascend as of December 31, 2006 and the period from December 5, 2005 (Inception) to December 31, 2005 and from the unaudited financial statements as of June 30, 2007 and for the six months ended June 30, 2007
and 2006 and for the period from December 5, 2005 (Inception) to June 30, 2007.
ePAK’s unaudited consolidated
statements of operations for the six months ended June 30, 2007 and June 30, 2006, the consolidated statements of operations for each of the three years ended December 31, 2006, the unaudited consolidated balance sheet as of
June 30, 2007 and the audited balance sheets as of December 31, 2006 and 2005, are included elsewhere in this proxy statement/prospectus.
Ascend’s unaudited statements of operations for the six months ended June 30, 2007, June 30, 2006 and the period from December 5, 2005 (Inception) to June 30, 2007 and audited statements of operations for the
year ended December 31, 2006, the period from December 5, 2005 (Inception) to December 31, 2005 and the period from December 5, 2005 (Inception) to December 31, 2006 and unaudited balance sheet as of June 30, 2007 and
audited balance sheets as of December 31, 2006 and December 31, 2005, are included elsewhere in this proxy statement/prospectus.
In the opinion of each of Ascend’s and ePAK’s management, the respective unaudited financial statements include all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of such
consolidated financial statements.
The selected financial information of Ascend and ePAK is only a summary and should be read in
conjunction with each company’s historical consolidated financial statements and related notes and “
Other Information About Ascend
” and
“ePAK’s Management’s Discussion and Analysis of Financial Condition and
Results of Operations”
contained elsewhere in this proxy statement/prospectus. The information presented may not be indicative of the future performance of Ascend or ePAK or of Continuing Pubco and ePAK following the redomestication merger
and acquisition.
33
Ascend’s Summary of Selected Financial Data
(in thousands, except per share amounts)
Six Months Ended
June 30,
Year Ended
December 31
For the Period
From December 5,
2005 (Inception)
to December 31,
For the Period From
December 5, 2005
(Inception) to
June 30,
2007
2006
2006
2005
2007
(unaudited)
(unaudited)
Income Statement Data:
Revenue
$
—
$
—
$
—
$
—
$
—
Net income (loss)
199
74
383
(1
)
580
Net income (loss) per share
$
0.02
$
0.02
$
0.06
$
(0.00
)
$
0.09
Cash dividends per share
—
—
—
—
—
June 30,
December 31,
2007
2006
2005
(unaudited)
Balance Sheet Data:
Total assets (including cash deposited in trust account)
$
40,232
$
39,816
$
105
Common stock subject to possible redemption
7,698
7,698
—
Stockholders’ equity
31,111
30,912
24
ePAK’s Summary of Selected Financial Data
(in thousands, except per share amounts)
Six Months Ended
June 30,
Year ended December 31,
2007
2006
2006
2005
2004
Income Statement Data:
Net Sales
$
20,463
$
16,711
$
36,146
$
27,013
$
21,732
Net income (loss)
1,152
1,121
2,179
103
(88
)
Net income (loss) attributable to common shareholders
114
18
119
(4,300
)
(291
)
Basic net income (loss) per common share
$
0.01
$
—
$
0.01
$
(0.28
)
$
(0.02
)
June 30,
December 31
2007
2006
2005
Balance Sheet Data:
Total assets
$
35,345
$
33,523
$
25,601
Long-term debt
1,233
1,061
274
Redeemable common shares
25,244
24,205
22,145
Shareholder’s equity (deficit)
(14,070
)
(14,191
)
(14,568
)
34
Non-GAAP Financial Measures
Calculation of EBITDA
ePAK presents EBITDA, a financial measure that is not
defined by US GAAP, because this information is relevant to ePAK’s business. ePAK defines EBITDA as net income before: income taxes; interest expense; and depreciation and amortization.
ePAK’s management uses EBITDA as an important financial measure to assess the ability of ePAK’s assets to generate cash sufficient to pay
interest on its indebtedness, meet capital expenditure and working capital requirements, and otherwise meet its obligations as they become due. ePAK’s management believes that the presentation of EBITDA included in this proxy
statement/prospectus provides useful information regarding ePAK’s results of operations because it assists in analyzing and benchmarking the performance and value of ePAK’s business.
Although ePAK uses EBITDA as a financial measure to assess the performance of its business, there are material limitations to using a measure such as
EBITDA, including the difficulty associated with using it as the sole measure to compare the results of one company to another and the inability to analyze significant items that directly affect a company’s net income or operating income
because it does not include certain material costs, such as interest and taxes, necessary to operate its business. In addition, ePAK’s calculation of EBITDA may not be consistent with similarly titled measures of other companies.
The following table presents a reconciliation of EBITDA to net income, its most directly comparable US GAAP financial measure, on a historical
basis, for the periods presented:
Reconciliation of Unaudited EBITDA to Net Income
(in thousands)
Six Months Ended
June 30,
Fiscal Year Ended
December 31,
2007
2006
2006
2005
2004
Net income (loss)
$
1,152
$
1,121
$
2,179
$
103
$
(88
)
Income tax expense
225
141
322
523
272
Interest expense
239
134
354
156
168
Depreciation and amortization
1,336
963
2,300
1,911
1,679
EBITDA
$
2,952
$
2,359
$
5,155
$
2,693
$
2,031
35
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The acquisition will be accounted for as a
“reverse merger” and recapitalization since the stockholders of ePAK will own at least 50.1% of the outstanding shares of the common stock immediately following the completion of the acquisition, will have its current officers assuming
almost all corporate and day-to-day management offices of Continuing Pubco other than chairman of the board, including chief executive officer, chief operating officer and chief financial officer and will have the right to appoint three of the five
directors to the board. Accordingly, ePAK will be deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of ePAK. Accordingly, the assets and liabilities and the historical
operations that will be reflected in the Ascend financial statements after consummation of the acquisition will be those of ePAK and will be recorded at the historical cost basis of ePAK. Ascend’s assets, liabilities and results of operations
will be consolidated with the assets, liabilities and results of operations of ePAK upon consummation of the acquisition.
We have
presented below selected unaudited pro forma condensed combined financial information that reflects recapitalization accounting and is intended to provide you with a better picture of what Continuing Pubco’s businesses might have looked like
had Ascend and ePAK actually been combined as of the periods indicated. You should not rely on the selected unaudited pro forma condensed combined financial information as being indicative of the historical results that would have occurred had the
companies been combined or the future results that may be achieved after the acquisition. The following selected unaudited pro forma condensed combined financial information has been derived from, and should be read in conjunction with, the
unaudited pro forma condensed combined financial statements and related notes thereto included elsewhere in this proxy statement/prospectus.
We are providing this information to aid you in your analysis of the financial aspects of the acquisition. The following unaudited selected pro forma condensed combined statement of operations combines Ascend’s historical statement of
operations with those of ePAK for the six months ended June 30, 2007 and the year ended December 31, 2006, in each case giving effect to the acquisition as if it had occurred on January 1, 2006. The following unaudited selected pro
forma condensed combined balance sheet combines Ascend’s historical balance sheet and those of ePAK as of June 30, 2007, giving effect to the transactions described in the acquisition agreement as if they had occurred on June 30,
2007.
The unaudited pro forma adjustments are based upon available information and assumptions that we believe are reasonable. The
unaudited pro forma condensed combined statements of operations and the pro forma condensed combined balance sheet do not purport to represent the results of operations that would have occurred had such transactions been consummated on the dates
indicated or the financial position for any future date or period.
The following information, which is included elsewhere in this proxy
statement/prospectus, should be read in conjunction with the pro forma condensed combined financial information:
•
accompanying notes to the unaudited pro forma condensed combined information;
•
separate historical consolidated financial statements of ePAK for the year ended December 31, 2006;
•
separate historical financial statements of Ascend for the year ended December 31, 2006;
•
separate historical unaudited consolidated financial statements of ePAK for the six months ended June 30, 2007; and
•
separate historical unaudited financial statements of Ascend for the six months ended June 30, 2007.
The following selected financial data is derived from the pro forma condensed combined financial statement included elsewhere in this proxy
statement/prospectus, which has been prepared using two different assumptions
36
with respect to the number of outstanding shares of Continuing Pubco stock immediately following the acquisition, as follows:
•
assuming no conversions—this presentation assumes that no stockholders of Ascend seek to convert their shares into a pro rata share of the trust account; and
•
assuming maximum conversions—this presentation assumes stockholders of Ascend owning 19.99% of the stock sold in Ascend’s initial public offering seek
conversion.
In the case of both assumptions, the data is based on (a) information and projections currently
available to the parties, including projected Subject Adjusted EBITDA of $6.7 million and estimated Adjusted Ascend Trust Value of $38.2 million, and (b) approximately 8.6 million shares of Ascend common stock currently outstanding,
resulting in the issuance to EHL at closing of approximately 8.6 million shares, or 50.1% of the after-issued outstanding shares of Continuing Pubco. The acquisition agreement provides for a grace range on Subject Adjusted EBITDA, such that if
it is within 5% of $6,675,000, it will be deemed to be $6,675,000 for purposes of calculating the number of Transaction Shares to be issued. Similarly, the acquisition agreement provides for a grace range on Adjusted Ascend Trust Value, such that if
it is within 5% of $38,200,000, it will be deemed to be $38,200,000 for purposes of calculating the number of Transaction Shares to be issued.
Selected Unaudited Pro Forma Statement of Income
Six Months Ended
June 30, 2007
Year Ended
December 31, 2006
Assuming
Maximum
Approval
Assuming
Minimum
Approval
Assuming
Maximum
Approval
Assuming
Minimum
Approval
(in thousands, except per share data)
Net Sales
$
20,463
$
20,463
$
36,146
$
36,146
Net income
1,351
1,351
2,562
2,562
Net income per share—Basic
0.08
0.09
0.15
0.16
Net income per share—Diluted
0.07
0.08
0.15
0.16
Selected Unaudited Pro Forma Balance Sheet
June 30, 2007
Assuming
Maximum
Approval
Assuming
Minimum
Approval
(in thousands)
Total assets
$
73,872
$
65,876
Long-term debt
1,233
1,233
Stockholders’ equity
54,347
46,351
Comparative Per Share Data
The following table sets forth unaudited pro forma combined per share ownership information of Continuing Pubco after giving effect to the acquisition and the redomestication merger, assuming both no conversions and
maximum conversions by Ascend stockholders. You should read this information in conjunction with the selected summary historical financial information included elsewhere in this proxy statement/prospectus, and the historical financial statements of
Ascend and ePAK and related notes that are included elsewhere in this proxy statement/prospectus. The unaudited pro forma combined per share information is derived from, and should be read in conjunction with, the unaudited pro forma condensed
combined financial information and related notes included elsewhere in this proxy statement/prospectus.
37
The unaudited pro forma combined earnings per share information below do not purport to represent the
earnings per share which would have actually occurred if the companies had been combined, nor earnings per share for any future date or period. The unaudited pro forma combined book value per share information below does not purport to represent
what the value of Ascend and ePAK would have actually been had the companies been combined.
Unaudited Comparative Per Share Data
ePAK(1)
Ascend(1)
Combined
Company(1)
Assuming maximum approval
8,601,002
8,566,667
17,167,669
50.1
%
49.9
%
100
%
Assuming minimum approval
8,601,002
7,187,357
15,788,359
54.5
%
45.5
%
100
%
Net income per common share—historical:
Year ended December 31, 2006
$
0.01
$
0.06
Six months ended June 30, 2007
$
0.01
$
0.02
Book value per share—historical—June 30, 2007:
$
(1.64
)
$
4.53
(2)
Book value per share—historical—December 31, 2006
$
(1.65
)
$
4.51
(2)
Net income per share—pro forma:
Year ended December 31, 2006
Maximum—Basic
$
0.15
Minimum—Basic
$
0.15
Maximum—Diluted
$
0.16
Minimum—Diluted
$
0.16
Six months ended June 30, 2007
Maximum—Basic
$
0.08
Minimum—Basic
$
0.07
Maximum—Diluted
$
0.09
Minimum—Diluted
$
0.08
Book value per share—pro forma—June 30, 2007:
Maximum
$
3.17
Minimum
$
2.94
Notes:
(1)
Historical per share amounts for Ascend were determined based upon 8,566,667 shares outstanding. Historical per share amounts for ePAK were based on the 8,601,002 shares to be
received. The pro forma per share amounts for the combined company were determined based upon the assumed number of shares to be issued under the two different levels of approval as described above.
(2)
This calculation includes shares of common stock subject to possible conversion.
38
SPECIAL MEETING OF ASCEND STOCKHOLDERS
General
We are furnishing this proxy statement/prospectus to Ascend stockholders as part of the solicitation of proxies by Ascend’s board of directors for
use at the special meeting of Ascend stockholders to be held on , 200 , and at any adjournment or
postponement thereof. This proxy statement/prospectus is first being furnished to Ascend’s stockholders on or about ,
200 in connection with the vote on the acquisition proposal, the certificate of incorporation amendments and 2007 incentive plan proposal. This document provides you with the information you need to know to be able to vote or
instruct your vote to be cast at the special meeting.
Date, Time and Place
The special meeting of stockholders will be held on
, 200 , at 10:00 a.m., eastern time, at the offices of Graubard Miller, Ascend’s general counsel, at
The Chrysler Building, 405 Lexington Avenue, 19th Floor, New York, New York 10174.
Purpose of the Special Meeting
At the special meeting, we are asking holders of Ascend common stock to:
•
To approve an agreement and plan of reorganization, dated as of July 30, 2007 (“acquisition agreement”), among Ascend, ACL, ePAK, and ePAK’s
parent company and sole stockholder, ePAK Holdings Ltd. (“EHL”), and the transactions contemplated thereby, including the acquisition (the “acquisition”) of ePAK by Continuing Pubco. We refer to this as the “acquisition
proposal.”
•
To approve the merger (the “redomestication merger”) of Ascend and ACL for the purposes of (a) moving the domicile of our public company from
Delaware to Bermuda and (b) concurrently with the redomestication merger, acquiring ePAK in the acquisition. We refer to this as the “redomestication proposal.”
•
To approve the 2007 Equity Incentive Plan (“2007 incentive plan”). We refer to this as the “2007 incentive plan proposal.”
•
To approve a proposal to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation and voting of proxies if, based upon the
tabulated vote at the time of the special meeting, the vote necessary to approve the above proposals has not been obtained. We refer to this as the “adjournment proposal.”
Recommendation of Ascend Board of Directors
Ascend’s board of directors:
•
has unanimously determined that each of the acquisition proposal, redomestication proposal and 2007 incentive plan proposal is advisable and in the best interests
of Ascend and its stockholders;
•
unanimously recommends that Ascend’s common stockholders vote “FOR” the acquisition proposal;
•
unanimously recommends that Ascend’s common stockholders vote “FOR” the redomestication proposal;
•
unanimously recommends that Ascend’s common stockholders vote “FOR” the 2007 incentive plan proposal; and
•
if necessary, unanimously recommends that Ascend’s common stockholders vote “FOR” the adjournment proposal.
39
Record Date; Who is Entitled to Vote
We have fixed the close of business on , 200 , as the “record
date” for determining the Ascend stockholders entitled to notice of and to attend and vote at the special meeting. As of the close of business on
, there were 8,566,667 shares of Ascend’s common stock outstanding and entitled to vote. Each share of Ascend’s common
stock is entitled to one vote per share at the special meeting.
Quorum
The presence, in person or by proxy, of a majority of all the outstanding shares of common stock constitutes a quorum at the special meeting. Abstentions
and broker non-votes will count as present for purposes of establishing a quorum.
Abstentions and Broker Non-Votes
If you do not give your broker voting instructions, under the rules of the NASD, your broker may not vote your shares on the acquisition proposal, the
redomestication proposal or the 2007 incentive plan proposal. Since a stockholder must affirmatively vote against the acquisition proposal to have conversion rights, individuals who fail to vote or who abstain from voting may not exercise their
conversion rights. Beneficial holders of shares held in “street name” that are voted against the acquisition proposal may exercise their conversion rights, provided that they comply with the required conversion procedures. See the
information set forth in “
Special Meeting of Ascend Stockholders—Conversion Rights.
”
Vote Required for Approval
Approval of the acquisition proposal will require the affirmative vote of the holders of a majority of the shares of Ascend common stock issued in its
IPO (“Public Shares”), including holders who purchase Public Shares subsequent to the IPO, and voted on the matter. Abstentions will have the same effect as a vote “AGAINST” the acquisition proposal and broker non-votes, while
considered present for the purpose of establishing a quorum, will have no effect on the acquisition proposal. You cannot seek conversion unless you affirmatively vote against the acquisition proposal.
Approval of the redomestication proposal will require the affirmative vote of the holders of a majority of the outstanding shares of Ascend common stock.
Because the redomestication proposal requires the affirmative vote of a majority of the shares of common stock outstanding, abstentions and shares not entitled to vote because of a broker non-vote will have the same effect as a vote
“against” this proposal.
The approval of the 2007 incentive plan proposal will require the affirmative vote of the holders of a
majority of Ascend’s common stock represented and entitled to vote at the meeting. Abstentions will have the same effect as a vote “AGAINST” the 2007 incentive plan proposal and broker non-votes, while considered present for the
purpose of establishing a quorum, will have no effect on this proposal.
In order to consummate the acquisition, each of the
redomestication proposal and 2007 incentive plan proposal must be approved by the stockholders. In order to consummate the redomestication merger, the acquisition proposal must be approved by the stockholders.
Adoption of the adjournment proposal requires the affirmative vote of a majority of the issued and outstanding shares of Ascend’s common stock
represented in person or by proxy at the meeting.
Ascend Inside Stockholders
Ascend’s initial stockholders who purchased their shares of common stock prior to Ascend’s initial public offering (“IPO”), and which
include all of Ascend’s directors and executive officers and their affiliates are referred to collectively in this proxy statement/prospectus as the “Ascend Inside Stockholders.” The Ascend
40
Inside Stockholders are comprised of Don K. Rice, Ascend’s current chairman of the board and chief executive officer, Russell C. Ball III, a director,
Stephen L. Brown, a director, and Arthur Spector, a board advisor. Each of the Ascend Inside Stockholders has agreed to vote all of the shares they purchased prior to the IPO (and Don K. Rice has agreed to vote certain shares he purchased in a
private placement consummated concurrently with the IPO) on the acquisition proposal in accordance with the vote of the majority of the votes cast by the holders of shares issued in the IPO (“Public Shares”). Accordingly, their vote will
have no effect on the outcome of the acquisition proposal. The Ascend Inside Stockholders also have indicated that they intend to vote such shares in favor of all other proposals being presented at the special meeting. The Ascend Inside Stockholders
also have indicated that they intend to vote any other shares they acquire after the IPO for all of the proposals. As of the record date, the Ascend Inside Stockholders have not acquired any additional shares of Ascend common stock, except that
Mr. Rice acquired 166,667 shares concurrently with the IPO. All of the Ascend Inside Stockholders also agreed, in connection with the IPO, to place their shares in escrow until May 11, 2009. As of the record date, the Ascend Inside
Stockholders own an aggregate of 1,666,667 shares, or 19.5%, of Ascend’s outstanding common stock.
Voting Your Shares
Each share of Ascend common stock that you own in your name entitles you to one vote. Your proxy card shows the number of shares of Ascend’s common
stock that you own.
There are two ways to vote your shares of Ascend common stock at the special meeting:
•
You can vote by signing and returning the enclosed proxy card.
If you vote by proxy card, your “proxy,” whose name is listed on the proxy card,
will vote your shares as you instruct on the proxy card. If you sign and return the proxy card but do not give instructions on how to vote your shares, your shares will be voted as recommended by Ascend’s board “FOR” the adoption of
the acquisition proposal, redomestication proposal, 2007 incentive plan proposal and, if presented at the special meeting, the adjournment proposal. Votes received after a matter has been voted upon at the special meeting will not be counted.
•
You can attend the special meeting and vote in person.
We will give you a ballot when you arrive. However, if your shares are held in the name of your
broker, bank or another nominee, you must get a proxy from the broker, bank or other nominee. That is the only way we can be sure that the broker, bank or nominee has not already voted your shares.
IF YOU DESIRE TO VOTE AGAINST THE ACQUISITION BUT DO NOT VOTE YOUR SHARES OF ASCEND’S COMMON STOCK IN ANY OF THE WAYS DESCRIBED ABOVE, IT WILL
NOT HAVE THE EFFECT OF A DEMAND FOR CONVERSION OF YOUR SHARES INTO A PRO RATA SHARE OF THE TRUST ACCOUNT IN WHICH A SUBSTANTIAL PORTION OF THE PROCEEDS OF ASCEND’S IPO ARE HELD. YOU ARE REQUESTED TO COMPLETE, SIGN AND RETURN A PROXY WHETHER OR
NOT YOU PLAN ON ATTENDING THE MEETING.
Revoking Your Proxy
If you give a proxy, you may revoke it at any time before the vote is taken at the meeting by doing any one of the following:
•
you may send another proxy card with a later date;
•
you may notify Ascend (Attention: Don Rice) in writing before the special meeting that you have revoked your proxy; or
•
you may attend the special meeting, revoke your proxy, and vote in person, as indicated above.
41
Who Can Answer Your Questions About Voting Your Shares
If you have any questions about how to vote or direct a vote in respect of your shares of Ascend’s common stock, you may call
, Ascend’s proxy solicitor, at ( )
, or Don K. Rice at Ascend at (610) 519-1336.
No Additional Matters May Be
Presented at the Special Meeting
This special meeting has been called only to consider the adoption of the acquisition proposal, the
redomestication proposal, the 2007 incentive plan proposal and, if presented at the special meeting, the adjournment proposal. Under Ascend’s bylaws, other than procedural matters incident to the conduct of the meeting, no other matters may be
considered at the special meeting if they are not included in the notice of the meeting.
Conversion Rights
Any of Ascend’s stockholders holding shares of Ascend common stock issued in Ascend’s IPO as of the record date who affirmatively votes these
shares against the acquisition proposal may also demand that we convert his, her or its shares into a pro rata portion of the trust account calculated as of two business days prior to the anticipated date of the consummation of the acquisition. Any
holders seeking such conversion must affirmatively vote against the acquisition proposal. Abstentions and broker non-votes do not satisfy this requirement. Additionally, holders demanding conversion must deliver their shares (either physically or
electronically using Depository Trust Company’s DWAC (Deposit Withdrawal at Custodian System) to our transfer agent promptly after the meeting. If you hold the shares in street name, you will have to coordinate with your broker to have
your shares certificated or delivered electronically. Shares that have not been tendered (either physically or electronically) in accordance with these procedures will not be converted into cash.
The closing price of Ascend’s common stock on
, 200 (the record date) was
$ per share. The cash held in the trust account on the record date was approximately $ , or
approximately $ per currently outstanding share.
Prior to exercising conversion rights, Ascend’s stockholders should verify the market price of Ascend’s common
stock, as they may receive higher proceeds from the sale of their common stock in the public market than from exercising their conversion rights if the market price per share is higher than the conversion price. We cannot assure Ascend stockholders
that they will be able to sell their shares of Ascend common stock in the open market, even if the market price per share is higher than the conversion price stated above, as there may not be sufficient liquidity in Ascend’s securities when its
stockholders wish to sell their shares.
If the holders of 20% or more of the Public Shares (
i.e.
1,380,000 shares or more) vote
against the acquisition and properly demand conversion of their shares, we will not be able to consummate the acquisition.
If you exercise
your conversion rights, then you will be exchanging your shares of our common stock for cash and will no longer own those shares. You will be entitled to receive cash for these shares only if you affirmatively vote against the acquisition proposal,
properly demand conversion, and deliver your shares (either physically or electronically) to our transfer agent promptly after the meeting.
Appraisal Rights
Under Delaware corporate law, the redomestication merger of Ascend and ACL causes the stockholders of
Ascend to have appraisal rights in connection with the transactions for which approval is sought. This right is separate from the conversion rights of the holders of Public Shares with respect to the acquisition proposal. However, because the
exercise of the appraisal right and the conversion rights both require a tender of the holder’s shares to Ascend, only one right may be elected in respect of the Public Shares. See
“Redomestication Proposal—Appraisal
Rights
” for more information about appraisal rights.
42
Solicitation Costs
We are soliciting proxies on behalf of Ascend’s board of directors. This solicitation is being made by mail but also may be made by telephone or in person. We and our directors and officers may also solicit
proxies in person, by telephone or by facsimile or email.
We have hired
to assist in the proxy solicitation process. We will pay a fee of approximately
$ plus reasonable out-of pocket charges and a flat fee of $ per outbound proxy solicitation
call. Such fee will be paid with currently available, non-trust account funds.
We will ask banks, brokers and other institutions, nominees
and fiduciaries to forward its proxy materials to their principals and to obtain their authority to execute proxies and voting instructions. We will reimburse them for their reasonable expenses.
43
THE ACQUISITION PROPOSAL
The discussion in this document of the acquisition and the principal terms of the
acquisition agreement by and among Ascend, ACL, ePAK and EHL is subject to, and is qualified in its entirety by reference to, the acquisition agreement. A copy of the acquisition agreement is attached as
Annex A
to this proxy
statement/prospectus.
General Description of the Acquisition
The acquisition agreement provides for a business combination transaction in which, concurrently with the redomestication merger:
•
all of the outstanding capital stock of ePAK will be acquired by Continuing Pubco; and
•
Continuing Pubco will be renamed “ePAK International Limited.”
In return for all of the capital stock of ePAK, EHL, ePAK’s sole shareholder (or its designees) will receive the aggregate number of Continuing
Pubco’s common stock (the “Transaction Shares”) determined by a formula set forth in Section 1.07(b) of the acquisition agreement and described in the section of this proxy statement/prospectus entitled “
The Acquisition
Agreement—Acquisition Consideration—Transaction Shares.
” Within 12 months after the acquisition of ePak, EHL will liquidate and distribute the common stock of Continuing Pubco in pursuance of a plan of reorganization with respect
to EHL.
As of the date hereof, based on (a) information and projections currently available to the parties, including Subject
Adjusted EBITDA of $6.7 million (resulting in a 5.72 multiple result of $38.3 million) and estimated Adjusted Ascend Trust Value of $38.2 million, and (b) 8,566,666 shares of Ascend common stock currently outstanding, the aggregate number of
Transaction Shares that will be issued at closing to EHL, excluding those underlying the Assumed Options, will be 8,601,002 shares, or 50.1% of the outstanding common stock of Continuing Pubco immediately following the closing. The foregoing figures
give no effect to any additional shares that may be issued to EHL post-closing, as described below, and assume none of Ascend’s currently outstanding common stock is converted into cash as permitted by Ascend’s certificate of
incorporation.
Background of the Acquisition
The terms of the acquisition agreement are the result of arm’s-length negotiations between representatives of Ascend and ePAK. The following is a discussion of the background of these negotiations, the acquisition agreement and related
transactions.
Ascend was formed on December 5, 2005 for the purpose of effecting a merger, capital stock exchange, asset acquisition
or other similar business combination with an operating business. Ascend’s registration statement for its initial public offering was declared effective on May 11, 2006 and the offering closed on May 22, 2006, generating net
proceeds of approximately $38.5 million from the sale of 6.9 million units, including the full exercise of the underwriters’ over-allotment option and the sale of 166,667 units to Don K. Rice, Ascend’s chairman of the board and chief
executive officer. Each unit was comprised of one share of Ascend common stock and two warrants, each with an exercise price of $5.00. As of August 31, 2007, Ascend held approximately $40.2 million in a trust account maintained by in
independent trustee, which will be released to Ascend upon the consummation of the business combination. Ascend must liquidate unless it has consummated a business combination by May 17, 2008. As of
200 , the record date, approximately $ was held in
deposit in the trust account.
Following consummation of Ascend’s IPO, the management of Ascend instituted an active marketing program
to their established base of private equity and venture capital firms, bankers, investment bankers,
44
accountants, lawyers and numerous groups of investors with which they had prior investment history or with which they served on boards. At the same
time, Ascend’s management canvassed selected firms that had exhibited a prior history of investments in companies of the size and type that Ascend was targeting. Mr. Rice also began attending conferences featuring attendees and presenters
that were of the type and size that met Ascend’s requirements.
Ascend looked at more than 100 companies during the period from after
its IPO until Ascend signed a letter of intent with ePAK in February 2007. Among these opportunities, Ascend focused on companies that had the best combination of the following characteristics:
•
demonstrated revenue generation;
•
compelling growth prospects;
•
attractive profit margins (current or potential);
•
talented management with an interest in continuing at the company;
•
reasonable valuation expectations;
•
the ability to deploy capital productively;
•
strong competitive positions;
•
stage of development of the products, processes or services;
•
degree of current or potential market acceptance of the products, processes or services;
•
a willingness to operate as a publicly-traded company;
•
proprietary features and degree of intellectual property or other protection of the products, processes or services; and
•
an understanding and acceptance of Ascend’s structure, acquisition process and timing.
As discussed below, Ascend entered into various levels of discussions with companies that it believed met most or all of the foregoing criteria. Although
Ascend investigated these opportunities in varying depth, none resulted in the execution of any preliminary letter of intent or memorandum of understanding. Ascend declined to move forward on some opportunities because it did not believe the
financial characteristics, business dynamics, management teams, attainable valuations and/or deal structures were suitable. There were also companies that were not interested in pursuing a deal with Ascend based on its publicly-traded status,
capital structure or ability to close with sufficient certainty or speed or which decided to accept competitive bids from other acquirers.
In May 2006, Ascend was introduced to a highly diversified industrial pipe company by Stephen L. Brown, an Ascend board member. During the period from May 2006 to June 2006, Ascend reviewed this potential target’s financial information
and held discussions with an intermediary that was working with the owners of the target. Although the target was not being actively marketed for sale, it expressed interest in further exploring the opportunity Ascend could provide for growth
and liquidity. In June 2006, a meeting was held between Mr. Rice and the target’s owners and management. After further due diligence it was determined by Ascend that the target would not be able to effectively deploy the level of
capital that Ascend would bring to the transaction. Discussions between Ascend and this target company were terminated.
In June 2006,
Ascend was contacted directly by a food snack specialty retailer with franchised outlets throughout the United States and abroad. Mr. Rice had an existing relationship with the owner of the potential target. During the period from June 2006 to
December 2006, Ascend management reviewed financial information, both historical and projected, supplied to it by the target and held numerous phone calls with ownership and company management. Discussions focused on potential purchase price
and use of proceeds from any business combination with Ascend for target’s growth. In August 2006, Ascend management held a two-day
45
meeting with target’s management in their offices. It was ultimately determined by Ascend and target’s ownership that the target’s
projections were not likely to be met. Discussions between Ascend and this target company were mutually terminated.
In June 2006, Russell
C. Ball III, a board member of Ascend, introduced Ascend to a supplier of home building materials to home builders. During the period from June 2006 to July 2006, Ascend engaged in preliminary due diligence, which included a review of target’s
financials and discussions with company advisors. It was determined that the target would not be able to deploy the amount of capital that Ascend would bring to the transaction. Ascend also had concerns with respect to the cyclicality of the home
building sector. Discussions between Ascend and this target company were terminated.
In June 2006, Ascend was introduced to a document
storage company by a private equity firm that held a controlling interest in the company. During the period from June 2006 to October 2006, Ascend engaged in preliminary due diligence, which included a review of target’s financials and
projections and discussion with management regarding target’s valuation and capital needs. In June 2006, a meeting between Ascend management and target’s senior management was held at the private equity firm’s offices. It
was mutually determined that the target needed to close the acquisitions it currently had under contract and to integrate those acquisitions before a business combination could be considered. Discussions between Ascend and this target company were
terminated.
In June 2006, a medical service billing company was brought to Ascend by a private equity firm that held a controlling
interest in the company. During the period from June 2006 to September 2006, financial reports and projections were reviewed by Ascend, and a meeting between Ascend and senior management of the target was held in the offices of the private
equity group. During this course, it was determined by the parties that an acceptable valuation could not be reached. Discussions between Ascend and this target company were terminated.
In July 2006, a company operating in the oil field supply business was introduced to Ascend by a private equity group that had a controlling interest in
the company. Mr. Rice had an existing relationship with this private equity group. During the period from July 2006 to September 2006, Ascend reviewed financial statements, both historical and projected, supplied by the target and spoke
with the ownership regarding valuation price and future financing needs. In July 2006, Mr. Rice met with target’s management and the target’s control ownership in the target’s offices in Texas. Discussions continued and
by September 2006, the ownership of the target concluded that the best alternative for them was to sell their company outright. The target was put up for sale and closed within six months at a price in excess of the amount that Ascend had been
discussing.
In July 2006, a company involved in the clerical temporary employment industry was brought to Ascend by an investor with whom
Ascend management had an existing relationship. During the period from July 2006 to January 2007, Ascend reviewed various financial information provided to it by target. In July 2006, a telephonic discussion between Mr. Rice and senior
management of the target was held. In August 2006, a meeting was held with senior management and ownership at the investor’s office. It was ultimately determined by Ascend that disparity existed between the exit strategies of management
and ownership of the target and that further pursuit of a business combination would not be fruitful. Discussions between Ascend and this target company were terminated.
In July 2006, a foam fabricator and packager for industrial and commercial products was brought to Ascend by an owner of the company who had been a board member of a company on whose board Mr. Rice also
served. During the period from July 2006 to August 2006, financial reports were reviewed and an analysis of the industry, historical growth and competitive environment faced by the target was undertaken by Ascend. Based on these analyses,
Ascend determined that the market the company served did not have enough acquisition opportunities to deploy the Ascend capital post closing. Discussions between Ascend and this target company were terminated.
46
In August 2006, a private equity group introduced Ascend to a target it controlled which provides voting
machines and documentation and electronic storage services to state and local governments in the United States. During the period from August 2006 to February 2007, Ascend reviewed financials, both historical and projected, supplied to it by
the target and had conversations with the owners regarding valuation and sources and uses of funds. In August and November 2006, Mr. Rice and Darl Petty, an associate of and advisor to Mr. Rice, met with target management at
target’s offices. Each of Messrs. Rice and Petty possesses extensive experience in investing in private growth companies through their firm, RSTW Partners. Mr. Petty receives no compensation from Ascend. Ascend undertook significant due
diligence with respect to the target and its industry. Ascend and representatives of the ownership group of the target concluded that a change in senior management would need to take place to position target as a public company and that it was not
the proper time for a business combination. Discussions between Ascend and this target company were terminated.
In August 2006, Ascend was
introduced to a construction and engineering company focused on building and repairing infrastructure projects in the United States. The opportunity was brought to Ascend by an investment banking firm with which it had no prior relationship.
During the period from August 2006 to December 2006, Ascend conducted financial and operational due diligence, including the review of financials, both historic and projected, provided by the target. In August 2006, Ascend held a meeting with
target’s senior management in the target’s offices. It was mutually concluded by target and Ascend’s management that Ascend did not have adequate capital to provide the owners with the liquidity they desired at closing of a
business combination. Discussions between Ascend and this target company were terminated.
In September 2006, an oil field equipment
distributor was brought to Ascend by a stockholder of the target with whom Mr. Rice had an existing relationship. During the period from September 2006 to October 2006, Ascend engaged in due diligence, including an examination of target’s
financial reports and projections. During this period, Mr. Rice also engaged in telephone discussions with target’s ownership and senior management. It was thereafter determined by the parties that a recapitalization of the target in
the private markets better suited the ownership group. Discussions between Ascend and this target company were terminated.
In October
2006, a media company focused on the Hispanic radio market was brought to Ascend by a private equity fund that held a controlling interest. During the period from October 2006 to December 2006, Ascend conducted due diligence, including
reviewing financial information and business plans. In October 2006, a meeting between Mr. Rice and senior management of the target was held in New York City. Thereafter, after additional due diligence and evaluation by Ascend, Ascend
determined that the desired valuation and debt levels of the target were too high. Discussions between Ascend and this target company were terminated.
In November 2006, Ascend was introduced to a provider of propane fuel to residential and consumer customers in the Northeast United States. This opportunity was brought to Ascend by an investment banking firm
with which it had no prior relationship. During the period from November 2006 to December 2006, Ascend reviewed financial information supplied to it by the target. In November 2006, Mr. Rice met with senior management and owners of the
target at the investment banking firm’s offices. Thereafter, after general industry due diligence, Ascend’s management determined that there were more attractive opportunities that were then under consideration by Ascend and it was in
the best interests of Ascend to devote its resources to examining those opportunities. Discussions between Ascend and this target company were terminated.
In November 2006, Ascend was introduced to a for-profit day care school for inner city children by a private equity firm that had a controlling ownership position. During November 2006, Ascend engaged in
preliminary due diligence, which included a review of target’s financials and projections and discussions with the control group regarding valuation ranges and liquidity needs. After various discussions, the control group determined that a
recapitalization in the private market better suited the target’s needs. Discussions between Ascend and this target company were terminated.
47
In December 2006, a U.S.-based energy drilling service company was brought to Ascend by a investment
banking firm with which Ascend had no prior relationship. The target focused on a high growth area of the energy service industry and had potentially good internal growth opportunities. During the period from October 2006 to January 2007,
financial reports were reviewed by Ascend and Ascend undertook an industry and customer requirements analysis. In October 2006, a meeting between Ascend and the target’s controlling stockholder was held the investment banking firm’s
office. The parties could not agree on the target’s valuation and the amount of liquidity that would be provided target’s ownership at closing. Discussions between Ascend and this target company were terminated.
In February 2007, a company in the specialty packaging and freight forwarding business was brought to Ascend by the underwriter of Ascend’s IPO,
EarlyBirdCapital. During the period from February 2007 to March 2007, financial reports and projections were reviewed by Ascend. In March 2007, a meeting between Ascend management and management and ownership of the target was held in New York
City. Thereafter, Ascend engaged in further review of the industry, the competition, the liquidity requirements of the control group and proposed valuation. The parties could not agree on the valuation of the target. Discussions between Ascend and
this target company were terminated.
ePAK was introduced to Ascend by EarlyBirdCapital in early August 2006. From August 2006 to
February 2007, Mr. Rice reviewed financial statements and the projections prepared by ePAK management. In August 2006, a telephonic meeting was held between Mr. Rice and Steve Dezso, the chief executive officer of ePAK. General
opportunities for the parties were discussed and there was sufficient interest by both parties to arrange an in-person meeting, which was held in Austin, Texas in late August 2006. This meeting was attended by ePAK senior management, including
Mr. Dezso, Richard Brook and Jim Thomas, and Messrs. Rice and Petty. A number of issues were covered at the meeting, including the background of management, the history of ePAK’s founding and historical performance and the
semiconductor and electronics industry generally. ePAK also gave an overview on its reasons for and history of manufacturing in China and the competition ePAK faces in its industry. The parties also discussed the goals of ePAK’s management and
future projections for ePAK’s organic and acquisition growth.
During September 2006, numerous telephonic meetings took place between
Messrs. Rice and Petty and members of ePAK management and Ascend undertook an extensive analysis on the industry and ePAK’s financial statements. It was determined that Messrs. Rice and Petty should travel to China to review ePAK’s
manufacturing facilities and meet with senior management and staff.
In late September 2006, Messrs. Rice and Petty visited ePAK’s
facilities in China and met with ePAK’s management, including, among others, Messrs. Mao Shi Khoo, chief operating officer, and Jason Lee, vice president, finance. During this visit, Messrs Rice and Petty conducted extensive on-site due
diligence.
Upon their return, Messrs. Rice and Petty continued extensive due diligence on the company, the industry and the competition
throughout October 2006. In November 2006, another meeting between Ascend and ePAK management was held in ePAK’s offices in Austin, Texas for purposes of due diligence. Throughout December 2006 and January 2007 financial due diligence
continued, and a letter of intent was negotiated and entered into in mid-February 2007. The terms of the letter of intent are substantially those embodied in the acquisition agreement and described elsewhere in this proxy statement/prospectus.
In late February 2007, Messrs. Rice and Petty again met with ePAK senior management in ePAK’s offices in Austin, Texas to review an
extensive list of questions and due diligence items over a two-day period. In March 2007, Messrs. Rice and Petty again visited ePAK’s facilities in China to further examine ePAK’s manufacturing facilities and complete on-site review
of ePAK’s financial books and records. During February and March 2007, Mr. Rice conducted customer calls to ePAK customers to ascertain the condition of ePAK’s customer relationship and customer views of the level of service and
product innovation ePAK was providing them.
48
At the request of Ascend, International Business Research undertook an extensive background check on key
members of ePAK’s management team, and the report was positive with no material negative findings. During the period from April to July 2007, Ascend completed its due diligence and negotiated the acquisition agreement and related agreement
with ePAK.
On July 27, 2007, a meeting of the board of directors of Ascend was held. All directors attended, as did, by invitation
telephonically, Brian L. Ross, Esq., of Graubard Miller, and representatives of Capitalink (Ladenburg Thalmann). Prior to the meeting, copies of the most recent drafts of the significant transaction documents, in substantially final form, were
delivered to all participants. Mr. Rice discussed at length with Ascend’s board ePAK’s business, operations and financial condition. It was acknowledged that Mr. Rice had regularly communicated with each member of the board
during the due diligence process and negotiations of the definitive agreements governing the acquisition. Mr. Rice explained at length the different analyses used to determine whether the consideration to be paid by Ascend in the acquisition
was fair from a financial point of view to Ascend’s stockholders, as well as to determine the fair market value of ePAK. The representative of Capitalink then made a presentation to the board with respect to their analysis of ePAK and the
proposed terms of the acquisition. Capitalink noted that, in its opinion, the consideration to be paid by Ascend pursuant to the acquisition agreement was fair, from a financial point of view, to the holders of Ascend common stock and that the fair
market value of ePAK was at least equal to 80% of Ascend’s net assets. For a more detailed description of Capitalink’s opinion, see the subsection below entitled “
Fairness Opinion.
” After considerable review and
discussion, the acquisition agreement and related documents were unanimously approved by the board, and the board determined to recommend the approval of the acquisition (and the related redomestication merger) to the stockholders of Ascend, and
that the consideration to be paid by Ascend pursuant to the acquisition agreement was fair, from a financial point of view, to the holders of Ascend common stock and that the fair market value of ePAK was at least equal to 80% of Ascend’s net
assets.
The acquisition agreement was signed as of July 30, 2007. Immediately thereafter, Ascend and ePAK issued a joint press
release announcing the execution of the acquisition agreement and discussing the terms of the acquisition agreement, and on July 31, 2007, Ascend filed a Current Report on Form 8-K discussing in greater detail the terms of the acquisition
agreement and ePAK’s business.
In connection with the consummation of the acquisition, Continuing Pubco will be obligated to pay
EarlyBirdCapital (1) a cash finder’s fee equal to 1.5% of the transaction consideration (including any assumed indebtedness) and (2) deferred commissions of $952,200 earned by it as underwriter in the IPO at the closing of the
acquisition.
Ascend’s Board of Directors’ Reasons for Approval of the Acquisition
General
The final agreed-upon
consideration in the acquisition agreement was determined by several factors. Ascend’s board of directors reviewed industry and financial data, including certain valuation analyses and metrics compiled by management, in order to determine that
the consideration to be paid by Ascend in the acquisition was fair and that the acquisition was in the best interests of Ascend’s stockholders.
In order to enable the board of directors of Ascend to evaluate the proposed acquisition, Ascend’s management conducted a due diligence review with respect to ePAK that included:
•
a general analysis of ePAK’s industry;
•
tours of ePAK’s manufacturing facilities and principal offices;
•
a valuation analysis of ePAK; and
•
reviews of historic financial statements and information and financial projections provided by ePAK.
49
Ascend’s board of directors considered a wide variety of factors in connection with its evaluation
of the acquisition. In light of the complexity of those factors, the Ascend board of directors did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific factors it considered in reaching
its decision. In addition, individual members of the Ascend board may have given different weight to different factors.
The historical
financial information and financial projections provided to Ascend by ePAK included (Singapore generally accepted accounting principles):
•
audited financial statements for the year ended December 31, 2004;
•
audited financial statements for the year ended December 31, 2005;
•
audited financial statements for the year ended December 31, 2006;
•
unaudited financial statements for the six months ended June 30, 2007; and
•
financial projections for the year ending December 31, 2007.
Board approval
In considering the acquisition, the Ascend board of directors gave considerable
weight to the following factors:
•
ePAK’s historic growth and potential for future growth
. Ascend believes that ePAK has in place the core infrastructure for strong business operations
that will enable ePAK to achieve growth both organically and through accretive strategic acquisitions. Ascend’s belief in ePAK’s growth potential is based in part on ePAK’s historical growth rate. ePAK’s revenues were
approximately $36.1 million for the year ended December 31, 2006, an increase of 33.7% as compared to approximately $27.0 million for the year ended December 31, 2005. ePAK’s unaudited revenues for the first six months of 2007 were
approximately $20.4 million, an increase of 22.2% as compared to unaudited revenues of approximately $16.7 million for the first six months of 2006. Net income for the year ended December 31, 2006 was approximately $2.2 million, compared to
approximately $0.1 million for the year ended December 31, 2005. Net income for the first six months of 2007 was approximately $1.2 million, compared to net income for the first six months of 2006 of approximately $1.1 million. Earnings before
interest, taxes, depreciation and amortization (“EBITDA”) was approximately $5.2 million in the year ended December 31, 2006, an increase of 93% as compared to EBITDA of approximately $2.7 million in the year ended December 31,
2005. EBITDA for the first six months of 2007 was approximately $3.0 million, an increase of 25% as compared to EBITDA of approximately $2.4 million for the first six months of 2006.
•
ePAK’s low-cost, well-located manufacturing structure
. ePAK’s facilities in the PRC provide ePAK with a relatively low cost large scale
manufacturing center that is centrally located to many of the producers of semiconductor products, which provides ePAK with the ability to meet its customer demand on a cost- and time-efficient basis. Ascend believes this is an important competitive
advantage that will allow ePAK to garner an increasing portion of market share.
•
The experience of ePAK’s management
. ePAK’s management team has extensive experience in the semiconductor industry. Further, its core management
team has been together for more than 15 years. Ascend believes that ePAK has a management team with the specialized knowledge necessary to compete in its market and the ability to recognize customer demand and introduce new products to address that
demand.
•
ePAK’s vertically integrated business model
. ePAK’s business model utilizes ePAK’s own design and manufacturing facilities and exploits the
company’s central location design to provide speed to market, which allows ePAK to produce product quickly when specific demand is identified and to supervise quality control. This allows ePAK to minimize risk of producing ahead of demand and
maintain quality production.
50
•
Wafer handling products as an emerging growth driver
. In addition to core growth in its traditional product offerings, ePAK recently entered into the wafer
handling product market and has experienced rapid growth in this area, with growth in sales of 12% in 2005, 22% in 2006 and % in the first six months of 2007. In a market historically dominated by a single provider, Entegris,
Inc., Ascend believes that ePAK, with its vertically integrated business model, experienced management team and ability to provide its wafer handling products with 50-60% gross margins, is well-positioned to garner a larger share of the market.
•
ePAK’s competitive position and market acceptance of its products
. ePAK’s reputation in its industry, within its distribution channels and among
its end customers was considered by the board to be one of the favorable factors in concluding that its competitive position was strong. As part of its due diligence investigation, Ascend interviewed numerous ePAK customers. Ascend reported to the
board that feedback from these sources on the company and its products was very strong.
•
Costs associated with effecting the business combination
. The board determined that the costs associated with effecting the acquisition with ePAK would be of
the same order of magnitude as would be encountered with most other business combinations. In addition, it was favorably viewed by the board that all of ePAK’s key employees would stay in place to operate the post-acquisition company and that
there would therefore be relatively minimal integration issues following the acquisition.
The board also evaluated
potentially adverse factors in its consideration of the acquisition of ePAK. These included the general uncertainties of operating in the PRC, the significant competition that exists in the semi-conductor industry and the risks inherent in operating
in the semi-conductor industry generally, including the cyclical nature of the industry.
Valuation
The board considered the valuation of ePAK in relation to its growth potential and found it to be attractive when compared to other companies in its
industries. The board looked at comparable companies and based on the valuation of these companies, the board calculated the expected initial valuation of ePAK in the public market. In this analysis, and Capitalink’s analyses, ePAK was
evaluated on a stand-alone basis without giving effect to any infusion of cash from Ascend’s trust fund upon consummation of the acquisition. Ascend presented information regarding certain publicly-traded companies that compete in ePAK’s
markets to the board, including the following companies:
•
Amkor Technology Inc.;
•
Entegris, Inc.;
•
Illinois Tool Works;
•
MEMC Electronic Materials Inc.;
•
Peak International Ltd.; and
•
Siliconware Precision.
This
analysis revealed that the median valuation of the aforementioned comparable companies was approximately 2.7 times trailing twelve month revenues, 9.8 times trailing twelve month EBITDA and 20.5 times trailing twelve month earnings. Based on these
multiples, ePAK would have a value range of between $61.1 million (based on trailing twelve month net income of $2.98 million) and $106.7 million (based on trailing twelve month revenues of $39.5 million). The board noted that ePAK had a three-year
historical EBITDA growth rate of 47.0% as compared to an average three-year historical EBITDA growth rate of 35.8% for the above-cited companies.
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Ascend’s board calculated that the valuation of maximum consideration payable to ePAK’s
stockholders amounted to approximately $50.2 million, comprised of:
•
$48.2 million of Ascend common stock (8,556,667 shares at a price of $5.63 per share), and
•
$7 million of assumed ePAK indebtedness, net of $5 million cash.
Since the value of the consideration to be paid by Ascend in the acquisition would be significantly below the valuation determined from the comparable company analysis, the board determined that the consideration to
be paid to ePAK was fair and that the acquisition was in the best interests of Ascend’s stockholders and approved the acquisition.
Satisfaction of
80% Test
It is a requirement that any business acquired by Ascend have a fair market value equal to at least 80% of Ascend’s net
assets at the time of acquisition, which assets shall include the amount in the trust account. Based on the financial analysis of ePAK generally used to approve the transaction, the Ascend board of directors determined that this requirement was met.
Ascend estimates that its net assets at the closing of the acquisition will be approximately $38 million, after deduction of the costs of the acquisition that may be paid from the funds in the trust account upon closing of the acquisition and
assuming that no Ascend stockholders vote against the acquisition and seek conversion of their Ascend shares into cash, of which 80% is approximately $30.4 million.
As described above, the board valued ePAK at approximately $61.1 million to $106.7 million based on its comparable company analysis and significant transaction experience. This value substantially exceeds the $30.4
million value required to meet the 80% test. The board noted that it based its calculation on the most conservative projections it had received from ePAK and used valuation multiples for companies that had significantly less growth potential than
ePAK, and thus it felt comfortable with its decision.
The Ascend board of directors believes, because of the financial skills and
background of several of its members, it was qualified to perform the valuation analysis described above and to conclude that the acquisition of ePAK met this requirement. The Ascend board members have a significant number of years of experience in
the private equity/venture capital and investment banking industries and have been involved in numerous transactions of a similar nature to the one contemplated between Ascend and ePAK. Notwithstanding this, the board specifically conditioned such
approval on Ascend obtaining, prior to soliciting the vote of stockholders on the acquisition, an opinion from an investment bank to the effect that the consideration to be paid by Ascend pursuant to the acquisition agreement is fair, from a
financial point of view, to the holders of Ascend common stock and that the fair market value of ePAK was at least equal to 80% of Ascend’s net assets.
Interests of Ascend’s Directors and Officers in the Acquisition
In considering the recommendation of the board of
directors of Ascend to vote for the proposals to be presented at the special meeting, you should be aware that certain members of the Ascend board have agreements or arrangements that provide them with interests in the acquisition that differ from,
or are in addition to, those of Ascend stockholders generally. In particular:
•
if the acquisition is not approved and Ascend is unable to complete another business combination by May 17, 2008, Ascend will be required to liquidate. In such
event, the 1,500,000 shares of common stock held by Ascend’s officers and directors that were acquired prior to the IPO for an aggregate purchase price of $25,000 will be worthless because Ascend’s initial stockholders are not entitled to
receive any liquidation proceeds with respect to such shares. Such shares had an aggregate market value of $8.46 million based on the last sale price of $5.64 on the OTC-BB on November 6, 2007, the record date. In addition, any warrants held by them
will become worthless.
•
If the acquisition is not approved, the Ascend securities purchased by Mr. Rice will become worthless as he has waived his right to participate in any
liquidation of Ascend in such circumstances.
52
•
If the acquisition is approved, Mr. Rice will become the Chairman of the Board and a director of Continuing Pubco and will enter into a two-year employment
agreement with Continuing Pubco providing for a base salary of $250,000 per year, as well as various benefits.
•
If Ascend liquidates prior to the consummation of a business combination, Mr. Rice will be personally liable to pay debts and obligations, if any, to vendors
and other entities that are owed money by Ascend for services rendered or products sold to Ascend, or to any target business, to the extent such creditors bring claims that would otherwise require payment from moneys in the trust account. This
arrangement was entered into to ensure that, in the event of liquidation, the trust account is not reduced by claims of creditors.
Recommendation of Ascend’s Board of Directors
After careful consideration, Ascend’s board of directors determined
unanimously that the acquisition proposal is advisable and in the best interests of Ascend and its stockholders. Ascend’s board of directors unanimously recommends that you vote or give instructions to vote “FOR” the acquisition.
The foregoing discussion of the information and factors considered by the Ascend board of directors is not meant to be exhaustive, but
includes the material information and factors considered by the Ascend board of directors.
Fairness Opinion
Capitalink made a presentation to our board of directors on July 27, 2007 and subsequently delivered its written opinion to the board of directors.
The opinion stated that, as of July 27, 2007, based upon and subject to the assumptions made, matters considered, and limitations on Capitalink’s review as set forth in the opinion, (i) the transaction consideration is fair, from a
financial point of view, to our stockholders, and (ii) the fair market value of ePAK is at least equal to 80% of our net assets. The amount of the transaction consideration was determined pursuant to negotiations between us, ePAK’s
shareholders and each of our respective financial advisors and not pursuant to recommendations of Capitalink. The full text of the written opinion of Capitalink is attached as
Annex C
and is incorporated by reference into this proxy
statement/prospectus statement.
You are urged to read the Capitalink opinion carefully and in its entirety for a description of the
assumptions made, matters considered, procedures followed and limitations on the review undertaken by Capitalink in rendering its opinion. The summary of the Capitalink opinion set forth in this proxy statement/prospectus statement is qualified in
its entirety by reference to the full text of the opinion.
The Capitalink opinion is for the use and benefit of our board of directors in
connection with its consideration of the transaction and is not intended to be and does not constitute a recommendation to you as to how you should vote or proceed with respect to the transaction. Capitalink was not requested to opine as to, and its
opinion does not in any manner address, the relative merits of the transaction as compared to any alternative business strategy that might exist for us, our underlying business decision to proceed with or effect the transaction, and other
alternatives to the transaction that might exist for us. Capitalink does not express any opinion as to the underlying valuation or future performance of ePAK or the price at which our securities might trade at any time in the future.
In arriving at its opinion, Capitalink took into account an assessment of general economic, market and financial conditions, as well as its experience in
connection with similar transactions and securities valuations generally. In so doing, among other things, Capitalink:
•
Reviewed the acquisition agreement.
•
Reviewed publicly available financial information and other data with respect to Ascend that it deemed relevant, including the Annual Report on Form 10-KSB for the
year ended December 31, 2006 and the Quarterly Report on Form 10-QSB for the six months ended June 30, 2007.
53
•
Reviewed non-public information and other data with respect to ePAK, including draft U.S. GAAP financial statements for the years ended December 31, 2004, 2005
and 2006, draft U.S. GAAP financial statements for the six months ended June 30, 2007 and 2006, financial projections for the years ending December 31, 2007, 2008, 2009, 2010 and 2011 (the “projections”), and other internal
financial information and management reports. The projections forecast organic growth in existing product lines only and did not take into account any acquisitions that may be planned by management.
•
Reviewed and analyzed the transaction’s pro forma impact on Ascend’s securities outstanding and stockholder ownership.
•
Considered the historical financial results and present financial condition of ePAK.
•
Reviewed certain publicly available information concerning the trading of, and the trading market for Ascend’s common stock and units.
•
Reviewed and analyzed the indicated value range of the transaction consideration.
•
Reviewed and analyzed ePAK’s projected unlevered free cash flows and prepared a discounted cash flow analysis.
•
Reviewed and analyzed certain financial characteristics of publicly-traded companies that were deemed to have characteristics comparable to ePAK.
•
Reviewed and analyzed certain financial characteristics of target companies in transactions where such target company was deemed to have characteristics comparable
to that of ePAK.
•
Reviewed and compared the net asset value of Ascend to the indicated total invested capital value of ePAK.
•
Reviewed and discussed with representatives of Ascend and ePAK management certain financial and operating information furnished by them, including the projections
and analyses with respect to ePAK’s business and operations.
•
Performed such other analyses and examinations as were deemed appropriate.
In arriving at its opinion, Capitalink relied upon and assumed the accuracy and completeness of all of the financial and other information that was
supplied or otherwise made available to Capitalink without assuming any responsibility for any independent verification of any such information. Further, Capitalink relied upon the assurances of Ascend and ePAK that they were not aware of any facts
or circumstances that would make any such information inaccurate or misleading. With respect to the financial information and projections utilized, Capitalink assumed that such information has been reasonably prepared on a basis reflecting the best
currently available estimates and judgments, and that such information provides a reasonable basis upon which it could make an analysis and form an opinion. The projections were solely used in connection with the rendering of Capitalink’s
fairness opinion. Investors should not place reliance upon such projections, as they are not necessarily an indication of what our revenues and profit margins will be in the future. The projections were prepared by ePAK management and are not to be
interpreted as projections of future performance (or “guidance”) by ePAK. Capitalink did not evaluate the solvency or fair value of ePAK under any foreign, state or federal laws relating to bankruptcy, insolvency or similar matters.
Capitalink did not make a physical inspection of the properties and facilities of ePAK and did not make or obtain any evaluations or appraisals of the company’s assets and liabilities (contingent or otherwise). In addition, Capitalink did not
attempt to confirm whether Ascend and ePAK had good title to their respective assets.
Capitalink assumed that the transaction will be
consummated in a manner that complies in all respects with the applicable provisions of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and all other applicable foreign, federal and state statutes, rules and
regulations. Capitalink assumes that the transaction will be consummated substantially in accordance with the terms set forth in the acquisition agreement, without any further amendments thereto, and that any amendments, revisions or waivers thereto
will not be detrimental to the stockholders of Ascend.
54
Capitalink’s analysis and opinion are necessarily based upon market, economic and other conditions,
as they existed on, and could be evaluated as of, July 27, 2007. Accordingly, although subsequent developments may affect its opinion, Capitalink has not assumed any obligation to update, review or reaffirm its opinion.
In connection with rendering its opinion, Capitalink performed certain financial, comparative and other analyses as summarized below. Each of the
analyses conducted by Capitalink was carried out to provide a different perspective on the transaction, and to enhance the total mix of information available. Capitalink did not form a conclusion as to whether any individual analysis, considered in
isolation, supported or failed to support an opinion as to the fairness, from a financial point of view, of the transaction consideration to Ascend’s stockholders. Further, the summary of Capitalink’s analyses described below is not a
complete description of the analyses underlying Capitalink’s opinion. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances and, therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, Capitalink made qualitative judgments as to the
relevance of each analysis and factors that it considered. In addition, Capitalink may have given various analyses more or less weight than other analyses, and may have deemed various assumptions more or less probable than other assumptions, so that
the range of valuations resulting from any particular analysis described above should not be taken to be Capitalink’s view of the value of ePAK’s assets. The estimates contained in Capitalink’s analyses and the ranges of valuations
resulting from any particular analysis are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. In addition, analyses relating to the value of
businesses or assets neither purports to be appraisals nor do they necessarily reflect the prices at which businesses or assets may actually be sold. Accordingly, Capitalink’s analyses and estimates are inherently subject to substantial
uncertainty. Capitalink believes that its analyses must be considered as a whole and that selecting portions of its analyses or the factors it considered, without considering all analyses and factors collectively, could create an incomplete and
misleading view of the process underlying the analyses performed by Capitalink in connection with the preparation of its opinion.
The
summaries of the financial reviews and analyses include information presented in tabular format. In order to fully understand Capitalink’s financial reviews and analyses, the tables must be read together with the accompanying text of each
summary. The tables alone do not constitute a complete description of the financial analyses, including the methodologies and assumptions underlying the analyses, and if viewed in isolation could create a misleading or incomplete view of the
financial analyses performed by Capitalink.
The analyses performed were prepared solely as part of Capitalink’s analysis of the
fairness, from a financial point of view, of the transaction consideration to our stockholders, and were provided to our board of directors in connection with the delivery of Capitalink’s opinion. The opinion of Capitalink was just one of the
many factors taken into account by our board of directors in making its determination to approve the transaction, including those described elsewhere in this proxy statement/prospectus statement.
Transaction Consideration Analysis
The transaction
consideration consists of an initial transaction consideration of 8,566,667 newly issued shares of Ascend common stock, to be potentially increased by the following:
•
Market Price Shares: a maximum of 442,625 shares of additional Ascend common stock payable upon the combined entity achieving certain stock price targets from the
closing date through 180 days thereafter for any 20 trading days within a 30 consecutive day trading period;
•
EBITDA Shares: a maximum of 265,575 shares of additional Ascend common stock payable upon the combined entity achieving certain EBITDA targets in 2008, 2009 and
2010; and
•
Redemption Shares: a maximum of 442,625 shares of additional Ascend common stock payable upon the redemption of public warrants.
55
The initial transaction consideration was valued at approximately $48.8 million, based on a $5.70 closing
price of Ascend shares on July 20, 2007.
Based on the projections utilized, Capitalink assumed that the value of the transaction
consideration will be increased by only 265,575 shares of the Market Price Shares and will not be increased by the EBITDA Shares. In addition, Capitalink did not include the value of the Redemption Shares in its calculation of the transaction
consideration because the projections do not take into account the proceeds from the exercise of warrants.
Therefore, the indicated value
of the transaction consideration used in Capitalink’s analysis was approximately $50.6 million.
Ascend will also be assuming
ePAK’s current debt of approximately $7.2 million, therefore the total invested capital consideration to be compared with ePAK’s valuation range was approximately $57.7 million.
Valuation Overview
Capitalink generated an indicated
valuation range for ePAK based on a discounted cash flow analysis, a comparable company analysis and a comparable transaction analysis each as more fully discussed below. Capitalink weighted the three approaches equally and arrived at an indicated
total invested capital range from approximately $56.3 million to approximately $66.7 million. Capitalink noted that the total invested capital consideration of $57.7 million was in the range of ePAK’s indicated total invested capital range.
Discounted Cash Flow Analysis
A
discounted cash flow analysis estimates value based upon a company’s projected future free cash flow discounted at a rate reflecting risks inherent in its business and capital structure. Unlevered free cash flow represents the amount of cash
generated and available for principal, interest and dividend payments after providing for ongoing business operations.
While the
discounted cash flow analysis is the most scientific of the methodologies used, it is dependent on projections and is further dependent on numerous industry-specific and macroeconomic factors.
Capitalink utilized the projections provided by ePAK management that are based on organic growth in existing product lines only. Notwithstanding the
projections relied upon by Capitalink, ePAK management plans to pursue complementary acquisitions that may result in significantly higher growth than that reflected in the projections and has prepared alternative projections that it has shared with
Ascend management. In addition, the projections assumed that none of the Ascend trust fund will be available to ePAK.
The projections
forecast strong future growth in revenues from FY2006 to FY2011 from approximately $36.2 million to $138.7 million, respectively. This represents a compound average growth rate (or CAGR) of approximately 30.8% over the period, as compared to a
historical CAGR of 28.3% from FY2004 to FY2006. Revenue growth is expected to be due to growth in the semiconductor market and increasing penetration in the disk drive and wafer markets.
The projections also project an improvement in EBITDA from FY2006 to FY2011, from approximately $5.5 million to $29.2 million, respectively, due to
increasing market penetration in the wafer business and increasing economies of scale. This represents an improvement in ePAK’s EBITDA margin from 15.3% to 21.1% and a CAGR of 39.4% over the period. For purposes of Capitalink’s analyses,
“EBITDA” means earnings before interest, taxes, depreciation and amortization.
In order to arrive at a present value, Capitalink
utilized discount rates ranging from 26.5% to 28.5%. This was based on an estimated weighted average cost of capital of 27.3% (based on ePAK’s estimated weighted average cost of debt of 3.6% and a 27.9% estimated cost of equity). The cost of
equity calculation was derived
56
utilizing the Ibbotson build up method utilizing appropriate equity risk, industry risk, country risk and size premiums and a company specific risk factor,
reflecting the risk associated with achieving revenue growth above that of the industry, further penetration in the wafer markets, and profitability improvements. Capitalink noted that ePAK has not met its FY2005 and FY2006 EBITDA budgets due to
several factors, including tray material cost overruns, higher than expected manufacturing overhead and underutilized equipment due to efforts to reduce cross contamination between different products by dedicating machines to specific material sets.
Capitalink presented a range of terminal values at the end of the forecast period by applying a range of terminal exit multiples based on
revenue and EBITDA as well as long term perpetual growth rates.
Utilizing terminal revenue multiples of between 1.3x and 1.5x, terminal
EBITDA multiples of between 7.5x and 8.5x and long term perpetual growth rates of between 8.5% and 9.5%, Capitalink derived an indicated total invested capital value range of approximately $61.4 million to approximately $74.4 million. For purposes
of Capitalink’s analyses, “total invested capital” means equity value plus all interest-bearing debt.
Comparable Company Analysis
A selected comparable company analysis reviews the trading multiples of publicly traded companies that are similar to ePAK with respect to
business and revenue model, operating sector, size and target customer base.
Capitalink located seven companies that it deemed comparable
to ePAK with respect to their industry sector and operating model:
•
Entegris Inc.
•
Miraial Co., Ltd.
•
Peak International Ltd.
•
Advanced Semiconductor Engineering Inc.
•
Siliconware Precision Industries Co. Ltd.
•
Amkor Technology Inc.
•
ASE Test Ltd.
Three of the
comparable companies provide products for the shipping and handling of semiconductors, while four of the comparable companies provide semiconductor assembly and test services and wafer level packaging solutions. All of the comparable companies are
substantially larger than ePAK, with latest twelve months, or LTM revenue ranging from approximately $60.2 million to approximately $2.9 billion, compared with approximately $38.6 million for ePAK.
Capitalink noted that except for Peak International, all of the comparable companies are more profitable than ePAK, with EBITDA margins ranging from
approximately 7.3% to approximately 50.7%, compared with approximately 16.1% for ePAK.
ePAK is projected to have a 2007 EBITDA growth rate
of 37.8%, which is higher than the comparable companies, which have 2007 EBITDA growth rates ranging from approximately (20.2%) to approximately 32.1%.
Except for Peak International, ePAK reinvests the highest percentage of its EBITDA in capital expenditures, with a capital expenditures to EBITDA ratio of 93.2%, compared to comparable companies’ rates ranging
from approximately 18.5% to approximately 105.2%.
Multiples utilizing total invested capital were used in the analyses. For comparison
purposes, all operating profits including EBITDA were normalized to exclude unusual and extraordinary expenses and income.
57
Capitalink generated a number of multiples worth noting with respect to the comparable companies:
Total Invested Capital Multiple of
Mean
Median
High
Low
LTM revenue
2.92x
2.79x
6.01x
0.59x
2007 revenue
2.98x
2.91x
4.52x
1.75x
2008 revenue
2.56x
2.50x
3.69x
1.59x
LTM EBITDA
9.4x
8.1x
14.8x
6.2x
2007 EBITDA
9.5x
8.5x
12.7x
7.1x
2008 EBITDA
7.9x
7.5x
10.2x
6.1x
Capitalink selected an appropriate multiple range for ePAK by examining the range indicated by the
comparable companies and taking into account certain company-specific factors.
Capitalink expects ePAK’s
•
Revenue valuation multiples to be significantly below the mean of the comparable companies due to its smaller size and lower profitability, to a certain extent
offset by its higher growth relative to the comparable companies, and
•
EBITDA multiples to be above the mean of the comparable companies in the LTM period due to its higher growth and below the mean of the comparable companies in the
CY07 and CY08 periods due to ePAK’s higher capital expenditures to EBITDA ratio and not achieving EBITDA targets in CY05 and CY06, somewhat offset by its higher growth.
Based on the above factors, Capitalink applied the following multiples to the respective statistics:
•
Multiples of 1.5x to 1.8x LTM revenue
•
Multiples of 1.2x to 1.5x 2007 revenue
•
Multiples of 0.9x to 1.2x 2008 revenue
•
Multiples of 10.0x to 11.0x LTM EBITDA
•
Multiples of 8.0x to 9.0x 2007 EBITDA
•
Multiples of 6.0x to 7.0x 2008 EBITDA
and calculated
a range of total invested capital for ePAK of approximately $58.9 million to approximately $70.2 million.
None of the comparable companies
have characteristics identical to ePAK. An analysis of publicly traded comparable companies is not mathematical; rather it involves complex consideration and judgments concerning differences in financial and operating characteristics of the
comparable companies and other factors that could affect the public trading of the comparable companies.
Comparable Transaction Analysis
A comparable transaction analysis involves a review of merger, acquisition and asset purchase transactions involving target companies
that are in related industries to ePAK. The comparable transaction analysis generally provides the widest range of value due to the varying importance of an acquisition to a buyer (i.e., a strategic buyer willing to pay more than a financial buyer)
in addition to the potential differences in the transaction process (i.e., competitiveness among potential buyers).
Information is
typically not disclosed for transactions involving a private seller, even when the buyer is a public company, unless the acquisition is deemed to be “material” for the acquirer. As a result, the selected
58
comparable transaction analysis is limited to transactions involving the acquisition of a public company, or substantially all of its assets, or the
acquisition of a large private company, or substantially all of its assets, by a public company.
Capitalink located five transactions
announced since January 2003 involving target companies providing products for the shipping and handling of semiconductors or providing semiconductor assembly and test services and wafer level packaging solutions, and for which detailed financial
information was available.
Asyst Technologies, Inc., silicon wafer and reticle carrier product lines
Entegris Inc. (NasdaqNM: ENTG)
Based on the information disclosed with respect to the targets in the each of the comparable
transactions, Capitalink calculated and compared the total invested capital as a multiple of LTM revenue and LTM EBITDA.
Capitalink noted
the following with respect to the multiples generated:
Multiple of total invested capital to
Mean
Median
High
Low
LTM revenue
1.45x
1.48x
1.99x
0.50x
LTM EBITDA
6.6x
7.2x
9.1x
3.7x
Capitalink expects ePAK’s
•
revenue multiples to be below the mean of the comparable transactions multiples due to its lower profitability and smaller size and
•
EBITDA multiples to be around the mean of two transactions (8.1x) where the targets’ EBITDA margin was similar to that of ePAK (STATS ChipPAC and Toshiba
Ceramics).
Based on the above factors, Capitalink applied the following multiples to the respective statistics:
•
Multiples of 1.3x to 1.5x LTM revenue,
•
Multiples of 7.5x to 8.5x LTM EBITDA,
and calculated
a range of total invested capital for ePAK of approximately $48.5 million to approximately $55.5 million.
None of the target companies in
the comparable transactions have characteristics identical to ePAK. Accordingly, an analysis of comparable business combinations is not mathematical; rather it involves complex considerations and judgments concerning differences in financial and
operating characteristics of the target companies in the comparable transactions and other factors that could affect the respective acquisition values.
Satisfaction of 80% Test
Ascend’s initial business combination must be with a target business whose fair market value
is at least equal to 80% of Ascend’s net assets at the time of such acquisition.
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Capitalink reviewed and estimated Ascend’s net assets based on its stockholders’ equity as of
June 30, 2007 and compared that to ePAK’s indicated range of total invested capital. Capitalink noted that the fair market value of ePAK exceeds 80% of Ascend’s net asset value.
Based on the information and analyses set forth above, Capitalink delivered its written opinion to our board of directors, which stated that, as of
July 27, 2007, based upon and subject to the assumptions made, matters considered, and limitations on its review as set forth in the opinion, (i) consideration to be paid by Ascend pursuant to the acquisition agreement is fair, from a
financial point of view, to the holders of Ascend common stock, and (ii) the fair market value of ePAK is at least equal to 80% of our net assets. Capitalink is an investment banking firm that, as part of its investment banking business,
regularly is engaged in the evaluation of businesses and their securities in connection with mergers, acquisitions, corporate restructurings, private placements, and for other purposes. We determined to use the services of Capitalink because it is a
recognized investment banking firm that has substantial experience in similar matters. Capitalink has received a fee in connection with the preparation and issuance of its opinion and will be reimbursed for its reasonable out-of-pocket expenses,
including attorneys’ fees. In addition, we have agreed to indemnify Capitalink for certain liabilities that may arise out of the rendering of its opinion. Further, Capitalink has not previously provided, nor are there any pending agreements to
provide, any other services to either company.
In the ordinary course of business, Capitalink’s affiliate, Ladenburg
Thalmann & Co. Inc. (“Ladenburg”), certain of Ladenburg’s affiliates, as well as investment funds in which they may have financial interests, may acquire, hold or sell, long or short positions, or trade or otherwise effect
transactions, in debt, equity, and other securities and financial instruments (including bank loans and other obligations) of, or investments in, Ascend, or any other party that may be involved in the transaction and their respective affiliates.
ePAK’s Board of Directors’ Reasons for Approval of the Acquisition
The ePAK board considered and reviewed, including with their advisors, a number of factors relating to the acquisition, including:
•
historical information concerning ePAK’s business, prospects, financial performance and condition, operations, technology, management and competitive position;
•
the financial condition, results of operations and business of ePAK before and after giving effect to the acquisition and its views of the prospects for ePAK’s
business both as an independent entity and assuming the consummation of the acquisition;
•
the consideration to be received by ePAK’s securityholders in the acquisition, in the aggregate and on a holder-by-holder basis;
•
the terms of the acquisition agreement, including the parties’ representations, warranties and covenants, and the conditions to their respective obligations;
•
the impact of the acquisition on ePAK’s customers and employees;
•
the possibility that that the acquisition might not be consummated and the effect of a public announcement of the acquisition on (i) ePAK’s sales and
operating results, (ii) ePAK’s ability to attract and retain key management, marketing and technical personnel, (iii) ePAK’s ability to raise additional capital and (iv) ePAK’s ability to consummate an alternative
strategic transaction; and
•
the possibility that the acquisition might not be consummated and the effect of substantial expenses incurred in connection with the acquisition.
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In concluding that the acquisition is in the best interests of ePAK and its shareholders, and in
approving the acquisition agreements and the acquisition, the ePAK board considered a number of factors, including:
•
its belief that the combination of ePAK and Ascend, which would have a significantly stronger capital position than ePAK individually and would be a public company,
would provide ePAK with a substantial amount of capital for future expansion or strategic acquisitions and an increased ability to raise additional capital;
•
its belief that the combined company will have greater resources to effectively compete in the market for ePAK’s products and services;
•
its belief that the addition of Don K. Rice to the combined company’s management team as chairman will provide the company with valuable experience and strong
leadership; and
•
the availability of a public trading market for the Continuing Pubco shares to be received by ePAK shareholders will, after the expiration of the applicable
restriction period on the transferability, provide the shareholders with more investment liquidity than that associated with their current interests in ePAK, for which there are no established trading markets.
The foregoing discussion of the factors considered by the ePAK board is not meant to be exhaustive, but includes some of the more material factors
considered by it in coming to their conclusions.
Material U.S. Federal Income Tax Consequences of the Acquisition
See “
Redomestication Proposal—Material U.S. Federal Income Tax Considerations of the Acquisition and Redomestication Merger.”
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THE ACQUISITION AGREEMENT
The following summary of the material provisions of the acquisition agreement is
qualified by reference to the complete text of the acquisition agreement, a copy of which is attached as
Annex A
to this proxy statement/prospectus as it may be amended. All stockholders are encouraged to read the acquisition agreement in its
entirety for a more complete description of the terms and conditions of the acquisition and redomestication merger.
Structure of Acquisition
On July 30, 2007, Ascend Acquisition Corp. (“Ascend”), a Delaware corporation, entered into an agreement and plan of
reorganization (the “acquisition agreement”) by which it will acquire e.Pak Resources (S) Pte. Ltd. (“ePAK” or the “Company”). In connection with this acquisition, Ascend will reincorporate and move its domicile
from Delaware to Bermuda via a merger (“redomestication merger”) with Ascend Company Limited, a Bermuda exempted company that is owned by Don K. Rice as nominee for Ascend (“ACL”), with the combined company continuing after the
redomestication merger (“Continuing Pubco”) existing as a Bermuda exempted company. Immediately following the closing of the transactions, the current stockholders and warrant and option holders of Ascend and ePAK will be the security
holders of the Continuing Pubco.
ePAK Holdings Limited (“EHL”), ePAK’s sole shareholder, approved and adopted the
acquisition agreement and the transactions contemplated thereby by virtue of its execution of the acquisition agreement. Accordingly, no further action is required to be taken by ePAK shareholders to approve the acquisition. Within 12 months after
the acquisition of ePak, EHL will liquidate and distribute the common stock of Continuing Pubco in pursuance of a plan of reorganization with respect to EHL.
Closing and Effective Time of the Acquisition
The closing of the acquisition will take place promptly following the
satisfaction of the conditions set forth in the acquisition agreement, which are summarized below under “
The Acquisition Agreement—Conditions to the Closing of the Acquisition
,” including the consummation of the redomestication
merger, unless Ascend and ePAK agree in writing to another time. The acquisition is expected to be consummated promptly after the special meeting of Ascend’s stockholders described in this proxy statement/prospectus.
Acquisition Consideration
Transaction Shares
In consideration of the acquisition, EHL will receive, at closing, the aggregate number of shares of Continuing Pubco’s common stock
(the “Transaction Shares”) determined by a formula set forth in Section 1.07(b) of the acquisition agreement that effectively allocates to EHL and holders of options to purchase shares of EHL a post-issuance ownership of the
outstanding common stock of Continuing Pubco immediately following the closing based on a comparison of (1) ePAK’s twelve month trailing EBITDA at June 30, 2007, as adjusted for various expenses and liabilities of ePAK, including
expense and bank charges associated with borrowings, option expense, expenses incurred by EHL and ePAK in connection with the proposed transaction with Ascend, amounts accrued under EHL’s profit sharing plan, expenses incurred in connection
with the conversion and audit of ePAK’s financial statements and certain other expenses (“Subject Adjusted EBITDA”), multiplied by 5.72, plus the aggregate exercise price of the EHL Options and (2) the value of Ascend’s
trust at closing as adjusted for various liabilities of Ascend (“Adjusted Ascend Trust Value”), less the number of ordinary shares issuable upon the exercise of the Assumed Options (see “Assumption of Options” below). The
acquisition agreement provides for a grace range on Subject Adjusted EBITDA, such that if it is within 5% of $6,675,000, it will be deemed to be $6,675,000 for purposes of calculating the number of Transaction Shares to be issued. Similarly, the
acquisition agreement provides for a grace range on Adjusted Ascend Trust Value, such that if it is within 5% of $38,200,000, it will be deemed to be $38,200,000 for purposes of calculating the number of Transaction Shares to be issued.
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As of the date hereof, based on (a) information and projections currently available to the parties,
including Subject Adjusted EBITDA of $6.7 million (resulting in a 5.72 multiple result of $38.3 million) and estimated Adjusted Ascend Trust Value of $38.2 million, and (b) 8,566,666 shares of Ascend common stock currently outstanding, the
aggregate number of Transaction Shares that will be issued at closing to EHL, excluding those underlying the Assumed Options, will be 8,601,002 shares, or 50.1% of the outstanding common stock of Continuing Pubco immediately following the closing.
The foregoing figures give no effect to any additional shares that may be issued to EHL post-closing, as described below, and assume none of Ascend’s currently outstanding common stock is converted into cash as permitted by Ascend’s
certificate of incorporation. The maximum and minimum percentage ownership of EHL in the outstanding ordinary shares of Continuing Pubco immediately following the closing is effectively limited under the terms of the acquisition agreement to a low
of 50.1% and a high of 54.5%, respectively.
Assumption of Options
At the closing date, all outstanding EHL Options will be, without any action on the part of any
holder of EHL Option, assumed by Continuing Pubco, and each EHL Option will become an option to acquire ordinary shares of Continuing Pubco on the same terms and conditions as were applicable under the EHL Option, except that the number of shares
purchasable upon exercise of such option and the exercise price thereof shall be proportionately adjusted to provide that the aggregate number of ordinary shares issuable upon the exercise thereof shall equal that number of Transaction Shares that
the holder of such EHL Option would have received had he or she exercised the EHL Option prior to the closing, and that the aggregate exercise price of the Assumed Option shall remain the same as the aggregate exercise price of such EHL Option.
Continuing Pubco will file a registration statement on Form S-8 on or as soon as practicable after the 91
st
day after the closing date with respect to all
of its ordinary shares subject to the Assumed Options that may be registered on Form S-8.
Contingent Consideration
EHL also will be entitled to receive additional ordinary shares of Continuing Pubco if the last reported sales price of Continuing
Pubco’s ordinary shares is equal to or exceeds one or more of the dollar amounts set forth in the table below under the caption “Share Price Trigger” on any twenty (20) trading days during any thirty (30) consecutive trading
day period at any time during the period commencing on the closing date and ending on the 180th day after the closing date. EHL would receive the aggregate number of shares for each and every corresponding share price trigger met or exceeded as
follows, for a total issuance of up to 442,625 shares:
Share Price Trigger
Number of Shares
$6.00
88,525
$6.50
88,525
$7.00
88,525
$7.50
88,525
$8.00
88,525
EHL also will be entitled to receive (1) 88,525 additional ordinary shares from Continuing
Pubco if Continuing Pubco has combined consolidated Share Issuance EBITDA (as defined below) of $14,727,000 or more for the year ending December 31, 2008, (2) 88,525 additional ordinary shares from Continuing Pubco if Continuing Pubco has
combined consolidated Share Issuance EBITDA of $24,268,000 or more for the year ending December 31, 2009 and (3) 88,525 additional ordinary shares from Continuing Pubco if Continuing Pubco has combined consolidated Share Issuance EBITDA of
$37,935,000 or more for the year ending December 31, 2010, for a total issuance of up to 265,575 additional shares.
“Share
Issuance EBITDA” for purposes of determining whether EHL and its designees are to receive these additional shares shall consist of Continuing Pubco’s operating earnings for the applicable period before interest expense and bank charges
associated with borrowings, depreciation and amortization expense and taxes, as
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adjusted for various expenses and liabilities of the Continuing Pubco, including option expense, expenses incurred by EHL and ePAK in connection with the
proposed transaction with Ascend, amounts accrued under the Continuing Pubco management bonus pool (see “Employment Agreements” below), expenses incurred in connection with the conversion and audit of ePAK’s financial statements, fees
and expenses resulting from the audit of the financial statements of the Continuing Pubco and compliance with the requirements of the Sarbanes-Oxley Act of 2002 and certain other expenses described in Section 1.14(b) of the acquisition
agreement.
If Continuing Pubco triggers a redemption of its public warrants, then, upon completion of the redemption of all of the
warrants (or, in the event that any of the warrants are exercised in connection with such redemption, Continuing Pubco’s receipt of all funds related to any such exercise during the redemption period), EHL also will receive an aggregate of
442,625 additional ordinary shares from Continuing Pubco.
Post-Closing Ownership of Ascend Common Stock
As a result of the acquisition, and assuming that:
•
no Ascend stockholder demands that Ascend convert its shares to cash as permitted by Ascend’s certificate of incorporation, EHL will own approximately 50.1% of
the outstanding Continuing Pubco common stock and the current stockholders of Ascend will own approximately 49.9% of the outstanding Continuing Pubco common stock immediately after the closing of the acquisition; and
•
assuming 19.99% of the Public Shares votes against the acquisition and such stock is converted into cash, EHL will own approximately 54.4% of the outstanding
Continuing Pubco common stock and the current stockholders of Ascend will own approximately 45.6% of the outstanding Continuing Pubco common stock immediately after the closing of the acquisition.
The foregoing is based on (a) information and projections currently available to the parties, including projected Subject Adjusted EBITDA of $6.7
million and estimated Adjusted Ascend Trust Value of $38.2 million, and (b) approximately 8.6 million shares of Ascend common stock currently outstanding. Based on this information, at closing of the acquisition, an aggregate of
approximately 8.6 shares of Continuing Pubco common stock would be issued at closing to EHL.
