On September 27, 2009, the board of directors of the Company approved a share purchase resolution. Pursuant to a letter of intent dated September 27, 2009, the Company shall purchase at least 51% of Tai Ao. The consideration for such purchase will be settled first with the note receivable from Xinyang of $83,601,327, and the remainder in cash. If the Company successfully negotiates with Tai Ao’s shareholders, the consideration will be determined in accordance with the audited net assets of Tai Ao at the purchase date. If the Company consummates such transaction, the transaction is expected to be accounted for as an acquisition of a company under common control.
The collectibility of the notes receivables from related parties to a large extent depends on completion of the share purchase resolution as mentioned below.
The Chinese government now requires foreign acquirers of assets based in China to use all cash in the acquisition. A share-based acquisition has to be approved by the Reform and Development Commission of the central government. The success of getting approval from the Reform and Development Commission is uncertain. The Company has to arrange for a large amount of cross-border capital, which can be time consuming and technically difficult due to the foreign exchange control in China.
In addition, the Chinese government recently imposed a new national security review on future foreign acquisitions of certain types of businesses and assets that are of the strategic and national security interest of China, including infrastructure projects. Since this regulatory requirement just became effective, it is uncertain how the government will view this transaction and what steps will be taken.
The Company is actively pursuing the acquisition. However, whether the application will be approved is still unclear as of March 31, 2011 due to the above mentioned reasons. Thus, there is uncertainty as to the collectibilty of the notes receivables from related parties. At this time, the Company estimates that there is no need for a reserve against the amounts due