The foregoing figures give no effect to any
additional shares that may be issued to EHL post-closing, as described above.
Indemnification
The acquisition agreement provides for the obligation of Continuing Pubco to indemnify EHL and its officers, directors and shareholders for breaches of
representations and warranties made and covenants undertaken by Ascend and ACL in the acquisition agreement. The payment of any indemnity obligations of Continuing Pubco shall be satisfied by the issuance by Continuing Pubco of the number of its
ordinary shares equal to the difference obtained by subtracting (i) the number of Transaction Shares from (ii) that number of Transaction Shares that would have been issued at the Closing pursuant to Section 1.7 had the Ascend Trust
Value been reduced by the amount of the Losses subject to such indemnification.
The acquisition agreement also provides the obligation of
EHL (and any other recipient of transaction consideration in the Share Transfer) to indemnify Continuing Pubco for breaches of representations and warranties made and covenants undertaken by ePAK and EHL in the acquisition agreement. As the sole
remedy for this indemnity obligation, Continuing Pubco will have recourse against EHL and any recipients of Continuing Pubco shares issued in the acquisition solely during the period beginning on the closing date and ending on the one year
anniversary thereof, and for such further period as may be required pursuant to the indemnification provisions of the acquisition agreement. The aggregate amount of this indemnity obligation will be limited solely to the fair market value, as of the
time an indemnity claim
is established, of the number of shares of Continuing
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Pubco common stock equal to (X) 15% of the sum of the Transaction Shares plus the number of shares issuable upon exercise of the Assumed Options, minus (Y)
the sum of the quotients obtained by dividing the dollar amount of each previous indemnity claim by the fair market value, as of the time such previous indemnity claim was established, of one share of Continuing Pubco common stock. EHL and any
recipients of Continuing Pubco shares issued in the acquisition may pay any indemnity claim in cash, or in its sole discretion, shares of Continuing Pubco common stock valued at a per share price equal to the fair market value as determined in the
acquisition agreement. The indemnification agreement is attached to this proxy statement/prospectus as
Annex G
. We encourage you to read the indemnification agreement in its entirety.
The board of directors of Ascend has appointed to take all necessary actions and
make all decisions regarding Continuing Pubco’s right to indemnification under the acquisition agreement. If ceases to so act, Continuing Pubco’s board of directors
shall appoint as a successor a person who was a director of Ascend prior to the closing who would qualify as an “independent” director of Continuing Pubco and who had no relationship with ePAK prior to the
closing. , and any successor, is charged with making determinations whether Continuing Pubco may be entitled to indemnification, and may make a claim for indemnification by
giving notice to , with a copy to , specifying the details of the
claim. may accept the claim or dispute it. If the claim is disputed by and not ultimately resolved by
negotiation, it shall be determined by arbitration. Upon a claim and its value becoming established by the parties or through arbitration, it is payable in cash or shares as described above.
Lock-Up and Registration Rights
The recipients of
Continuing Pubco’s common stock in the Share Transfer and Ascend’s founding stockholders have agreed not to sell any of these shares until after the six-month anniversary of the closing date. Beginning following the closing, the recipients
of the ordinary shares in the Share Transfer will have the right (exercisable by holders of at least a majority of such shares) to demand on two occasions that Continuing Pubco cause a registration statement to be filed and declared effective under
the Securities Act of 1933, as amended, covering the resale of any and all of such shares. In addition, such persons will receive piggyback and Form S-3 registration rights with respect to such shares. The registration rights agreement is attached
to this proxy statement/prospectus as
Annex H
. We encourage you to read the registration rights agreement in its entirety.
Post-Transaction
Management
The current executive officers of ePAK will continue in their positions with ePAK after the acquisition. Steve Dezso,
ePAK’s current president and chief executive officer, also will become the president and chief executive officer of Continuing Pubco upon consummation of the acquisition. Mao Shi Khoo, ePAK’s current chief operating officer, also will
become the chief operating officer of Continuing Pubco upon consummation of the acquisition. Don K. Rice, Ascend’s current chairman of the board, will become chairman of the board of Continuing Pubco upon consummation of the acquisition. Jim
Thomas, ePAK’s current chief technology officer, also will become the chief technology officer of Continuing Pubco upon consummation of the acquisition. Jason Lee, ePAK’s current vice president, finance, will become the senior vice
president, finance of Continuing Pubco upon consummation of the acquisition. Chok Chun Weng, ePAK’s current vice president, South Asia sales, will become the senior vice president, South Asia sales of Continuing Pubco upon consummation of the
acquisition. Jeff Blaine ePAK’s current vice president, North Asia sales, will become the senior vice president, North Asia sales of Continuing Pubco upon consummation of the acquisition. Richard Brook, ePAK’s current vice president,
business development, will become the executive vice president, business development of Continuing Pubco upon consummation of the acquisition.
Employment Agreements
A condition to the closing of the acquisition is that each of Messrs. Dezso, Khoo, Thomas, Chok,
Blaine and Brook enter into an employment agreement with Continuing Pubco, effective upon the consummation of the
65
acquisition. The form of employment agreement to be used for each of Messrs. Dezso, Khoo, Thomas, Chok and Blaine is attached to this proxy
statement/prospectus as
Annex I.
The form of employment agreement to be used for Mr. Brook is attached to this proxy statement/prospectus as
Annex J
. For a summary of the employment agreements, see the section entitled
“
Directors and Executive Officers of Continuing Pubco Following the Acquisition—Employment Agreements
.” We encourage you to read the employment agreements in their entirety.
Election of Directors; Voting Agreement
Upon
consummation of the acquisition, the board of directors of Continuing Pubco will be comprised of five members. The board will include three persons designated by EHL, such designees initially being Mr. Dezso, a Hock Voon Loo and Steve San
Filippo, and two persons designated by certain stockholders of Ascend (“Founding Ascend Holders”), such designees initially being Mr. Rice and Warren “Budd” Florkiewicz. The majority of the board shall be “independent
directors” within the meaning of the Nasdaq rules. EHL, on the one hand, and the Founding Ascend Holders, on the other hand, have entered into a voting agreement pursuant to which they have agreed to vote for the other’s designees to the
board of directors of Continuing Pubco through the annual meeting of the stockholders of Continuing Pubco to be held in 2010. The board will be separated into classes as follows:
•
Steve San Filippo who will serve in the class to stand for reelection in 2008.
•
Don K. Rice and Hock Voon Loo, who will serve in the class to stand for reelection in 2009.
•
Steve Dezso and Warren “Budd” Florkiewicz, who will serve in the class to stand for reelection in 2010.
Ascend’s directors do not currently receive any cash compensation for their services as members of the board of directors. However, in the future,
non-employee directors of Continuing Pubco may receive certain cash fees and stock-based awards as the board of directors may determine.
Representations and Warranties
The acquisition agreement contains representations and warranties of each of ePAK and Ascend
relating, among other things, to:
•
proper corporate organization and similar corporate matters;
•
capital structure of each constituent company;
•
the authorization, performance and enforceability of the acquisition agreement;
•
licenses and permits;
•
taxes;
•
financial information and absence of undisclosed liabilities;
•
holding of leases and ownership of other properties, including intellectual property;
•
contracts;
•
title to properties and assets;
•
environmental matters;
•
title to and condition of other assets;
•
absence of certain changes;
•
employee matters;
•
compliance with laws;
66
•
product liability and product recalls;
•
litigations; and
•
compliance with applicable provisions of securities laws.
Covenants
Ascend and ePAK have each agreed to take such actions as are necessary, proper or advisable to consummate the
acquisition. Each of them has also agreed, subject to certain exceptions, to continue to operate its respective businesses in the ordinary course prior to the closing and not to take the following actions without the prior written consent of the
other party:
•
waive any stock repurchase rights, accelerate, amend or (except as specifically provided for in the acquisition agreement) change the period of exercisability of
options or restricted stock, or reprice options granted under any employee, consultant, director or other stock plans or authorize cash payments in exchange for any options granted under any of such plans;
•
grant any severance or termination pay to any officer or employee except pursuant to applicable law, written agreements outstanding, or policies, or adopt any new
severance plan, or amend or modify or alter in any manner any severance plan, agreement or arrangement;
•
transfer or license to any person or otherwise extend, amend or modify any material rights to any intellectual property of ePAK or Ascend, as applicable, or enter
into grants to transfer or license to any person future patent rights, other than in the ordinary course of business consistent with past practices provided that in no event will ePAK or Ascend license on an exclusive basis or sell any intellectual
property of the ePAK or Ascend, as applicable;
•
declare, set aside or pay any dividends on or make any other distributions (whether in cash, stock, equity securities or property) in respect of any capital stock
or split, combine or reclassify any capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any capital stock;
•
purchase, redeem or otherwise acquire, directly or indirectly, any shares of capital stock of ePAK and Ascend, as applicable, including repurchases of unvested
shares at cost in connection with the termination of the relationship with any employee or consultant pursuant to agreements in effect on the date of the acquisition agreement;
•
issue, deliver, sell, authorize, pledge or otherwise encumber, or agree to any of the foregoing with respect to, any shares of capital stock or any securities
convertible into or exchangeable for shares of capital stock, or subscriptions, rights, warrants or options to acquire any shares of capital stock or any securities convertible into or exchangeable for shares of capital stock, or enter into other
agreements or commitments of any character obligating it to issue any such shares or convertible or exchangeable securities;
•
amend its certificate of incorporation or bylaws or equivalent company documents;
•
acquire or agree to acquire by merging or consolidating with, or by purchasing any equity interest in or a portion of the assets of, or by any other manner, any
business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to the business of Ascend or ePAK ,
as applicable, or enter into any joint ventures, strategic partnerships or alliances or other arrangements that provide for exclusivity of territory or otherwise restrict such party’s ability to compete or to offer or sell any products or
services;
•
sell, lease, license, encumber or otherwise dispose of any properties or assets, except sales of inventory in the ordinary course of business and the sale, lease or
disposition of assets (other than through licensing) of property or assets that are not material to its business;
67
•
except for borrowing under ePAK’s existing credit facilities in the ordinary course of business, incur any indebtedness for borrowed money in excess of $25,000
in the aggregate or guarantee any such indebtedness of another person, issue or sell any debt securities or options, warrants, calls or other rights to acquire any debt securities of Ascend or ePAK, as applicable, enter into any “keep
well” or other agreement to maintain any financial statement condition or enter into any arrangement having the economic effect of any of the foregoing;
•
adopt or amend any employee benefit plan, policy or arrangement, any employee 2007 incentive plan, or enter into any employment contract or collective bargaining
agreement (other than offer letters and letter agreements entered into in the ordinary course of business consistent with past practice with employees who are terminable “at will”), pay any special bonus or special remuneration to any
director or employee, or increase the salaries or wage rates or fringe benefits (including rights to severance or indemnification) of its directors, officers, employees or consultants, except in the ordinary course of business consistent with past
practices;
•
pay, discharge, settle or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), or litigation
(whether or not commenced prior to the date of the acquisition agreement) other than the payment, discharge, settlement or satisfaction, in the ordinary course of business consistent with past practices or in accordance with their terms, or
liabilities previously disclosed in financial statements to the other party in connection with the acquisition agreement or incurred since the date of such financial statements, or waive the benefits of, agree to modify in any manner, terminate,
release any person from or knowingly fail to enforce any confidentiality or similar agreement to which ePAK is a party or of which ePAK is a beneficiary or to which Ascend is a party or of which Ascend is a beneficiary, as applicable;
•
except in the ordinary course of business consistent with past practices, modify, amend or terminate any material contract of ePAK or Ascend, as applicable, or
waive, delay the exercise of, release or assign any material rights or assign any material rights or claims thereunder;
•
except as required by applicable U.S. or Singapore GAAP, revalue any of its assets or make any change in accounting methods, principles or practices;
•
except in the ordinary course of business consistent with past practices, incur or enter into any agreement, contract or commitment requiring such party to pay in
excess of $100,000 in any 12 month period;
•
engage in any action that could reasonably be expected to cause the acquisition to fail to qualify as a “reorganization” under Section 368(a) of the
Code;
•
settle any litigation to which any director, officer of stockholder of such company is a party or, in the case of ePAK, where the consideration given is other than
monetary;
•
make or rescind any tax elections that, individually or in the aggregate, could be reasonably likely to adversely affect in any material respect the tax liability
or tax attributes of such party, settle or compromise any material income tax liability or, except as required by applicable law, materially change any method of accounting for tax purposes or prepare or file any return in a manner inconsistent with
past practice;
•
form, establish or acquire any subsidiary except as contemplated by the acquisition agreement;
•
make capital expenditures in excess of $300,000, except in accordance with prudent business and operational practices consistent with prior practice;
•
make or omit to take any action which would be reasonably anticipated to have a material adverse effect;
•
enter into any transaction with or distribute or advance any assets or property to any of its officers, directors, partners, stockholders or other affiliates; or
•
agree in writing or otherwise agree, commit or resolve to take any of the foregoing actions.
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The acquisition agreement also contains additional covenants of the parties, including covenants
providing for:
•
each party to use commercially reasonable efforts to obtain all necessary approvals from stockholders, governmental agencies and other third parties that are
required for the consummation of the transactions contemplated by the acquisition agreement;
•
ePAK to maintain insurance polices providing insurance coverage for its business and its assets in the amounts and against the risks as are commercially reasonable
for the businesses and risks covered;
•
the protection of confidential information of the parties and, subject to the confidentiality requirements, the provision of reasonable access to information;
•
Ascend to prepare and file this proxy statement/prospectus;
•
ePAK to provide financial statements audited in accordance with U.S. GAAP for the fiscal years ended December 31, 2006, 2005 and 2004 by November 15,
2007;
•
the ePAK stockholder to release and forever discharge ePAK and its directors, officers, employees and agents, from any and all rights, claims, demands, judgments,
obligations, liabilities and damages arising out of or resulting from such stockholder’s status as a holder of an equity interest in ePAK, and employment, service, consulting or other similar agreement entered into with ePAK prior to the
consummation of the acquisition agreement;
•
ePAK and the ePAK stockholder to waive their rights to make claims against Ascend to collect from the trust account established for the benefit of the Ascend
stockholders who purchased their securities in Ascend’s IPO for any moneys that may be owed to them by Ascend for any reason whatsoever, including breach by Ascend of the acquisition agreement or its representations and warranties therein;
•
the ePAK stockholder to repay to ePAK at or prior to the consummation of the acquisition, all direct and indirect indebtedness and other obligations owed by them to
ePAK;
•
each party to use commercially reasonable efforts to secure the consent of third parties as necessary to consummate the acquisition as contemplated by the
acquisition agreement; or
•
Continuing Pubco to maintain Ascend’s current policies of directors’ and officers’ liability insurance with respect to claims arising from facts and
events that occurred prior to the consummation of the acquisition for a period of six years after the consummation of the acquisition.
Conditions to the Closing of the Acquisition
General conditions
Consummation of the acquisition is conditioned on the Ascend stockholders, at a meeting called for these purposes, (i) adopting the acquisition
agreement and approving the transactions contemplated thereby, including the acquisition, (ii) approving the redomestication merger and (ii) approving the 2007 incentive plan.
The adoption of the acquisition agreement will require the affirmative vote of the holders of a majority of the shares of Ascend’s common stock
issued in its IPO (“Public Shares”), including holders who purchase Public Shares subsequent to the IPO, and voted on the matter. The holders of the Ascend common stock issued prior to its IPO, including the current officers and directors
of Ascend, have agreed to vote such shares in the matter of the approval of the acquisition agreement to the same effect as the majority of the Public Shares are voted. Additionally, if holders owning 20% or more of the Public Shares both vote
against the acquisition and exercise their right to convert their Public Shares into a pro-rata portion of the funds held in trust by Ascend for the benefit of the holders of the Public Shares, then the acquisitions contemplated by the acquisition
agreement cannot be consummated. The approval of the equity 2007 incentive plan will require the affirmative vote of a majority of the outstanding Ascend common stock present in person or by proxy at the stockholder meeting.
69
In addition, the consummation of the transactions contemplated by the acquisition agreement is
conditioned upon other conditions, including:
•
the delivery by each party to the other party of a certificate to the effect that the representations and warranties of the delivering party are true and correct in
all material respects as of the closing and all covenants contained in the acquisition agreement have been materially complied with by the delivering party;
•
the receipt of necessary consents and approvals by third parties and the completion of necessary proceedings;
•
Continuing Pubco’s common stock and warrants being listed for trading on either the Nasdaq Global Market or Nasdaq Capital Market and there being no action or
proceeding pending or threatened against Continuing Pubco by the National Association of Securities Dealers, Inc. (NASD) to prohibit or terminate the quotation of Continuing Pubco’s common stock on either the Nasdaq Global Market or Nasdaq
Capital Market; and
•
no order, stay, judgment or decree being issued by any governmental authority preventing, restraining or prohibiting in whole or in part, the consummation of such
transactions.
ePAK’s conditions to closing
The obligations of ePAK to consummate the transactions contemplated by the acquisition agreement, in addition to the general conditions described above,
are conditioned upon each of the following, among other things:
•
there shall have been no material adverse effect with respect to Ascend since the date of the acquisition agreement;
•
ePAK shall have received from Graubard Miller, counsel to Ascend, a legal opinion, which among other things, opines on the validity and enforceability of the
acquisition agreement and the transactions contemplated thereby; substantially in the form annexed to the acquisition agreement, which is customary for transactions of this nature;
•
Ascend shall have executed and delivered an employment agreement for each of Messrs. Dezso, Khoo, Chok, Thomas, Blaine and Brook on the terms described in this
proxy statement/prospectus and such employment agreement shall be in full force and effect as of the closing of the acquisition;
•
the voting agreement between certain stockholders of Ascend and EHL shall be in full force and effect, and the EHL designees shall have been elected to Continuing
Pubco’s board of directors; and
•
the trust fund established for the benefit of the holders of Ascend’s public common stock shall contain no less than $39,354,720 and shall be dispersed to
Continuing Pubco and ePAK immediately upon the closing, less: (a) all liabilities of Ascend and Merger Sub due and owing or incurred at or prior to the closing, which shall be paid as and when due (including any loans by insiders of Ascend to
Ascend, which shall be paid at closing), (b) all amounts payable to stockholders of Ascend that elect to convert their shares of Ascend common stock into cash, which shall be paid as soon as practicable following closing, (c) all Ascend
and Merger Sub tax liabilities, which shall be paid as and when due, (d) all professional fees related to these transactions, which shall be paid at closing, as well as other fees and expenses incurred by Ascend and Merger Sub in connection
with the acquisition agreement and the transactions contemplated thereby, and (e) all finders fees and investment banking fees (including those payable to EarlyBirdCapital, Inc. as a finder’s fee and for deferred underwriting commissions
earned by it in connection with Ascend’s IPO), which shall be paid at closing.
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Ascend’s conditions to closing
The obligations of Ascend to consummate the transactions contemplated by the acquisition agreement, in addition to the general conditions described above,
are conditioned upon each of the following, among other things:
•
there shall have been no material adverse effect with respect to ePAK since the date of the acquisition agreement;
•
the employment agreement between Continuing Pubco and each of Messrs. Dezso, Khoo, Chok, Thomas, Lee, Blaine and Brook, shall have been executed by each of them and
such employment agreements shall be in full force and effect; as of the closing of the acquisition;
•
Continuing Pubco shall have received from Yeo Wee Kiong Law Corporation and Mallesons Stephen Jaques, counsels to ePAK, legal opinions, which among other things,
opines on the validity and enforceability of the acquisition agreement and the transactions contemplated thereby substantially in the form annexed to the acquisition agreement, which is customary for transactions of this nature;
•
the voting agreement between certain stockholders of Ascend and EHL shall be in full force and effect, and the Ascend designees shall have been elected to
Continuing Pubco’s board of directors;
•
EHL and its affiliates shall have repaid any and all amounts owed by them to ePAK;
•
Ascend shall have received financial statements for ePAK audited in accordance with US GAAP for the years ended December 31, 2006, 2005 and 2004 and such
audited financials shall not indicate any material adverse changes to the financial results or condition of ePAK on a consolidated basis as compared to the financial statements for the same periods audited in accordance with Singapore GAAP, which
were previously provided to Ascend; and
•
Subject Adjusted EBITDA shall not be less than $5,673,500.
Termination
The acquisition agreement provides that it may be terminated at any time, but not later than the closing, as
follows:
•
at anytime, by mutual written consent of Ascend on the one hand and EHL on the other hand;
•
by EHL if the acquisition shall not have been consummated by December 31, 2007 for any reason; provided, however, that if by such date all of closing
conditions contained the acquisition agreement that are in the control of Ascend have been satisfied by Ascend or properly waived by EHL, but for the lack of receiving (1) final SEC clearance of the registration statement of which the proxy
statement/prospectus is a part and/or the meeting of Ascend’s stockholders has not yet taken place and/or (2) approval from Nasdaq of Continuing Pubco’s Nasdaq listing application and Ascend has taken all commercially reasonable
actions (excluding those actions solely in the control of ePAK) to satisfy these conditions, including filing the registration statement with the SEC as contemplated by the acquisition agreement and responding to all SEC comments in a reasonably
timely manner and filing the Nasdaq listing application, such date shall be extended to May 17, 2008; and provided further, that the right to terminate the acquisition agreement shall not be available to EHL if any of its or its affiliates actions
or failure to act has been a principal cause of or resulted in the failure of the acquisition to occur on or before such date and such action or failure to act constitutes a breach of the acquisition agreement;
•
by either party if a governmental entity shall have issued an order, decree or ruling or taken any other action, in any case having the effect of permanently
restraining, enjoining or otherwise prohibiting the acquisition, which order, decree, ruling or other action is final and nonappealable;
71
•
by either party if the other party has breached any of its covenants or representations and warranties in any material respect and has not cured its breach within
thirty days of the notice of an intent to terminate, provided that the terminating party is itself not in breach;
•
by either party if, at the Ascend stockholder meeting, the acquisition agreement and the transactions contemplated thereby shall fail to be approved and adopted by
the affirmative vote of the holders of Ascend’s common stock, or 20% or more of the Public Shares request conversion of their shares into the pro rata portion of the trust fund in accordance with Ascend’s certificate of incorporation; or
•
by Ascend if Subject Adjusted EBITDA is less than $5,673,500.
If permitted under the applicable law, either ePAK or Ascend may waive any inaccuracies in the representations and warranties made to such party contained in the acquisition agreement and waive compliance with any
agreements or conditions for the benefit of itself or such party contained in the acquisition agreement. The condition requiring that the holders of fewer than 20% of the shares of Ascend common stock issued in its IPO affirmatively vote against the
acquisition proposal and properly demand conversion of their shares into cash may not be waived. We cannot assure you that all of the conditions will be satisfied or waived. Ascend’s board of directors will resolicit stockholder approval of the
acquisition if a party waives a material condition to the acquisition agreement or such changes in the terms of the acquisition render the disclosure previously provided materially misleading.
Effect of Termination
In the event of proper
termination by either Ascend or ePAK, the acquisition agreement will become void and have no effect, without any liability or obligation on the part of Ascend or ePAK, except that:
•
the confidentiality obligations set forth in the acquisition agreement will survive;
•
the rights of the parties to bring actions against each other for breach of the acquisition agreement will survive; and
•
the fees and expenses incurred in connection with the acquisition agreement and the transactions contemplated thereby will be paid by the party incurring such
expenses.
The acquisition agreement does not provide for specific penalties or payments in the event of a material
breach by a party of its covenants or warranties or a refusal or wrongful failure of the other party to consummate the acquisition. In such event, the non-wrongful party would be entitled to assert its legal rights for breach of contract against the
wrongful party.
Fees and Expenses
All
fees and expenses incurred in connection with the acquisition agreement and the transactions contemplated thereby will be paid by the party incurring such expenses whether or not the acquisition agreement is consummated.
Confidentiality; Access to Information
Ascend and
ePAK will afford to the other party and its financial advisors, accountants, counsel and other representatives prior to the completion of the acquisition reasonable access during normal business hours, upon reasonable notice, to all of their
respective properties, books, records and personnel to obtain all information concerning the business, including the status of product development efforts, properties, results of operations and personnel, as each party may reasonably request. Ascend
and ePAK will maintain in confidence any non-public information received from the other party, and use such non-public information only for purposes of consummating the transactions contemplated by the acquisition agreement.
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Amendments
The acquisition agreement may be amended by the parties thereto at any time by execution of an instrument in writing signed on behalf of each of the parties.
Extension; Waiver
At any time prior to the closing, any party to the acquisition agreement may, in
writing, to the extent legally allowed:
•
extend the time for the performance of any of the obligations or other acts of the other parties to the agreement;
•
waive any inaccuracies in the representations and warranties made to such party contained in the acquisition agreement or in any document delivered pursuant to the
acquisition agreement; and
•
waive compliance with any of the agreements or conditions for the benefit of such party contained in the acquisition agreement.
Public Announcements
Ascend and ePAK have agreed
that until closing or termination of the acquisition agreement, the parties will:
•
cooperate in good faith to jointly prepare all press releases and public announcements pertaining to the acquisition agreement and the transactions governed by it;
and
•
not issue or otherwise make any public announcement or communication pertaining to the acquisition agreement or the transaction without the prior consent of the
other party, which shall not be unreasonably withheld by the other party, except as may be required by applicable laws or court process.
Arbitration
Any disputes or claims arising under or in connection with the acquisition agreement or the transactions
contemplated thereunder will be resolved by binding arbitration. Arbitration will be commenced by the filing by a party of an arbitration demand with the American Arbitration Association (“AAA”). The arbitration will be governed and
conducted by applicable AAA rules, and any award or decision shall be conclusive and binding on the parties. Each party consented to the exclusive jurisdiction of the federal and state courts located in the State of Texas, Travis County, for such
purpose. The arbitration shall be conducted in Texas. Each party shall pay its own fees and expenses for the arbitration, except that any costs and charges imposed by the AAA and any fees of the arbitrator shall be assessed against the losing party.
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REDOMESTICATION PROPOSAL
General
We are seeking to reincorporate and relocate our public company from Delaware to Bermuda. In the redomestication merger, Ascend and ACL will be amalgamated, resulting in a single combined company, Continuing Pubco.
Immediately following the redomestication merger, Continuing Pubco will be renamed “ePAK International Limited” and will be a public company, reporting under the Exchange Act, and its securities will be listed on Nasdaq. Consummation of
the redomestication merger is a condition to the consummation of the acquisition. Accordingly, if the redomestication merger is not approved by Ascend’s stockholders, the acquisition will not be consummated.
We believe that the redomestication of our public company to Bermuda will provide us with material cost savings by allowing our company to be subject to
a reduced overall tax rate, and will give our company more flexibility and simplicity in the manner in which we are able to conduct our corporate transactions. The principal cost savings will result from Continuing Pubco not being subject to United
States taxation regimes. Holding companies incorporated in the United States, such as Ascend, are generally obligated to pay taxes at the U.S. rate of 35% on internal corporate dividends paid to them from their foreign operating subsidiaries, which
results in an added cost to internal cash management and reduces funds available for operations, capital improvements and acquisitions. Holding companies incorporated outside the United States that have operations outside of the United States, such
as Continuing Pubco, typically are not subject to United States internal dividend tax. Accordingly, such holding companies are able to move capital within the holding company structure and to structure new acquisitions and diversifications more
easily and with greater flexibility.
The full texts of the certificate of incorporation and by-laws of Continuing Pubco, as same
will be restated and amended immediately prior to the redomestication merger, are set forth in
Annex D
to this proxy statement/prospectus. The discussion, including the comparison of rights, set forth below is qualified in its
entirety by reference to these documents.
Adoption of the Redomestication Proposal
The board of directors of each of Ascend and Ascend’s wholly owned subsidiary, ACL, has unanimously approved the redomestication merger. The board of
directors of Ascend unanimously recommends a vote “FOR” the approval of the redomestication proposal.
The affirmative vote of
the holders of a majority of Ascend’s outstanding shares of common stock is required for approval of the redomestication proposal. Abstentions and broker non-votes will have the effect of a vote against the proposal.
The consummation of the redomestication merger is a condition to the consummation of the acquisition. Similarly, consummation of the acquisition is a
condition to the consummation of the redomestication merger. Accordingly, neither proposal will be implemented unless the other is approved by the stockholders of Ascend.
Redomestication Merger Procedure
The redomestication merger will be achieved by the merger of
Ascend, a Delaware corporation, and ACL, a Bermuda exempted company formed by Ascend for the purpose of affecting the redomestication merger. The certificate of incorporation and by-laws, the equivalent of a certificate of incorporation and bylaws
of a United States company, of ACL will be restated and amended immediately prior to closing of the redomestication merger in the form of
Annex D
to this proxy statement/prospectus, and will be the certificate of incorporation and by-laws of
Continuing Pubco immediately following the redomestication merger.
In the redomestication merger, Continuing Pubco will issue its common
stock and warrants in exchange for the outstanding common stock and warrants of Ascend on a one-for-one basis. This prospectus covers an
74
aggregate of 23,600,001 shares of common stock, 14,733,334 warrants and one purchase option to be issued by Continuing Pubco in the exchange. The
aforementioned shares to be issued include 8,566,667 shares issuable in exchange for all of the outstanding shares of common stock of Ascend, 14,133,334 shares that may be issued on exercise of warrants to be issued hereby, 300,000 shares that may
be issued on exercise of the purchase option to be issued hereby and 600,000 shares that may be issued on exercise of warrants that may be issued on exercise of the purchase option to be issued hereby. The warrants to be issued hereby include
14,133,334 warrants to be issued in exchange for a like number of outstanding warrants of Ascend and 600,000 warrants that may be issued on exercise of the purchase option to be issued hereby. The purchase option will be issued in exchange for the
outstanding underwriter’s unit purchase option that was issued in connection with the May 2006 initial public offering by Ascend. The warrants and purchase option issued by Continuing Pubco hereby will have substantially identical terms to
those of Ascend for which they are exchanged, except that they will be exercisable for the purchase of shares of Continuing Pubco’s common stock.
Immediately following the consummation of both the redomestication merger and the acquisition, the former stockholders of Ascend and EHL, the sole shareholder of ePAK, will be the stockholders of Continuing Pubco.
Ascend’s units will be separated into their component securities immediately prior to the redomestication merger and each unit will cease to exist as a separate security. Following the redomestication merger, the Ascend common stock and
warrants no longer will be eligible to trade on the OTC-BB. It is anticipated that the shares of common stock and warrants of Continuing Pubco will be traded on Nasdaq.
Your percentage ownership of our public company will not be affected by the redomestication merger. Concurrently with the redomestication merger, and as part of the acquisition, however, there will be the dilutive
issuance of a substantial number of shares of common stock of Continuing Pubco as consideration of Continuing Pubco’s acquisition of ePAK. See the sections of this proxy statement/prospectus entitled “
The Acquisition Proposal.
”
You are not required to surrender the certificates evidencing your Ascend common stock and warrants in order to affect the exchange for
Continuing Pubco common stock and warrants. The issued and outstanding certificates of Ascend will represent your rights as a holder of common stock and/or warrants of Continuing Pubco. ACCORDINGLY, PLEASE DO NOT DESTROY OR DISCARD YOUR CURRENT
CERTIFICATES FOR ASCEND SECURITIES. You may, however, submit your Ascend certificates to our transfer agent, Continental Stock Transfer and Trust Company, 17 Battery Place, New York, New York 10004 (212-509-4000) following the redomestication merger
for new certificates evidencing the corresponding Continuing Pubco securities if you so choose, subject to normal requirements as to proper endorsement, signature guarantee, if required, and payment of applicable taxes.
If you have lost your certificates, you can contact our transfer agent to have new certificates issued. You may be requested to post a bond or other
security to reimburse us for any damages or costs if the lost certificate is later delivered for sale or transfer.
Management of Continuing Pubco (ePAK
International Limited)
The board of directors of Continuing Pubco will be comprised of five members who initially will be
Messrs. Steve Dezso, Don K. Rice, Hock Voon Loo, Warren “Budd” Florkiewicz and Steve San Filippo. The majority of the board shall be “independent directors” within the meaning of the Nasdaq rules.
The current executive
officers of ePAK will assume equivalent offices with Continuing Pubco following the redomestication merger. Mr. Dezso, ePAK’s current president and chief executive officer, also will become the president chief executive officer of Continuing
Pubco upon consummation of the acquisition. Mr. Rice, Ascend’s current chairman of the board, will become chairman of the board of Continuing Pubco upon consummation of the acquisition. See the section entitled “
Directors
and Executive Officers of Continuing Pubco Following the Acquisition
.”
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Appraisal Rights
If the redomestication merger occurs, the Ascend stockholders who do not vote in favor of the redomestication merger have the right to demand in cash the fair value of their Ascend shares (exclusive of any element of
value arising from the accomplishment or expectation of the merger) instead of taking the Continuing Pubco common stock. Holders of options or warrants to purchase Ascend common stock do not have any appraisal rights.
A holder of Ascend common stock will not have its shares of Ascend common stock converted into Continuing Pubco common stock if such holder validly
exercises and perfects statutory appraisal rights with respect to the Ascend shares. In the event such holder withdraws the demand for appraisal or otherwise becomes ineligible to exercise appraisal rights, the shares will automatically convert into
shares of the Continuing Pubco common stock on the same basis as the other shares of Ascend common stock that are converted in the redomestication merger.
To perfect the appraisal right, stockholders must not vote in favor of the redomestication merger and then mail or deliver a written demand for appraisal, before the taking of the vote on the redomestication proposal
at the special meeting of Ascend stockholders. This written demand must be separate from any written consent or vote against approval of the redomestication merger. Voting against approval of the redomestication merger or failing to vote on the
proposal will not constitute a demand for appraisal within the meaning of Section 262 of the Delaware General Corporations Law. The written demand should be delivered to:
Ascend Acquisition Corp.
435 Devon Park Drive, Building 400
Wayne, Pennsylvania 19087
Attention: Don K.
Rice
A written demand for appraisal of the Ascend shares is only effective if it reasonably informs Ascend of the identity of the
stockholder and that the stockholder demands appraisal of his, her or its shares. Accordingly, the written demand for appraisal should specify the stockholder’s name and mailing address, the number of shares of Ascend stock owned and that the
stockholder is thereby demanding appraisal.
A dissenting stockholder who is the record owner, such as a broker, of Ascend stock as a
nominee for others, may exercise a right of appraisal with respect to the common stock held for one or more beneficial owners, while not exercising such right for other beneficial owners. In that case, the record stockholder should specify in the
written demand the number of shares as to which the stockholder wishes to demand appraisal. If the written demand does not expressly specify the number of shares, Ascend will assume that the written demand covers all the shares of Ascend common
stock that are in the nominee’s name.
It is important that Ascend receive all written demands promptly as provided above. Failure to
comply with any of these conditions will result in the stockholder only being entitled to receiving the shares of Continuing Pubco in the redomestication merger.
Dissenting stockholders must not approve the redomestication merger. If a dissenting stockholder votes in favor of the merger, the stockholder’s right to appraisal will terminate, even if the stockholder
previously filed a written demand for appraisal. A vote against approval of the redomestication merger is not required in order to exercise appraisal rights.
Dissenters must continuously hold their shares of Ascend common stock from the date they make the demand for appraisal through the closing of the redomestication merger. Record holders of Ascend common stock who make
the appraisal demand, but subsequently sell their shares of common stock prior to the merger will lose any right to appraisal in respect of the sold shares.
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Within 120 days after the effective date of the merger, either the Continuing Pubco or any stockholder
who has complied with the conditions of Section 262 may file a petition in the Delaware Court of Chancery demanding that the Chancery Court determine the fair value of the shares of stock held by all the stockholders who are entitled to
appraisal rights. Neither Ascend nor the Continuing Pubco has any intention at this time of filing this petition. Because the Continuing Pubco has no obligation to file this petition, if no dissenting stockholder files this petition within 120 days
after the closing, the dissenting stockholder may lose its rights of appraisal.
A dissenting stockholder who no longer wishes to exercise
appraisal rights must withdraw the holder’s demand for appraisal rights within 60 days after the effective date of the redomestication merger. A stockholder also may withdraw a demand for appraisal after 60 days after the effective date of the
merger, but only with the written consent of the Continuing Pubco. If a stockholder effectively withdraws a demand for appraisal rights, the stockholder will receive the merger consideration provided in the redomestication merger.
If the stockholder is in compliance with the demand requirements, its is entitled to receive from the Continuing Pubco a statement setting for the
aggregate number of shares for which appraisal has been demanded and the aggregate number of stockholders making the demand. To obtain this statement, the stockholder must make a written demand to the Continuing Pubco within 120 days after the
effective date of the redomestication merger. The Continuing Pubco must make the statement before the later of (i) the 10th day after receiving such request or (ii) the 10th day after the period win which demand for appraisal rights must
be made has expired.
If a Chancery Court proceeding is commenced by a dissenting stockholder, the Continuing Pubco has 20 days to provide
the court with the names of dissenting stockholders with which it has not settled a claim for appraisal. The court may then send notice of a hearing to all the stockholders demanding appraisal rights, and then conduct a hearing to determine whether
the stockholders have fully complied with Section 262 and their entitlement to the appraisal rights under that section. The court may require deposit of the stock certificates of dissenting stockholders with the court. A dissenting stockholder
who does not follow this requirement may be dismissed from the proceeding.
The Chancery Court will determine the value of the shares. To
determine the fair value, the court will consider all relevant factors, and will exclude any appreciation or depreciation due to the anticipation or accomplishment of the redomestication merger. Whether or not an investment banking firm has
determined that the merger is fair is not an opinion that the merger consideration is fair value under Section 262. Upon determination of the value, the Continuing Pubco will be ordered to pay that value, together with simple or compound
interest as the court directs. To receive payment, the dissenting stockholders must surrender their stock certificates to the Continuing Pubco.
The costs of the appraisal proceeding may be assessed against the Continuing Pubco and the stockholders as the court determines. See a copy of Section 262 of the Delaware General Corporate Law attached hereto as
Annex P
.
Comparison of Corporate Governance and Stockholder Rights
Continuing Pubco will be an exempted company organized under the Bermuda Companies Act. Bermuda law and Continuing Pubco’s certificate of incorporation and by-laws will govern the rights of our stockholders. The
Bermuda Companies Act differs in some material respects from laws generally applicable to United States corporations and their stockholders. In addition, the certificate of incorporation and by-laws will differ in certain material respects from the
certificate of incorporation and by-laws of Ascend. As a result, when you become a stockholder of Continuing Pubco your rights will differ in some regards as compared to when you were a stockholder of Ascend. Below is a summary chart outlining
important similarities and differences in the corporate governance and stockholder rights associated with each of Ascend and Continuing Pubco. You also should review the certificate of incorporation and by-laws of Continuing Pubco (as same will be
restated and
77
amended immediately prior to the redomestication merger) attached as
Annex D
to this proxy statement/ prospectus, as well as the Delaware corporate
law and corporate laws of Bermuda, including the Bermuda Companies Act, to understand how these laws apply to Ascend and Continuing Pubco.
Provision
Ascend
(A Delaware General Corporation)
Continuing Pubco
(An Exempted Company under
Bermuda
Law)
Applicable legislation
General Corporation Law of the State of Delaware
The Companies Act of 1981
General business restrictions
None.
Certain restrictions on local business operation and local land ownership.
Reporting under the Exchange Act of 1934
Common stock and warrants registered under the Exchange Act and company files quarterly, annual and other reports under the Exchange Act.
Same.
Authorized capital
31 million shares of which 30 million are shares of common stock and one million are shares of preferred stock.
71 million shares of which 70 million are shares of common stock and one million are shares of preferred stock.
Preferred stock
Directors may fix the designations, powers, preferences, rights, qualifications, limitations and restrictions by resolution.
Same.
Taxation
Delaware imposes a franchise tax on Ascend based on assumed par value of securities. Delaware corporations are also subject to US federal laws and federal and state income taxes.
No taxes on profits, income or dividends. No capital gains tax, estate tax or death duty.
Certain disclosures required to be made to State corporate or other authority
Not applicable.
Ultimate beneficial ownership of securities is disclosed to the Bermuda Monetary Authority, but not publicly disclosed. Identity of directors and officers is available for public inspection.
Election of directors
By stockholders by a majority of the votes cast at a duly noticed and held meeting where a quorum is present.
Same.
Term of directors
Directors serve for an annual term.
Staggered board of three classes, each class serving for three years.
Directors—Number
Three
Five
Filing of board vacancies
Remaining directors may appoint directors to fill vacancies until next annual meeting of stockholders.
Same.
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Provision
Ascend
(A Delaware General Corporation)
Continuing Pubco
(An Exempted Company under
Bermuda
Law)
Removal of directors
By stockholders with or without cause unless board is classified or elected by cumulative voting.
As prescribed by Continuing Pubco’s by-laws, the shareholders may, in a special general meeting (the “SGM”) called for the purpose, remove a director. Given that Continuing
Pubco’s board will be classified into three classes, such removal can only be for “cause.” Notice of the intention to remove a director must be served on the director no less than 14 days before the SGM called for that purpose, and
the director shall be entitled to attend and be heard at the SGM.
Directors—Powers
All powers to govern the corporation not reserved to the stockholders.
Same.
Directors—Committees
Directors may establish one or more committees with the authority that the board determines.
Same.
Directors—Consent Action
Directors may take action by written consent of all directors in lieu of action by meeting.
Same.
Directors—Appoint Officers
Directors appoint the officers of the corporation, subject to the by-laws, with such powers as they determine.
Same.
Quorum required for board meetings
Generally a majority of the authorized directors.
Same.
Vote required for board approvals
Generally majority of the quorum.
Same.
Indemnification of directors
As prescribed by Ascend’s certificate of incorporation, directors’ are not liable for breach of fiduciary duty, except for breach of duty of loyalty to corporation or stockholders,
actions not in good faith or involving knowing violation of law or under certain other circumstances. Ascend has undertaken to indemnify any directors acting in good faith, in a manner reasonably believed to be in or not opposed to the best
interests of the corporation. Ascend maintains insurance on behalf of directors.
As prescribed by Continuing Pubco’s by-laws, directors will be exempt from and indemnified for any liability for negligence, default, breach of duty or trust, except for liability in
respect of fraud or dishonesty. Continuing Pubco will maintain insurance on behalf of directors.
79
Provision
Ascend
(A Delaware General Corporation)
Continuing Pubco
(An Exempted Company under
Bermuda
Law)
Interested director transactions
Under Delaware law, transactions entered into by Ascend in which a director has an interest would be voidable unless (i) the material facts as to the interested director’s relationship or
interests are disclosed or are known to the board of directors and the board in good faith authorized the transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors constitute less than
a quorum, (ii) the material facts as to the director’s relationship or interest and as to the transaction are disclosed or are known to the stockholders entitled to vote on the transaction and the transaction is specifically approved in good
faith by vote of the stockholders or (iii) the transaction is fair to the corporation as of the time it is authorized, approved or ratified by the board of directors, a committee of the board of directors or the stockholders. Under Delaware law, the
interested director could be held liable for a transaction in which that director derived an improper personal benefit.
Under Bermuda law, transactions entered into by Continuing Pubco in which a director has an interest are not voidable, nor can the interested director be liable to Continuing Pubco for any
profit realized pursuant to such transactions; provided that the nature of the interest is disclosed at the first opportunity at a meeting of directors, or in writing to the directors.
Annual meeting of stockholders
One annual shareholder meeting every 13 months. In lieu of a meeting, shareholders may elect directors and take other action by written consent. Delaware law permits the board of directors or
any person who is authorized under a corporation’s certificate of incorporation or bylaws to call a special meeting of stockholders.
One annual general meeting every calendar year. Bermuda law provides that a special general meeting may be called by the board of directors and must be called upon the request of shareholders
holding not less than 10% of the paid-up capital of the company carrying the right to vote.
Meeting of stockholders—Notice
Not less than 10 days or more than 60 days.
Same.
Bermuda law also requires that shareholders be given at least five (5) days’ advance notice of a general meeting but the accidental omission to give notice to any person does not invalidate the proceedings at a
meeting.
80
Provision
Ascend
(A Delaware General Corporation)
Continuing Pubco
(An Exempted Company under
Bermuda
Law)
Voting rights
Each Ascend stockholder is entitled to one vote for each share of stock held by the stockholder. Delaware law provides that a majority of the shares entitled to vote, present in person or
represented by proxy, constitutes a quorum at a meeting of stockholders. In matters other than the election of directors, with the exception of special voting requirements related to extraordinary transactions, the affirmative vote of a majority of
shares present in person or represented by proxy at the meeting and entitled to vote is required for stockholder action, and the affirmative vote of a plurality of shares is required for the election of directors.
Generally the same.
Stockholder proposals
In general, to bring a matter before an annual meeting or to nominate a candidate for director, a stockholder must give notice of the proposed matter
or nomination not less than 60 days and not more than 90 days prior to public disclosure of the date of annual meeting.
In the event that less than 70 days notice or prior public disclosure of the date of the meeting is given or made to stockholder, to be timely, the notice must be received by the company no later than the close of
business on the 10
th
day following the day on which such notice of the date of the meeting was mailed or public disclosure was made, whichever first
occurs.
The Bermuda Companies Act provides that shareholders may, as set forth below and at their own expense (unless a company otherwise resolves), require a company to give notice of any resolution
that the shareholders can properly propose at the next annual general meeting and/or to circulate a statement prepared by the requesting shareholders in respect of any matter referred to in a proposed resolution or any business to be conducted at a
general meeting. The number of shareholders necessary for such a requisition is either that number of shareholders representing at least 5% of the total voting rights of all shareholders having a right to vote at the meeting to which the requisition
relates or 100 or more shareholders.
81
Provision
Ascend
(A Delaware General Corporation)
Continuing Pubco
(An Exempted Company under
Bermuda
Law)
Access to books and records
Delaware law permits any stockholder to inspect or obtain copies of a corporation’s stockholder list and its other books and records for any purpose reasonably related to such person’s
interest as a stockholder.
Members of the general public have the right to inspect the public documents of a company available at the office of the Registrar of Companies in Bermuda. These documents include a
company’s certificate of incorporation, its memorandum of association (including its objects and powers) and any alteration to its memorandum of association. The shareholders have the additional right to inspect the by-laws of the company,
minutes of general meetings and the company’s audited financial statements, which must be presented at the annual general meeting.
Dividends
Ascend may generally pay dividends out of surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and for the preceding fiscal year. Delaware
law also provides that dividends may not be paid out of net profits at any time when capital is less than the capital represented by the outstanding stock of all classes having a preference upon the distribution of assets.
Continuing Pubco may pay dividends that are declared from time to time by its board of directors unless there are reasonable grounds for believing that the company is or would, after the
payment, be unable to pay its liabilities as they become due or that the realizable value of its assets would then be less than the aggregate of its liabilities and issued share capital and share premium accounts. The excess of the consideration
paid on issue of shares over the aggregate par value of such shares must (except in certain limited circumstances) be credited to a share premium account. Share premium may be distributed in certain limited circumstances, for example to pay up
unissued shares which may be distributed to shareholders in proportion to their holdings, but is otherwise subject to limitation.
82
Provision
Ascend
(A Delaware General Corporation)
Continuing Pubco
(An Exempted Company under
Bermuda
Law)
Amendment of Charter Documents
Amendment of certificate of incorporation of Ascend: requires the vote of the majority of shares entitled to vote present at a meeting at which a
quorum is present (or written consent of holders of a majority of shares entitled to vote).
Amendment of by-laws: Majority vote of stockholders is required to amend the by-laws.
Same.
Takeovers
Delaware law provides that a parent corporation, by resolution of its board of directors and without any stockholder vote, may merge with any subsidiary of which it owns at least 90% of the
outstanding shares of each class of stock that is entitled to vote on the transaction. Upon any such merger, dissenting stockholders of the subsidiary would have appraisal rights.
Bermuda law provides that where an offer is made for shares of a company and, within four months of the offer, the holders of not less than 90% of the shares which are the subject of the offer
accept, the offeror may by notice require the non-tendering shareholders to transfer their shares on the terms of the offer. Dissenting shareholders may apply to the court within one month of the notice objecting to the transfer. The burden is on
the dissenting shareholders to show that the court should exercise its discretion to enjoin the required transfer, which the court will be unlikely to do unless there is evidence of fraud or bad faith or collusion between the offeror and the holders
of the shares who have accepted the offer as a means of unfairly forcing out minority stockholders.
Availability of merger as form of corporate reorganization
Yes, by merger or consolidation or sale of substantially all assets.
Notice: 20 days for stockholder meeting. No notice if by written consent (subject to 30 days notice of appraisal rights to non-consenting stockholders).
Vote Required: Majority of shares entitled to vote present at a meeting at which a quorum is present
or written consent of holders of a majority of shares entitled to vote, in each case
Yes, by way of amalgamation which is permitted under the Companies Act 1981.
Notice: 5 days notice for shareholder meeting or such longer period as may be specified in the
Company’s by-laws.
Vote Required: Unless the by-laws otherwise provide,
three-fourths of those voting at such meeting must approve the amalgamation, where the quorum for purposes of the approval of the amalgamation is
83
Provision
Ascend
(A Delaware General Corporation)
Continuing Pubco
(An Exempted Company under
Bermuda
Law)
subject to additional rights imposed by terms of Preferred Stock or Certificate of Incorporation. Separate series or class vote when series adversely
affected in a manner different from other series or classes.
Appraisal Rights:
Generally, non-consenting stockholders have the right to demand payment in cash at fair market value in connection with merger or acquisition, except in the case of a sale of assets for cash.
two persons at least holding or representing by proxy more than one-third of the issued shares. All shareholders have the right to vote on an
amalgamation.
Appraisal Rights: Generally non-consenting shareholders who are not
satisfied that they have been offered fair value for their shares may within one month apply to the court to appraise the fair value of their shares.
SEC Position on Indemnification for Securities Act Liabilities
Insofar as indemnification for liabilities arising under the Securities Act of 1933 is permitted as described in the table above to directors, officers or
persons controlling Continuing Pubco, Ascend and Continuing Pubco have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore
unenforceable.
Material U.S. Federal Income Tax Considerations of the Acquisition and Redomestication Merger
The following section represents the opinion of Graubard Miller, counsel to Ascend, regarding the material U.S. federal income tax consequences of the
acquisition and redomestication merger to Ascend stockholders who are U.S. Holders (as defined below) and hold their shares of Ascend common stock as capital assets (generally, for investment) within the meaning of Section 1221(a) of the Internal
Revenue Code of 1986 (as amended), which we refer to as the Code. This discussion is based on the Code, Treasury regulations promulgated thereunder, published rulings and court decisions, all as currently in effect as of the date hereof, and all of
which are subject to change, possibly with retroactive effect. Tax considerations under state, local and foreign laws, or federal laws other than those pertaining to the income tax are not addressed. A U.S. Holder is: a beneficial owner of Ascend
common stock that is an individual citizen or resident of the United States, a corporation or other entity treated as a corporation for U.S. federal income tax purposes created or organized in or under the laws of the United States or any political
subdivision thereof, an estate the income of which is subject to U.S. federal income taxation regardless of its source, or a trust that is subject to the primary supervision of a U.S. court and the control of one of more U.S. persons or has a valid
election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. If a partnership (including for this purpose any entity or arrangement, domestic or foreign, treated as a partnership for U.S. federal income tax purposes)
is a beneficial owner of Ascend common stock, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. A beneficial owner of Ascend common stock that is a
partnership, and the partners in such partnership, should consult their own tax advisors about the U.S. federal income tax consequences of the acquisition and redomestication merger.
This discussion does not address all of the U.S. federal income tax consequences that may be relevant to particular holders in light of their individual
circumstances, or to holders that are subject to special rules, such as:
•
insurance companies;
•
financial institutions;
84
•
tax-exempt organizations;
•
dealers in securities or currencies;
•
traders in securities that elect to use a mark to market method of accounting;
•
persons that hold ascend common stock as part of a straddle, hedge, constructive sale or conversion transaction; or
•
persons who acquired their stock pursuant to the exercise of employee options or otherwise as compensation.
The acquisition and redomestication merger each have been structured to qualify as a reorganization under the Code. In connection with the filing of the
Registration Statement of which this document is a part, Ascend has received an opinion of Graubard Miller, its counsel, to the effect that the redomestication merger and concurrent acquisition will qualify as a reorganization within the meaning of
Section 368(a) of the Code and Treasury Regulations Sections 1.367(a)-3(c). The tax opinion issued to Ascend by Graubard Miller is attached to this proxy statement/prospectus as Annex F. Graubard Miller has consented to the use of its opinion
in this proxy statement/prospectus.
If (i) not more 50% of the outstanding shares of Continuing Pubco are issued in connection with
the transactions to the Ascend stockholders that are U.S. persons (treating any shares owned by a partnership or other entity or arrangement taxed as a partnership for U.S. federal income tax purposes as owned proportionately by its partners) and
(ii) the fair market value of ePak equals or exceeds the fair market value of Ascend at the time of the transactions, gain or loss generally will not be recognized on the exchange of Ascend common stock for the common stock of Continuing Pubco
by any holder of Ascend common stock that owns less than 5% of the common stock of Continuing Pubco following the redomestication merger. The U.S. federal tax basis of the common stock of Continuing Pubco received by the holder of Ascend common
stock in the redomestication merger will be the same as the adjusted tax basis of the Ascend common stock surrendered in exchange therefore. The holding period of the common stock of Continuing Pubco received in the redomestication merger by a
holder of Ascend common stock will include the period during which such Ascend common stock was held as a capital asset on the date of the redomestication merger.
If (i) not more 50% of the outstanding shares of Continuing Pubco are issued in connection with the transactions to the Ascend stockholders that are U.S. persons (treating any shares owned by a partnership or
other entity or arrangement taxed as a partnership for U.S. federal income tax purposes as owned proportionately by its partners) and (ii) the fair market value of ePak equals or exceeds the fair market value of Ascend at the time of the
transactions, an Ascend stockholder who owns five (5%) percent or more of the common stock of Continuing Pubco will recognize gain upon the exchange of such stockholder’s stock in Ascend for common stock of Continuing Pubco, unless such
stockholder files a gain recognition agreement with the stockholder’s income tax return for the taxable year that includes the date of the redomestication merger. Gain is measured by the difference between the fair market value of the shares of
Continuing Pubco common stock received and the tax basis of that stockholder’s shares of Ascend common stock. The gain recognition agreement requires, among other things, the five-percent or more Continuing Pubco stockholder:
•
to waive the statute of limitations on a Form 8838,
•
to file a statement with his or her income tax return for each of the five full taxable years following the year of the redomestication merger certifying that a
taxable disposition of substantially all of the assets of Continuing Pubco has not occurred; and
•
if such a disposition has occurred, to include in income the previously unrecognized gain on the conversion of the shares and pay interest on any resulting tax.
Ascend stockholders required to file gain recognition agreements as described above are strongly encouraged to consult
their own tax advisors regarding the specific information to be included in such agreements, and the requirements for recognizing gain with respect to the Ascend securities.
85
If (i) more than 50% of the outstanding shares of Continuing Pubco are issued in connection with the
transactions to the Ascend stockholders that are U.S. persons (treating any shares owned by a partnership or other entity or arrangement taxed as a partnership for U.S. federal income tax purposes as owned proportionately by its partners) or
(ii) the fair market value of ePak is less than the fair market value of Ascend at the time of the transactions, an Ascend stockholder, regardless of the percentage of common stock owned, will recognize gain for U.S. federal income tax purposes
equal to the difference between the fair market value of the Continuing Pubco common stock and the tax basis of the Ascend common stock for which it is exchanged.
The percentage of Continuing Pubco common stock that will be issued to the Ascend stockholders in the transactions will not exceed 49.9% of the outstanding shares of Continuing Pubco common stock, including as
outstanding certain shares that EHL or the other recipients of transaction Shares may elect to return to Continuing Pubco to satisfy indemnity claims, if any. Ascend believes that the fair market value of ePAK equals or exceeds the fair market value
of Ascend. However, the determination of the relative fair market values of ePAK and Ascend is inherently factual and cannot be made with precision. If the Internal Revenue Service were to successfully challenge either the percentage ownership of
the Ascend stockholders or the relative fair market values of ePAK and Ascend, Ascend stockholders would recognize gain upon the redomestication merger.
A stockholder of Ascend who exercises conversion rights and effects a termination of the stockholder’s interest in Ascend will be required to recognize gain or loss upon the exchange of that stockholder’s
shares of common stock of Ascend for cash. Such gain or loss will be measured by the difference between the amount of cash received and the tax basis of that stockholder’s share of Ascend common stock. This gain or loss will be long-term
capital gain or loss if the holding period for the share of Ascend common stock is more than one year.
The foregoing U.S. federal income
tax consequences are not affected by the changes made to the Code by the American Jobs Creation Act of 2004 in the treatment of domestic business entities which expatriate from the United States to a foreign jurisdiction. These new provisions
generally apply to the direct or indirect acquisition of substantially all of the properties of a domestic enterprise by a foreign corporation if there is at least 60% or 80% of continuing share ownership in the successor foreign entity by the
former stockholders of the U.S. corporation and substantial business activities are not conducted in the jurisdiction in which such successor is created or organized. Under the terms of the acquisition agreement, immediately following the
redomestication merger and acquisition, the current holders of Ascend will own less than 60% of the then outstanding shares of Continuing Pubco common stock.
For United States federal income tax purposes, the gross amount of all dividends paid with respect to Continuing Pubco’s common stock out of current or accumulated earnings and profit (“E&P”) to a
United States Holder generally will be treated as foreign source ordinary income to such holder. United States corporations that hold shares of Continuing Pubco’s common stock will not be entitled to the dividends received deduction available
for dividends received from United States corporations. To the extent a distribution exceeds E&P, it will be treated first as a return of capital to the extent of the basis of the United States Holder, and then as gain from the sale of a capital
asset.
Upon consummation of the acquisition and redomestication merger, Ascend should not incur any material amount of federal income or
other tax as a result thereof. An evaluation will be made to establish whether Ascend has any intangible assets which would be deemed transferred to Continuing Pubco in connection with the redomestication merger. If there are any such intangible
assets, it is not expected that they will be of a substantial value and any federal income tax will not be of material significance. The Internal Revenue Service may not agree with this conclusion, in which event there may be a significant tax
obligation for Continuing Pubco to pay based on the value of the assets of Ascend at the time of the redomestication merger.
The
conclusions expressed above are based on current law. Future legislative, administrative or judicial changes or interpretations, which can apply retroactively, could affect the accuracy of those conclusions. No rulings have been or will be sought
from the Internal Revenue Service concerning the tax consequences of the transactions contemplated by the securities purchase agreement or redomestication merger.
86
The discussion does not address all of the tax consequences that may be relevant to particular taxpayers
in light of their personal circumstances or to taxpayers subject to special treatment under the Code. Such taxpayers include non-U.S. persons, insurance companies, tax-exempt entities, dealers in securities, banks and persons who acquired their
stock interests pursuant to the exercise of employee options or otherwise as compensation.
Because of the complexity of the tax laws,
and because the tax consequences to any particular stockholder may be affected by matters not discussed above, each stockholder is urged to consult a tax advisor with respect to the specific tax consequences of the transactions contemplated by the
redomestication merger and the stock purchase to him, her or it, including the applicability and effect of state, local and non-U.S. tax laws, as well as U.S. federal tax laws.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OUR STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE REDOMESTICATION PROPOSAL.
87
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
The following unaudited pro forma condensed combined balance sheet combines Ascend’s historical balance sheet and that of ePAK as of June 30,
2007, giving effect to the transactions described in the acquisition agreement as if they had occurred on June 30, 2007. The following unaudited pro forma condensed combined statements of operations combine Ascend’s historical statements
of operations for the six months ended June 30, 2007 and the year ended December 31, 2006 with those of ePAK for the six months ended June 30, 2007 and the year ended December 31, 2006, in each case giving effect to the
acquisition as if it had occurred on January 1, 2006.
The acquisition will be accounted for as a “reverse merger” and
recapitalization since the stockholders of ePAK will own at least 50.1% of the outstanding shares of the common stock immediately following the completion of the acquisition, will have the right to appoint three of the five directors to the board
and, other than chairman of the board, will have its current officers assuming all corporate offices of Continuing Pubco, including chief executive officer, chief operating officer and all other day-to-day operating positions. Accordingly, ePAK will
be deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of ePAK. The assets and liabilities and the historical operations that will be reflected in the Ascend financial
statements after consummation of the acquisition will be those of ePAK and will be recorded at the historical cost basis of ePAK. Ascend’s assets, liabilities and results of operations will be consolidated with the assets, liabilities and
results of operations of ePAK upon consummation of the acquisition.
The pro forma adjustments give effect to events that are directly
attributable to the transactions discussed below that have a continuing impact on the operations of Ascend and are based on available data and certain assumptions that management believes are factually supportable.
The unaudited pro forma condensed combined financial statements described above should be read in conjunction with Ascend’s historical financial
statements and those of ePAK and the related notes thereto. The pro forma adjustments are preliminary and the unaudited pro forma information is not necessarily indicative of the financial position or results of operations that may have actually
occurred had the acquisition taken place on the dates noted, or of Continuing Pubco’s future financial position or operating results.
Consummation of the acquisition is conditioned upon, among other things, the Ascend stockholders adopting and approving the acquisition agreement. If Ascend stockholders owning 20% or more of Ascend common stock sold in the IPO vote against
the acquisition and exercise their right to convert their shares of Ascend common stock issued in the IPO into a pro rata portion of the funds held in the trust account, then the acquisition cannot be consummated. Consequently, up to 1,379,999
shares of Ascend common stock, representing 19.99% of the Public Shares are subject to possible conversion in this manner. This would represent an aggregate maximum conversion liability of approximately $8.0 million as of June 30, 2007.
The following unaudited pro forma financial statements have been prepared using two different assumptions with respect to the number of
outstanding shares of Continuing Pubco stock immediately following the acquisition, as follows:
•
assuming no conversions—this presentation assumes that no stockholders of Ascend seek to convert their shares into a pro rata share of the trust account; and
•
assuming maximum conversions—this presentation assumes stockholders of Ascend owning 19.99% of the stock sold in Ascend’s initial public offering seek
conversion.
In the case of both assumptions, the data is based on (a) information and projections currently
available to the parties, including projected Subject Adjusted EBITDA of $6.7 million and estimated Adjusted Ascend Trust Value of $38.2 million, and (b) approximately 8.6 million shares of Ascend common stock currently outstanding,
88
resulting in the issuance to EHL at closing of approximately 8.6 million shares, or 50% of the after-issued outstanding shares of Continuing Pubco. The
acquisition agreement provides for a grace range on Subject Adjusted EBITDA, such that if it is within 5% of $6,675,000, it will be deemed to be $6,675,000 for purposes of calculating the number of Transaction Shares to be issued. Similarly, the
acquisition agreement provides for a grace range on Adjusted Ascend Trust Value, such that if it is within 5% of $38,200,000, it will be deemed to be $38,200,000 for purposes of calculating the number of Transaction Shares to be issued.
We are providing this information to aid you in your analysis of the financial aspects of the acquisition. The unaudited pro forma condensed combined
financial statements described above should be read in conjunction with Ascend’s historical financial statements and those of ePAK and the related notes thereto. The pro forma adjustments are preliminary and the unaudited pro forma information
is not necessarily indicative of the financial position or results of operations that may have actually occurred had the acquisition taken place on the dates noted, or of Continuing Pubco’s future financial position or operating results.
89
ePAK International Limited
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
June 30, 2007
(IN THOUSANDS)
Maximum Approval
Minimum Approval
Ascend
Historical
ePAK
Historical
Pro Forma
Adjustments
Pro Forma
Combined
Pro Forma
Adjustments
Pro Forma
Combined
Current assets:
Cash and cash equivalents
$
187
$
1,239
$
40,005
(a)
$
39,726
$
40,005
(a)
$
31,730
(1,705
)(b)
(1,705
)(b)
(7,996
)(c)
Restricted cash and cash equivalents
390
390
390
Investments held in trust
40,005
—
(40,005
)(a)
—
(40,005
)(a)
—
Accounts receivable, net of allowance for doubtful accounts of $28 at June 30, 2007
—
7,283
—
7,283
—
7,283
Inventories
—
10,408
—
10,408
—
10,408
Deferred tax assets
7
—
7
—
7
Other current assets
40
1,008
—
1,048
—
1,048
Total current assets
40,232
20,335
(1,705
)
58,862
(9,701
)
50,866
Long-term deposits
—
13
—
13
—
13
Property plant & equipment, net
—
14,997
—
14,997
—
14,997
Total assets
$
40,232
$
35,345
$
(1,705
)
$
73,872
$
(9,701
)
$
65,876
Current liabilities:
Accounts payable
$
—
$
9,242
$
—
$
9,242
$
—
$
9,242
Accrued liabilities
—
1,575
—
1,575
—
1,575
Current maturities of long-term debt
—
530
—
530
—
530
Short-term borrowings
—
5,485
—
5,485
—
5,485
Short-term loan from Parent Company
—
4,819
(4,819
)(c)
—
(4,819
)(c)
—
Income taxes payable
—
1,024
—
1,024
—
1,024
Other current liabilities
173
—
—
173
—
173
Deferred interest
298
—
(298
)(c)
—
(298
)(c)
—
Deferred payment due underwriter
952
—
(952
)(b)
—
(952
)(b)
—
Total current liabilities
1,423
22,675
(6,069
)
18,029
(6,069
)
18,029
Long-term debt, net of current maturities
—
1,233
—
1,233
—
1,233
Deferred tax liabilities
—
263
—
263
—
263
Total liabilities
1,423
24,171
(6,069
)
19,525
(6,069
)
19,525
Common stock subject to possible conversion
7,698
—
(7,698
)(c)
—
(7,698
)(c)
—
Redeemable common shares:
Convertible contingently redeemable common shares at redemption value, 13,166,667
—
25,244
(25,244
)(c)
—
(25,244
)(c)
—
Shareholders’ equity (deficit)
Common stock
1
400
(399
)(c)
2
(399
)(c)
2
Additional paid-in capital
30,529
—
39,039
(c)
68,815
31,043
(c)
60,819
(753
)(b)
(753
)(b)
Accumulated deficit
581
(14,525
)
(581
)(c)
(14,525
)
(581
)(c)
(14,525
)
Non-distributable reserves
—
121
—
121
—
121
Accumulated other comprehensive loss
—
(66
)
—
(66
)
—
(66
)
Total shareholders’ equity (deficit)
31,111
(14,070
)
37,306
54,347
29,310
46,351
Total liabilities and shareholders’ equity (deficit)
$
40,232
$
35,345
$
(1,705
)
$
73,872
$
(9,701
)
$
65,876
90
ePAK International Limited
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS
ENDED JUNE 30, 2007
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Maximum Approval
Minimum Approval
Ascend
Historical
ePAK
Historical
Pro Forma
Adjustments
Pro Forma
Combined
Pro Forma
Adjustments
Pro Forma
Combined
Net Sales
$
20,463
$
20,463
$
20,463
Cost of Sales
13,304
13,304
13,304
Gross Profit
7,159
7,159
7,159
Selling, general and administrative expense
$
(359
)
(5,257
)
(5,616
)
$
(5,616
)
Research and development
(95
)
$
—
(95
)
$
—
(95
)
Operating (loss) profit
(359
)
1,807
—
1,448
—
1,448
Other income (expense):
Interest income
525
10
535
535
Other income
—
5
5
5
Interest expense
—
(239
)
(239
)
—
(239
)
Other expense
—
(206
)
(206
)
—
(206
)
Total other income (expense)
525
(430
)
—
95
—
95
Income before income taxes
166
1,377
—
1,543
—
1,543
Income tax benefit (expense)
33
(225
)
(192
)
(192
)
Net income
199
1,152
—
1,351
—
1,351
Accretion of convertible contingently redeemable common shares
(1,038
)
1,038
(e)
—
1,038
(e)
—
Net income attributable to common shareholders
$
199
$
114
$
1,038
$
1,351
$
1,038
$
1,351
Pro forma net income per share:
Basic
$
0.08
$
0.09
Diluted
$
0.07
$
0.08
91
ePAK International Limited
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED
DECEMBER 31, 2006
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Maximum Approval
Minimum Approval
Ascend
Historical
ePAK
Historical
Pro Forma
Adjustments
Pro Forma
Combined
Pro Forma
Adjustments
Pro Forma
Combined
Net Sales
$
36,146
$
36,146
$
36,146
Cost of Sales
23,083
23,083
23,083
Gross Profit
13,063
13,063
13,063
Selling, general and administrative expense
$
(268
)
(9,797
)
(10,065
)
(10,065
)
Research and development
(180
)
$
—
(180
)
$
—
(180
)
Operating (loss) profit
(268
)
3,086
—
2,818
—
2,818
Other income (expense):
Interest income
684
22
706
706
Other income
—
15
15
15
Interest expense
—
(354
)
(354
)
(354
)
Other expense
—
(268
)
(268
)
(268
)
Total other income (expense)
684
(585
)
—
99
—
99
Income before income taxes
416
2,501
—
2,917
—
2,917
Income tax expense
(33
)
(322
)
(355
)
(355
)
Net income
383
2,179
—
2,562
—
2,562
Accretion of convertible contingently redeemable common shares
(2,060
)
2,060
(e)
—
2,060
(e)
—
Net income attributable to common shareholders
$
383
$
119
$
2,060
$
2,562
$
2,060
$
2,562
Pro forma net income per share:
Basic
$
0.15
$
0.16
Diluted
$
0.15
$
0.16
92
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
All amounts and balances have been
rounded and presented to the nearest thousands, except share data.
NOTE 1 PRO FORMA ADJUSTMENTS
Adjustments included in the column under the heading “Pro Forma Adjustments” include the following:
(a)
To reflect the release of funds held in trust by Ascend.
(b)
To reflect payment of deferred underwriters fees of $952 and a finders fee, estimated at $753, due to EarlyBirdCapital, Inc.
(c)
To reflect issuance of Ascend/ePAK International common stock, and (Assuming Minimum Approval) payment to dissenting Ascend stockholders. To eliminate the Ascend’s retained
earnings as the accounting acquiree under the reverse acquisition application of the purchase method of accounting. This reflects the forgiveness of a short-term, intercompany loan from ePAK’s Holding Company, which is accounted for as a
capital contribution in equity from the holding company.
(d)
Interest income that was deferred by Ascend in the amount of $130 and $169 for the six months ended June 30, 2007 and the year ended December 31, 2006 would have been recorded as
income if the transaction had taken place at the beginning of each period. These amounts have not been included in interest income for such periods since they do not meet the requirements for pro forma income statement adjustments under SEC
guidelines.
(e)
To remove effect of ePAK equity structure adjustment in income statement, as convertible contingently redeemable shares would no longer be redeemable
(f)
Pro forma net income per share was calculated by dividing pro forma net income by the weighted average number of shares outstanding, as follows:
June 30, 2007
December 31, 2006
Assuming
Maximum
Approval
Assuming
Minimum
Approval
Assuming
Maximum
Approval
Assuming
Minimum
Approval
ePAK
8,601,002
8,601,002
8,601,002
8,601,002
Ascend
8,566,667
7,187,357
8,566,667
7,187,357
Pro Forma basic shares outstanding
17,167,669
15,788,359
17,167,669
15,788,359
Dilutive effect of warrants
1,536,780
1,536,780
—
—
Pro Forma fully diluted shares outstanding
18,704,449
17,325,139
17,167,669
15,788,359
The final purchase accounting may be impacted by contingent consideration as follows:
ePAK’s stockholders will also be entitled to receive, on an all or none basis, an additional 88,525 shares, for each of the next three fiscal
years beginning with the fiscal year ending December 31, 2008, if the combined company achieves the following EBITDA targets:
FY Ending December 31,
EBITDA Target
2008
$
14,727,000
2009
$
24,268,000
2010
$
37,935,000
As additional consideration, ePAK’s stockholders will be entitled to receive up to 442,625
shares if the last reported sales price on any twenty trading days during any consecutive thirty day trading period within six months of the closing of the transaction meets or exceeds the following values:
Share Price Trigger
Number of Market
Price Shares
$6.00
88,525
$6.50
88,525
$7.00
88,525
$7.50
88,525
$8.00
88,525
In addition, ePAK stockholders will be entitled to 442,625 shares upon the redemption of ePAK
International’s publicly traded warrants and its corresponding receipt of funds.
93
THE 2007 EQUITY INCENTIVE PLAN PROPOSAL
We are requesting that stockholders vote in favor of adopting the
2007 Equity Incentive Plan (the “2007 incentive plan”). The board of Ascend has approved the 2007 incentive plan, subject to approval from the stockholders at the Special Meeting. Upon consummation of the redomestication merger, the 2007
incentive plan will be utilized by Continuing Pubco with respect to the officers, directors and employees of and consultants to Continuing Pubco and ePAK (referred to together in this section as the “Company”).
The board believes strongly that the 2007 incentive plan will be essential to the Company’s success. In particular, the board believes that the
employees of the Company are the most valuable asset of the Company and that the awards permitted under the 2007 incentive plan are vital to the Company’s ability to attract and retain outstanding and highly skilled individuals in the extremely
competitive labor markets in which they compete. Such awards also are crucial to the Company’s ability to motivate employees to achieve its goals.
Vote Required
The approval of the 2007 incentive plan requires the affirmative vote of a majority of the votes cast on the
proposal at the Annual Meeting.
Description of the 2007 Incentive Plan
The following is a summary of the principal features of the 2007 incentive plan and its operation. The summary is qualified in its entirety by reference
to the 2007 incentive plan itself set forth in Annex E.
General
The 2007 incentive plan provides for the grant of the following types of incentive awards: (i) stock options, (ii) stock appreciation rights,
(iii) restricted stock, (iv) restricted stock units, and (v) performance shares and performance units. Each of these is referred to individually as an “Award.” Those who will be eligible for Awards under the 2007 incentive
plan include employees, directors and consultants who provide services to the Company and its affiliates. As of September 30, 2007, approximately 87 employees, directors and consultants would be eligible to participate in the 2007 incentive plan.
Number of Shares of Common Stock Available Under the 2007 Incentive Plan
The board has reserved 2,600,000 shares of the Company’s common stock for issuance under the 2007 incentive plan. Shares subject to awards that
expire, terminate or are cancelled without having been exercised or awards that are forfeited to or repurchased by the Company will become available for future grant under the 2007 incentive plan, subject to certain exceptions such as shares
withheld to satisfy tax obligations.
If the Company declares a dividend or other distribution or engages in a recapitalization, stock
split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of shares or other securities of the Company, or other change in the corporate structure of the Company affecting the
Company’s common stock, the Administrator will adjust the number and class of shares that may be delivered under the 2007 incentive plan, the number, class, and price of shares covered by each outstanding Award, and the numerical per-person
limits on Awards.
Administration of the 2007 Incentive Plan
The board, or a committee of directors or of other individuals satisfying applicable laws and appointed by the board (referred to herein as the
“Administrator”), will administer the 2007 incentive plan. To the extent desirable to qualify awards as “performance based compensation” under Section 162(m) of the Internal Revenue Code (the “Code”) or to exempt
transactions under Rule 16b-3 of the Securities Exchange Act of 1934, the
94
committee must qualify as “outside directors” under Section 162(m) of and/or as “non-employee directors” under Rule 16b-3.
Subject to the terms of the 2007 incentive plan, the Administrator has the sole discretion to select the employees, consultants, and directors who will receive Awards, determine the terms and conditions of Awards, and to interpret the provisions of
the 2007 incentive plan and outstanding Awards. The Administrator has discretion to implement an exchange program whereby outstanding awards may be cancelled and exchanged for new awards (which may have a lower exercise price and different terms).
Options
The
Administrator is able to grant nonstatutory stock options and incentive stock options under the 2007 incentive plan. The Administrator determines the number of shares subject to each option, although the 2007 incentive plan provides that a
participant may not receive options for more than 1,000,000 shares in any fiscal year, except in connection with his or her initial service as an employee with the Company, in which case he or she may be granted an option to purchase up to an
additional 500,000 shares.
The Administrator determines the exercise price of options granted under the 2007 incentive plan, provided the
exercise price must be at least equal to the fair market value of the Company’s common stock on the date of grant. In addition, the exercise price of an incentive stock option granted to any participant who owns more than 10% of the total
voting power of all classes of the Company’s outstanding stock must be at least 110% of the fair market value of the common stock on the grant date.
The term of an option may not exceed ten years, except that, with respect to any participant who owns 10% of the voting power of all classes of the Company’s outstanding capital stock, the term of an incentive
stock option may not exceed five years.
After a termination of service with the Company, a participant will be able to exercise the vested
portion of his or her option for the period of time stated in the Award agreement. If no such period of time is stated in the participant’s Award agreement, the participant will generally be able to exercise his or her option for (i) three
months following his or her termination for reasons other than death or disability, and (ii) twelve months following his or her termination due to death or disability. In no event may an option be exercised later than the expiration of its
term.
Stock Appreciation Rights
The Administrator will be able to grant stock appreciation rights, which are the rights to receive the appreciation in fair market value of common stock between the exercise date and the date of grant. The Company can
pay the appreciation in either cash or shares of common stock. Stock appreciation rights will become exercisable at the times and on the terms established by the Administrator, subject to the terms of the 2007 incentive plan. The Administrator,
subject to the terms of the 2007 incentive plan, will have complete discretion to determine the terms and conditions of stock appreciation rights granted under the 2007 incentive plan; provided, however, that the exercise price may not be less than
100% of the fair market value of a share on the date of grant. The term of a stock appreciation right may not exceed ten years. No participant will be granted stock appreciation rights covering more than 1,000,000 shares during any fiscal year,
except that a participant may be granted stock appreciation rights covering up to an additional 500,000 shares in connection with his or her initial service as an employee with the Company.
After termination of service with the Company, a participant will be able to exercise the vested portion of his or her stock appreciation right for the
period of time stated in the Award agreement. If no such period of time is stated in a participant’s Award agreement, a participant will generally be able to exercise his or her stock appreciation right for (i) three months following his
or her termination for reasons other than death or disability, and (ii) twelve months following his or her termination due to death or disability. In no event will a stock appreciation right be exercised later than the expiration of its term.
95
Restricted Stock
Awards of restricted stock are rights to acquire or purchase shares of the Company’s common stock, which vest in accordance with the terms and conditions established by the Administrator in its sole discretion.
For example, the Administrator may set restrictions based on the achievement of specific performance goals. The Award agreement will generally grant the Company a right to repurchase or reacquire the shares upon the termination of the
participant’s service with the Company for any reason (including death or disability). The Administrator will determine the number of shares granted pursuant to an Award of restricted stock, but no participant will be granted a right to
purchase or acquire more than 1,000,000 shares of restricted stock during any fiscal year, except that a participant may be granted up to an additional 500,000 shares of restricted stock in connection with his or her initial employment with the
Company.
Restricted Stock Units
Awards of restricted stock units result in a payment to a participant only if the vesting criteria the Administrator establishes is satisfied. For example, the Administrator may set restrictions based on the
achievement of specific performance goals. Upon satisfying the applicable vesting criteria, the participant will be entitled to the payout specified in the Award agreement. Notwithstanding the foregoing, at any time after the grant of restricted
stock units, the Administrator may reduce or waive any vesting criteria that must be met to receive a payout. The Administrator, in its sole discretion, may pay earned restricted stock units in cash, shares, or a combination thereof. Restricted
stock units that are fully paid in cash will not reduce the number of shares available for grant under the 2007 incentive plan. On the date set forth in the Award agreement, all unearned restricted stock units will be forfeited to the Company. The
Administrator determines the number of restricted stock units granted to any participant, but no participant may be granted more than 1,000,000 restricted stock units during any fiscal year, except that the participant may be granted up to an
additional 500,000 restricted stock units in connection with his or her initial employment with the Company.
Performance Units and
Performance Shares
The Administrator will be able to grant performance units and performance shares, which are Awards that will result
in a payment to a participant only if the performance goals or other vesting criteria the Administrator may establish are achieved or the Awards otherwise vest. The Administrator will establish performance or other vesting criteria in its
discretion, which, depending on the extent to which they are met, will determine the number and/or the value of performance units and performance shares to be paid out to participants. During any fiscal year, no participant will receive more than
1,000,000 performance shares and no participant will receive more than 1,000,000 performance units, except that a participant may be granted performance shares covering up to an additional 500,000 shares in connection with his or her initial
employment with the Company. Performance units will have an initial dollar value established by the Administrator on or before the date of grant. Performance shares will have an initial value equal to the fair market value of a share of the
Company’s common stock on the grant date.
Performance Goals
Awards of restricted stock, restricted stock units, performance shares and performance units under the 2007 incentive plan may be made subject to the
attainment of performance goals relating to one or more business criteria within the meaning of Section 162(m) of the Code and may provide for a targeted level or levels of achievement including: (i) revenue, gross margin, operating
margin, operating income, pre-tax profit, earnings before interest, taxes and depreciation, net income, cash flow, expenses, the market price of the shares, earnings, return on stockholder equity, return on capital, product quality, economic value
added, number of customers, market share, return on investments, profit after taxes, customer satisfaction, business divestitures and acquisitions, supplier awards from significant customers, new product development, working capital, individual
objectives, time to market, return on net assets, and sales. The performance goals may differ from participant to participant and from Award to Award and may be used to measure the performance of the Company’s business as a whole or one of the
Company’s business units and may be measured relative to a peer group or index.
96
Transferability of Awards
Awards granted under the 2007 incentive plan are generally not transferable, and all rights with respect to an Award granted to a participant generally
will be available during a participant’s lifetime only to the participant.
Change of Control
In the event of a change of control of the Company, each outstanding Award will be assumed or an equivalent option or right substituted by the successor
corporation or a parent or subsidiary of the successor corporation. In the event that the successor corporation, or the parent or subsidiary of the successor corporation, refuses to assume or substitute for the Award, the participant will fully vest
in and have the right to exercise all of his or her outstanding options or stock appreciation rights, including shares as to which such Awards would not otherwise be vested or exercisable, all restrictions on restricted stock will lapse, and, with
respect to restricted stock units, performance shares and performance units, all performance goals or other vesting criteria will be deemed achieved at target levels and all other terms and conditions met. In addition, if an option or stock
appreciation right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a change of control, the Administrator will notify the participant in writing or electronically that the option or stock appreciation right
will be fully vested and exercisable for a period of time determined by the Administrator in its sole discretion, and the option or stock appreciation right will terminate upon the expiration of such period.
Amendment and Termination of the 2007 Incentive Plan
The Administrator will have the authority to amend, alter, suspend or terminate the 2007 incentive plan, except that stockholder approval will be required for any amendment to the 2007 incentive plan to the extent
required by any applicable laws. No amendment, alteration, suspension or termination of the 2007 incentive plan will impair the rights of any participant, unless mutually agreed otherwise between the participant and the Administrator and which
agreement must be in writing and signed by the participant and the Company. The 2007 incentive plan will terminate on the tenth anniversary of its adoption by the stockholders, unless the board terminates it earlier.
Number of Awards Granted to Employees, Consultants, and Directors
The number of Awards that an employee, director or consultant may receive under the 2007 incentive plan is in the discretion of the Administrator and therefore cannot be determined in advance.
Federal Tax Aspects
The following paragraphs are a
summary of the general federal income tax consequences to U.S. taxpayers and the Company of Awards granted under the 2007 incentive plan. Tax consequences for any particular individual may be different.
Nonstatutory Stock Options
No
taxable income is reportable when a nonstatutory stock option with an exercise price equal to the fair market value of the underlying stock on the date of grant is granted to a participant. Upon exercise, the participant will recognize ordinary
income in an amount equal to the excess of the fair market value (on the exercise date) of the shares purchased over the exercise price of the option. Any taxable income recognized in connection with an option exercise by an employee of the Company
is subject to tax withholding by the Company. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss.
97
Incentive Stock Options
No taxable income is reportable when an incentive stock option is granted or exercised (except for purposes of the alternative minimum tax, in which case
taxation is the same as for nonstatutory stock options). If the participant exercises the option and then later sells or otherwise disposes of the shares more than two years after the grant date and more than one year after the exercise date, the
difference between the sale price and the exercise price will be taxed as capital gain or loss. If the participant exercises the option and then later sells or otherwise disposes of the shares before the end of the two- or one-year holding periods
described above, he or she generally will have ordinary income at the time of the sale equal to the fair market value of the shares on the exercise date (or the sale price, if less) minus the exercise price of the option.
Stock Appreciation Rights
No taxable
income is reportable when a stock appreciation right with an exercise price equal to the fair market value of the underlying stock on the date of grant is granted to a participant. Upon exercise, the participant will recognize ordinary income in an
amount equal to the amount of cash received and the fair market value of any shares received. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss.
Restricted Stock, Restricted Stock Units, Performance Units and Performance Shares.
A participant generally will not have taxable income at the time an Award of restricted stock, restricted stock units, performance shares or performance
units are granted. Instead, he or she will recognize ordinary income in the first taxable year in which his or her interest in the shares underlying the Award becomes either (i) freely transferable, or (ii) no longer subject to substantial
risk of forfeiture. However, the recipient of a restricted stock Award may elect to recognize income at the time he or she receives the Award in an amount equal to the fair market value of the shares underlying the Award (less any cash paid for the
shares) on the date the Award is granted.
Tax Effect for the Company.
The Company generally will be entitled to a tax deduction in connection with an Award under the 2007 incentive plan in an amount equal to the ordinary
income realized by a participant and at the time the participant recognizes such income (for example, the exercise of a nonstatutory stock option). Special rules limit the deductibility of compensation paid to the Company’s Chief Executive
Officer and to each of its four most highly compensated executive officers. Under Section 162(m) of the Code, the annual compensation paid to any of these specified executives will be deductible only to the extent that it does not exceed
$1,000,000. However, the Company can preserve the deductibility of certain compensation in excess of $1,000,000 if the conditions of Section 162(m) are met. These conditions include stockholder approval of the 2007 incentive plan, setting
limits on the number of Awards that any individual may receive and for Awards other than certain stock options, establishing performance criteria that must be met before the Award actually will vest or be paid. The 2007 incentive plan has been
designed to permit the Administrator to grant Awards that qualify as performance-based for purposes of satisfying the conditions of Section 162(m), thereby permitting the Company to continue to receive a federal income tax deduction in
connection with such Awards.
Section 409A
Section 409A of the Code provides certain requirements on non-qualified deferred compensation arrangements. These include new requirements with respect to an individual’s election to defer compensation and
the individual’s selection of the timing and form of distribution of the deferred compensation. Section 409A also generally provides that distributions must be made on or following the occurrence of certain events (e.g., the
individual’s separation from service, a predetermined date, or the individual’s death). Section 409A imposes restrictions on an individual’s ability to change his or her distribution timing or form after the compensation has been
deferred. For certain individuals who are officers, Section 409A requires that such individual’s distribution commence no earlier than six months after such officer’s separation from service.
98
Awards granted under the Plan with a deferral feature will be subject to the requirements of
Section 409A. If an Award is subject to and fails to satisfy the requirements of Section 409A, the recipient of that award may recognize ordinary income on the amounts deferred under the Award, to the extent vested, which may be prior to
when the compensation is actually or constructively received. Also, if an Award that is subject to Section 409A fails to comply with Section 409A’s provisions, Section 409A imposes an additional 20% federal income tax on
compensation recognized as ordinary income, as well as interest on such deferred compensation. The Internal Revenue Service has not issued final regulations under Section 409A and, accordingly, the requirements of Section 409A (and the
application of those requirements to Awards issued under the Plan) are not entirely clear.
THE FOREGOING IS ONLY A SUMMARY OF THE
EFFECT OF UNITED STATES FEDERAL INCOME TAXATION UPON PARTICIPANTS AND THE COMPANY WITH RESPECT TO THE GRANT AND EXERCISE OF AWARDS UNDER THE INCENTIVE PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX CONSEQUENCES OF A
PARTICIPANT’S DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE PARTICIPANT MAY RESIDE.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING “FOR” THE
ADOPTION OF THE 2007 EQUITY INCENTIVE PLAN AND THE NUMBER OF SHARES RESERVED FOR ISSUANCE UNDER THE INCENTIVE PLAN.
99
THE ADJOURNMENT PROPOSAL
The adjournment proposal allows Ascend’s board of directors to submit a
proposal to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation of proxies in the event, based on the tabulated votes, there are not sufficient votes at the time of the special meeting to approve the
consummation of the acquisition. In no event will Ascend solicit proxies to adjourn the special meeting or consummate the acquisition beyond the date by which it may properly do so under its certificate of incorporation and Delaware law.
Consequences if Adjournment Proposal Is Not Approved
If an adjournment proposal is presented to the meeting and is not approved by the stockholders, Ascend’s board of directors may not be able to adjourn the special meeting to a later date in the event, based on
the tabulated votes, there are not sufficient votes at the time of the special meeting to approve the consummation of the acquisition. In such event, Ascend will be required to liquidate.
Required Vote
Adoption of the adjournment proposal
requires the affirmative vote of a majority of the issued and outstanding shares of Ascend’s common stock represented in person or by proxy at the meeting. Adoption of the adjournment proposal is not conditioned upon the adoption of any of the
other proposals.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OUR STOCKHOLDERS VOTE “FOR” THE APPROVAL OF AN
ADJOURNMENT PROPOSAL, IF PRESENTED.
100
OTHER INFORMATION RELATED TO ASCEND
Business of Ascend
Ascend was formed on December 5, 2005, to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an
unidentified operating business. Prior to executing the acquisition agreement with ePAK, Ascend’s efforts were limited to organizational activities, completion of its IPO and the evaluation of possible business combinations.
IPO Proceeds Held in Trust
The registration
statement for Ascend’s IPO was declared effective May 11, 2006. On May 17, 2006, Ascend sold 6,000,000 units in the IPO and on May 22, 2006, Ascend sold an additional 900,000 units in the IPO pursuant to the underwriters
over-allotment option. Each of Ascend’s units consists of one share of common stock and two redeemable common stock purchase warrants. Each warrant entitles the holder to purchase from us one share of common stock at an exercise price of $5.00.
Ascend received net proceeds of approximately $37,203,000 from the IPO.
Don K. Rice, Ascend’s chairman of the board, chief executive
officer, president and treasurer, purchased 166,667 Units at $6.00 per unit (for an aggregate purchase price of $1,000,002) from Ascend. This purchase took place on a private placement basis simultaneously with the consummation of the IPO. The
“insider units” are identical to the units sold in the IPO; however, Mr. Rice has waived his right to receive distributions upon Ascend’s liquidation prior to a business combination with respect to the securities underlying the
insider units. Additionally, he has agreed that the insider units and underlying securities will not be sold or transferred by him until after we have completed a business combination.
Ascend’s management has broad discretion with respect to the specific application of the net proceeds of the IPO. $38,510,202, which includes
$1,000,002 relating to the sale of insider units and $952,200 deferred payment due to the underwriter of the IPO, of these net proceeds was placed in a trust account and has been invested in United States “government securities” within the
meaning of Section 2(a)(16) of the Investment Company Act of 1940 with a maturity of 180 days or less, or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. The funds held in
the trust account will not be released until the earlier of the date on which Ascend consummates a business combination or liquidates its assets.
If the acquisition with ePAK is consummated, the trust account will be released to Continuing Pubco and used to pay for working capital and general corporate purposes of Continuing Pubco and ePAK and to pay expenses and other payments
required in connection with the acquisition, including:
•
amounts owed to stockholders of Ascend who do not approve the acquisition and elect to convert their shares of common stock into their pro rata share of the trust
account;
•
the deferred underwriting commissions of $952,200;
•
a finders fee equal to 1.5% of the total consideration in the acquisition (including any assumed indebtedness of ePAK);
•
professional fees; and
•
other transaction costs.
The
remaining proceeds also could potentially be used to pay off the existing debt of ePAK; fund working capital increases going forward; acquire other businesses; pay dividends; or repurchase Continuing Pubco common stock or warrants.
101
Fair Market Value of Target Business
Pursuant to Ascend’s certificate of incorporation, the initial target business that Ascend acquires must have a fair market value equal to at least 80% of Ascend’s net assets at the time of such acquisition.
Ascend’s board of directors determined that this test was met in connection with its acquisition of ePAK. Further, Ascend has received an opinion from Capitalink that the fair market value of ePAK was at least equal to 80% of Ascend’s net
assets at the time the acquisition agreement was signed.
Stockholder Approval of Business Combination
The approval of the acquisition proposal will require the affirmative vote of holders of a majority of the Public Shares, including holders who purchase
Public Shares subsequent to the IPO, and voted on the matter. If the holders of 20% or more of the Public Shares both vote against the acquisition proposal and properly demand that Ascend convert their shares into a pro rata portion of Ascend’s
trust account, calculated as of two business days prior to the anticipated date of the consummation of the acquisition, then the acquisition will not be consummated and Ascend will be forced to liquidate. The Ascend Inside Stockholders have agreed
to vote the common stock they purchased prior to the IPO (the “Original Shares”) on the acquisition proposal in accordance with the vote of holders of a majority of the Public Shares. The Ascend Inside Stockholders also have indicated that
they intend to vote their Original Shares in favor of all other proposals being presented at the meeting. These Ascend Inside Stockholders have also indicated they intend to vote any shares they acquired after the IPO for all of the proposals. As of
the record date, the Ascend Inside Stockholders have not acquired any additional shares of Ascend common stock since the IPO, except that Mr. Rice acquired 166,667 shares as part of his purchase of insider units concurrently with the
consummation of the IPO.
Liquidation if No Business Combination
Ascend’s certificate of incorporation provides for mandatory liquidation of Ascend in the event that Ascend does not consummate a business combination within 18 months from the date of consummation of its IPO, or
24 months from the consummation of the IPO if certain extension criteria have been satisfied. Such dates are November 11, 2007 and May 17, 2008, respectively. Ascend signed a letter of intent with ePAK on February 22, 2007 and signed
a definitive acquisition agreement with ePAK on July 30, 2007. As a result of having signed the letter of intent, Ascend satisfied the extension criteria; provided, however, that the terms of the acquisition agreement require that the
acquisition be consummated on or prior to February 13, 2008 or it is terminable by any party.
If Ascend does not complete the
acquisition or another business combination by May 17, 2008, it will be dissolved pursuant to Section 275 of the Delaware General Corporation Law (“DGCL”). In connection with such dissolution, the expected procedures of which are
set forth below, Ascend will distribute to all of its public stockholders, in proportion to their respective equity interests, an aggregate sum equal to the amount in the trust account, inclusive of any interest, plus remaining assets. The Ascend
Inside Stockholders have waived their rights to participate in any liquidation distribution with respect to shares of common stock owned by them immediately prior to the IPO. There will be no distribution from the trust account with respect to
Ascend’s warrants.
It is anticipated that, if Ascend is unable to complete the business combination with ePAK, the following will
occur:
•
Ascend’s board of directors will convene and adopt a specific plan of dissolution and liquidation, which it will then vote to recommend to Ascend’s
stockholders; at such time it will also cause to be prepared a preliminary proxy statement/prospectus setting out such plan of dissolution and liquidation as well as the board’s recommendation of such plan;
•
Ascend will promptly file a preliminary proxy statement/prospectus with the Securities and Exchange Commission;
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•
if the Securities and Exchange Commission does not review the preliminary proxy statement/prospectus, then, 10 days following the filing of such preliminary proxy
statement/prospectus, Ascend will mail the definitive proxy statement/prospectus to its stockholders, and 10 to 20 days following the mailing of such definitive proxy statement/prospectus, Ascend will convene a meeting of its stockholders, at which
they will vote on the plan of dissolution and liquidation; and
•
if the Securities and Exchange Commission does review the preliminary proxy statement/prospectus, Ascend currently estimates that it would receive their comments 30
days after the filing of such proxy statement/prospectus. Ascend would then mail the definitive proxy statement/prospectus to its stockholders following the conclusion of the comment and review process (the length of which cannot be predicted with
any certainty, and which may be substantial) and Ascend will convene a meeting of its stockholders at which they will vote on the plan of dissolution and liquidation.
Ascend expects that all costs associated with the implementation and completion of Ascend’s plan of dissolution and liquidation will be funded by
any remaining net assets not held in the trust account, although Ascend cannot assure you that there will be sufficient funds for such purpose. If such funds are insufficient, it is anticipated that Ascend’s management will advance the funds
necessary to complete such dissolution and liquidation (currently anticipated to be no more than approximately $50,000).
Ascend will not
liquidate the trust account unless and until its stockholders approve such plan of dissolution and liquidation. Accordingly, the foregoing procedures may result in substantial delays in Ascend’s liquidation and the distribution to its public
stockholders of the funds in the trust account and any remaining net assets as part of Ascend’s plan of dissolution and liquidation.
If Ascend were to expend all of the net proceeds of the IPO, other than the proceeds deposited in the trust account, the per share liquidation price as of
, 200 , the record date, would be approximately
$ , or $ less than the per-unit offering price of $ in Ascend’s IPO. The proceeds deposited in
the trust account could, however, become subject to the claims of Ascend’s creditors and there is no assurance that the actual per share liquidation price will not be less than
$ , due to those claims. If Ascend liquidates prior to the consummation of a business combination, Mr. Rice, chairman of the board and chief executive officer of Ascend will
be personally liable to pay debts and obligations to vendors and other entities that are owed money by Ascend for services rendered or products sold to Ascend, or to any target business, to the extent such creditors bring claims that would otherwise
require payment from moneys in the trust account. There is no assurance, however, that they would be able to satisfy those obligations. However, because Ascend was obligated to have, and subsequently did have, all vendors and service providers that
we engaged and owe money to, and the prospective target businesses we had negotiated with, waive any right, title, interest or claim of any kind they may have had in or to any monies held in the trust account, Ascend believes the likelihood of
Mr. Rice having to pay any such debts and obligations is minimal. Nevertheless, we cannot assure you that the per share distribution from the trust fund, if Ascend liquidates, will not be less than
$ , plus interest, then held in the trust fund due to claims of creditors.
Additionally, if Ascend is forced to file a bankruptcy case or an involuntary bankruptcy case is filed against Ascend that is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be
included in the bankruptcy estate and subject to the claims of third parties with priority over the claims of Ascend’s stockholders. Also, in any such case, any distributions received by stockholders in Ascend’s dissolution might be viewed
under applicable debtor/creditor or bankruptcy laws as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy court could seek to recover all amounts received by Ascend’s stockholders in the
dissolution. Furthermore, because Ascend intends to distribute the proceeds held in the trust account to its public stockholders as soon as possible after dissolution, this may be viewed or interpreted as giving preference to the public stockholders
over any potential creditors with respect to access to or distributions from Ascend’s assets. In addition, Ascend’s board of directors may be viewed as having breached their fiduciary duties to Ascend’s creditors or may have acted in
bad faith, thereby exposing itself and Ascend’s company to claims of punitive damages, by paying public stockholders from the trust account prior to
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addressing the claims of creditors or complying with certain provisions of the DGCL with respect to the dissolution and liquidation. We cannot assure you
that claims will not be brought against Ascend for these reasons.
To the extent any bankruptcy or other claims deplete the trust account,
we cannot assure you we will be able to return to Ascend’s public stockholders at least $ per share.
Under Sections 280 through 282 of the DGCL, stockholders may be held liable for claims by third parties against a corporation to the extent of
distributions received by them in a dissolution. Pursuant to Section 280, if the corporation complies with certain procedures intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period
during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to
stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder’s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder
would be barred after the third anniversary of the dissolution. Although Ascend will seek stockholder approval to liquidate the trust account to its public stockholders as part of its plan of dissolution and liquidation, Ascend will seek to conclude
this process as soon as possible and as a result do not intend to comply with those procedures. Because we will not be complying with the foregoing provisions, Section 281(b) of the DGCL requires Ascend to adopt a plan that will provide for
Ascend’s payment, based on facts known to it at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. However, because
Ascend is a blank check company, rather than an operating company, and its operations have been limited to searching for prospective target businesses to acquire, the only likely claims to arise would be from Ascend’s vendors and service
providers to which Ascend owes money and potential target businesses, from all of which Ascend has received agreements waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account. As a result,
the claims that could be made against Ascend will be significantly limited and the likelihood that any claim would result in any liability extending to the trust is remote. Nevertheless, such agreements may or may not be enforceable. As such,
Ascend’s stockholders could potentially be liable for any claims to the extent of distributions received by them in a dissolution and any liability of Ascend’s stockholders may extend beyond the third anniversary of such dissolution.
Accordingly, we cannot assure you that third parties will not seek to recover from Ascend’s stockholders amounts owed to them by Ascend.
Facilities
Since May 11, 2006, we have paid 400 Building LLC, an affiliate of Arthur Spector, our special advisor, a
monthly fee of $7,500 for office space and general and administrative services. The cost for this space is included in a $7,500 per-month fee. Ascend believes, based on rents and fees for similar services in the same geographic area, that the fees
charged by 400 Building LLC are at least as favorable as Ascend could have obtained from an unaffiliated person. Ascend considers its current office space adequate for current operations.
Employees
Ascend has one executive officer who also
serves on Ascend’s board of directors. Mr. Rice is not obligated to contribute any specific number of hours per week and devotes only as much time to Ascend’s affairs as he deems necessary. Ascend does not intend to have any full time
employees prior to the consummation of the acquisition.
Periodic Reporting and Audited Financial Statements
Ascend has registered its securities under the Securities Exchange Act of 1934 and has reporting obligations, including the requirement to file annual and
quarterly reports with the SEC. In accordance with the requirements of the Securities Exchange Act of 1934, Ascend’s annual reports contain financial statements
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audited and reported on by Ascend’s independent accountants. Ascend has filed with the Securities and Exchange Commission a Form 10-K covering the
fiscal year ended December 31, 2006 and its most recent Form 10-Q covering the fiscal quarter ended June 30, 2007.
Legal Proceedings
There are no legal proceedings pending against Ascend.
Results of Operations
The following discussion should be read in conjunction with Ascend’s
audited December 31, 2006 and unaudited June 30, 2007 financial statements and related notes thereto included elsewhere in this proxy statement/prospectus.
Net income of $62,839 reported for the quarter ended June 30, 2007 consists of $6,278 expense for director and officer liability insurance, $22,500 expense for a monthly administrative services agreement, $9,125
for franchise and state capital stock taxes, $151,252 for legal, accounting and consulting expenses (which includes $149,552 of third party legal and consulting costs related to the merger) and $17,225 for other expenses. Interest on the trust fund
investment was $267,750, excluding $66,896 of deferred interest, and interest earned on the money market accounts was $1,469.
Net income
of $74,219 reported for the quarter ended June 30, 2006 consists of $3,472 expense for director and officer liability insurance, $12,500 expense for a monthly administrative services agreement, $20,500 for franchise and state capital stock
taxes, $4,200 for legal and accounting, $14,600 for federal and state income taxes and $13,389 for other expenses. Interest on the trust fund investment was $141,387, excluding $35,325 of deferred interest, and interest earned on the money market
account was $1,493.
Net income of $198,842 reported for the six months ended June 30, 2007 consists of $12,528 expense for director
and officer liability insurance, $45,000 expense for a monthly administrative services agreement, $12,750 for franchise and state capital stock taxes, $237,208 for legal, accounting and consulting expenses (which includes $216,805 of third party
legal and consulting costs related to the merger), ($32,700) reversal of prior period state income taxes and $51,359 for other expenses. Interest on the trust fund investment was $520,996, excluding $130,168 of deferred interest, and interest earned
on the money market accounts was $3,991.
Net income of $74,233 reported for the six months ended June 30, 2006 consists of $3,472
expense for director and officer liability insurance, $12,500 expense for a monthly administrative services agreement, $20,565 for franchise and state capital stock taxes, $4,200 for legal and accounting, $14,600 for federal and state income taxes
and $13,478 for other expenses. Interest on the trust fund investment was $141,387, excluding $35,325 of deferred interest, and interest earned on the money market account was $1,661.
Net income of $580,445 reported for the period from December 5, 2005 (inception) to June 30, 2007 consists of $28,500 expense for director and
officer liability insurance, $102,500 expense for a monthly administrative services agreement, $64,415 for franchise and state capital stock taxes, $314,075 for legal, accounting and consulting expenses (which includes $216,805 of third party legal
and consulting costs related to the merger) and $119,275 for other expenses. Interest on the trust fund investment was $1,196,697, excluding $298,894 of deferred interest, and interest earned on the money market accounts was $12,513.
Ascend consummated its IPO on May 17, 2006 and the over-allotment option on May 22, 2006. $38,510,202, which includes $36,558,000 of the net
proceeds of the IPO, $1,000,002 related to the sale of insider units and $952,200 deferred payment due to the underwriter, is held in trust and the remaining proceeds are available to be used to provide for business, legal and accounting due
diligence on prospective acquisitions and continuing general and administrative expenses.
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Ascend believes that it has sufficient available funds outside of the trust account to operate for at
least 24 months from the date of the IPO (May 17, 2008), assuming that a business combination is not consummated during that time. Over this time period, Ascend will be using these funds for identifying and evaluating prospective acquisition
candidates, performing business due diligence on prospective target businesses, traveling to and from the offices, plant or similar locations of prospective target businesses, reviewing corporate documents and material agreements of prospective
target businesses, selecting the target business to acquire and structuring, negotiating and consummating the business combination. Ascend anticipates that it will incur approximately $180,000 for the administrative fee payable to 400 Building LLC
($7,500 per month for two years), $120,000 of expenses for legal, accounting and other expenses attendant to the due diligence investigations, structuring and negotiating of a business combination, $80,000 of expenses in legal and accounting fees
relating to our SEC reporting obligations, $75,000 of expenses for the due diligence and investigation of a target business, and $215,000 for general working capital that will be used for miscellaneous expenses and reserves, including approximately
$80,000 for director and officer liability insurance premiums. Ascend does not believe it will need to raise additional funds in order to meet the expenditures required for operating our business. However, it may need to raise additional funds
through a private offering of debt or equity securities if it is required to consummate a business combination that is presented to us. Ascend would only consummate such a fundraising simultaneously with the consummation of a business combination.
Ascend is obligated, commencing May 11, 2006, to pay to 400 Building LLC, an affiliate of Arthur Spector, our special advisor, a
monthly fee of $7,500 for general and administrative services.
On December 20, 2005, Don K. Rice advanced an aggregate of $80,000 to
us for payment of offering expenses on our behalf. The loan was payable without interest on the earlier of December 20, 2006 or the consummation of the IPO. This loan was repaid on May 24, 2006 out of proceeds of the IPO.
Don K. Rice had also committed to purchase 166,667 units at $6.00 per unit (for an aggregate purchase price of $1,000,002) from us. This purchase took
place on a private placement basis simultaneously with the consummation of the IPO on May 17, 2006.
In connection with the IPO,
Ascend issued to the underwriter, for $100, an option to purchase up to a total of 300,000 units. Ascend estimated that the fair value of this option was approximately $711,000 ($2.37 per Unit) using a Black-Scholes option-pricing model. The fair
value of the option granted to the underwriter was estimated as of the date of grant using the following assumptions: (1) expected volatility of 46.56%, (2) risk-free interest rate of 4.31% and (3) expected life of 5 years.
Ascend intends to reimburse its officers and directors for any reasonable out-of-pocket expenses incurred by them in connection with
certain activities on Ascend’s behalf such as identifying and investigating possible target businesses and business combinations. From Ascend’s inception through the record date, Ascend has reimbursed its officers and directors an
aggregate of $ incurred by them on Ascend’s behalf.
Off-Balance Sheet
Arrangements
Options and warrants issued in conjunction with our initial public offering are equity-linked derivatives and,
accordingly, represent off-balance sheet arrangements. The options and warrants meet the scope exception in paragraph 11(a) of FAS 133 and are accordingly not accounted for as derivatives for purposes of FAS 133, but instead are accounted for as
equity. See Note 6 to the financial statements for more information.
Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company
reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Disclosure controls and procedures include, without
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limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act
is accumulated and communicated to management, including our chief executive officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, Ascend’s chief executive officer (principal executive, financial and accounting officer) carried out an evaluation of the effectiveness of the design
and operation of Ascend’s disclosure controls and procedures as of June 30, 2007. Based upon his evaluation, he concluded that Ascend’s disclosure controls and procedures were effective.
Ascend’s internal control over financial reporting is a process designed by, or under the supervision of, its chief executive officer and effected
by its board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally
accepted accounting principles (United States). Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of Ascend’s assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of Ascend’s financial statements in accordance with generally accepted accounting principles (United States),
and that Ascend’s receipts and expenditures are being made only in accordance with the authorization of its board of directors and management; and provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of Ascend’s assets that could have a material effect on Ascend’s financial statements.
During
the most recently completed fiscal quarter, there has been no change in Ascend’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, its internal control over financial
reporting.
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BUSINESS OF ePAK
Business of ePAK
ePAK is a full-service designer, manufacturer and supplier of precision engineered products and solutions for the automated transport and handling of semiconductor and electronics devices. The Company and its
subsidiaries operate a large scale design and manufacturing facility in Shenzhen, Peoples Republic of China (“PRC”) with additional sales, design and applications engineering operations located in a number of offices servicing North
America, Europe and Asia. The Company’s precision manufactured handling solutions provide ePAK’s customers with the automated means of manufacturing, handling and transporting their critical semiconductor and electronic devices with a high
degree of reliability and efficiency.
The Company’s products are used in nearly all stages of the processing, handling and transport
of semiconductors. Customers use ePAK’s products to move their mechanically and electrically sensitive products between process steps within their factories and between manufacturing facilities around the world as these semiconductor products
are sequentially built from raw silicon to finished integrated circuits (“ICs”). ePAK’s automation and handling products provide interface with test and component assembly equipment, transport media for delivering products to
end-system manufacturers and final interface with circuit board assembly systems. The Company’s high purity product solutions provide the semiconductor, disk drive, solar and electronics industries with high purity, precision manufactured
protection and handling media for the storage, handling, processing and transportation of products throughout the manufacturing process. ePAK’s applications and engineering team formulates, designs and implements solutions optimized for
customers’ requirements, facilitating the reliable realization of their time-critical product revenues. The Company leverages its experience gained from servicing the semiconductor industry to further develop markets that benefit from its core
competencies, allowing ePAK to expand into providing similar products and services for the liquid crystal display, data storage, solar cell, printed circuit board, and medical sciences test industries.
The majority of ePAK’s products are consumables whose demand is driven by a combination of semiconductor, integrated circuit, and electronic system
manufacturing activity. The Company’s consumable products include raw wafer shippers, finished wafer transport media, IC test and handling trays, die singulation grip rings and flex frames, IC tape and reel for high speed automated circuit
board assembly, and IC shipping tubes. Demand for ePAK’s data storage media shippers and subcomponent trays, also consumables, is driven by the manufacturing activity of data storage systems, largely composed of disk drives. The Company also
manufactures process carriers used in the manufacture of silicon wafers, compound semiconductor wafers, data storage systems and integrated circuits. These process carriers facilitate advanced automation and protect the integrity of customer
products during the various processing stages used in the manufacture of semiconductor wafers and IC’s. The demand for process carriers correlates with overall semiconductor and IC industry capital spending and manufacturing activity.
ePAK maintains a large scale manufacturing center in Shenzhen, PRC. From this central manufacturing base supplies its customers through a
global network of Just-In-Time (“JIT”) distribution facilities in locations near the Company’s customers with concentrations in North America, Europe, Singapore, the PRC, the Philippines, Taiwan, Korea and Japan. Products are sold
from and customers are serviced by a worldwide direct sales force and a design applications engineering team. ePAK supplements its own sales and support team through the use of distributors in selected regions around the world, including in Europe,
Japan and the PRC.
ePAK was formed in 1999 and established its initial operations in the PRC. The Company maintains 100% owned
subsidiaries in the US, Hong Kong, and the PRC. ePAK’s executive offices are located at 4926 Spicewood Springs Road, Suite 200, Austin, Texas 78759 and its telephone number is (512) 231-8083.
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The Semiconductor Industry
Semiconductors are the key components of the vast majority of today’s electronics systems and their proliferation in an increasing spectrum of applications provides for a rapidly growing market for semiconductor-
based products. Traditionally, semiconductors were largely weighted towards computing applications, with a particular emphasis on personal computers. Today, their use continues to expand in a large, growing and diverse range of applications in
addition to computing, including telecommunications, wireless and broadband communications, household and consumer electronics, numerous automotive applications, and personal information managers.
Manufacturing processes in the semiconductor and electronics industry utilize a broad spectrum of consumable and semi-consumable materials requiring a
complex set of performance requirements. Various processes in the transformation of raw silicon wafers into electronics end systems require a high degree of performance from these materials in terms of purity, stability, functional repeatability,
thermal range, dimensional precision and protection from the potentially damaging effects of electrostatic discharge (“ESD”). Given the complexity of these manufacturing processes in concert with the relatively high value of the resulting
semiconductor products, the performance of the materials is critical to manufacturers’ efficient and cost effective operations. The automated processing and manufacturing steps used in the transformation of semiconductors into electronic
systems requires the use of high performance consumable materials such as raw wafer shippers, finished wafer transport media, IC test and handling trays, die singulation grip rings and flex frames, IC tape and reel, IC shipping tubes, bare die
trays, data storage subcomponent trays and data storage media shippers. Demand for these consumable materials is largely driven by the unit-volume production of semiconductors and electronic systems. Semi-consumable products and capacity expansion
oriented products such as wafer and substrate process cassettes react to demand driven by process changes, product functional end of life and capacity expansions.
Semiconductor manufacturing is comprised of two principal segments: front-end and back-end processes. Front-end processes begin with the manufacture of raw silicon or compound semiconductor wafers. These wafers are
grown in crystalline ingot form by raw wafer manufacturers, making use of raw silicon or more exotic materials such as gallium arsenide, indium phosphide, or sapphire. These crystalline semiconductor ingots are typically shaped into circular logs
ranging in diameter from one to 12 inches and subsequently sliced into thin wafers ranging in thickness from over 500um to less than 50um. Due to the physical properties of the materials, their crystalline nature, and low aspect ratios, these wafers
can be quite fragile and susceptible to breakage during handling and processing. Front-end processing continues as the raw wafers are transported to semiconductor wafer fabrication operations (“wafer fab”).
Once raw wafers reach wafer fab operations they are subjected to a wide variety of process steps where the wafers experience a range of thermal extremes,
exposure to various chemicals and repetitive cleaning operations where their purity is protected through the removal of submicron organic and inorganic contaminants. At each process step, wafer carriers provide the means for sophisticated automated
handling while maintaining the purity and mechanical integrity of the wafers. Wafer fabrication includes multiple exposures to process steps including deposition, chemical mechanical planarization (“CMP”), photolithography, etch and
cleaning in the creation of a finished semiconductor wafer containing resident electronic circuitry and interconnects. It is critical at each of these process steps that the high performance of wafer process carriers contribute to the overall
manufacturing yield and reliability of the semiconductor devices. Once the build-up of the circuitry and interconnects on a wafer is complete, the end of the front-end wafer fabrication process is concluded.
The performance of wafer carriers plays a critical role in maximizing silicon wafer manufacturing yields. This criticality is compounded by the fact that
the value of a single batch of wafers, typically 25, increases at each step in the wafer fabrication process and can easily exceed several million revenue dollars to the customer. It is critical that the wafer carriers provide a high degree of
protection from mechanical, and in some cases ESD, induced stresses, while aiding in maintaining wafer purity and cleanliness throughout the wafer manufacturing process. The largest cost component in operating wafer fabs is typically related to the
depreciation and utilization
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of capital equipment. This utilization rate is directly related to manufacturing throughput and efficiency. The contribution of wafer handling media is
critical to the efficiency equation by providing reliability and repeatability with regard to its automation equipment interface role in transferring wafers from process to process and station to station. Here, dimensional stability coupled with
high precision tight tolerance product design and manufacturing capabilities ensures high efficiency. Designing with and manufacturing using high performance engineering plastics requires a great deal of experience, technical expertise and ongoing
development.
Availability and JIT delivery of wafer carriers are critical to maintaining the ongoing production of raw and finished
wafers. The value of these wafers, and the ability to process and ship on an ongoing basis, constitutes the revenue streams for operators of both raw wafer and wafer fab operators. Without sufficient supplies of carriers, these operators are unable
to realize their time critical revenue streams and risk interruption to their operations, thus the carriers form an integral link in the semiconductor and electronics manufacturing supply chain. ePAK’s maintenance of JIT delivery warehouses and
customer consignment programs enhances focus on minimizing delivery lead times resulting in greater flexibility and ability to respond to customer opportunities.
When the final wafer fab manufacturing process is reached, the wafer fab front-end operations are complete and the result is a finished wafer. Finished wafers are then transported to the back-end integrated circuit
manufacturing operations using specialized wafer carriers for manual or automated handling and transport. The back-end manufacturing process can include wafer probe, test, die singulation, assembly and packaging into integrated circuits.
In recent years, many of the products and services valued by the semiconductor and electronics industry are also in demand from other similar
industries. As such, demand for precision engineered products and solutions for the automated transport and handling of products has increased for the liquid crystal display, data storage, solar cell, printed circuit board and medical sciences test
industries.
ePAK’s Business Strategy
ePAK’s objective is to be a global leader in its selected markets by delivering the broadest and deepest line of engineered protection and handling materials possible to the semiconductor and precision engineered products manufacturing
industries. The Company’s strategy is built around leveraging its marketing and operational experience and techniques to maximize the solutions offered to customers while optimizing its cost structure through its manufacturing efficiencies,
with a particular emphasis on high value materials utilization.
ePAK’s strategy includes the following elements:
•
Broad Vertical Market Segment Product Offerings
. The Company’s customer base includes over 500 customers comprised of a broad range of semiconductor and
electronics manufacturers. The majority of these customers utilize engineered handling solutions within their operations from numerous classes of products offered by ePAK. The Company’s broad product offerings within the vertical semiconductor
manufacturing market provide it with the opportunity to engage with a customer initially with a single product offering, through which they are introduced to ePAK’s other service, delivery, design and production capabilities, many of which ePAK
believes are unique to it. Based on an acknowledgement of the value the Company adds to the customer’s operations in one product segment, ePAK seeks to create demand-pull for related and complementary products also being used by the customer.
The Company believes that manufacturers of semiconductors and electronic systems place a premium on suppliers who are able to comprehensively meet their materials protection and handling needs, and ePAK believes that its broad product offering
positions it as a premium supplier while creating additional demand for products used within the manufacturing chain.
•
Operationally Complementary Product Offerings
. The Company seeks to maintain a broad product portfolio so that it may optimize its overall cost structure by
taking advantage of the efficiencies gained by offering products for the various vertical markets it serves that utilize complementary manufacturing techniques and engineering materials. This also enables ePAK to enhance its revenue
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base and minimize the risk associated with product and customer concentration, as well as helping it control costs by optimizing material utilization. Since
high value, high performance engineering materials comprise the largest component of ePAK’s cost structure, the Company believes it can continue to enhance its operational performance by optimizing material utilization. ePAK’s emphasis on
driving its business from the market and applications side allows it to service complementary downstream markets with some products manufactured extensively from de-rated manufacturing losses while utilizing the high performance qualities maintained
within the de-rated engineering plastics. By joining its broad product base marketing and operational strategies together, coupled with its engineering materials compounding capabilities, ePAK believes that it can maximize the use of its engineering
materials in the highest value state possible.
•
Global Supply and Local Service
. ePAK believes that its superior responsiveness to new customer opportunities and the reliability of its supply to its
existing customers enhances its competitiveness and maximizes the barriers to entry of its competitors with potential and existing customer relationships. The Company maintains a single large scale manufacturing center in Shenzhen, PRC employing
over 1,500 staff, including over 150 experienced product design and manufacturing engineers. Maintaining a single large-scale facility allows ePAK to optimize capacity utilization while maintaining a high level of product quality and performance.
The PRC facility holds certification to international quality standards including ISO 9001:2000. The Company’s environmental initiatives are reflected in the manufacturing site’s ISO14001 certification. The internationally recognized ISO
certifications are secured through an audit of ePAK’s systems, verifying compliance with ISO standards. Furthermore, the Company was among the first companies in the PRC to receive certification as a Sony Green Partner. The Company believes
that these quality certifications gain customer confidence that can result in rapid customer adoption of ePAK products.
ePAK’s manufacturing center is linked to its global customers through its local engineering, sales and support staff. The Company believes its emphasis on local service and delivery results in enhanced customer relationships and leads
to opportunities to provide additional high value product and service solutions to its global customer base. Local service and delivery supported by JIT supply and inventory management, coupled with customer consignment programs, further enable ePAK
to respond quickly to changes in customer demand.
•
Emphasis on Consumables
. Supplying consumable products provides ePAK with a recurring revenue stream. Demand driven by semiconductor unit-volume production,
which drives over 90% of ePAK’s revenues, has provided for relatively stable growth of the Company’s underlying markets. According to VLSI Research, Inc., during the twenty years spanning 1986 through 2006, annual global IC unit volume
sales growth has averaged 10% with only two years of decline, including a decline in 2001 resulting from the general decline in the technology sector during that time. Similarly, silicon wafer demand grew 18 out of 20 years during this period and
averaged 8% annual growth. Often the semiconductor markets are measured by dollar sales volumes, rather than IC unit volumes, which have a higher variability than unit sales volumes. Such markets have also had drastic swings in semiconductor capital
equipment expenditures. ePAK focuses its sales strategy on products driven by semiconductor unit-volume production that has historically experienced a more consistent growth and recurring revenue stream. Similar to its strategy regarding its
products for semiconductor production, ePAK is focusing its product expansions to serve a growing consumables market with recurring revenue opportunities.
•
Applications Driven Solutions
. Materials handling, protection and automation performance within the semiconductor and electronics industry continuously
evolve. Largely, this evolution is driven by demand for greater production efficiencies resulting in higher manufacturing throughput and shrinking semiconductor device geometries. This evolution and the resulting increase in product performance
requirements creates a market environment where ePAK can utilize its experience to bring innovative products and services to market at a pace that the Company believes is consistent with the requirements of its customers’ demand for more
advanced products. ePAK seeks to formulate a full service solution
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capitalizing on its technical design expertise, high purity and tight tolerance manufacturing capabilities, and product supply initiatives. Additionally, the
Company is able to provide JIT and consignment supply options further addressing customer application needs.
•
Expanding Large Scale Manufacturing Operations
. ePAK’s large scale manufacturing operations encompass a wide array of processes and capabilities under
the management and direction of its experienced management team. Manufacturing processes include injection molding, extrusion, thermoforming, vacuum forming and materials compounding of a wide variety of high performance engineering resins. The
Company believes that its product quality and integrity is enhanced by managing a single large scale manufacturing center with its experienced operations management team concentrated in that location. ePAK’s manufacturing operations in
Shenzhen, PRC, are positioned to maintain short supply lines to the consumers of a majority of the products the Company delivers : China, one of the fastest growing semiconductor and electronics producing regions in the world; North Asia, including
Japan, Korea, Taiwan, and the Philippines; and South Asia, including those in Malaysia, Singapore, and Thailand. Longer supply lines exist in support of the more mature market regions, including North America and Europe. To compensate for these
longer supply lines, ePAK maintains JIT stocking operations and customer consignment programs.
•
Strategic Acquisitions
. ePAK continually evaluates strategic acquisitions that would contribute to its growth, accelerate its technological and service
expertise, and/or increase its manufacturing and operational efficiencies. The Company seeks acquisition targets that would benefit from the skill of ePAK’s management team and business model, allow the Company to expand its product offerings
to, and its relationships with, its existing customer base, or that would allow ePAK to apply its technical and service expertise, business strategies and operational efficiencies in product areas and markets that it has not previously served.
•
Expanding Markets
. In recent years, many of the products and services valued by the semiconductor and electronics industry are also in demand from other
similar industries. As such, demand for precision engineered products and solutions for the automated transport and handling of products has increased for the liquid crystal display, data storage, solar cell, printed circuit board, and medical
sciences test industries. Although ePAK does not expect that any of these other industries will become its primary focus, it believes that each of these industries provides considerable opportunities to expand the sale of its products and intends to
pursue these opportunities.
Products, Services and Delivery
The Company is a full-service designer, manufacturer and supplier of precision engineered products and solutions for the automated transport and handling
of semiconductors and electronic devices. Its broad product portfolio encompasses three major categories defined around its position in the markets it serves: (a) front-end protection and handling carriers, (b) back-end protection and
handling media; and(c) end-system automated assembly products.
Front-End Products
ePAK’s front-end products facilitate the automated manufacture, transport and processing of semiconductor wafers, while offering a high level of
mechanical and physical protection. Its front-end products include transport and handling carriers, process cassettes used in the manufacture of semiconductor wafers, and storage environments used for holding finished wafers and work-in-progress
(“WIP”) wafers.
•
Wafer Carriers
. ePAK’s front-end products include the ePRO line of wafer carriers used in the high volume transport of raw wafers from wafer
manufacturing operations to wafer fabs. ePRO products offer high purity materials designed to minimize contamination risks during wafer transport from raw wafer manufacturers to wafer fabs, while maintaining wafer integrity throughout the rigors of
the transportation and handling cycle. The Company’s ePRO product line handles wafers ranging from 100mm through 300mm in diameter. ePAK also offers smaller diameter wafer carriers ranging from
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1-inch to 3-inches, with applications typically geared towards high performance specialty wafers formulated from compound semiconductor materials. The
Company also offers a wide variety of secondary packaging solutions, such as clean room bags, moisture barrier bags and special outer packaging to assist the customer in passing rigorous drop tests often required by their customers.
•
Process Cassettes
. ePAK’s line of wafer and solar cell process cassettes enable the transfer of wafers and solar cells from process station to process
station as part of the fabrication process. Wafer to wafer, or cell to cell, positional tolerance and cassette dimensional stability are critical in providing reliable interface with automated processing equipment. Design and material performance
are instrumental to the manufacture and function of these cassettes, given the critical role they play and their exposure to various thermal and chemical environments. Unlike the majority of the products the Company sells, process cassettes are used
repeatedly. ePAK also supplies process cassettes that are used in wet chemical processing. These cassettes must be able to withstand exposure to the various chemicals and temperatures used in the production of semiconductors and solar cells. The
Company has gained considerable experience in designing solutions and using unique materials in these applications and will continue to invest in the development of products in this area. Many of ePAK’s cassettes are used for processing of
ultra-thin wafers. These wafers can typically be as thin as 80-100um and present unique handling challenges. The Company has considerable design experience in this area and offers a series of special cassettes for this application.
•
Storage Environments
. Storage environments encase process cassettes and buffer WIP wafers and solar cells as well as store finished goods prior to transfer
to assembly and test operations. Controlled environment storage, including lot identification and traceability features, can be provided by storage environments through integrated radio frequency identification (“RFID”) tags or optical
coding systems. Like process cassettes, storage environments are typically multi-use products. ePAK offers these storage environments in a range of sizes and material options. The Company has developed several solutions in this area and continues to
invest in the development of products in this area. Furthermore, ePAK offers a unique solution for solar cell storage that has also been popular with the expanding solar cell market.
Back-End Products
ePAK’s
back-end products facilitate the handling and transfer of finished wafers, the manufacture of packaged ICs, the transport of finished ICs and electronic components to system sub-assembly and final assembly manufacturers. Maintaining the physical and
functional integrity of finished wafers, fragile ICs and other electronic components is crucial to ensuring the proper operation and functionality of electronic systems. The ability of the Company’s back-end products to interface with high
speed automated assembly and SMT equipment enhances high production throughput and manufacturing efficiencies.
The Company formulates
product, delivery and supply arrangements tailored to the individual customers’ performance needs. JIT and consignment programs are designed for each individual customer accounting for their unique set of needs driven by their specific
processing, forecasting and operations support requirements.
•
Wafer Canisters
. Wafer canisters, like ePAK’s eLX system, provide the means of transport for semiconductor wafers from wafer fab operations to back-end
assembly and test facilities. The wafer canister transport system includes products produced by the Company that are placed inside the canister and in between each wafer. These products include a protective interleaf that is placed between the
wafers, as well as, various options for special padding that is placed above and below the wafers inside the canister to provide cushioning during transport. ePAK has produced a series of proprietary products in this area that have become
increasingly popular with the global customer base. This product, known as the ePAD system, consists of shock absorbing cushions as a high purity alternative to foam. In typical applications, wafer canisters interface with automated loaders at the
last stage of the wafer fab operations and automated unloaders at the initial stage of the assembly and test operations.
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All of the Company’s canisters are designed to facilitate automated wafer handling, guaranteeing a higher degree of wafer protection over manual
methods, due to the reduction in potential manual mishandling.
•
Wafer Jars
. Wafer jars, like wafer canisters, are a means of transport for semiconductor wafers from wafer fab operations to back-end assembly and test
facilities. However, wafer jars typically lack the ability for use with automated wafer handling equipment and thus require manual loading and unloading. Coupled with the lower degree of physical protection afforded by wafer jars, the market
segments utilizing them are largely skewed towards lower technology products.
•
IC Trays
. Following the wafer fabrication process, finished wafers containing functional circuitry are transported to IC assembly and test operations where
they are cut into individual die. An individual die is typically mounted to a metal lead frame or circuit substrate where interconnections are made between pads or conductive bumps on the die surface and corresponding pads or interconnects on the
lead frame or substrate. The die is typically encapsulated or over molded to offer environmental protection. The end result is a packaged IC ready for mounting on a printed circuit board (“PCB”) or integration into an electronic system. IC
handling trays are introduced during the final processing steps of finished ICs. They may be used for automated test equipment (“ATE”) interface, and are subsequently used for transport of ICs from the assembly and test operations to
surface mount technology (“SMT”) circuit assembly operations, where they serve as interface to high speed SMT equipment. ePAK’s customer application driven marketing led to the development and introduction of the patented eBIN system
of lot sorting, segregation, and tracking. Separate ICs with similar appearances can have substantially different levels of performance or functional characteristics. The Company’s eBIN stud and rider system provides its customer with a means
of visually tracking and identifying differing classes of product according to test results, manufacturing batch classification or process characteristics. ePAK’s applications approach to product development also addresses manufacturing yield
challenges with the Company’s patented V-Cut pocket design for ball grid array (“BGA”) substrates. IC handling trays are manufactured from a range of engineering materials customized around the application and differ according to
thermal, ESD, dimensional and purity requirements.
•
Tape and Reel
. ePAK’s tape and reel products are also used for the safe handling and transport of IC’s from back-end operations to PCB houses.
These products allow for high speed mounting of ICs onto PCBs and are generally used for smaller devices than those that ship in IC trays. The tape and reel system consists of two tapes, a carrier tape and a cover tape, and a reel. The Company
manufactures embossed carrier tape and rigid reels while acting as a reseller of activated adhesive cover tape. In use, individual components are placed by our customers into precision formed pockets along the length of the carrier tape which also
provide ESD protection through the inherent conductive properties of the tape material. The individual components are held in the pocket through the application of an electrostatically dissipative cover tape attached to the carrier tape by
heat-activated or pressure sensitive adhesive. Finally, the sealed tape system is wound around industry standard 13-inch or 7-inch reels which may also provide ESD protection through either the reel materials inherently conductive products or
through an antistatic topical coating.
•
Grip Rings and Flex Frames
. Following the final stages of semiconductor wafer manufacturing, wafers are often subject to back grinding operations to reduce
wafer thickness. Individual dies from wafers may be sawn and singulated, sorted, marked and shipped. To facilitate these operations Mylar film can be stretched across concentric locking grip rings with a single wafer mounted to the film. ePAK
manufactures tight tolerance grip or hoop rings to enable these post wafer fab processing steps where product performance and manufacturing repeatability are crucial.
•
IC Shipping Tubes
. IC shipping tubes are the longest lived transport media for the transport of ICs and other electronic components and subassemblies.
Traditionally manufactured by the industry from polyvinylchloride (“PVC”), ePAK provides both PVC and polystyrene tubes options.
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•
Bare Dice Trays
. The Company facilitates the handling of singulated bare semiconductor die through the design, manufacture and supply of bare die trays.
These trays provide mechanical and ESD protection in 2-inch or 4-inch square tray form containing an array of pockets sized to hold just one individual die. Depending upon the requirements of the application, high purity material properties can be
achieved where there is susceptibility to contamination.
•
Vacuum Formed Trays
. ePAK manufactures a broad line of vacuumed formed trays which are used in many applications. These products utilize the Company’s
precision manufacturing capabilities and are produced for a wide range of customers. ePAK produces a series of secondary packaging products that, in combination with many of the products described above, provide a full shipping system for the
customer, with the exception of the cardboard shipping box.
End-System Products
ePAK’s end-system products facilitate the automated assembly of electronic send systems, including magnetic disk drives for computer and consumer
applications and imaging products. Sensitivity to ionic, chemical and particulate contamination is high in these applications. End-system products include disk substrate and media carriers and automation trays.
Disk Substrate and Media Carriers
. Manufacturing operations beyond the semiconductor industry also require high purity, high performance solutions
enabling automated handling and assembly of components. The data storage industry is one such example. The substrates and magnetic media, which are found in disk drives and on which non-volatile data is stored, have exceptionally stringent
requirements for protection from contamination. The Company’s technical expertise in high performance engineering materials, advanced cleaning and processing operations and innovative applications-oriented design approach has led to rapid
customer adoption of its disk substrate and magnetic media carriers. ePAK’s innovations with high density carriers and external closure mechanisms can offer the data storage markets substantial increases in manufacturing throughput coupled with
reduced levels of surface contamination.
Automation Trays
. Much like IC handling trays, trays developed for the optical device and
data storage markets are used in high speed, high reliability automated assembly processes. Within the automation tray product segment, high purity materials offer protection for contamination sensitive components and precision manufacturing
tolerances facilitate high speed automation. Automation trays are used in handling optical lenses within the imaging industry and for read/write heads and disk drive suspension assemblies in the data storage industry.
Services
Design Services
. The
Company’s global applications and engineering team is highly experienced with the processes and procedures of semiconductor and electronic components and systems. The team draws on its wealth of applications experience and in-depth knowledge of
the manufacturing challenges faced by customers in the markets that ePAK serves. Applications driven product design begins with an evaluation and analysis of customer challenges, integrates the customer goals and draws on materials, manufacturing,
tooling and automation expertise in formulating a thorough product solution. Cross-industry and cross-product knowledge is leveraged to deliver these solutions. The end result of ePAK’s solutions oriented design service is often a new drawing,
design or product that uniquely addresses the application.
Cleaning Services
. The Company offers high quality precision cleaning
capabilities housed within ePAK’s extensive clean room operations facilities. Precision cleaning operations are designed to provide customers with critical contamination control of particles as small as 0.2 um. The Company’s cleaning
services are typically offered as part of an overall sourcing solution that might also include various delivery and logistics offerings to formulate a comprehensive sourcing solution that meets or exceeds all of the customer’s requirements.
Cleaning services are often applied to IC trays, wafer handling media, disk drive products, and optical lens trays.
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Forecasting, Planning and Logistics Services
. ePAK provides products and services to customers
throughout the semiconductor and electronics supply chain. The breadth of market engagements and depth of supply chain penetration offers enables ePAK an understanding regarding product segment current and forecasted demand.
Customers and Markets
The
Company’s major customer groups include manufacturers of semiconductor wafers, ICs and electronic components and electronic system producers. Its most significant customers, based on sales in fiscal year 2006, include Amkor Technologies, ASE
Test, Hitachi, On Semiconductor, Seagate, Skyworks, ST Microelectronics, STATS Chippac, Texas Instruments and Toko Electronics.
In fiscal
years 2006, 2005 and 2004, net sales to ePAK’s top ten customers accounted for approximately 55%, 60% and 59%, respectively, of net sales. In 2006, no customers accounted for more than 10% of the Company’s sales. In 2005, ST
Microelectronics accounted for more than 10% of the Company’s sales, and in 2004 Kangawa Shoji and ST Microelectronics accounted for more than 10% of the Company’s sales. Over 300 customers purchased products from ePAK during 2006.
The Company solicits sales from and issues quotations to its customers. Transactions are consummated with the issuance of a purchase order
by the customer, followed by ePAK’s shipment of goods to the customer pursuant to the purchase order. In some cases, customers first issue blanket purchase orders, then subsequent partial shipment releases against the blanket purchase order.
ePAK then ships pursuant to the shipment release.
The Company may enter into sourcing agreements with its customers. These agreements
generally have a term of one to two years, but they do not typically include any long term binding commitments on the parties to the agreements. The ePAK global sourcing and supply team works closely with customers to manage ongoing supply
arrangements factoring in customer, market and industry activities. These factors are used in soliciting blanket purchase orders, product and delivery-specific purchase orders, and non-binding forecasts for future product order volume. These are
subsequently updated on a periodic or ongoing basis. Customers may from time to time alter or cancel orders for reasons beyond the Company’s control.
The percentage of sales from customers located outside the U.S. was approximately 88%, 88%, and 90% in fiscal 2006, 2005, and 2004, respectively. ePAK records sales location by the billing destination, even if the
customer is headquartered in the U.S. It anticipates that sales to international customers will continue to represent a significant percentage of net sales. The percentages of its sales by region are set forth in the table below:
Fiscal Year Ended December 31,
2006
2005
2004
Asia
81.3
%
83.6
%
86.3
%
Europe
6.7
4.4
4.0
U.S.
12.0
12.0
9.7
Other
—
—
—
Total
100.0
%
100.0
%
100.0
%
ePAK’s sales are generally made pursuant to standard purchase orders, which can be revised by
its customers to reflect changes in the customer’s requirements. Generally, the Company’s purchase orders allow customers to reschedule delivery dates and cancel purchase orders without significant penalties. For these reasons, ePAK
believes that its backlog, while useful for scheduling production, is not necessarily a reliable indicator of future revenues.
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Sales and Marketing
The Company sells its products worldwide through a direct sales force, independent sales agents and distributors located in all major semiconductor and electronics markets, including those in North America, Asia, and
Europe. These global sales organizations are supported by local application engineering, service, logistics and delivery staff acting to formulate comprehensive solution offerings for ePAK’s customers.
The Company’s marketing efforts focus on the creation of demand-pull. Demand-pull for sales is the result of introducing customers, who are sourcing
one or more products or services from ePAK, to other products and services available from ePAK. With its broad vertical and lateral product offerings, the Company also offers inducements to reward existing customers who specify the use of its
products and services to other parts of their supply chain where ePAK has no or limited engagement. The Company’s industry reputation for providing rigorous and comprehensive solutions provides it with the opportunity to build on its successes.
In the process, the Company further enhances its reputation and customer relationships allowing ePAK involvement in earlier stage opportunities. This positions the Company to capitalize on business opportunities as they arise and make effort to
incorporate ePAK’s solutions into early stage specifications.
ePAK believes that its full spectrum of sourcing activities,
incorporating a combination of design, service, analytical, product, quality, logistic and delivery elements, is important to its marketing efforts.
Competition
The market for the Company’s products is highly competitive. While product and price are important factors
impacting ePAK’s competitive capabilities, the Company competes on the basis of the quality, service, delivery and value of its total solution. Elements important to formulating ePAK’s total customer solution include product quality and
performance, design and engineering support, the Company’s technical expertise and reputation, delivery and logistics services and ePAK’s worldwide presence with local service. The effectiveness of ePAK’s total solution formulation
varies from market segment to market segment and from customer to customer.
The market for ePAK’s products is highly fragmented, and
it competes with a number of different companies primarily on a product line by product line basis. Competitors of the Company’s front-end product segment include Entegris, Miraial and Shin-Etsu Polymer. Competitors of ePAK’s back-end
product segment include 3M, C-Pak, Daewon, ITW/Camtex, Kostat, Peak International and many small regional suppliers. Competitors of the Company’s end-system products include Chosen and Entegris. Some of ePAK’s competitors are larger and
have greater financial, technical, marketing, distribution and other resources than the Company. In industry down cycles, they may be willing to sell below fully absorbed costs at prices ePAK cannot match. The Company may not be able to compete
successfully against any of these competitors.
Product, Service and Materials Development
The Company’s engineering and development efforts are focused on providing continued introduction of new products and services as well as increasing
the manufacturing efficiencies of its operations. ePAK maintains a technical and engineering staff of over 100 persons at its factory in Shenzhen PRC, at its design center in Austin, Texas, and at its facilities in Singapore, Korea, the Philippines
and Taiwan.
The product and service development cycle begins with customer and market interactions defining market needs and requirements.
ePAK’s sales, product engineering and technical team works to develop product and service solutions to meet market or customer specific needs. It makes use of advanced 2-D and 3-D design and modeling applications and methods including advanced
computer aided drafting (“CAD”) or finite element multidisciplinary analysis (“FEMA”) and design of experiments methods (“DOE”) in characterizing system applications and ensuring that solutions are optimized around
requirements.
Materials development is a key area of focus for ePAK to both deliver high performance product solutions as well as to
increase its internal materials utilization efficiencies. Through upstream integration, the Company
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continues to produce a broadening range of high performance engineering materials that it traditionally purchased from third party material compounders. By
maintaining advanced internal compounding capabilities, ePAK is able to optimize material performance for a given application rather than purchasing higher cost compounded materials whose properties meet a broad range of performance requirements.
ePAK anticipates expanding the size and scope of its material formulation operations.
Product, service and materials development efforts
at ePAK are supported by advanced test and measurement laboratory operations within our organization. Our laboratory capabilities include ionic chromatography, liquid particle count, smart scope non-contact dimensional characterization, tensile
strength tester, impact tester, surface tension testing, and static decay testing.
The Company’s research and development
expenditures in fiscal 2006, 2005, and 2004 were $0.18 million, $0.16 million, and $0.1 million, respectively, which expenditures were all associated with product development initiatives.
Manufacturing
ePAK believes that its advanced
large-scale manufacturing, cleaning and processing facilities in Shenzhen, PRC, all managed under rigorous quality systems, are critical to its competitiveness and provide the Company with a tactical and strategic advantage. ePAK’s facilities
and processes include:
•
Precision Injection Molding
. From the its inception, ePAK has continuously developed its injection molding capabilities and expanded them to include the
processing and molding of a broadening array of technically challenging engineering resins. This growth in capability allows the Company to add to the performance capabilities of the injection molded products it produces. Injection molding involves
heating natural and compounded engineering resins and forcing the molten plastic into precision tooled molds. Injection molding processes are applied extensively in the creation of ePAK’s wafer process cassette, canister and jar products along
with IC trays and other rigid products.
•
Extrusion
. Extrusion, whereby molten plastic is forced through a die, is used to create IC shipping tube products as well as raw sheet materials used in the
production of carrier tape and various wafer and packing products. Dimensional tolerances may be quite stringent and the material performance characteristics and purity may be crucial in determining the overall performance of ePAK’s end
products.
•
Vacuum Forming
. Vacuum forming processes are used in the final production of carrier tape, flexible handling trays, shock absorbent packing materials and
ancillary wafer protection products. Vacuum formed products are created through the application of heat to a thin polymer sheet and then drawing a vacuum through a multi-cavity mold such that the sheet shape conforms to the dimensions defined by a
mold cavity. Various alterations to the typical vacuum forming process can be applied to increase dimensional accuracy and the mechanical performance of finished products. The raw material used in this process may also be made by the Company and
ePAK has extensive experience in formulating ultra clean materials for use in this process.
•
Compounding
. Compounding alters the performance characteristics of base or previously compounded polymer resins through the controlled blending-in of
performance modifiers. These modifiers can include minerals, elements or other resins. ePAK’s material compounding capabilities allow tailoring material performance to meet specific criteria required for a given application. Additionally,
captive compounding allows better control of manufacturing costs through the compounding of byproducts of the Company’s manufacturing processes or materials that have reached end of life in their original application. Compounding also
contributes to ePAK’s overall control of the quality and purity of injection molded, extruded and vacuum formed end products.
•
Sub Micron Cleaning
. ePAK maintains high volume sub micron cleaning capabilities in support of its semiconductor wafer and disk drive products. Cleaning
services are also provided to the wafer and disk
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drive industries in support of the customers’ internal requirements and in order to formulate and implement closed-loop service and supply arrangements
with select customers. The Company’s cleaning operations are housed within ultra-clean clean room environments.
•
Assembly
. ePAK maintains product assembly operations with extensive quality and logistic controls, making use of automated processes, where applicable, to
further ensure quality and efficiency. Some of the assembly operations are housed within clean room environments to further ensure product purity and precision.
•
Vision System Processing
. The Company makes use of advanced 2-D and 3-D imaging systems in the production and testing of certain products where quality and
dimensional accuracy are critical.
ePAK has made, and expects to continue to make, significant investments in expanding
and improving upon its manufacturing capabilities. These investments contribute to its ability to manufacture and process technologically advanced products and support its applications oriented design and development emphasis.
The Company’s products are made from a variety of raw materials that are generally available in quantity from alternate sources of supply. However,
certain materials included in ePAK’s products are obtained from a single source or a limited group of suppliers. It seeks to reduce dependence on limited source suppliers, but it may experience adverse impacts or interruptions to manufacturing
processes for certain products should the performance of one or more of these limited source suppliers diminish or experience interruption. A significant change in the price or performance of raw materials could adversely affect ePAK’s
operating results.
The Company’s manufacturing site in Shenzhen, PRC, contains two legal entities operating within different physical
structures: ePAK Technologies (Shenzhen) Co. Ltd, and ePAK Multi-Products Factory. ePAK Technologies Ltd is a wholly foreign owned entity (“WFOE”) formed under PRC law and a 100% owned subsidiary of ePAK., ePAK Multi-Products Factory is a
licensed processing entity (“LPE”) created through a licensed processing agreement formed under PRC law, and is operated by e.PAK Hong Kong Pte, Ltd., a subsidiary of ePAK. The Company owns or leases the equipment, facilities and
improvements located at its manufacturing site.
Intellectual Property
ePAK believes that the success of its business relies in part on its proprietary technology and capabilities, processes, information, designs and know how. It protects its intellectual property rights with trade
secrets and patents, and relies on a combination of patent, trademark and trade secret laws and license agreements to protect these rights. As of July 30, 2007, the Company’s intellectual property rights portfolio included 21 issued
patents and 34 patents filed in China and the United States. There can be no assurance that patents will be issued from pending or future applications or that, if patents are issued, they will not be challenged, invalidated or circumvented, or that
any rights granted thereunder will provide meaningful protection or other commercial advantage to ePAK. Moreover, there can be no assurance that any patent rights will be upheld in the future or that the Company will be able to preserve any of its
other intellectual property rights. Although patents may delay or deter competitors from offering competing products, ePAK believes that its competitors may be able to design around its patents and may at some point be able to commercialize products
similar to those covered by the Company’s patents.
In ePAK’s industry, it is not unusual for companies to receive notices
alleging infringement of patents or other intellectual property rights of others. It expects, from time-to-time, to be notified of claims that it may be infringing patents, maskwork rights or copyrights owned by third parties. If it appears
necessary or desirable, the Company may seek licenses under patents that it is alleged to be infringing. Although patent holders commonly offer such licenses, licenses may not be offered and the terms of any offered licenses may not be acceptable to
ePAK. The failure to obtain a license under a key patent or intellectual property right from a third party for technology used by the Company could harm its business.
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Employees
As of November 1, 2007, ePAK had 1,519 employees. The majority of these employees are located at its manufacturing site in the PRC and a large portion of those who work at ePAK Multi-Products Factory are under the legal employment of Heng
Gang Bao An Development Co. Ltd. While the staff are under the direct employment of Heng Gang Bao An Development Co. Ltd., the Company deems these employees to be employees of ePAK Hong Kong Pte Ltd, a wholly-owned subsidiary of ePAK, given that the
Company recruits, manages, directs the efforts of, and controls their activities. As of November 1, 2007, ePAK employees numbered 13 in the U.S., 16 in Singapore, 4 in Taiwan, 2 in Korea, 3 in the Philippines and 1,481 in the PRC. None of
ePAK’s employees are represented by a labor union or covered by a collective bargaining agreement. The Company’s future success will largely be dependent on its ability to attract, retain and motivate highly qualified technical and
management personnel. The employment market for such personnel is competitive and there can be no assurance that ePAK will successfully staff all necessary positions.
Corporate History
ePAK established its initial operations through the creation of ePAK Resources
(S) Pte Ltd in Singapore during 1999. The Company maintains 100% owned subsidiaries in the US, Hong Kong, and the PRC. The Company’s executive offices are located at 4926 Spicewood Springs Road, Suite 200, Austin, Texas 78759 and its
telephone number is (512) 231-8083.
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ePAK’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This following is not a complete discussion of ePAK’s financial condition, changes in financial condition and results of
operations. It is intended merely to facilitate an understanding of the most salient aspects of ePAK’s financial condition and operating performance and to provide a context for the discussion that follows. The detailed discussion and analysis
that follows must be read in its entirety in order to fully understand ePAK financial condition and results of operations. The following discussion should be considered with the financial statements of ePAK included in this proxy
statement/prospectus and should be viewed in light of the risks summarized in “Risk Factors.”
Overview
ePAK Resources (S) Pte Ltd (“ePAK” or the “Company”) is a full-service designer, manufacturer and supplier of precision
engineered products and solutions for the automated transport and handling of semiconductor and electronics devices. The Company operates a large scale design and manufacturing facility in Shenzhen, PRC with further sales, design and application
engineering facilities located in a number of offices around the world servicing North America, Europe and Asia. ePAK’s precision manufactured handling solutions provide the Company’s customers with the automated means of manufacturing,
handling, and transporting their critical semiconductor and electronic devices with a high degree of reliability and efficiency.
The
majority of the Company’s products are unit driven consumables, demand for which is driven by a combination of semiconductor, integrated circuit, and electronic system manufacturing activity. The Company’s unit driven consumable products
include raw wafer shippers, finished wafer transport media, IC test and handling trays, die singulation grip rings and flex frames, IC tape and reel for high speed automated circuit board assembly, and IC shipping tubes. ePAK’s data storage
media shippers and subcomponent trays, which are also unit driven consumables, is driven by the manufacturing activity of data storage systems largely composed of disk drives. ePAK also manufactures process carriers used in the manufacture of
silicon wafers, compound semiconductor wafers, data storage systems, and integrated circuits. These process carriers, facilitating advanced automation, protect the integrity of ePAK’s customers’ products during the various processing
stages used in the manufacture of semiconductor wafers and integrated circuits. The demand for process carriers correlates with overall semiconductor and IC manufacturing activity.
Key Operating Factors
Key factors, which ePAK management believes have the largest impact on the
overall results of operations of the Company include:
Level of sales
Since a large portion of the Company’s product costs (excepting raw materials and direct labor) are largely fixed in the short/medium term, an
increase or decrease in sales affects gross profits and overall profitability significantly.
Variable margin on sales
The Company’s variable margin on sales is determined by selling prices and the cost of manufacturing and raw materials. This is also affected by a
number of factors, which include the Company’s sale mix, purchase prices of raw material, competition, direct labor costs, and the efficiency of the Company’s production operations, among others.
121
Fixed cost structure
The Company’s fixed cost structure has some degree of impact on profitability. There are a number of large fixed or semi-fixed cost components, which include salaries, indirect labor, and benefits, and
depreciation and amortization. It is not possible to vary these costs easily in the short term as volumes fluctuate. Thus changes in sales volumes can affect the usage and productivity of these cost components and can have a large effect on the
results of operations.
Origin net sales
The following tables summarize ePAK’s total net sales, based upon the country to which sales to external customers were made, attributed to significant countries:
Year ended
December 31,
2006
Year ended
December 31,
2005
Year ended
December 31,
2004
(in thousands)
Net Sales:
China, including Hong Kong
$
11,070
31
%
$
10,412
39
%
$
9,149
42
%
Korea
3,199
9
%
2,418
9
%
2,203
10
%
Philippines
3,610
10
%
1,869
7
%
1,310
6
%
Singapore
7,093
20
%
4,844
18
%
4,959
23
%
Taiwan
2,563
7
%
2,009
7
%
556
3
%
United States
4,338
12
%
3,340
12
%
1,969
9
%
Europe
2,419
7
%
1,206
4
%
853
4
%
Others
1,854
5
%
915
3
%
733
3
%
$
36,146
100
%
$
27,013
100
%
$
21,732
100
%
ePAK’s Results of Operations
Comparison of Six Months Ended June 30, 2007 to Six Months Ended June 30, 2006
Net Sales
Net sales increased by 22%
to $20.5 million in the first six months ended June 30, 2007 from $16.7 million in the six months ended June 30, 2006. The increase in sales of $3.7 million resulted from a combination of the increase in sales of wafer shippers, wafer
transport media and data storage devices of $4.0 million, which was offset by a slight decrease of $0.3 million in the sales of IC handling products. The increase in sales in wafer shippers, wafer transport media and data storage devices was largely
attributable to an increase in the number of new customers using ePAK’s wafer products, we believe due to product design enhancements aimed at resolving specific customers’ special requirements and timely delivery of customer orders. The
continuous development of new products among the wafer shippers, wafer transport media and data storage devices widened the product spectrum and drove the increase in unit volume. The slight decrease in unit volume in IC handling products was due to
efforts by ePAK’s customers in reducing inventory during the first six months of 2007. On a geographical basis, total regional sales to North America were $2.9 million (or 14% of sales), Asia Pacific $16.1 million (or 79% of sales) and Europe
were $1.5 million (or 7% of sales).
Gross Profit
Gross profit in the six months ended June 30, 2007 was increased by $0.9 million, or 14.9%, to $7.2 million as compared to $6.2 million for the six months ended June 30, 2006. The gross margin percentage for
the six months ended June 30, 2007, was 35% versus 38% in the comparable period of 2006. The decrease in gross
122
margin was attributable to an increase in material costs for IC handling products due to supply shortages for carbon fiber, without a corresponding price
increase for ePAK’s products. ePAK expects this pricing trend to continue in the near future.
Selling, General and Administrative
Expenses
Selling, general and administrative expenses increased by $0.6 million, or 14%, to $5.3 million in the six months ended
June 30, 2007, up from $4.6 million in the comparable period a year earlier. However, selling, general and administrative expenses as a percentage of revenues decreased to 26% in the first six months of 2007 from 28% in 2006. The increase in
selling, general and administrative expenses of $0.6 million was mainly attributable to increases in selling expenses by $0.34 million due to the increases in sales.
Interest Expenses
Interest expense increased to $0.24 million in the first six months of 2007 from
$0.13 million in the comparable period in 2006. The increase in interest expense was a result of higher debt balances and higher interest rates on ePAK’s floating-rate debt, compared to the comparable period in 2006.
Other expenses
Other expenses
increased to $0.2 million in the first six months of 2007 from $0.15 million in the comparable period in 2006. These expenses consisted of the realized and unrealized exchange rate differences arising from payments for purchases in Chinese Yuan and
in revaluation of payables in Chinese Yuan. The increase in exchange losses were due to the appreciation of Chinese Yuan during the first six months of 2007 by approximately 2.4%.
Income Tax Expense
The Company
incurred $0.23 million in income tax expense for the six months ended June 30, 2007 compared to $0.14 million in the six months ended June 30, 2006. The effective tax rate was 16.3% in the 2007 period, compared to 11.2% in the 2006 period.
The increase in the effective tax rate was due to the taxable income earned in the U.S. which is taxed at a higher rate than in other countries.
Net Income
The Company recorded a net income of $1.2 million for the six months ended June 30, 2007 was slightly over
the net income of $1.1 million in the six months ended June 30, 2006. An accretion of convertible contingently redeemable common shares of $1 million and $1.1 million for the six months ended June 30, 2007 and 2006 were recorded, to reduce the
net income attributable to common shareholders to $0.1 million and zero respectively for six months ended June 30, 2007 and 2006.
Comparison of Year
Ended December 31, 2006 to Year Ended December 31, 2005
Net Sales
For the year ended December 31, 2006, net sales were $36.1 million, up $9.1 million, or 34%, from sales of $27 million reported for the year ended
December 31, 2005. Out of the total increase in sales in 2006 over 2005, $5.4 million was derived from the sales of wafer shippers, finished wafer transport media and data storage shippers media and $3.6 million from the sales of IC handling
products. The raw wafer shippers, finished wafer transport media and data storage shippers media products were the front-end products offered to facilitate the automated manufacture, transport and processing of semiconductor wafers, which were
introduced into the market in large scale in mid 2005. The average unit selling prices of raw wafer shippers, finished wafer transport media and data storage transport shippers media were approximately 4 times that of IC trays. Due to the higher
average selling price per unit, the wafer products sales grew at a faster pace than the sales of IC handling products. ePAK expects this trend to continue in the near future
. Therefore the contribution from wafer products to the overall
increase in sales was significant, with 59% of the increase in overall sales derived from the wafer
123
products in 2006. The sales mix of wafer products as compared to total sales also increased from 12% in 2005 to 24% in 2006. Moreover, ePAK also grew its IC
handling products through organic growth as driven by the unit volume increase in the semiconductors industry. ePAK expects its revenue from raw wafer shippers, finished wafer transport media, and data storage shippers media continue to increase.
Gross Profit
Gross
profit for 2006 was $13 million, an increase of 44% as compared to $9 million for 2005, and the gross margin in 2006 was 36%, versus 34% for 2005. The improvement in gross margin was partially attributable to the increase in sales, which lead to
fixed production overhead costs per product units to decrease. In addition, the increase in product mix for the wafer shippers, finished wafer transport media and data storage shippers media products, which generally have lower percentage of
material cost content, to 24% in 2006 from 12 % in 2005, coupled with an increase in average selling prices on IC handling products during the 2006 led to the increase the gross profit margin. Gross margin was partially offset by increases in
material costs due to increased oil prices and shortages in certain materials. ePAK believes that the average selling prices of its products will increase over time. However, product costs could increase if its suppliers raise prices, which could
result in a material decline in our gross margin. In the past, suppliers have raised prices for products experiencing increasing demand. Although ePAK has product cost reduction programs in place that involve efforts to reduce internal costs and
supplier costs, there can be no assurance that product costs will be reduced or that such reductions will be sufficient to offset any declines in average selling prices due to reduced demand, increased competition or other factors.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1.8 million, or 22%, to $9.8 million in 2006 up from $8 million in 2005. However, selling, general and administrative expenses as a percentage of revenues decreased to 27% in 2006
from 30% in 2005 which was resulted from the pace of increase in sales revenue being faster than the increase in selling, general and administrative expenses. Selling, general and administrative expenses increased by $1.7 million in 2006 as compared
to 2005 due to the following factors:
•
$0.46 million, or 30%, increase in freight expenses;
•
$0.3 million, or 21%, increase in admin salary compensation, which includes the increase in profit sharing bonuses to management of $0.15 million;
•
$0.32 million, or 36%, increase in sales salary and commission to agents;
•
$0.1 million, or 34%, increase in meal expenses; and
•
Offset by a decrease in employee share option expenses by $0.23 million to $0.3 million in 2006 from $0.53 million in 2005.
Interest Expenses
Interest expense
increased to $0.35 million in 2006 from $0.16 million in 2005. The increase in interest expense was a result of higher debt balances and higher interest rates on ePAK’s floating-rate debt, compared to the comparable period in 2005.
Other Expenses
Other expenses
increased to $0.27 million in 2006 from $0.14 million in 2005. The other expenses consisted of the realized and unrealized exchange differences arising from payments for purchases in Chinese Yuan and in revaluation of payables in Chinese Yuan. The
increase in exchange losses were due to the appreciation of Chinese Yuan starting July 1, 2005 when the Chinese government began to decouple the Chinese Yuan from the U.S. dollar.
124
Income Tax Expense
The Company incurred $0.32 million in income tax expense for 2006 compared to $0.52 million in 2005 due to an increase in certain tax contingencies recorded in 2005.
Net Income
The Company recorded a
net income of $2.2 million for 2006, as compared to $0.1 million for 2005. This increase was primarily due to the increase in sales and gross profit margin. The accretion amounted to $2.1 million in 2006 and $4.4 million in 2005 and resulted in a
net income attributable to common shareholders of $0.1 million in 2006 and a net loss of $4.3 million in 2005.
Comparison of Year Ended
December 31, 2005 to Year Ended December 31, 2004
Net Sales
For the year ended December 31, 2005, net sales were $27 million, up $5.3 million, or 24%, from $21.7 million in sales reported for the year ended
December 31, 2004. The increase was principally driven by expansion in production capacity enabled by additional equity investment of $5.1 million received by ePAK on March 31, 2005, which fueled the market expansion into the wafer
transport media product line and allowed for increase production capacity for IC handling products, sales of which was previously limited by then existing capacity.
Gross Profit
Gross profit for 2005 was $9 million, increased by 25% as compared to $7.2 million for
2004, and gross margin in 2005 was 34%, versus 33% for 2004. The improvement in profit margin was due to the increase of wafer products in the sales mix, which generally have higher profit margin than IC handling products.
Selling, General and Administrative Expenses
The Company’s selling, general and administrative expenses increased $1.02 million, or 15%, to $8.0 million in 2005 from $7 million in 2004. The increase in selling, general and administrative expenses primarily resulted from increased
freight and shipping charges and sales commission as a result of the increase in unit sales. Moreover, employee stock option expenses also increased by $0.35 million from $0.18 million in 2004 to $0.53 million in 2005.
Interest Expenses
Interest expense
decreased to $0.16 million in 2005 from $0.17 million in 2004. The decrease in interest expenses in 2005 was due to the injection of $5.1 million capital from EHL in March 2005. As a result, short term bank debt was reduced and less interest expense
was incurred.
Other expenses
Other expenses increased to $0.14 million in 2005 from $0.06 million in 2004. The other expenses consisted of the realized and unrealized exchange difference arising from payments for purchases in Chinese Yuan and in revaluation of Chinese
Yuan payables since July 2005.
Income Tax Expense
The Company incurred $0.52 million in income tax expense for 2005 compared to $0.27 million in 2004 due to tax contingencies recorded in 2005.
Net Income
The Company recorded a
net income of $ 0.1 million for 2005 as compared to a net loss of $0.09 million in 2004. The accretion amounted to $4.4 million for year ended December 31, 2005 compared to $0.2 million for same period in 2004 and resulted in a net loss attributable
to common shareholders of $4.4 million and $0.3 million for 2005 and 2004.
125
Liquidity and Capital Resources
ePAK has financed its operations and growth primarily with equity funding from EHL and through borrowings under its credit facilities with banks.
ePAK generated net cash flows from operating activities of $5.4 million and $5.6 million during the six months ended June 30, 2007 and 2006,
respectively. These operating cash flows were primarily due to the generation of net income of $1.2 million and $1.1 million, adjustments for depreciation of property, plant and equipment of $1.3 million and $1.0 million and an increase in the
proceeds received from an increase in working capital of $2.5 million and $3.3 million for the six months ended June 30, 2007 and 2006, respectively,
ePAK used $1.8 million and $2.8 million in investing activities during the six months ended June 30, 2007 and 2006, respectively, for the purchase of its machinery for expansion of its production capacities in
ePAK’s factories in China.
ePAK used $4.9 million and $3.2 in financing activities primarily related to the net repayment of
short-term borrowings of $5.0 million and $2.9 million during the six months ended June 30, 2007 and 2006, respectively. During the six months ended June 30, 2007, ePAK received $0.5 million from borrowings on credit facilities available for
machinery purchases.
Net cash generated from operations during the year ended December 31, 2006 was $12.4 million.
Changes in the principal components of working capital during the year ended December 31, 2006 were as follows:
Net trade receivables increased to $6.5 million at December 31, 2006 from $5.7 million at December 31, 2005, an increase of 14%. The increase is
attributable to increased sales volume. Net inventory balances increased 54% or $3.2 million during the year ended as a result of increased sales volume. The Company’s trade and other payables increased $1.9 million, or 26%, from $7.5 million
at December 31, 2005 to $9.4 million at December 31, 2006. The increase was attributable to the increase in the amount of purchases made in line with the increase in sales. Depreciation expense for the year ended December 31, 2006 was
$2.3 million versus $1.9 million for 2005.
The Company’s principal investing and financing activities during the year ended
December 31, 2006 were as follows:
Net cash used in investing activities was $5.1 million for the year ended December 31, 2006.
Net cash used in financing activities was $6.6 million for the year ended December 31, 2006, consisting primarily of net repayment on borrowings for $6.5 million.
126
Contractual Obligations
As of December 31, 2006, the Company had the following contractual obligations and the effect those obligations are expected to have on the liquidity and cash flow in future periods:
Payments Due by Period
Contractual Obligations
Total
Less than
1 year
2 to 5
years
More than
5 years
(in Dollars in thousands)
Current borrowings
501
501
—
—
Non-current borrowings
1,061
—
1,061
—
Operating leases
9,315
730
1,983
6,602
Purchase obligations
757
757
—
—
Total contractual obligations
11,634
1,988
3,044
6,602
Critical Accounting Policies
Management’s discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S.
generally accepted accounting principles. Estimates, judgment, assumptions are made in the preparation of the financial statements. These estimates, judgments and assumptions affect the application of the Company’s accounting policies, reported
amounts of assets, liabilities, income and expenses, and disclosures made. They are assessed on an on-going basis and are based on experience, knowledge of current conditions and relevant information available at the time, including expectations of
future events that are believed to be reasonable under the circumstances. Actual results could differ from those estimates and such differences may be material to ePAK’s financial statements.
(a)
Share-Based Compensation
In December 2004, the
Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”)
No. 123R
, Share-Based Payment
(“SFAS 123R”). SFAS No. 123R is a revision of
FASB Statement No.
123, “Accounting for Stock-Based Compensation,”
and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends
SFAS No. 95, “Statement of Cash
Flows,”
and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in exchange for share-based payment compensation. SFAS No. 123R requires a public
entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost is recognized over the period during which an employee is required to
provide services in exchange for the award. The Group has elected to retroactively adopt the provision of SFAS 123 (R) for all periods.
(b)
Inventories
Inventories are stated at the lower of
cost or market. Raw materials which comprise cost of purchases and all direct expenditures are determined on a weighted average cost (WAC) basis. Finished goods and work-in-progress comprise costs of direct materials, direct labor and a proportion
of manufacturing overheads based on normal operating capacity determined on a WAC basis. Consumables include items such as uniforms and gloves.
Market value for finished goods and work-in-progress is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated selling costs. Market value for raw materials is the estimated
replacement cost. An allowance for loss on obsolescence is provided where appropriate.
127
(c)
Revenue Recognition
The Group generates revenue
from the design, fabrication, and production of precision engineered packing products. In some instances, the Group provides some or all of these services to its customers under the terms of a multiple-element sales arrangement. These arrangements
typically involve the sale of the packing products bundled with some or all of these services. When a sales arrangement involves multiple elements, the items included in the arrangement (deliverables) are evaluated pursuant to
EITF Issue No.
00-21, Revenue Arrangements with Multiple Deliverables
, to determine whether they represent separate units of accounting.
As the Group
does not qualify to account for the items included in multiple-element arrangements as separate units of accounting, the units are combined and accounted for as a single unit of accounting. Revenue for a combined unit of accounting is recognized
based on the method appropriate for the last delivered item, which typically is the proportional performance method based on units of delivery. All costs related to the design and fabrication of moulds are expensed as incurred.
Revenues arising from sale of goods and services are recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable,
collectibility is reasonably assured and the delivery of the product or services has occurred. This condition normally is met when the customer has taken title and assumed the risks and rewards of ownership of the product or when the Group can
objectively demonstrate that customer acceptance has occurred depending on the terms of the arrangement.
The Group provides rights of
return for the packing products sold to customers. The value of any refund is limited to the sales price charged to the customer. Customers are required to return packing products within 30 to 45 days from the date of shipment from the Group, unless
specifically requested in writing by the customer to extend the sales return period. Where a right of return exists, revenue for the Group is recorded when the return period has lapsed or where the Group can reliably demonstrate that all
customer-specified criteria of the delivered products are met. The Group evaluates its provisions for estimated returns based on historical returns. In accordance with FAS 48 - Revenue Recognition When a Righ
t of Return Exists
, where the
Group provides customers with a right of return, a provision is recognized for estimated returns.
(d)
Income Taxes
The Group accounts for income
tax in accordance with
SFAS No. 109 “Accounting for Income Taxes,”
which requires the asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred taxes are provided for the
estimated future tax effects attributable to temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, and for the expected future tax benefit from items including tax loss carry
forwards. Deferred tax assets and liabilities are measured using the enacted tax rates for the respective years of recovery or reversal anticipated. The effect from a change in tax rates is recognized in income in the period of enactment. A
valuation allowance is provided for deferred tax assets when it is more likely then not that some or all of the deferred tax assets will not be realized in the future.
128
ePAK’s Executive and Director Compensation
The following Summary Compensation Table sets forth certain information regarding compensation earned for services rendered to ePAK during fiscal 2006 by
ePAK’s principal executive officer, principal financial officer and the next three most highly compensated officers other than the principal executive officer as of the end of the fiscal year ended December 31, 2006. Collectively, these
are the “Named Executive Officers”.
SUMMARY COMPENSATION TABLE
Name and principal position
Year
Salary
($)(1)
Bonus
($)(2)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Change in
Pension
Value and
Non-qualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
Total
($)
Steve Dezso
Chief Executive Officer, President and Director
2006
150,000
42,449
—
—
—
—
—
192,449
Jason Lee
Senior Vice President Finance
2006
116,833
5,040
—
—
—
—
—
121,873
Chok Chun Weng
Executive Vice President South Asia Sales
2006
150,000
42,449
—
—
—
—
—
192,449
Khoo Mao Shi
Chief Operating Officer
2006
150,000
113,198
—
—
—
—
—
263,198
Jeff Blaine
Executive Vice President North Asia Sales
2006
150,000
42,449
—
—
—
—
—
192,449
James R. Thomas
Chief Technology Officer
2006
150,000
42,449
—
—
—
—
—
192,449
(1)
Represents the base salary earned by each executive in fiscal 2006.
(2)
Represents bonuses earned by each executive in fiscal 2006 pursuant to discretionary grants by the ePAK board of directors.
All members of management are eligible for a profit sharing plan, which is included in the Shareholders Agreement dated January 18, 2005. Pursuant
to the agreement, if ePAK and its subsidiaries earn up to $5.0 million in profit, 10% of the such profit shall be distributed to the members of management, in such proportions as may be decided by the Board. If ePAK and its subsidiaries earn more
than $5.0 million in profit, each member of management will receive a proportionate share of $500,000 plus a percentage of the amount of profit exceeding $5.0 million, in proportions to be determined by the board.
Director Compensation
All of the current directors
of ePAK are officers of ePAK, investors or are affiliated with investors in ePAK. Because of these relationships, the directors have not been paid compensation for performance of their duties as directors.
129
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS(1)
STOCK AWARDS
Name
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable(2)
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
Option
Exercise
Price
($)
Option
Expiration
Date
Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)
Market
Value of
Shares or
Units
of
Stock
That
Have
Not
Vested
($)
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(#)
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested
(#)
Steve Dezso
Chief Executive Officer, President and Director
100,000
(3)
—
$
0.20
(4)
—
—
—
—
10,000
(5)
30,000
(5)(6)
$
0.20
(7)
—
—
—
—
Jason Lee
Senior Vice President Finance
30,000
(8)
—
$
0.20
(9)
—
—
—
—
40,000
(3)
$
0.20
(4)
—
—
—
—
Chok Chun Weng
Executive Vice President South Asia Sales
100,000
(3)
$
0.20
(4)
—
—
—
—
10,000
(5)
30,000
(5)(6)
$
0.20
(7)
—
—
—
—
Khoo Mao Shi
Chief Operating Officer
100,000
(3)
—
$
0.20
(4)
—
—
—
—
10,000
(5)
30,000
(5)(6)
$
0.20
(7)
—
—
—
—
Jeff Blaine
Executive Vice President North Asia Sales
100,000
(3)
—
$
0.20
(4)
—
—
—
—
10,000
(5)
30,000
(5)(6)
$
0.20
(7)
—
—
—
—
James R. Thomas
Chief Technology Officer
100,000
(3)
—
—
—
—
10,000
(5)
30,000
(5)(6)
$
0.20
(7)
—
—
—
—
(1)
All option share amounts reflect ePAK’s existing capitalization and do not give effect to any adjustment to the number of shares issuable upon the exercise resulting from the
assumption of such options by Continuing Pubco.
(2)
Options vest at a rate of 25% of the total option shares on each of the first four anniversaries of the date of the grant, except for the May 25, 2005 grants, which vested 25%
on the date of the grant, with the remainder vesting at a rate of 25% of the total option shares on each of the first three anniversaries of the date of the grant.
(3)
Grant date was September 4, 2002.
(4)
Options expire at a rate of 25% of the total option shares on each of September 1, 2008, September 1, 2009, September 1, 2010 and September 1, 2011.
(5)
Grant date was May 25. 2005.
(6)
Options will vest on May 25, 2008.
(7)
Options expire at a rate of 25% of the total option shares on each of May 25, 2010, May 25, 2011, May 25, 2012 and May 25, 2013.
(8)
Grant date was September 4, 2002.
(9)
Options expire at a rate of 25% of the total option shares on each of December 15, 2007, December 15, 2008, December 15, 2009 and December 15, 2010.
130
DIRECTORS AND EXECUTIVE OFFICERS OF CONTINUING PUBCO
FOLLOWING THE ACQUISITION
At the effective time of the acquisition, the board of directors and executive officers of Continuing Pubco will be as follows:
Name
Age
Position
Don K. Rice
59
Chairman of the Board and Director
Steve Dezso
42
Chief Executive Officer, President and Director
Khoo Mao Shi
45
Chief Operating Officer
Jason Lee
44
Senior Vice President Finance
Richard Brook
47
Executive Vice President Business Development
James R. Thomas
45
Chief Technology Officer
Jeffrey L. Blaine
43
Executive Vice President North Asia Sales
Chok Chun Weng
45
Executive Vice President South Asia Sales
Warren “Budd” Florkiewicz
64
Director
Steve E. San Filippo
Director
Hock Voon Loo
52
Director
Don K. Rice
will become chairman of the board of Continuing Pubco upon consummation of the
acquisition. Mr. Rice has served as Ascend’s chairman of the board, chief executive officer, president and treasurer since its inception in December 2005. Mr. Rice is a managing partner of Capital Point Partners, a mezzanine finance
company. Mr. Rice was a co-founder and has been a managing partner of RSTW Partners since 1989. RSTW Partners is a privately held firm that, through limited partnerships, invests primarily in the subordinated debt of middle market companies
located throughout the United States. Prior to forming RSTW Partners, from 1986 to December 1988, Mr. Rice was affiliated with First Texas Merchant Banking Group, a firm which specialized in providing subordinated debt financing, and was its
vice president from 1986 to 1988 and president and chief executive officer from May 1988 to December 1988. He was also vice president of PruCapital, Inc., an investment subsidiary of The Prudential Insurance Company of America, from March 1984 to
April 1986. Mr. Rice has served as a member of the board of directors of NationsHealth, Inc. since its inception in August 2003. Mr. Rice currently serves on the board of directors of Mrs. Fields Famous Brands, a producer of consumer
snack foods. Mr. Rice has served or is currently serving on a number of RSTW Partners portfolio companies’ boards of directors. Mr. Rice has served on the board of the Association for Corporate Growth (Houston Chapter) and the Houston
Venture Capital Board. Mr. Rice holds a B.B.A. and M.B.A. from the University of Texas.
Steve Dezso
will become chief
executive officer, president and a director of Continuing Pubco upon consummation of the acquisition. Mr. Dezso has been ePAK’s president, chief executive officer and a director since ePAK’s founding in 1999. He will continue in these
roles with ePAK following consummation of the acquisition. Prior to joining the Company, Mr. Dezso was vice president of Peak International Limited, a semiconductor packaging company, where he was responsible for North American operations, and
in other capacities within the Peak group, from 1991 to 1999. In 1991, Mr. Dezso worked for NonVolatile Electronics, a semiconductor company, as vice president business development PC markets and as a design engineer for E-Systems, an
electronics communication company from 1987-1989. Mr. Dezso holds a Bachelor of Science degree in electrical engineering and Masters of Business Administration degree, both from the University of Texas.
Khoo Mao Shi
will become chief operating officer of Continuing Pubco upon consummation of the acquisition. Mr. Khoo has been ePAK’s
chief operating officer since ePAK’s founding in 1999. He will continue in this role with ePAK following consummation of the acquisition. Prior to joining ePAK, Mr. Khoo served as vice president responsible for manufacturing operations at
Peak International Limited, where he was employed from 1989 to 1999. Mr. Khoo also worked as a senior production manager for Advanced Micro Devices, a
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semiconductor company, from 1984 to 1986, and as a contract auditor for Thomson-CSF, a consumer electronics company, from 1986 to 1989. He holds a Bachelor
of Science degree in mechanical engineering from the University of Wisconsin.
Jason Yiu Pun Lee
will become senior vice president,
finance of Continuing Pubco upon consummation of the acquisition. Mr. Lee has been ePAK’s vice president, finance since joining ePAK in 2001. He will continue in this role with ePAK following consummation of the acquisition. Prior to
joining ePAK, Mr. Lee served as deputy finance director of Henderson China Holdings Ltd., a Hong Kong Stock Exchange listed property development company, from 2000 to 2001. He also served as financial controller with Magician Industries Co.
Ltd., a manufacturing company listed on the Hong Kong Stock Exchange, from 1999 to 2000 and SAS Dragon Holdings Limited, a distributor of electronic components and semiconductors listed on the Hong Kong Stock Exchange from 1994 to 1999. Mr. Lee
also served as a manager with Ernst & Young from 1987 to 1993. He is a CPA and member of the Hong Kong Society of Accountants. Mr. Lee obtained a Bachelor of Commerce degree in accounting and marketing from the University of Calgary,
Canada.
Richard Brook
will become executive vice president, business development of Continuing Pubco upon consummation of the
acquisition. Mr. Brooks has been ePAK’s vice president, business development since joining ePAK in 2002. He will continue in this role with ePAK following consummation of the acquisition. Prior to joining the Company, Mr. Brook served
as chief executive officer of Peak International Limited where he was employed from 1991 to 1999. Mr. Brook worked as an engineering manager with Texas Instruments, a semiconductor company, from 1984 to 1991 where he was granted two patents in
the field of semiconductor materials and technology which have been highly commercialized. He holds a Bachelor of Science degree in Mechanical Engineering from the University of Saskatchewan and a Masters of Engineering Management from Southern
Methodist University.
James R. “Jim” Thomas
will become chief technology officer of Continuing Pubco upon consummation of
the acquisition. Mr. Thomas has been ePAK’s chief technology officer since co-founding ePAK in 1999 and manages the development of new products and processes at ePAK. He will continue in this role with ePAK following consummation of the
acquisition. Prior to joining ePAK, Mr. Thomas served as vice president of engineering and sales responsible for product engineering and sales at Peak International Limited where he was employed from 1992 to 1999. Mr. Thomas worked for
Texas Instruments as a semiconductor package assembly and development engineer from 1987 to 1990 and at Compaq Computer Corporation, a personal computer company, as an engineering project manager from 1990 to 1992. Mr. Thomas holds six patents
and has numerous patents pending. He holds a Bachelor of Science degree in mechanical engineering from Texas A&M University.
Jeffrey L. “Jeff” Blaine
will become senior vice president, North Asia sales of Continuing Pubco upon consummation of the acquisition. Mr. Blaine has been the vice president, North Asia sales for ePAK since its
founding in 1999. He will continue in this role with ePAK following consummation of the acquisition. Prior to joining ePAK, Mr. Blaine served as vice president responsible for worldwide sales of Peak International Limited where he was employed
from 1992 to 1999. Mr. Blaine worked for Texas Instruments as an engineer from 1987 to 1992. He holds a Bachelor of Science Degree in electrical engineering from Kansas State University.
Chok Chun Weng
will become senior vice president, South Asia sales of Continuing Pubco upon consummation of the acquisition. Mr. Chok has
been the vice president, South Asia sales for ePAK since its founding in 1999. He will continue in this role with ePAK following consummation of the acquisition. Prior to joining ePAK, Mr. Chok served as vice president responsible for South
Asia sales at Peak International Limited where he was employed from 1994 to 1999.
Warren “Budd” Florkiewicz
will become a
member of the board of directors of Continuing Pubco upon consummation of the acquisition. Mr. Florkiewicz has served as the chairman of the board and chief executive officer of Foam Fabricators, Inc., a packaging company based in Scottsdale,
Arizona, from the date he purchased it in 1989 until the present. In 1982, Mr. Florkiewicz co-founded WMF Container Corporation, which, during his
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tenure acquired Thompson Industries, from Dart & Kraft, a producer of a wide array of consumer products. He served as WMF’s president from 1982
to 1986, when WMF was merged with Texstyrene Corporation. From the date of this merger in 1986 until early 1987, he served as president of the WMF subsidiary of Texstyrene. In early 1987, he was named president of Texstyrene, which changed its name
to Aris Corporation. He held this position until late 1988, when he resigned to purchase and operate Foam Fabricators. In late 1980, he joined Dart Industries (which later became Dart & Kraft) as president of Thompson Industries, a
subsidiary which manufactures foam cups and containers. From 1979 to 1980, he served as executive vice president of Ireco Chemicals, a Salt Lake City based explosives manufacturer. From 1976 to 1979, Mr. Florkiewicz served as president of Fluid
Ionics Systems, an environmental equipment manufacturer and subsidiary of Dart Industries. Earlier in his career Mr. Florkiewicz also held engineering positions at General Motors, Koppers Company, Joy Manufacturing and Envirotech, principally
in the areas of air pollution control equipment. He is also an investor in and board member of several private companies and has served on various industry committees as chairman or a member, including the Arizona Association of Industries, National
Board of Directors of the Society of Plastics Industry and Association of Foam Packaging Recyclers. He holds a Bachelor of Science degree in mechanical engineering from Purdue University and an MBA from the University of Chicago.
Steve E. San Filippo
will become a member of the board of directors of Continuing Pubco upon consummation of the acquisition. Mr. San Filippo
has been a partner of Ireland San Filippo, certified public accountants and business advisors, since founding that firm in 1980. Mr. Filippo is the head of that firm’s corporate compliance group and a member of its executive committee. He
also is a co-manager of the firm’s investment advisor service company, ISFIA. From 1974 to 1980, he was a member of Laventhol & Horwath, a certified public accounting firm in San Francisco. He began his public accounting career at
Price Waterhouse, joining that firm in 1973 and remaining there until 1974. With more than 33 years’ experience in public accounting, Mr. San Filippo has serviced small, medium and large clients operating in a variety of industries. He
also is a member of the board of the Sequoia Hospital Foundation and a member of each of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants. He holds a B.S. as an accounting specialist
from the University of San Francisco.
Hock Voon Loo
will become a member of the board of directors of Continuing Pubco upon
consummation of the acquisition. Mr. Loo is currently the managing director of Walden International Singapore Pte. Ltd., an international venture capital firm that focuses on investing in early stage technology businesses in the Asia-Pacific
region and the United States. In this capacity, Mr. Loo oversees the firm’s activities in Singapore, Australia, Taiwan, South Korea, India and Southeast Asia. Mr. Loo joined Walden International in 1989. In 1994, he established the
firm’s representative office in Beijing, China. In 1998, he represented the firm in setting up Amwin Management, a 50/50 joint venture with Australian Mezzanine Investments Pty Limited (the predecessor to CHAMP Equity), in Sydney, Australia.
The joint venture was established after successfully winning one of five licenses to manage a fund under the Australian government’s Innovation Investment Fund (“IIF”) program (which was administered by the Industry R&D Department
of the Department of Information, Science & Technology). The objective of the IIF program is to encourage the commercialization of Australian innovations. Amwin Management is the fund manager of Amwin Innovation Trust, a $42 million
(Australia) IIF fund, of which Mr. Loo has been a director and a member of the investment committee since its inception. From 1984 to 1989, he was the senior investment officer at the Singapore Economic Development Board, a government statutory
board under the Ministry of Trade and Industry. In this capacity, Mr. Loo was responsible for promoting venture capital industry and administering research and development grants. From 1987 to 1988, he was the centre director of the
Board’s San Francisco office in the United States. From 1980 to 1984, Mr. Loo was an engineer at Singapore Telecom, then a statutory board under the Ministry of Communications, where he was responsible for the planning of undersea cable
systems linking Singapore to other countries. Mr. Loo has served as vice chairman of the Singapore Venture Capital Association. He holds a B.Sc engineering degree in Electrical and Electronics Engineering from Imperial College of
Science & Technology, University of London, United Kingdom.
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Code of Ethics
In May 2006, Ascend’s board of directors adopted a code of ethics that applies to its directors, officers and employees. Requests for copies of its code of ethics should be sent in writing to Ascend Acquisition
Corp., 435 Devon Park Drive, Building 400, Wayne, Pennsylvania 19087.
Section 16(a) of the Securities and Exchange Act of 1934, as amended, requires Ascend directors, officers and persons owning more than 10% of
Ascend’s common stock to file reports of ownership and changes of ownership with the SEC. Based on its review of the copies of such reports furnished to Ascend, or representations from certain reporting persons that no other reports were
required, Ascend believes that all applicable filing requirements were complied with during the fiscal year ended December 31, 2006 and as required through June 30, 2007.
Meetings and Committees of the Board of Directors of Ascend
During the fiscal year ended
December 31, 2006, Ascend’s board of directors held four meetings. Although Ascend does not, and Continuing Pubco will not, have any formal policy regarding director attendance at annual stockholder meetings, it will attempt to schedule
its annual meetings so that all of its directors can attend.
Independence of Directors
A condition to the consummation of the acquisition is the listing of Continuing Pubco’s common stock and warrants on Nasdaq. Nasdaq rules will
require that Continuing Pubco’s board of directors be comprised of a majority of independent directors. Continuing Pubco will adhere to the rules of Nasdaq in determining whether a director is independent. The board of directors of Continuing
Pubco also will consult with counsel to ensure that the board’s determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence of directors. Nasdaq listing standards define
an “independent director” generally as a person, other than an officer of a company, who does not have a relationship with the company that would interfere with the director’s exercise of independent judgment. Consistent with these
considerations, the board of directors of Ascend has affirmatively determined that, upon appointment to the board of directors of Continuing Pubco at the closing of the acquisition, Messrs. Florkiewicz, Loo and San Filippo will be the independent
directors of Continuing Pubco for the ensuing term.
Corporate Governance
Ascend currently does not have audit or nominating committees as it is not a listed issuer and is not required to have such committees. As a condition to
the consummation of the redomestication merger and acquisition, Continuing Pubco will be required to obtain listing on Nasdaq. In connection with its listing on Nasdaq, Continuing Pubco will establish an audit committee, compensation committee and
nominating committee, as further described below.
Audit Committee
Upon consummation of the acquisition, the board of directors of Continuing Pubco will establish an audit committee of the board of directors. The initial
members of this committee will be Messrs. Florkiewicz, Loo and San Filippo, each of whom will be an independent director under Nasdaq’s listing standards. Mr. San Filippo will be the chairman of this committee.
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The audit committee’s duties, which will be specified in the audit committee charter, will include,
but will not be limited to:
•
reviewing and discussing with management and the independent auditor the annual audited financial statements, and recommending to the board whether the audited
financial statements should be included in our Form 10-K;
•
discussing with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of our financial
statements;
•
discussing with management and the independent auditor the effect on our financial statements of (i) regulatory and accounting initiatives and
(ii) off-balance sheet structures;
•
discussing with management major financial risk exposures and the steps management has taken to monitor and control such exposures, including our risk assessment
and risk management policies;
•
reviewing disclosures made to the audit committee by our principal executive officer and principal financial officer during their certification process for our Form
10-Ks and Form 10-Qs about any significant deficiencies in the design or operation of internal controls or material weaknesses therein and any fraud involving management or other employees who have a significant role in our internal controls;
•
verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the
audit as required by law;
•
reviewing and approving all related-party transactions including analyzing the shareholder base of each target business so as to ensure that we do not consummate a
business combination with an entity that is affiliated with our management;
•
inquiring and discussing with management our compliance with applicable laws and regulations;
•
pre-approving all audit services and permitted non-audit services to be performed by our independent auditor, including the fees and terms of the services to be
performed;
•
appointing or replacing the independent auditor;
•
reviewing proxy disclosure to ensure that it is in compliance with SEC rules and regulations;
•
determining the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent
auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work; and
•
establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or reports which
raise material issues regarding our financial statements or accounting policies.
Financial Experts on Audit Committee
The audit committee will at all times be composed exclusively of “independent directors” who are “financially
literate” as defined under Nasdaq’s listing standards. Nasdaq’s listing standards define “financially literate” as being able to read and understand fundamental financial statements, including a company’s balance sheet,
income statement and cash flow statement. In addition, we will be required to certify to Nasdaq that the committee has, and will continue to have, at least one member who has past employment experience in finance or accounting, requisite
professional certification in accounting, or other comparable experience or background that results in the individual’s financial sophistication. The board of directors has determined that Mr. San Filippo satisfies Nasdaq’s definition
of financial sophistication and also qualifies as an “audit committee financial expert,” as defined under rules and regulations of the SEC.
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Compensation Committee Information
Upon consummation of the acquisition, the board of directors of Continuing Pubco will establish a compensation committee. The initial members of this
committee will be Messrs. Florkiewicz, Loo and San Filippo, each of whom will be an independent director under Nasdaq’s listing standards. The chairman of this committee will be Mr. Florkiewicz. The purpose of the compensation committee
will be to review and approve compensation paid to Continuing Pubco’s officers and to administer the 2007 incentive plan and other compensation plans that may be implemented by Continuing Pubco, including authority to make and modify awards
under such plans. Initially, the only plan will be the 2007 incentive plan.
Compensation Committee Interlocks and Insider Participation
None of the persons designated as directors of Continuing Pubco currently serve on the compensation committee of any other company on
which any other director designee of Continuing Pubco or any officer or director of Ascend or ePAK is currently a member.
Nominating
Committee Information
Upon consummation of the acquisition, the board of directors of Continuing Pubco will establish a nominating
committee. The initial members of this committee will be Messrs. Florkiewicz, Loo and San Filippo, each of whom will be an independent director under Nasdaq’s listing standards. The chairman of this committee will be Mr. Loo.
The nominating committee will be responsible for overseeing the selection of persons to be nominated to serve on our board of directors. The
nominating committee will consider persons identified by its members, management, shareholders, investment bankers and others. The guidelines for selecting nominees, which will be specified in the nominating committee charter, will provide that,
generally, persons to be nominated should be actively engaged in business, have an understanding of financial statements, corporate budgeting and capital structure, be familiar with the requirements of a publicly traded company, be familiar with
industries relevant to our business, be willing to devote significant time to the oversight duties of the board of directors of a public company, and be able to promote a diversity of views based on the person’s education, experience and
professional employment. The nominating committee will evaluate each individual in the context of the board as a whole, with the objective of recommending a group of persons that can best implement our business plan, perpetuate our business and
represent shareholder interests. The nominating committee may require certain skills or attributes, such as financial or accounting experience, to meet specific board needs that arise from time to time. The nominating committee will not distinguish
among nominees recommended by shareholders and other persons.
Election of Directors; Voting Agreement
Upon consummation of the acquisition, the board of directors of Continuing Pubco will be comprised of five members. The board will include three persons
designated by EHL, such designees initially being Mr. Dezso, Hock Voon Loo and Steve San Filippo and two persons designated by certain stockholders of Ascend (“Founding Ascend Holders”), such designees initially being Mr. Rice
and Warren “Budd” Florkiewicz. The majority of the board shall be “independent directors” within the meaning of the Nasdaq rules. EHL, on the one hand, and the Founding Ascend Holders, on the other hand, have entered into a
voting agreement pursuant to which they have agreed to vote for the other’s designees to the board of directors of Continuing Pubco through the annual meeting of the stockholders of Continuing Pubco to be held in 2010. The board will be
separated into classes as follows:
•
Steve San Filippo, who will serve in the class to stand for reelection in 2008.
•
Don K. Rice and Hock Voon Loo, who will serve in the class to stand for reelection in 2009.
•
Steve Dezso and Warren “Budd” Florkiewicz, who will serve in the class to stand for reelection in 2010.
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Ascend’s directors do not currently receive any cash compensation for their services as members of
the board of directors. However, in the future, non-employee directors of Continuing Pubco may receive certain cash fees and stock-based awards as the board of directors may determine.
Executive Compensation
No executive officer has received any cash compensation for services rendered
to us. Commencing May 11, 2006 through the consummation of the acquisition, we will pay 400 Building LLC, an affiliate of Arthur Spector, a fee of $7,500 per month for providing us with office space and certain office and secretarial services.
However, this arrangement is solely for our benefit and is not intended to provide Mr. Spector compensation in lieu of a salary. Other than the $7,500 per month administrative fee, no compensation of any kind, including finders, consulting or
other similar fees, will be paid to any of our existing stockholders, including our directors, or any of their respective affiliates, prior to, or for any services they render in order to effectuate, the consummation of a business combination.
However, such individuals will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. There is
no limit on the amount of these out-of-pocket expenses and there will be no review of the reasonableness of the expenses by anyone other than our board of directors, which includes persons who may seek reimbursement, or a court of competent
jurisdiction if such reimbursement is challenged. Because of the foregoing, we will generally not have the benefit of independent directors examining the propriety of expenses incurred on our behalf and subject to reimbursement.
Since our formation, we have not granted any stock options or stock appreciation rights or any awards under any plans.
Upon consummation of the acquisition, Continuing Pubco will operate in the semi-conductor industry. In connection with the acquisition of ePAK,
Continuing Pubco will enter into employments agreement with each of Messrs. Dezso, Rice, Khoo, Chok, Thomas, Blaine and Brook.
The
policies of Continuing Pubco with respect to the compensation of the aforementioned executive officers and other executive officers following the acquisition will be administered by Continuing Pubco’s board in consultation with its compensation
committee. This committee will be formed from the independent directors on Continuing Pubco’s board following consummation of the acquisition. Messrs. Florkiewicz, Loo and San Filippo shall serve as its initial members. Mr. Florkiewicz will be
the initial chairperson of this committee. The compensation policies followed by Continuing Pubco will be intended to provide for compensation that is sufficient to attract, motivate and retain executives of outstanding ability and potential and to
establish an appropriate relationship between executive compensation and the creation of shareholder value. To meet these goals, the compensation committee will be charged with recommending executive compensation packages to Continuing Pubco’s
board of directors.
It is anticipated that performance-based and equity-based compensation will be an important foundation in executive
compensation packages as we believe it is important to maintain a strong link between executive incentives and the creation of shareholder value. We believe that performance and equity-based compensation can be an important component of the total
executive compensation package for maximizing shareholder value while, at the same time, attracting, motivating and retaining high-quality executives. The employment agreements to be entered into by future executive officers of Continuing Pubco and
the adoption of the proposed 2007 incentive plan reflect and will reflect what we believe is a focus on performance- and equity-based compensation. Since Continuing Pubco will not have a compensation committee until completion of the acquisition, we
have not yet adopted any formal guidelines for allocating total compensation between equity compensation and cash compensation for executives hired in the future.
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Compensation Discussion and Analysis
Overall, Continuing Pubco will seek to provide total compensation packages that are competitive in terms of potential value to its executives, and which
are tailored to the unique characteristics and needs of Continuing Pubco within its industry in order to create an executive compensation program that will adequately reward its executives for their roles in creating value for Continuing Pubco
shareholders. Continuing Pubco intends to be competitive with other similarly situated companies in its industry following completion of the acquisition.
The compensation decisions regarding Continuing Pubco’s executives will be based on Continuing Pubco’s need to attract individuals with the skills necessary for Continuing Pubco to achieve its business plan,
to reward those individuals fairly over time, and to retain those individuals who continue to perform at or above Continuing Pubco’s expectations.
It is anticipated that Continuing Pubco’s executives’ compensation will have three primary components—salary, cash incentive bonus and stock-based awards. Continuing Pubco will view the three components
of executive compensation as related but distinct. Although Continuing Pubco’s compensation committee will review total compensation, we do not believe that significant compensation derived from one component of compensation should negate or
reduce compensation from other components. We anticipate determining the appropriate level for each compensation component based in part, but not exclusively, on its view of internal equity and consistency, individual performance and other
information deemed relevant and timely. Since Continuing Pubco’s compensation committee will not be formed until consummation of the acquisition, we have not adopted any formal or informal policies or guidelines for allocating compensation
between long-term and currently paid out compensation, between cash and non-cash compensation, or among different forms of compensation.
In addition to the guidance provided by its compensation committee, Continuing Pubco may utilize the services of third parties from time to time in connection with the hiring and compensation awarded to executive employees. This could
include subscriptions to executive compensation surveys and other databases.
Continuing Pubco’s compensation committee will be
charged with performing an annual review of Continuing Pubco’s executive officers’ cash compensation and equity holdings to determine whether they provide adequate incentives and motivation to executive officers and whether they adequately
compensate the executive officers relative to comparable officers in other companies.
Benchmarking of Cash and Equity Compensation
We believe it is important when making compensation-related decisions to be informed as to current practices of similarly situated publicly
held companies in the semi-conductor and related industries. We expect that the compensation committee will stay apprised of the cash and equity compensation practices of publicly held companies in the semi-conductor and related industries through
the review of such companies’ public reports and through other resources. It is expected that any companies chosen for inclusion in any benchmarking group would have business characteristics comparable to Continuing Pubco, including revenues,
financial growth metrics, stage of development, employee headcount and market capitalization. While benchmarking may not always be appropriate as a stand-alone tool for setting compensation due to the aspects of Continuing Pubco post-acquisition
business and objectives that may be unique to Continuing Pubco, we generally believe that gathering this information will be an important part of its compensation-related decision-making process.
Compensation Components
Base
Salary.
Generally, Continuing Pubco, working with the compensation committee, anticipates setting executive base salaries at levels comparable with those of executives in similar positions and with similar responsibilities at comparable
companies. Continuing Pubco will seek to maintain base salary amounts at or near the industry norms, while avoiding paying amounts in excess of what it believes is necessary to motivate
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executives to meet corporate goals. It is anticipated base salaries will generally be reviewed annually, subject to terms of employment agreements, and that
the compensation committee and board will seek to adjust base salary amounts to realign such salaries with industry norms after taking into account individual responsibilities, performance and experience.
Annual Bonuses.
Continuing Pubco intends to utilize cash incentive bonuses for executives to focus them on achieving key operational and financial
objectives within a yearly time horizon. Near the beginning of each year, the board, upon the recommendation of the compensation committee and subject to any applicable employment agreements, will determine performance parameters for appropriate
executives. At the end of each year, the board and compensation committee will determine the level of achievement for each corporate goal.
The performance parameters for which executive officers are eligible to receive cash bonuses under the terms of the employment agreements to be executed in connection with the consummation of the acquisition will be set by the compensation
committee each year, within 45 days of approval of such year’s annual budget.
Continuing Pubco will structure cash incentive bonus
compensation so that it is taxable to its employees at the time it becomes available to them. At this time, it is not anticipated that any executive officer’s annual cash compensation will exceed $1 million, and we have accordingly not
made any plans to qualify for any compensation deductions under Section 162(m) of the Internal Revenue Code.
Equity Awards.
Continuing Pubco also will use stock options and other stock-based awards to reward long-term performance. It believes that providing a meaningful portion of its executives’ total compensation package in stock options and other stock-based
awards will align the incentives of its executives with the interests of Continuing Pubco’s shareholders and with Continuing Pubco’s long-term success. The compensation committee and board will develop their equity award determinations
based on their judgments as to whether the complete compensation packages provided to Continuing Pubco’s executives, including prior equity awards, are sufficient to retain, motivate and adequately award the executives.
Equity awards will be granted through Continuing Pubco’s 2007 incentive plan, which was adopted by Ascend board and is being submitted to the
stockholders of Ascend for their consideration at the special meeting. All of Continuing Pubco’s employees, directors, officers and consultants will be eligible to participate in the 2007 incentive plan. The material terms of the 2007 incentive
plan are further described in the section of this proxy statement/prospectus entitled
“2007 Incentive Plan Proposal.”
No awards have been made under the plan as of the date of this proxy statement/prospectus. It is anticipated that
all options granted under the plan in the future will have an exercise price at least equal to the fair market of Continuing Pubco’s common stock on the date of grant.
Continuing Pubco will account for any equity compensation expense under the rules of SFAS 123R, which requires a company to estimate and record an
expense for each award of equity compensation over the service period of the award. Accounting rules also will require Continuing Pubco to record cash compensation as an expense at the time the obligation is accrued.
Severance Benefit.
Ascend currently has no severance benefits plan. Continuing Pubco may consider the adoption of a severance plan for executive
officers and other employee in the future. The employment agreements to be entered into by the persons who will initially serve as executive officers of Continuing Pubco following consummation of the acquisition provide for certain rights and
obligations in the event of the termination of employment as more fully described in the section of this proxy statement/prospectus entitled “Employment Agreements.”
Other Compensation.
Continuing Pubco will establish and maintain various employee benefit plans, including medical, dental, life insurance and
401(k) plans. These plans will be available to all salaried employees and will not discriminate in favor of executive officers. Continuing Pubco may extend other perquisites to its executives that are not available to its employees generally.
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Employment Agreements
As a condition of the closing, Continuing Pubco will have entered into employment agreements with each of Messrs. Dezso, Khoo, Rice, Chok, Thomas, Blaine and Brook (the “Executives”), each having an initial
term of two years.
Pursuant to Mr. Dezso’s employment agreement, he shall serve as the President and Chief Executive Officer of
Continuing Pubco and receive an annual base salary of $370,000.
Pursuant to Mr. Khoo’s employment agreement, he shall serve as
the Chief Operating Officer of Continuing Pubco and receive an annual base salary of $300,000.
Pursuant to Mr. Rice’s employment
agreement, he shall serve as the Chairman of Continuing Pubco and receive an annual base salary of $250,000.
Pursuant to
Mr. Chok’s employment agreement, he shall serve as the Senior Vice President, South Asia Sales of Continuing Pubco and receive an annual base salary of $220,000.
Pursuant to Mr. Thomas’ employment agreement, he shall serve as the Chief Technology Officer of Continuing Pubco and receive an annual base
salary of $276,000.
Pursuant to Mr. Blaine’s employment agreement, he shall serve as the Senior Vice President, North Asia Sales
of Continuing Pubco and receive an annual base salary of $220,000.
Pursuant to Mr. Brook’s employment agreement, he shall serve
as the Executive Vice President, Business Development of Continuing Pubco and receive an annual base salary of $276,000. Mr. Brook shall also receive a one-time cash bonus payment equal to four times the total commission earned by him during
the three calendar month period ended immediately prior to the calendar month on which the closing occurs.
Pursuant to each
Executive’s employment agreement, such Executive will also be eligible to participate in the management bonus pool to be established by Continuing Pubco following the closing of the transaction, with his allocation to be determined by the Board
of Directors of Continuing Pubco or its Compensation Committee.
If an Executive is terminated without cause or terminates his own
employment for good reason (each as defined in the Executive’s respective employment agreement), then he will receive his base salary for a period ending on the later of (i) the end of the initial term of the agreement or (ii) 12
months after the date of termination. Additionally, his unexercised stock options will continue to vest for the remainder of the initial term of the agreement. If an Executive is terminated for cause, by mutual agreement or voluntarily, then he will
be entitled to accrued compensation and unreimbursed expenses.
If an Executive is terminated without cause or terminates his employment
for good reason within 12 months following a “change of control,” then he will continue to receive his base salary for a period of 24 months. Additionally, in the event of a change of control, any options or restricted stock held by him
will automatically vest in full. A “change of control” is generally defined as any merger, acquisition or similar transaction by the Company into or with another corporation in which the shareholders of Continuing Pubco immediately prior
to such transaction hold, immediately after such transaction or transactions, less than 50% of the general voting power of the surviving or acquiring entity, or any sale, lease or transfer of all or substantially all of the assets of Continuing
Pubco.
The agreement also contains confidentiality and non-solicitation provisions and a non-competition obligation. Pursuant to the terms
of the agreement, an Executive will agree not to compete with Continuing Pubco within the United States or any other country in which it conducts its business for a period ending on the later of (i) the end of the initial term of the agreement
or (ii) 12 months after the date of termination of such Executive’s employment agreement.
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As soon as practicable after Closing, Continuing Pubco shall adopt a management bonus pool having an
initial term of three years and providing for the annual distribution of aggregate cash bonuses equal to 10% of ePAK’s net profits (as adjusted in accordance with the terms of the acquisition agreement) for each year ending December 31
(pro rated for any partial years) as reported on the Company’s audited financial statements for each such year to Steve Dezso, Mao Shi Khoo, Chok Chun Weng, James Thomas, Jeffrey Blaine and Richard Brook and those members of the Company’s
management that, upon recommendation from Steve Dezso, are determined as eligible to participate thereunder by the Continuing Pubco’s board of directors or the compensation committee thereof.
Auditor Fees
The firm of Goldstein Golub Kessler LLP
acts as Ascend’s principal accountant. Goldstein Golub Kessler LLP (“GGK”) has a continuing relationship with RSM McGladrey, Inc. (“RSM”), from which it leases auditing staff who are full time, permanent employees of RSM and
through which its partners provide non-audit services. GGK has no full time employees and therefore, none of the audit services performed were provided by permanent full-time employees of GGK. GGK manages and supervises the audit and audit staff,
and is exclusively responsible for the opinion rendered in connection with this examination.
Other services, which do not include
financial information systems design and implementation, have been provided to Ascend by RSM. The following is a summary of fees paid to Ascend’s principal accountant for services provided.
Audit Fees
During 2006,
Ascend’s principal accountant charged $14,000 for work performed in connection with its Form 10-QSB filings for the quarters ended March 31, 2006, June 30, 2006 and September 30, 2006. Ascend was charged $13,000 by its
principal accountant in connection with the audit of Ascend’s December 31, 2006 financial statements. During 2007, Ascend’s principal accountant charged $10,880 for work performed in connection with its Form 10-QSB filings for the
quarters ended March 31, 2007 and June 30, 2006.
Ascend’s principal accountant charged $35,000 for services they performed
in connection with Ascend’s initial public offering, including the financial statements included in the Current Report of Form 8-K filed with the Securities and Exchange Commission on May 18, 2006.
Audit-Related Fees
During 2006 and
2005, Ascend’s principal accountant did not render assurance and related services reasonably related to the performance of the audit or review of financial statements.
Tax Fees
During 2006, RSM charged
Ascend $2,300 for preparation of its 2005 federal tax return.
All Other Fees
During 2006 and 2005, there were no fees billed for products and services provided by the principal accountant other than those set forth above.
Audit Committee Approval
Ascend currently does not have an audit committee. However, its board of directors has approved the services described above.
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BENEFICIAL OWNERSHIP OF SECURITIES
Security Ownership of Certain Beneficial Owners and Management
The following tables set forth information regarding the beneficial ownership of Ascend’s common stock as of
, 2007 and of Continuing Pubco’s common stock after consummation of the redomestication merger and acquisition by:
•
each person known by us to be the beneficial owner of more than 5% of Ascend’s outstanding shares of common stock either on the record date or after the
consummation of the transactions;
•
each of Ascend’s current executive officers and directors;
•
each person who will become director upon consummation of the transactions;
•
all Ascend’s current executive officers and directors as a group; and
•
all of Continuing Pubco’s executive officers and directors as a group after the consummation of the transactions.
The following tables show beneficial ownership immediately after the acquisition assuming maximum conversion of the Public Shares and assuming no
conversion of the Public Shares, respectively, in each case based on approximately 8.6 million shares being issued to EHL at closing of the acquisition.
Beneficial Ownership of
Ascend Common Stock
Beneficial Ownership
of Continuing Pubco Common
Stock after Consummation of
Transactions Assuming
Maximum Conversions
Beneficial Ownership of
Continuing Pubco Common
Stock after Consummation of
Transactions Assuming
no
Conversions
Name and Address of
Beneficial Owner(1)
Number
of Shares
Percent of
Class before
Transactions
Number
of Shares
Percent of
Class after
Transactions
Number
of Shares
Percent of
Class after
Transactions
Don K. Rice
1,358,096
(2)
15.9
%
1,358,096
(2)
8.6
%
1,358,096
(2)
7.9
%
Russell C. Ball III(3)
102,857
1.2
%
102,857
0.7
%
102,857
0.6
%
Stephen L. Brown(4)
102,857
1.2
%
102,857
0.7
%
102,857
0.6
%
Fir Tree, Inc.(5)
839,500
(6)
9.8
%
839,500
(6)
5.3
%
839,500
(6)
4.9
%
Hummingbird Management LLC(7)
748,100
8.7
%
748,100
4.7
%
748,100
4.4
%
David M. Knott(8)
451,500
(9)
5.3
%
451,500
(9)
2.9
%
451,500
(9)
2.6
%
Azimuth Opportunity, Ltd.(10)
433,000
5.1
%
433,000
2.7
%
433,000
2.5
%
All current directors and executive officers as a group (three directors)
All post-acquistion directors and executive officers as a group ( persons)
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*
Less than one percent.
(1)
Unless otherwise indicated, the business address of each of the individuals is 435 Devon Park Drive, Building 400, Wayne, Pennsylvania 19087.
(2)
Does not include 953,334 warrants held by Mr. Rice, which warrants are not exercisable and will not become exercisable within 60 days.
(3)
Mr. Ball’s business address is Wind River Holdings, L.O. 555 Croton Road, King of Prussia, Pennsylvania 19406.
(4)
Mr. Brown’s business address is Brimco LLC, 750 Lexington Avenue, New York, New York 10022.
(5)
The business address of Fir Tree, Inc. is 505 Fifth Avenue, 23
rd
Floor, New York, New York 10017.
(6)
Represents (i) 649,049 shares of common stock held by Sapling, LLC, and (ii) 190,451 shares of common stock held by Fir Tree Recovery Master Fund, L.P. Fir Tree, Inc. is
the investment manager of both entities and exercises voting and disposition power over the shares. The foregoing was derived from a Schedule 13G/A filed with the SEC on February 14, 2007.
(7)
The business address of Hummingbird Management LLC is 460 Park Avenue, 12
th
Floor, New York, New York 10022.
(8)
The business address of David M. Knott is Dorset Management Company, 485 Underhill Blvd., Suite 205, Syosset, New York 11791.
(9)
Represents shares held by Mr. Knott and Dorset Management Company. The foregoing was derived from a Schedule 13G/A filed with the SEC on February 14, 2007.
(10)
The business address of Azimuth Opportunity, Ltd. is c/o W. Smiths Finance, Nemours Chambers, P.O. Box 3170, Road Town, Tortola, British Virgin Islands.
(11)
The business address of Messrs. Dezso, Khoo, Lee, Brook, Thomas, Blaine, Chok, Florkiewicz and San Filippo is 4926 Spicewood Springs Road, Austin, Texas 78759.
(12)
Number Assumes full vesting of all options held by such beneficial owner. As of November 1, 2007, 10,000 shares are currently unvested. These 10,000 shares will vest on
May 25, 2008.
(13)
Includes an option to purchase 51,470 shares of common stock.
(14)
Includes an option to purchase 29,412 shares of common stock.
(15)
Represents an option to purchase 25,717 shares of common stock.
(16)
Includes an option to purchase 36,764 shares of common stock.
(17)
Includes an option to purchase 23,897 shares of common stock.
(18)
The business address of Pacven Walden Ventures IV, LP is PO Box 309, Ugland House, Grand Cayman, Cayman Island, British West Indies.
(19)
The business address of Quilvest Asian Equity Limited is Room 2120, Two Pacific Place, 88 Queensway, Hong Kong.
(20)
The business address of Capital International Asia CDPQ, Inc. is Centre CDP Capital, 1000, Place Jean-Paul Riopelle, Montreal, Quebec H2Z 2B3, Canada.
(21)
The business address of DEG—Deutsche Investitions—und Entwicklungsgeselischaft mbH is Belvederstr. 40, 50933 Cologne, Germany.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Ascend Related Party Transactions
In December 2005, Ascend issued 875,000 shares of its common stock to the individuals set forth below for $25,000 in cash, at an average purchase price of
approximately $0.029 per share as follows:
Name
Number
of Shares
Relationship to Us
Don K. Rice
695,000
Chairman of the Board, Chief Executive Officer, President and Treasurer
Stephen L. Brown
60,000
Secretary and Director
Russell C. Ball III
60,000
Director
Arthur Spector
60,000
Special Advisor
Effective April 19, 2006, Ascend’s board of directors authorized a stock dividend of
0.714285 shares of common stock for each outstanding share of common stock, effectively lowering the purchase price to $0.0167 per share.
The holders of the majority of these shares will be entitled to make up to two demands that Ascend register these shares. The holders of the majority of these shares may elect to exercise these registration rights at any time commencing
three months prior to the date on which these shares of common stock are released from escrow. In addition, these stockholders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to the
date on which these shares of common stock are released from escrow. Ascend will bear the expenses incurred in connection with the filing of any such registration statements.
Don K. Rice, Ascend’s chairman of the board, chief executive officer, president and treasurer, has purchased insider units (for an aggregate
purchase price of $1,000,002) from Ascend. This purchase took place on a private placement basis simultaneously with the consummation of the IPO. All of the proceeds received from this purchase were placed in the trust fund. The insider units are
identical to the units offered to the public; however, Mr. Rice has waived his right to receive distributions upon liquidation prior to a business combination with respect to the securities underlying the insider units. Additionally, he has
agreed that the insider units and underlying securities will not be sold or transferred by him until after Ascend has completed a business combination.
400 Building LLC, an affiliate of Arthur Spector, has agreed that, commencing May 11, 2006 through the acquisition of a target business, it will make available to Ascend a small amount of office space and certain
office and secretarial services, as we may require from time to time. Ascend has agreed to pay 400 Building LLC $7,500 per month for these services. Mr. Spector is the sole member and sole manager of 400 Building LLC and, as a result, will
benefit from the transaction to the extent of his interest in 400 Building LLC. However, this arrangement is solely for Ascend’s benefit and is not intended to provide Mr. Spector compensation in lieu of a salary. Ascend believes that,
based on rents and fees for similar services in the Philadelphia metropolitan area, the fee charged by 400 Building LLC is at least as favorable as we could have obtained from an unaffiliated person. However, as Ascend’s directors may not be
deemed “independent,” it did not have the benefit of disinterested directors approving this transaction.
Don K. Rice advanced
Ascend an aggregate of $80,000 to cover expenses related to the IPO. The loan was repaid on May 24, 2006 from the proceeds of the IPO not placed in trust.
Ascend will reimburse its officers, directors and special advisor for any reasonable out-of-pocket business expenses incurred by them in connection with certain activities on its behalf such as identifying and
investigating possible target businesses and business combinations. There is no limit on the amount of out-of-pocket expenses reimbursable by Ascend, which will be reviewed only by its board or a court of competent jurisdiction if such reimbursement
is challenged.
144
Other than the $7,500 per-month administrative fee and reimbursable out-of-pocket expenses payable to its
officers and directors, no compensation or fees of any kind, including finder’s fees, consulting fees or other similar compensation, will be paid to any of Ascend’s existing stockholders, officers or directors who owned its common stock
prior to this offering, or to any of their respective affiliates, prior to or with respect to the business combination.
All ongoing and
future transactions between Ascend and any of its officers and directors or their respective affiliates, including loans by Ascend’s officers and directors, will be on terms believed by it to be no less favorable to it than are available from
unaffiliated third parties. Such transactions or loans, including any forgiveness of loans, will require prior approval by a majority of Ascend’s uninterested “independent” directors (to the extent Ascend has any) or the members of
its board who do not have an interest in the transaction, in either case who had access, at Ascend’s expense, to its attorneys or independent legal counsel. It will not enter into any such transaction unless its disinterested
“independent” directors (or, if there are no “independent” directors, its disinterested directors) determine that the terms of such transaction are no less favorable to it than those that would be available to it with respect to
such a transaction from unaffiliated third parties.
ePAK Related Party Transactions
Currently, ePAK is not a party to any related party transactions with Ascend.
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DESCRIPTION OF CONTINUING PUBCO’S SECURITIES FOLLOWING THE ACQUISITION
The following description of the
material terms of the capital stock and warrants of Continuing Pubco following the redomestication merger and acquisition includes a summary of specified provisions of the certificate of incorporation and by-laws of Continuing Pubco that will be in
effect upon completion of the transactions. This description is subject to the relevant provisions of Bermuda law and is qualified by reference to Continuing Pubco’s certificate of incorporation and by-laws as will be in effect upon
consummation of the transactions, copies of which are attached to this proxy statement/prospectus and are incorporated in this proxy/prospectus by reference.
General
The articles of formation of Continuing Pubco will authorize the issuance of 70,000,000 shares of common stock, par
value $.0001, and 1,000,000 shares of preferred stock, par value $.0001.
In the redomestication merger, Continuing Pubco will issue its
shares of common stock and warrants in exchange for the outstanding common stock and warrants of Ascend on a one-for-one basis. This proxy statement/prospectus covers an aggregate of 23,600,001 shares of common stock, 14,733,334 warrants and one
purchase option to be issued by Continuing Pubco in the exchange.
The aforementioned shares to be issued include:
•
8,566,667 shares of Continuing Pubco’s common stock issuable in exchange for all of the outstanding shares of common stock of Ascend;
•
14,133,334 shares of Continuing Pubco’s common stock that may be issued on exercise of warrants to be issued hereby,
•
300,000 shares of Continuing Pubco’s common stock that may be issued on exercise of the purchase option to be issued hereby; and
•
600,000 shares of Continuing Pubco’s common stock that may be issued on exercise of warrants that may be issued on exercise of the purchase option to be issued
hereby.
The warrants to be issued hereby include 14,133,334 warrants to be issued in exchange for a like number of
outstanding warrants of Ascend and 600,000 warrants that may be issued on exercise of the purchase option to be issued hereby. The purchase option will be issued in exchange for the outstanding underwriter’s unit purchase option that was issued
in connection with the May 2006 initial public offering by Ascend. The warrants and purchase option issued by Continuing Pubco hereby will have substantially identical terms to those of Ascend for which they are exchanged.
Common Stock
The holders of common stock will be
entitled to one vote for each share held of record on all matters to be voted on by stockholders.
Continuing Pubco’s board of
directors will be divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. There is no cumulative voting with respect to the election of directors, with the
result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors.
Holders of
Continuing Pubco common stock will not have any conversion, preemptive or other subscription rights and there will be no sinking fund or redemption provisions applicable to the common stock.
146
Preferred Stock
The articles of formation of Continuing Pubco will authorize the issuance of 1,000,000 shares of a blank check preferred stock with such designations, rights and preferences as may be determined from time to time by
Continuing Pubco’s board of directors. Accordingly, Continuing Pubco’s board of directors will be empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could
adversely affect the voting power or other rights of the holders of common stock. In addition, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of Continuing Pubco.
Warrants
Each of Continuing Pubco’s warrant
will entitle the registered holder to purchase one share of Continuing Pubco’s common stock at a price of $5.00 per share, subject to adjustment as discussed below, at any time commencing on the completion of the acquisition. The warrants
expire on May 11, 2011 at 5:00 p.m., New York City time. Continuing Pubco may call the warrants for redemption;
•
in whole and not in part;
•
at a price of $.01 per warrant at any time after the warrants become exercisable;
•
upon not less than 30 days’ prior written notice of redemption to each warrant holder; and
•
if, and only if, the reported last sale price of the common stock equals or exceeds $8.50 per share, for any 20 trading days within a 30 trading day period ending
on the third business day prior to the notice of redemption to warrant holders.
The redemption criteria for Continuing
Pubco’s warrants has been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price and provide a sufficient degree of liquidity to cushion the market reaction to its redemption call.
If Continuing Pubco calls the warrants for redemption as described above, its management will have the option to require any holder that
wishes to exercise his warrant (including those underlying the insider units or purchased by Mr. Rice or his affiliates or designees in the aftermarket) to do so on a “cashless basis.” If its management takes advantage of this option,
all holders of warrants would pay the exercise price by surrendering his warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of common stock underlying the
warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall mean the average reported last sale
price of the common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to holders of warrants. Requiring a cashless exercise in this manner will reduce the number of shares to be
issued and thereby lessen the dilutive effect of a warrant redemption. Continuing Pubco believes this feature is an attractive option to it if it does not need the cash from the exercise of the warrants after the business combination.
The warrants will be issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent,
and Continuing Pubco in form substantially the same as the currently existing warrant agreement for Ascend. You should review a copy of the warrant agreement, which is attached to this proxy statement/prospectus as
Annex Q
, for a complete
description of the terms and conditions applicable to the warrants.
The exercise price and number of shares of common stock issuable on
exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or Continuing Pubco’s recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for
issuances of common stock at a price below the exercise price.
The warrants may be exercised upon surrender of the warrant certificate on
or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed
147
and executed as indicated, accompanied by full payment of the exercise price, by certified check payable to Continuing Pubco, for the number of warrants
being exercised. The warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon
exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.
No warrants will be exercisable unless at the time of exercise a prospectus relating to common stock issuable upon exercise of the warrants is current and the common stock has been registered or qualified or deemed to be exempt under the
securities laws of the state of residence of the holder of the warrants. Under the terms of a warrant agreement, Continuing Pubco has agreed to maintain a current prospectus relating to common stock issuable upon exercise of the warrants until the
expiration of the warrants. However, there is no assurance that Continuing Pubco will be able to do so. The warrants may be deprived of any value and the market for the warrants may be limited if the prospectus relating to the common stock issuable
upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside. If Continuing Pubco is unable to deliver securities pursuant to
the exercise of a warrant because a registration statement under the Securities Act of 1933, as amended, with respect to the Continuing Pubco common stock is not effective, then in no event would Continuing Pubco be obligated to pay cash or other
consideration to the holders of warrants or otherwise “net-cash settle” any warrant exercise.
Purchase Option
In connection with Ascend’s IPO, Ascend granted its underwriter an option to purchase up to a total of 300,000 units at $7.50 per unit. The option is
exercisable for a total of 300,000 shares of common stock, 600,000 warrants (and 600,000 shares of common stock underlying the warrants). In connection with the redomestication merger, Continuing Pubco will issue an option in exchange for the
aforementioned underwriter option to purchase a like number of shares of common stock and warrants on the same terms.
Dividends
Ascend has not paid any cash dividends on its common stock to date. The payment of cash dividends by Continuing Pubco in the future will be dependent upon
its revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of the acquisition. The payment of any dividends will be within the discretion of Continuing Pubco’s board of directors. It is the
present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, we do not anticipate declaring any dividends in the foreseeable future.
Transfer Agent and Warrant Agent
The transfer agent
for Continuing Pubco’s common stock and warrants and warrant agent for its warrants will be Continental Stock Transfer & Trust Company (“Continental”), 17 Battery Place, New York, New York 10004. Continental is Ascend’s
current transfer and warrant agent.
Registration Rights
The Ascend Inside Holders have certain registration rights, which rights will apply to the shares of Continuing Pubco common stock issued to them in exchange for their shares of Ascend common stock. EHL also shall
have relatively identical registration rights. Each of the Ascend Inside Holders and EHL will be entitled to make up to two demands that Continuing Pubco register their respective shares for resale under the Securities Act. The holders of the
majority of these shares can elect to exercise these registration rights at any time commencing three months prior to the date on which their shares of common stock are to be released from escrow or the lock-up agreements executed in connection with
the acquisition, as applicable. In addition, these stockholders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to the date on which these shares of common stock are released from
escrow. Continuing Pubco will bear the expenses incurred in connection with the filing of any such registration statements.
148
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after the redomestication merger and consummation of the
acquisition, Continuing Pubco will have 17,133,334 shares of common stock outstanding, assuming no cash conversion of Public Shares. Of that amount, 8,566,667 will be registered and freely tradable without securities law restriction, but of that
amount 1,500,000 shares of common stock are being held in escrow until May 2009. Additionally, any of such shares held by “affiliates,” as that term is defined in Rule 144 under the Securities Act, which generally includes officers,
directors or 10% stockholders will also be restricted from public sale as “restricted stock.” At least 8.6 million shares of common stock being issued in the acquisition will be restricted stock (as that term is defined in Rule 144,
promulgated under the Securities Act). The holders of these shares will have registration rights as described in this proxy statement/prospectus. In addition, there will be outstanding 14,133,334 warrants, each to purchase one share of common stock,
which will be freely tradable after the redomestication merger. The common stock issuable upon exercise of the warrants is subject to the registration requirements of the federal and state blue sky laws, which may not be obtained in all
circumstances, and if registered, will be freely tradable provided that there is a registration statement in effect at the time of their exercise. In addition, in connection with the initial public offering, we issued a unit purchase option to the
representative of the underwriters which is exercisable for 300,000 units, comprised of 300,000 shares of common stock and 600,000 warrants, each warrant to purchase one share of common stock. Such securities underlying the representative’s
unit purchase option and underlying securities have registration rights and may be sold pursuant to Rule 144. Therefore, there are an aggregate of approximately 15 million shares of common stock that may be issued in the future upon exercise of
outstanding warrants and options. In addition, the 2007 incentive plan will provide Continuing Pubco the ability to grant options and other equity-based awards for up to an aggregate of 2,600,000 shares of common stock, and Continuing Pubco will be
obligated to register these shares under a registration statement on Form S-8 within 90 days after consummation of the acquisition.
In
general, under Rule 144, a person who has owned restricted shares of common stock beneficially for at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of the then average
preceding four weekly trading volume or 1% of the total number of outstanding shares of common stock. Sales under Rule 144 are also subject to manner of sale provisions, notice requirements and the availability of current public information
about the company. A person who has not been one of our affiliates for at least the three months immediately preceding the sale and who has beneficially owned shares of common stock for at least two years is entitled to sell the shares under
Rule 144 without regard to the limitations described above.
No prediction can be made about the effect that market sales of the
common stock of Continuing Pubco or the availability for sale of the common stock of Continuing Pubco will have on the market price of the common stock. It is anticipated that the market should be similar to that of Ascend because the
redomestication merger will largely be substituting one security for another on as equal terms as is possible. Nevertheless, sales of substantial amounts of our common stock in the public market could adversely affect the market price for our
securities and could impair our future ability to raise capital through the sale of common stock or securities linked to the common stock.
149
PRICE RANGE OF ASCEND SECURITIES
The closing price for each unit, share of common stock and warrant of Ascend
on July 31, 2007, the last trading day before announcement of the execution of the acquisition agreement was $6.92, $5.65 and $0.60, respectively. Ascend’s units, common stock and warrants are each quoted on the OTCBB under the symbols
ASAQU, ASAQ and ASAQW, respectively. Ascend’s units commenced public trading on May 12, 2006 and its common stock and warrants commenced public trading on July 25, 2006.
The table below sets forth, for the calendar quarters indicated, the high and low bid prices of the Ascend common stock, warrants and units as reported
on the OTCBB. The over-the-counter market quotations reported below reflect inter-dealer prices, without markup, markdown or commissions and may not represent actual transactions.
Units
Common Stock
Warrants
2006
High
Low
High
Low
High
Low
Second Quarter (starting May 12)
$
6.23
$
5.98
Third Quarter
$
6.20
$
5.92
$
5.37
$
5.20
$
0.45
$
0.22
Fourth Quarter
$
6.20
$
5.97
$
5.35
$
5.29
$
0.41
$
0.35
Units
Common Stock
Warrants
2007
High
Low
High
Low
High
Low
First Quarter
$
6.65
$
6.11
$
5.59
$
5.35
$
0.49
$
0.35
Second Quarter
$
6.85
$
6.60
$
5.65
$
5.54
$
0.59
$
0.47
Third Quarter
$
6.99
$
6.41
$
5.70
$
5.59
$
0.65
$
0.40
Fourth Quarter*
—
—
—
—
—
—
*
Through , 2007.
Holders of Ascend common stock, warrants and units should obtain current market quotations for their securities. The market price of Ascend common stock,
warrants and units could vary at any time before the redomestication merger and acquisition are consummated.
In connection with the
redomestication merger and acquisition, Ascend and ePAK will use their reasonable best efforts to obtain listing of Continuing Pubco’s common stock and warrants on The Nasdaq Stock Market under the symbols
“ ” and “ ,” respectively. Such listing is a condition to the consummation of the
acquisition and the redomestication merger and acquisition will not be consummated if such listing is not obtained, unless the Nasdaq listing requirement is waived by EHL. Ascend believes that Continuing Pubco will meet the Nasdaq listing
requirements upon consummation of the transactions and that such listing will be obtained. Immediately prior to the consummation of the redomestication merger and acquisition, Ascend’s units will be separated into their components securities
and the separate trading of the units will cease.
Holders
As of , 200 , there were
holders of record of Ascend units, holders of record of Ascend common stock and holders of record of Ascend warrants. Ascend believes that the beneficial holders of the units,
common stock and warrants to be in excess of 400 persons each.
APPRAISAL RIGHTS
Under Delaware corporate law, the redomestication merger causes the stockholders of Ascend
to have appraisal rights in connection with the transactions for which approval is sought. This right is separate from the conversion rights of the holders of Public Shares with respect to the acquisition proposal. However, because the exercise of
the appraisal right and the conversion rights both require the tender of Public Shares to Ascend, only one right may be elected in respect of the Public Shares. See Section 262 of the Delaware General Corporation Law attached hereto as
Annex
P
and the section
“Redomestication Proposal—Appraisal Rights”
for more information about appraisal rights.
150
STOCKHOLDER PROPOSALS
The first Continuing Pubco annual meeting of stockholders following the redomestication
merger and acquisition will be held on or about , 200 unless the date is changed by the board of directors. If you
are a stockholder and you want to include a proposal in the proxy statement/prospectus for the year 2008 annual meeting, you need to provide it to us by no later than
, 200 . You should direct any proposals to our secretary at Ascend’s principal office which will be in
. If you want to present a matter of business to be considered at the year 200 annual meeting, under Ascend’s
by-laws you must give timely notice of the matter, in writing, to our secretary. To be timely, the notice has to be given between
and . If
Ascend is liquidated as a result of not consummating a business combination transaction before May 17, 2008, there will be no annual meeting in 200 .
EXPERTS
The consolidated financial statements of e.PAK Resources (S) Pte Ltd and its subsidiaries at
December 31, 2006 and 2005 and for each of the three years in the period ended December 31, 2006 appearing in this registration statement have been audited by Ernst & Young, independent registered public accounting firm, as set
forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
The financial statements of Ascend at December 31, 2006 and the year then ended and the period from December 5, 2005 (inception) to
December 31, 2005 included in this proxy statement/prospectus have been audited by Goldstein Golub Kessler LLP, an independent registered public accounting firm, as set forth in their report appearing elsewhere herein, and are included in
reliance upon such report given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Ascend files reports, proxy statement/prospectus and other information
with the SEC as required by the Securities Exchange Act of 1934, as amended. You may read and copy reports, proxy statement/prospectus and other information filed by Ascend with the SEC at the SEC public reference room located at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also obtain copies of the materials described above at prescribed rates by writing to the SEC, Public
Reference Section, 100 F Street, N.E., Washington, D.C. 20549. You may access information on Ascend at the SEC web site containing reports, proxy statement/prospectus and other information at: http://www.sec.gov.
Information and statements contained in this proxy statement/prospectus or any annex to this proxy statement/prospectus are qualified in all respects by
reference to the copy of the relevant contract or other annex filed as an exhibit to this proxy statement/prospectus.
All information
contained in this document relating to Ascend has been supplied by Ascend, and all such information relating to ePAK has been supplied by ePAK. Information provided by one another does not constitute any representation, estimate or projection of the
other.
If you would like additional copies of this document or if you have questions about the acquisition, you should contact via phone
or in writing:
(United States dollars in thousands, except number of shares and per share data)
June 30
2007
(Unaudited)
December 31
2006
ASSETS
Current assets:
Cash and cash equivalents
$
1,239
$
2,624
Restricted cash and cash equivalents
390
381
Accounts receivable, net of allowance for doubtful accounts of $28 and $28, at June 30, 2007 and December 31, 2006,
respectively
7,283
6,535
Inventories
10,408
8,994
Deferred tax assets
7
8
Other current assets
1,008
462
Total current assets
$
20,335
$
19,004
Long-term deposits
13
13
Property, plant and equipment, net
14,997
14,506
Total assets
$
35,345
$
33,523
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable
$
9,242
$
9,432
Accrued liabilities
1,575
1,571
Current maturities of long-term debt
530
501
Short-term borrowings
5,485
4,964
Short-term loan from Parent Company
4,819
4,903
Income taxes payable
1,024
930
Total current liabilities
$
22,675
$
22,301
Non-current liabilities:
Long-term debt, less current maturities
1,233
1,061
Deferred tax liabilities
263
147
Redeemable Common Share:
Convertible contingently redeemable common shares at redemption value: 13,166,667
25,244
24,205
Shareholders’ deficit:
Common shares, 24,000,000 shares authorized; issued and outstanding shares: 2,000,000
400
400
Common share warrants
—
19
Accumulated deficit
(14,525
)
(14,698
)
Non-distributable reserves
121
121
Accumulated other comprehensive (loss) income
(66
)
(33
)
Total shareholders’ deficit
$
(14,070
)
$
(14,191
)
Total liabilities and shareholders’ deficit
$
35,345
$
33,523
F-2
e.PAK RESOURCES AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(United States dollars in thousands, except number of shares and per share data)
6 Months ended June 30,
2007
(Unaudited)
2006
(Unaudited)
Net sales
$
20,463
$
16,711
Cost of sales
(13,304
)
(10,482
)
Gross profit
7,159
6,229
Selling, general and administrative expenses
(5,257
)
(4,614
)
Research and development
(95
)
(93
)
Operating profit
1,807
1,522
Interest income
10
9
Other income
5
12
Interest expense
(239
)
(134
)
Other expense
(206
)
(147
)
Income before income taxes
1,377
1,262
Income tax expense
(225
)
(141
)
Net income
1,152
1,121
Accretion of convertible contingently redeemable common shares
(1,038
)
(1,103
)
Net income attributable to common shareholders
$
114
$
18
F-3
e.PAK RESOURCES AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS (CONT’D)
(United States dollars in thousands, except number of shares and per share data)
6 Months ended June 30,
2007
2006
Basic net income per common share
0.01
—
Basic net income per convertible contingently redeemable common share
0.01
—
Diluted net income per common share
—
—
Diluted net income per convertible contingently redeemable common share
0.01
—
Common shares used in basic net income per common share calculation
2,000,000
2,000,000
Shares used in basic net income per convertible contingently redeemable common share calculation
13,166,667
13,166,667
15,166,667
15,166,667
Common shares used in diluted net income per common share calculation
4,553,852
4,537,842
Shares used in diluted net income per convertible contingently redeemable common share calculation
13,166,667
13,166,667
Reconciliation of basic net income to diluted net income attributable to convertible contingently
redeemable common shareholders.
2007
2006
Basic net income attributable to convertible contingently redeemable common shareholders
$
99
$
16
Additional allocation to common shareholders - impact of potential common shares
(14
)
(3
)
Dilutive net income attributable to convertible contingently redeemable common shareholders
$
85
$
13
F-4
e.PAK RESOURCES AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS (CONT’D)
(United States dollars in thousands, except number of shares and per share data)
Reconciliation of weighted average number
of common shares used in the basic earnings per share calculation to diluted earnings per share calculation.
6 Months ended June 30,
2007
2006
Weighted average common shares used in basic net income per ordinary share calculations
2,000,000
2,000,000
Dilutive effect of common share warrants
945,216
933,721
Common share warrants
—
115,648
Dilutive effect of employee share options
1,608,636
1,488,473
Weighted average common shares used in the diluted net income per ordinary share calculation
4,553,852
4,537,842
The 18,269,306 convertible contingently redeemable common share were not included in the
computation of diluted earnings per common share for the six months ended June 30, 2007 or 2006 because to do so would have been antidilutive for the periods presented.
F-5
e.PAK RESOURCES AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CONVERTIBLE
CONTINGENTLY REDEEMABLE COMMON SHARES AND SHAREHOLDERS’ DEFICIT
(United States dollars in thousands, except number of shares)
Convertible
Contingently
Redeemable
Common Share
Outstanding
Convertible
Contingently
Redeemable
Common
Shares
Common
Shares
Outstanding
Common
Shares
Common
Share
Warrants
Additional
Paid-in
Capital
Accumulated
Deficit
Non
Distributable
Reserves
Accumulated
Other
Comprehensive
Income/(Loss)
Comprehensive
Income/(Loss)
Total
Balance at December 31, 2005
13,166,667
$
22,145
2,000,000
$
235
$
19
—
$
(14,889
)
$
58
$
9
—
$
(14,568
)
Capital contribution for share-based compensation from Parent Company
165
165
Effect of Singapore Companies (Amendment) Act 2005
165
(165
)
—
Accretion of convertible contingently redeemable common share
1,103
(1,103
)
(1,103
)
Transfer of non-distributable reserve
—
(30
)
30
Net income
1,121
1,121
1,121
Foreign currency translation adjustment
(21
)
(21
)
(21
)
Total comprehensive income
1,100
Balance at June 30, 2006
13,166,667
$
23,248
2,000,000
$
400
$
19
—
$
(14,901
)
$
88
$
(12
)
$
(14,406
)
Capital contribution for share-based compensation from Parent Company
135
135
Accretion of convertible contingently redeemable common share
957
(135
)
(822
)
(957
)
Transfer of non-distributable reserve
(33
)
33
—
Net income
1,058
—
1,058
1,058
Foreign currency translation adjustment
(21
)
(21
)
(21
)
Total comprehensive income
$
1,037
Balance at December 31, 2006
13,166,667
$
24,205
2,000,000
$
400
$
19
$
(14,698
)
$
121
$
(33
)
$
(14,191
)
Capital contribution for share-based compensation from Parent Company
40
40
Accretion of convertible contingently redeemable common share
1,038
(40
)
(998
)
(1,038
)
Expiration of common share warrants
(19
)
19
Transfer of non-distributable reserve
—
—
—
Net income
1,152
1,152
1,152
Foreign currency translation adjustment
(33
)
(33
)
(33
)
Total comprehensive income
$
1,119
Balance at June 30, 2007
13,166,667
$
25,243
2,000,000
$
400
—
—
$
(14,525
)
$
121
$
(66
)
$
(14,070
)
F-6
e.PAK RESOURCES AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(United States dollars in thousands)
6 Months ended June 30,
2007
(Unaudited)
2006
(Unaudited)
Cash flows from operating activities
Net income
$
1,152
$
1,121
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment
1,336
963
Share-based compensation
41
165
Write-off of inventory
110
103
Deferred tax expense (benefit)
221
4
Foreign exchange differences
(16
)
(14
)
Increase (decrease) in cash from changes in:
Accounts receivable
(748
)
(570
)
Inventories
(1,454
)
(1,142
)
Due from Parent Company
—
125
Other current assets
(615
)
(124
)
Accounts payable
5,372
4,708
Accrued liabilities
3
154
Income tax payables
(9
)
135
Net cashflow provided by operating activities
5,393
5,628
Cash flows from investing activities
Purchase of property, plant and equipment
(1,827
)
(2,775
)
Net cash flows used in investing activities
(1,827
)
(2,775
)
Cash flows from financing activities
Increase in restricted cash and cash equivalents
(9
)
(8
)
Proceeds from short-term borrowings
10,747
10,492
Repayment of short-term borrowings
(15,789
)
(13,434
)
Proceeds from long-term debt
448
—
Repayment of long-term debt
(247
)
(146
)
Repayment of loans from Parent Company
(84
)
(148
)
Net cash flows used in financing activities
(4,934
)
(3,244
)
Net decrease in cash and cash equivalents
(1,368
)
(391
)
Cash and cash equivalents at beginning of year
2,624
1,979
Effects of exchange rates on cash and cash equivalents
(17
)
(6
)
Cash and cash equivalents at end of year
$
1,239
$
1,582
Supplemental cash flow disclosures:
Cash paid for interest
239
134
Cash paid for income taxes
4
12
Non-cash purchase of property, plant and equipment through accounts payable
50
—
Non-cash settlement of accounts payable through issuance of notes payable
5,563
3,841
F-7
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS—(Continued)
(United States dollars in thousands, except number of shares and per share data)
(1)
DESCRIPTION OF BUSINESS
e.PAK Resources
(S) Pte Ltd (the “Company”) and subsidiaries (the “Group”) is a full-service designer, manufacturer and supplier of precision engineered products and solutions for the automated transport and handling of semiconductor and
electronics devices. The Group operates large scale design and manufacturing facilities in Shenzhen, Peoples’ Republic of China (the “PRC”), with additional sales design and application engineering operations located in offices
servicing North America, Europe and Asia. The Group’s precision manufacturing handling solutions provide the Group’s customers with automated manufacturing, handling and transportation of their critical semiconductor and electronic
devices.
The Company is incorporated in the Republic of Singapore. The Company is a wholly-owned subsidiary of e.PAK Holdings Limited
(“Parent Company”), incorporated in Hong Kong.
(2)
Going Concern
The accompanying financial
statements have been prepared assuming that the Group will continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this uncertainty. The Group has an obligation at the option of the holders of the Group’s convertible contingently redeemable common shares, to pay in full the redemption
value of convertible contingently redeemable common shares at any time on or after the occurrence of the Parent Company failing to complete a public listing by December 31, 2007. The Group and the Parent Company are currently in negotiations
regarding an acquisition agreement with a publicly traded company in the United States of America which, in management’s opinion, will occur by the first quarter of 2008 (Note 11). In line with the terms of the Parent Company shareholder
agreement, the transaction with the publicly traded company, if it occurs, will cancel the potential obligation to redeem the convertible contingently redeemable common shares. If the Group is unable to complete this acquisition, the Group does not
have sufficient cash to repay the obligation arising from the convertible contingently redeemable common shares when they become contingently redeemable on December 31, 2007. These conditions raise substantial doubt about the Group’s
ability to continue as a going concern.
(3)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of Consolidation
The consolidated financial
statements comprise the financial statements of the Company and its Subsidiaries. The financial statements of the subsidiaries are prepared at the same reporting dates as the Company. All intra-group balances, income and expenses and profits and
losses resulting from intra-group transactions are eliminated in consolidation. Subsidiaries are consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such
control ceases.
(b)
Use of Estimates
The preparation of consolidated
financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ from
those estimates.
F-8
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS—(Continued)
(United States dollars in thousands, except number of shares and per share data)
(c)
Cash and Cash Equivalents
Cash and cash
equivalents consist of cash and highly liquid investments with maturities of three months or less when purchased.
(d)
Restricted Cash and Cash Equivalents
Restricted
cash and cash equivalents represents amounts used as collateral for the Group’s short term borrowings.
(e)
Share-Based Compensation
In December 2004, the
Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”)
No. 123R, Share-Based Payment
(“SFAS 123R”). SFAS No. 123R is a revision of
FASB Statement
No. 123, “Accounting for Stock-Based Compensation,”
and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends
SFAS No. 95,
“Statement of Cash Flows,”
and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in exchange for share-based payment compensation. SFAS
No. 123R requires a public entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost is recognized over the period during which
an employee is required to provide services in exchange for the award. The Group has elected to retroactively adopt the provision of SFAS 123 (R) for all periods.
(f)
Inventories
Inventories are stated at the lower of
cost or market. Raw materials which comprise cost of purchases and all direct expenditures are determined on a weighted average cost (WAC) basis. Finished goods and work-in-progress comprise costs of direct materials, direct labor and a proportion
of manufacturing overheads based on normal operating capacity determined on a WAC basis. Consumables include items such as uniforms and gloves.
Market value for finished goods and work-in-progress is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated selling costs. Market value for raw materials is the estimated
replacement cost. An allowance for loss on obsolescence is provided where appropriate.
(g)
Property, Plant, and Equipment, net
Property,
plant and equipment are recorded at historical cost. Depreciation of property, plant and equipment is computed using the straight-line method based on the following estimated useful lives of the assets:
Leasehold improvements
The shorter of the useful life of the asset or the lease term
Furniture and fittings
5 years
Office and factory equipment
5 to 10 years
Machinery, tooling and moulds
5 to 10 years
Repair and maintenance costs are expensed when incurred.
F-9
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS—(Continued)
(United States dollars in thousands, except number of shares and per share data)
(h)
Impairment of Long-Lived Assets
The Group accounts
for long-lived assets in accordance with
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
which requires impairment losses to be recorded on long-lived assets used in operations when indicators of
impairment exist. Reviews are performed to determine whether the carrying value of assets is impaired when impairment indicators exist. The Group determines the existence of impairment by comparing the expected future cash flows (undiscounted and
without interest charges) to the net asset carrying value. If the carrying values exceed the undiscounted cash flows, the impairment loss is measured at the amount by which the carrying amount of the asset exceeds the fair value of the long-lived
assets.
(i)
Research and Development
Research and development
expenditures are expensed in the period incurred.
(j)
Fair Value of Financial Instruments
The carrying
value of cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings approximate fair value due to the short maturity of those instruments and in some cases, are subject to variable interest rates.
(k)
Internally Developed Patents
The costs of
internally developed patents are expensed in the period incurred.
(l)
Foreign Currency Translation
The Group considers
the United States Dollar (“USD”) as their functional currency except for one subsidiary in China whose functional currency is the Chinese Renminbi. The Group’s reporting currency is the United States Dollar (“USD”).
Transactions in foreign currencies are measured in the respective functional currencies of the Company or its subsidiaries and are recorded
on initial recognition in the functional currencies at exchange rates approximating those ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the closing rate of exchange ruling at the
balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign
currency are translated using the exchange rates at the date when the fair value was determined.
Exchange differences arising on the
settlement of monetary items or on remeasuring monetary items at the balance sheet date are recognised in the Consolidated Statement of Operations.
The results and financial position of subsidiaries are translated into USD, the Group’s reporting currency, for consolidation into the financial statements using the following procedures:
•
Assets and liabilities at each balance sheet date presented are translated at the closing exchange rate at that balance sheet date; and
•
Income and expenses for each statement of operations period are translated at average exchange rates for the year, which approximates the exchange rates at the
dates of the transactions.
F-10
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS—(Continued)
(United States dollars in thousands, except number of shares and per share data)
All resulting unrealized exchange gains or losses are recognised as a separate component of equity as
accumulated other comprehensive income (loss). On disposal of a foreign operation, the cumulative amount of exchange differences recorded in equity relating to that foreign operation is recognised in the Consolidated Statement of Operations as a
component of the gain or loss on disposal.
Realized gains and losses resulting from foreign currency transactions are included in other
income in the Consolidated Statements of Operations.
(m)
Revenue Recognition
The Group generates revenue
from the design, fabrication, and production of precision engineered packing products. In some instances, the Group provides some or all of these services to its customers under the terms of a multiple-element sales arrangement. These arrangements
typically involve the sale of the packing products bundled with some or all of these services. When a sales arrangement involves multiple elements, the items included in the arrangement (deliverables) are evaluated pursuant to
EITF Issue No.
00-21, Revenue Arrangements with Multiple Deliverables
, to determine whether they represent separate units of accounting.
As the Group
does not qualify to account for the items included in multiple-element arrangements as separate units of accounting, the units are combined and accounted for as a single unit of accounting. Revenue for a combined unit of accounting is recognized
based on the method appropriate for the last delivered item, which typically is the proportional performance method based on units of delivery. All costs related to the design and fabrication of moulds are expensed as incurred.
Revenues arising from sale of goods and services are recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable,
collectibility is reasonably assured and the delivery of the product or services has occurred. This condition normally is met when the customer has taken title and assumed the risks and rewards of ownership of the product or when the Group can
objectively demonstrate that customer acceptance has occurred depending on the terms of the arrangement. The Group records taxes collected from customers on a net basis.
The Group provides rights of return for the packing products sold to customers. The value of any refund is limited to the sales price charged to the customer. Customers are required to return packing products within
30 to 45 days from the date of shipment from the Group, unless specifically requested in writing by the customer to extend the sales return period. Where a right of return exists, revenue for the Group is recorded when the return period has lapsed
or where the Group can reliably demonstrate that all customer-specified criteria of the delivered products are met. The Group evaluates its provisions for estimated returns based on historical returns. In accordance with
FAS 48 – Revenue
Recognition When a Right of Return Exists,
where the Group provides customers with a right of return, a provision is recognized for estimated returns.
(n)
Concentrations of Risk
Financial instruments which
are subject to credit risk consist principally of accounts receivable and cash and cash equivalents. With respect to accounts receivable, the Group mitigates its credit risk by selling primarily to well established companies and performing ongoing
credit evaluations. The Group has historically mitigated its risk with respect to cash and cash equivalents through diversification of its deposits into various reputable institutions.
(o)
Allowance for Doubtful Accounts
The collectibility
of the Group's accounts receivable is evaluated based on a combination of factors. In circumstances where the Group is aware of a specific customer’s inability to meet its financial obligation to
F-11
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS—(Continued)
(United States dollars in thousands, except number of shares and per share data)
the Group, a specific allowance for bad debts is recorded against amounts due. An allowance is also made based on the aging of receivables and the history of
uncollectible accounts receivable. Accounts receivable are stated net of such allowance.
(p)
Shipping and Handling
Costs incurred for shipping
and handling are included in cost of sales.
(q)
Product Warranty
The Group estimates the costs
that will be incurred under warranties for returns and replacement of defective goods and records a liability in the amount of such costs at the time the obligation is incurred. Factors that affect the Group’s warranty accrual include the
number of units sold, historical and anticipated rates of warranty claims and cost per claim. At each reporting date, the Group assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
(r)
Income Taxes
The Group accounts for income tax in
accordance with
SFAS No. 109 “Accounting for Income Taxes,”
which requires the asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred taxes are provided for the
estimated future tax effects attributable to temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, and for the expected future tax benefit from items including tax loss carry
forwards. Deferred tax assets and liabilities are measured using the enacted tax rates for the respective years of recovery or reversal anticipated. The effect from a change in tax rates is recognized in income in the period of enactment. A
valuation allowance is provided for deferred tax assets when it is more likely then not that some or all of the deferred tax assets will not be realized in the future.
FIN No. 48 prescribes a recognition threshold and measurement attribute, as well as criteria for subsequently recognizing, derecognizing and measuring uncertain tax positions for financial statement purposes. FIN No.
48 also requires expanded disclosure with respect to the uncertain tax positions. The adoption of FIN No. 48 on January 1, 2007 did not have a material impact on the Group’s consolidated financial position.
(s)
Earnings Per Share
Basic net income per common
share is computed by dividing net income attributable to common shareholders for the period by the weighted average number of common shares outstanding during the period. Net income attributable to common shareholders is calculated using the two
class method under Emerging Issues Task Force, or EITF, Issue No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128.” EITF No. 03-6 establishes standards regarding the computation of
earnings per share by companies that have issued securities other than common shares that contractually entitle the holder of such securities to participate in dividends and earnings of the Company. Pursuant to EITF 03-6, the two-class method of
computing basic earnings per share is required when an entity has participating securities. Dividends must be calculated for the participating security on undistributed earnings and are a reduction in the net income attributable to common
shareholders. Subsequent to January 2005, the Convertible contingently redeemable common shares are considered to have the same participating rights to that of the Seires A and B preferred shares. Assumed dividends on undistributed earnings are
allocated as if the entire net income were distributed and are based on the relationship of the weighted average number of common shares outstanding and the weighted average number of common shares outstanding if the preferred shares were converted
into common shares.
F-12
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS—(Continued)
(United States dollars in thousands, except number of shares and per share data)
Diluted net income per common share is computed by dividing the net income attributable to common
shareholders for the period by the weighted average number of ordinary and potential ordinary shares outstanding during the period, if the effect of potential ordinary shares is dilutive. Potential common shares include incremental shares of common
shares issuable upon the exercise of options, warrants, and the conversion of preferred securities. The Company’s potentially dilutive shares have not been included in the computation of diluted net income or loss per common share for periods
in which the result would be anti-dilutive. The dilutive net income attributable to convertible contingently redeemable common shares takes into account the effect of the change in allocated earnings as a resulting from any dilutive potential
ordinary shares.
(t)
Accumulated Other Comprehensive Income (Loss)
SFAS No. 130 “Reporting Comprehensive Income,”
establishes standards for reporting comprehensive income and its components in the financial statements. Comprehensive income is defined as the change in equity of a
company during a period from transactions and other events and circumstances excluding transactions resulting from investment by owners and distributions to owners. Accumulated other comprehensive income (loss) as of June 30, 2007 and December
31, 2006 consists of cumulative foreign currency translation adjustments.
(u)
Related Parties
Parties are considered to be
related to the Group if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Group. Related parties also include principal owners of the Group, its management,
members of the immediate families of principal owners of the Group and its management and other parties.
(v)
Operating Leases
Rental payments under operating
leases are expensed on a straight-line basis over the period of the respective lease terms.
(w)
Segment Information
The Group operates in one
segment for the design, development, manufacture and supply of precision engineered products and solutions for the automated transport and handling of semiconductor and electronic devices. All products are sold on a worldwide basis. In accordance
with
SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information
, the Group’s chief operating decision-makers have been identified as the President and the Board of Directors who review the operating results of
the Group to make decisions about allocating resources and assessing performance for the Group.
(x)
Advertising
Advertising cost relates to trade
exhibitions and fairs are expensed as incurred. Advertising expense for the 6 months ended June 30, 2007 and 2006 were $40 and $39, respectively.
(y)
Allocation of Parent Company Expenses
In
accordance with SEC Staff Accounting Bulletin Topic 1 B –
Allocation of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity
, the Group has recorded in its
consolidated Statement of Operations certain expenses incurred by the Parent Company, on behalf of the Group.
F-13
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS—(Continued)
(United States dollars in thousands, except number of shares and per share data)
(z)
New Pronouncements
In September 2006, the
Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, Fair Value Measurements
(“SFAS No. 157”) which defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Group is currently evaluating whether the adoption of SFAS No. 157 will have an impact on its consolidated financial position.
In February 2007, the FASB issued
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities –
including an amendment of FASB Statement No. 115.”
SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value
option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal year beginning after November 15, 2007. The Group is currently evaluating whether the adoption of SFAS
No. 159 will have an impact on its consolidated financial position.
(4)
REORGANIZATION OF THE COMPANY
On January 14,
2005, a reorganization agreement (“Agreement”) was signed between the Company’s shareholders and the Parent Company, a private shell company created on the date of the agreement. As part of the agreement, the Company’s
shareholders approved the conversion of all Convertible Preferred Shares of the Company into 13,166,667 common shares having a par value of S$0.20 per share. Following this conversion, the former Series A, B, and founding shareholders of the Group
exchanged a total of 15,166,667 common shares of the Group for 2,000,000 common shares of e.PAK Holdings Limited, 9,000,000 shares of e.PAK Holdings Limited Series A Convertible Preferred Shares, and 4,166,667 shares of e.PAK Holdings Limited Series
B Convertible Preferred Shares. Subsequent to this exchange, the Group was then 100% owned by the Parent Company. As a result of this share exchange, each of the Group’s former shareholders held the same ownership percentage, the same number of
shares, the same class of shares and each of the respective share classes maintained the same rights before and after the reorganization. As this reorganization was without substance, the reorganization was accounted for on a historical cost
carryover basis.
(5)
RESTRICTED CASH AND CASH EQUIVALENTS
Restricted
cash and cash equivalents consist of cash balances held by a bank as collateral for the Group’s short term borrowings. The fixed deposit is rolled forward on a monthly basis and bears interest at an average rate of 5.60% .
As of June 30 2007 and December 31, 2006, $390 and $381 respectively were held as restricted cash and cash equivalents.
F-14
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS—(Continued)
(United States dollars in thousands, except number of shares and per share data)
(6)
INVENTORIES
The components of inventories are as
follows:
June 30,
December 31,
2007
(Unaudited)
2006
Raw materials
$
4,457
$
4,330
Work-in-process
418
314
Finished goods
5,463
4,274
Consumables
70
76
$
10,408
$
8,994
Inventories written-off to cost of sales for the 6 months ended June 30, 2007 and year ended
December 31, 2006 was $110 and $228 respectively. Finished goods inventory include goods held on consignment by customers under consignment agreements totaled $773 and $1,668 as at June 30, 2007 and December 31, 2006 respectively.
(7)
SHARE-BASED COMPENSATION EXPENSE
The Group adopted
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”)
for all financial periods presented, which requires the Group to measure the cost of employee services received in exchange
for equity awards based on the grant date fair value. Straight-line method of expense attribution has been elected as the accounting policy of the Group, however, as the tranches of options are graded vested, the amount of compensation cost
recognized at any date is at least equal to the value of the vested portion of the award at that date.
On September 19, 1999, the
Group granted to its founders’ options (the “Founder Options”) to subscribe for up to 500,000 shares of Series A Preferred Share. The Founder Options were exercisable at any time from the date of grant for a period of 5 years or upon
the listing of the Group on a Recognized Stock Exchange, whichever is earlier (the “Founder Option Period”). The expected term used in calculating the fair value of the grant was 5 years, based on management’s assumption at the grant
date the Group would not successfully complete a listing before the expiry of the options. As these founder options were immediately exercisable, these Founder Options were expensed upon grant in 1999.
On March 2, 2000, the Group approved and adopted the e.PAK Directors’ and Employees’ Share Incentive Plan (the “Former Plan”).
The options were granted to the Directors, Executives, and Employees of the Group, and the options issued were approved separately by the Board through a Board of Directors’ resolution. On March 2, 2000 and September 4, 2002, the
Group obtained approval from the Board to grant 500,000 and 1,307,525 stock options, respectively, under the Former Plan. The options vested over four anniversary dates, with 25% of the options vesting on each annual anniversary of the option offer
letter.
On May 25, 2005, the Parent Company, adopted the e.PAK Directors and Employees Share Incentive Plan (the “New Plan”)
pursuant to the Reorganization Agreement dated January 18, 2005 between the Shareholders and e.PAK Holdings Limited (see note 3 on Reorganization of the Company). Although the replacement of the Former Plan with the New Plan constituted an
accounting modification, an analysis of the terms of the Plan concluded that there was no change in the fair value of the options before and after the modifications. The New Plan is currently in the name of and operated by the Parent Company,
however, the benefits of the share option plan accrue to individuals who are Directors, Executives, and Employees of e.PAK Resources (S) Pte Ltd and its subsidiaries. Share based compensation expense related to the grant of the Parent Company's
stock options to the Directors, Executives and Employees of the Group are recognized in the Group's financial statements as expense, with an offsetting capital contribution from the Parent Company.
F-15
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS—(Continued)
(United States dollars in thousands, except number of shares and per share data)
The New Plan’s key provisions are as follows:
The maximum number of unexercised share options currently permitted to be granted under the Plan is an amount equal to 15% of the authorized shares of the
Parent Company less 1,041,666 shares. Any further grant of share options in excess of the limit is subject to shareholders’ approval in a general meeting. The offer of a grant of share options must be accepted within 30 days from the date of
offer and upon payment of a nominal consideration of HK$ 1 (approximately US$ 0.13 at December 31, 2006) by the grantee. Share options granted generally vest in four years of equal pro-rata vesting. Each tranche of options vests over four
anniversary dates, with 25% of the options vest on each annual anniversary of the option offer letter date expire.
On May 25, 2005,
the Parent Company obtained approval from the Board of Directors to grant 300,000 options to acquire common shares of the Parent Company under the New Plan. Each tranche of options vests over four vesting dates, with 25% of options vesting on each
annual anniversary of the option offer letter date and expire in four years after vesting dates. The grants contain only service conditions. There are no grants with market or performance conditions.
In March 2007, the Parent Company extended the expiry period for 286,117 fully vested stock options held by 54 employees. As a result of this accounting
modification, the Group recognized additional compensation expense of $37 for the six months ended June 30, 2007. As of June 30, 2007, total unrecognized compensation cost related to share-based options and awards is $144 and the related
weighted-average period it is expected to recognized is 1.9 years.
A summary of option activity under the Plan as of June 30, 2007 and
changes during the 6 months period then ended is presented below:
Options
Exercise
Price
Weighted-
Average
Exercise
Price
Balance, December 31, 2006
1,786,457
US$
0.20
US$
0.20
Granted and Accepted
—
—
—
Exercised
—
—
—
Forfeited / Expired
—
—
—
Balance, June 30, 2007
1,786,457
US$
0.20
US$
0.20
F-16
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS—(Continued)
(United States dollars in thousands, except number of shares and per share data)
A summary of the status of the Group’s unvested options as of June 30, 2007, is as follow:
Year ended June 30,
2007 Weighted Average
Shares
Fair Value
Non-vested, January 1
175,000
$
1.39
Granted
—
—
Vested
(75,000
)
$
1.38
Forfeited
—
—
Non-vested, June 30
100,000
$
1.39
A summary of the Group’s outstanding share options as of June 30, 2007:
Outstanding Share
Options
Exercisable Share
Options
Exercise Price (US$)
Options
Weighted-
average
Exercise
Price
(US$)
Options
Weighted-
average
Exercise
Price
(US$)
$0.20
342,002
$
0.20
342,002
$
0.20
$0.20
1,144,455
$
0.20
1,144,455
$
0.20
$0.20
300,000
$
0.20
200,000
$
0.20
1,786,457
$
0.20
1,686,457
$
0.20
The share-based compensation cost that has been charged against income for those plans was $41 and
$165 for the 6 months ended June 30, 2007 and 2006, respectively.
(8)
GEOGRAPHIC INFORMATION
The Group currently
operates in one business segment; the design, development, manufacture and supply of precision engineered products and solutions for the automated transport and handling of semiconductor and electronic devices. The Group is not organized by market
and is managed and operated as one business. A single management team that reports to the chief operating decision makers comprehensively manages the entire business. The Group does not operate any material separate lines of business or separate
business entities with respect to its products or product development. Accordingly, the Group does not accumulate discrete financial information with respect to separate product lines and does not have separately reportable segments as defined by
SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information
.
F-17
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS—(Continued)
(United States dollars in thousands, except number of shares and per share data)
The following tables summarize total net sales, based upon the country to which sales to external
customers were made, and identifiable assets and property, plant and equipment, net attributed to significant countries:
6 Months ended
June 30,
2007
2006
Net Sales:
China *
$
5,629
$
5,237
Singapore
6,317
3,615
USA
2,898
2,347
Korea
1,173
1,746
Taiwan
1,099
1,295
Philippines
1,720
1,456
Europe
1,473
983
Others
154
32
$
20,463
$
16,711
6 Months ended
June 30,
2007
2006
Property, Plant and Equipment:
China*
$
14,956
$
12,789
Singapore
19
19
USA
22
23
Others
—
—
$
14,997
$
12,831
For the 6 months ended June 30, 2007 one customer (ST Microelectronics) accounted for 12% of
net sales. In the 6 months ended June 30, 2006, one customer (ST Microelectronics) accounted for 10% of net sales. In the 6 months ended June 30, 2007 and 2006, net sales to the Group’s top ten customers accounted for approximately
58% and 59%, respectively, of the Group’s net sales.
*
China includes Hong Kong.
(9)
COMMITMENTS
As of June 30, 2007, the Company
and its subsidiaries have contracted for future capital expenditures for property, plant and equipment of $1,532. Such expenditures will be made in 2007 and 2008.
(10)
FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
The Group’s principal financial instruments are comprised of long-term debt and fixed deposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial
assets and liabilities such as trade receivables and trade payables, which arise directly from its operations.
The main risks arising from
the Group's financial instruments are foreign exchange risk, interest rate risk, liquidity risk and credit risk. The Board of Directors reviews and agrees policies for managing each of these risks and they are summarized below.
F-18
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS—(Continued)
(United States dollars in thousands, except number of shares and per share data)
Interest rate risk
The Group obtains additional financing through bank borrowings. The Group's policy is to obtain the most favorable interest rates available without
increasing its foreign currency exposure.
Credit risk
Surplus funds are placed with reputable institutions.
Information relating to the Group's interest rate exposure is disclosed in the notes on the Group's borrowings.
The carrying
amount of cash and cash equivalents, trade receivable and other receivables represent the Group's maximum exposure to credit risk in relation to financial assets. No other financial assets carry a significant exposure to credit risk.
Liquidity risk
Short-term
funding is obtained from bank credit facilities.
Foreign exchange risk
The Group incurs a significant portion of its costs in Chinese Renminbi, which gives rise to transactional currency exposure for entities that do not have
a functional currency of the Chinese Renminbi.
Fair value
Fair value is defined as the amount at which the financial instrument could be exchanged in a current transaction between willing parties in an arm's
length transaction, other than in a forced or liquidation sale. Fair values are obtained from quoted market prices, discounted cash flow models and option pricing models as appropriate.
The following methods and assumptions are used to estimate the fair value of each class of financial instruments:
Cash and cash equivalents and short-term receivables
The carrying amounts of these balances approximate fair value due to the relatively short-term maturity of these financial instruments.
Short-term borrowings and other current liabilities
The carrying amounts of these balances
approximate fair value because of the relatively short-term maturity and variable rates of these financial instruments.
Long-term bank
debt
The carrying amount of the long-term debt approximate their fair values, as the debt is based on floating market interest rates.
Disclosure of the nature of the financial instruments and their significant terms and conditions that could affect the amount, timing and
certainty of future cash flows is presented in the respective notes to the financial statements, where applicable.
F-19
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS—(Continued)
(United States dollars in thousands, except number of shares and per share data)
(11)
SUBSEQUENT EVENTS
The Group has entered into
negotiations regarding an acquisition agreement with Ascend Acquisition Corp. (“Ascend”), a publicly traded company in the United States of America, Ascend’s wholly owned subsidiary “ACL”, and the Parent Company.
Under the terms of the acquisition agreement, Ascend and ACL will be combined in the redomestication merger, with the continuing entity, Continuing
Pubco, existing as an exempted Company under the law of Bermuda. Continuing Pubco will acquire all of the Company’s outstanding shares from the Parent Company in the acquisition. All of the outstanding options to purchase common shares of the
Parent Company will be assumed by Continuing Pubco and such options (“Assumed Options”) will entitle the holders to purchase common shares of Continuing Pubco. All of the current security holders of Ascend, together with the Parent Company
and holders of the Parent Company Options will become the security holders of Continuing Pubco. Continuing Pubco will be a publicly reporting company, registered under the United States federal securities laws.
F-20
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
e.PAK Resources (S) Pte Ltd
We have audited the
accompanying consolidated balance sheets of e.PAK Resources (S) Pte Ltd and subsidiaries (the “Group”) as of December 31, 2006 and 2005 and the related consolidated statements of operations, convertible contingently redeemable
preferred shares, convertible contingently redeemable common shares and shareholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of
the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted
our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. We were not engaged to perform an audit of the Group’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the consolidated financial position of e.PAK Resources (S) Pte Ltd and subsidiaries at December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
The
accompanying financial statements have been prepared assuming that the Group will continue as a going concern. As described in Note 2, the Group, a wholly owned subsidiary of e.PAK Holdings Limited, has an obligation, at the option of the holders of
the Group’s convertible contingently redeemable common shares, to pay in full the redemption value of these convertible contingently redeemable common shares at any time on or after the occurrence of e.PAK Holdings Limited’s failure to
complete a public listing on or before December 31, 2007. The Group does not have sufficient cash to repay the potential obligation arising from these convertible contingently redeemable common shares when they become contingently redeemable on
December 31, 2007. These conditions raise substantial doubt about the Group’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
As
discussed in Note 18 to the consolidated financial statements, the Group adopted the provisions of
SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”
“SFAS
No. 150” on January 1, 2004. In accordance with the provisions of SFAS No. 150, the Group recorded a cumulative effect of change in accounting principle of $274,935 to reclassify a financial instrument from mezzanine equity to a
liability at fair value.
Ernst & Young
Singapore
October 31, 2007
F-21
e.PAK RESOURCES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(United States dollars in thousands, except number of shares and per share data)
December 31,
2006
2005
ASSETS
Current assets:
Cash and cash equivalents
$
2,624
$
1,979
Restricted cash and cash equivalents
5
381
364
Accounts receivable, net of allowance for doubtful accounts of $28 and $29, at December 31, 2006 and 2005, respectively
6
6,535
5,733
Inventories
7
8,994
5,834
Due from Parent Company
25
—
125
Deferred tax assets
14
8
7
Other current assets
8
462
527
Total current assets
$
19,004
$
14,569
Long-term deposits
13
13
Property, plant and equipment, net
9
14,506
11,019
Total assets
$
33,523
$
25,601
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable
$
9,432
$
7,487
Accrued liabilities
10
1,571
1,185
Current maturities of long-term debt
12
501
310
Short-term borrowings
13
4,964
2,921
Deferred tax liabilities
14
—
2
Short-term loan from Parent Company
25
4,903
5,053
Income taxes payable
930
792
Total current liabilities
$
22,301
$
17,750
Non-current liabilities:
Long-term debt, less current maturities
12
1,061
274
Deferred tax liabilities
14
147
—
Redeemable common shares:
Convertible contingently redeemable common shares at redemption value, (2005: Par Value S$0.20): 13,166,667
24,205
22,145
Shareholders’ deficit:
Common shares, 24,000,000 shares authorized; issued and outstanding shares, (2005: Par value S$0.20): 2,000,000
400
235
Common share warrants
19
19
Accumulated deficit
(14,698
)
(14,889
)
Non-distributable reserves
19
121
58
Accumulated other comprehensive (loss) income
(33
)
9
Total shareholders’ deficit
$
(14,191
)
$
(14,568
)
Total liabilities and shareholders’ deficit
$
33,523
$
25,601
The accompanying notes are an integral part of these financial statements.
F-22
e.PAK RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(United States dollars in thousands, except number of shares and per share data)
Year ended December 31,
2006
2005
2004
Net sales
$
36,146
$
27,013
$
21,732
Cost of sales
(23,083
)
(17,961
)
(14,557
)
Gross profit
13,063
9,052
7,175
Selling, general and administrative expenses
(9,797
)
(8,027
)
(7,009
)
Research and development
(180
)
(158
)
(102
)
Operating profit
3,086
867
64
Interest income
22
15
3
Other income
15
40
65
Interest expense
(354
)
(156
)
(168
)
Other expense
(268
)
(140
)
(55
)
Income (loss) before income taxes
2,501
626
(91
)
Income tax expense
14
(322
)
(523
)
(272
)
Net income (loss) before cumulative effect of change in accounting principle
2,179
103
(363
)
Cumulative effect of change in accounting principle
17
—
—
275
Net income (loss)
2,179
103
(88
)
Accretion of convertible contingently redeemable preferred shares
—
—
(203
)
Issuance of Series B common share warrants
—
(1,271
)
—
Accretion of convertible contingently redeemable common shares
(2,060
)
(3,132
)
—
Net income (loss) attributable to common shareholders
$
119
$
(4,300
)
$
(291
)
The accompanying notes are an integral part of these financial statements.
F-23
e.PAK RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONT’D)
(United States dollars in
thousands, except number of shares and per share data)
Year ended December 31,
2006
2005
2004
Basic net income (loss) per common share before cumulative effect of change in accounting principle
0.01
(0.28
)
(0.04
)
Cumulative effect of change in accounting principle per common share
—
—
0.02
Basic net income (loss) per common share
0.01
(0.28
)
(0.02
)
Basic net income (loss) per Series A preferred share before cumulative effect of change in accounting principle
N/A
(0.28
)
(0.04
)
Cumulative effect of change in accounting principle per Series A preferred share
N/A
—
0.02
Basic net income (loss) per Series A convertible preferred share
N/A
(0.28
)
(0.02
)
Basic net income (loss) per Series B convertible preferred share before cumulative effect of change in accounting principle
N/A
(0.28
)
(0.04
)
Cumulative effect of change in accounting principle per Series B convertible preferred share
N/A
—
0.02
Basic net income (loss) per Series B convertible preferred share
N/A
(0.28
)
(0.02
)
Basic net income (loss) per convertible contingently redeemable common share before cumulative effect of change in accounting
principle
0.01
(0.28
)
N/A
Cumulative effect of change in accounting principle per convertible contingently redeemable common share
—
—
N/A
Basic net income (loss) per convertible contingently redeemable common share
0.01
(0.28
)
N/A
Diluted net income (loss) per common share before cumulative effect of change in accounting principle
—
(0.28
)
(0.04
)
Cumulative effect of change in accounting principle per common share
—
—
0.02
Diluted net income (loss) per common share
—
(0.28
)
(0.02
)
Diluted net income (loss) per convertible contingently redeemable common share before cumulative effect of change in accounting
principle
0.01
(0.28
)
N/A
Cumulative effect of change in accounting principle per convertible contingently redeemable common share
—
—
N/A
Diluted net income (loss) per convertible contingently redeemable common share
0.01
(0.28
)
N/A
Common shares used in basic net income (loss) per common share calculation
2,000,000
2,000,000
2,000,000
Participating Preferred shares used in basic net income (loss) per Series A share calculation
—
443,836
9,000,000
Participating Preferred shares used in basic net income (loss) per Series B share calculation
—
205,479
4,166,667
Shares used basis net income (loss) per convertible contingently redeemable common share calculation
13,166,667
12,517,352
—
15,166,667
15,166,667
15,166,667
Common shares used in diluted net income (loss) per common share calculation
4,651,067
2,000,000
2,000,000
Shares used in diluted net income (loss) per convertible contingently redeemable common share calculation
13,166,667
12,517,352
—
The accompanying notes are an integral part of these financial statements.
F-24
e.PAK RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONT’D)
(United States dollars in
thousands, except number of shares and per share data)
Reconciliation of basic net income to diluted net income attributable to
convertible contingently redeemable common shareholders.
2006
Basic net income attributable to convertible contingently redeemable common shareholders
$
103
Additional allocation to common shareholders - impact of potential common shares
(15
)
Dilutive net income attributable to convertible contingently redeemable common shareholders
$
88
Reconciliation of weighted average number of common shares used in the basic earnings per share
calculation to diluted earnings per share calculation.
Year ended December 31,
2006
2005
2004
Weighted average common shares used in basic net income (loss) per ordinary share calculations
2,000,000
2,000,000
2,000,000
Dilutive effect of Series B convertible contingently redeemable common share warrants issued by Parent Company
941,985
—
—
Dilutive effect of Common share warrants
125,167
—
—
Dilutive effect of employee share options
1,583,915
—
—
Weighted average common shares used in the diluted net income (loss) per ordinary share calculation
4,651,067
2,000,000
2,000,000
The following securities were not included in the computation of diluted earnings per common share
because to do so would have been antidilutive for the periods presented.
Year ended December 31,
2006
2005
2004
Series A convertible preferred shares
N/A
443,836
9,000,000
Series A preferred share warrants
N/A
N/A
112,403
Series B convertible preferred shares
N/A
205,479
4,166,667
Series B convertible contingently redeemable common share warrants issued by Parent Company
N/A
720,401
N/A
Common share warrants
N/A
102,857
77,838
Employee stock options
N/A
1,437,079
1,225,122
Convertible contingently redeemable common shares
18,269,306
17,619,991
N/A
18,269,306
20,529,643
14,582,030
The accompanying notes are an integral part of these financial statements.
F-25
e.PAK RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONVERTIBLE CONTINGENTLY REDEEMABLE PREFERRED
SHARES, CONVERTIBLE CONTINGENTLY REDEEMABLE COMMON SHARES AND SHAREHOLDERS’ EQUITY (DEFICIT)
(United States dollars in
thousands, except number of shares)
Series A
Convertible
Contingently
Redeemable
Preferred
Shares
Series B
Convertible
Contingently
Redeemable
Preferred
Shares - Par
Series A
Convertible
Preferred
Share
Warrants
Total
Convertible
Contingently
Redeemable
Common
Shares
Outstanding
Convertible
Contingently
Redeemable
Common
Shares
Total
Balance at December 31, 2003
9,000,000
4,166,667
$
12,575
$
6,235
$
772
$
19,582
Reclassification of Series A preferred share warrants upon adoption of FAS 150
(772
)
(772
)
Accretion of convertible contingently redeemable preferred shares
131
72
203
Reclassification of convertible preferred shares – due to waiver
(9,000,000
)
(4,166,667
)
(12,706
)
(6,307
)
(19,013
)
Reclassification of Series A convertible preferred share warrants—due to waiver
Expiration of Series A convertible preferred share warrants
Share-based compensation expense
Transfer of non-distributable reserve
Net loss
Foreign currency translation adjustment
Total comprehensive income
Balance at December 31, 2004
—
—
—
—
—
—
—
—
—
Conversion of preferred shares to convertible contingently redeemable common shares
13,166,667
19,013
19,013
Share-based compensation expense
Capital contribution for share-based compensation from Parent Company
Issuance of Series B common share warrants by Parent Company for benefit of the Group
Recognition of Series B common share warrants as a reduction to income attributable to common shareholders
Accretion of convertible contingently redeemable common shares
3,132
3,132
Transfer of non-distributable reserve
Net income
Foreign currency translation adjustment
Total comprehensive income
Balance at December 31, 2005
—
—
—
—
—
13,166,667
$
22,145
$
22,145
Capital contribution for share-based compensation from Parent Company
Effect of Singapore Companies (Amendment) Act 2005
Accretion of convertible contingently redeemable common share
2,060
2,060
Transfer of non-distributable reserve
Net income
Foreign currency translation adjustment
Total comprehensive income
Balance at December 31, 2006
—
—
—
—
—
13,166,667
$
24,205
$
24,205
The accompanying notes are an integral part of these financial statements.
F-26
e.PAK RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONVERTIBLE CONTINGENTLY REDEEMABLE PREFERRED SHARES, CONVERTIBLE CONTINGENTLY REDEEMABLE COMMON SHARES AND SHAREHOLDERS’ EQUITY (DEFICIT)
(United States dollars in thousands, except number of shares)
Common
Shares
Outstanding
Series A
Convertible
Preferred
Shares
Outstanding
Series B
Convertible
Preferred
Shares
Outstanding
Common
Shares
Common
Share
Warrants
Series A
Convertible
Preferred
Shares
Series B
Convertible
Preferred
Shares
Series A
Convertible
Preferred
Share
Warrants
Additional
Paid-in
Capital
Accumulated
Deficit
Non
Distributable
Reserves
Accumulated
Other
Compre-
hensive
Income/
(Loss)
Compre-
hensive
Income/
(Loss)
Total
Balance at December 31, 2003
2,000,000
$
235
$
19
$
(12,717
)
$
16
$
2
-
$
(12,445
)
Reclassification of Series A preferred share warrants upon adoption of FAS 150
Accretion of convertible contingently redeemable preferred shares
(203
)
(203
)
Reclassification of convertible preferred shares – due to waiver
9,000,000
4,166,667
12,706
6,307
19,013
Reclassification of Series A convertible preferred share warrants – due to waiver
483
483
Expiration of Series A convertible preferred share warrants
(483
)
483
—
Share-based compensation expense
183
183
Transfer of non-distributable reserve
(7
)
7
—
Net loss
(88
)
(88
)
(88
)
Foreign currency translation adjustment
11
11
11
Total comprehensive income
$
(77
)
Balance at December 31, 2004
2,000,000
9,000,000
4,166,667
$
235
$
19
$
12,706
$
6,307
—
$
666
$
(13,015
)
$
23
$
13
$
6,954
Conversion of preferred shares to convertible contingently redeemable common shares
(9,000,000
)
(4,166,667
)
(12,706
)
(6,307
)
(19,013
)
Share-based compensation expense
72
72
Capital contribution for share-based compensation from Parent Company
452
452
Issuance of Series B common share warrants by Parent Company for benefit of the Group
1,271
1,271
Recognition of Series B common share warrants as reduction of income attributable to common shareholders
(1,271
)
(1,271
)
Accretion of convertible contingently redeemable common shares
(1,190
)
(1,942
)
(3,132
)
Transfer of non-distributable reserve
(35
)
35
—
Net income
103
103
103
Foreign currency translation adjustment
(4
)
(4
)
(4
)
Total comprehensive income
$
99
Balance at December 31, 2005
2,000,000
—
—
$
235
$
19
—
—
—
—
$
(14,889
)
$
58
$
9
$
(14,568
)
The accompanying notes are an integral part of these financial statements.
F-27
e.PAK RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONVERTIBLE CONTINGENTLY REDEEMABLE PREFERRED SHARES, CONVERTIBLE CONTINGENTLY REDEEMABLE COMMON SHARES AND SHAREHOLDERS’ EQUITY (DEFICIT)
(United States dollars in thousands, except number of shares)
Common
Shares
Outstanding
Series A
Convertible
Preferred
Shares
Outstanding
Series B
Convertible
Preferred
Shares
Outstanding
Common
Shares
Common
Share
Warrants
Series A
Convertible
Preferred
Shares
Series B
Convertible
Preferred
Shares
Series A
Convertible
Preferred
Share
Warrants
Additional
Paid-in
Capital
Accumulated
Deficit
Non
Distributable
Reserves
Accumulated
Other
Compre-
hensive
Income/
(Loss)
Compre-
hensive
Income/
(Loss)
Total
Capital contribution for share-based compensation from Parent Company
300
300
Effect of Singapore Companies (Amendment) Act 2005
165
(165
)
—
Accretion of convertible contingently redeemable common share
(135
)
(1,925
)
(2,060
)
Transfer of non-distributable reserve
(63
)
63
—
Net income
2,179
2,179
2,179
Foreign currency translation adjustment
(42
)
(42
)
(42
)
Total comprehensive income
$
2,137
Balance at December 31, 2006
2,000,000
—
—
$
400
$
19
—
—
—
—
$
(14,698
)
$
121
$
(33
)
$
(14,191
)
The accompanying notes are an integral part of these financial statements.
F-28
e.PAK RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(United States dollars in thousands)
Year ended December 31,
2006
2005
2004
Cash flows from operating activities
Net income (loss)
$
2,179
$
103
$
(88
)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment
2,300
1,911
1,679
Share-based compensation
300
524
183
(Recovery) provision for doubtful accounts
6
6
7
Write-off of inventory
228
155
98
Adjustment for fair value of Series A warrants
—
—
(14
)
Deferred tax expense (benefit)
144
48
(53
)
Cumulative effective of change in accounting principle
—
—
(275
)
Foreign exchange differences
83
73
(2
)
Increase (decrease) in cash from changes in:
Accounts receivable
(808
)
(1,769
)
(1,017
)
Inventories
(3,388
)
(1,500
)
(2,194
)
Due from Parent Company
125
(125
)
—
Other current assets
65
(128
)
(218
)
Accounts payable
10,668
6,492
6,389
Accrued liabilities
391
245
336
Income tax payables
138
467
325
Net cash flows provided by operating activities
12,431
6,502
5,156
Cash flows from investing activities
Purchase of property, plant and equipment
(5,099
)
(3,306
)
(3,321
)
Net cash flows used in investing activities
(5,099
)
(3,306
)
(3,321
)
Cash flows from financing activities
Increase in restricted cash and cash equivalents
(17
)
(10
)
(4
)
Proceeds from short-term borrowings
19,417
10,172
10,657
Repayment of short-term borrowings
(26,868
)
(15,278
)
(14,644
)
Proceeds from long-term debt
1,622
443
477
Repayment of long-term debt
(644
)
(269
)
(67
)
Proceeds from loans from Parent Company
—
2,870
—
Repayment of loans from Parent Company
(150
)
—
—
Proceeds from loans from shareholders
—
—
2,135
Net cash flows used in financing activities
(6,640
)
(2,072
)
(1,446
)
Net increase in cash and cash equivalents
692
1,124
389
Cash and cash equivalents at beginning of year
1,979
856
456
Effects of exchange rates on cash and cash equivalents
(47
)
(1
)
11
Cash and cash equivalents at end of year
$
2,624
$
1,979
$
856
Supplemental cash flow disclosures:
Cash paid for interest
346
155
127
Cash paid for income taxes
40
8
—
Non-cash purchase of property, plant and equipment through accounts payable
688
—
287
Non-cash settlement of accounts payable through issuance of notes payable
9,494
6,042
4,741
The accompanying notes are an integral part of these financial statements.
F-29
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(United States dollars in thousands, except number of shares and per share data)
(1)
DESCRIPTION OF BUSINESS
e.PAK Resources
(S) Pte Ltd (the “Company”) and subsidiaries (the “Group”) is a full-service designer, manufacturer and supplier of precision engineered products and solutions for the automated transport and handling of semiconductor and
electronics devices. The Group operates large scale design and manufacturing facilities in Shenzhen, Peoples Republic of China (the “PRC”), with additional sales design and application engineering operations located in offices servicing
North America, Europe and Asia. The Group’s precision manufacturing handling solutions provide the Group’s customers with automated manufacturing, handling and transportation of their critical semiconductor and electronic devices.
The Company is incorporated in the Republic of Singapore. The Company is a wholly-owned subsidiary of e.PAK Holdings Limited (“Parent
Company”), incorporated in Hong Kong.
(2)
Going Concern
The accompanying financial
statements have been prepared assuming that the Group will continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this uncertainty. The Group has an obligation at the option of the holders of the Group’s convertible contingently redeemable common shares, to pay in full the redemption
value of convertible contingently redeemable common shares at any time on or after the occurrence of the Parent Company failing to complete a public listing by December 31, 2007 (Note 16). The Group and the Parent Company are currently in
negotiations regarding an acquisition agreement with a publicly traded company in the United States of America which, in management’s opinion, will occur by the first quarter of 2008 (Note 27). In line with the terms of the Parent Company
shareholder agreement (Note 16), the transaction with the publicly traded company, if it occurs, will cancel the potential obligation to redeem the convertible contingently redeemable common shares. If the Group is unable to complete this
acquisition, the Group does not have sufficient cash to repay the obligation arising from the convertible contingently redeemable common shares when they become contingently redeemable on December 31, 2007. These conditions raise substantial
doubt about the Group’s ability to continue as a going concern.
(3)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of Consolidation
The consolidated financial
statements comprise the financial statements of the Company and its Subsidiaries. The financial statements of the subsidiaries are prepared at the same reporting dates as the Company. All intra-group balances, income and expenses and profits and
losses resulting from intra-group transactions are eliminated in consolidation. Subsidiaries are consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such
control ceases.
(b)
Use of Estimates
The preparation of consolidated
financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ from
those estimates.
(c)
Cash and Cash Equivalents
Cash and cash
equivalents consist of cash and highly liquid investments with maturities of three months or less when purchased.
F-30
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
(d)
Restricted Cash and Cash Equivalents
Restricted
cash and cash equivalents represents amounts used as collateral for the Group’s short term borrowings.
(e)
Share-Based Compensation
In December 2004, the
Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”)
No. 123R, Share-Based Payment
(“SFAS 123R”). SFAS No. 123R is a revision of
FASB Statement
No. 123, “Accounting for Stock-Based Compensation,”
and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends
SFAS No. 95,
“Statement of Cash Flows,”
and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in exchange for share-based payment compensation. SFAS
No. 123R requires a public entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost is recognized over the period during which
an employee is required to provide services in exchange for the award. The Group has elected to retroactively adopt the provision of SFAS 123 (R) for all periods.
(f)
Inventories
Inventories are stated at the lower of
cost or market. Raw materials which comprise cost of purchases and all direct expenditures are determined on a weighted average cost (WAC) basis. Finished goods and work-in-progress comprise costs of direct materials, direct labor and a proportion
of manufacturing overheads based on normal operating capacity determined on a WAC basis. Consumables include items such as uniforms and gloves.
Market value for finished goods and work-in-progress is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated selling costs. Market value for raw materials is the estimated
replacement cost. An allowance for loss on obsolescence is provided where appropriate.
(g)
Property, Plant, and Equipment, net
Property,
plant and equipment are recorded at historical cost. Depreciation of property, plant and equipment is computed using the straight-line method based on the following estimated useful lives of the assets:
Leasehold improvements
The shorter of the useful life of the asset or the lease term
Furniture and fittings
5 years
Office and factory equipment
5 to 10 years
Machinery, tooling and moulds
5 to 10 years
Repair and maintenance costs are expensed when incurred.
(h)
Impairment of Long-Lived Assets
The Group accounts
for long-lived assets in accordance with
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
which requires impairment losses to be recorded on long-lived assets used in operations when indicators of
impairment exist. Reviews are performed to determine whether the carrying value of assets is impaired when impairment indicators exist. The Group determines the existence of impairment by comparing the expected future cash flows (undiscounted and
without interest
F-31
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
charges) to the net asset carrying value. If the carrying values exceed the undiscounted cash flows, the impairment loss is measured at the amount by which
the carrying amount of the asset exceeds the fair value of the long-lived assets.
(i)
Research and Development
Research and development
expenditures are expensed in the period incurred.
(j)
Fair Value of Financial Instruments
The carrying
value of cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings approximate fair value due to the short maturity of those instruments and in some cases, are subject to variable interest rates.
(k)
Internally Developed Patents
The costs of
internally developed patents are expensed in the period incurred.
(l)
Foreign Currency Translation
The Group considers
the United States Dollar (“USD”) as their functional currency except for one subsidiary in China whose functional currency is the Chinese Renminbi. The Group’s reporting currency is the United States Dollar (“USD”).
Transactions in foreign currencies are measured in the respective functional currencies of the Company or its subsidiaries and are recorded
on initial recognition in the functional currencies at exchange rates approximating those ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the closing rate of exchange ruling at the
balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign
currency are translated using the exchange rates at the date when the fair value was determined.
Exchange differences arising on the
settlement of monetary items or on remeasuring monetary items at the balance sheet date are recognised in the Consolidated Statement of Operations.
The results and financial position of subsidiaries are translated into USD, the Group’s reporting currency, for consolidation into the financial statements using the following procedures:
•
Assets and liabilities at each balance sheet date presented are translated at the closing exchange rate at that balance sheet date; and
•
Income and expenses for each statement of operations period are translated at average exchange rates for the year, which approximates the exchange rates at the
dates of the transactions.
All resulting unrealized exchange gains or losses are recognised as a separate component of
equity as accumulated other comprehensive income (loss). On disposal of a foreign operation, the cumulative amount of exchange differences recorded in equity relating to that foreign operation is recognised in the Consolidated Statement of
Operations as a component of the gain or loss on disposal.
Realized gains and losses resulting from foreign currency transactions are
included in other income in the Consolidated Statements of Operations.
F-32
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
(m)
Revenue Recognition
The Group generates revenue
from the design, fabrication, and production of precision engineered packing products. In some instances, the Group provides some or all of these services to its customers under the terms of a multiple-element sales arrangement. These arrangements
typically involve the sale of the packing products bundled with some or all of these services. When a sales arrangement involves multiple elements, the items included in the arrangement (deliverables) are evaluated pursuant to
EITF Issue No.
00-21, Revenue Arrangements with Multiple Deliverables
, to determine whether they represent separate units of accounting.
As the Group
does not qualify to account for the items included in multiple-element arrangements as separate units of accounting, the units are combined and accounted for as a single unit of accounting. Revenue for a combined unit of accounting is recognized
based on the method appropriate for the last delivered item, which typically is the proportional performance method based on units of delivery. All costs related to the design and fabrication of moulds are expensed as incurred.
Revenues arising from sale of goods and services are recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable,
collectibility is reasonably assured and the delivery of the product or services has occurred. This condition normally is met when the customer has taken title and assumed the risks and rewards of ownership of the product or when the Group can
objectively demonstrate that customer acceptance has occurred depending on the terms of the arrangement.
The Group provides rights of
return for the packing products sold to customers. The value of any refund is limited to the sales price charged to the customer. Customers are required to return packing products within 30 to 45 days from the date of shipment from the Group, unless
specifically requested in writing by the customer to extend the sales return period. Where a right of return exists, revenue for the Group is recorded when the return period has lapsed or where the Group can reliably demonstrate that all
customer-specified criteria of the delivered products are met. The Group evaluates its provisions for estimated returns based on historical returns. In accordance with FAS 48 – Revenue Recognition When a Righ
t of Return Exists
, where the
Group provides customers with a right of return, a provision is recognized for estimated returns.
(n)
Concentrations of Risk
Financial instruments which
are subject to credit risk consist principally of accounts receivable and cash and cash equivalents. With respect to accounts receivable, the Group mitigates its credit risk by selling primarily to well established companies and performing ongoing
credit evaluations. The Group has historically mitigated its risk with respect to cash and cash equivalents through diversification of its deposits into various reputable institutions.
(o)
Allowance for Doubtful Accounts
The collectibility
of the Group’s accounts receivable is evaluated based on a combination of factors. In circumstances where the Group is aware of a specific customer’s inability to meet its financial obligation to the Group, a specific allowance for bad
debts is recorded against amounts due. An allowance is also made based on the aging of receivables and the history of uncollectible accounts receivable. Accounts receivable are stated net of such allowance.
(p)
Shipping and Handling
Costs incurred for shipping
and handling are included in cost of sales.
F-33
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
(q)
Product Warranty
The Group estimates the costs
that will be incurred under warranties for returns and replacement of defective goods and records a liability in the amount of such costs at the time the obligation is incurred. Factors that affect the Group’s warranty accrual include the
number of units sold, historical and anticipated rates of warranty claims and cost per claim. At each reporting date, the Group assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
(r)
Income Taxes
The Group accounts for income tax in
accordance with
SFAS No. 109 “Accounting for Income Taxes,”
which requires the asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred taxes are provided for the
estimated future tax effects attributable to temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, and for the expected future tax benefit from items including tax loss carry
forwards. Deferred tax assets and liabilities are measured using the enacted tax rates for the respective years of recovery or reversal anticipated. The effect from a change in tax rates is recognized in income in the period of enactment. A
valuation allowance is provided for deferred tax assets when it is more likely then not that some or all of the deferred tax assets will not be realized in the future.
(s)
Earnings Per Share
Basic net income per common
share is computed by dividing net income attributable to common shareholders for the period by the weighted average number of common shares outstanding during the period. Net income attributable to common shareholders is calculated using the two
class method under Emerging Issues Task Force, or EITF, Issue No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128.” EITF No. 03-6 establishes standards regarding the computation of
earnings per share by companies that have issued securities other than common shares that contractually entitle the holder of such securities to participate in dividends and earnings of the Company. Pursuant to EITF 03-6, the two-class method of
computing basic earnings per share is required when an entity has participating securities. Dividends must be calculated for the participating security on undistributed earnings and are a reduction in the net income attributable to common
shareholders. Prior to their conversion to ordinary shares in January 2005, the Company’s Series A and B preferred shares were participating securities as they had the right to dividends should dividends be declared on common shares. Subsequent
to January 2005, the Convertible contingently redeemable common shares are considered to have the same participating rights to that of the Series A and B preferred shares. Assumed dividends on undistributed earnings are allocated as if the entire
net income were distributed and are based on the relationship of the weighted average number of common shares outstanding and the weighted average number of common shares outstanding if the preferred shares were converted into common shares.
Diluted net income per common share is computed by dividing the net income attributable to common shareholders for the period by the
weighted average number of ordinary and potential ordinary shares outstanding during the period, if the effect of potential ordinary shares is dilutive. Potential common shares include incremental shares of common shares issuable upon the exercise
of options, warrants, and the conversion of preferred securities. The Company’s potentially dilutive shares have not been included in the computation of diluted net income or loss per common share for periods in which the result would be
anti-dilutive. The dilutive net income attributable to convertible contingently redeemable common shares takes into account the effect of the change in allocated earnings as a resulting from any dilutive potential ordinary shares.
F-34
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
(t)
Accumulated Other Comprehensive Income (Loss)
SFAS No. 130 “Reporting Comprehensive Income,”
establishes standards for reporting comprehensive income and its components in the financial statements. Comprehensive income is defined as the change in equity of a
company during a period from transactions and other events and circumstances excluding transactions resulting from investment by owners and distributions to owners. Accumulated other comprehensive income (loss) as of December 31, 2006 and 2005
consists of cumulative foreign currency translation adjustments.
(u)
Related Parties
Parties are considered to be
related to the Group if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Group. Related parties also include principal owners of the Group, its management,
members of the immediate families of principal owners of the Group and its management and other parties.
(v)
Operating Leases
Rental payments under operating
leases are expensed on a straight-line basis over the period of the respective lease terms.
(w)
Segment Information
The Group operates in one
segment for the design, development, manufacture and supply of precision engineered products and solutions for the automated transport and handling of semiconductor and electronic devices. All products are sold on a worldwide basis. In accordance
with
SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information
, the Group’s chief operating decision-makers have been identified as the President and the Board of Directors who review the operating results of
the Group to make decisions about allocating resources and assessing performance for the Group.
(x)
Advertising
Advertising cost relates to trade
exhibitions and fairs are expensed as incurred. Advertising expense for the years ended December 31, 2006, 2005 and 2004 were $60, $71 and $43, respectively.
(z)
Allocation of Parent Company Expenses
In
accordance with SEC Staff Accounting Bulletin Topic 1 B –
Allocation of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity
, the Group has recorded in its
consolidated Statement of Operations certain expenses incurred by the Parent Company, on behalf of the Group.
(aa)
New Pronouncements
In March 2006, the Emerging
Issues Task Force (“EITF”) reached a consensus on Issue No. 06-3,
How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)
.
EITF 06-3 provides guidance on presentation of any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer. As per EITF 06-3, the presentation of taxes on either a gross
(included in
F-35
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that should be disclosed. In addition, for any such taxes that
are reported on a gross basis, a Company should disclose the amounts of taxes in interim and annual financial statements for each period for which income statement is presented if these amounts are significant. The EITF 06-3 guidance is applicable
to financial reports for interim and annual reporting periods beginning after December 15, 2006. Earlier application is permitted. The Group has historically and will continue to record taxes collected from customers on a net basis.
Accordingly, the adoption of EITF 06-3 will not have an effect on the Group’s results of operations or financial position.
In July
2006, the FASB issued
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
(“FIN No. 48”) which prescribes a recognition threshold and measurement
attribute, as well as criteria for subsequently recognizing, derecognizing and measuring uncertain tax positions for financial statement purposes. FIN No. 48 also requires expanded disclosure with respect to the uncertain tax positions. FIN
No. 48 is effective for fiscal years beginning after December 15, 2006, and the impact on adoption, if any, is required to be recognized as a change in accounting principle through a cumulative-effect adjustment to retained earnings as of
the beginning of the year of adoption. The Group is currently evaluating whether the adoption of FIN No. 48 will have an impact on its consolidated financial position.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, Fair Value Measurements
(“SFAS
No. 157”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting
pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Group is
currently evaluating whether the adoption of SFAS No. 157 will have an impact on its consolidated financial position.
In February
2007, the FASB issued
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115.”
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective
for fiscal year beginning after November 15, 2007. The Group is currently evaluating whether the adoption of SFAS No. 159 will have an impact on its consolidated financial position.
(4)
REORGANIZATION OF THE COMPANY
On January 14,
2005, a reorganization agreement (“Agreement”) was signed between the Company’s shareholders and the Parent Company, a private shell company created on the date of the agreement. As part of the agreement, the Company’s
shareholders approved the conversion of all Convertible Preferred Shares of the Company into 13,166,667 common shares having a par value of S$0.20 per share. Following this conversion, the former Series A, B, and founding shareholders of the Group
exchanged a total of 15,166,667 common shares of the Group for 2,000,000 common shares of e.PAK Holdings Limited, 9,000,000 shares of e.PAK Holdings Limited Series A Convertible Preferred Shares, and 4,166,667 shares of e.PAK Holdings Limited Series
B Convertible Preferred Shares. Subsequent to this exchange, the Group was then 100% owned by the Parent Company. As a result of this share exchange, each of the Group’s former shareholders held the same ownership percentage, the same number of
shares, the same class of shares and each of the respective share classes maintained the same rights before and after the reorganization. As this reorganization was without substance, the reorganization was accounted for on a historical cost
carryover basis.
F-36
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
(5)
RESTRICTED CASH AND CASH EQUIVALENTS
Restricted
cash and cash equivalents consist of cash balances held by a bank as collateral for the Group’s short term borrowings. The fixed deposit is rolled forward on a monthly basis and bears interest at an average rate of 4.57% (2005: 2.47% and 2004:
1.00%).
As of December 31, 2006, 2005 and 2004, $381, $364 and $354 respectively were held as restricted cash and cash equivalents.
(6)
ACCOUNTS RECEIVABLE, NET
Accounts receivable from
customers consists of the following:
December 31,
2006
2005
Accounts receivable
$
6,563
$
5,762
Less: allowance for doubtful accounts
(28
)
(29
)
$
6,535
$
5,733
Movements in allowance for doubtful accounts are as follows:
December 31,
2006
2005
Balance at beginning of year
$
29
$
23
Provision during the year
6
6
Written-off during the year
(7
)
—
Balance at end of year
$
28
$
29
(7)
INVENTORIES
The components of inventories are as
follows:
December 31,
2006
2005
Raw materials
$
4,330
$
2,661
Work-in-process
314
327
Finished goods
4,274
2,800
Consumables
76
46
$
8,994
$
5,834
Inventories written-off to cost of sales for the years ended December 31, 2006, 2005 and 2004
was $228, $155 and $98 respectively. Finished goods inventory include goods held on consignment by customers under consignment agreements totaled $1,668 (2005: $951).
(8)
OTHER CURRENT ASSETS
December 31,
2006
2005
Deposits
$
159
$
81
Prepayments
94
278
Other receivables
209
168
$
462
$
527
F-37
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data
(9)
PROPERTY, PLANT AND EQUIPMENT, NET
Property,
plant, and equipment consists of the following:
December 31,
2006
2005
Leasehold improvements
$
3,818
$
3,111
Furniture and fittings
363
307
Office and factory equipment
5,952
4,129
Machinery, tooling and moulds
14,255
11,058
24,388
18,605
Less: accumulated depreciation
(9,882
)
(7,586
)
$
14,506
$
11,019
Depreciation expense for the years ended December 31, 2006, 2005 and 2004 was $2,300, $1,911
and $1,679, respectively.
(10)
ACCRUED LIABILITIES
Accrued liabilities consist of
the following:
December 31,
2006
2005
Accrued operating expenses
$
200
$
161
Accrued payroll
259
300
Accruals to directors
294
140
Accrued utilities
227
117
Accrual for warranty
14
31
Accrued rental – office and factory premises
448
374
Accrued bonus
129
62
$
1,571
$
1,185
As of December 31, 2006, accruals to directors relate to the reimbursement for traveling and
accommodation of $6 (2005: $7) as well as profit sharing accrued to directors and key officers of the Group for $288 (2005: $133).
(11)
BANKING FACILITIES
At December 31, 2006, 2005
and 2004, the Group had the following credit facilities available for use $15,811, $10,523, $4,488 respectively, of which $9,285, $7,018, $2,093 remained unused. The Group’s utilized borrowing facilities represent long-term debt and short-term
borrowings on the consolidated balance sheet.
F-38
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
(12)
LONG-TERM DEBT
Long-term debt consists of the
following (with interest rates as of December 31, 2006):
Long-Term Debt
Currency /
Fixed vs.
Floating
Maturity
Date
2006
2005
Machine Financing Loan
USD
29-Aug-09
$
540
$
—
Floating
Machine Financing Loan
RMB
13-Dec-09
1,022
584
Floating
Total long-term debt
$
1,562
$
584
Less: current maturities of long-term debt
501
310
Long-term debt
$
1,061
$
274
Long-term debt for 2006 consists of the following:
(a)
$1,022 term loan bearing interest of 8.19% and repayable over three years in equal installments commencing December 13, 2006.
(b)
$540 term loan bearing interest of 8.25% and repayable over three years in equal installments commencing August 31, 2006.
Long-term debt (a) and (b) are secured by machinery, tooling and moulds of a subsidiary company and a corporate guarantee by the Company. The
floating interest rates of these loans are re-priced on a monthly basis.
Annual maturities of long-term debt as of December 31, 2006
are as follows:
Fiscal year ending December 31
2007
$
501
2008
544
2009
517
$
1,562
The long-term debt for the year ended December 31, 2005 was paid in full prior to
December 31, 2006.
(13)
SHORT-TERM BORROWINGS
Short term borrowings
represent notes payable to banks and short-term loans. Notes payable bear interest at 2.00% (2005: 2.50%) per annum above the prevailing Singapore Inter-Bank Offer Rate (“SIBOR”) of 3.43% (2005: 3.25%). The repayment term for notes
payable is 90-120 days. Short-term loans bear interests at 1.75% above relevant SIBOR to 1.75% above Development Bank of Singapore LA prime lending rate of 5.55% (2005:2.50% above relevant SIBOR to 2.50% above Development Bank of Singapore LA prime
rate of 4.75%) per annum. These short-term loans are secured by a collateralized security over all account receivables, a collateralized security on the Group’s fixed deposits of not less than $369 and a guarantee from the Parent Company.
F-39
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
(14)
INCOME TAXES
Income is subject to taxation in the
various countries in which the Company and its Subsidiaries operate. The net income (loss) before income taxes by geographical location was as follows for the periods indicated:
Year ended December 31,
2006
2005
2004
Singapore
$
(365
)
$
67
$
(15
)
Foreign
2,866
559
(76
)
$
2,501
$
626
$
(91
)
The current and deferred elements of income tax expense (benefit) by geographical location are as
follows:
Year ended December 31,
2006
2005
2004
Current income tax :
Singapore
$
110
$
439
$
325
Foreign
68
36
—
178
475
325
Deferred income tax (benefit):
Singapore
(2
)
48
(53
)
Foreign
146
—
—
144
48
(53
)
$
322
$
523
$
272
The components of net deferred tax assets (liabilities) as of December 31, 2006 and 2005 are
as follows:
December 31,
2006
2005
Deferred tax assets:
Accrued unutilized leave
$
8
$
7
Net operating loss carry forwards
32
158
Gross deferred tax assets
40
165
Less: Valuation allowance for deferred tax assets
(32
)
(158
)
Net deferred tax assets
8
7
Deferred tax liabilities:
Tax over book depreciation of property, plant and equipment
$
(147
)
$
—
Unremitted interest income
—
(2
)
Total deferred tax liabilities
(147
)
(2
)
Net deferred taxes
(139
)
5
F-40
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
The reconciliation between income tax expense at the applicable statutory tax rate and the actual
income tax expense is as follows:
Year ended December 31,
2006
2005
2004
Income tax expense at Singapore income tax rate of 20%
$
501
$
125
$
(17
)
Difference in tax rates outside Singapore
(100
)
(28
)
3
Non-deductible expenses
260
490
380
Tax exemptions
(163
)
(4
)
(5
)
Tax holiday
(50
)
(27
)
(26
)
Change in valuation allowance
(126
)
(33
)
(63
)
Income tax expense
$
322
$
523
$
272
The reconciliation is prepared by aggregating separate reconciliations for each national
jurisdiction.
The net change in valuation allowance for the years ended December 31, 2006, 2005 and 2004 was a decrease of
approximately $126, $33 and $63 respectively, resulting primarily from the utilization of net operating losses.
As of December 31,
2006, the Group has unutilized net operating loss carry forwards of approximately $214 from operations in the United States of America to offset against taxable income arising in the future. These losses expire between 2020 and 2024. The Group
recorded a full valuation allowance for the unutilized net operating loss carry forwards due to the uncertainty as to their ultimate realization.
The subsidiary incorporated in the People’s Republic of China (“PRC”) is exempted from PRC corporate tax for the first 2 years of operations and is subject to corporate tax at 50% of the Shenzhen PRC’s corporate tax rate
for the following 3 years of operations commencing from 2003. The new China Income Tax (“CIT”) laws were enacted on March 16, 2007 and will be effective on January 1, 2008. The future tax rate for both domestic and foreign owned
enterprises is stipulated to be 25% in the new CIT laws. As the new CIT laws were not yet announced or published during the periods presented, the new corporate income tax rates are not considered “enacted” for deferred taxation purposes.
Accordingly, the calculations of deferred tax balances for 2004 to 2006 have not taken into account future enacted changes to corporate income tax rates.
The basis and diluted tax holiday per share has been computed, for all periods presented, for common shares, Series A and B convertible preferred shares and convertible contingently redeemable common shares. In all
instances, the per share amounts are less than a cent per share and therefore, have not been presented separately.
The off-shore profits
for the Group’s subsidiaries in Hong Kong are not subject to Hong Kong profits tax as they are not derived in Hong Kong.
Deferred
taxes have not been provided on approximately $2,995 of certain undistributed earnings of the Group’s foreign subsidiaries as such amounts are considered to be permanently reinvested. It is not practicable to determine the unrecognized deferred
tax liability on these earnings because the actual tax liability on these earnings, if any, is dependent on circumstances existing when remittance occurs.
On February 2006, the Inland Revenue Authority of Singapore released a circular with detailed guidance on, and documentation requirements for, transfer pricing and advance pricing agreements. The Group has assessed
its tax position for a potential income tax exposure, related to its subsidiaries in Mainland China, Hong Kong, Singapore and the United States of America. Based on this assessment, the Group has recorded a contingent liability of $90 in 2006, which
is included in income taxes payable and reflected as non-deductible expenses in the tax reconciliation.
F-41
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
(15)
SHAREHOLDERS’ EQUITY
Effective
January 30, 2006, the Company was subject to the amendments promulgated under the Singapore Companies (Amendment) Act 2005. These amendments include the abolition of the concepts of “par value” and “authorized share
capital”. The relevant amendments have resulted in all common shares being recorded with no par value.
Each holder of the common
shares is entitled to one vote for each share held of record on each matter submitted to a vote of stockholders. Subject to any preferences that may be granted to the holders of the Company’s preferred shares, each holder of common share is
entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available, as well as any distributions to the stockholders and, in the event of liquidation, dissolution or winding up of the Company, is
entitled to share ratably in all assets of the Company remaining after payment of liabilities and payments to other equity holders.
(16)
CONVERTIBLE PREFERRED SHARES
Series A
Convertible Contingently Redeemable Preferred Shares
On September 10, 1999, the Group entered into an agreement with a group of
investors for the sale of Series A Convertible Contingently Redeemable Preferred Shares (“Series A Preferred Shares”). A total of 5,000,000 shares of Series A Preferred Shares at $1 per share were sold to the Series A Preferred Share
holders for total consideration of $5 million. The key terms of the subscription agreement are as follows:
•
Each Series A Share is convertible at the option of the holder into one common share of the Group. The right of conversion is exercisable at any time prior to the
listing of any shares on a recognized stock exchange. In the event of a listing, the right of conversion is deemed to be exercised.
•
Series A shareholders have the right to participate in dividends distributions to the Group’s common shareholders when and if declared by the Group’s
Board of Directors. No such dividends have been declared to date.
•
Future preferred share issuances at prices below $1 per share must receive approval by the Series A shareholders.
•
The Group obtained, and ultimately, exercised a put option to require the Series A investors to purchase an additional 4,000,000 shares of the Group’s Series A
Preferred Shares at $1 per share and as a result, the Group received a total of $4 million in additional proceeds of which $2 million was received on April 7, 2000 and another $2 million was received on August 16, 2000, respectively. The
terms of these additional shares of Series A Preferred Shares were identical to the shares issued on September 10, 1999.
•
A call option was awarded to the investors on September 10, 1999 to purchase up to an additional 500,000 Series A Preferred Shares at a purchase price of $1
per share for a period of 5 years. The call option expired unexercised on September 10, 2004.
•
The Group would be required, at the option of the Series A preferred shareholders, to redeem the Series A shares in full at the redemption amount at any time on or
after the occurrence of the Group failing to complete a public listing by December 31, 2003.
•
If the holders elect to redeem their securities subsequent to December 31, 2003, they are entitled to receive an annual 10% non-compounded return on their
original investment calculated from their respective issuance dates.
F-42
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
•
In the event of a liquidation of the Group, the Series A preferred shareholders would have priority over the ordinary shareholders in the repayment of capital
together with any declared but unpaid dividends on a non-cumulative basis.
Series B Convertible Contingently
Redeemable Preferred Shares
On May 25, 2001, the Group entered into an agreement with a group of investors for the sale of Series
B Convertible Contingently Redeemable Preferred Shares (“Series B Preferred Share”). A total of 3.33 million shares of Series B Preferred Shares at $1.20 per share were sold to the Series B Preferred Share holders for total
consideration of $4 million. The key terms of the subscription agreement are as follows:
•
Each Series B share is convertible at the option of the holder into one common share of the Group. The right of conversion is exercisable at any time prior to the
listing of any shares on a recognized stock exchange. In the event of a listing, the right of conversion is deemed to be exercised.
•
Series B shareholders have the right to participate in dividends distributions to the Group’s common shareholders when and if declared by the Group’s
Board of Directors. No such dividends have been declared to date.
•
Future preferred share issuances at prices below $1.40 per share must receive approval by the Series B Shareholders.
•
The Group obtained, and ultimately exercised, it’s put option to require the Series B investors to purchase an additional 833,335 shares of the Group’s
Series B Preferred Shares at $1.20 per share and as a result, the Group received a total of $1 million in additional proceeds on January 29, 2002. The terms of these additional shares of Series B Preferred Shares were identical to the shares
issued on May 25, 2001.
•
The Group would be required, at the option of the Series B Preferred Shareholders, to redeem the Series B Shares in full at the redemption amount at any time
on or after the occurrence of the Group failing to complete a public listing by December 31, 2003.
•
If the holders elect to redeem their securities subsequent to December 31, 2003, the holders are entitled to receive an annual 10% non-compounded return on
their original investment calculated from their respective issuance date.
•
In the event of a liquidation of the Group, the Series A and B Preferred Shareholders would have equal priority over the ordinary shareholders in the repayment of
capital together with any declared but unpaid dividends on a non-cumulative basis.
Upon issuance of the Series A and B
Preferred Shares in 1999 and 2001, respectively, the Group recorded the relative fair values of the Series A call option, the Series A and B put option and the convertible contingently redeemable preferred securities. The resulting discount on the
Preferred Shares as a result of the fair value allocation was accreted up to the Series A and B redemption value as of December 31, 2003. As of December 31, 2003, the cumulative accrued 10% non-compounded return on the Series A and B
shareholders original investment was $3,575 and $1,234, respectively.
For the period from January 1, 2004 through February 23,
2004, the Group recorded an additional $131 and $73 of cumulative accrued return on its Series A and B preferred shares, respectively.
On
February 23, 2004, the Series A and B preferred shareholders signed an agreement with the Group to formally waive their rights, under the respective share agreements to require redemption of their Preferred Shares. Upon signing of this
agreement, the value of the Series A and B Preferred Shares, including the cumulative accrued return balance, of $12,706 and $6,307, respectively, were reclassified from mezzanine equity to permanent equity.
F-43
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
On January 18, 2005, the Parent Company entered into a subscription agreement with a group of
investors for the sale of 5,102,639 shares of Series C Convertible Preferred Share (“Series C Preferred Shares”) for a total purchase price of $5,103. As a stipulation for those former Series B Preferred Shareholders of the Group, whose
subscription agreement contained an anti-dilution clause regarding future preferred share issuances at a price less than $1.40 per share, the Parent Company issued 1,041,666 warrants to the former Series B Preferred Shareholders’ convertible
into Ordinary Shares of the Parent Company with an exercise price of $0.20 a share. The warrants are exercisable at any time during the 15-day period on either: the Group notifies the warrant holder in writing that it has received SEC clearance on
its effective filing status or 30 days prior to the completion of a merger, consolidation, or sale of substantially all of the Parent Company’s assets. The fair value of this warrant on the date of grant was $1,271 and has been recorded as a
charge to income available to common stock holders in the 2005 Consolidated Statement of Operations.
The terms of the January 18, 2005
Parent Company shareholder agreement state that the Parent Company is required, at the option of any of its Series A, B, or C preferred shareholders, to redeem the respective class of preferred shares in full at the redemption amount at any time on
or after the occurrence of the Parent Company failing to complete a public listing by December 31, 2007. Further, if requested by greater than 75% of the Parent Company Series A, Series B, and Series C shareholders, the Group would be required
to convert all of the Parent Company’s common and preferred shares for an equivalent number of common and preferred shares of the Group. The common and preferred shares of the Group will have the same rights as the common and preferred shares
converted from the Parent Company. Upon the signing of this agreement, a portion of the Group’s common shares became contingently convertible into convertible redeemable preferred shares of the Group and as a result, the Group reclassified the
balance of its original Series A and B preferred shares through February 23, 2004 totaling $12,706 and $6,307, respectively, from permanent equity to convertible contingently redeemable common shares, a class of mezzanine equity. The
convertible contingently redeemable shares are carried at their redemption value.
Pursuant to the reorganization agreement described in
Note 3 and the Parent Company shareholder agreement on January 14, 2005, on April 15, 2005, the Series A and B shareholders converted 9,000,000 and 4,166,667 respectively, of Preferred Shares, into 13,166,667 Common Shares of the Group.
Following this conversion, the former Series A, B, and founding shareholders of the Group exchanged a total of 15,166,667 Common Shares of the Group for 2,000,000 Common Shares of e.PAK Holdings Limited, 9,000,000 shares of e.PAK Holdings Limited
Series A Convertible Preferred Shares, and 4,166,667 shares of e.PAK Holdings Limited Series B Convertible Preferred Shares. After the exchange, the Series A, B, and founding shareholders each hold the same number of shares in the Parent Company as
originally held in the Company. Subsequent to this exchange, the Group was then 100% owned by the Parent Company.
During 2005, the Group
recorded an additional $3,082 of cumulative accrued return on its convertible contingently redeemable common shares which represented accrued returns from February 23, 2004 (the date at which the original redemption waiver was signed) through
December 31, 2005. An additional cumulative accrued return of $1,910 was recorded during 2006.
According to the arrangements, if the
Parent Company Series C shareholders elect to exchange their securities into an equivalent number of Series C preferred shares of the Group, the Parent Company will waive the Group of its obligation to settle the short-term payable to the Parent
Company. Accordingly, the Group has not recorded the initial redemption value of the Series C shares, to the extent that the short-term payable to the Parent Company is in excess of the Series C redemption value. The Group recorded an additional
accretion charge to income available to common shareholders of $150 (2005: $50), which represented the shortfall of the short-term payable to the Parent Company when compared to the redemption value of the Series C shares.
F-44
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
(17)
CHANGE IN ACCOUNTING PRINCIPLE
The Group adopted
the provisions of
Statement of Financial Accounting Standards No 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”)
on January 1, 2004. On this date,
the Group reclassified the carrying value of its Series A call option instruments from mezzanine equity to liability. Upon adoption of SFAS No 150, the $275 difference between the fair value and the carrying value of these warrants was recorded as a
cumulative effect of a change in accounting principle. For the period from January 1, 2004 to February 23, 2004, the Group recorded a reduction in the fair value of the warrant liability as other income of $14. Subsequent to the signing of
the redemption waiver agreement on February 23, 2004, the Series A Preferred Shares were no longer contingently redeemable and as such, the Group reclassified its Series A call option instrument from liability to equity. Upon expiration of the
call instrument on September 10, 2004, the carrying value of the call instrument was reclassified to additional paid in capital.
(18)
SHARE-BASED COMPENSATION EXPENSE
The Group adopted
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”)
for all financial periods presented, which requires the Group to measure the cost of employee services received in exchange
for equity awards based on the grant date fair value. Straight-line method of expense attribution has been elected as the accounting policy of the Group, however, as the tranches of options are graded vested, the amount of compensation cost
recognized at any date is at least equal to the value of the vested portion of the award at that date.
On September 19, 1999, the
Group granted to its founders’ options (the “Founder Options”) to subscribe for up to 500,000 shares of Series A Preferred Share. The Founder Options were exercisable at any time from the date of grant for a period of 5 years or upon
the listing of the Group on a Recognized Stock Exchange, whichever is earlier (the “Founder Option Period”). The expected term used in calculating the fair value of the grant was 5 years, based on management’s assumption at the grant
date the Group would not successfully complete a listing before the expiry of the options. As these founder options were immediately exercisable, these Founder Options were expensed upon grant in 1999.
On March 2, 2000, the Group approved and adopted the e.PAK Directors’ and Employees’ Share Incentive Plan (the “Former Plan”).
The options were granted to the Directors, Executives, and Employees of the Group, and the options issued were approved separately by the Board through a Board of Directors’ resolution. On March 2, 2000 and September 4, 2002, the
Group obtained approval from the Board to grant 500,000 and 1,307,525 stock options, respectively, under the Former Plan. The options vested over four anniversary dates, with 25% of the options vesting on each annual anniversary of the option offer
letter.
On May 25, 2005, the Parent Company, adopted the e.PAK Directors and Employees Share Incentive Plan (the “New Plan”)
pursuant to the Reorganization Agreement dated January 18, 2005 between the Shareholders and e.PAK Holdings Limited (see note 3 on Reorganization of the Company). Although the replacement of the Former Plan with the New Plan constituted an
accounting modification, an analysis of the terms of the Plan concluded that there was no change in the fair value of the options before and after the modifications. The New Plan is currently in the name of and operated by the Parent Company,
however, the benefits of the share option plan accrue to individuals who are Directors, Executives, and Employees of e.PAK Resources (S) Pte Ltd and its subsidiaries. Share based compensation expense related to the grant of the Parent
Company’s stock options to the Directors, Executives and Employees of the Group are recognized in the Group’s financial statements as expense, with an offsetting capital contribution from the Parent Company.
F-45
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
The New Plan’s key provisions are as follows:
The maximum number of unexercised share options currently permitted to be granted under the Plan is an amount equal to 15% of the authorized shares of the
Parent Company less 1,041,666 shares. Any further grant of share options in excess of the limit is subject to shareholders’ approval in a general meeting. The offer of a grant of share options must be accepted within 30 days from the date of
offer and upon payment of a nominal consideration of HK$ 1 (approximately US$ 0.13 at December 31, 2006) by the grantee. Share options granted generally vest in four years of equal pro-rata vesting. Each tranche of options vests over four
anniversary dates, with 25% of the options vest on each annual anniversary of the option offer letter date expire.
On May 25, 2005,
the Parent Company obtained approval from the Board of Directors to grant 300,000 options to acquire common shares of the Parent Company under the New Plan. Each tranche of options vests over four vesting dates, with 25% of options vesting on each
annual anniversary of the option offer letter date and expire in four years after vesting dates. The grants contain only service conditions. There are no grants with market or performance conditions.
During 2005, the Parent Company extended the expiry period for 295,893 fully vested stock options held by 32 employees. As a result of this accounting
modification, the Group recognized additional compensation expense of $237 for the year ended December 31, 2005. As of December 31, 2006, total unrecognized compensation cost related to share-based options and awards is $170 and the
related weighted-average period it is expected to be recognized is 2.4 years.
The fair value of each option award is estimated on the date
of grant using a Binomial option valuation model that uses the assumptions noted in the following table.
Measurement Dates
2005
2002
2000
Exercise price
US$0.20
US$0.20
US$0.20
Expected volatility
63-84%
63-72%
63-72%
Weighted-average volatility
74%
68%
68%
Risk-free interest rate
3.65-3.89%
3.00-3.67%
6.45-6.53%
Dividend
0%
0%
0%
Suboptimal Early Exercise Factor (SOEF) (in times)
10
10
10
The risk-free rate of interest for periods within the contractual life of the option is based on a
zero-coupon U.S. government instrument with the same contractual term as the option. Expected volatilities are based on listed companies of similar size and industry. The Group uses its own historical trend data to estimate option exercise timing
and employee termination rates within the valuation model as well as to estimate the forfeiture rate. The Suboptimal Early Exercise Factor (“SOEF”) of options granted indicates an assumption that exercise is generally expected to occur
when the share price reaches ten times the stock option’s exercise price.
F-46
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
A summary of option activity under the Plan as of December 31, 2004, 2005 and 2006, and changes
during the year then ended is presented below:
Options
Exercise
Price
Weighted-
Average
Exercise Price
Balance, January 1, 2004
2,202,726
US$
0.20
US$
0.20
Granted and Accepted
—
—
—
Exercised
—
—
—
Forfeited / Expired
(572,845
)
US$
0.20
US$
0.20
Balance, December 31, 2004
1,629,881
US$
0.20
US$
0.20
Granted and Accepted
300,000
US$
0.20
Exercised
—
—
—
Forfeited / Expired
(18,937
)
US$
0.20
US$
0.20
Balance, December 31, 2005
1,910,944
US$
0.20
US$
0.20
Granted and Accepted
—
—
—
Exercised
(47,939
)
US$
0.20
Forfeited / Expired
(76,548
)
US$
0.20
US$
0.20
Balance, December 31, 2006
1,786,457
US$
0.20
US$
0.20
The cash proceeds from option exercises under the Group’s stock option plans for the year
ended December 31, 2006 was $10 paid to the Parent Company.
A summary of the status of the Group’s unvested options as of
December 31, 2006, 2005 and 2004, and changes during the year ended December 31, 2006, 2005 and 2004 is as follow:
Year ended December 31,
2006
Weighted Average
2005
Weighted Average
2004
Weighted Average
Shares
Fair Value
Shares
Fair Value
Shares
Fair Value
Non-vested, January 1
539,090
$
0.96
600,195
$
0.59
950,040
$
0.59
Granted
—
—
300,000
$
1.38
—
$
0.59
Vested
(346,104
)
$
0.76
(354,105
)
$
0.70
(307,605
)
$
0.59
Forfeited
(17,986
)
$
0.59
(7,000
)
$
0.59
(42,240
)
$
0.59
Non-vested, December 31
175,000
$
1.39
539,090
$
0.96
600,195
$
0.59
A summary of the Group’s outstanding share options as of December 31, 2006:
Outstanding Share Options
Exercisable Share Options
Exercise Price (US$)
Options
Weighted-
average
Remaining
Contractual
Life (Years)
Weighted-
average
Exercise
Price
(US$)
Options
Weighted-
average
Remaining
Contractual
Life (Years)
Weighted-
average
Exercise
Price
(US$)
$0.20
342,002
3.22
$
0.20
342,002
3.22
$
0.20
$0.20
1,144,455
2.82
$
0.20
1,144,455
2.82
$
0.20
$0.20
300,000
3.71
$
0.20
125,000
2.71
$
0.20
1,786,457
3.25
$
0.20
1,611,457
2.91
$
0.20
The share-based compensation cost that has been charged against income for those plans was $300,
$287 and $183 for the years ended December 31, 2006, 2005 and 2004, respectively of which $288, $275, and
F-47
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
$170 was charged to selling, general and administrative expenses and $12, $12 and $13 was charged to cost of sales for the years ended December 31,
2006, 2005 and 2004 respectively.
(19)
NON-DISTRIBUTABLE RESERVES
As of December 31,
2006, 2005 and 2004, approximately $121, $58 and $23, respectively, were held by e.PAK Technologies Shenzhen as restricted retained earnings. Governed by the Company Law of The People’s Republic of China, e.PAK Technologies Shenzhen, a wholly
owned subsidiary of the Company is required to withhold 10% of their retained earnings on an annual cumulative basis.
(20)
GEOGRAPHIC INFORMATION
The Group currently
operates in one business segment; the design, development, manufacture and supply of precision engineered products and solutions for the automated transport and handling of semiconductor and electronic devices. The Group is not organized by market
and is managed and operated as one business. A single management team that reports to the chief operating decision makers comprehensively manages the entire business. The Group does not operate any material separate lines of business or separate
business entities with respect to its products or product development. Accordingly, the Group does not accumulate discrete financial information with respect to separate product lines and does not have separately reportable segments as defined by
SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information
.
The following tables summarize total net
sales, based upon the country to which sales to external customers were made, and identifiable assets and property, plant and equipment, net attributed to significant countries:
Year ended December 31,
2006
2005
2004
Net Sales:
China*
$
11,070
$
10,412
$
9,149
Singapore
7,093
4,844
4,959
USA
4,338
3,340
1,969
Korea
3,199
2,418
2,203
Taiwan
2,563
2,009
556
Philippines
3,610
1,869
1,310
Europe
2,419
1,206
853
Others
1,854
915
733
$
36,146
$
27,013
$
21,732
Year ended December 31,
2006
2005
Property, Plant and Equipment:
China*
$
14,441
$
10,959
Singapore
20
18
USA
45
42
Others
—
—
$
14,506
$
11,019
F-48
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
For the year ended December 31, 2006 no customer accounted for 10% or more of net sales. In the
year ended December 31, 2005, one customer (ST Microelectronics) accounted for 13% of net sales. In the year ended December 31, 2004, two customers (ST Microelectronics and Kangawa HK) individually accounted for 10% or more of net sales,
13% and 10%, respectively. In the fiscal years ended December 31, 2006, 2005, and 2004, net sales to the Group’s top ten customers accounted for approximately 55%, 60% and 60%, respectively, of the Group’s net sales.
*
China includes Hong Kong.
(21)
COMMITMENTS
As of December 31, 2006, the
Company and its subsidiaries have contracted for future capital expenditures for property, plant and equipment of $757. Such expenditures will be made in 2007.
(22)
LEASES
As of December 31, 2006, the Group was
obligated under non-cancellable operating lease agreements for offices and factory premises. Rental expense under operating leases for the years ended December 31, 2006, 2005 and 2004 was $811, $700 and $643, respectively.
Future minimum lease payments for non-cancellable operating leases with initial or remaining terms in excess of one year are as follows:
Fiscal year ending December 31
2007
$
730
2008
694
2009
475
2010
407
2011
407
Thereafter to 2027
6,602
Total minimum lease payments
$
9,315
(23)
EMPLOYEE DEFINED CONTRIBUTION PLANS
The Group has
made contributions, for the benefit of its Singapore employees, to Provident Funds as required under the Singapore Central Provident Fund (“CPF”) regulations. In addition, certain subsidiaries of the Group are required to contribute
amounts based on employees’ salaries to the defined contribute retirement program as stipulated by relevant local authorities. The employees are entitled to the Group’s contributions subject to the regulations of the relevant local
authorities. The employees of the subsidiaries in Mainland China participate in the defined contribution retirement plans managed by the local government authorities whereby the subsidiaries are required to contribute to the plan at fixed rates of
the employees’ salary costs. Total expense related to the above plans was $256, $232 and $174 for the years ended December 31, 2006, 2005 and 2004, respectively.
(24)
COMMON SHARE WARRANTS
In connection with a
financing agreement in 2000, the Group entered into a warrant agreement with a commercial bank, pursuant to which the Group granted the bank common share warrants exercisable at $1 per share. These warrants are exercisable for a period of 7 years
from the date of the warrant agreement or upon an initial public offering of the Group whichever is earlier. The warrants entitle the holder to subscribe
F-49
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
for common shares in the Group based on a predetermined formula as specified in the warrant agreement. The fair value of this warrant of $19 was capitalized
and subsequently amortized over the life of the financing agreement that expired on May 8, 2007.
(25)
RELATED PARTY TRANSACTIONS
Year ended December 31,
2006
2005
2004
Share-based compensation
$
300
$
452
—
Due from Parent Company
—
$
125
—
Short-term loan from Parent Company
$
4,903
$
5,053
—
Loan from shareholders
—
—
$
2,135
Reassignment of loan from shareholders and accrued interest to Parent Company
—
$
(2,183
)
—
Share-based compensation expense represent share options granted to directors, executives and
employees (see Note 19, Share-Based Compensation Expense) from the Parent Company. Amounts due from Parent Company include legal fees, secretarial fees and audit fees paid on behalf of the Parent Company. The short-term loan from the Parent Company
is repayable upon demand and is unsecured and interest-free. Loan from shareholders bear interest at 5% per annum and is unsecured. The loan and interest accrued was assigned to the Parent Company on March 7, 2005.
(26)
FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
The Group’s principal financial instruments are comprised of long-term debt and fixed deposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial
assets and liabilities such as trade receivables and trade payables, which arise directly from its operations.
The main risks arising from
the Group’s financial instruments are foreign exchange risk, interest rate risk, liquidity risk and credit risk. The Board of Directors reviews and agrees policies for managing each of these risks and they are summarized below.
Interest rate risk
The Group
obtains additional financing through bank borrowings. The Group’s policy is to obtain the most favorable interest rates available without increasing its foreign currency exposure.
Credit risk
Surplus funds are
placed with reputable institutions.
Information relating to the Group’s interest rate exposure is disclosed in the notes on the
Group’s borrowings.
The carrying amount of cash and cash equivalents, trade receivable and other receivables represent the
Group’s maximum exposure to credit risk in relation to financial assets. No other financial assets carry a significant exposure to credit risk.
Liquidity risk
Short-term funding is obtained from bank credit facilities.
F-50
e.PAK RESOURCES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(United States
dollars in thousands, except number of shares and per share data)
(26)
FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (continued)
Foreign exchange risk
The Group incurs a significant portion of its costs in Chinese
Renminbi, which gives rise to transactional currency exposure for entities that do not have a functional currency of the Chinese Renminbi.
Fair value
Fair value is defined as the amount at which the financial instrument could be exchanged in a current
transaction between willing parties in an arm’s length transaction, other than in a forced or liquidation sale. Fair values are obtained from quoted market prices, discounted cash flow models and option pricing models as appropriate.
The following methods and assumptions are used to estimate the fair value of each class of financial instruments:
Cash and cash equivalents and short-term receivables
The carrying amounts of these balances approximate fair value due to the relatively short-term maturity of these financial instruments.
Short-term borrowings and other current liabilities
The carrying amounts of these balances
approximate fair value because of the relatively short-term maturity and variable rates of these financial instruments.
Long-term bank
debt
The carrying amount of the long-term debt approximate their fair values, as the debt is based on floating market interest rates.
Disclosure of the nature of the financial instruments and their significant terms and conditions that could affect the amount, timing and
certainty of future cash flows is presented in the respective notes to the financial statements, where applicable.
(27)
SUBSEQUENT EVENTS
The Group has entered into
negotiations regarding an acquisition agreement with Ascend Acquisition Corp. (“Ascend”), a publicly traded company in the United States of America, Ascend’s wholly owned subsidiary “ACL”, and the Parent Company.
Under the terms of the acquisition agreement, Ascend and ACL will be combined in the redomestication merger, with the continuing entity, Continuing
Pubco, existing as an exempted Company under the law of Bermuda. Continuing Pubco will acquire all of the Company’s outstanding shares from the Parent Company in the acquisition. All of the outstanding options to purchase common shares of the
Parent Company will be assumed by Continuing Pubco and such options (“Assumed Options”) will entitle the holders to purchase common shares of Continuing Pubco. All of the current security holders of Ascend, together with the Parent Company
and holders of the Parent Company Options will become the security holders of Continuing Pubco. Continuing Pubco will be a publicly reporting company, registered under the United States federal securities laws.
F-51
This page is intentionally left blank.
F-52
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
CONDENSED BALANCE SHEETS
(Unaudited)
June 30, 2007
December 31, 2006
ASSETS
Current assets:
Cash and cash equivalents
$
186,787
$
423,590
Investments held in trust
40,005,884
39,354,720
Prepaid expenses and other receivables
11,600
10,028
Deferred income taxes
28,100
28,100
Total assets
$
40,232,371
$
39,816,438
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses
$
144,208
$
42,585
Income taxes payable
28,100
42,800
Deferred interest
298,984
168,816
Deferred payment due to underwriter
952,200
952,200
Total liabilities
1,423,492
1,206,401
Commitments
Common stock, subject to possible conversion, 1,379,310 shares at
conversion value
7,698,189
7,698,189
Stockholders’ Equity:
Preferred stock, $.0001 par value, authorized 1,000,000 shares; none issued
—
—
Common stock, $.0001 par value, authorized 30,000,000 shares; issued and outstanding 8,566,667 shares (which includes 1,379,310 shares subject
to possible conversion) and 1,500,000 shares, respectively
857
857
Additional paid-in capital
30,529,388
30,529,388
Retained earnings accumulated during development stage
580,445
381,603
Total stockholders’ equity
31,110,690
30,911,848
Total liabilities and stockholders’ equity
$
40,232,371
$
39,816,438
See accompanying notes to unaudited condensed financial statements.
F-53
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Quarter Ended
June 30,
Six Months Ended
June 30,
December 5, 2005
(Inception) to
June 30,
2007
2006
2007
2006
2007
General and administrative expenses
$
206,380
$
54,061
$
358,845
$
54,215
$
628,765
Operating loss
(206,380
)
(54,061
)
(358,845
)
(54,215
)
(628,765
)
Other income:
Interest income
1,469
1,493
3,991
1,661
12,513
Interest on trust fund investment
267,750
141,387
520,996
141,387
1,196,697
Total other income
269,219
142,880
524,987
143,048
1,209,210
Income before income taxes
62,839
88,819
166,142
88,833
580,445
Income tax (expense) benefit
—
(14,600
)
32,700
(14,600
)
—
Net income
$
62,839
$
74,219
$
198,842
$
74,233
$
580,445
Weighted average shares of common stock outstanding (basic and diluted)
8,566,667
5,323,443
8,566,667
3,422,284
6,608,668
Earnings per common share (basic and diluted)
$
.01
$
.01
$
.02
$
.02
$
.09
See accompanying notes to unaudited condensed financial statements.
F-54
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
December 5,
2005
(Inception)
to June 30,
2007
2006
2007
Cash flows from operating activities:
Net income
$
198,842
$
74,233
$
580,445
Adjustments to reconcile net income to net cash used in operating activities:
Interest income on investments held in trust
(651,164
)
(176,712
)
(1,495,681
)
Change in operating assets and liabilities:
Increase in prepaid expenses and other receivables
(1,572
)
(27,720
)
(11,600
)
Increase in deferred tax asset
—
(5,700
)
(28,100
)
Increase in accounts payable and accrued expenses
101,623
28,802
144,208
(Decrease) increase in income taxes payable
(14,700
)
20,300
28,100
Increase in deferred interest
130,168
35,325
298,984
Net cash used in operating activities
(236,803
)
(51,472
)
(483,644
)
Cash flows from investing activities:
Purchase of treasury bills held in trust
—
(7,701,237
)
(15,485,695
)
Purchase of municipal securities held in trust
—
(30,808,965
)
(30,809,507
)
Sale/maturity of treasury bills held in trust
—
—
15,613,788
Sale of municipal securities held in trust
—
—
31,176,329
Purchase of Pennsylvania municipal securities held in trust
—
—
(39,005,118
)
Net cash used in investing activities
—
(38,510,202
)
(38,510,203
)
Cash flows from financing activities:
Gross proceeds from initial public offering
—
41,400,000
41,400,000
Proceeds from note payable to stockholder
—
—
80,000
Repayment of note payable to stockholder
—
(80,000
)
(80,000
)
Proceeds from sale of shares of common stock to founding stockholders
—
—
25,000
Proceeds from issuance of option
—
100
100
Proceeds from sale of insider units
—
1,000,002
1,000,002
Payment of costs of public offering
—
(3,219,468
)
(3,244,468
)
Net cash provided by financing activities
—
39,100,634
39,180,634
Net (decrease) increase in cash and cash equivalents
(236,803
)
538,960
186,787
Cash and cash equivalents at beginning of period
423,590
80,061
—
Cash and cash equivalents at end of period
$
186,787
$
619,021
$
186,787
Supplemental schedule of non-cash financing activity:
Deferred payment due to underwriter
—
$
952,200
$
952,200
See accompanying notes to unaudited condensed financial statements.
F-55
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The condensed financial statements at June 30, 2007 and for the three and six month periods ended
June 30, 2007 and 2006 and for the period from December 5, 2005 (inception) to June 30, 2007 are unaudited and include the accounts of Ascend Acquisition Corp. (a corporation in the development stage) (“the
Company”). The condensed balance sheet at December 31, 2006 has been derived from the audited financial statements.
In the opinion of
management, all adjustments (consisting of normal accruals) have been made that are necessary to present fairly the financial position of the Company as of June 30, 2007 and the results of its operations and its cash flows for the three and six
months ended June 30, 2007 and 2006, respectively. All activity from December 5, 2005 (inception) through May 17, 2006 relates to the Company’s formation and the public offering described below. Operating results for
the interim period presented are not necessarily indicative of the results to be expected for a full year.
The statements and related notes have been
prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations.
2. Organization and Business Operations
The Company was incorporated in Delaware on December 5, 2005 as a blank check company whose objective is to acquire an operating business.
The registration statement for the Company’s initial public offering (“the Offering”) was declared effective May 11, 2006. The Company
consummated the Offering, including the over-allotment option, on May 17, 2006 and May 22, 2006, respectively, and received total net proceeds of approximately $37,203,000 (Note 6). The Company’s management has broad discretion
with respect to the specific application of the net proceeds of the Offering, although substantially all of the net proceeds of the Offering are intended to be generally applied toward consummating a business combination with an operating business
(“Business Combination”). Furthermore, there is no assurance that the Company will be able to successfully effect a Business Combination. An amount of $38,510,202, which includes $1,000,002 relating to the sale of insider units (Note 7)
and $952,200 deferred payment due to the underwriter (Note 6), was placed in an interest-bearing trust account (“Trust Account”) until the earlier of (i) the consummation of a Business Combination or (ii) liquidation of the
Company. Under the agreement governing the Trust Account, funds will be invested in United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 with a maturity of 180 days or
less, or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. The remaining net proceeds (not held in the Trust Account) may be used to pay for business, legal and accounting due
diligence on prospective acquisitions and continuing general and administrative expenses.
The Company has signed a definitive agreement for the
acquisition of a target business (Note 8) and will submit such transaction for stockholder approval. In the event that stockholders owning 20% or more of the shares sold in the Offering vote against the Business Combination and exercise their
conversion rights described below, the Business Combination will not be consummated. All of the Company’s stockholders prior to the Offering, including all of the officers and directors of the Company (“Initial Stockholders”), have
agreed to vote their 1,500,000 founding shares of common stock in accordance with the vote of the majority in interest of all other stockholders of the Company (“Public Stockholders”) with respect to any Business
Combination. After consummation of a Business Combination, these voting safeguards will no longer be applicable.
F-56
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
NOTES TO UNAUDITED CONDENSED
FINANCIAL STATEMENTS—(Continued)
With respect to a Business Combination that is approved and consummated, any Public Stockholder who voted against the
Business Combination may demand that the Company convert his shares to cash. The per share conversion price will equal the amount in the Trust Account, calculated as of two business days prior to the consummation of the proposed Business
Combination, divided by the number of shares of common stock held by Public Stockholders at the consummation of the Offering. Accordingly, Public Stockholders holding 19.99% of the aggregate number of shares owned by all Public Stockholders may
seek conversion of their shares in the event of a Business Combination. Such Public Stockholders are entitled to receive their per share interest in the Trust Account computed without regard to the shares held by Initial Stockholders.
Accordingly, a portion of the net proceeds of the Offering has been classified as common stock subject to conversion and 19.99% of the interest earned on the Trust Account has been recorded as deferred interest in the accompanying balance sheets.
The Company’s Amended and Restated Certificate of Incorporation provides for mandatory liquidation of the Company in the event that the Company does
not consummate a Business Combination within 18 months from the date of the consummation of the Offering (November 17, 2007), or 24 months from the consummation of the Offering (May 17, 2008) if certain extension criteria have been
satisfied. In the event of liquidation, it is likely that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be less than the initial public offering price per share in the
Offering due to costs related to the Offering, general and administrative expenses incurred prior to the liquidation event and since no value would be attributed to the Warrants contained in the Units sold (Note 6).
The Company may face a mandatory liquidation by May 17, 2008 if a business combination is not consummated, which raises substantial doubt about its ability to
continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
3.
Income Tax
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109 (“FIN 48”), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an
uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits. The Company adopted FIN 48 on January 1, 2007. Since the Company is a development
stage company that began operations on December 5, 2005, there have been no audits of filed tax returns as of this time, however, the Company believes its accruals are sufficient and it does not expect the total amounts of any uncertain tax
position to significantly increase or decrease within the next year. The adoption of FIN 48 did not have a material effect on the Company’s financial condition, results of operations or liquidity.
4. Investments Held in Trust
Investments held in trust at
June 30, 2007 consist of a Pennsylvania Municipal Money Market trust obligation of $39,897,089, plus accrued interest of $108,795. Investments held in trust at December 31, 2006 consist of a Pennsylvania Municipal Money Market trust
obligation of $39,248,419, plus accrued interest of $106,301.
F-57
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
NOTES TO UNAUDITED CONDENSED
FINANCIAL STATEMENTS—(Continued)
5. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share:
Quarter Ended June 30,
Six Months Ended June 30,
December 5,
2005
(Inception)
to
June 30,
2007
2007
2006
2007
2006
Numerator: Net income
$
62,839
$
74,219
$
198,842
$
74,233
$
580,445
Denominator: Average common
shares outstanding
8,566,667
5,323,443
8,566,667
3,422,284
6,608,668
Basic and diluted earnings per share
$
.01
$
.01
$
.02
$
.02
$
.09
No computation for diluted earnings per share was prepared for the Redeemable Common Stock Purchase Warrants (see
Note 6) to purchase an aggregate of 14,133,334 shares of common stock at $5.00 per share and the underwriters’ option (see Note 6) to purchase 300,000 Units at an exercise price of $7.50 per Unit, respectively, that were outstanding at
June 30, 2007 because the shares underlying the conversion of the warrants are contingently issuable and the exercise price of the underwriters’ option is in excess of the related market value of the Units.
6. Stockholders’ Equity
The Offering
On May 17, 2006, the Company sold 6,000,000 units (“Units”) in the Offering and on May 22, 2006, the Company sold an additional 900,000 Units related
to the underwriter’s over-allotment option. Each Unit consists of one share of the Company’s common stock, $.0001 par value, and two Redeemable Common Stock Purchase Warrants (“Warrants”). Each Warrant entitles the
holder to purchase from the Company one share of common stock at an exercise price of $5.00 commencing on the later of the completion of a Business Combination with a target business or May 11, 2007 and expiring May 10, 2010. The
Warrants will be redeemable, at the Company’s option, at a price of $.01 per Warrant upon 30 days’ notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $8.50 per share for
any 20 trading days within a 30 trading day period ending on the third day prior to the date on which notice of redemption is given. The Company agreed to pay EarlyBirdCapital, Inc., the underwriter in the Offering (“Underwriter”) an
underwriting discount of 8% of the gross proceeds of the Offering and a non-accountable expense allowance of 1% of the gross proceeds of the Offering. However, the Underwriter agreed that 2.3% of the underwriting discount ($952,200) will not be
payable unless and until the Company completes a Business Combination and has waived its right to receive such payment upon the Company’s liquidation if it is unable to complete a Business Combination.
In connection with this Offering, the Company also issued an option (“Option”), for $100, to the Underwriter to purchase 300,000 Units at an exercise
price of $7.50 per Unit. The Units issuable upon exercise of the Option are identical to the Units sold in the Offering. The Company has accounted for the fair value of the Option, inclusive of the receipt of the $100 cash payment, as an
expense of the Offering resulting in a charge directly to stockholders’ equity. The Company estimated that, as of the date of issuance, the fair value of the Option was approximately $711,000 ($2.37 per Unit) using a Black-Scholes
option-pricing model. The fair value of the Option granted to the Underwriter was estimated using the following assumptions: (1) expected volatility of 46.56%, (2) risk-free interest rate of 4.31% and (3) expected life of 5
years. The Option may be exercised for cash or on a “cashless” basis, at the holder’s option, such that the holder may use the appreciated value of the
F-58
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
NOTES TO UNAUDITED CONDENSED
FINANCIAL STATEMENTS—(Continued)
Option (the difference between the exercise prices of the Option and the underlying Warrants and the market price of the Units and underlying securities) to
exercise the option without the payment of any cash.
Common Stock
The Company’s initial stockholders purchased 875,000 common shares for $25,000 on December 5, 2005. On April 19, 2006, the Company’s Board of Directors authorized a stock dividend of 0.714285
shares of common stock for each share of common stock outstanding, bringing the initial outstanding shares to 1,500,000. On April 20, 2006, the Company’s Certificate of Incorporation was amended to increase the authorized shares of common
stock from 15,000,000 to 30,000,000 shares of common stock. All references in the accompanying financial statements to the number of shares of stock have been retroactively restated to reflect these transactions.
Preferred Stock
The Company is authorized to issue 1,000,000 shares
of preferred stock, par value $.0001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors.
The agreement with the Underwriter prohibits the Company, prior to a Business Combination, from issuing preferred stock which participates in the proceeds of the Trust Account or which votes as a class with the Common
Stock on a Business Combination.
7. Commitments
The Company presently occupies office space provided by an affiliate of the Company’s special advisor. Such affiliate has agreed that, until the Company consummates a Business Combination, it will make such office space, as well
as certain office and secretarial services, available to the Company, as may be required by the Company from time to time. The Company has agreed to pay such affiliate $7,500 per month for such services commencing May 11, 2006.
Pursuant to letter agreements with the Company and the Underwriter, the Initial Stockholders have waived their right to receive distributions with respect to their
founding shares upon the Company’s liquidation.
One of the Initial Stockholders committed to purchase 166,667 Units at $6.00 per unit (for an
aggregate purchase price of $1,000,002) privately from the Company. These purchases took place simultaneously with the consummation of the Offering. All of the proceeds received from this purchase have been placed in the Trust Account. The Units
purchased by such Initial Stockholder are identical to the Units offered in the Offering except that if the Company calls the Warrants for redemption, the Warrants underlying these Units may be exercisable on a “cashless basis” so long as
such Warrants are held by such Initial Stockholder or his affiliates. Additionally, such Initial Stockholder has waived his right to receive distributions upon the Company’s liquidation prior to a Business Combination with respect to the
securities underlying these Units. This Initial Stockholder has further agreed that the Units and underlying securities will not be sold or transferred by him until after the Company has completed a Business Combination and has agreed to vote the
shares of common stock underlying these Units in accordance with the vote of the majority in interest of the Public Stockholders with respect to any Business Combination.
The Initial Stockholders are entitled to registration rights with respect to their founding shares pursuant to an agreement signed on May 11, 2006. The holders of the majority of these shares are entitled to
make up to two
F-59
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
NOTES TO UNAUDITED CONDENSED
FINANCIAL STATEMENTS—(Continued)
demands that the Company register these shares at any time commencing February 11, 2009. In addition, the Initial Stockholders have certain
“piggy-back” registration rights on registration statements filed subsequent to May 11, 2009.
8. Subsequent Event
On July 31, 2007, the Company announced that it has signed a definitive agreement to acquire e.PAK Resources (S) Pte. Ltd. (“ePAK”), a privately
held, full-service supplier of semiconductor transfer and handling products.
Pursuant to the agreement, ePAK’s common stockholders and holders of
ePAK’s parent company’s stock options and other rights (collectively, the “ePAK’s stockholders”) will receive shares and options exercisable into shares aggregating approximately 8.6 million shares of ePak
International, the post-transaction public company.
ePAK’s stockholders will also be entitled to receive, on an all or none basis, an additional
88,525 shares, for each of the next three fiscal years beginning with the fiscal year ending December 31, 2008, if the combined company achieves the following EBITDA targets:
FY Ending December 31,
EBITDA Target
2008
$14,727,000
2009
$24,268,000
2010
$37,935,000
As additional consideration, ePAK’s stockholders will be entitled to receive up to 442,625 shares if the last
reported sales price on any twenty trading days during any consecutive thirty day trading period within six months of the closing of the transaction meets or exceeds the following values:
Share Price Trigger
Number of Market Price Shares
$6.00
88,525
$6.50
88,525
$7.00
88,525
$7.50
88,525
$8.00
88,525
In addition, ePAK stockholders will be entitled to 442,625 shares upon the redemption of ePAK International’s
publicly traded warrants and its corresponding receipt of funds.
In connection with the closing of the transactions, expected in the fourth quarter of
2007 or first quarter of 2008, the Company will be amalgamated with its wholly owned Bermuda subsidiary, Ascend Company Limited, with the company continuing after the amalgamation being renamed ePAK International Ltd. and existing as public company
domiciled in Bermuda. Common stock and warrants of ePAK International will be issued in exchange for all of the outstanding common stock and warrants of Ascend, on a one-for-one basis. Accordingly, following the closing, all of the
stockholders and warrant holders of Ascend and the shareholders of ePAK will be the security holders of ePAK International.
Following the closing of the
transaction, the post-transaction public company will be renamed ePAK International Ltd. It is expected that ePAK International’s common stock and warrants will trade on the NASDAQ Global Market.
F-60
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Ascend Acquisition Corp.
We have audited the accompanying balance sheets of
Ascend Acquisition Corp. (a corporation in the development stage) as of December 31, 2006 and 2005, and the related statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2006, the period from
December 5, 2005 (inception) to December 31, 2005 and the cumulative period from December 5, 2005 (inception) to December 31, 2006. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Ascend Acquisition Corp. as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the year ended December 31, 2006, the period from
December 5, 2005 (inception) to December 31, 2005 and the cumulative period from December 5, 2005 (inception) to December 31, 2006 in conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that Ascend Acquisition Corp. will continue as a going concern. As discussed in Note 1 to the
financial statements, Ascend Acquisition Corp. may face a mandatory liquidation by November 17, 2007 if a business combination is not consummated, unless certain extension criteria are met, which raises substantial doubt about its ability to
continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
February 22, 2007
F-61
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
BALANCE SHEETS
December 31,
2006
December 31,
2005
ASSETS
Current assets:
Cash and cash equivalents
$
423,590
$
80,061
Investments held in trust
39,354,720
—
Prepaid expenses
10,028
—
Deferred income taxes
28,100
—
Total current assets
39,816,438
80,061
Deferred offering costs associated with initial public offering
—
25,000
Total assets
$
39,816,438
$
105,061
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses
$
42,585
$
1,192
Income taxes payable
42,800
—
Deferred interest
168,816
—
Deferred payment due to underwriter
952,200
—
Note payable, stockholder
—
80,000
Total liabilities
1,206,401
81,192
Commitments
Common stock, subject to possible conversion, 1,379,310 shares at conversion value
7,698,189
—
Stockholders’ Equity:
Preferred stock, $.0001 par value, authorized 1,000,000 shares; none issued
—
—
Common stock, $.0001 par value, authorized 30,000,000 shares; issued and outstanding 8,566,667 shares (which includes 1,379,310 shares subject
to possible conversion) and 1,500,000 shares, respectively
857
150
Additional paid-in capital
30,529,388
24,850
Retained earnings (deficit) accumulated during development stage
381,603
(1,131
)
Total stockholders’ equity
30,911,848
23,869
Total liabilities and stockholders’ equity
$
39,816,438
$
105,061
The accompanying notes
should be read in conjunction with the financial statements.
F-62
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
STATEMENTS OF OPERATIONS
Year
Ended
December 31,
2006
December 5,
2005
(Inception) to
December 31,
2005
December 5,
2005
(Inception) to
December 31,
2006
General and administrative expenses
$
268,728
$
1,192
$
269,920
Operating loss
(268,728
)
(1,192
)
(269,920
)
Other income:
Interest income
8,461
61
8,522
Interest on trust fund investment
675,701
—
675,701
Total other income
684,162
61
684,223
Income (loss) before income taxes
415,434
(1,131
)
414,303
Income tax provision
(32,700
)
—
(32,700
)
Net income (loss)
$
382,734
$
(1,131
)
$
381,603
Weighted average shares of common stock outstanding
Basic and diluted
6,015,617
1,500,000
5,704,592
Earnings per common share
Basic and diluted
$
.06
$
(.00
)
$
.07
The accompanying notes should be read in conjunction with the financial statements.
F-63
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
Additional
Paid-In
Capital
Retained
Earnings
(Deficit)
Accumulated
during the
Development
Stage
Total
Shares
Amount
Sale of 1,500,000 shares of common stock to initial stockholders on December 5, 2005 at $0.0167 per share
1,500,000
$
150
$
24,850
$
—
$
25,000
Net loss for the period December 5, 2005 (inception) to December 31, 2005
—
—
—
(1,131
)
(1,131
)
Balance, December 31, 2005
1,500,000
150
24,850
(1,131
)
23,869
Sale of 6,900,000 units, net of underwriters’ discount and offering expenses (includes 1,379,310 shares subject to possible redemption)
6,900,000
690
37,202,642
—
37,203,332
Proceeds from issuance of insider units
166,667
17
999,985
—
1,000,002
Proceeds subject to possible conversion of 1,379,310 shares at approximately $5.58 per share
—
—
(7,698,189
)
—
(7,698,189
)
Proceeds from issuance of option
—
—
100
—
100
Net income for the year ended December 31, 2006
—
—
—
382,734
382,734
Balance, December 31, 2006
8,566,667
$
857
$
30,529,388
$
381,603
$
30,911,848
The accompanying notes
should be read in conjunction with the financial statements.
F-64
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
STATEMENTS OF CASH FLOWS
Year Ended
December 31,
2006
December 5,
2005
(Inception) to
December 31,
2005
December 5,
2005
(Inception) to
December 31,
2006
Cash flows from operating activities:
Net income (loss)
$
382,734
$
(1,131
)
$
381,603
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Interest income on investments held in trust
(844,517
)
—
(844,517
)
Change in operating assets and liabilities:
Decrease (increase) in prepaid expenses
(10,028
)
—
(10,028
)
Increase in deferred tax asset
(28,100
)
—
(28,100
)
Increase in accounts payable and accrued expenses
41,393
1,192
42,585
Increase in income taxes payable
42,800
—
42,800
Increase in deferred interest
168,816
—
168,816
Net cash used in operating activities
(246,902
)
61
(246,841
)
Cash flows from investing activities:
Purchase of treasury bills held in trust
(15,485,695
)
—
(15,485,695
)
Purchase of municipal securities held in trust
(30,809,507
)
—
(30,809,507
)
Sale/maturity of treasury bills held in trust
15,613,788
—
15,613,788
Sale of municipal securities held in trust
31,176,329
—
31,176,329
Purchase of Pennsylvania municipal securities held in trust
(39,005,118
)
—
(39,005,118
)
Net cash used in investing activities
(38,510,203
)
—
(38,510,203
)
Cash flows from financing activities:
Gross proceeds from initial public offering
41,400,000
—
41,400,000
Proceeds from note payable to stockholder
—
80,000
80,000
Repayment of note payable to stockholder
(80,000
)
—
(80,000
)
Proceeds from sale of shares of common stock to founding stockholders
—
25,000
25,000
Proceeds from issuance of option
100
—
100
Proceeds from sale of insider units
1,000,002
—
1,000,002
Payment of costs of public offering
(3,219,468
)
(25,000
)
(3,244,468
)
Net cash provided by financing activities
39,100,634
80,000
39,180,634
Net increase in cash and cash equivalents
343,529
80,061
423,590
Cash and cash equivalents at beginning of period
80,061
—
—
Cash and cash equivalents at end of period
$
423,590
$
80,061
$
423,590
Supplemental schedule of non-cash financing activity:
Accrual of costs of public offering
$
—
$
32,401
$
—
Deferred payment due to underwriter
952,200
—
952,200
The accompanying notes should be read in conjunction with the financial statements.
F-65
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
NOTES TO FINANCIAL STATEMENTS
1. Organization and
Business Operations
The Company was incorporated in Delaware on December 5, 2005 as a blank check company whose objective is to acquire an
operating business.
The registration statement for the Company’s initial public offering (“the Offering”) was declared effective
May 11, 2006. The Company consummated the Offering, including the over-allotment option, on May 17, 2006 and May 22, 2006, respectively, and received total net proceeds of approximately $37,203,000 (Note 5). The Company’s
management has broad discretion with respect to the specific application of the net proceeds of the Offering, although substantially all of the net proceeds of the Offering are intended to be generally applied toward consummating a business
combination with an operating business (“Business Combination”). Furthermore, there is no assurance that the Company will be able to successfully effect a Business Combination. An amount of $38,510,202, which includes $1,000,002 relating
to the sale of insider units and $952,200 deferred payment due to the underwriter (Note 5), is being held in an interest-bearing trust account (“Trust Account”) until the earlier of (i) the consummation of a Business Combination or
(ii) liquidation of the Company. Under the agreement governing the Trust Account, funds will be invested in United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 with a
maturity of 180 days or less, or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. The remaining net proceeds (not held in the Trust Account) may be used to pay for business, legal
and accounting due diligence on prospective acquisitions and continuing general and administrative expenses.
The Company, after signing a definitive
agreement for the acquisition of a target business, will submit such transaction for stockholder approval. In the event that stockholders owning 20% or more of the shares sold in the Offering vote against the Business Combination and exercise their
conversion rights described below, the Business Combination will not be consummated. All of the Company’s stockholders prior to the Offering, including all of the officers and directors of the Company (“Initial Stockholders”), have
agreed to vote their 1,500,000 founding shares of common stock in accordance with the vote of the majority in interest of all other stockholders of the Company (“Public Stockholders”) with respect to any Business Combination. After
consummation of a Business Combination, these voting safeguards will no longer be applicable.
With respect to a Business Combination that is approved and
consummated, any Public Stockholder who voted against the Business Combination may demand that the Company convert his shares to cash. The per share conversion price will equal the amount in the Trust Account, calculated as of two business days
prior to the consummation of the proposed Business Combination, divided by the number of shares of common stock held by Public Stockholders at the consummation of the Offering. Accordingly, Public Stockholders holding 19.99% of the aggregate number
of shares owned by all Public Stockholders may seek conversion of their shares in the event of a Business Combination. Such Public Stockholders are entitled to receive their per share interest in the Trust Account computed without regard to the
shares held by Initial Stockholders. Accordingly, a portion of the net proceeds of the Offering has been classified as common stock subject to conversion and 19.99% of the interest earned on the Trust Account has been recorded as deferred interest
in the accompanying December 31, 2006 balance sheet.
The Company’s Amended and Restated Certificate of Incorporation provides for mandatory
liquidation of the Company in the event that the Company does not consummate a Business Combination within 18 months from the date of the consummation of the Offering (November 17, 2007), or 24 months from the consummation of the Offering (May 17,
2008) if certain extension criteria have been satisfied. In the event of liquidation, it is likely that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be less than the initial
public offering price per share in the Offering due to costs related to the
F-66
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
NOTES TO FINANCIAL
STATEMENTS—(Continued)
Offering, general and administrative expenses incurred prior to the liquidation event and since no value would be attributed to the Warrants contained in the
Units sold (Note 5).
The Company may face a mandatory liquidation by November 17, 2007 if a business combination is not consummated, unless
certain extension criteria are met, which raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual amounts could differ from those
estimates.
Concentration of Credit Risk
Financial
instruments that potentially subject the Company to credit risk consist of cash equivalents and short-term investments. The Company’s policy is to place investments with financial institutions evaluated as being creditworthy, or in short-term
money market funds which are exposed to minimal interest rate and credit risk and in a highly rated United States Treasury Bills. At times, the Company has bank balances in excess of federally insured limits.
Fair Value of Financial Instruments
The following methods and
assumptions are used to estimate the fair value of each class of financial instruments for which it is practical to estimate:
Cash:
The carrying amount approximates the fair value.
Investment in Pennsylvania Municipal Money Market account:
This investment is
considered a trading security. The investment is carried at market value, which approximates cost plus accrued interest.
Deferred Interest
A portion (19.99%) of the interest earned on the Trust Account has been deferred on the balance sheet as it represents interest attributable to
the common stock subject to possible conversion (See Note 1).
Income Taxes
Deferred income taxes are provided for the differences between the bases of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Earnings per Common Share
Basic earnings per share (“EPS”) are computed by dividing net income applicable to common stock by the weighted average common shares outstanding during the period. Diluted EPS reflects the additional
dilution for all potentially dilutive securities such as stock warrants.
F-67
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
NOTES TO FINANCIAL
STATEMENTS—(Continued)
Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement
No. 109 (“FIN 48”), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is “more likely than
not” that the position is sustainable based on its technical merits. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The Company does not expect FIN 48 will have a material effect on its
consolidated financial condition or results of operations.
3. Investments Held in Trust
Investments held in trust at December 31, 2006 consist of a Pennsylvania Municipal Money Market trust obligation of $39,248,419, plus accrued interest of $106,301.
4. Earnings per Share
The following table sets forth
the computation of basic and diluted earnings per share:
Year Ended
December 31,
2006
December 5,
2005
(Inception) to
December 31,
2005
December 5,
2005
(Inception) to
December 31,
2006
Numerator: Net income (loss)
$
382,734
$
(1,131
)
$
381,603
Denominator: Average common shares outstanding
6,015,617
1,500,000
5,704,592
Basic and diluted earnings per share
$
.06
$
(.00
)
$
.07
No computation for diluted earnings per share was prepared for the Redeemable Common Stock Purchase Warrants (see
Note 5) to purchase an aggregate of 14,133,334 shares of common stock at $5.00 per share and the underwriters’ option (see Note 5) to purchase 300,000 Units at an exercise price of $7.50 per Unit, respectively, that were outstanding at
December 31, 2006 because the shares underlying the conversion of the warrants are contingently issuable and the exercise price of the underwriters’ option is in excess of the related market value of the Units.
5. Stockholders’ Equity
The Offering
On May 17, 2006, the Company sold 6,000,000 units (“Units”) in the Offering and on May 22, 2006, the Company sold an additional 900,000 Units related
to the underwriter’s over-allotment option. Each Unit consists of one share of the Company’s common stock, $.0001 par value, and two Redeemable Common Stock Purchase Warrants (“Warrants”). Each Warrant entitles the holder to
purchase from the Company one share of common stock at an exercise price of $5.00 commencing on the later of the completion of a Business Combination with a target business or May 11, 2007 and expiring May 10, 2010. The Warrants will be
redeemable, at the Company’s option, at a price of $.01 per Warrant upon 30 days’ notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $8.50 per share for any 20 trading
days within a 30 trading day period ending on the third day prior to the date on which notice of redemption is given. The Company agreed to pay EarlyBirdCapital, Inc., the underwriter in the Offering (“Underwriter”) an underwriting
discount of 8% of the gross proceeds of the Offering and a non-accountable expense allowance of 1% of the
F-68
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
NOTES TO FINANCIAL
STATEMENTS—(Continued)
gross proceeds of the Offering. However, the Underwriter agreed that 2.3% of the underwriting discount ($952,200) will not be payable unless and until the
Company completes a Business Combination and has waived its right to receive such payment upon the Company’s liquidation if it is unable to complete a Business Combination.
In connection with this Offering, the Company also issued an option (“Option”), for $100, to the Underwriter to purchase 300,000 Units at an exercise price of $7.50 per Unit. The Units issuable upon
exercise of the Option are identical to the Units sold in the Offering. The Company has accounted for the fair value of the Option, inclusive of the receipt of the $100 cash payment, as an expense of the Offering resulting in a charge directly to
stockholders’ equity. The Company estimated that, as of the date of issuance, the fair value of the Option was approximately $711,000 ($2.37 per Unit) using a Black-Scholes option-pricing model. The fair value of the Option granted to the
Underwriter was estimated using the following assumptions: (1) expected volatility of 46.56%, (2) risk-free interest rate of 4.31% and (3) expected life of 5 years. The Option may be exercised for cash or on a “cashless”
basis, at the holder’s option, such that the holder may use the appreciated value of the Option (the difference between the exercise prices of the Option and the underlying Warrants and the market price of the Units and underlying securities)
to exercise the option without the payment of any cash.
Common Stock
The Company’s initial stockholders purchased 875,000 common shares for $25,000 on December 5, 2005. On April 19, 2006, the Company’s Board of Directors authorized a stock dividend of 0.714285
shares of common stock for each share of common stock outstanding, bringing the initial outstanding shares to 1,500,000. On April 20, 2006, the Company’s Certificate of Incorporation was amended to increase the authorized shares of common
stock from 15,000,000 to 30,000,000 shares of common stock. All references in the accompanying financial statements to the number of shares of stock have been retroactively restated to reflect these transactions.
Preferred Stock
The Company is authorized to issue 1,000,000 shares
of preferred stock, par value $.0001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors.
The agreement with the Underwriter prohibits the Company, prior to a Business Combination, from issuing preferred stock which participates in the proceeds of the Trust Account or which votes as a class with the Common
Stock on a Business Combination.
6. Note Payable, Stockholder
The Company issued an $80,000 unsecured promissory note to an Initial Stockholder, who is also an officer, on December 20, 2005. The note was non interest-bearing and was due following the consummation of the Offering from the net
proceeds of such Offering. The note was repaid on May 24, 2006.
F-69
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
NOTES TO FINANCIAL
STATEMENTS—(Continued)
7. Income taxes
The provision for income taxes consists of the following:
For the year ended
December 31,
For the period
December 5,
2005 (inception)
to December 31,
2006
2006
2005
Current federal
$
28,100
$
—
$
28,100
Deferred federal
(28,100
)
—
(28,100
)
Current state
32,700
—
32,700
Deferred state
—
—
—
$
32,700
$
—
$
32,700
The total provision for income taxes differs from that amount which would be computed by applying the U.S. Federal
income tax rate to income before provision for income taxes as follow:
For the year ended
December 31,
For the period
December 5,
2005 (inception)
to December 31,
2006
2006
2005
Statutory federal income tax rate
34.0
%
(34.0
%)
34.0
%
Permanent differences and other
(34.0
%)
—
(34.0
%)
State tax effect
7.9
%
7.9
%
Increase in valuation allowance
—
34.0
%
—
Effective income tax rate
7.9
%
—
7.9
%
The tax effect of temporary differences that give rise to the net deferred tax asset is as follows:
December 31,
2006
2005
Expenses deferred for income tax purposes
$
88,100
$
—
Deferred interest
16,000
Federal net operating loss carryforwards
—
385
Valuation allowance
(76,000
)
(385
)
Net deferred tax asset
$
28,100
$
—
During the year ended December 31, 2006, the Company paid $9 in federal income taxes for 2005 and $18,000 to
Pennsylvania for 2006 income tax.
8. Commitments
The Company presently occupies office space provided by an affiliate of the Company’s special advisor. Such affiliate has agreed that, until the Company consummates a Business Combination, it will make such office space, as well as
certain office and secretarial services, available to the Company, as may be required by the Company from time to time. The Company has agreed to pay such affiliate $7,500 per month for such services commencing May 11, 2006.
F-70
ASCEND ACQUISITION CORP.
(a corporation in the development stage)
NOTES TO FINANCIAL
STATEMENTS—(Continued)
Pursuant to letter agreements with the Company and the Underwriter, the Initial Stockholders have waived their right
to receive distributions with respect to their founding shares upon the Company’s liquidation.
One of the Initial Stockholders committed to purchase
166,667 Units at $6.00 per unit (for an aggregate purchase price of $1,000,002) privately from the Company. These purchases took place simultaneously with the consummation of the Offering. All of the proceeds received from this purchase have been
placed in the Trust Account. The Units purchased by such Initial Stockholder are identical to the Units offered in the Offering except that if the Company calls the Warrants for redemption, the Warrants underlying these Units may be exercisable on a
“cashless basis” so long as such Warrants are held by such Initial Stockholder or his affiliates. Additionally, such Initial Stockholder has waived his right to receive distributions upon the Company’s liquidation prior to a Business
Combination with respect to the securities underlying these Units. This Initial Stockholder has further agreed that the Units and underlying securities will not be sold or transferred by him until after the Company has completed a Business
Combination and has agreed to vote the shares of common stock underlying these Units in accordance with the vote of the majority in interest of the Public Stockholders with respect to any Business Combination.
The Initial Stockholders will be entitled to registration rights with respect to their founding shares pursuant to an agreement signed on May 11, 2006. The holders
of the majority of these shares are entitled to make up to two demands that the Company register these shares at any time commencing February 11, 2009. In addition, the Initial Stockholders have certain “piggy-back” registration
rights on registration statements filed subsequent to May 11, 2009.
F-71
Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 8A. Controls and Procedures.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or
submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management,
including our chief executive officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15
under the Exchange Act, our Chief Executive Officer (principal executive, financial and accounting officer) carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31,
2006. Based upon his evaluation, he concluded that our disclosure controls and procedures were effective.
Our internal control over financial reporting is
a process designed by, or under the supervision of, our chief executive officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the
preparation of our financial statements for external purposes in accordance with generally accepted accounting principles (United States). Internal control over financial reporting includes policies and procedures that pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance
with generally accepted accounting principles (United States), and that our receipts and expenditures are being made only in accordance with the authorization of our board of directors and management; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
F-72
Annex A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
ASCEND ACQUISITION CORP.,
(“Parent”)
ASCEND COMPANY LIMITED,
(“Amalgamation Sub”)
ePAK
HOLDINGS LIMITED
(“EHL”)
AND
e.PAK RESOURCES (S) PTE. LTD.
(the “Company” or “EPR”)
DATED AS OF JULY 30, 2007
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (“
Agreement
”) is made and entered into as of July 30, 2007 by and among Ascend
Acquisition Corp., a Delaware corporation (“
Parent
”), Ascend Company Limited, a Bermuda limited company that is owned by Don K. Rice as nominee for Parent (“
Amalgamation Sub
”), ePak Holdings Limited
(“
EHL
”), a limited liability company incorporated in the Hong Kong Special Administrative Region of the People’s Republic of China (“
Hong Kong
”), and e.Pak Resources (S) Pte. Ltd., a Singapore limited
company and wholly owned subsidiary of EHL (“
Company
”). The term “
Agreement
” as used herein refers to this Agreement and Plan of Reorganization, as the same may be amended from time to time, and all schedules hereto
(including the Company Schedule and the Parent Schedule, as defined in the preambles to Articles II and III hereof, respectively).
RECITALS
A. Upon the terms and subject to the conditions of this Agreement and in accordance with the applicable laws of the jurisdictions set
forth on
Schedule A
hereto (the “
Applicable Corporate Laws
”), Parent, Amalgamation Sub, EHL and the Company intend to enter into a business combination, reincorporation and share transfer (collectively, the
“
Acquisition
”) as set forth herein.
B. The boards of directors of each of Parent, Amalgamation Sub, the Company and EHL
have determined that the Acquisition is fair to, and in the best interests of, their respective companies and stockholders.
NOW,
THEREFORE, in consideration of the covenants, promises and representations set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows (defined terms
used in this Agreement are listed alphabetically in Article IX, together with the Section and, if applicable, paragraph number in which the definition of each such term is located):
ARTICLE I
THE ACQUISITION
1.1
The Acquisition.
At the Effective Time (as defined in Section 1.2), and subject to and upon the terms and conditions of this Agreement
and the Applicable Corporate Laws, the parties hereto shall consummate the Acquisition, by which (a) all of the outstanding capital shares of Amalgamation Sub shall be transferred by Mr. Rice, as nominee for Parent, to Parent,
(b) Parent shall then be immediately amalgamated with Amalgamation Sub (the “
Amalgamation
”), the separate corporate existence of each of Parent and Amalgamation Sub shall cease and the resultant, continuing entity shall bear
the name of Amalgamation Sub (“
Continuing Corporation
”), (c) all of the outstanding securities of Parent shall be exchanged for securities of Continuing Corporation in like number and tenor and (d) concurrently therewith,
Amalgamation Sub shall acquire all of the issued share capital of the Company (the “
Share Transfer
”).
1.2
Effective
Time; Closing
. Subject to the conditions of this Agreement, the parties hereto shall concurrently cause the Acquisition to be consummated by filing with each jurisdiction set forth on
Schedule A
the certificates, articles and other
transaction documents necessary to consummate the Acquisition (including, but not limited to, any notices, stock transfer forms, statutory declarations and payment of any transfer, stamp or duty taxes in accordance with
Section 1.8(c))
including, but not limited to, those described on
Schedule A
in accordance with the Applicable Corporate Laws (collectively, the “
Transaction Certificates
”). The time of the last such filing to be properly completed and
become effective, or such later time as may be agreed in writing by the parties hereto and specified in the Transaction Certificates, shall be referred to herein as the “
Effective Time.
” Unless this Agreement has been terminated
pursuant to Section 8.1, the closing of the Acquisition (the “
Closing
”) shall take place at the offices of Graubard Miller, counsel to Parent, 405 Lexington Avenue, New
A-1
York, New York 10174-1901 at a time and date to be specified by the parties, which shall be no later than the second business day after the satisfaction or
waiver of the conditions set forth in Article VI, or at such other time, date and location as the parties hereto agree in writing (the “
Closing Date
”). Closing signatures may be transmitted by facsimile.
1.3
Effect of the Acquisition
. At the Effective Time, the effect of the Acquisition shall be as provided in this Agreement and the Applicable
Corporate Laws. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time:
(a) All the
property, rights, privileges, powers and franchises of Parent and Amalgamation Sub shall vest in the Continuing Corporation, and all debts, liabilities and duties of Parent and Amalgamation Sub shall become the debts, liabilities and duties of the
Continuing Corporation;
(b) All of the outstanding common stock (“
Parent Common Stock
”) and warrants of
Parent (“
Parent Warrants
”) outstanding immediately prior to the Acquisition will be exchanged for common shares of Continuing Corporation (“
Continuing Corporation Common Shares
”) and warrants of Continuing
Corporation having materially identical terms to the Parent Warrants (“
Continuing Corporation Warrants
”);
(c) All of the issued share capital of the Company shall be transferred to the Continuing Corporation in the Share Transfer and the Company shall become a wholly owned subsidiary of the Continuing Corporation; and
(d) In consideration for the transfer of all of the issued share capital of the Company to the Continuing Corporation, the Continuing
Corporation shall issue Continuing Corporation Common Shares as provided in this Agreement.
1.4
Articles of Association; Memorandum of
Association.
(a) At the Effective Time, the Memorandum of Association and Bylaws of Amalgamation Sub shall become the
Memorandum of Association and Bylaws of the Continuing Corporation; and
(b) At the Effective Time, the Articles of
Association and Memorandum of Association of the Company shall remain the Articles of Association and Memorandum of Association of the Company.
1.5
Effect on Parent Securities.
Subject to the terms and conditions of this Agreement, the following shall occur:
(a) immediately prior to the Effective Time, all of Parent’s outstanding publicly traded units shall be separated into their Parent Common Stock and Parent Warrant components and the units shall cease to exist;
(b) at the Effective Time, all of the outstanding shares of Parent Common Stock shall be immediately and automatically converted into the
right to receive Continuing Corporation Common Shares (having the same material terms as the Parent Common Stock) on a one-for-one basis; and
(c) at the Effective Time, all of the outstanding Parent Warrants shall be immediately and automatically converted into the right to receive Continuing Corporation Warrants (having the same material terms as the
Parent Warrants) on a one-for-one basis.
1.6
Effect on Capital Stock of Amalgamation Sub.
At the Effective Time, all the common
shares of Amalgamation Sub (the “
Amalgamation Sub Common Shares
”) issued and outstanding immediately prior to the Effective Time shall be terminated.
1.7
Purchase of Company Securities.
At the Effective Time, the following shall occur:
(a)
Purchase of Company Securities.
Subject to the terms and conditions of this Agreement, at the Effective Time, EHL shall sell, transfer, assign, convey and deliver to Amalgamation Sub, and Amalgamation Sub shall purchase from EHL,
all of the Company Securities (as defined in Section 2.3(a)),
A-2
in exchange for the right of EHL to receive (i) the aggregate number of ordinary shares (the “
Transaction Shares
”) of Continuing
Corporation Common Shares determined in accordance with Section 1.7(b), (ii) up to an aggregate of 442,625 additional Continuing Corporation Common Shares (“
Market Price Shares
”) if the market price of the Continuing
Corporation Common Shares exceeds certain levels as provided in Section 1.14(a), (iii) the right to receive 442,625 additional Continuing Corporation Common Shares (“
Redemption Shares
”) upon redemption of the Continuing
Corporation’s publicly traded warrants as provided in Section 1.14(c), and (iv) up to an aggregate of 265,575 additional Continuing Corporation Common Shares (“
EBITDA Shares
”) if the combined companies following the
Acquisition generate annual EBITDA for fiscal 2008, 2009 and/or 2010 in excess of certain levels as provided in Section 1.14(b).
The Transaction Shares, Market Price Shares, Redemption Shares and EBITDA Shares shall be referred to herein
collectively as the “
Transaction Consideration.
” The Transaction Consideration shall be issued by Continuing Corporation to EHL, subject to the terms and conditions set forth in this Agreement.
(b)
Calculation and Adjustment of Transaction Shares.
(i) “
Ascend Trust Value
” shall mean the value of all amounts held in the Trust Fund as of immediately prior to the
Closing, less the sum of all Parent Effective Time Liabilities (excluding the amounts to be paid to holders who convert their Parent Common Stock into a pro rata portion of the Trust Fund pursuant to Section B of the Sixth Article of Parent’s
Amended and Restated Certificate of Incorporation as in effect as of the date hereof); provided, that, for purposes of this Section 1.7(b), if such amount is within the range from and including $36,290,000 to and including $40,110,000, Ascend
Trust Value shall be deemed equal to $38,200,000.
(ii) “
Ascend Outstanding Shares
” shall mean the number
of shares of Parent Common Stock (including Parent Common Stock issuable upon the conversion or exercise of all outstanding options, warrants, rights (including conversion or preemptive rights) or other agreements for the purchase or acquisition
from Parent or the Continuing Corporation (other than the Parent Warrants) and including the shares of Parent Common Stock to be converted into a pro rata portion of the Trust Fund pursuant to Section B of the Sixth Article of Parent’s Amended
and Restated Certificate of Incorporation as in effect as of the date hereof) outstanding as of immediately prior to the Closing.
(iii) “
EBITDA
” for purposes of this Section 1.7(b) shall consist of the Company’s consolidated operating earnings before interest expense and bank charges associated with borrowings, depreciation and amortization
expense and taxes plus the sum of (A) the Company’s employee share options expense as required to be expensed off according to US GAAP or Singapore GAAP or Hong Kong GAAP, (B) amounts paid or accrued by the Company or EHL
pursuant to Section 8 of that certain Shareholders Agreement dated January 18, 2005 among EHL and the “Investor Shareholders” and “Founder Shareholders” as defined therein, (C) all costs and expenses incurred by
the Company and EHL related to the Acquisition and the preparation of this Agreement and all documents and agreements contemplated herein, including the fees and disbursements of counsel, financial advisors and accountants and fees and expenses
resulting from the conversion of the Company’s financial statements to US GAAP and the audit thereof by Ernst & Young LLP, (D) fees and expenses resulting from the audit of the Company’s financial statements for fiscal
2007 by Ernst & Young LLP, and (E) losses associated with currency exchange translation, in each case incurred or accrued to the Company with respect to the period from July 1, 2006 through June 30, 2007 and $70,000 of
expenses incurred by the Company in connection with activities related to GWA Capital Partners.
(iv) “
EBITDA
Factor
” shall mean the sum of (A) that number derived from multiplying EBITDA by 5.72, plus (B) the aggregate exercise price of all EHL Options (as defined below).
(v) “
EBITDA Factor Ratio
” shall mean quotient obtained by dividing (A) EBITDA Factor by (B) the sum of Ascend
Trust Value plus EBITDA Factor.
(vi) “
Assumed Option Shares
” shall mean the aggregate number of Continuing
Corporation Common Shares underlying all of the Assumed Options (as defined below).
A-3
(vii) On the date three (3) days prior to the Effective Time, Parent shall deliver
to the Company a written good faith calculation of Ascend Trust Value as of the Effective Time, together with all financial statements and other information necessary to support such calculation (the “
Ascend Trust Value
Calculation
”).
(viii) As soon as practicable following June 30, 2007 (but in no event later than
August 15, 2007), the Company shall deliver to Parent a written good faith calculation of Interim EBITDA for the twelve (12) month period ended at June 30, 2007, together with all financial statements and other information reasonably
necessary to support such calculation.
(ix) The number of Transaction Shares to be issued at Closing shall be equal to:
(EBITDA Factor Ratio x Ascend Outstanding Shares / (1 – EBITDA Factor Ratio)) – Assumed Option Shares
(x) Notwithstanding anything the contrary contained in this Agreement, for purposes of this Section 1.7(b), if EBITDA
is (a) within the range from and including $6,341,250 to and including $7,008,750, EBITDA shall be deemed equal to $6,675,000; (b) equal to or less than $5,673,750, EBITDA shall be deemed to be $5,673,750; and (c) equal to or greater
than $8,010,000, EBITDA shall be deemed to be $8,010,000.
(xi) As soon as practicable following the Effective Time (but no
later than forty-five (45) days thereafter), the Continuing Corporation shall deliver to the Representative a final computation (the “
Parent Effective Time Liabilities Calculation
”) of the Parent Effective Time Liabilities. If
the Representative agrees with the Parent Effective Time Liabilities Calculation or does not object to such computation within fifteen (15) days after its receipt of such computation by delivering a Parent Effective Time Liabilities Objection
Notice (as defined below) to the Continuing Corporation, the Parent Effective Time Liabilities Calculation shall be deemed to be final and conclusive and shall be binding on the Continuing Corporation, EHL, the Representative and each of the holders
of the capital stock of the Continuing Corporation. If the Representative disagrees with the Parent Effective Time Liabilities Calculation, the Representative shall, within fifteen (15) days after receipt of the Parent Effective Time
Liabilities Calculation, deliver a notice (a “
Parent Liabilities Objection Notice
”) to the Continuing Corporation setting forth the Representative’s proposed calculation of the amount of Parent Effective Time Liabilities. The
Committee, on behalf of the Continuing Corporation, and the Representative will use their respective commercially reasonable efforts to resolve any disagreements as to the computation of the amount of Parent Effective Time Liabilities, but if they
do not obtain a final resolution within the 90-day period following the Closing, or there is otherwise a dispute with respect to the number of Transaction Shares issued at Closing, including a dispute with respect to any values used in the
computation thereof pursuant to this Agreement, that is not resolved by the end of such period, the Committee or the Representative shall instruct the PCOAB-registered accounting firm then serving as Continuing Corporation’s independent
accounting firm to review all of the above calculations and relevant financial information available at the time of such review and deliver a statement of its determination of each calculation in dispute, including the number of Transaction Shares
that would have been issued at Closing had such accounting firm’s calculations been utilized at Closing (the “
Transaction Share True-up
”). The Transaction Share True-up shall be binding on the parties and any difference between
the number of Transaction Shares issuable under the Transaction Share True-up and the actual number of Transaction Shares issued at Closing (the “
Actual Issuance
”) shall be remedied as follows: If the Actual Issuance is greater than
the Transaction Share True-up (“
Overage
”), the number of Escrow Shares equal to the Overage shall be returned to Continuing Corporation from the Escrow as soon as practicable. If the number of Escrow Shares available in Escrow is
not sufficient to make up 100% of the Overage, EHL (or the relevant recipients of Transaction Shares severally and not jointly) shall return to Continuing Corporation on demand, for cancellation, that number of Transaction Shares received by him or
it necessary to fully cover the Overage. If the Transaction Share True-up is greater than the Actual Issuance (“
Shortage
”), Continuing
A-4
Corporation shall, as soon as practicable, issue to EHL (or to such other persons as EHL instructs Continuing Corporation in writing) that number of
additional Continuing Corporation Common Shares equal to the Shortage.
(c)
Cancellation of Treasury and Parent-Owned
Stock.
At the Effective Time, all of the Company Securities held by the Company or owned by Amalgamation Sub, Parent or any direct or indirect wholly-owned subsidiary of the Company or of Parent immediately prior to the Effective Time shall be
canceled and extinguished without any conversion or exchange in respect thereof.
(d)
Adjustments to Exchange Ratios.
The number of Continuing Corporation Common Shares to be issued under this Section 1.7 as a result of the Acquisition shall be equitably adjusted to reflect appropriately the effect of any stock split, reverse stock split, stock dividend
(including any dividend or distribution of securities convertible into Continuing Corporation Common Shares), reorganization, recapitalization, reclassification, combination, exchange of shares or other like change with respect to Continuing
Corporation Common Shares or Company Securities occurring on or after the date hereof and prior to the date of issuance or payments thereof.
(e)
Fractional Shares.
No fraction of a Continuing Corporation Common Share will be issued by virtue of the Acquisition, and each recipient who would otherwise be entitled to a fraction of a Continuing
Corporation Common Share (after aggregating all fractional Continuing Corporation Common Shares that otherwise would be received by such holder) shall receive, up on compliance with Section 1.8, receive, in lieu of such fractional share, one
(1) Continuing Corporation Common Share.
(f)
Treatment of EHL Options.
(i) All options to purchase shares of EHL Ordinary Shares issued and outstanding
immediately prior to the Effective Time under the ePak Holdings Limited Directors’ and Employees’ Shares Incentive Plan (“
EHL Options
”) shall, at the Effective Time, be deemed without any action on the part of any holder
of EHL Options to have been, and shall be, assumed by the Continuing Corporation and each EHL Option shall become an option to acquire shares of Continuing Corporation Common Shares, on the same terms and conditions as were applicable under the EHL
Option immediately prior to the Effective Time (collectively, the “
Assumed Options
”), except (i) that such Assumed Option shall be exercisable for that number of whole Continuing Corporation Common Shares equal to the product
(rounded down to the nearest whole number of Continuing Corporation Common Shares) obtained by multiplying the number of shares of EHL Ordinary Shares issuable upon the exercise of such EHL Option immediately prior to the Effective Time by the
Option Exchange Ratio (as defined below), and (ii) that the per share exercise price for the Continuing Corporation Common Shares issuable upon exercise of such Assumed Option shall be equal to the quotient (rounded up to the nearest whole
cent) obtained by dividing the exercise price per share of the EHL Ordinary Shares for which the EHL Option was exercisable immediately prior to the Effective Time by the Option Exchange Ratio. All Assumed Options that were deemed “incentive
stock options” under Section 422 of the Internal Revenue Code of 1986, as amended (the “
Code
”), shall continue to be deemed “incentive stock options.” The Continuing Corporation shall file a registration
statement on Form S-8 on or as practicable after the 91
st
day after the Closing with respect to all shares of its common stock subject to the Assumed
Options that may be registered on Form S-8 and shall use its commercially reasonable efforts to cause and maintain the effectiveness of such registration statement or any other registration statement under the Securities Act covering such shares for
so long as such Assumed Options remain outstanding. EHL shall not grant any options under the ePak Holdings Limited Directors’ and Employees’ Shares Incentive Plan after the date hereof nor shall it change the terms of any currently
outstanding EHL Options.
(ii) “
EHL Outstanding Shares
” shall mean the number of Ordinary Shares of
EHL (including Ordinary Shares issuable upon the conversion or exercise of all outstanding EHL Options and A RCPS, B RCPS and C RCPS) outstanding as of immediately prior to the Closing.
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(iii) The “
Option Exchange Ratio
” shall be equal to:
[(EBITDA Factor Ratio x Ascend Outstanding Shares / (1 – EBITDA Factor Ratio))] / EHL Outstanding Shares
1.8
Issuance of Certificates; Uncertificated Shares.
(a)
Issuance Procedures.
At the Closing, Continuing Corporation shall issue to EHL, and EHL shall receive, certificates representing the Transaction Shares issuable pursuant to this Agreement, less the Escrow
Shares (as defined in Section 1.13(a)).
(b)
Required Withholding.
Continuing Corporation shall be entitled to
deduct and withhold from any consideration payable or otherwise deliverable pursuant to this Agreement such amounts as are required to be deducted or withheld therefrom under the Code or under any provision of state, local or foreign tax law. To the
extent such amounts are so deducted or withheld, such amounts shall be treated for all purposes under this Agreement as having been paid to the person to whom such amounts would otherwise have been paid.
(c)
Transfer Taxes.
The Continuing Corporation shall pay any transfer, stamp or duty taxes (“
Stamp Taxes
”)
resulting from the Share Transfer within fourteen (14) days after the Effective Date and any additional Stamp Taxes arising from any issuances of Transaction Consideration occurring after the Effective Date within fourteen (14) days after
the date of each such issuance.
1.9
No Further Ownership Rights in Company Stock.
All Continuing Corporation Common Shares issued
in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to the Company Securities and there shall be no further registration of transfers on the records of the Company of Company
Securities that were outstanding immediately prior to the Effective Time. If, after the Effective Time, Company Certificates are presented to the Company or Continuing Corporation for any reason, they shall be canceled and exchanged as provided in
this Article I.
1.10
Lost, Stolen or Destroyed Certificates.
In the event that any certificates or other documents evidencing
Company Securities (the “
Company Certificates
”) shall have been lost, stolen or destroyed, Continuing Corporation shall issue, in exchange for such lost, stolen or destroyed Company Certificates, upon the making of an affidavit of
that fact by the holder thereof, the certificates representing the Continuing Corporation Common Shares that the Company Securities formerly represented by such Company Certificates were converted into; provided, however, that, as a condition
precedent to the issuance of such certificates representing Continuing Corporation Common Shares, the owner of such lost, stolen or destroyed Company Certificates shall indemnify Continuing Corporation against any claim that may be made against
Parent, the Continuing Corporation or the Company with respect to the Company Certificates alleged to have been lost, stolen or destroyed pursuant to a form of lost instrument agreement reasonably acceptable to the Continuing Corporation.
1.11
Tax Consequences.
It is intended by the parties hereto that the Acquisition and the Share Transfer each shall constitute a
reorganization within the meaning of Section 368 of the Code. The Parties hereto adopt this Agreement as a “plan of reorganization” within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Income Tax Regulations.
The parties acknowledge and agree that the capital stock of the Company owned by EHL and transferred to Amalgamation Sub in the Share Transfer constitutes at least 90% of the fair market value of the net assets of EHL and at least 70% of the fair
market value of the gross assets of EHL. Amalgamation Sub has no present plan or intention to sell or dispose of the capital stock of the Company or any of the Company’s assets. After the Closing, Amalgamation Sub will continue or cause to be
continued the historic business of the Company. Within 12 months after the Closing Date, EHL will liquidate, and distribute the Continuing Corporation Common Shares received as the Transaction Consideration (including the right to receive the Market
Price Shares, the Redemption Shares and EBITDA Shares) in pursuance of the plan or reorganization. The Continuing Corporation will comply with the record-keeping and information filing requirements of United States Treasury Regulations §
1.368-3.
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1.12
Taking of Necessary Action; Further Action.
If, at any time after the Effective Time, any
further lawful action is reasonably necessary to effect the transactions required by this Agreement and to vest the Continuing Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of
the Company, the officers and directors of the Continuing Corporation and EHL will take all such lawful and reasonably necessary action.
1.13
Escrow
.
(a) As the sole remedy for the indemnity obligations set forth in Article VII, at the Closing,
Continuing Corporation shall deposit into escrow, to be held for the period beginning on the Closing Date and ending on the one year anniversary thereof (the “
Escrow Period
”) and for such further period as may be required pursuant
to the Escrow Agreement referred to below, a number of Transaction Shares equal to 15% of the Transaction Shares plus the Assumed Option Shares (the “
Escrow Shares
”), all in accordance with the terms and conditions of the Escrow
Agreement to be entered into at the Closing between Continuing Corporation, the Representative referred to in Section 1.17 and Continental Stock Transfer & Trust Company, as Escrow Agent, in the form annexed hereto as
Exhibit A
(the “
Escrow Agreement
”).
(b) The Escrow Shares and the Escrow also shall be utilized to effectuate any
reduction in the Transaction Shares as a result of the Transaction Share True-up in Section 1.7(b).
1.14
Potential Additional
Issuances.
(a)
Contingent Share Issuance.
(i) In the event that the Last Reported Sales Price (as defined herein) of the Continuing Corporation Common Shares is equal to or exceeds
one or more of the dollar amounts set forth in the table below under the caption “Share Price Trigger” on any twenty (20) Trading Days (as defined herein) during any thirty (30) consecutive Trading Day period (the “
Share
Price Measurement Period
”) at any time during the period commencing on the Closing Date and ending on the 180th day thereafter (the “
Share Price Trigger Period
”), the Continuing Corporation will issue, and EHL (or its
designees set forth in the Payment Schedule (as defined below)) will receive, the aggregate number of Market Price Shares for each and every corresponding Share Price Trigger met or exceeded as follows, for a total issuance of up to 442,625 Market
Price Shares:
Share Price Trigger
Number of Market Price
Shares
$6.00
88,525
$6.50
88,525
$7.00
88,525
$7.50
88,525
$8.00
88,525
(ii) The term “
Last Reported Sales Price
” on any date shall mean
the closing sale price per share of the Continuing Corporation Common Shares (or if no closing sale price is reported, the average of the closing bid and asked prices) on that date as reported in composite transactions for the principal U.S.
securities exchange on which the Continuing Corporation Common Shares is traded or, if same is not listed on a U.S. national or regional securities exchange, as reported by the Nasdaq Global Market or Nasdaq Capital Market or OTC-BB, as applicable.
If the Continuing Corporation Common Shares is not listed for trading on a U.S. national or regional securities exchange and not reported by the Nasdaq Global Market or Nasdaq Capital Market or OTC-BB on the relevant date, the Last Reported Sales
Price will be the last quoted bid price for a Continuing Corporation Common Share in the over-the-counter market on the relevant date as reported by Pink Sheets LLC or similar organization.
(iii) The term “
Trading Day
” shall mean a day during which trading in securities generally occurs on the principal
national securities exchange on which the Continuing Corporation Common Shares is
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then listed or, if not then listed on a national securities exchange, on the Nasdaq Global Market or, if not then quoted on the Nasdaq Global Market, on the
principal other market or trading system on which the Continuing Corporation Common Shares is traded or quoted.
(iv) Any
Market Price Shares shall be issued by Continuing Corporation to EHL (or its designees set forth in the Payment Schedule) within ten (10) business days after the conditions in Section 1.14(a) have been satisfied.
(v) Each Share Price Trigger shall be equitably adjusted to reflect appropriately the effect of any stock split, reverse stock split,
stock dividend (including any dividend or distribution of securities convertible into Continuing Corporation Common Shares), reorganization, recapitalization, reclassification, combination, exchange of shares or other like change with respect to
Continuing Corporation Common Shares occurring after the date hereof and prior to the termination of the Share Price Measurement Period.
(b)
EBITDA Share Issuance.
(i) If the Continuing Corporation has combined
consolidated EBITDA of $14,727,000 or more for the year ending December 31, 2008 as set forth in Continuing Corporation’s audited consolidated financial statements for the year ending December 31, 2008, EHL (or its designees set forth
in the Payment Schedule) shall be entitled to receive an aggregate of 88,525 EBITDA Shares.
(ii) Additionally, if the
Continuing Corporation has combined consolidated EBITDA of $24,268,000 or more for the year ending December 31, 2009 as set forth in Continuing Corporation’s audited consolidated financial statements for the year ending December 31,
2009, EHL (or its designees) shall be entitled to receive an aggregate of 88,525 additional EBITDA Shares.
(iii)
Additionally, if the Continuing Corporation has combined consolidated EBITDA of $37,935,000 or more for the year ending December 31, 2010 as set forth in Continuing Corporation’s audited consolidated financial statements for the year
ending December 31, 2010, EHL (or its designees) shall be entitled to receive an aggregate of 88,525 additional EBITDA Shares.
(iv) Any EBITDA Shares issuable under this Section 1.14(b) shall be delivered by the Continuing Corporation to each recipient within ten (10) business days after the date that the audit for the applicable fiscal year has been
completed by Continuing Corporation’s independent auditing firm, which shall occur no later than ninety (90) days after the end of each applicable fiscal year unless otherwise agreed to in writing by the Representative.
(v) “
EBITDA
” for purposes of this Section 1.14(b) shall consist of the Company’s operating earnings before
interest expense and bank charges associated with borrowings, depreciation and amortization expense and taxes plus the sum of (A) the Company’s employee share options expense as required to be expensed according to US GAAP,
(B) amounts paid or accrued by the Company or the Continuing Corporation under the Bonus Plan (as defined herein), (C) costs and expenses incurred related to the Acquisition and the preparation of this Agreement and all documents and
agreements contemplated herein, including the fees and disbursements of counsel, financial advisors and accountants and fees and expenses resulting from the conversion of the Company’s financial statements to US GAAP and the audit thereof
by Ernst & Young LLP, (D) losses associated with currency exchange translation, (E) fees and expenses resulting from the audit of the Company’s financial statements by independent auditors of the Continuing Corporation,
(F) costs and expenses associated with compliance with SEC reporting and compliance obligations, including but not limited to the Sarbanes-Oxley Act of 2002 and (G) expenses associated with the issuance of EBITDA Shares and the Redemption
Shares, amounts to be paid to holders who convert their Parent Common Stock into a pro rata portion of the Trust Fund pursuant to Section B of the Sixth Article of Parent’s Amended and Restated Certificate of Incorporation as in effect as of
the date hereof and the exercise of the Continuing Corporation Warrants, in each case incurred or accrued to the Company during the applicable period.
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(c)
Redemption Share Issuance.
If Continuing Corporation triggers a redemption of
the Continuing Corporation Warrants, then, upon completion of the redemption of all of Continuing Corporation Warrants (or, in the event that any of the Continuing Corporation Warrants are exercised in connection with such redemption, the Continuing
Corporation’s receipt of all funds related to any such exercise of any Continuing Corporation Warrants during the redemption period), the Continuing Corporation will issue, and EHL (or its designees set forth in the Payment Schedule) shall
receive, an aggregate of 442,625 Redemption Shares within 10 business days thereafter.
(d)
Additional Issuances as
Additional “Purchase Price.
” Any issuances of Market Price Shares, EBITDA Shares or Redemption Shares shall be deemed to have been made in consideration for the Acquisition and shall be deemed additional “purchase price” paid
in the Acquisition.
(e)
Payment Schedule.
At or following the Closing, EHL will distribute the Transaction
Consideration to the holders of its equity securities in connection with, or prior to, a plan of liquidation and dissolution to be approved by its shareholders. Upon such distribution, EHL shall deliver to the Continuing Corporation a schedule
setting forth the name, address and percentage interest of each such securityholder in any Transaction Consideration to be paid thereafter pursuant to this Section 1.14 (the “
Payment Schedule
”). Any payment of Transaction
Consideration pursuant to this Section 1.14 or distribution of the Escrow Shares shall thereafter be distributed in accordance with the Payment Schedule.
1.15
Rule 145.
Continuing Corporation Common Shares issued pursuant to this Agreement may be subject to certain resale restrictions to the extent required under Rule 145 promulgated under the Securities Act of
1933, as amended (“
Securities Act
”) and all certificates representing such shares shall bear an appropriate restrictive legend.
1.16
Recipient Issues.
Prior to issuance of any Transaction Consideration by the Continuing Corporation (or distribution of same by EHL to its shareholders), EHL shall deliver to Continuing Corporation an executed certificate
(“
Recipient Certificate
”) from EHL and any other recipient of Transaction Consideration in the form of Exhibit B hereto.
1.17
Committee and Representative for Purposes of Escrow Agreement.
(a)
Committee.
At or prior to
the Closing, the current stockholders of Parent who are parties to the Voting Agreement (as defined in Section 6.2(k)) shall designate one or more of the designees to the Continuing Corporation’s board of directors as a committee to act on
behalf of Continuing Corporation and to take all necessary actions and make all decisions with respect to Continuing Corporation’s rights and obligations under the Escrow Agreement. In the event of a vacancy in such committee, the Board of
Directors of Continuing Corporation shall appoint as a successor a Person who was a director of Parent prior to the Closing Date or some other Person who would qualify as an “independent” director of Continuing Corporation and who has not
had any compensatory business relationship with the Company prior to the Closing. Such committee is intended to be the “Committee” referred to in Article VII hereof and the Escrow Agreement.
(b)
Representative.
Hock Voon Loo shall be appointed under the Escrow Agreement to represent the interests of the recipients of
Transaction Consideration for purposes of the Escrow Agreement. If such Person ceases to serve in such capacity, for any reason, such Person shall designate his or her successor. Failing such designation within 10 business days after the
Representative has ceased to serve, those members of the Board of Directors of Continuing Corporation who served as directors of the Company prior to the Acquisition shall appoint a successor. Such Person or successor is intended to be the
“Representative” referred to in Section 1.13(a) and Article VII hereof and the Escrow Agreement.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY PARTIES
Subject to, and except as set forth in, the
exceptions set forth in
Schedule 2
attached hereto (the “
Company Schedule
”), each of the Company and EHL hereby represents and warrants to, and covenants with, Parent, Amalgamation Sub and Continuing Corporation, as follows
(as used in this Article II, and elsewhere in this Agreement, the term “Company” includes the Company and its Subsidiaries, as hereinafter defined, unless the context clearly otherwise indicates):
2.1
Organization and Qualification.
(a) The Company is a limited company duly organized, validly existing and in good standing under the laws of Singapore. EHL is a limited company duly incorporated, validly existing and in good standing under the laws
of Hong Kong. The Company has the requisite company power and authority to own, lease and operate its assets and properties and to carry on the Company’s business as it is now being conducted. The Company is in possession of all franchises,
licenses, permits and similar authority (“
Approvals
”) necessary to own, lease and operate its properties and to carry on the Company’s business as it is now being conducted, except where the failure to have such Approvals would
not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company. Complete and correct copies of the certificate of incorporation, Memorandum of Association and Bylaws or other comparable governing
instruments with different names (collectively referred to herein as the “
Company Charter Documents
”) of each of the Company and EHL, as amended and currently in effect, have been heretofore delivered to Parent or Parent’s
counsel. Neither the Company nor EHL is in violation of any of the provisions of the Company Charter Documents applicable to it.
(b) The Company is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its activities makes
such qualification or licensing necessary, except for such failures to be so duly qualified or licensed and in good standing that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company.
Each jurisdiction in which the Company is so qualified or licensed is listed in
Schedule 2.1.
(c) The minute books
of the Company contain minutes of all meetings and consents in lieu of meetings of its Board of Directors (and any committees thereof), similar governing bodies and shareholders (“
Corporate Records
”) since the time of the
Company’s organization and accurately reflect all actions by the directors and shareholders with respect to all transactions referred to in such minutes in all material respects. Copies of such Corporate Records of the Company have been
heretofore delivered to Parent or Parent’s counsel.
(d) The share transfer, warrant and option transfer and ownership
records of the Company contain true, complete and accurate records of the securities ownership as of the date of such records and the transfers involving the share capital and other securities of the Company since the time of the Company’s
organization. Copies of such records of the Company have been heretofore delivered or made available to Parent or Parent’s counsel.
(e) EHL is a holding company and does not engage in any direct commercial operations of its own. Neither EHL nor any Subsidiary that is not wholly owned by the Company possesses any assets, properties or Approvals
necessary for the Company to conduct its business as presently conducted.
2.2
Subsidiaries.
(a) The Company has no direct or indirect subsidiaries or participations in joint ventures other than those listed in
Schedule 2.2
(the “
Subsidiaries
”). The Company owns all of the outstanding equity securities of the Subsidiaries, free and clear of all Liens (as defined in Section 10.2(e)). Except for the Subsidiaries, the Company
does not own, directly or indirectly, any ownership, equity, profits or voting interest in any
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Person or has any agreement or commitment to purchase any such interest, and has not agreed and is not obligated to make nor is bound by any written, oral or
other agreement, contract, subcontract, lease, binding understanding, instrument, note, option, warranty, purchase order, license, sublicense, insurance policy, benefit plan, commitment or undertaking of any nature, as of the date hereof or as may
hereafter be in effect under which it may become obligated, to make any future investment in or capital contribution to any other entity.
(b) Each Subsidiary that is a corporation or limited company is duly incorporated or organized, validly existing and in good standing under the laws of its jurisdiction of formation (as listed in
Schedule 2.2
)
and has the requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being conducted. Each Subsidiary is in possession of all Approvals necessary to own, lease and operate
its properties and to carry on its business as it is now being conducted, except where the failure to have such Approvals would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company or such
Subsidiary. Complete and correct copies of the articles of association, memorandum of association, articles or certificates of incorporation, bylaws, articles of formation and/or operating agreement or similar formation and governance documents
(collectively, the “
Subsidiary Charter Documents
” and, collectively with the Company Charter Documents, the “
ePak Charter Documents
”) of each Subsidiary, as amended and currently in effect, have been heretofore
delivered to Parent or Parent’s counsel. No Subsidiary is in violation of any of the provisions of its Subsidiary Charter Documents.
(c) Each Subsidiary is duly qualified or licensed to do business as a foreign corporation or foreign limited liability company and is in good standing in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its activities makes such qualification or licensing necessary, except for such failures to be so duly qualified or licensed and in good standing that would not, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect on the Company or such Subsidiary. Each jurisdiction in which each Subsidiary is so qualified or licensed is listed in
Schedule 2.2.
(d) The minute books of each Subsidiary contain minutes of all meetings and consents in lieu of meetings of its Board of Directors (and
any committees thereof), similar governing bodies and stockholders since January 1, 2000 and accurately reflect all actions by such parties with respect to all transactions referred to in such minutes in all material respects. Copies of the
Corporate Records of each Subsidiary have been heretofore been delivered or made available to Parent or Parent’s counsel.
2.3
Capitalization.
(a) The authorized share capital of the Company consists of 24,000,000 ordinary shares
(“
Company Common Stock
”) and 10,000,000 Series B redeemable convertible preference shares of preferred stock (“
Company Preferred Stock
” and, collectively with the Company Common Stock, the “
Company
Securities
”), of which 15,166,667shares of Company Common Stock and no shares of Company Preferred Stock, respectively, are issued and outstanding as of the date of this Agreement, all of which are validly issued, fully paid and
nonassessable. All of the outstanding Company Common Stock and Company Preferred Stock is owned by EHL, free from all liens, charges and encumbrances other than restrictions on transfer under this under applicable securities laws.
(b) As of the date of this Agreement, no Company Securities are reserved for issuance upon the exercise of outstanding options, warrants
or other rights.
(c) All outstanding Company Securities have been issued and granted in compliance with (x) all
applicable securities laws and other applicable laws and regulations, and (y) all requirements set forth in any applicable Company Contracts (as defined in Section 2.19), except where the failure to so comply would not have a Material
Adverse Effect on the Company.
(d) Except as set forth in Schedule 2.3(d), there are no subscriptions, options, warrants,
equity securities, partnership interests or similar ownership interests, calls, rights (including preemptive rights), commitments or agreements of any character to which the Company is a party or by which it is bound
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obligating the Company and/or EHL to issue, deliver or sell, or cause to be issued, delivered or sold, or repurchase, redeem or otherwise acquire, or cause
the repurchase, redemption or acquisition of, any shares of capital stock or similar ownership interests of the Company or obligating the Company to grant, extend, accelerate the vesting of or enter into any such subscription, option, warrant,
equity security, call, right, commitment or agreement.
(e) There are no registration rights, and there is no voting trust,
proxy, rights plan, antitakeover plan or other agreement or understanding to which the Company is a party or by which the Company is bound with respect to any equity security of any class of the Company.
(f) No outstanding Company Securities are unvested or are subject to a repurchase option, risk of forfeiture or other condition under any
applicable agreement with the Company.
(g) The authorized and outstanding capital stock of each Subsidiary are set forth in
Schedule 2.3(g)
hereto. The Company owns all of the outstanding equity securities of each Subsidiary, free and clear of all Liens, either directly or indirectly through one or more other Subsidiaries. There are no outstanding options,
warrants or other rights to purchase securities of any Subsidiary.
2.4
Authority Relative to this Agreement.
Each of the Company
and EHL has all necessary corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder and, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the
consummation by the Company and EHL of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of the Company and EHL (including the approval by its Board of Directors and, in the case
of EHL, its shareholders, subject in all cases to the satisfaction of the terms and conditions of this Agreement, including the conditions set forth in Article VI), and no other corporate proceedings on the part of the Company or EHL are necessary
to authorize this Agreement or to consummate the transactions contemplated hereby pursuant to Applicable Corporate Law. This Agreement has been duly and validly executed and delivered by the Company and EHL and, assuming the due authorization,
execution and delivery thereof by the other parties hereto, constitutes the legal and binding obligation of the Company and EHL, enforceable against each of them in accordance with the terms hereof, except as may be limited by bankruptcy,
insolvency, winding-up, reorganization or other similar laws affecting the enforcement of creditors’ rights generally and by general principles of equity.
2.5
No Conflict; Required Filings and Consents.
(a) The execution and delivery of
this Agreement by the Company and EHL do not, and the performance of this Agreement by the Company and EHL shall not, (i) conflict with or violate any of the Company Charter Documents, (ii) conflict with or violate any Legal Requirements
(as defined in Section 10.2(b)), (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or materially impair the Company’s rights under, or give to
others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the properties or assets of the Company pursuant to, any Material Company Contracts or (iv) result in the
triggering, acceleration or increase of any payment to any Person pursuant to any Material Company Contract, including any “change in control” or similar provision of any Material Company Contract, except, with respect to clauses (ii),
(iii) or (iv), for any such conflicts, violations, breaches, defaults, triggerings, accelerations, increases or other occurrences that would not, individually and in the aggregate, have a Material Adverse Effect on the Company.
(b) The execution and delivery of this Agreement by each of the Company and EHL does not, and the performance of its obligations hereunder
will not, require any consent, approval, authorization or permit of, or filing with or notification to, any local, state, federal or foreign government or related agency or body (“
Governmental Entity
”) or other third party
(including, without limitation, lenders and lessors, except (i) for applicable requirements, if any, of the Securities Act of 1933 (“
Securities Act
”), the Securities Exchange Act of 1934 (“
Exchange Act
”) or the
securities laws of any state or foreign jurisdiction (the “
Blue Sky Laws
”), and the rules and regulations thereunder, and appropriate documents received from or filed with
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the relevant authorities of other jurisdictions in which the Company is licensed or qualified to do business, (ii) the Transaction Certificates,
(iii) the consents, approvals, authorizations and permits described in
Schedule 2.5(b)
hereto and (iv) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would
not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company or, after the Closing, the Continuing Corporation, or prevent the consummation of the Acquisition or otherwise prevent the parties hereto
from performing their obligations under this Agreement.
2.6
Compliance.
Each of the Company and EHL is in compliance with and is
not in violation of any Legal Requirements with respect to the conduct of its business, or the ownership or operation of its business, except for failures to comply or violations which, individually or in the aggregate, have not had and are not
reasonably likely to have a Material Adverse Effect on the Company. Except as set forth in
Schedule 2.6
, no written notice of non-compliance with any Legal Requirements has been received by the Company or EHL (and neither the Company nor EHL
has any knowledge of any such notice delivered to any other Person). Neither the Company nor EHL is in violation of any term of any Material Company Contract (as defined in Section 2.19(a)(i)), except for failures to comply or violations which,
individually or in the aggregate, have not had and are not reasonably likely to have a Material Adverse Effect on the Company.
2.7
Financial Statements.
(a) The Company has provided to Parent the audited consolidated financial statements
(including any related notes thereto) of the Company for the fiscal years ended December 31, 2006, 2005 and 2004 (the “
Audited Financial Statements
”). The Audited Financial Statements were prepared in accordance with the
published rules and regulations of any applicable Governmental Entity and with the Singapore Financial Reporting Standard (“
Singapore GAAP
”), applied on a consistent basis throughout the periods indicated (except as may be indicated
in the notes thereto), and each fairly presents in all material respects the financial position of the Company at the respective dates thereof and the results of its operations and cash flows for the periods indicated. The Company also has provided
to Parent the Audited Financial Statements (the “
US GAAP Converted Financials
”) as same has been converted to comply with generally accepted accounting principles of the United States (“
US GAAP
”) for the years ended
31 December 2006, 2005 and 2004. Upon the review and certification of the US GAAP Converted Financials (“
US GAAP Audited Financials
”), the US GAAP Audited Financials shall not indicate any material adverse changes to
the financial results or condition of the Company on a consolidated basis as compared to the Audited Financial Statements or any other Material Adverse Effect on the Company and shall not render any other representation made by the Company or EHL in
this Agreement materially untrue or inaccurate.
(b) The Company has provided to Parent a correct and complete copy of the
unaudited consolidated financial statements (including, in each case, any related notes thereto) of the Company for the three month periods ended March 31, 2007 and March 31, 2006 (the “
Unaudited Financial Statements
”).
The Unaudited Financial Statements were prepared in accordance with US GAAP applied on a consistent basis throughout the periods indicated and consistent with the US GAAP Converted Financials, and fairly present in all material respects
the financial position of the Company at the date thereof and the results of its operations and cash flows for the period indicated, except that such statements do not contain notes and are subject to normal audit adjustments.
(c) The books of account, minute books, stock certificate books and stock transfer ledgers and other similar books and records of the
Company have been maintained in accordance with good business practice, are complete and correct in all material respects and there have been no material transactions that are required to be set forth therein and which have not been so set forth.
(d) The accounts and notes receivable of the Company reflected on the balance sheets included in the Audited Financial
Statements and the Unaudited Financial Statements (i) arose from bona fide sales transactions in the ordinary course of business, (ii) are legal, valid and binding obligations of the respective debtors enforceable in accordance with their
terms, except as such may be limited by bankruptcy,
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insolvency, reorganization, or other similar laws affecting creditors’ rights generally, and by general equitable principles, (iii) are not subject
to any valid set-off or counterclaim except to the extent set forth in such balance sheet in which they are reflected and (iv) are not the subject of any legal actions or proceedings brought by or on behalf of the Company.
2.8
No Undisclosed Liabilities
. Except as set forth in the Unaudited Financial Statements
or Schedule 2.8
hereto, the Company has no
liabilities (absolute, accrued, contingent or otherwise) of a nature required to be disclosed on a balance sheet or in the related notes to financial statements that are, individually or in the aggregate, material to the business, results of
operations or financial condition of the Company, except such liabilities arising in the ordinary course of the Company’s business since January 1, 2007, none of which would have a Material Adverse Effect on the Company.
2.9
Absence of Certain Changes or Events
. Except as set forth in
Schedule 2.9
hereto or in the Unaudited Financial Statements and except as
contemplated herein, since March 31, 2007, there has not been: (i) any Material Adverse Effect on the Company, (ii) any declaration, setting aside or payment of any dividend on, or other distribution (whether in cash, stock or
property) in respect of, any of the Company’s stock, or any purchase, redemption or other acquisition by the Company of any of the Company’s capital stock or any other securities of the Company or any options, warrants, calls or rights to
acquire any such shares or other securities, (iii) any split, combination or reclassification of any of the Company’s capital stock, (iv) any granting by the Company of any material increase in compensation or fringe benefits, except
for normal increases of cash compensation in the ordinary course of business consistent with past practice, or any payment by the Company of any material bonus, except for bonuses made in the ordinary course of business consistent with past
practice, or any granting by the Company of any material increase in severance or termination pay or any entry by the Company into any currently effective employment, severance, termination or indemnification agreement or any agreement, in each case
the benefits of which are contingent or the terms of which are materially altered upon the occurrence of a transaction involving the Company of the nature contemplated hereby, (v) entry by the Company into any licensing or other agreement with
regard to the acquisition or disposition of any Intellectual Property (as defined in Section 2.18 hereof) other than (A) licenses in the ordinary course of business, (B) shrink-wrap, click-wrap or similar widely-available commercial
end-user licenses, (C) implied licenses which may be contained in non-disclosure agreements entered into in the ordinary course of business and (D) licenses granted to the Company pursuant to employee proprietary information agreements (or
similar agreements with current or former employees or consultants), or any amendment or consent with respect to any licensing agreement filed or required to be filed by the Company with respect to any Governmental Entity, (vi) any material
change by the Company in its accounting methods, principles or practices other than in connection with the conversion of the Audited Financial Statements to US GAAP and the audit thereof, (vii) any change in the auditors of the Company,
(viii) any issuance of capital stock of the Company, (ix) any revaluation by the Company of any of its assets other than in the ordinary course of business, including, without limitation, writing down the value of capitalized inventory or
writing off notes or accounts receivable or any sale of assets of the Company other than in the ordinary course of business, (ix) any redemption or purchase or agreement to redeem or purchase any of the Company’s share capital;
(x) any surrender relating to group relief or any surrender of a tax refund, (xi) refusal of any insurance claim or settlement thereof below the current amount claimed; or (xii) any agreement, whether written or oral, to do any of the
foregoing.
2.10
Litigation
.
(a)
Schedule 2.10(a)
sets forth all claims, suits, actions or proceedings pending, or to the knowledge of the Company and EHL, threatened against the Company or EHL before any court, government department,
commission, agency, instrumentality or authority, or any arbitrator.
(b) Except as disclosed in
Schedule 2.10(b)
hereto, there are no claims, suits, actions or proceedings pending or, to the knowledge of the Company and EHL, threatened against the Company or EHL before any court, governmental department, commission, agency, instrumentality or authority, or any
arbitrator that seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or which
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would reasonably be expected, either singularly or in the aggregate with all such claims, actions or proceedings, to have a Material Adverse Effect on the
Company or have a Material Adverse Effect on the ability of the parties hereto to consummate the Acquisition.
2.11
Employee Benefit
Plans
.
(a)
Schedule 2.11(a)
lists all employee compensation, incentive, fringe or benefit plans, programs,
policies, commitments or other arrangements (whether or not set forth in a written document) covering any active or former employee, director or consultant of the Company, or any trade or business (whether or not incorporated) which is under common
control with the Company, with respect to which the Company has liability (individually, a “
Plan
” and, collectively, the “
Plans
”). All Plans have been maintained and administered in all material respects in
compliance with their respective terms and with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Plans. No suit, action or other litigation (excluding claims for benefits incurred in the
ordinary course of Plan activities) has been brought, or, to the knowledge of the Company and EHL, is threatened, against or with respect to any Plan. There are no audits, inquiries or proceedings pending or, to the knowledge of the Company and EHL,
threatened by any governmental agency with respect to any Plan. All contributions, reserves or premium payments required to be made or accrued as of the date hereof to the Plans have been timely made or accrued. Except as otherwise contemplated
herein, the Company does not have any plan or commitment to establish any new Plan, to modify any Plan (except to the extent required by law or to conform any such Plan to the requirements of any applicable law, in each case as previously disclosed
to Parent in writing, or as required by this Agreement), or to enter into any new Plan. Each Plan can be amended, terminated or otherwise discontinued after the Closing in accordance with its terms, without liability to Parent or the Company (other
than ordinary administration expenses and expenses for benefits accrued but not yet paid).
(b) Except as disclosed in
Schedule 2.11
hereto and as otherwise contemplated herein, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment (including severance,
unemployment compensation, golden parachute, bonus or otherwise) becoming due to any stockholder, director or employee of the Company under any Plan, (ii) materially increase any benefits otherwise payable under any Plan, or (iii) result
in the acceleration of the time of payment or vesting of any benefits payable under any Plan.
2.12
Labor Matters
. The Company is
not a party to any collective bargaining agreement or other labor union contract applicable to persons employed by the Company and the Company does not know of any activities or proceedings of any labor union to organize any such employees.
2.13
Restrictions on Business Activities
. Except as disclosed in
Schedule 2.13
hereto, to the knowledge of the Company and
EHL, there is no agreement, commitment, judgment, injunction, order or decree binding upon the Company or its assets or to which the Company is a party which contains provisions prohibiting or materially impairing any business practice of the
Company, any acquisition of property by the Company or the conduct of business by the Company as currently conducted other than such effects, individually or in the aggregate, which have not had and would not reasonably be expected to have a
Material Adverse Effect on the Company.
2.14
Title to Property
.
(a) All real property owned by the Company (including improvements and fixtures thereon, easements and rights of way for the benefit of
the Company) is shown or reflected on the balance sheet of the Company included in the Unaudited Financial Statements. The Company has good, valid and marketable title to the real property owned by it, and except as set forth in the Unaudited
Financial Statements or on
Schedule 2.14(a)
hereto, all of such real property is held free and clear of (i) all leases, licenses and other rights to occupy or use such real property and (ii) all Liens, rights of way, easements,
restrictions, exceptions, variances, reservations, covenants or other title defects or limitations of any kind, other than liens for taxes not yet due and payable or being contested in appropriate proceedings in good faith, liens imposed by law and
incurred in the ordinary course of business for obligations not past due to carriers,
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warehousemen, laborers, materialmen and the like, liens in respect of pledges or deposits under workers’ compensation laws or similar legislation and
such liens or other imperfections of title, if any, as do not materially detract from the value of or materially interfere with the present use of the property affected thereby.
Schedule 2.14(a)
hereto also contains a list of all options or
other contracts under which the Company has a right to acquire any interest in real property.
(b) All leases of real
property held by the Company, and all personal property and other property and assets of the Company owned, used or held for use in connection with the business of the Company (the “
Personal Property
”) are shown or reflected on the
balance sheet included in the Audited Financial Statements, other than those entered into or acquired on or after December 31, 2006 in the ordinary course of business. The Company has good and marketable title to the Personal Property owned by
it, and all such Personal Property is in each case held free and clear of all Liens, except for Liens disclosed in the Audited Financial Statements or in
Schedule 2.14
hereto, liens for taxes not yet due and payable or being contested by the
appropriate parties in good faith, liens imposed by law and incurred in the ordinary course of business for obligations not past due to carriers, warehousemen, laborers, materialmen and the like, liens in respect of pledges or deposits under
workers’ compensation laws or similar legislation and such minor liens or other imperfections of title, none of which liens or encumbrances has or will have, individually or in the aggregate, a Material Adverse Effect on such property or on the
present use of such property in the businesses of the Company.
(c) All leases pursuant to which the Company leases from
others material real or Personal Property are, to the knowledge of the Company, valid and enforceable in accordance with their respective terms, and there is not, under any of such leases, any existing material default or event of default of the
Company or, to the knowledge of the Company and EHL, any other party (or any event which with notice or lapse of time, or both, would constitute a material default), except where the lack of such validity and effectiveness or the existence of such
default or event of default would not reasonably be expected to have a Material Adverse Effect on the Company.
(d) The
Company is in possession of, or has valid and effective rights to, all properties, assets and rights required for the conduct of its business as currently conducted in the ordinary course, except where the lack of such possession or rights would not
reasonably be expected to have a Material Adverse Effect on the Company.
2.15
Taxes
.
(a) Definition of Taxes. For the purposes of this Agreement, “
Tax
” or “
Taxes
” refers to any and all
federal, state, local and foreign taxes, including, without limitation, gross receipts, income, profits, sales, use, occupation, value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes,
assessments, governmental charges and duties together with all interest, penalties and additions imposed with respect to any such amounts.
(b)
Tax Returns and Audits
. Except as set forth in
Schedule 2.15
hereto:
(i)
The Company has timely filed all federal, state, local and foreign returns, estimates, information statements and reports relating to Taxes (“
Returns
”) required to be filed by the Company with any Tax authority prior to the date
hereof, except such Returns which are not material to the Company. All such Returns are true, correct and complete in all material respects. The Company has paid all Taxes shown to be due and payable on such Returns.
(ii) All Taxes that the Company is required by law to withhold or collect have been duly withheld or collected, and have been timely paid
over to the proper governmental authorities to the extent due and payable.
(iii) The Company has not been delinquent in the
payment of any material Tax nor is there any material Tax deficiency outstanding, proposed or assessed against the Company, nor has the Company executed any unexpired waiver of any statute of limitations on or extending the period for the assessment
or collection of any Tax.
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(iv) To the knowledge of the Company and EHL, no audit or other examination of any Return
of the Company by any Tax authority is presently in progress, nor has the Company been notified of any request for such an audit or other examination.
(v) No material adjustment relating to any Returns filed by the Company has been proposed in writing, formally or informally, by any Tax authority to the Company or any representative thereof.
(vi) The Company has no liability for any material unpaid Taxes which have not been accrued for or reserved in accordance with Singapore
GAAP on the Company’s balance sheets included in the Audited Financial Statements or in accordance with US GAAP on the Unaudited Financial Statements, other than any liability for unpaid Taxes that may have accrued since the end of the
most recent fiscal year in connection with the operation of the business of the Company in the ordinary course of business, none of which is material to the business, results of operations or financial condition of the Company.
(vii) The Company has not taken any action and does not know of any fact, agreement, plan or other circumstance that is reasonably likely
to prevent either the Acquisition or Share Transfer from qualifying as a reorganization within the meaning of Section 368(a) of the Code.
(viii) The Company has no liability for the Taxes of any Person under Treas. Reg. § 1.1502-6 (or any similar provision of state, local for foreign law, including any arrangement for group or consortium relief or
similar arrangement), as a transferee or successor, by contract, or otherwise.
(ix) Neither the Company nor EHL is
(i) a “controlled foreign corporation” (a “
CFC
”) within the meaning of Section 957 of the Code or (ii) a “passive foreign investment company (a “
PFIC
”) within the meaning of
Section 1297 of the Code.
2.16
Environmental Matters
.
(a) Except as disclosed in
Schedule 2.16
hereto and except for such matters that, individually or in the aggregate, are not
reasonably likely to have a Material Adverse Effect, to the knowledge of the Company: (i) the Company has complied with all applicable Environmental Laws (as defined below); (ii) the properties currently operated by the Company (including
soils, groundwater, surface water, air, buildings or other structures) are not contaminated with any Hazardous Substances (as defined below); (iii) the properties formerly owned or operated by the Company were not contaminated with Hazardous
Substances during the period of ownership or operation by the Company or, to the knowledge of the Company and EHL, during any prior period; (iv) the Company is not subject to liability for any Hazardous Substance disposal or contamination on
any third party or public property (whether above, on or below ground or in the atmosphere or water); (v) the Company has not caused any release or threat of release of any Hazardous Substance; (vi) the Company has not received any notice,
demand, letter, claim or request for information alleging that the Company may be in violation of or liable under any Environmental Law; and (vii) the Company is not subject to any orders, decrees, injunctions or other arrangements with any
Governmental Entity or subject to any indemnity or other agreement with any third party relating to liability under any Environmental Law or relating to Hazardous Substances.
(b) As used in this Agreement, the term “
Environmental Law
” means any federal, state, local or foreign law, regulation,
order, decree, permit, authorization, common law or agency requirement relating to: (A) the protection, investigation or restoration of the environment, health and safety, or natural resources; (B) the handling, use, presence, disposal,
release or threatened release of any Hazardous Substance or (C) noise, odor, wetlands, pollution or contamination.
(c)
As used in this Agreement, the term “
Hazardous Substance
” means any substance that is: (i) listed, classified or regulated as hazardous, toxic or dangerous pursuant to any Environmental Law; or (ii) any petroleum product
or by-product, asbestos-containing material, lead-containing paint or plumbing, polychlorinated biphenyls, radioactive materials or radon.
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(d)
Schedule 2.16(d)
sets forth all environmental studies and investigations
completed or in process with respect to the Company and/or its subsidiaries or their respective properties or assets, including all phase reports, that are known to the Company. All such written reports and material documentation relating to any
such study or investigation has been made available by the Company to Parent.
2.17
Brokers; Third Party Expenses
. The Company has
not incurred, nor will it incur, directly or indirectly, any liability for brokerage, finders’ fees, agent’s commissions or any similar charges in connection with this Agreement or any transactions contemplated hereby. Except pursuant to
Sections 1.5 and 1.7, and as disclosed in
Schedule 2.17
hereto, no shares of common stock, options, warrants or other securities of either the Company or Parent are payable to any third party by the Company as a result of this Acquisition.
2.18
Intellectual Property. Schedule 2.18
hereto contains a description of all material Intellectual Property owned by the Company.
For the purposes of this Agreement, the following terms have the following definitions:
“
Intellectual
Property
” shall mean any or all of the following and all worldwide common law and statutory rights in, arising out of, or associated therewith: (i) patents and applications therefor and all reissues, divisions, renewals, extensions,
provisionals, continuations and continuations-in-part thereof (“
Patents
”); (ii) inventions (whether patentable or not), invention disclosures, improvements, trade secrets, proprietary information, know how, technology,
technical data and customer lists; (iii) copyrights, copyrights registrations and applications therefor (“
Copyrights
”); (iv) software and software programs; (v) domain names and the uniform resource locators
associated therewith; (vi) industrial designs and any registrations and applications therefor; (vii) trade names, logos, common law trademarks and service marks, trademark and service mark registrations and applications therefor
(collectively, “
Trademarks
”); (viii) all databases and data collections and all rights therein; (ix) all moral and economic rights of authors and inventors, however denominated, and (x) any proprietary rights that are
similar or equivalent to any of the foregoing (as applicable).
“
Company Intellectual Property
” shall mean
any Intellectual Property that is owned by, or exclusively licensed to, the Company, including software and software programs developed by or exclusively licensed to the Company (specifically excluding any off the shelf or shrink-wrap software).
“
Registered Intellectual Property
” means all Intellectual Property that is the subject of an application,
certificate, filing, registration or other document issued, filed with, or recorded by any government or other legal authority.
“
Company Registered Intellectual Property
” means all of the Registered Intellectual Property owned by the Company.
“
Company Products
” means all current versions of products or service offerings of the Company.
(a) Except as disclosed in
Schedule 2.18
hereto, (i) no Company Intellectual Property or Company Product is subject to any material proceeding before any Governmental Entity or outstanding decree, order,
or judgment or any Governmental Entity restricting in any manner the use, transfer or licensing thereof by the Company, or which may affect the validity or enforceability of such Company Intellectual Property, (ii) nor is the Company a party to
any written agreement that contains any stipulation or other provision that expressly restricts in any material manner the use, transfer or licensing of any Company Intellectual Property that is contained in Company Products, which in any of the
foregoing such cases would reasonably be expected to have a Material Adverse Effect on the Company.
(b) The Company owns
or has enforceable rights to use all Company Intellectual Property required for the conduct of its business as presently conducted. Except as disclosed in
Schedule 2.18
hereto and except for Company Intellectual Property that is exclusively
licensed to the Company, the Company owns and has good and exclusive title to each material item of Company Intellectual
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Property owned by it free and clear of any Liens (excluding non-exclusive licenses and related restrictions granted by it in the ordinary course of
business); and the Company is the exclusive owner of all material registered Trademarks and Copyrights among the Company Intellectual Property (except for Trademarks and Copyrights that are exclusively licensed to Company) that are used in
connection with the operation or conduct of the business of the Company including the sale of any products or the provision of any services by the Company. To the Company’s knowledge, no proceeding before any Governmental Entity involving any
Intellectual Property licensed to the Company is pending that, if adversely determined, would adversely affect the use or exploitation of such Intellectual Property by the Company.
(c) The use of any Company Intellectual Property in the operation of the business of the Company as such business currently is conducted,
(i) with respect to Patents, to the Company’s knowledge, has not and does not infringe the Patents of any third party, and (ii) with respect to all other Intellectual Property, has not and does not infringe or misappropriate the
Intellectual Property of any third party. The operation of the business of the Company as such business currently is conducted does not constitute unfair competition or trade practices under the laws of any jurisdiction in which the Company
currently conducts business. The Company has not received any written claims or threats from third parties alleging any such infringement, misappropriation or unfair competition or trade practices.
2.19
Agreements, Contracts and Commitments
.
(a) Except as set forth on
Schedule 2.19(a)
, the Company is not a party to any Material Company Contracts (as hereinafter defined). For purposes of this Agreement, (i) the term “
Company
Contracts
” shall mean all contracts, agreements, leases, mortgages, indentures, notes, bonds, licenses, permits, franchises, purchase orders, sales orders, and other understandings, commitments and obligations of any kind, whether written
or oral, to which the Company is a party or by or to which any of the properties or assets of the Company may be bound or subject (including without limitation notes or other instruments payable to the Company) and (ii) the term
“
Material Company Contracts
” shall mean (x) each Company Contract (I) providing for payments (present or future) to the Company in excess of $100,000 in the aggregate or (II) providing that the Company presently has any
liability or obligation of any nature whatsoever (absolute, contingent or otherwise) in excess of $100,000, in each case other than purchase orders issued by or to the Company in the ordinary course of business, and (y) without limitation of
subclause (x), each of the following Company Contracts:
(i) any mortgage, indenture, note, installment obligation or other
instrument, agreement or arrangement for or relating to any borrowing of money from the Company by any officer, director, stockholder or holder of derivative equity securities of the Company (each such person, an “
Insider
”);
(ii) any mortgage, indenture, note, installment obligation or other instrument, agreement or arrangement for or relating to
any borrowing of money from an Insider by the Company;
(iii) any guaranty, direct or indirect, by the Company, a Subsidiary
or any Insider on the behalf of the Company of any obligation of a third party for borrowings, or otherwise, excluding endorsements made for collection in the ordinary course of business;
(iv) any Company Contract of employment or management, other than employee proprietary information agreements (or similar agreements with
current or former employees or consultants);
(v) any Company Contract made other than in the ordinary course of business or
(x) providing for the grant of any preferential rights to purchase or lease any asset of the Company or (y) providing for any right (exclusive or non-exclusive) to sell or distribute, or otherwise relating to the sale or distribution of,
any product or service of the Company other than purchase orders for the Company’s products or services entered into in the ordinary course of business;
(vi) any obligation to register any shares of the capital stock or other securities of the Company with any Governmental Entity;
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(vii) any obligation to make payments, contingent or otherwise, arising out of the prior
acquisition of the business, material assets or stock of other Persons;
(viii) any collective bargaining agreement with any
labor union;
(ix) any lease or similar arrangement for the use by the Company of real property or personal property (other
than any lease of vehicles, office equipment or operating or other capital equipment made in the ordinary course of business where the annual lease payments for any such lease are less than $25,000);
(x) any agreement relating to Company Intellectual Property;
(xi) any distribution, manufacturing or supply agreement that is material to the business or operations of the Company other than purchase
orders entered into in the ordinary course of business consistent with past practice;
(xii) any Company Contract granting
or purporting to grant, or otherwise in any way relating to, any mineral rights or any other interest (including, without limitation, a leasehold interest) in real property; and
(xiii) any Company Contract to which any Insider of the Company is a party, other than employee proprietary information agreements (or
similar agreements with current or former employees or consultants).
(b) Each Material Company Contract was entered into
at arms’ length and in the ordinary course, is in full force and effect and, to the knowledge of the Company and EHL, is valid and binding upon and enforceable against each of the parties thereto (except insofar as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally or by principles governing the availability of equitable remedies). True, correct and complete copies of all Material Company
Contracts (or written summaries in the case of oral Material Company Contracts) have been heretofore delivered to Parent or Parent’s counsel.
(c) Except as set forth in
Schedule 2.19(c)
, neither the Company nor, to the knowledge of the Company and EHL, any other party thereto is in breach of or in default under, and, to the knowledge of the Company and EHL, no event has
occurred which with notice or lapse of time or both would become a breach of or default under, any Material Company Contract, and no party to any Material Company Contract has given any written notice of any claim of any such breach, default or
event, which, individually or in the aggregate, are reasonably likely to have a Material Adverse Effect on the Company.
2.20 Insurance.
Schedule 2.20
sets forth the Company’s insurance policies and fidelity bonds covering the assets, business, equipment, properties, operations, employees, officers and directors (collectively, the “
Insurance Policies
”). The
insurances provided by such Insurance Policies are customary in amount and scope for companies similarly situated to the Company.
2.21
Governmental Actions/Filings.
(a) Except as set forth in
Schedule 2.21(a)
, the Company has been granted and
holds, and has made, all Governmental Actions/Filings (as defined below) (including, without limitation, the Governmental Actions/Filings required for (i) emission or discharge of effluents and pollutants into the air and the water and
(ii) the manufacture and sale of all products manufactured and sold by it) necessary to the conduct by the Company of its business (as presently conducted), and true, complete and correct copies of which have heretofore been delivered or made
available to Parent, except where the lack of such Governmental Actions/Filings would not reasonably be expected to have a Material Adverse Effect on the Company. Each such Governmental Action/Filing is in full force and effect, and the Company is
in material compliance with all of its obligations with respect thereto. No event has occurred and is continuing which requires or permits, or after notice or lapse of time or both would require or permit, and consummation of the transactions
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contemplated by this Agreement or any ancillary documents will not require or permit (with or without notice or lapse of time, or both), any modification or
termination of any such Governmental Actions/Filings except such events which, either individually or in the aggregate, would not have a Material Adverse Effect upon the Company.
(b) For purposes of this Agreement, the term “
Governmental Action/Filing
” shall mean any franchise, license, certificate
of compliance, authorization, consent, order, permit, approval, consent or other action of, or any filing, registration or qualification with, any federal, state, municipal, foreign or other governmental, administrative or judicial body, agency or
authority.
2.22
Interested Party Transactions
. Except as set forth in the
Schedule 2.22
hereto, no Insider or a member of
his or her immediate family or any affiliate thereof is indebted to the Company, nor is the Company indebted (or committed to make loans or extend or guarantee credit) to any of such Persons, other than (i) for payment of salary for services
rendered, (ii) reimbursement for reasonable expenses incurred on behalf of the Company, and (iii) for other employee benefits made generally available to all employees. Except as set forth in
Schedule 2.22
, to the knowledge of the
Company and EHL, none of such individuals has any direct or indirect ownership interest in any Person with whom the Company is affiliated or with whom the Company has a contractual relationship, or in any Person that competes with the Company,
except that each employee, stockholder, officer or director of the Company and members of their respective immediate families may own less than 5% of the outstanding stock in publicly traded companies that may compete with the Company. Except as set
forth in
Schedule 2.22
, to the knowledge of the Company and EHL, no Insider of the Company or EHL is, directly or indirectly, interested in any Material Company Contract with the Company (other than such contracts as relate to any such
Person’s ownership of capital stock or other securities of the Company or such Person’s role with the Company).
2.23
Board
Approval
. The board of directors of each of the Company and EHL (including any required committee or subgroup thereof) has, as of the date of this Agreement, duly approved this Agreement and the transactions contemplated hereby.
2.24
Shareholder Approval
. Prior to the date of execution of this Agreement, the board of directors and shareholders of EHL have approved the
adoption of this Agreement and the Acquisition as required by its articles and memorandum of association and any other applicable corporate governance documents and all Applicable Corporate Law.
2.25
Suppliers; Customers
.
Schedule 2.25(a)
sets forth the five largest suppliers to the Company (in terms of dollar volume) and indicates
amounts paid by the Company to each such suppliers in the year ended December 31, 2006 and the three months ended March 31, 2007.
Schedule 2.25(b)
sets forth the five largest customers of the Company (in terms of dollar volume) and
indicates amounts paid to the Company by each such customer in the year ended December 31, 2006 and the three months ended March 31, 2007.
2.26
Filing of Charges
. All charges by or in favor of the Company have (if appropriate) been registered in accordance with the provisions of Section 131 of the Companies Act (Singapore), or comply with the
necessary formalities as to registration or otherwise in any other relevant jurisdiction. The registered particulars of charges over assets of the Company are complete and accurate in all respects.
2.27
Representations and Warranties Complete
. The representations and warranties of the Company included in this Agreement and any list,
statement, document or information set forth in, or attached to, any Schedule provided pursuant to this Agreement or delivered hereunder, when taken as a whole, do not contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements contained therein not misleading, in light of the circumstance under which they were made.
2.28
Survival of Representations and Warranties
. The representations and warranties of the Company set forth in this Agreement shall survive the Closing until the end of the Escrow Period.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND
AMALGAMATION SUB
Subject to the exceptions set forth in Schedule 3 attached hereto (the “
Parent Schedule
”), each of Parent and Amalgamation Sub
represents and warrants to, and covenants with, the Company, as follows:
3.1
Organization and Qualification
.
(a) Parent is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has the
requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being conducted. Parent is in possession of all Approvals necessary to own, lease and operate its properties and to
carry on its business as it is now being conducted, except where the failure to have such Approvals would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Parent. Complete and correct copies of the
certificate of incorporation and bylaws of Parent, as amended and currently in effect, have been heretofore delivered or made available to the Company (collectively, the “
Parent Charter Documents
”). Parent is not in violation of any
of the provisions of the Parent Charter Documents.
(b) Parent is duly qualified or licensed to do business as a foreign
corporation and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its activities makes such qualification or licensing necessary, except for such failures to be so duly
qualified or licensed and in good standing that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Parent.
(c) Parent and its subsidiaries do not engage in any direct commercial operations.
3.2
Subsidiaries
.
(a) Except for Amalgamation Sub, all of the outstanding capital shares of which are owned by
Mr. Rice as nominee for Parent (and all of which shares shall be transferred by Mr. Rice to Parent immediately prior to Closing), Parent has no Subsidiaries and does not own, directly or indirectly, any ownership, equity, profits or voting
interest in any Person or have any agreement or commitment to purchase any such interest, and Parent has not agreed and is not obligated to make nor is bound by any written, oral or other agreement, contract, subcontract, lease, binding
understanding, instrument, note, option, warranty, purchase order, license, sublicense, insurance policy, benefit plan, commitment or undertaking of any nature, as of the date hereof or as may hereafter be in effect under which it may become
obligated to make, any future investment in or capital contribution to any other entity.
(b) Amalgamation Sub is a limited
company duly organized, validly existing and in good standing under the laws of the Bermuda and has the requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being
conducted. Amalgamation Sub is not in violation of any of the provisions of its articles of association or memorandum of association (collectively, the “
Amalgamation Sub Charter Documents
” and, collectively with the Parent Charter
Documents, the “
Ascend Charter Documents
”).
(c) Amalgamation Sub has no assets or properties of any kind,
does not now conduct and has never conducted any business, and has and will have at the Closing no obligations or liabilities of any nature whatsoever, except such obligations and liabilities as are imposed under or incurred in connection with the
consummation of this Agreement and the transactions contemplated hereby.
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3.3
Capitalization
.
(a) As of the date of this Agreement, the authorized capital stock of Parent consists of 30,000,000 shares of Parent Common Stock and
1,000,000 shares of preferred stock, par value $0.0001 per share (“
Parent Preferred Stock
”), of which 8,556,667 shares of Parent Common Stock and no shares of Parent Preferred Stock are issued and outstanding, all of which are
validly issued, fully paid and nonassessable.
(b) Except as set forth in
Schedule 3.3(b)
, (i) no shares of
Parent Common Stock or Parent Preferred Stock are reserved for issuance upon the exercise of outstanding options to purchase Parent Common Stock or Parent Preferred Stock (“
Parent Stock Options
”) and there are no outstanding Parent
Stock Options; (ii) no shares of Parent Common Stock or Parent Preferred Stock are reserved for issuance upon the exercise of outstanding warrants to purchase Parent Common Stock or Parent Preferred Stock, there are no other outstanding
securities of Parent; and (iii) no shares of Parent Common Stock or Parent Preferred Stock are reserved for issuance upon the conversion of the Parent Preferred Stock or any outstanding convertible notes, debentures or securities
(“
Parent Convertible Securities
”). All shares of Parent Common Stock and Parent Preferred Stock subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instrument pursuant to which they are
issuable, will be duly authorized, validly issued, fully paid and nonassessable. All outstanding shares of Parent Common Stock and Parent Warrants have been issued and granted in compliance with (x) all applicable securities laws and other
applicable laws and regulations, and (y) all requirements set forth in any applicable Parent Contracts (as defined in Section 3.19), except where the failure to so comply would not have a Material Adverse Effect on Parent. Parent has
heretofore delivered or made available to the Company true, complete and accurate copies of the form of Parent Warrants, including any and all documents and agreements relating thereto.
(c) The Continuing Corporation Common Shares to be issued in connection with the Acquisition, upon issuance in accordance with the terms
of this Agreement, will be duly authorized and validly issued and such Continuing Corporation Common Shares will be fully paid and nonassessable and free from all claims, liens, charges, encumbrances and equities.
(d) Except as set forth in
Schedule 3.3(d)
or as contemplated by this Agreement or the Parent SEC Reports (as defined in
Section 3.7), there are no registration rights, and there is no voting trust, proxy, rights plan, antitakeover plan or other agreements or understandings to which the Parent is a party or by which the Parent is bound with respect to any equity
security of any class of the Parent.
(e) Except as provided for in this Agreement or as set forth in Section 3.3(e),
as a result of the consummation of the transactions contemplated hereby, no shares of capital stock, warrants, options or other securities of the Parent are issuable and no rights in connection with any shares, warrants, options or other securities
of the Parent accelerate or otherwise become triggered (whether as to vesting, exercisability, convertibility or otherwise).
(f) Except as set forth herein, there are no subscriptions, options, warrants, equity securities, partnership interests or similar ownership interests, calls, rights (including preemptive rights), commitments or agreements of any character
to which the Parent or the Amalgamation Sub is a party or by which the Parent or Amalgamation Sub is bound obligating the Parent or the Amalgamation Sub to issue, deliver or sell, or cause to be issued, delivered or sold, or repurchase, redeem or
otherwise acquire, or cause the repurchase, redemption or acquisition of, any shares of capital stock or similar ownership interests of the Parent or Amalgamation Sub or obligating the Parent or Amalgamation Sub to grant, extend, accelerate the
vesting of or enter into any such subscription, option, warrant, equity security, call, right, commitment or agreement.
3.4
Authority
Relative to this Agreement
. Each of Parent and Amalgamation Sub has full corporate power and authority to: (i) execute, deliver and perform this Agreement, and each ancillary document that Parent or Amalgamation Sub has executed or
delivered or is to execute or deliver pursuant to this Agreement, and (ii) carry out Parent’s and Amalgamation Sub’s obligations hereunder and thereunder and, to consummate the transactions
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contemplated hereby. The execution and delivery of this Agreement and the consummation by Parent and Amalgamation Sub of the transactions contemplated hereby
have been duly and validly authorized by all necessary corporate action on the part of Parent and Amalgamation Sub (including the approval by their respective Boards of Directors), and no other corporate proceedings on the part of Parent or
Amalgamation Sub are necessary to authorize this Agreement or to consummate the transactions contemplated hereby, other than the Acquisition and Reincorporation Approval (as defined in Section 5.1(a)). This Agreement has been duly and validly
executed and delivered by Parent and Amalgamation Sub and, assuming the due authorization, execution and delivery thereof by the other parties hereto, constitutes the legal and binding obligation of Parent and Amalgamation Sub, enforceable against
Parent and Amalgamation Sub in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors’ rights generally and by general principles of equity.
3.5
No Conflict; Required Filings and Consents
.
(a) The execution and delivery of this Agreement by Parent and Amalgamation Sub do not, and the performance of this Agreement by Parent
and Amalgamation Sub shall not: (i) conflict with or violate any of the Ascend Charter Documents, (ii) conflict with or violate any Legal Requirements, (iii) result in any breach of or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or materially impair Parent’s or Amalgamation Sub’s rights under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the
creation of a Lien on any of the properties or assets of Parent pursuant to, any Parent Contracts, or (iv) result in the triggering, acceleration or increase of any payment to any Person pursuant to any Parent Contract, including any
“change in control” or similar provision of any Parent Contract, except, with respect to clauses (ii), (iii) or (iv), for any such conflicts, violations, breaches, defaults or other occurrences that would not, individually and in the
aggregate, have a Material Adverse Effect on Parent.
(b) The execution and delivery of this Agreement by Parent and
Amalgamation Sub do not, and the performance of their respective obligations hereunder will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity, except (i) for applicable
requirements, if any, of the Securities Act, the Exchange Act, Blue Sky Laws, and the rules and regulations thereunder, and appropriate documents with the relevant authorities of other jurisdictions in which Parent or Amalgamation Sub is qualified
to do business, (ii) the Transaction Certificates and (iii) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect on Parent, or prevent consummation of the Acquisition or otherwise prevent the parties hereto from performing their obligations under this Agreement.
3.6
Compliance
. Parent is in compliance with and is not in violation of any Legal Requirements with respect to the conduct of its business, or the
ownership or operation of its business, except for failures to comply or violations which, individually or in the aggregate, have not had and are not reasonably likely to have a Material Adverse Effect on Parent. The business and activities of
Parent have not been and are not being conducted in violation of any Legal Requirements. Parent is not in default or violation of any term, condition or provision of its Charter Documents. No written notice of non-compliance with any Legal
Requirements has been received by Parent. The Parent is not in violation of any term of any Parent Contract, except for failures to comply which, individually or in the aggregate, have not had and are not reasonably likely to have a Material Adverse
Effect on the Parent.
3.7
SEC Filings; Financial Statements
.
(a) Parent has made available to the Company a correct and complete copy of each report and registration statement (the “
Parent
SEC Reports
”) filed by Parent with the Securities and Exchange Commission (“
SEC
”) and any state securities regulation agencies, which are all the forms, reports and documents required to be filed by Parent with the SEC
prior to the date of this Agreement. All Parent SEC Reports required to be filed by Parent in the twelve (12) month period prior to the date of this Agreement
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were filed in a timely manner. As of their respective dates the Parent SEC Reports: (i) were prepared in accordance and complied in all material
respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such Parent SEC Reports, and (ii) did not at the time they were filed (and if
amended or superseded by a filing prior to the date of this Agreement then on the date of such filing and as so amended or superseded) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Except to the extent set forth in the preceding sentence, Parent makes no representation or warranty whatsoever concerning
any Parent SEC Report as of any time other than the date or period with respect to which it was filed.
(b) Except as set
forth in
Schedule 3.7(b)
, each set of financial statements (including, in each case, any related notes thereto) contained in Parent SEC Reports, including each Parent SEC Report filed after the date hereof until the Closing, complied or will
comply as to form in all material respects with the published rules and regulations of the SEC with respect thereto, was or will be prepared in accordance with US GAAP applied on a consistent basis throughout the periods indicated (except as
may be indicated in the notes thereto or, in the case of unaudited statements, do not contain footnotes as permitted by Form 10-QSB of the Exchange Act) and each fairly presents or will fairly present in all material respects the financial position
of Parent at the respective dates thereof and the results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were, are or will be subject to normal adjustments which were not or are not
expected to have a Material Adverse Effect on Parent taken as a whole.
3.8
No Undisclosed Liabilities
. Parent has no liabilities
(absolute, accrued, contingent or otherwise) of a nature required to be disclosed on a balance sheet or in the related notes to the financial statements included in Parent SEC Reports that are, individually or in the aggregate, material to the
business, results of operations or financial condition of Parent, except (i) liabilities provided for in or otherwise disclosed in Parent SEC Reports filed prior to the date hereof, and (ii) liabilities incurred since January 1, 2007
in the ordinary course of business, none of which would have a Material Adverse Effect on Parent.
3.9
Absence of Certain Changes or
Events
. Except as set forth in Parent SEC Reports filed prior to the date of this Agreement, and except as contemplated herein, since January 1, 2007, there has not been: (i) any Material Adverse Effect on Parent, (ii) any
declaration, setting aside or payment of any dividend on, or other distribution (whether in cash, stock or property) in respect of, any of Parent’s capital stock, or any purchase, redemption or other acquisition by Parent of any of
Parent’s capital stock or any other securities of Parent or any options, warrants, calls or rights to acquire any such shares or other securities, (iii) any split, combination or reclassification of any of Parent’s capital stock,
(iv) any granting by Parent of any material increase in compensation or fringe benefits, except for normal increases of cash compensation in the ordinary course of business consistent with past practice, or any payment by Parent of any bonus,
except for bonuses made in the ordinary course of business consistent with past practice, or any granting by Parent of any increase in severance or termination pay or any entry by Parent into any currently effective employment, severance,
termination or indemnification agreement or any agreement the benefits of which are contingent or the terms of which are materially altered upon the occurrence of a transaction involving Parent of the nature contemplated hereby, (v) entry by
Parent into any licensing or other agreement with regard to the acquisition or disposition of any Intellectual Property other than licenses in the ordinary course of business consistent with past practice or any amendment or consent with respect to
any licensing agreement filed or required to be filed by Parent with respect to any Governmental Entity, (vi) any material change by Parent in its accounting methods, principles or practices, except as required by concurrent changes in
US GAAP, (vii) any change in the auditors of Parent, (viii) any issuance of capital stock of Parent, (ix) any revaluation by Parent of any of its assets, other than in the ordinary course of business, including, without
limitation, writing down the value of capitalized inventory or writing off notes or accounts receivable or any sale of assets of Parent other than in the ordinary course of business, or (x) any agreement, whether written or oral, to do any of
the foregoing.
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3.10
Litigation
. There are no claims, suits, actions or proceedings pending or to Parent’s
knowledge, threatened against Parent, before any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator that seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement
or which would reasonably be expected, either singularly or in the aggregate with all such claims, actions or proceedings, to have a Material Adverse Effect on Parent or have a Material Adverse Effect on the ability of the parties hereto to
consummate the Acquisition.
3.11
Employee Benefit Plans
. Except as may be contemplated by the Continuing Corporation Plan (as
defined in Section 5.1(a)), Parent does not maintain, and has no liability under, any employee compensation, incentive, fringe or benefit plans, programs, policies, commitments or other arrangements (whether or not set forth in a written
document) covering any active or former employee, director or consultant of Parent, or any trade or business (whether or not incorporated) which is under common control with Parent with respect to which Parent has liability, and neither the
execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment (including severance, unemployment compensation, golden parachute, bonus or otherwise) becoming due to any
stockholder, director or employee of Parent, or (ii) result in the acceleration of the time of payment or vesting of any such benefits.
3.12
Labor Matters
. Parent is not a party to any collective bargaining agreement or other labor union contract applicable to persons employed by Parent and Parent does not know of any activities or proceedings of any labor union to
organize any such employees.
3.13
Restrictions on Business Activities
. Since its organization, neither Parent nor Amalgamation Sub
has conducted any business activities other than activities directed toward the accomplishment of a business combination. Except as set forth in the Parent Charter Documents, there is no agreement, commitment, judgment, injunction, order or decree
binding upon Parent or merger Sub or to which either is a party which contains provisions prohibiting or materially impairing any business practice of Parent or Amalgamation Sub, any acquisition of property by Parent or Amalgamation Sub or the
conduct of business by Parent or Amalgamation Sub as currently conducted other than such effects, individually or in the aggregate, which have not had and would not reasonably be expected to have, a Material Adverse Effect on Parent or Amalgamation
Sub.
3.14
Title to Property
. Parent does not own or lease any real property or personal property. Except as set forth in
Schedule
3.14
, there are no options or other contracts under which Parent has a right or obligation to acquire or lease any interest in real property or personal property.
3.15
Taxes
. Except as set forth in
Schedule 3.15
hereto:
(a) Parent has
timely filed all Returns required to be filed by Parent with any Tax authority prior to the date hereof, except such Returns which are not material to Parent. All such Returns are true, correct and complete in all material respects. Parent has paid
all Taxes shown to be due on such Returns.
(b) All Taxes that Parent is required by law to withhold or collect have been
duly withheld or collected, and have been timely paid over to the proper governmental authorities to the extent due and payable.
(c) Parent has not been delinquent in the payment of any material Tax that has not been accrued for in Parent’s books and records of account for the period for which such Tax relates nor is there any material Tax deficiency
outstanding, proposed or assessed against Parent, nor has Parent executed any unexpired waiver of any statute of limitations on or extending the period for the assessment or collection of any Tax.
(d) No audit or other examination of any Return of Parent by any Tax authority is presently in progress, nor has Parent been notified of
any request for such an audit or other examination.
(e) No material adjustment relating to any Returns filed by Parent has
been proposed in writing, formally or informally, by any Tax authority to Parent or any representative thereof.
(f) Parent
has no liability for any material unpaid Taxes which have not been accrued for or reserved in accordance with US GAAP on Parent’s balance sheets included in the audited financial statements for the most
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recent fiscal year ended, other than any liability for unpaid Taxes that may have accrued since the end of the most recent fiscal year in connection with the
operation of the business of Parent in the ordinary course of business, none of which is material to the business, results of operations or financial condition of Parent.
(g) Parent has not taken any action and does not know of any fact, agreement, plan or other circumstance that is reasonably likely to
prevent the Acquisition or Share Transfer from qualifying as a reorganization within the meaning of Section 368(a) of the Code.
(h) Parent has no liability for the Taxes of any Person under Treas. Reg. § 1.1502-6 (or any similar provision of state, local for foreign law, including any arrangement for group or consortium relief or similar arrangement), as a
transferee or successor, by contract, or otherwise.
(i) Following the Closing, neither the Continuing Corporation nor any
of its director or indirect subsidiaries is or will be (i) a CFC, (ii) PFIC or (iii) subject to the provisions of Section 7874 of the Code.
3.16
Environmental Matters
. Except for such matters that, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect, to the knowledge of Parent: (i) Parent has complied
with all applicable Environmental Laws; (ii) Parent is not subject to liability for any Hazardous Substance disposal or contamination on any third party property; (iii) Parent has not been associated with any release or threat of release
of any Hazardous Substance; (iv) Parent has not received any notice, demand, letter, claim or request for information alleging that Parent may be in violation of or liable under any Environmental Law; and (v) Parent is not subject to any
orders, decrees, injunctions or other arrangements with any Governmental Entity or subject to any indemnity or other agreement with any third party relating to liability under any Environmental Law or relating to Hazardous Substances.
3.17
Brokers
. Except as set forth in
Schedule 3.17
, Parent has not incurred, nor will it incur, directly or indirectly, any liability for
brokerage or finders’ fees or agent’s commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. Except pursuant to Section1.5 and 1.7 and as disclosed in
Schedule 3.17
, no shares of
common stock, options, warrants or other securities of either the Company, Parent or the Continuing Corporation are payable to any third party by the Parent or the Continuing Corporation as a result of this Acquisition.
3.18
Intellectual Property
. Parent does not own, license or otherwise have any right, title or interest in any material Intellectual Property or
material Registered Intellectual Property, except non-exclusive rights to the name “Ascend”.
3.19
Agreements, Contracts and
Commitments
.
(a) Except as set forth in the Parent SEC Reports filed prior to the date of this Agreement, and with
respect to confidentiality and nondisclosure agreements, there are no contracts, agreements, leases, mortgages, indentures, notes, bonds, liens, license, permit, franchise, purchase orders, sales orders or other understandings, commitments or
obligations (including without limitation outstanding offers or proposals) of any kind, whether written or oral, to which Parent is a party or by or to which any of the properties or assets of Parent may be bound, subject or affected, which either
(a) creates or imposes a liability greater than $100,000, or (b) may not be cancelled by Parent on 30 days’ or less prior notice (“
Parent Contracts
”). All Parent Contracts are listed in
Schedule 3.19
other than
those that are exhibits to the Parent SEC Reports.
(b) Except as set forth in the Parent SEC Reports filed prior to the
date of this Agreement, each Parent Contract was entered into at arms’ length and in the ordinary course, is in full force and effect and is valid and binding upon and enforceable against each of the parties thereto. True, correct and complete
copies of all Parent Contracts (or written summaries in the case of oral Parent Contracts) and of all outstanding offers or proposals of Parent have been heretofore delivered to the Company.
(c) Neither Parent nor, to the knowledge of Parent, any other party thereto is in breach of or in default under, and no event has occurred
which with notice or lapse of time or both would become a breach of or
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default under, any Parent Contract, and no party to any Parent Contract has given any written notice of any claim of any such breach, default or event,
which, individually or in the aggregate, are reasonably likely to have a Material Adverse Effect on Parent. Each agreement, contract or commitment to which Parent is a party or by which it is bound that has not expired by its terms is in full force
and effect, except where such failure to be in full force and effect is not reasonably likely to have a Material Adverse Effect on Parent.
3.20
Insurance
. Except for directors’ and officers’ liability insurance, Parent does not maintain any insurance policies or fidelity bonds covering the assets, business, equipment, properties, operations, employees,
officers or directors of Parent or Amalgamation Sub.
3.21
Interested Party Transactions
. Except as set forth in the Parent SEC
Reports filed prior to the date of this Agreement: (a) no employee, officer, director or stockholder of Parent or a member of his or her immediate family is indebted to Parent nor is Parent indebted (or committed to make loans or extend or
guarantee credit) to any of them, other than reimbursement for reasonable expenses incurred on behalf of Parent; (b) to Parent’s knowledge, none of such individuals has any direct or indirect ownership interest in any Person with whom
Parent is affiliated or with whom Parent has a material contractual relationship, or any Person that competes with Parent, except that each employee, stockholder, officer or director of Parent and members of their respective immediate families may
own less than 5% of the outstanding stock in publicly traded companies that may compete with Parent; and (c) to Parent’s knowledge, no officer, director or stockholder or any member of their immediate families is, directly or indirectly,
interested in any material contract with Parent (other than such contracts as relate to any such individual ownership of capital stock or other securities of Parent).
3.22
Indebtedness
. Parent has no indebtedness for borrowed money, except as set forth on
Schedule 3.22
.
3.23
Over-the-Counter Bulletin Board Quotation
. Parent Common Stock is quoted on the Over-the-Counter Bulletin Board (“
OTC BB
”). The Parent is in compliance with the requirements of the OTC BB
for continued listing of the Parent Common Stock thereon and there is no action or proceeding pending or, to Parent’s knowledge, threatened against Parent by Nasdaq or the NASD, Inc. (“
NASD
”) with respect to any intention by
such entities to prohibit or terminate the quotation of any such securities on the OTC BB. The transactions contemplated by this Agreement will not contravene the rules and regulations of the OTC BB.
3.24
Board Approval
. The Board of Directors of Parent (including any required committee or subgroup of the Board of Directors of Parent) has, as
of the date of this Agreement, unanimously (i) declared the advisability of the Acquisition and approved this Agreement and the transactions contemplated hereby, (ii) determined that the Acquisition is in the best interests of the
stockholders of Parent, and (iii) determined that the fair market value of the Company is equal to at least 80% of Parent’s net assets (including the Trust Fund).
3.25
Trust Fund
. As of the date hereof and at the Closing Date, Parent has and will have no less than $39,354,720 invested in United States
Government securities in a trust account administered by Continental (the “
Trust Fund
”), less such amounts required to be paid or reserved, including those amounts described in this Agreement.
3.26
Governmental Filings
. Except as set forth in
Schedule 3.26
, Parent has been granted and holds, and has made, all Governmental
Actions/Filings necessary to the conduct by Parent of its business (as presently conducted) or used or held for use by Parent, and true, complete and correct copies of which have heretofore been delivered to the Company. Each such Governmental
Action/Filing is in full force and effect and, except as disclosed in
Schedule 3.26
, will not expire prior to December 31, 2008, and Parent is in compliance with all of its obligations with respect thereto. No event has occurred and is
continuing which requires or permits, or after notice or lapse of time or both would require or permit, and consummation of the transactions contemplated by this Agreement or any ancillary documents will not require or permit (with or without notice
or lapse of time, or both), any modification or termination of any such Governmental Actions/Filings except such events which, either individually or in the aggregate, would not have a Material Adverse Effect upon Parent.
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3.27
Representations and Warranties Complete
. The representations and warranties of Parent
included in this Agreement and any list, statement, document or information set forth in, or attached to, any Schedule provided pursuant to this Agreement or delivered hereunder, are true and complete in all material respects and do not contain any
untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading, under the circumstance under which they were made.
3.28
Survival of Representations and Warranties
. The representations and warranties of Parent set forth in this Agreement shall survive until the
end of the Escrow Period.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1
Conduct of Business by the Company and Parent
.
During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement pursuant to its terms or the Closing, each of the Company, EHL, Parent and Amalgamation Sub shall, except to the extent that the
other parties shall otherwise consent in writing, carry on its business in the usual, regular and ordinary course consistent with past practices, in substantially the same manner as heretofore conducted and in compliance with all applicable laws and
regulations (except where noncompliance would not have a Material Adverse Effect), pay its debts and taxes when due subject to good faith disputes over such debts or taxes, pay or perform other material obligations of such party when due, and,
unless inconsistent with prudent business practices or as would not reasonably be expected to have a Material Adverse Effect on such party, use its commercially reasonable efforts consistent with past practices and policies to (i) preserve
substantially intact its present business organization, (ii) keep available the services of its present officers and key employees and (iii) preserve its relationships with customers, suppliers, distributors, licensors, licensees, and
others with which it has significant business dealings. In addition, except as required or permitted by the terms of this Agreement or by Law, without the prior written consent of Parent and EHL, during the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement pursuant to its terms or the Closing, each of the Company, EHL, Parent and Amalgamation Sub shall not do any of the following or cause any of the following to occur:
(a) Waive any stock repurchase rights, accelerate, amend or (except as specifically provided for herein) change the period of
exercisability of options or restricted stock, or reprice options granted under any employee, consultant, director or other stock plans or authorize cash payments in exchange for any options granted under any of such plans;
(b) Grant any severance or termination pay to any officer or employee except pursuant to applicable law, written agreements outstanding,
or policies existing on the date hereof and as previously or concurrently disclosed in writing or made available to the other party, or adopt any new severance plan, or amend or modify or alter in any manner any severance plan, agreement or
arrangement existing on the date hereof;
(c) Transfer or license to any person or otherwise extend, amend or modify any
material rights to any Intellectual Property of the Company or Parent, as applicable, or enter into grants to transfer or license to any person future patent rights, other than in the ordinary course of business consistent with past practices
provided that in no event shall the Company or Parent license on an exclusive basis or sell any Intellectual Property of the Company, or Parent as applicable;
(d) Declare, set aside or pay any dividends on or make any other distributions (whether in cash, stock, equity securities or property) in
respect of any capital stock or split, combine or reclassify any capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any capital stock;
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(e) Purchase, redeem or otherwise acquire, directly or indirectly, any shares of capital
stock of the Company and Parent, as applicable, other than repurchases of unvested shares at cost in connection with the termination of the relationship with any employee or consultant pursuant to agreements in effect on the date hereof;
(f) Issue, deliver, sell, authorize, pledge or otherwise encumber, or agree to any of the foregoing with respect to, any shares of
capital stock or any securities convertible into or exchangeable for shares of capital stock, or subscriptions, rights, warrants or options to acquire any shares of capital stock or any securities convertible into or exchangeable for shares of
capital stock, or enter into other agreements or commitments of any character obligating it to issue any such shares or convertible or exchangeable securities, other than in connection with the exercise or conversion of any convertible or
exchangeable securities outstanding as of the date hereof;
(g) Amend its Charter Documents, except that the Company shall
be entitled to amend such Charter Documents solely to remove or waive any liquidation preference that would be triggered by the consummation of the Acquisition and the Share Transfer;
(h) Acquire or agree to acquire by merging or consolidating with, or by purchasing any equity interest in or a portion of the assets of,
or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to the
business of Parent or the Company as applicable, or enter into any joint ventures, strategic partnerships or alliances or other arrangements that provide for exclusivity of territory or otherwise restrict such party’s ability to compete or to
offer or sell any products or services;
(i) Sell, lease, license, encumber or otherwise dispose of any properties or
assets, except (A) sales of inventory in the ordinary course of business consistent with past practice, and (B) the sale, lease or disposition (other than through licensing) of property or assets that are not material, individually or in
the aggregate, to the business of such party;
(j) Except for borrowing under the Company’s existing credit facilities
in the ordinary course of business, incur any indebtedness for borrowed money in excess of $25,000 in the aggregate or guarantee any such indebtedness of another person, issue or sell any debt securities or options, warrants, calls or other rights
to acquire any debt securities of Parent or the Company, as applicable, enter into any “keep well” or other agreement to maintain any financial statement condition or enter into any arrangement having the economic effect of any of the
foregoing;
(k) Adopt or amend any employee benefit plan, policy or arrangement, any employee stock purchase or employee
stock option plan, or enter into any employment contract or collective bargaining agreement (other than offer letters and letter agreements entered into in the ordinary course of business consistent with past practice with employees who are
terminable “at will”), pay any special bonus or special remuneration to any director or employee other than pursuant to obligations existing as of the date hereof, or increase the salaries or wage rates or fringe benefits (including rights
to severance or indemnification) of its directors, officers, employees or consultants, except in the ordinary course of business consistent with past practices other than pursuant to obligations existing as of the date hereof;
(l) Pay, discharge, settle or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), or litigation (whether or not commenced prior to the date of this Agreement) other than the payment, discharge, settlement or satisfaction, in the ordinary course of business consistent with past practices or in accordance with their
terms, or liabilities recognized or disclosed in the Unaudited Financial Statements or in the most recent financial statements included in the Parent SEC Reports filed prior to the date of this Agreement, as applicable, or incurred in the ordinary
course of business since the date of such financial statements, or waive the benefits of, agree to modify in any manner, terminate, release any person from or knowingly fail to enforce any confidentiality or similar agreement to which the Company is
a party or of which the Company is a beneficiary or to which Parent is a party or of which Parent is a beneficiary, as applicable, which failure would reasonably likely be expected to have a Material Adverse Effect on the Company or Parent, as
applicable, except that EHL and the Company may
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provide for the payment of all reasonable fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby incurred by
EHL and the Company to be paid by either of EHL or the Company upon or prior to the consummation of the Acquisition;
(m)
Except in the ordinary course of business consistent with past practices, modify, amend or terminate any Material Company Contract or Parent Contract, as applicable, or waive, delay the exercise of, release or assign any material rights or claims
thereunder;
(n) Except as required by US GAAP or Singapore GAAP, revalue any of its assets or make any change in
accounting methods, principles or practices;
(o) Except in the ordinary course of business consistent with past practices,
incur or enter into any agreement, contract or commitment requiring such party to pay in excess of $100,000 in any 12 month period;
(p) Engage in any action that would reasonably be expected to cause the Acquisition or Share Transfer to fail to qualify as a “reorganization” under Section 368(a) of the Code;
(q) Settle any litigation to which an Insider is a party or where the consideration given by the Company is other than monetary;
(r) Make or rescind any Tax elections that, individually or in the aggregate, would be reasonably likely to adversely
affect in any material respect the Tax liability or Tax attributes of such party, settle or compromise any material income tax liability or, except as required by applicable law, materially change any method of accounting for Tax purposes or prepare
or file any Return in a manner inconsistent with past practice;
(s) Form, establish or acquire any subsidiary except as
contemplated by this Agreement;
(t) Make capital expenditures in excess of $300,000, except in accordance with prudent
business and operational practices consistent with prior practice;
(u) Enter into any transaction with or distribute or
advance any assets or property to any of its officers, directors, partners, stockholders or other affiliates other than the payment of salary and benefits in the ordinary course of business consistent with past practice; or
(v) Agree in writing or otherwise agree, commit or resolve to take any of the actions described in Section 4.1 (a) through
(u) above.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1
Registration Statement and Proxy Statement and Prospectus; Special Meeting
.
(a) As soon as is reasonably practicable after receipt by Parent from the Company of all financial and other information relating to
the Company as Parent may reasonably request Parent and Amalgamation Sub shall prepare and file with the SEC under the Exchange Act, and with all other applicable regulatory bodies, a registration statement on Form S-4 and F-4 as applicable with
respect to the Continuing Corporation Common Shares and Continuing Corporation Warrants to be issued in the exchange (“
Public Company Securities Exchange
”).
(b) The Form S-4 shall include proxy materials for the purpose of soliciting proxies from holders of Parent Common Stock to vote in favor
of, among other things, (i) the adoption of this Agreement and the approval of the Acquisition and the reincorporation of Parent via the Amalgamation with Amalgamation Sub (“
Acquisition and Reincorporation Proposal
”) and
(ii) the adoption of the 2007 Incentive Compensation Plan, substantially in the form attached hereto as
Exhibit C
(the “
Continuing Corporation
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Plan
”), at a meeting of holders of Parent Common Stock to be called and held for such purpose (the “
Special Meeting
”). The
Continuing Corporation Plan shall provide that an aggregate number of Continuing Corporation Common Shares equal to (i) 15% of the total number of outstanding Continuing Corporation Common Shares immediately after the consummation of the
Acquisition plus (ii) the number of shares issuable upon the exercise of the EHL Options to be assumed pursuant to
Section 1.7(f)
shall be reserved for issuance pursuant to the Continuing Corporation Plan
.
The Company shall
furnish to Parent all information concerning the Company as Parent may reasonably request in connection with the preparation of the registration statement, prospectus and proxy statement contemplated hereby (collectively, the “
Registration
Statement
”). The Company and its counsel shall be given a commercially reasonable opportunity to review and comment on the Registration Statement and amendments thereto prior to their being filed with the SEC. Parent, with the assistance of
the Company, shall promptly respond to any SEC comments on the Registration Statement and shall otherwise use reasonable best efforts to cause the Registration Statement to be declared effective by the SEC as promptly as practicable.
(c) As soon as practicable following the declaration of effectiveness of the Registration Statement by the SEC, Parent shall distribute
the related prospectuses and proxy statement to the holders of Parent Common Stock and, pursuant thereto, shall call the Special Meeting in accordance with the DGCL and, subject to the other provisions of this Agreement, use reasonable best efforts
to solicit proxies from such holders to vote in favor of the adoption of this Agreement and the approval of the Acquisition and the other matters presented for approval or adoption at the Special Meeting.
(d) Parent shall comply with all applicable provisions of and rules under the Securities Act, Exchange Act and all applicable provisions
of the DGCL in the preparation, filing and distribution of the Registration Statement and the prospectuses and proxy statements included therein, the solicitation of proxies thereunder, and the calling and holding of the Special Meeting. Without
limiting the foregoing, Parent shall ensure that the prospectuses and proxy statement does not, as of the date on which the Registration Statement is declared effective, and as of the date of the Special Meeting, contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading (provided that Parent shall not be responsible for the accuracy or completeness
of any information relating to the Company, EHL or the recipients of Transaction Consideration or any other information, in each case furnished by the Company, EHL or any such recipient in writing explicitly for inclusion in the Registration
Statement). The Company and EHL shall use commercially reasonable efforts to ensure that the information relating to the Company and EHL supplied by them in writing explicitly for inclusion in the Registration Statement will not as of the date on
which the Registration Statement is declared effective (or any amendment or supplement thereto) or at the time of the Special Meeting contain any statement which, at such time and in light of the circumstances under which it is made, be false or
misleading with respect to any material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statement therein not false or misleading.
(e) Parent, acting through its board of directors, shall include in the prospectuses and proxy statement comprising the Registration
Statement the recommendation of its board of directors that the holders of Parent Common Stock vote in favor of the adoption of the Acquisition and Reincorporation Proposal and the other proposals contemplated hereby and shall otherwise use
reasonable best efforts to obtain such stockholder approval.
(f) EHL and the Company also shall cooperate with Parent and
provide all information reasonably requested by Parent in connection with any application or other filing made secure listing of Continuing Corporation’s securities on the Nasdaq Stock Market prior to the Closing.
(g) In the event that an opinion of counsel regarding the tax consequences of the Acquisition (the “
Tax Opinion
”) is
necessary or desirable in connection with the Registration Statement, the parties to this Agreement shall cooperate with tax counsel as reasonably requested in preparing such opinion, including providing properly executed representation letters with
respect to the treatment of each of the Acquisition and Share Transfer as a “reorganization” within the meaning of Section 368(a) of the Code.
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5.2
Directors and Officers of Parent and the Company after Acquisition
. The Parties shall take all
necessary actions so that the persons listed in Schedule 5.2 are elected as directors of Continuing Corporation and to the offices of Continuing Corporation and the Company as listed on Schedule 5.2, effective immediately after the Closing. EHL and
those stockholders of Parent stated to be parties thereto shall enter into a Voting Agreement in the form of
Exhibit D
hereto concurrently with the execution of this Agreement.
5.3
Public Disclosure
. From the date of this Agreement until the earlier of the Closing or termination of this Agreement in accordance with its
terms, the parties shall cooperate in good faith to jointly prepare all press releases and public announcements pertaining to this Agreement and the transactions governed by it, and no party shall issue or otherwise make any public announcement or
communication pertaining to this Agreement or the transaction without the prior consent of Parent and EHL, except as required by any legal requirement applicable to the Parent or EHL, as applicable, or by the rules and regulations of, or pursuant to
any agreement of, a stock exchange or trading system on which the capital stock of Parent is then listed. Each party will not unreasonably delay, withhold or condition approval from the others with respect to any press release or public
announcement. If any party determines with the advice of counsel that it is required to make this Agreement and the terms of the transaction public or otherwise issue a press release or make public disclosure with respect thereto, it shall, at a
reasonable time before making any public disclosure, consult with the other party regarding such disclosure, seek such confidential treatment for such terms or portions of this Agreement or the transaction as may be reasonably requested by the other
party and disclose only such information as is legally compelled to be disclosed.
5.4
Other Actions
.
(a) As promptly as practicable after execution of this Agreement, Parent will prepare and timely file a Current Report on Form 8-K
pursuant to the Exchange Act to report the execution of this Agreement (“
Acquisition Form 8-K
”), which the Company shall be given reasonable opportunity to review and comment upon prior to filing and for which the Company shall
supply descriptions of its business and risks related to its business and required or appropriate financial information. Promptly after the execution of this Agreement, Parent, the Company and EHL shall also jointly issue a press release announcing
the execution of this Agreement (“
Acquisition Press Release
”).
(b) At least five (5) days prior to
Closing, Parent shall prepare a draft Form 8-K announcing the Closing, together with, or incorporating by reference, the financial statements prepared by the Company and such other information that may be required to be disclosed with respect to the
Acquisition in a Current Report on Form 8-K with respect to the Acquisition (“
Closing Form 8-K
”), which shall be in a form reasonably acceptable to the Company and in a format acceptable for EDGAR filing. Prior to Closing, Parent,
the Company and EHL shall jointly prepare the press release announcing the consummation of the transactions hereunder (“
Closing Press Release
”). Concurrently with the Closing, Parent shall timely file the Closing Form 8-K with the
SEC and distribute the Closing Press Release.
(c) From the date of this Agreement until the earlier of the Closing or
termination of this Agreement in accordance with its terms, the Company, EHL and Parent shall further cooperate with each other and use their respective reasonable best efforts to take or cause to be taken all actions, and do or cause to be done all
things, reasonably necessary, proper or advisable on its part under this Agreement and applicable laws to consummate the Acquisition and the other transactions contemplated hereby as soon as practicable, including preparing and filing as soon as
practicable all documentation to effect all necessary notices, reports and other filings and to obtain as soon as practicable all consents, registrations, approvals, permits and authorizations necessary or advisable to be obtained from any third
party and/or any Governmental Entity in order to consummate the Acquisition or any of the other transactions contemplated hereby; provided that the foregoing shall not require Parent or the Company to agree to any divestiture by itself or any of its
affiliates of shares of capital stock or of any business, assets or property, or the imposition of any material limitation on the ability of any of them to conduct their business or to own or exercise control of such assets, properties and stock.
This obligation shall include, on the part of Parent, sending a termination letter to Continental in substantially the form of Exhibit A attached to the Investment Management Trust Agreement by and between Parent and Continental dated as of
May 11, 2006. Subject to applicable laws
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relating to the exchange of information and the preservation of any applicable attorney-client privilege, work-product doctrine, self-audit privilege or
other similar privilege, each of the Company and Parent shall have the right to review and comment on in advance, and to the extent practicable each will consult the other on, all the information relating to such party, that appear in any filing
made with, or written materials submitted to, any third party and/or any Governmental Entity in connection with the Acquisition and the other transactions contemplated hereby. In exercising the foregoing right, each of the Company, EHL and Parent
shall act reasonably and as promptly as practicable.
5.5
Required Information
. In connection with the preparation of the
Acquisition Form 8-K and Acquisition Press Release, or any other statement, filing, notice or application made by or on behalf of Parent, the Company or EHL to any third party and/or any Governmental Entity in connection with the Acquisition or the
other transactions contemplated hereby, and subject to any applicable contractual confidentiality obligations (which the Company, EHL or the Parent, as applicable, shall use its commercially reasonable efforts to cause to be waived), the Company,
EHL and Parent each shall, upon request by any other party to this Agreement, furnish the other with all information concerning themselves, their respective directors, officers and stockholders (including the directors of Continuing Corporation and
the Company to be elected effective as of the Closing pursuant to Section 5.2 hereof) and such other matters as may be reasonably requested in connection with the Acquisition.
5.6
Confidentiality; Access to Information
.
(a)
Confidentiality
. Any confidentiality agreement previously executed among the parties shall be superseded in its entirety by the provisions of this Agreement. Each party agrees to maintain in confidence any
non-public information received from the other party, and to use such non-public information only for purposes of consummating the transactions contemplated by this Agreement. Such confidentiality obligations will not apply to (i) information
which was known to the one party to this Agreement or their respective agents prior to receipt from another party hereto; (ii) information which is or becomes generally known other than as a result of a breach of any confidentiality agreement
previously executed by the parties hereto; (iii) information acquired by a party or their respective agents from a third party who was not bound to an obligation of confidentiality; and (iv) disclosure required by law applicable to the
recipient of such information. In the event this Agreement is terminated as provided in Article VIII hereof, each party (i) will destroy or return or cause to be returned to the other all documents and other material obtained from the other in
connection with the Acquisition contemplated hereby, and (ii) will use its reasonable best efforts to delete from its computer systems all documents and other material obtained from the other in connection with the Acquisition contemplated
hereby. The confidentiality obligations hereunder shall survive for a period of three (3) years after the earlier to occur of the Closing or the termination of this Agreement.
(b)
Access to Information
.
(i) Subject to any applicable contractual confidentiality obligations (which the Company or EHL, as applicable, shall use its commercially reasonable efforts to cause to be waived), each of the Company and EHL will
afford Parent and its financial advisors, accountants, counsel and other representatives reasonable access during normal business hours, upon reasonable notice, to the properties, books, records and personnel of the Company and EHL during the period
prior to the Closing to obtain all information concerning the business, including the status of product development efforts, properties, results of operations and personnel of the Company, as Parent may reasonably request; provided that neither the
Parent nor its representatives may contact any personnel of the Company or EHL without the prior consent of the Company’s Chief Executive Officer or Chief Financial Officer, which consent shall not be unreasonably withheld. No information or
knowledge obtained by Parent in any investigation pursuant to this Section 5.6 will affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Acquisition.
(ii) Subject to any applicable contractual confidentiality obligations (which Parent shall use its commercially reasonable
efforts to cause to be waived), Parent will afford the Company and its
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financial advisors, underwriters, accountants, counsel and other representatives reasonable access during normal business hours, upon reasonable notice, to
the properties, books, records and personnel of Parent during the period prior to the Closing to obtain all information concerning the business, including the status of business or product development efforts, properties, results of operations and
personnel of Parent, as the Company may reasonably request; provided that neither the Company or EHL nor its respective representatives may contact any personnel of Parent without the prior consent of Parent’s Chief Executive Officer, which
consent shall not be unreasonably withheld. No information or knowledge obtained by the Company in any investigation pursuant to this Section 5.6 will affect or be deemed to modify any representation or warranty contained herein or the
conditions to the obligations of the parties to consummate the Acquisition.
(iii) Each of the Company and EHL will, and
will cause its auditors to, (a) continue to provide Parent and its advisors full access to all of the Company’s financial information used in the preparation of its Audited Financial Statements and Unaudited Financial Statements and the
financial information furnished pursuant to Section 5.19 hereof and (b) cooperate fully with any reviews performed by Parent or its advisors of any such financial statements or information.
5.7
Activities of EHL Post-Closing
. Concurrently with the consummation of the Acquisition or within ten (10) business days thereafter, EHL
shall change its name to a new name not utilizing the term “ePak” or any derivative thereof or any term otherwise relating to the business of the Company or its products or services. Following consummation of the Acquisition, EHL shall not
engage, directly or indirectly, in any business that is competitive with or similar to the businesses in which the Company is engaged at the time of Closing or which, at the time of the Closing, the Company has proposed to engage.
5.8
Reasonable Efforts
. Upon the terms and subject to the conditions set forth in this Agreement, each of the parties agrees to use its
commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in
the most expeditious manner practicable, the Acquisition and the other transactions contemplated by this Agreement, including using commercially reasonable efforts to accomplish the following: (i) the taking of all reasonable acts necessary to
cause the conditions precedent set forth in Article VI to be satisfied, (ii) the obtaining of all necessary actions, waivers, consents, approvals, orders and authorizations from Governmental Entities and the making of all necessary
registrations, declarations and filings (including registrations, declarations and filings with Governmental Entities, if any) in connection with the Acquisition, (iii) the obtaining of all consents, approvals or waivers from third parties
required as a result of the transactions contemplated in this Agreement, including without limitation the consents referred to in
Schedule 2.5
of the Company Disclosure Schedule, (iv) the defending of any suits, claims, actions,
investigations or proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby, including seeking to have any stay or temporary restraining order entered by any court or
other Governmental Entity vacated or reversed and (v) the execution or delivery of any additional instruments reasonably necessary to consummate the transactions contemplated by this Agreement. In connection with and without limiting the
foregoing, Parent and its board of directors and the Company and its board of directors shall, if any state takeover statute or similar statute or regulation is or becomes applicable to the Acquisition, this Agreement or any of the transactions
contemplated by this Agreement, use its commercially reasonable efforts to enable the Acquisition and the other transactions contemplated by this Agreement to be consummated as promptly as practicable on the terms contemplated by this Agreement.
Notwithstanding anything herein to the contrary, nothing in this Agreement shall be deemed to require Parent or the Company to agree to any divestiture by itself or any of its affiliates of shares of capital stock or of any business, assets or
property, or the imposition of any material limitation on the ability of any of them to conduct their business or to own or exercise control of such assets, properties and stock.
5.9
Treatment as a Reorganization
. None of Parent, Amalgamation Sub, Continuing Corporation, the Company or EHL shall take any action prior to or
following the Acquisition that would reasonably be expected to cause (i) the Acquisition or Share Transfer to fail to qualify as a “reorganization” within the meaning of
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Section 368(a) of the Code or (ii) a gain recognition agreement within the meaning of Treas. Reg. Sec. 1.367(a)-8 to be required to be filed by any
of the shareholders of EHL, including as a result of any contribution or drop-down of the share capital of the Company to a subsidiary of Amalgamation Sub.
5.10
No Continuing Corporation Common Shares Transactions
. Each recipient of Transaction Consideration and each of the Initial Stockholders (as such term is defined in that certain Stock Escrow Agreement, dated
May 11, 2006, by and among Parent, Don K. Rice, Russell C. Ball III, Stephen L. Brown, Arthur Spector and Continental Stock Transfer & Trust Company) shall agree that it shall not, prior to six month anniversary of Closing, sell,
transfer or otherwise dispose of an interest in any of the Continuing Corporation Common Shares it receives as a result of the Acquisition or otherwise holds or acquires other than as permitted pursuant to the Lock-Up Agreement in the form of
Exhibit E
.
5.11
Certain Claims
. As additional consideration and a condition for the issuance of Continuing Corporation
Common Shares pursuant to this Agreement, at Closing, EHL shall deliver to Parent a written release from EHL in a form reasonably acceptable to Parent and the Company, by which EHL, on behalf of itself and its directors, officers and employees
(“
Subject Persons
”) shall release and forever discharge, effective as of the Closing Date, the Company and its directors, officers, employees and agents, from any and all rights, claims, demands, judgments, obligations, liabilities
and damages, whether accrued or unaccrued, asserted or unasserted, and whether known or unknown arising out of or resulting from each Subject Person’s (i) status as a holder of an equity interest in the Company; and (ii) employment,
service, consulting or other similar agreement entered into with the Company prior to Closing to the extent that the basis for claims under any such agreement that survives the Closing arise prior to the Closing, provided, however, the foregoing
shall not release any obligations of Parent or the Continuing Corporation set forth in this Agreement or any other documents executed in connection with the transactions contemplated hereby.
5.12
No Securities Transactions
. Neither the Company or EHL nor any of their respective officers, directors, employees, agents and
representatives, directly or indirectly, shall engage in any transactions involving the securities of Parent prior to the time of the making of a public announcement of the transactions contemplated by this Agreement. The Company and EHL shall use
its commercially reasonable efforts to require each of its officers, directors, employees, agents and representatives to comply with, and notify its shareholders of, the foregoing requirement.
5.13
No Claim Against Trust Fund
. Notwithstanding anything else in this Agreement, the Company and EHL acknowledge that they have read
Parent’s final prospectus dated May 11, 2006 and understand that Parent has established the Trust Fund for the benefit of Parent’s public stockholders and that Parent may disburse monies from the Trust Fund only (a) to
Parent’s public stockholders in the event they elect to convert their shares into cash in accordance with Parent’s Charter Documents and/or the liquidation of Parent or (b) to Parent after it consummates a business combination. The
Company and EHL further acknowledge that, if the transactions contemplated by this Agreement, or, upon termination of this Agreement, another business combination, are not consummated by May 11, 2008, Parent will be obligated to return to its
stockholders the amounts being held in the Trust Fund. Accordingly, the Company and EHL, for themselves and their subsidiaries, hereby waive all rights, title, interest or claim of any kind against Parent to collect from the Trust Fund any monies
that may be owed to them by Parent for any reason whatsoever, including but not limited to a breach of this Agreement by Parent or any negotiations, agreements or understandings with Parent (whether in the past, present or future), and will not seek
recourse against the Trust Fund at any time for any reason whatsoever. This paragraph will survive this Agreement and will not expire and will not be altered in any way without the express written consent of Parent, the Company and EHL.
Notwithstanding the foregoing, nothing herein shall prohibit EHL, the Company, their respective shareholders or the Representative from seeking the release of the Trust Fund to the Continuing Corporation at or following the Closing in accordance
with the terms of the applicable documents governing the Trust Fund and Section 5.24.
5.14
Disclosure of Certain Matters
. Each
of Parent, the Company and EHL will provide the others with prompt written notice of any event, development or condition of which such party becomes aware that (a) would
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cause any of such party’s representations and warranties to become materially untrue or misleading or which may affect its ability to consummate the
transactions contemplated by this Agreement, (b) gives such party any reason to believe that it is more likely than not that any of the conditions set forth in Article VI will not be satisfied, or (c) would require any amendment or
supplement to the Registration Statement pursuant to applicable SEC rules and regulations.
5.15
Nasdaq Listing
. Parent and the
Company shall use their reasonable best efforts to obtain the listing for trading on the Nasdaq Global Market or Nasdaq Capital Market of the Continuing Corporation Common Shares and Continuing Corporation Warrants.
5.16 [Reserved.]
5.17
Charter
Protections; Directors’ and Officers’ Liability Insurance
.
(a) All rights to indemnification for acts or
omissions occurring through the Closing Date now existing in favor of the current directors and officers of Parent and the Company as provided in the Charter Documents of Parent or the Company, as applicable, or in any indemnification agreements
shall survive the Acquisition and shall continue in full force and effect in accordance with their terms.
(b) For a period
of six (6) years after the Closing Date, Continuing Corporation shall cause to be maintained in effect the current policies of directors and officers liability insurance maintained by Parent and the Company, respectively, (or policies of at
least the same coverage and amounts containing terms and conditions which are no less advantageous) with respect to claims arising from facts and events that occurred prior to the Closing Date.
(c) If Continuing Corporation or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not
be the continuing or surviving entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, in each such case, to the extent necessary, proper provision shall be
made so that the successors and assigns of Continuing Corporation assume the obligations set forth in this Section 5.17.
(d) The provisions of this Section 5.17 are intended to be for the benefit of, and shall be enforceable by, each Person who will have been a director or officer of Parent or the Company for all periods ending on or before the Closing
Date and may not be changed without the consent of Committee referred to in Section 1.17(a).
5.18
Repayment of Obligations
.
Any and all indebtedness or other obligations owed to the Company by EHL or any officer, director, shareholder, consultant, employee or affiliate of EHL or the Company shall be repaid on or before the Closing, including the indebtedness and other
obligations described in
Schedule 2.22
.
5.19
Certain Financial Information
.
(a) Within thirty (30) days after the end of each month ending between the date hereof and the earlier of the Closing Date and the
date on which this Agreement is terminated, the Company shall deliver to Parent unaudited consolidated financial statements of the Company for such month, including a balance sheet, statement of operations and statement of cash flows that are
certified as correct and complete by the Chief Executive Officer and Chief Financial Officer of the Company, prepared in accordance with the US GAAP applied on a consistent basis to prior periods (except as may be indicated in the notes
thereto) and fairly present in all material respects the financial position of the Company at the date thereof and the results of its operations and cash flows for the period indicated, except that such statements need not contain notes and may be
subject to normal adjustments that are not expected to have a Material Adverse Effect on the Company.
(b) As soon as
practicable (but no later than November 15, 2007), the Company shall deliver to Parent the US GAAP Audited Financials for the years ended December 31, 2006, 2005 and 2004.
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5.20 [Reserved].
5.21 “
HSR Act
.” If required pursuant to the HSR Act, as promptly as practicable after the date of this Agreement, Parent and the Company shall each prepare and file the notification required of it
thereunder in connection with the transactions contemplated by this Agreement and shall promptly and in good faith respond to all information requested of it by the Federal Trade Commission and Department of Justice in connection with such
notification and otherwise cooperate in good faith with each other and such Governmental Entities. Parent and the Company shall (a) promptly inform the other of any communication to or from the Federal Trade Commission, the Department of
Justice or any other Governmental Entity regarding the transactions contemplated by this Agreement, (b) give the other prompt notice of the commencement of any action, suit, litigation, arbitration, proceeding or investigation by or before any
Governmental Entity with respect to such transactions and (c) keep the other reasonably informed as to the status of any such action, suit, litigation, arbitration, proceeding or investigation. Filing fees with respect to the notifications
required under the HSR Act shall be shared equally by Parent and the EHL.
5.22
Company Contract Consents
. As soon as practicable
after the date hereof and prior to the Closing Date, the Company and EHL shall use commercially reasonable efforts to negotiate with each party to each of the Material Company Contracts, if any, that would require consent to the Acquisition to
remain in full force after the Acquisition and take commercially reasonable action to obtain such consent, in each case without change to the term or provisions of such Material Company Contract and without the payment of any consideration (the
“
Company Contract Consents
”). Each Company Contract Consent shall be effective as of the Closing Date.
5.23
Parent
Borrowings
. Through the Closing, Parent shall be allowed to borrow funds from its directors, officers and/or stockholders to meet its reasonable capital requirements, with any such loans to be made only as reasonably required by the operation of
Parent in due course on a non-interest bearing basis and repayable at Closing. The proceeds of such loans shall not be used for the payment of salaries, bonuses or other compensation to any of Parent’s directors, officers or stockholders.
5.24
Trust Fund Disbursement
. The Trust Fund shall be dispersed to the Continuing Corporation immediately upon the Closing with not
less than $39,354,720 being made available to Continuing Corporation and the Company for working capital; provided, however, that from such amount (a) all liabilities of Parent and Amalgamation Sub due and owing or incurred at or prior to the
Effective Time, shall be paid as and when due (including any loans by insiders of Parent to Parent, which shall be paid at Closing), (b) all amounts payable to stockholders of Parent that elect to convert their shares of Parent Common Stock
into cash, which shall be paid as soon as practicable following Closing, (c) all Parent and Amalgamation Sub tax liabilities, which shall be paid as and when due, (d) all professional fees related to these transactions, which shall be paid
at Closing, as well as other fees and expenses incurred by Parent and Amalgamation Sub in connection with the Agreement and the transactions contemplated hereby and (e) all finders fees and investment banking fees (including those payable to
EarlyBird), which shall be paid at Closing (collectively, the “
Parent Effective Time Liabilities
”).
5.25
Applicable
Foreign Filings
. At or prior to closing, EHL and the Company shall cause to be fulfilled those obligations and cause to be filed those documents described on Schedule A to this Agreement.
5.26
Employment Agreements
. At or prior to closing, Continuing Corporation and each of each of Steve Dezso, Mao Shi Khoo, Chun Weng Chok, James
Thomas, Jeffrey Blaine and Don Rice shall enter into employment agreements in the form of
Exhibit F
hereto and Continuing Corporation and Richard Brook shall enter into an employment agreement in the form of
Exhibit G
hereto, each
having such additional terms as described in the Acquisition Form 8-K (the “
Employment Agreements
”).
5.27
Management
Bonus Pool
. As soon as practicable after Closing, the Continuing Corporation shall adopt a management bonus pool having an initial term of three years and providing for the annual distribution of aggregate cash bonuses equal to 10% of the
Company’s net profits for each year ending December 31 (pro rated
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for any partial years) as reported on the Company’s audited financial statements for each such year (the “
Bonus Plan
”) to Steve Dezso,
Mao Shi Khoo, Chun Weng Chok, James Thomas, Jeffrey Blaine and Richard Brook and those members of the Company’s management that, upon recommendation from Steve Dezso, are determined as eligible to participate thereunder by the Continuing
Corporation’s board of directors or the compensation committee thereof. For the purposes of determining the aggregate amount of funds to be allocated for distribution under the Bonus Plan, the calculation of “net profits” shall not
include expenses associated with the issuance of EBITDA Shares and the Redemption Shares, amounts to be paid to holders who convert their Parent Common Stock into a pro rata portion of the Trust Fund pursuant to Section B of the Sixth Article of
Parent’s Amended and Restated Certificate of Incorporation as in effect as of the date hereof and the exercise of the Continuing Corporation Warrants, in each case incurred or accrued to the Company during the applicable period.
5.28
Pre-Closing Amendment to Amalgamation Sub Charter
. Immediately prior to the Closing, Amalgamation Sub shall cause to be filed and become
effective an amendment to its Articles and Memorandum of Association changing its name to “ePak International Limited” and an increasing the number of its authorized ordinary shares to 70,000,000 and its preferred shares to 1,000,000
(“
Amalgamation Sub Charter Amendment
”).
5.29
Tax Matters
(a)
CFC Status
. The Continuing Corporation will use commercially reasonable efforts to not sell or issue any shares of the
Continuing Corporation or any subsidiary to any person or entity if such sale or issuance of shares would cause the Continuing Corporation or any subsidiary to be a CFC. The Continuing Corporation makes no representation or warranty with respect to
sales of its capital stock by holders thereof. The Continuing Corporation will provide prompt written notice to the recipients of Transaction Consideration that are subject to taxation in the United States (each, a “
US Shareholder
”)
if at any time the Continuing Corporation becomes aware that it or any subsidiary may, or has, become a CFC. Upon request of a US Shareholder from time to time, subject to obtaining the consent of its shareholders to release such information, the
Continuing Corporation will promptly provide in writing such information in its possession concerning its and its subsidiaries’ shareholders and, to the Continuing Corporation’s actual knowledge, the direct and indirect interest holders in
each shareholder sufficient for such US Shareholder to determine that the Continuing Corporation and any subsidiary is not a CFC. In addition, the Continuing Corporation will cooperate in good faith with the US Shareholders and their tax advisors to
take any and all commercially reasonable actions as requested by the US Shareholders to avoid it or any subsidiary becoming and to mitigate the impact on the US Shareholders of becoming or being a CFC.
(b)
PFIC Status
. The Continuing Corporation will use, and cause each direct and indirect subsidiary to use, commercially reasonable
efforts to conduct its affairs such that it will not cause the Continuing Corporation or any of its direct or indirect subsidiaries to be a PFIC for the current year or any subsequent year. The Continuing Corporation agrees to make available to any
US Shareholder upon request, the books and records of the Continuing Corporation and its direct and indirect subsidiaries, and to provide information to such US Shareholder with respect to the Continuing Corporation’s or any subsidiary’s
status or potential status as a PFIC. Upon a determination by the Continuing Corporation, any US Shareholder or any taxing authority that the Continuing Corporation or any direct or indirect subsidiary has been or is likely to become a PFIC, the
Continuing Corporation will provide any US Shareholder with all information reasonably available to the Continuing Corporation or any of its subsidiaries to permit such US Shareholder to (i) accurately prepare all Tax returns and comply with
any reporting requirements as a result of such determination and (ii) make any election (including, without limitation, a “qualified electing fund” election under Section 1295 of the Code), with respect to the Continuing
Corporation or any of its direct or indirect subsidiaries, and comply with any reporting or other requirements incident to such election. If a determination is made by the Continuing Corporation, any US Shareholder or any taxing authority that the
Continuing Corporation is a PFIC for a particular year, then for such year and for each year thereafter, the Continuing Corporation will also provide the US Shareholders with a completed “PFIC Annual Information Statement” as required by
Treasury Regulation Section 1.1295-1(g) and otherwise comply with applicable Treasury Regulation requirements. The Continuing Corporation will promptly notify the US Shareholders of
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any assertion by the Internal Revenue Service that the Continuing Corporation or any of its subsidiaries is or is likely to become a PFIC.
ARTICLE VI
CONDITIONS TO THE
TRANSACTION
6.1
Conditions to Obligations of Each Party to Effect the Acquisition
. The respective obligations of each party to
this Agreement to effect the Acquisition shall be subject to the satisfaction at or prior to the Closing Date of the following conditions:
(a)
Parent Stockholder Approval
. The Acquisition and Reincorporation Proposal and Continuing Corporation Plan proposals shall have been duly approved and adopted by the stockholders of Parent by the requisite
vote under the laws of the State of Delaware.
(b)
Parent Common Stock
. Persons who hold twenty percent (20%) or
more of the shares of Parent Common Stock issued in Parent’s initial public offering of securities shall not have exercised their rights to convert their shares into a pro rata share of the Trust Fund in accordance with Parent’s Charter
Documents.
(c)
Stock Quotation or Listing
. The Continuing Corporation Common Shares and Continuing Corporation
Warrants shall be approved for listing on the Nasdaq Global Market or Nasdaq Capital Market and there will be no action or proceeding pending or threatened against Continuing Corporation by the NASD to prohibit or terminate the quotation of
Continuing Corporation Common Shares or Continuing Corporation Warrants on Nasdaq.
(d)
Registration Statement
Effective
. The Registration Statement shall have been declared effective by the SEC.
(e)
HSR Act
. All specified
waiting periods under the HSR Act, if applicable, shall have expired and no Governmental Entity shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and which has the effect of making the Acquisition illegal or otherwise prohibiting consummation of the Acquisition, substantially on the terms contemplated by this Agreement.
(f)
No Order
. No Governmental Entity shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is in effect and which has the effect of making the Acquisition illegal or otherwise prohibiting consummation of the Acquisition, substantially on
the terms contemplated by this Agreement.
(g)
No Injunctions or Restraints; Illegality
. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Acquisition shall be in effect, nor shall any proceeding brought by an
administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be threatened or pending.
(h)
Escrow Agreement
. The Escrow Agent shall have executed and delivered to the Parent and the Company the Escrow Agreement, and
such Escrow Agreement shall be in full force and effect.
6.2
Additional Conditions to Obligations of EHL and the Company
. The
obligations of the EHL and the Company to consummate and effect the Acquisition shall be subject to the satisfaction at or prior to the Closing Date of each of the following conditions, any of which may be waived, in writing, exclusively by EHL:
(a)
Representations and Warranties
. Each representation and warranty of Parent and Amalgamation Sub contained in
this Agreement that is (i) qualified as to materiality shall have been true and correct (A) as of the date of this Agreement and (B) on and as of the Closing Date, with the same force and effect as if made on the Closing Date (other
than such representations and warranties as of a specified date, which shall
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be true and correct as of such date) and (ii) not qualified as to materiality shall have been true and correct in all material respects (A) as of
the date of this Agreement and (B) on and as of the Closing Date, with the same force and effect as if made on the Closing Date (other than such representations and warranties as of a specified date, which shall be true and correct as of such
date). The Company shall have received a certificate with respect to the foregoing signed on behalf of Parent and Amalgamation Sub by an authorized officer of Parent (“
Parent Closing Certificate
”).
(b)
Agreements and Covenants
. Parent and Amalgamation Sub shall have performed or complied with all agreements and covenants
required by this Agreement to be performed or complied with by them on or prior to the Closing Date, except to the extent that any failure to perform or comply (other than a willful or intentional failure to perform or comply by Parent) does not,
and will not, constitute a Material Adverse Effect with respect to Parent or Amalgamation Sub, and the Parent Closing Certificate shall include a provision to such effect.
(c)
No Litigation
. No action, suit or proceeding shall be pending or overtly threatened before any Governmental Entity which is
reasonably likely to (i) prevent consummation of any of the transactions contemplated by this Agreement, (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation or (iii) affect
materially and adversely or otherwise encumber the title of the Continuing Corporation Common Shares to be issued in connection with the Acquisition and no order, judgment, decree, stipulation or injunction to any such effect shall be in effect.
(d)
Consents
.
Parent shall have obtained all consents, waivers and approvals required to be obtained by it in
connection with the consummation of the transactions contemplated hereby, other than consents, waivers and approvals the absence of which, either alone or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on Parent
and the Parent Closing Certificate shall include a provision to such effect.
(e)
Material Adverse Effect
.
No
Material Adverse Effect with respect to Parent or Amalgamation Sub shall have occurred since the date of this Agreement.
(f)
SEC Compliance
.
Immediately prior to Closing, Parent shall be in compliance with the reporting requirements under the Exchange Act.
(g)
Opinion of Counsel
.
The Company shall have received from Graubard Miller, Parent’s counsel, an opinion of counsel
in substantially the form of
Exhibit H
annexed hereto.
(h)
Resignations
.
The persons listed in
Schedule 6.2(h) shall have resigned from all of their positions and offices with Parent and Amalgamation Sub.
(i)
Trust
Fund
.
Parent shall have made appropriate arrangements to have the Trust Fund, which shall contain no less than the amount referred to in Section 3.25, dispersed immediately upon the Closing in accordance with Section 5.24.
(j)
Employment Agreements
.
The Employment Agreements between Continuing Corporation and/or the Company and,
separately, each of Steve Dezso, Mao Shi Khoo, Chun Weng Chok, James Thomas, Jeffrey Blaine and Richard Brook shall have been executed and delivered at Closing by Continuing Corporation and/or the Company, as applicable, and shall be enforceable
against Continuing Corporation and/or the Company, as applicable.
(k)
Voting Agreement
.
The voting agreement
in the form of
Exhibit D,
hereto (“
Voting Agreement
”) shall be in full force and effect, and the designees contemplated thereby shall have been elected to Continuing Corporation’s and the Company’s Board of
Directors.
(l)
Registration Rights Agreement
.
The Registration Rights Agreement between each recipient of
Transaction Consideration and Continuing Corporation in the form of
Exhibit I
shall have been executed and delivered by the Continuing Corporation.
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(m)
Transfer of Amalgamation Sub Shares
.
The currently outstanding capital
shares of Amalgamation Sub that are owned by Mr. Rice as nominee for Parent shall be transferred by Mr. Rice to Parent for nominal consideration.
(n)
Amalgamation Sub Charter Amendment
.
The Amalgamation Sub Charter Amendment shall have been affected as required under this Agreement.
(o)
Other Deliveries.
At or prior to Closing, Parent shall have delivered to the Company (i) copies of resolutions and actions
taken by Parent’s and Amalgamation Sub’s board of directors and stockholders in connection with the approval of this Agreement and the transactions contemplated hereunder, and (ii) such other documents or certificates as shall
reasonably be required by the Company and its counsel in order to consummate the transactions contemplated hereunder.
6.3
Additional
Conditions to the Obligations of Parent and Amalgamation Sub.
The obligations of Parent and Amalgamation Sub to consummate and effect the Acquisition shall be subject to the satisfaction at or prior to the Closing Date of each of the following
conditions, any of which may be waived, in writing, exclusively by Parent:
(a)
Representations and Warranties.
Each
representation and warranty of the Company and EHL contained in this Agreement that is (i) qualified as to materiality shall have been true and correct (A) as of the date of this Agreement and (B) on and as of the Closing Date, with
the same force and effect as if made on the Closing Date (other than such representations and warranties as of a specified date, which shall be true and correct as of such date) and (ii) not qualified as to materiality shall have been true and
correct in all material respects (A) as of the date of this Agreement and (B) on and as of the Closing Date (other than such representations and warranties as of a specified date, which shall be true and correct as of such date). Parent
shall have received a certificate with respect to the foregoing signed on behalf of the Company by an authorized officer of the Company (“
Company Closing Certificate
”).
(b)
Agreements and Covenants.
The Company and EHL shall have performed or complied with all agreements and covenants required by
this Agreement to be performed or complied with by them at or prior to the Closing Date except to the extent that any failure to perform or comply (other than a willful or intentional failure to perform or comply by the Company) does not, and will
not, constitute a Material Adverse Effect on the Company, and the Company Closing Certificate shall include a provision to such effect.
(c)
No Litigation.
No action, suit or proceeding shall be pending or overtly threatened before any Governmental Entity which is reasonably likely to (i) prevent consummation of any of the transactions
contemplated by this Agreement, (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation or (iii) affect materially and adversely the right of Parent to own, operate or control any of the
material assets and operations of the Continuing Corporation following the Acquisition and no order, judgment, decree, stipulation or injunction to any such effect shall be in effect.
(d)
Consents.
The Company and EHL shall have obtained all consents, waivers, permits and approvals required to be obtained by the
Company or EHL in connection with the consummation of the transactions contemplated hereby, other than consents, waivers and approvals the absence of which, either alone or in the aggregate, would not reasonably be expected to have a Material
Adverse Effect on the Company and the Company Closing Certificate shall include a provision to such effect.
(e)
Material
Adverse Effect
.
No Material Adverse Effect with respect to the Company or EHL shall have occurred since the date of this Agreement.
(f)
Opinion of Singapore Counsel
.
Parent shall have received from Yeo Wee Kiong Law Corporation, counsel to the Company, an opinion of counsel in substantially the form of
Exhibit J
annexed
hereto.
(g)
Opinion of Hong Kong Counsel
.
Parent shall have received from Mallesons Stephen Jaques, counsel
to the Company, an opinion of counsel in substantially the form of
Exhibit K
annexed hereto.
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(h)
Resignations
.
The persons listed in
Schedule 6.3(h)
shall have
resigned from their positions and offices with the Company.
(i)
Derivative Securities
.
There shall be
outstanding no options, warrants or other derivative securities entitling the holders thereof to acquire shares of Company Common Stock or other securities of the Company.
(j)
Employment Agreements
.
The Employment Agreements shall have been executed and delivered at Closing by each of Steve
Dezso , Mao Shi Khoo, Chun Weng Chok, James Thomas, Jeffrey Blaine and Richard Brook and shall be enforceable against each such Person.
(k)
Voting Agreement
.
The Voting Agreement shall be in full force and effect and the designees contemplated thereby shall have been elected to Continuing Corporation’s and the Company’s Board
of Directors.
(l)
US GAAP Audited Financials
.
Parent shall have received the US GAAP Audited
Financials.
(m)
June 30, 2007 EBITDA.
Neither the Pre-Closing EBITDA Calculation nor any other information
known to any party shall indicate that the Company had EBITDA for the 12 months ending June 30, 2007 of less than $5,673,750.
(n)
Recipient Certificates
.
Each Person that is to receive Transaction Consideration at the Closing shall have executed and delivered to Continuing Corporation a Recipient Certificate.
(o)
Other Deliveries
.
At or prior to Closing, the Company and EHL shall have delivered to Parent: (i) copies of
resolutions and actions taken by EHL’s and the Company’s respective board of directors and shareholders in connection with the adoption and approval of this Agreement and the transactions contemplated hereunder, and (ii) such other
documents or certificates as shall reasonably be required by Parent and its counsel in order to consummate the transactions contemplated hereunder.
ARTICLE VII
INDEMNIFICATION
7.1
Indemnification
.
(a) Subject to the terms and conditions of this Article VII
(including without limitation the limitations set forth in Section 7.3), Parent, the Continuing Corporation and their respective officers, directors and affiliates (the “
Parent Indemnitees
”) shall be indemnified, defended and
held harmless by EHL and its shareholders from and against all Losses asserted against, resulting to, imposed upon, or incurred by any Parent Indemnitee by reason of, arising out of or resulting from:
(i) the inaccuracy or breach of any representation or warranty of the Company contained in or made pursuant to this Agreement, any
Schedule or any certificate delivered by the Company to Parent pursuant to this Agreement with respect hereto or thereto in connection with the Closing; or
(ii) the non-fulfillment or breach of any covenant or agreement of the Company contained in this Agreement.
(b) Subject to the terms and conditions of this Article VII (including without limitation the limitations set forth in Section 7.3), EHL and the recipients of the Transaction Consideration (it being expressly
agreed that the shareholders of EHL, upon the receipt of any Transaction Consideration, will be third party beneficiaries of the provisions of this Article VII) and their respective officers, directors, and affiliates (the “
Recipient
Indemnitees
”) shall be indemnified, defended and held harmless by Continuing Corporation, from and against all Losses asserted against, resulting to, imposed upon, or incurred by any Recipient Indemnitee by reason of, arising out of or
resulting from:
(i) the inaccuracy or breach of any representation or warranty of Parent or Amalgamation Sub contained in
or made pursuant to this Agreement, any Schedule or any certificate delivered by Parent to the Company pursuant to this Agreement with respect hereto or thereto in connection with the Closing;
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(ii) the non-fulfillment or breach of any covenant or agreement of the Parent,
Amalgamation Sub or the Continuing Corporation contained in this Agreement; or
(iii) the excess of any Parent Effective
Time Liabilities over such amount determined pursuant to Section 1.7(b)(xi).
(c) As used in this Article VII, the term
“
Losses
” shall include all losses, liabilities, damages, judgments, awards, orders, penalties, settlements, costs and expenses (including, without limitation, interest, penalties, court costs and reasonable legal fees and expenses)
including those arising from any demands, claims, suits, actions, costs of investigation, notices of violation or noncompliance, causes of action, proceedings and assessments whether or not made by third parties or, in the case of demands, claims,
suits, actions, notices of violation or noncompliance, causes of action and proceedings made by third parties, whether or not ultimately determined to be valid. Solely for the purpose of determining the amount of any Losses (and not for determining
any breach) for which Parent Indemnitee may be entitled to indemnification pursuant to Article VII, any representation or warranty contained in this Agreement that is qualified by a term or terms such as “material,” “materially,”
or “Material Adverse Effect” shall be deemed made or given without such qualification and without giving effect to such words.
(d) For purposes of clarity, Section 5.27 will not be subject to the indemnification obligations of this Article VII.
(e) The term “
Indemnitees
” shall mean the Recipient Indemnitees in contexts in which Continuing Corporation is required to provide indemnification hereunder and shall mean Parent Indemnitees in
contexts in which EHL is required to provide indemnification hereunder. The term “
Indemnifying Party
” shall mean the Party providing indemnification hereunder.
7.2
Indemnification of Third Party Claims
. The indemnification obligations and liabilities under Section 7.1 of this Article VII with respect
to actions, proceedings, lawsuits, investigations, demands or other claims brought against Indemnitee by a Person other than a Party hereto (a “
Third Party Claim
”) shall be subject to the following terms and conditions:
(a)
Notice of Claim
.
(i) With respect to Parent Indemnitees, Continuing Corporation, acting through the Committee, will give the Representative prompt written notice after receiving written notice of any Third Party Claim (a
“
Notice of Claim
”), which Notice of Third Party Claim shall set forth (i) a brief description of the nature of the Third Party Claim, (ii) the total amount of the actual out-of-pocket Loss or the estimated Loss to the
extent that Losses with respect to such Third Party Claim are not known by the Parent Indemnitee or determinable at such time (including any costs or expenses which have been or are estimated to be incurred in connection therewith), and
(iii) whether such Loss may be covered (in whole or in part) under any insurance and the estimated amount of such Loss which may be covered under such insurance, and the Representative shall be entitled to participate in the defense of the
Third Party Claim at its expense.
(ii) With respect to Recipient Indemnitees, Recipient Indemnitees, acting through the
Representative, will give the Committee and the Board of Directors of Continuing Corporation prompt written Notice of Claim which shall set forth (i) a brief description of the nature of the Third Party Claim, (ii) the total amount of the
actual out-of-pocket Loss or the estimated Loss to the extent that Losses with respect to such Third Party Claim are not known by the Representative or determinable at such time (including any costs or expenses which have been or are estimated to be
incurred in connection therewith), and (iii) whether such Loss may be covered (in whole or in part) under any insurance and the estimated amount of such Loss which may be covered under such insurance, and the Representative shall be entitled to
participate in the defense of the Third Party Claim at its expense.
(b)
Defense
. The Indemnifying Party shall have
the right, at its option (subject to the limitations set forth in subsection 7.2(c) below) and at its own expense, by written notice to the Indemnitee, to assume the entire control of, subject to the right of Indemnitee to participate (at its
expense and with counsel of its
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choice) in, the defense, compromise or settlement of the Third Party Claim as to which such Notice of Claim has been given, and shall be entitled to appoint
a recognized and reputable counsel reasonably acceptable to Indemnitee to be the lead counsel in connection with such defense. If the Indemnifying Party is permitted and elects to assume the defense of a Third Party Claim:
(i) the Indemnifying Party shall diligently and in good faith defend such Third Party Claim and shall keep the Indemnitee reasonably
informed of the status of such defense; provided, however, that Indemnitee shall have the right to approve any settlement, which approval shall not be unreasonably delayed, withheld or conditioned; and
(ii) Indemnitee shall cooperate fully in all respects with the Indemnifying Party in any such defense, compromise or settlement thereof,
including, without limitation, the selection of counsel, and Indemnitee shall make available to the Indemnifying Party all pertinent information and documents under its control.
(c)
Limitations of Right to Assume Defense
. The Indemnifying Party shall not be entitled to assume control of such defense if
(i) the Third Party Claim relates to or arises in connection with any criminal proceeding, action, indictment, allegation or investigation against the Indemnitee; or (ii) the Third Party Claim seeks an injunction or equitable relief
against Indemnified Party.
(d)
Other Limitations
. Failure to give prompt Notice of Claim or to provide copies of
relevant available documents or to furnish relevant available data shall not constitute a defense (in whole or in part) to any Third Party Claim by Indemnified Party against the Indemnifying Party and shall not affect the Indemnifying Party’s
duty or obligations under this Article VII, except to the extent (and only to the extent that) such failure shall have adversely affected the ability of the Indemnifying Party to defend against or reduce its liability or caused or increased such
liability or otherwise caused the damages for which the Indemnifying Party is obligated to be greater than such damages would have been had Indemnitee given the Indemnifying Party prompt notice hereunder. Indemnitee shall not settle any action
related to a Third Party Claim without the written consent of the Indemnifying Party, which consent shall not be unreasonably delayed, withheld or conditioned. Indemnitee shall make available to the Indemnifying Party all relevant records and other
relevant materials required or reasonably requested by them and in the possession or under the control of Indemnitee, for the use of the Indemnifying Party and its representatives in defending any such action, and shall in other respects give
reasonable cooperation in such defense.
(e)
Failure to Defend
. If the Indemnifying Party, within a commercially
reasonable time after receiving a Notice of Claim, fails to defend such Third Party Claim actively and in good faith, Indemnitee will (upon further written notice) have the right to undertake the defense, compromise or settlement of such Third Party
Claim as it may determine in its reasonable discretion, provided that the Indemnifying Party shall have the right to approve any settlement, which approval will not be unreasonably delayed, withheld or conditioned.
(f)
Indemnitee’s Rights
. Anything in this Section 7.2 to the contrary notwithstanding, the Indemnifying Party shall not,
without the written consent of Indemnitee, which consent will not be unreasonably delayed, withheld or conditioned, settle or compromise any action or consent to the entry of any judgment which does not include as an unconditional term thereof the
giving by the claimant or the plaintiff to Indemnitee of a full and unconditional release from all liability and obligation in respect of such action without any payment by Indemnitee.
(g)
Indemnifying Party Consent
. Unless the Indemnifying Party has consented to a settlement of a Third Party Claim, the amount of
the settlement shall not be a binding determination of the amount of the Loss and such amount shall be determined in accordance with the provisions of the Escrow Agreement.
(h)
Insurance Effect
. To the extent that any Losses that are subject to indemnification pursuant to this Article VII are covered by
insurance, Indemnitee shall use commercially reasonable efforts to obtain the maximum recovery under such insurance; provided that Indemnitee shall nevertheless be entitled to bring a claim for indemnification under this Article VII in respect of
such Losses. The existence of a claim by Indemnitee for monies from an insurer or against a third party in respect of any Loss shall not, however,
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delay any payment pursuant to the indemnification provisions contained herein and otherwise determined to be due and owing by the Indemnifying Party. If
Indemnitee has received the payment required by this Agreement from the Indemnifying Party in respect of any Loss and later receives proceeds from insurance or other amounts in respect of such Loss, then it shall hold such proceeds or other amounts
in trust for the benefit of the Indemnifying Party and shall pay to the Indemnifying Party, as promptly as practicable after receipt thereof by the Indemnitee, a sum equal to the amount of such proceeds or other amount received, up to the aggregate
amount of any payments received from the Indemnifying Party pursuant to this Agreement in respect of such Loss. Notwithstanding any other provisions of this Agreement, it is the intention of the parties that no insurer or any other third party shall
be (i) entitled to a benefit it would not be entitled to receive in the absence of the foregoing indemnification provisions, or (ii) relieved of the responsibility to pay any claims for which it is obligated.
(i)
Tax Benefits
. Any amount payable pursuant to this Article VII shall be decreased to the extent of any Tax benefit actually
realized by the Indemnitees arising out of an indemnifiable Loss. The Indemnifying Party and the Indemnitees shall cooperate in good faith in providing each other the information necessary to determine the Tax benefits, as the case may be, in each
case. For purposes of this Agreement, an Indemnitee shall be deemed to have “actually realized” a net Tax benefit to the extent that, and at such time as, the amount of Taxes payable by such Indemnitee is reduced below the amount of Taxes
that such Indemnitee would be required to pay but for the receipt of the indemnity payment or the incurrence or payment of such Loss or Tax, as the case may be. The amount of any increase or reduction hereunder shall be adjusted to reflect any final
determination (which shall include the execution of Form 870-AD or successor form) with respect to the Indemnitee’s liability for Taxes, and payments between the parties to this Agreement to reflect such adjustment shall be made if necessary.
7.3
Limitations on Indemnification
.
(a)
Survival: Time Limitation
. The representations, warranties, covenants and agreements in this Agreement or in any writing delivered by a Party to another in connection with this Agreement (including any
closing certificates pursuant to Section 6.3) shall survive the Closing until the expiration of the Escrow Period, except for the obligation of the Continuing Corporation to issue the Transaction Consideration and any covenants and agreements
which by their terms must be performed after the expiration of the Escrow Period.
(b)
Continuation of Claim
. Any
claim made by a party hereunder shall be preserved despite the subsequent expiration of the Escrow Period and any claim set forth in a Notice of Claim sent prior to the expiration of the Escrow Period shall survive until final resolution thereof.
Except as set forth in the immediately preceding sentence, no claim for indemnification under this Article VII shall be brought after the end of the Escrow Period.
(c)
Deductible
. No amount shall be payable to the Parent Indemnitees or the Recipient Indemnitees under Article VII unless and
until the aggregate amount of all indemnifiable Losses of the Parent Indemnitees or the Recipient Indemnitees, as the case may be, otherwise payable exceeds $250,000 (the “
Deductible
”), in which event the amounts payable shall be
only those amounts then in excess of the Deductible and all future amounts that become payable under Section 7.1 from time to time thereafter, provided that the obligation of the Continuing Corporation to issue the Transaction Consideration and
obligations pursuant to covenants and agreements which by their terms must be performed after the Effective Date shall not be subject to such limitation.
(d)
Aggregate Amount Limitation
. The aggregate liability of the Indemnifying Parties for Losses pursuant to Section 7.1 to the Parent Indemnitees shall not in any event exceed the aggregate number of
Escrow Shares, which shall be the sole and exclusive source for the payment of any such liabilities, and the aggregate liability of the Indemnifying Parties for Losses pursuant to Section 7.1 to the Recipient Indemnitees shall not in any event
exceed the number of Continuing Corporation Common Shares equal to the initial aggregate number of Escrow Shares, provided that the obligation of the Continuing Corporation to
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issue Transaction Consideration and obligations pursuant to covenants and agreements which by their terms must be performed after the Effective Date shall
not be subject to such limitation.
7.4
Exclusive Remedy
. Each potential Indemnitee hereby acknowledges and agrees that, from and
after the Closing, its sole remedy with respect to any and all claims for money damages arising out of or relating to this Agreement and the transactions contemplated hereby shall be pursuant and subject to the requirements of the indemnification
provisions set forth in this Article VII. Notwithstanding any of the foregoing, nothing contained in this Article VII shall in any way impair, modify or otherwise limit Parent’s, Continuing Corporation, the Company’s, the
Representative’s or EHL’s right to bring any claim, demand or suit against the other party based upon such other party’s actual fraud or intentional or willful misrepresentation, it being understood that a mere breach of a
representation and warranty, without intentional or willful misrepresentation, does not constitute fraud; provided that the aggregate liability of any Indemnifying Party for Losses arising from actual fraud or intentional or willful
misrepresentation shall not in any event exceed the aggregate Transaction Consideration.
7.5
Adjustment to Transaction
Consideration
. Amounts paid for indemnification under Article VII shall be deemed to be an adjustment to the value of the Transaction Consideration, except as otherwise required by Law.
7.6
Representative and Committee Capacities
. The Parties acknowledge that the Representative and any member of the Committee’s obligations
under this Article VII are to act solely as a representative or agent in the manner set forth herein and in the Escrow Agreement with respect to the obligations under this Article VII and that no such Person acting in such capacity shall have any
personal responsibility for any expenses incurred by him in such capacity or any payments to Indemnitee as a result of such indemnification obligations other than in its capacity as an Indemnifying Party as otherwise provided hereby. Out-of-pocket
expenses of any such Person representing the interest of the Indemnitee for attorneys’ fees and other costs shall be borne by Indemnitee, which may, in turn, make a claim for reimbursement thereof against the Indemnifying Party upon the claim
with respect to which such expenses are incurred becoming an Established Claim (as defined in the Escrow Agreement). The parties further acknowledge that all actions to be taken by Indemnitee pursuant to this Article VII shall be taken on its behalf
by the Representative or Committee (as applicable) in accordance with the provisions of the Escrow Agreement. The agency of the Representative may be changed by the holders of a majority in interest of the outstanding shares of EHL or, following the
liquidation of EHL, a majority in interest of the Continuing Corporation Common Shares held buy the members of EHL as of the time of such final liquidation (collectively, the “
Majority EHL Holders
”), in each case from time to time
upon not less than ten (10) days’ prior written notice to Representative and the Continuing Corporation. No bond shall be required of the Representative, and the Representative shall receive reasonable reimbursement for fees and expenses
incurred in good faith arising out of or in connection with the acceptance or administration of his duties under this Agreement or the Escrow Agreement, such fees and expenses shall be deducted from the Escrow Fund (as defined in the Escrow
Agreement). If the Representative shall die, become disabled or otherwise be unable to fulfill his responsibilities as agent for the purposes of this Agreement or the Escrow Agreement, then the Majority EHL Holders shall, within ten (10) days
after such death or disability, appoint a successor agent and, promptly thereafter, shall notify Escrow Agreement and the Continuing Corporation of the identity of such successor. Any such successor shall become the “Representative” for
purposes of this Agreement and the Escrow Agreement. If for any reason there is no Representative at any time, all references herein to the Representative shall be deemed to refer to the Majority EHL Holders.
7.7
Payment of Indemnification Obligation of Continuing Corporation to Recipient Indemnitees
. Any payment for the indemnification obligations of
Continuing Corporation to the Recipient Indemnitees under this Article VII shall be made through the issuance of the number of Continuing Corporation Common Shares equal to the difference obtained by subtracting (i) the number of Transaction
Shares plus the number of shares issuable upon the exercise of the Assumed Options from (ii) that number of Transaction Shares plus the number of shares issuable upon the exercise of the Assumed Options that would have been issued or issuable
at the Closing pursuant to Section 1.7 had the Ascend Trust Value been reduced by the amount of the Losses subject to such indemnification, in each case after giving effect to the Transaction Share True-up.
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ARTICLE VIII
TERMINATION
8.1
Termination
. This Agreement may be terminated at any time prior to the
Closing:
(a) by mutual written agreement of Parent and EHL at any time;
(b) by EHL if the Acquisition shall not have been consummated by December 31, 2007 for any reason; provided, however, that if by such
date all of the conditions set forth in Sections 6.1 and 6.3 of this Agreement have been satisfied or properly waived in accordance with the terms of this Agreement, with the exception of the conditions set forth in Section 6.1(a), (c) and
(d), and if, but for its lack of receiving (1) final SEC clearance of the registration statement and/or proxy statement and/or the meeting of Parent’s stockholders has not yet taken place and/or (2) approval from Nasdaq of its Nasdaq
listing application, the Parent has taken all commercially reasonable actions (excluding those actions solely in the control of the Company) to satisfy the conditions set forth in Section 6.1(a), (c) and (d), including filing the
registration statement and proxy statement with the SEC as contemplated by this Agreement and responding to all SEC comments in a reasonably timely manner and filing the Nasdaq listing application, such date shall be extended to February 13,
2008; and provided further, that the right to terminate this Agreement under this Section 8.1(b) shall not be available to EHL if any of its or its Affiliates actions or failure to act has been a principal cause of or resulted in the failure of
the Acquisition to occur on or before such date and such action or failure to act constitutes a breach of this Agreement;
(c) by either Parent or EHL if a Governmental Entity shall have issued an order, decree, judgment or ruling or taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the
Acquisition, which order, decree, ruling or other action is final and nonappealable;
(d) by EHL, upon a material breach of
any representation, warranty, covenant or agreement on the part of Parent set forth in this Agreement, or if any representation or warranty of Parent shall have become untrue, in either case such that the conditions set forth in Article VI would not
be satisfied as of the time of such breach or as of the time such representation or warranty shall have become untrue, provided, that if such breach by Parent is curable by Parent prior to the Closing Date, then EHL may not terminate this Agreement
under this Section 8.1(d) for thirty (30) days after delivery of written notice from EHL to Parent of such breach, provided Parent continues to exercise commercially reasonable efforts to cure such breach (it being understood that EHL may
not terminate this Agreement pursuant to this Section 8.1(d) if it shall have materially breached this Agreement and such breach has not been cured or if such breach by Parent is cured during such thirty (30)-day period);
(e) by Parent, upon a material breach of any representation, warranty, covenant or agreement on the part of the Company or EHL set forth
in this Agreement, or if any representation or warranty of the Company or EHL shall have become untrue, in either case such that the conditions set forth in Article VI would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided, that if such breach is curable by the Company prior to the Closing Date, then Parent may not terminate this Agreement under this Section 8.1(e) for thirty (30) days after
delivery of written notice from Parent to the Company of such breach, provided the Company continues to exercise commercially reasonable efforts to cure such breach (it being understood that Parent may not terminate this Agreement pursuant to this
Section 8.1(e) if it shall have materially breached this Agreement and such breach has not been cured or if such breach by the Company or EHL is cured during such thirty (30)-day period);
(f) by EHL or Parent, if, at the Special Meeting (including any adjournments thereof), this Agreement and the transactions contemplated
thereby shall fail to be approved and adopted by the affirmative vote of the holders of Parent Common Stock required under Parent’s certificate of incorporation, or the holders of 20% or more of the number of shares of Parent Common Stock
issued in Parent’s initial public offering and outstanding as of the date of the record date of the Special Meeting exercise their rights to convert the shares of Parent Common Stock held by them into cash in accordance with Parent’s
certificate of incorporation; or
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(g) by Parent if the Company had EBITDA for the 12 months ended June 30, 2007 of
less than $5,673,500.
8.2
Notice of Termination; Effect of Termination
. Any termination of this Agreement under Section 8.1
above will be effective immediately upon (or, if the termination is pursuant to Section 8.1(d) or Section 8.1(e) and the proviso therein is applicable, thirty (30) days after) the delivery of written notice of the terminating party to
the other parties hereto. In the event of the termination of this Agreement as provided in Section 8.1, this Agreement shall be of no further force or effect and the Acquisition shall be abandoned, except for and subject to the following:
(i) Sections 5.6, 5.13, 8.2 and 8.3 and Article X (General Provisions) shall survive the termination of this Agreement, and (ii) nothing herein shall relieve any party from liability for any breach of this Agreement, including a breach by
a party electing to terminate this Agreement pursuant to Section 8.1(b) caused by the action or failure to act of such party constituting a principal cause of or resulting in the failure of the Acquisition to occur on or before the date stated
therein.
8.3
Fees and Expenses.
All fees and expenses incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses whether or not the Acquisition is consummated; provided, however, that if the Acquisition is consummated, the expenses of the Company and EHL shall be borne, at the discretion of the
Company’s management, by either EHL or the Company.
ARTICLE IX
DEFINED TERMS
Terms defined in this Agreement are organized alphabetically as
follows, together with the Section and, where applicable, paragraph, number in which definition of each such term is located:
“AAA”
Section 10.12
“Acquisition”
Recital A
“Acquisition and Reincorporation Approval”
Section 5.1(b)
“Acquisition Form 8-K”
Section 5.4(a)
“Acquisition Press Release”
Section 5.4(a)
“Actual Issuance”
Section 1.7(b)(xi)
“Affiliate”
Section 10.2(f)
“Agreement”
Heading
“Amalgamation”
Section 1.1
“Amalgamation Sub Charter Amendment”
Section 5.28
“Amalgamation Sub Charter Documents”
Section 3.2(b)
“Amalgamation Sub Common Shares”
Section 1.6
“Applicable Corporate Laws”
Recital A
“Approvals”
Section 2.1(a)
“Ascend Charter Documents”
Section 3.2(b)
“Ascend Outstanding Shares”
Section 1.7(b)(ii)
“Ascend Trust Value”
Section 1.7(b)(i)
“Ascend Trust Value Calculation”
Section 1.7(b)(vii)
“Assumed Options”
Section 1.7(f)(i)
“Assumed Option Shares”
Section 1.7(b)(vi)
“Audited Financial Statements”
Section 2.7(a)
“Blue Sky Laws”
Section 2.5(a)
“Bonus Plan”
Section 5.27
“CFC”
2.15(b)(ix)
“Closing”
Section 1.2
“Closing Date”
Section 1.2
“Closing Form 8-K
Section 5.4(b)
“Closing Press Release”
Section 5.4(b)
“Code”
Section 1.7(f)(i)
“Company”
Heading
“Company Certificates”
Section 1.10
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“Company Charter Documents”
Section 2.1(a)
“Company Closing Certificate”
Section 6.3(a)
“Company Common Stock”
Section 2.3(a)
“Company Contract Consents”
Section 5.22
“Company Contracts”
Section 2.19(a)
“Company Intellectual Property”
Section 2.18
“Company Preferred Stock”
Section 2.3(a)
“Company Products”
Section 2.18
“Company Registered Intellectual Property”
Section 2.18
“Company Schedule”
Article II Preamble
“Company Securities”
Section 2.3(a)
“Continuing Corporation”
Section 1.1
“Continuing Corporation Common Shares”
Section 1.3(b) and 1.7(a)
“Continuing Corporation Plan”
Section 5.1(b)
“Continuing Corporation Warrants”
Section 1.3(b)
“Copyrights”
Section 2.18
“Corporate Records”
Section 2.1(c)
“Deductible”
Section 7.3(c)
“EBITDA Factor”
Section 1.7(b)(iv)
“EBITDA Factor Ratio”
Section 1.7(b)(v)
“EBITDA Shares”
Section 1.7(a)
“Effective Time”
Section 1.2
“EHL”
Header
“EHL Profit Plan”
Section 1.7(b)(iii)
“EHL Options”
Section 1.7(f)(i)
“EHL Outstanding Shares”
Section 1.7(f)(ii)
“Employment Agreements”
Section 5.6
“Environmental Law”
Section 2.16(b)
“EPR”
Header
“ePak Charter Documents”
Section 2.2(b)
“Escrow Agreement”
Section 1.13(a)
“Escrow Period”
Section 1.13(a)
“Escrow Shares”
Section 1.13(a)
“Exchange Act”
Section 2.5(a)
“Governmental Action/Filing”
Section 2.21(b)
“Governmental Entity”
Section 2.5(a)
“Hazardous Substance”
Section 2.16(c)
“Hong Kong”
Header
“HSR Act”
Section 5.21
“Indemnifying Party”
Section 7.1(e)
“Indemnitees”
Section 7.1(e)
“Insider”
Section 2.19(a)(i)
“Insurance Policies”
Section 2.20
“Intellectual Property”
Section 2.18
“knowledge”
Section 10.2(d)
“Last Reported Sales Price”
Section 1.14(a)(ii)
“Legal Requirements”
Section 10.2(b)
“Lien”
Section 10.2(e)
“Losses”
Section 7.1(c)
“Majority EHL Holders”
Section 7.6
“Market Price Shares”
Section 1.7(a)
“Material Adverse Effect”
Section 10.2(a)
“Material Company Contracts”
Section 2.19(a)
“NASD”
Section 3.23
“Notice of Claim”
Section 7.2(a)(i)
“Option Exchange Ratio”
Section 1.7(f)(iii)
“OTC BB”
Section 3.23
“Overage”
Section 1.7(b)(xi)
“Parent”
Heading
“Parent Charter Documents”
Section 3.1(a)
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“Parent Closing Certificate”
Section 6.2(a)
“Parent Common Stock”
Section 1.3(b)
“Parent Contracts”
Section 3.19(a)
“Parent Convertible Securities”
Section 3.3(b)
“Parent Effective Time Liabilities”
Section 5.24
“Parent Effective Time Liabilities Calculation”
Section 1.7(b)(xi)
“Parent Indemnitees”
Section 7.1(a)
“Parent Liabilities Objection Notice”
Section 1.7(b)(xi)
“Parent Preferred Stock”
Section 3.3(a)
“Parent Schedule”
Article III Preamble
“Parent Schedule Documents”
Section 3.1(a)
“Parent SEC Reports”
Section 3.7(a)
“Parent Stock Options”
Section 3.3(b)
“Parent Warrants”
Section 1.3(b)
“Patents”
Section 2.18
“Payment Schedule”
Section 1.14(e)
“Person”
Section 10.2(c)
“Personal Property”
Section 2.14(b)
“PFIC”
Section 2.15(b)(ix)
“Plan/Plans”
Section 2.11(a)
“Public Company Securities Exchange”
Section 5.1(a)
“Purchase Price”
Section 1.14(d)
“Recipient Certificate”
Section 1.16
“Recipient Indemnitees”
Section 7.1(b)
“Redemption Shares”
Section 1.7(a)
“Registered Intellectual Property”
Section 2.18
“Registration Statement”
Section 5.1(b)
“Returns”
Section 2.15(b)(i)
“SEC”
Section 3.7(a)
“Securities Act”
Section 1.15
“Share Price Measurement Price”
Section 1.14(a)(i)
“Share Price Trigger Period”
Section 1.14(a)(i)
“Share Transfer”
Section 1.1
“Shortage”
Section 1.7(b)(xi)
“Singapore GAAP”
Section 2.7(a)
“Special Meeting”
Section 5.1(b)
“Stamp Taxes”
Section 1.8(c)
“Subject Persons”
Section 5.11
“Subsidiaries”
Section 2.2(a)
“Subsidiary Charter Documents”
Section 2.2(b)
“Tax/Taxes”
Section 2.15(a)
“Tax Opinion”
Section 5.1(g)
“Third Party Claim”
Section 7.2
“Trademarks”
Section 2.18
“Trading Day”
Section 1.14(b)(iii)
“Transaction Certificates”
Section 1.2
“Transaction Consideration”
Section 1.7(a)
“Transaction Shares”
Section 1.7(a)
“Transaction Share True-up”
Section 1.7(b)(xi)
“Trust Fund”
Section 3.25
“Unaudited Financial Statements”
Section 2.7(b)
“U.S. GAAP”
Section 2.7(a)
“U.S. GAAP Audited Financials”
Section 2.7(a)
“U.S. GAAP Converted Financials”
Section 2.7(a)
“U.S. Shareholder”
Section 5.29(a)
“Voting Agreement”
Section 6.2(k)
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ARTICLE X
GENERAL PROVISIONS
10.1
Notices
. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial delivery service, or sent via telecopy (receipt confirmed) to the parties at the following addresses or telecopy numbers (or at such other address or telecopy numbers for a
party as shall be specified by like notice):
if to Parent, to:
Ascend Acquisition Corp.
435 Devon Park Drive, Building 400
Wayne, Pennsylvania 19087
Attention: Don K. Rice
610-519-1336—telephone
610-519-9993—facsimile
with a copy to:
Graubard
Miller
405 Lexington Avenue
New York, New York 10174-1901
Attention: David Alan Miller, Esq.
Brian L. Ross, Esq.
212-818-8661 telephone
212-818-8881 telecopy
if to the Company or EHL to:
e.Pak Resources (S) Pte. Ltd.
121Genting Lane
Singapore 349572
with a
copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
8911 Capital of Texas Highway, North
Westech 360
Suite 3350
Austin, Texas 78759-8497
Attention: Brian K. Beard, Esq.
Evan Kastner, Esq.
512-338-5400 telephone
512-338-5499 telecopy
10.2
Interpretation
. The definitions of the terms herein shall apply equally
to the singular and plural forms of the terms defined. Whenever the context shall require, any pronoun shall include the corresponding masculine, feminine and neuter forms. When a reference is made in this Agreement to an Exhibit or Schedule, such
reference shall be to an Exhibit or Schedule to this Agreement unless otherwise indicated. When a reference is made in this Agreement to Sections or subsections, such reference shall be to a Section or subsection of this Agreement. Unless otherwise
indicated the words “include,” “includes” and “including” when used herein shall be deemed in each case to be followed by the words “without limitation.” The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When reference is made herein to “the business of” an entity, such reference
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shall be deemed to include the business of all direct and indirect Subsidiaries of such entity. Reference to the Subsidiaries of an entity shall be deemed to
include all direct and indirect Subsidiaries of such entity. For purposes of this Agreement:
(a) the term
“
Material Adverse Effect
” when used in connection with an entity means any change, event, violation, inaccuracy, circumstance or effect, individually or when aggregated with other changes, events, violations, inaccuracies,
circumstances or effects, that is materially adverse to the business, assets (including intangible assets), revenues, financial condition, prospects or results of operations of such entity, taken as a whole, it being understood that none of the
following alone or in combination shall be deemed, in and of itself, to constitute a Material Adverse Effect: (i) changes attributable to the public announcement or pendency of the transactions contemplated hereby and the consummation of the
transactions contemplated hereby or compliance by such entity with the prohibitions of, or any actions by such entity taken pursuant to, this Agreement or in connection with the transactions contemplated hereby (including any cancellations of or
delays in customer orders, any reduction in sales, any disruption in supplier, distributor, licensee, licensor, partner or similar relationships or any loss of employees), (ii) changes in general national or regional economic conditions,
financing or capital markets in general or changes in currency exchange rates or the semiconductor industry generally, (iii) any SEC rulemaking requiring enhanced or revised disclosure of transaction with a public shell, (iv) any change in
legal requirements or US GAAP after the date hereof applicable to such entity, any action required to be taken under any law or order or any existing agreement by which such entity or any of its subsidiaries (or any of their respective
properties) is bound, (v) the outbreak of war, hostilities, or terrorist activities, either in the United States or abroad or (vi) the payment of any amounts due to, or the provision of any other benefits to, any persons or entities based
on agreements disclosed in Schedule 2 or Schedule 3, as applicable;
(b) the term “
Legal Requirements
”
means any federal, state, local, municipal, foreign or other law, statute, constitution, principle of common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented
or otherwise put into effect by or under the authority of any Governmental Entity;
(c) the term “
Person
”
shall mean any individual, corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any limited liability company or joint stock
company), firm or other enterprise, association, organization, entity or Governmental Entity;
(d) the term
“
knowledge
” means actual knowledge or awareness, after reasonable inquiry, as to a specified fact or event of a Person that is an individual or of an executive officer of a Person that is a corporation or of a Person in a similar
capacity of an entity other than a corporation;
(e) the term “
Lien
” means any mortgage, pledge, security
interest, encumbrance, lien, restriction or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof, any sale with recourse against the seller or any Affiliate of the
seller, or any agreement to give any security interest);
(f) the term “
Affiliate
” means, as applied to any
Person, any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with, such Person. For purposes of this definition, “control” (including with correlative meanings, the terms
“controlling,” “controlled by” and “under common control with”), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or otherwise; and
(g) all monetary amounts set forth herein
are referenced in United States dollars, unless otherwise noted.
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10.3
Counterparts; Facsimile Signatures
. This Agreement and each other document executed in
connection with the transactions contemplated hereby, and the consummation thereof, may be executed in one or more counterparts, all of which shall be considered one and the same document and shall become effective when one or more counterparts have
been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart. Delivery by facsimile to counsel for the other party of a counterpart executed by a party shall be deemed
to meet the requirements of the previous sentence.
10.4
Entire Agreement; Third Party Beneficiaries
. This Agreement and the
documents and instruments and other agreements among the parties hereto as contemplated by or referred to herein, including the Exhibits and Schedules hereto (a) constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, it being understood that any letter of intent between Parent and EHL dated prior to the date
hereof and any amendment thereto dated prior to the date hereof is hereby terminated in its entirety and shall be of no further force and effect (except to the extent expressly stated to survive the execution of this Agreement and the consummation
of the transactions contemplated hereby); and (b) are not intended to confer upon any other person any rights or remedies hereunder (except as specifically provided in this Agreement).
10.5
Severability
. In the event that any provision of this Agreement, or the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of
such void or unenforceable provision.
10.6
Other Remedies; Specific Performance
. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise
of any other remedy. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly
agreed that the parties shall be entitled to seek an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in equity.
10.7
Governing Law
. This Agreement shall be
governed by and construed in accordance with the law of the State of Texas regardless of the law that might otherwise govern under applicable principles of conflicts of law thereof.
10.8
Rules of Construction
. The parties hereto agree that they have been represented by counsel during the negotiation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
10.9
Assignment
. No party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written
approval of the other parties. Subject to the first sentence of this Section 10.9, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.
10.10
Amendment
. This Agreement may be amended by the parties hereto at any time by execution of an instrument in writing signed on behalf of each
of the parties.
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10.11
Extension; Waiver
. At any time prior to the Closing, any party hereto may, to the extent
legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any
document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such party. Delay in exercising any right under this Agreement shall not constitute a waiver of such right.
10.12
Arbitration
. Any disputes or claims arising under or in connection with this Agreement or the transactions contemplated hereunder shall be
resolved by binding arbitration. Notice of a demand to arbitrate a dispute by either party shall be given in writing to the other at their last known address. Arbitration shall be commenced by the filing by a party of an arbitration demand with the
American Arbitration Association (“
AAA
”) in its office in Austin, Texas. The arbitration and resolution of the dispute shall be resolved by a single arbitrator appointed by the AAA pursuant to AAA rules. The arbitration shall in all
respects be governed and conducted by applicable AAA rules, and any award and/or decision shall be conclusive and binding on the parties. The arbitration shall be conducted in Austin, Texas. The arbitrator shall supply a written opinion supporting
any award, and judgment may be entered on the award in any court of competent jurisdiction. Each party shall pay its own fees and expenses for the arbitration, except that any costs and charges imposed by the AAA and any fees of the arbitrator for
his services shall be assessed against the losing party by the arbitrator. In the event that preliminary or permanent injunctive relief is necessary or desirable in order to prevent a party from acting contrary to this Agreement or to prevent
irreparable harm prior to a confirmation of an arbitration award, then either party is authorized and entitled to commence a lawsuit solely to obtain equitable relief against the other pending the completion of the arbitration in a court having
jurisdiction over the parties. Each party hereby consents to the exclusive jurisdiction of the federal and state courts located in the State of Texas, Travis County, for such purpose. All rights and remedies of the parties shall be cumulative and in
addition to any other rights and remedies obtainable from arbitration.
[The remainder of this page has been intentionally left blank.]
A-55
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first
written above.
ASCEND ACQUISITION CORP
By:
/s/ D
ON
K.
R
ICE
Don K. Rice
Chairman of the Board and Chief Executive Officer
ASCEND COMPANY LIMITED
By:
/s/ D
ON
K.
R
ICE
Don K. Rice
Chairman of the Board and Chief Executive Officer
ePAK HOLDINGS LIMITED
By:
/s/ S
TEVE
D
EZSO
Steve Dezso
Chief Executive Officer
e.PAK RESOURCES (S) PTE. LTD.
By:
/s/ S
TEVE
D
EZSO
Steve Dezso
Chief Executive Officer
A
GREEMENT
AND
P
LAN
OF
R
EORGANIZATION
A-56
INDEX OF SCHEDULES
Exhibits
Exhibit A
—
Escrow Agreement
Exhibit B
—
Recipient Certificate
Exhibit C
—
2007 Incentive Compensation Plan
Exhibit D
—
Voting Agreement
Exhibit E
—
Lock-up Agreement
Exhibit F
—
Employment Agreement between Continuing Corporation
and each of Steve Dezso, Mao Shi Khoo, Chun Weng
Chok, James Thomas, Jeffrey Blaine and Don Rice
Exhibit G
—
Employment Agreement between Continuing Corporation
and Richard Brook
Exhibit H
—
Graubard Miller Opinion
Exhibit I
—
Registration Rights Agreement
Exhibit J
—
Singapore Counsel Opinion
Exhibit K
—
Hong Kong Counsel Opinion
Schedules
Schedule 2
—
Company Schedule
Schedule 3
—
Parent Schedule
Schedule 5.2
—
Directors and Officers of Parent and the Company
Schedule 6.2(h)
—
Parent Resignations
Schedule 6.3(h)
—
Company Resignations
A-57
SCHEDULE A
Required Filings and Jurisdictions
Bermuda
Will need to amend Amalgamation Sub’s articles and memorandum of association to increase authorized capital and effect name change as contemplated in
this Agreement and to file necessary certificate to effect the Amalgamation.
Singapore
Stamp duty will be payable on the transfer of the shares within 14 days of the execution of the share transfer form. This would be at a rate of
S$0.20 for every S$100 of the purchase consideration or NTA of the shares (whichever is higher). Once the transfers have been stamped, they can then be registered in the books of the Company and a notification made to the Accounting and Corporate
Regulatory Authority in Singapore (i.e. the Companies registry).
Hong Kong
EHL to file a Form NC2 with the Companies Registry of Hong Kong for change of company name of EHL pursuant to Sections 5.7 and 5.25 at or prior to
closing. The Companies Registry will issue a new certificate showing the new name within approximately
7 business days
after the Form NC2 has been submitted. The change of name will be effective from the date on which such new
certificate is issued.
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SCHEDULE 2
COMPANY SCHEDULE
(Information Furnished Separately)
A-59
SCHEDULE 3
PARENT SCHEDULE
(Information Furnished Separately)
A-60
SCHEDULE 5.2
DIRECTORS AND OFFICERS OF PARENT AND THE COMPANY
PARENT OFFICERS AND DIRECTORS
Directors
Don Rice
Steven Dezso
Warren “Budd” Florkiewicz
Hock Voon Loo
Steve San Filippo
Officers
Steve Dezso
—
President and Chief Executive Officer
Khoo Mao Shi
—
Chief Operating Officer
Jason Lee
—
Executive Vice President Finance
Richard Brook
—
Executive Vice President Business Development
James R. Thomas
—
Chief Technology Officer
Jeffrey L. Blaine
—
Executive Vice President North Asia Sales
Chok Chun Weng
—
Executive Vice President South Asia Sales
COMPANY OFFICERS AND DIRECTORS
Directors
Don Rice
Steven Dezso
Warren “Budd” Florkiewicz
Hock Voon Loo
Steve San Filippo
Officers
Steve Dezso
—
President and Chief Executive Officer
Khoo Mao Shi
—
Chief Operating Officer
Jason Lee
—
Executive Vice President Finance
Richard Brook
—
Executive Vice President Business Development
James R. Thomas
—
Chief Technology Officer
Jeffrey L. Blaine
—
Executive Vice President North Asia Sales
Chok Chun Weng
—
Executive Vice President South Asia Sales
A-61
SCHEDULE 6.2(h)
PARENT RESIGNATIONS
Russell C. Ball III—all positions with Parent
Stephen Brown—all positions with Parent
Don K. Rice—Chief
Executive Officer
Arthur Spector—Advisor
All of the
above resignations will be effective as of the Closing Date.
A-62
SCHEDULE 6.3(l)
COMPANY RESIGNATIONS
Bruno Paul Yves Ghislain Seghin
director
Chok Chun Weng
director
All of the above resignations will be effective as of the Closing Date.
A-63
Annex C
Smart Investment Banking
July 27, 2007
The Board of Directors
Ascend
Acquisition Corp.
435 Devon Park Drive, Building 400
Wayne,
PA 19087
Gentlemen:
We have been advised
that, pursuant to the unexecuted Agreement and Plan of Reorganization, dated July 30, 2007 (the “Acquisition Agreement”), between Ascend Acquisition Corp. (“Ascend”), Ascend Company Limited, ePAK Holdings Limited and e.Pak
Resources (S) PTE. Ltd. (“ePak”), Ascend will acquire all of the outstanding stock of ePak (the “Transaction”). Pursuant to the Acquisition Agreement, Ascend will pay (i) 8,566,667 shares of Ascend common stock, subject
to adjustment based on ePak’s EBITDA for the LTM period ended June 30, 2007 (the “Initial Transaction Consideration”), (ii) a maximum of 442,625 shares of additional Ascend common stock payable upon the combined entity
achieving certain stock price targets from the closing date through 180 days thereafter for any 20 trading days within a 30 consecutive day trading period (the “Market Price Shares”), (iii) a maximum of 265,575 shares of additional
Ascend common stock payable upon the combined entity achieving certain EBITDA targets in 2008, 2009 and/or 2010 (“EBITDA Shares”), and (iv) a maximum of 442,625 shares of additional Ascend common stock payable upon the redemption of
public warrants (the “Redemption Shares”), (items (i), (ii), (iii) and (iv) are hereinafter, the “Transaction Consideration”). The terms and conditions of the Transaction are more specifically set forth in the
Acquisition Agreement.
We have been retained to render an opinion as to whether, on the date of such opinion, (i) the Transaction
Consideration is fair, from a financial point of view, to Ascend’s stockholders, and (ii) the fair market value of ePak is at least equal to 80% of the net assets of Ascend. We have not been requested to opine as to, and our opinion does
not in any manner address, the relative merits of the Transaction as compared to any alternative business strategy that might exist for Ascend, the decision of whether Ascend should complete the Transaction, and other alternatives to the Transaction
that might exist for Ascend. The financial terms and other terms of the Transaction were determined pursuant to negotiations between Ascend, ePak and each of their respective financial advisors, and not pursuant to our recommendations.
In arriving at our opinion, we took into account an assessment of general economic, market and financial conditions as well as our experience in
connection with similar transactions and securities valuations generally and, among other things:
•
Reviewed the Acquisition Agreement.
•
Reviewed publicly available financial information and other data with respect to Ascend that we deemed relevant, including the Annual Report on Form 10-KSB for the
year ended December 31, 2006 and the Quarterly Report on Form 10-QSB for the three months ended March 31, 2006.
•
Reviewed non-public information and other data with respect to ePak, including draft audited U.S. GAAP financial statements for the years ended December 31,
2004, 2005 and 2006, draft financial statements for the three months ended March 31, 2007 and 2006, financial projections for the years
The Board of Directors
Ascend Acquisition Corp.
July 27, 2007
Page 2
ending December 31, 2007, 2008, 2009, 2010 and 2011 (the “Projections”), and other internal financial information and management reports. The
Projections forecast organic growth in existing product lines only and does not take into any acquisitions currently planned by management.
•
Reviewed and analyzed the Transaction’s pro forma impact on Ascend’s securities outstanding and stockholder ownership.
•
Considered the historical financial results and present financial condition of ePak.
•
Reviewed certain publicly available information concerning the trading of, and the trading market for Ascend’s common stock and units.
•
Reviewed and analyzed the indicated value range of the Transaction Consideration.
•
Reviewed and analyzed ePak’s projected unlevered free cash flows and prepared a discounted cash flow analysis.
•
Reviewed and analyzed certain financial characteristics of publicly-traded companies that were deemed to have characteristics comparable to ePak.
•
Reviewed and analyzed certain financial characteristics of target companies in transactions where such target company was deemed to have characteristics comparable
to that of ePak.
•
Reviewed and compared the net asset value of Ascend to the indicated total invested capital value of ePak.
•
Reviewed and discussed with representatives of Ascend and ePak management certain financial and operating information furnished by them, including the Projections
and analyses with respect to ePak’s business and operations.
•
Performed such other analyses and examinations as were deemed appropriate.
In arriving at our opinion we have relied upon and assumed the accuracy and completeness of all of the financial and other information that was supplied
or otherwise made available to us without assuming any responsibility for any independent verification of any such information and we have further relied upon the assurances of Ascend and ePak management that they were not aware of any facts or
circumstances that would make any such information inaccurate or misleading. With respect to the financial information and Projections utilized, we assumed that such information has been reasonably prepared on a basis reflecting the best currently
available estimates and judgments, and that such information provides a reasonable basis upon which we could make our analysis and form an opinion. We have not evaluated the solvency or fair value of Ascend or ePak under any foreign, state or
federal laws relating to bankruptcy, insolvency or similar matters. We have not made a physical inspection of the properties and facilities of ePak and have not made or obtained any evaluations or appraisals of ePak’s assets and liabilities
(contingent or otherwise). In addition, we have not attempted to confirm whether ePak has good title to its assets.
We assumed that the
Transaction will be consummated in a manner that complies in all respects with the applicable provisions of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and all other applicable foreign, federal and state
statutes, rules and regulations. We assumed that the Transaction will be consummated substantially in accordance with the terms set forth in the Acquisition Agreement, without any further amendments thereto, and without waiver by Ascend of any of
the conditions to any obligations or in the alternative that any such amendments, revisions or waivers thereto will not be detrimental to Ascend or its stockholders in any material respect.
Based on the Projections utilized, we assumed that the value of the Transaction Consideration will be increased by only 265,575 shares of the Market
Price Shares and will not be increased by the EBITDA Shares. In
C-2
The Board of Directors
Ascend Acquisition Corp.
July 27, 2007
Page 3
addition, we did not include the value of the Redemption Shares in our calculation of the Transaction Consideration because the Projections do not take into
account the proceeds from the exercise of warrants.
Our analysis and opinion are necessarily based upon market, economic and other
conditions, as they exist on, and could be evaluated as of, July 27, 2007. Accordingly, although subsequent developments may affect our opinion, we do not assume any obligation to update, review or reaffirm our opinion.
Our opinion is for the use and benefit of the Board of Directors of Ascend in connection with its consideration of the Transaction and is not intended to
be and does not constitute an opinion or recommendation to any stockholder of Ascend as to how such stockholder should vote with respect to the Transaction. We do not express any opinion as to the underlying valuation or future performance of Ascend
or ePak, or the price at which either company’s securities might trade at any time in the future.
Based upon and subject to the
foregoing, it is our opinion that, as of the date of this letter, (i) the Transaction Consideration is fair, from a financial point of view, to Ascend’s stockholders, and (ii) the fair market value of ePak is at least equal to 80% of
the net assets of ePak.
In connection with our services, we will be paid a fee which is not contingent on the completion of the
transaction. Neither Capitalink nor its principals beneficially own any interest in Ascend or ePak and Capitalink has not provided any other services to Ascend or ePak in the past. In addition, Ascend has agreed to indemnify us for certain
liabilities that may arise out of the rendering this opinion.
In the ordinary course of business, Capitalink’s affiliate, Ladenburg
Thalmann & Co. Inc. (“Ladenburg”), certain of Ladenburg’s affiliates, as well as investment funds in which they may have financial interests, may acquire, hold or sell, long or short positions, or trade or otherwise effect
transactions, in debt, equity, and other securities and financial instruments (including bank loans and other obligations) of, or investments in, Ascend, or any other party that may be involved in the Transaction and their respective affiliates.
Our opinion is for the use and benefit of the Board of Directors of Ascend and is rendered in connection with its consideration of the
Transaction and may not be used by Ascend for any other purpose or reproduced, disseminated, quoted or referred to by Ascend at any time, in any manner or for any purpose, without our prior written consent, except that this opinion may be reproduced
in full in, and references to the opinion and to us and our relationship with Ascend may be included in filings made by Ascend with the Securities and Exchange Commission, if required by Securities and Exchange Commission rules, and in any proxy
statement or similar disclosure document disseminated to stockholders if required by the Securities and Exchange Commission rules.
Very truly yours,
Capitalink, L.C.
C-3
Annex G
ESCROW AGREEMENT
ESCROW AGREEMENT
(“Agreement”) dated
, 2007 by and among
ePAK INTERNATIONAL LTD.
, a Bermuda limited company (“
Parent
”),
EPAK HOLDINGS
LTD
., a Hong Kong limited company (“EHL”),
HOCK VOON LOO
, as the representative (the “
Representative
”) of EHL and its stockholders, and
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
, as escrow agent
(the “
Escrow Agent
”).
WHEREAS, Ascend Acquisition Corp., a Delaware corporation (“
Ascend
”), and its
wholly owned subsidiary, Ascend Company Limited, a Bermuda limited company (“
ACL
”), have consummated an amalgamation, with the continuing corporation being the Parent;
WHEREAS, Parent has acquired all of the outstanding capital shares of e.Pak Resources (S) Pte Ltd (“
ePak
”) from EHL (“
Share
Transfer
”);
WHEREAS, in consideration of the Share Transfer, Parent has issued certain of its ordinary shares to EHL and its
designees (“
Transaction Shares
”);
WHEREAS, all of the foregoing transactions have occurred pursuant to the terms of an
Agreement and Plan of Reorganization, dated as of July 30, 2007, by and among Ascend, ACL, ePak and EHL (“
Reorganization Agreement
”);
WHEREAS, pursuant to the Reorganization Agreement, Parent (i) is to be indemnified in certain respects and (ii) may be entitled to the return, for cancellation, of some of the Transaction Shares in certain
circumstances. The parties desire to establish escrow funds as collateral security for the indemnification obligations set forth in Sections 7.1(a) and 7.2 of the Reorganization Agreement and to effectuate the return to Parent of Transaction Shares
under the Reorganization Agreement if required pursuant to its terms. The Representative has been designated pursuant to the Reorganization Agreement to represent EHL and its designees who receive Transaction Shares (collectively the
“
Shareholders
”) and each Permitted Transferee (as hereinafter defined) of the Shareholders (the Shareholders and all such Permitted Transferees are hereinafter referred to collectively as the “
Owners
”), and to act
on their behalf for purposes of this Agreement. Capitalized terms used herein that are not otherwise defined herein shall have the meanings ascribed to them in the Reorganization Agreement.
The parties agree as follows:
1. (a) Concurrently with the execution hereof, Parent shall deliver to the Escrow Agent, on behalf of the Shareholders, to be held in escrow pursuant to the terms of this Agreement, stock certificates issued in the name of the Shareholders
representing an aggregate of Transaction Shares
[15% of (Transaction Shares + Replacement Option Shares)]
received by such Shareholders pursuant to the Reorganization
Agreement (“
Escrow Shares
”), together with ten (10) assignments separate from certificate executed in blank by such Shareholders to be held in escrow pursuant to this Agreement and Articles VII and Section 1.13 of the
Reorganization Agreement (the “
Escrow Fund
”). The Escrow Agent shall maintain a separate account for each Shareholder’s, and, subsequent to any transfer permitted pursuant to Paragraph 1(f) hereof, each Owner’s portion of
each Escrow Fund (collectively referred to herein as the “
Escrow Funds
”).
(b) The Escrow Agent hereby
agrees to act as escrow agent and to hold, safeguard and disburse the Escrow Funds pursuant to the terms and conditions hereof and the Reorganization Agreement. It shall treat each Escrow Fund as a trust fund in accordance with the terms of this
Agreement and not as the property of Parent. The Escrow Agent’s duties hereunder shall terminate upon its distribution of the entirety of the Escrow Funds in accordance with this Agreement and the Reorganization Agreement.
(c) Except as herein provided, the Owners shall retain all of their rights as
shareholders of Parent with respect to the Escrow Shares including, without limitation, the right to vote such shares, until such time, if ever, that same is returned to Parent under the terms hereof.
(d) The Escrow Fund shall be maintained during the period from the date hereof and ending on the last day of the Escrow Period.
(e) During the Escrow Period, all dividends payable in cash with respect to the Escrow Shares held in an Escrow Fund shall
be paid to the respective Owner associated with such Escrow Fund, but all dividends payable in stock or other non-cash property (“
Non-Cash Dividends
”) shall be delivered to the Escrow Agent to hold in accordance with the terms
hereof and the Reorganization Agreement. As used herein, the term “Escrow Fund” shall be deemed to include the Non-Cash Dividends distributed thereon, if any.
(f) During the Escrow Period, no sale, transfer or other disposition may be made of any of the Escrow Shares except (i) to a
“Permitted Transferee” (as hereinafter defined), (ii) by virtue of the laws of descent and distribution upon death of any Owner, (iii) pursuant to a qualified domestic relations order or (iv) a transfer by EHL to its
shareholders pursuant to a plan of liquidation adopted by EHL; provided, however, that such permissive transfers may be implemented only upon the respective transferee’s written agreement to be bound by the terms and conditions of this
Agreement. As used in this Agreement, the term “
Permitted Transferee
” shall include: (x) members of a Shareholder’s “Immediate Family” (as hereinafter defined); (y) an entity in which (A) a Shareholder
and/or members of a Shareholder’s Immediate Family beneficially own 100% of such entity’s voting and non-voting equity securities, or (B) a Shareholder and/or a member of such Shareholder’s Immediate Family is a general partner
and in which such Shareholder and/or members of such Shareholder’s Immediate Family beneficially own 100% of all capital accounts of such entity; and (z) a revocable trust established by a Shareholder during his lifetime for the benefit of
such Shareholder or for the exclusive benefit of all or any of such Shareholder’s Immediate Family. As used in this Agreement, the term “
Immediate Family
” means, with respect to any Shareholder, a spouse, parents, lineal
descendants, the spouse of any lineal descendant, and brothers and sisters (or a trust, all of whose current beneficiaries are members of an Immediate Family of the Shareholder). In connection with and as a condition to each permitted transfer, the
Permitted Transferee shall deliver to the Escrow Agent an assignment separate from certificate executed by the transferring Shareholder, or where applicable, an order of a court of competent jurisdiction, evidencing the transfer of shares to the
Permitted Transferee, together with ten (10) assignments separate from certificate executed in blank by the Permitted Transferee, with respect to the shares transferred to the Permitted Transferee. Upon receipt of such documents, the Escrow
Agent shall deliver to Parent the original stock certificate out of which the assigned shares are to be transferred, together with the executed assignment separate from certificate executed by the transferring Shareholder, or a copy of the
applicable court order, and shall request that Parent issue new certificates representing (m) the number of shares, if any, that continue to be owned by the transferring Shareholder, and (n) the number of shares owned by the Permitted
Transferee as the result of such transfer. Parent, the transferring Shareholder and the Permitted Transferee shall cooperate in all respects with the Escrow Agent in documenting each such transfer and in effectuating the result intended to be
accomplished thereby. During the Escrow Period, no Owner shall pledge or grant a security interest in any of the Transaction Shares included in the Escrow Fund or grant a security interest in any Owner’s rights under this Agreement.
2. (a) Parent, acting through the Committee, may make a claim for indemnification pursuant to Article VII of the Reorganization
Agreement the Reorganization Agreement (“
Indemnity Claim
”) against the Escrow Fund by giving notice to the Representative (with a copy to the Escrow Agent) specifying (i) the covenant, representation, warranty or agreement
contained in the Reorganization Agreement which it asserts has been breached by EHL or otherwise entitles Parent to indemnification pursuant to Article VII of the Reorganization Agreement, (ii) in reasonable detail, the nature and dollar amount
of each individual item of any Losses related to such Indemnity Claim, the date each such item was paid or properly accrued or arose, and the nature of the inaccuracy, breach or non-fulfillment to which such item is related, (iii) whether the
Indemnity Claim results from a Third Party Claim against Parent and (vi) whether such Loss may be covered (in whole or in part) under any insurance and the estimated amount of such Loss which may be
G-2
covered under such insurance (an “
Indemnity Notice
”). The Committee also shall deliver to the Escrow Agent (with a copy to the
Representative), concurrently with its delivery to the Escrow Agent of the Indemnity Notice, a certification as to the date on which the Indemnity Notice was delivered to the Representative. The Representative shall send a copy of the Indemnity
Notice to each of the Shareholders within 5 days after its receipt thereof, shall provide the Shareholders, at their own expense, with access to any information reasonably requested by the Shareholders related to the Indemnity Claim (including
copies of any relevant documents) subject to such Indemnity Notice and available to the Representative without undue effort, and shall make itself available to the Shareholders to discuss the Indemnity Claim at such reasonable times as may be
requested by the Shareholders.
(b) If the Representative shall give a notice to the Committee (with a copy to the Escrow
Agent) (a “
Counter Indemnity Notice
”), within 45 days following the date of receipt (as specified in the Committee’s certification) by the Representative of a copy of the Indemnity Notice, disputing whether the Indemnity Claim
is indemnifiable under the Reorganization Agreement, the Committee and the Representative shall attempt to resolve such dispute by voluntary settlement as provided in Section 2(c) below. If no Counter Indemnity Notice with respect to an
Indemnity Claim set forth in a Indemnity Notice delivered in accordance with the terms hereof is received by the Escrow Agent from the Representative within such 45-day period, the Indemnity Claim set forth in such Indemnity Notice shall be deemed
to be an Established Claim (as hereinafter defined) for purposes of this Agreement.
(c) If the Representative delivers a
Counter Indemnity Notice to the Escrow Agent, the Committee and the Representative shall, during the period of 60 days following the delivery of such Counter Indemnity Notice or such greater period of time as the Committee and the Representative may
mutually agree to in writing (the “
Dispute Period
”) (with a copy of such written agreement delivered by either of the Committee and the Representative to the Escrow Agent), attempt to resolve the dispute set forth in the Indemnity
Notice with respect to which the Counter Indemnity Notice was given. If the Committee and the Representative shall reach a settlement with respect to any such dispute, they shall jointly deliver written notice of such settlement to the Escrow Agent
specifying the terms thereof (the “
Settlement Notice
”). If the Committee and the Representative shall be unable to reach a settlement with respect to a dispute within the Dispute Period, such dispute shall be resolved by arbitration
pursuant to Section 2(d) below.
(d) If the Committee and the Representative cannot resolve a dispute prior to
expiration of the Dispute Period, then such dispute shall be submitted (and either party may submit such dispute) for arbitration before a single arbitrator in Austin, Texas, in accordance with the commercial arbitration rules of the American
Arbitration Association then in effect and the provisions of Section 10.12 of the Reorganization Agreement to the extent that such provisions do not conflict with the provisions of this paragraph. The Committee and the Representative shall
attempt to agree upon an arbitrator; if they shall be unable to agree upon an arbitrator within 10 days after the dispute is submitted for arbitration, then either the Committee or the Representative, upon written notice to the other, may apply for
appointment of such arbitrator by the American Arbitration Association. The arbitration shall be conducted in Austin, Texas. Each party shall pay the fees and expenses of counsel used by it and 50% of the fees and expenses of the arbitrator and of
other expenses of the arbitration. The arbitrator shall render his decision within 130 days after his appointment and may award costs to either the Committee or the Representative if, in his sole opinion reasonably exercised, the claims made by any
other party had no reasonable basis and were arbitrary and capricious. Such decision and award shall be in writing and shall be final and conclusive on the parties, and counterpart copies thereof shall be delivered to each of the parties. Judgment
may be obtained on the decision of the arbitrator so rendered in any Texas state court sitting in Travis County, or any federal court sitting in Travis County, having jurisdiction, and may be enforced in accordance with the law of the State of
Texas. If the arbitrator shall fail to render his decision or award within such 130-day period, either the Committee or the Representative may apply to any Texas state court sitting in Travis County, or any federal court sitting in Travis County,
then having jurisdiction, by action, proceeding or otherwise, as may be proper to determine the matter in dispute consistently with the provisions of this Agreement. The parties consent to the exclusive jurisdiction of the Texas state courts having
jurisdiction and sitting in Travis County, or any federal court
G-3
sitting in Travis County, for this purpose. The prevailing party (or either party, in the case of a decision or award rendered in part for each party) shall
send a copy of the arbitration decision or of any final non-appealable judgment of the court to the Escrow Agent (the “
Final Judgment Notice
”).
(e) As used in this Agreement, “
Established Claim
” means any (i) Indemnification Claim deemed established pursuant
to the last sentence of Section 2(b) above, (ii) Indemnification Claim resolved in favor of Parent Indemnitees by settlement pursuant to Section 2(c) above, resulting in a dollar award to Parent Indemnitees, (iii) Indemnification
Claim established by the decision of an arbitrator pursuant to Section 2(d) above, resulting in a dollar award to Parent Indemnitees, or (iv) Third Party Claim that the Committee and the Representative have jointly notified the Escrow
Agent has been settled in accordance with the provisions of the Reorganization Agreement.
(f) (i) Subject to subsection
(f)(ii), promptly after an Indemnity Claim becomes an Established Claim, the Committee and the Representative shall jointly deliver a notice to the Escrow Agent (a “
Joint Indemnity Notice
”) directing the Escrow Agent to pay to
Parent, and the Escrow Agent promptly shall pay to Parent, an amount equal to the aggregate dollar amount to be awarded to the Parent Indemnities of the Established Claim (or, if at such time there remains in the Escrow Fund less than the full
amount so payable, the full amount remaining in the Escrow Fund).
(ii) Payment of an Established Claim shall be made in
Escrow Shares pro rata from the account maintained on behalf of each Owner. For purposes of each payment, such shares shall be valued at the “Fair Market Value” (as defined below). However, in no event shall the Escrow Agent be required to
calculate Fair Market Value or make a determination of the number of shares to be delivered to Parent in satisfaction of any Established Claim; rather, such calculation shall be included in and made part of the Joint Indemnity Notice. The Escrow
Agent shall transfer to Parent out of the Escrow Fund that number of Escrow Shares necessary to satisfy each Established Claim, as set out in the Joint Indemnity Notice. Any dispute between the Committee and the Representative concerning the
calculation of Fair Market Value or the number of shares necessary to satisfy any Established Claim, or any other dispute regarding a Joint Indemnity Notice, shall be resolved between the Committee and the Representative in accordance with the
procedures specified in Sections 2(c) and (d) above, and shall not involve the Escrow Agent. Each transfer of shares in satisfaction of an Established Claim shall be made by the Escrow Agent delivering to Parent one or more share certificates
held in each Owner’s account evidencing not less than such Owner’s pro rata portion of the aggregate number of Escrow Shares specified in the Joint Indemnity Notice, together with assignments separate from certificate executed in blank by
such Owner and completed by the Escrow Agent in accordance with instructions included in the Joint Indemnity Notice. Simultaneously with, and as a condition to, receipt of the stock certificates and assignments, Parent shall deliver to the Escrow
Agent new certificates representing the number of Escrow Shares owned by each Owner after such payment. The parties hereto (other than the Escrow Agent) agree that the foregoing right to make payments of Established Claims in Escrow Shares may be
made notwithstanding any other agreements restricting or limiting the ability of any Owner to sell any Parent common shares or otherwise. As used herein, “Fair Market Value” means the average reported closing price for a Parent common
share for the ten trading days ending on the last trading day prior to the day that an Indemnification Claim becomes an Established Claim.
(iii) Notwithstanding anything herein to the contrary, at such time as an Indemnification Claim has become an Established Claim, the Representative shall have the right to substitute for the Escrow Shares that
otherwise would be paid in satisfaction of such claim (the “
Claim Shares
”) cash in an amount equal to the aggregate dollar amount of the Established Claim (“
Substituted Cash
”). In such event (i) the Joint
Indemnity Notice shall include a statement describing the substitution of Substituted Cash for the Claim Shares, and (ii) substantially contemporaneously with the delivery of such Joint Indemnity Notice, the Representative shall cause currently
available funds to be delivered to the Escrow Agent in an amount equal to the Substituted Cash. Upon receipt of such Joint Indemnity Notice and Substituted Cash, the Escrow Agent shall (y) in payment of the Established Claim described in the
Joint Indemnity Notice, deliver the Substituted Cash to Parent in lieu of the Claim Shares, and (z) cause the Claim Shares to be returned to the Representative.
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(g) Upon receipt from time to time of a written accounting submitted in good faith to the
Escrow Agent (with a copy to the Committee) by the Representative of any reasonable expenses or costs incurred by it in its capacity as the Representative, the Escrow Agent shall promptly disburse to the Representative from the Escrow Fund that
number of Escrow Shares having an average reported closing price for a Parent common share for the ten trading days ending on the last trading day prior to the day on which such disbursement is made. Payment of such expenses or costs shall be made
in Escrow Shares pro rata from the account maintained on behalf of each Owner.
3. On the first Business Day after the
expiration of the Escrow Period, the Escrow Agent shall distribute and deliver to each Owner certificates representing the Escrow Shares then in such Owner’s account in the Escrow Fund, unless at such time there are any Indemnity Claims with
respect to which Indemnity Notices have been received but which have not been resolved pursuant to Section 2 hereof or in respect of which the Escrow Agent has not been notified of, and received a copy of, a final determination (after
exhaustion of any appeals) by a court of competent jurisdiction, as the case may be (in either case, “
Pending Claims
”), and which, if resolved or finally determined in favor of Parent, would result in a payment to Parent, in which
case the Escrow Agent shall retain, and the total amount of such distributions to such Owner shall be reduced by, the “
Pending Claims Reserve
” (as hereafter defined). The Committee shall certify in good faith to the Escrow Agent the
Fair Market Value to be used in calculating the Pending Claims Reserve and the number of Escrow Shares to be retained therefor. Thereafter, if any Pending Claim becomes an Established Claim, the Committee and the Representative shall deliver to the
Escrow Agent a Joint Indemnity Notice directing the Escrow Agent to pay to Parent an amount in respect thereof determined in accordance with Section 2(f) above, and to deliver to each Owner the Escrow Shares then in such owner’s account in
the Escrow Fund having a Fair Market Value equal to the amount by which the remaining portion of his account in the Escrow Fund exceeds the then Pending Claims Reserve (as reduced by the amount set forth in the Joint Settlement Notice) (determined
as set forth below), all as specified in a Joint Indemnity Notice. If any Pending Claim is resolved against Parent, the Committee and the Representative shall, and either of the Committee or the Representative may, deliver to the Escrow Agent a
notice directing the Escrow Agent to pay to each Owner the amount by which the remaining portion of his account in the Escrow Fund exceeds the then Pending Claims Reserve (as reduced by the amount set forth in the Settlement Notice or the Final
Judgment Notice applicable to such Pending Claim). Upon resolution of all Pending Claims, the Committee and the Representative shall deliver to the Escrow Agent a Joint Indemnity Notice directing the Escrow Agent shall pay to such Owner the
remaining portion of his or her account in the Escrow Fund.
As used herein, the “
Pending Claims Reserve
”
shall mean, at the time any such determination is made, that number of Escrow Shares having an average reported closing price for a Parent common share for the ten trading days ending on the last trading day prior to the day on which such
determination is made equal to the sum of the aggregate dollar amounts claimed to be due with respect to all Pending Claims (as shown in the Indemnity Notices of such Claims).
4. (a) As soon as practicable following the Effective Time (but no later than forty-five (45) days thereafter), Parent shall deliver
to the Representative a final computation (the “Parent Effective Time Liabilities Calculation”) of the Parent Effective Time Liabilities. If the Representative agrees with the Parent Effective Time Liabilities Calculation or does not
object to such computation within fifteen (15) days after its receipt of such computation by delivering a Parent Effective Time Liabilities Objection Notice (as defined below) to Parent, the Parent Effective Time Liabilities Calculation shall
be deemed to be final and conclusive and shall be binding on Parent, EHL, the Representative and each of the holders of the capital stock of Parent. If the Representative disagrees with the Parent Effective Time Liabilities Calculation, the
Representative shall, within fifteen (15) days after receipt of the Parent Effective Time Liabilities Calculation, deliver a notice (a “Parent Liabilities Objection Notice”) to Parent setting forth the Representative’s proposed
calculation of the amount of Parent Effective Time Liabilities. Parent and the Representative will use their respective commercially reasonable efforts to resolve any disagreements as to the computation of the amount of Parent Effective Time
Liabilities, but if they do not obtain a final
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resolution within the 90-day period following the Closing, or there is otherwise a dispute with respect to the number of Transaction Shares issued at
Closing, including a dispute with respect to any values used in the computation thereof pursuant to the Reorganization Agreement, that is not resolved by the end of such period, the Committee or the Representative shall instruct the PCOAB-registered
accounting firm then serving as Parent’s independent accounting firm to review all of the applicable calculations and relevant financial information available at the time of such review and deliver a statement of its determination of each
calculation in dispute, including the number of Transaction Shares that would have been issued at Closing had such accounting firm’s calculations been utilized at Closing (the “
Transaction Share True-up
”). The Transaction Share
True-up shall be binding on the parties and any difference between the number of Transaction Shares issuable under the Transaction Share True-up and the actual number of Transaction Shares issued at Closing (the “
Actual Issuance
”).
If the Actual Issuance is greater than the Transaction Share True-up (“Overage”), the number of Escrow Shares equal to the Overage shall be returned to Parent from the Escrow as soon as practicable.
(b) If it is determined that there is an Overage, Parent shall deliver a notice (“
Adjustment Notice
”) to the
Representative, with a copy to the Escrow Agent, setting forth the Overage and stating the number of Escrow Shares to be returned to Parent for cancellation pursuant to Section 1.7(b)(xi) of the Reorganization Agreement. If the Representative
shall give a notice to Parent (with a copy to the Escrow Agent) (a “
Counter Adjustment Notice
”), within ten (10) days following the date of receipt by the Representative of a copy of the Adjustment Notice, disputing
Parent’s calculation of the Overage or number of Escrow Shares to be returned to Parent in connection therewith, the Committee and Representative shall attempt to resolve such dispute by voluntary settlement in the manner provided in
Section 2(c) or, if the dispute is not so resolved, by arbitration in the manner provided in Section 2(d). If no Counter Adjustment Notice is received by the Escrow Agent from the Representative within such five-day period, the calculation
of the Overage and related number of Escrow Shares to be returned to Parent shall be deemed to be established as set forth in the Adjustment Notice for all purposes of this Agreement.
(c) Promptly upon the Overage calculation becoming established either as set forth in the Adjustment Notice, by mutual resolution of
Parent and the Representative or by arbitration, as the case may be, upon receipt of notice from either Parent or the Representative (with a copy to the other), the Escrow Agent shall deliver to Parent, for cancellation, that number of Escrow Shares
required under Section 4(a) as so established.
5. The Escrow Agent, the Committee, Parent and the Representative shall
use commercially reasonable efforts cooperate in all respects with one another in the calculation of any amounts determined to be payable to Parent and the Owners in accordance with this Agreement and in implementing the procedures necessary to
effect such payments.
6. (a) The Escrow Agent undertakes to perform only such duties as are expressly set forth herein. It
is understood that the Escrow Agent is not a trustee or fiduciary and is acting hereunder merely in a ministerial capacity.
(b) The Escrow Agent shall not be liable for any action taken or omitted by it in good faith and in the exercise of its own best judgment, and may rely conclusively and shall be protected in acting upon any order, notice, demand,
certificate, opinion or advice of counsel (including counsel chosen by the Escrow Agent), statement, instrument, report or other paper or document (not only as to its due execution and the validity and effectiveness of its provisions, but also as to
the truth and acceptability of any information therein contained) which is reasonably believed by the Escrow Agent to be genuine and to be signed or presented by the proper person or persons. The Escrow Agent shall not be bound by any notice or
demand, or any waiver, modification, termination or rescission of this Agreement unless evidenced by a writing delivered to the Escrow Agent signed by the proper party or parties and, if the duties or rights of the Escrow Agent are affected, unless
it shall have given its prior written consent thereto.
(c) The Escrow Agent’s sole responsibility upon receipt of any
notice reasonably believed by Escrow Agent to be genuine and to have been signed or presented by the proper party or parties requiring any
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payment to Parent pursuant to the terms of this Agreement or, if such notice is disputed by the Committee or the Representative, the settlement with respect
to any such dispute, whether by virtue of joint resolution, arbitration or determination of a court of competent jurisdiction, is to pay to Parent the amount specified in such notice, and the Escrow Agent shall have no duty to determine the
validity, authenticity or enforceability of any specification or certification made in such notice.
(d) The Escrow Agent
shall not be liable for any action taken by it in good faith and reasonably believed by it to be authorized or within the rights or powers conferred upon it by this Agreement, and may consult with counsel of its own choice and shall have full and
complete authorization and indemnification under Section 6(g), below, for any action taken or suffered by it hereunder in good faith and in accordance with the opinion of such counsel.
(e) The Escrow Agent may resign at any time and be discharged from its duties as escrow agent hereunder by its giving the other parties
hereto written notice and such resignation shall become effective as hereinafter provided. Such resignation shall become effective at such time that the Escrow Agent shall turn over the Escrow Funds to a successor escrow agent appointed jointly by
the Committee and the Representative. If no new escrow agent is so appointed within the 60 day period following the giving of such notice of resignation, the Escrow Agent may deposit the Escrow Funds with any court it reasonably deems appropriate.
(g) The Escrow Agent shall be indemnified and held harmless by Parent from and against any expenses, including counsel fees
and disbursements, or loss suffered by the Escrow Agent in connection with any action, suit or other proceeding involving any claim which in any way, directly or indirectly, arises out of or relates to this Agreement, the services of the Escrow
Agent hereunder, or the Escrow Funds held by it hereunder, other than expenses or losses arising from the gross negligence or willful misconduct of the Escrow Agent. Promptly after the receipt by the Escrow Agent of notice of any demand or claim or
the commencement of any action, suit or proceeding, the Escrow Agent shall notify the other parties hereto in writing. In the event of the receipt of such notice, the Escrow Agent, in its sole discretion, may commence an action in the nature of
interpleader in an appropriate court to determine ownership or disposition of the Escrow Fund in question or it may deposit such Escrow Fund with the clerk of any appropriate court and be relieved of any liability with respect thereto or it may
retain the Escrow Fund pending receipt of a final, non appealable order of a court having jurisdiction over all of the parties hereto directing to whom and under what circumstances the Escrow Fund in question is to be disbursed and delivered.
(h) The Escrow Agent shall be entitled to reasonable compensation from Parent for all services rendered by it hereunder.
The Escrow Agent shall also be entitled to reimbursement from Parent for all reasonable documented expenses paid or incurred by it in the administration of its duties hereunder including, but not limited to, all counsel, advisors’ and
agents’ fees and disbursements and all taxes or other governmental charges.
(i) From time to time on and after the
date hereof, the Committee and the Representative shall deliver or cause to be delivered to the Escrow Agent such further documents and instruments and shall do or cause to be done such further acts as the Escrow Agent shall reasonably request to
carry out more effectively the provisions and purposes of this Agreement, to evidence compliance herewith or to assure itself that it is protected in acting hereunder.
(j) Notwithstanding anything herein to the contrary, the Escrow Agent shall not be relieved from liability hereunder for its own gross
negligence or its own willful misconduct.
7. This Agreement expressly sets forth all the duties of the Escrow Agent with
respect to any and all matters pertinent hereto. No implied duties or obligations shall be read into this Agreement against the Escrow Agent. The Escrow Agent shall not be bound by the provisions of any agreement among the parties hereto except this
Agreement and shall have no duty to inquire into the terms and conditions of any agreement made or entered into in connection with this Agreement, including, without limitation, the Reorganization Agreement.
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8. This Agreement shall inure to the benefit of and be binding upon the parties and their
respective heirs, successors, assigns and legal representatives, shall be governed by and construed in accordance with the law of Texas applicable to contracts made and to be performed therein except that issues relating to the rights and
obligations of the Escrow Agent shall be governed by and construed in accordance with the law of Texas applicable to contracts made and to be performed therein. This Agreement cannot be changed or terminated except by a writing signed by the
Committee, the Representative and the Escrow Agent.
10. All notices and other communications under this Agreement shall be
in writing and shall be deemed given if given by hand or delivered by nationally recognized overnight carrier, or if given by telecopier and confirmed by mail (registered or certified mail, postage prepaid, return receipt requested), to the
respective parties as follows:
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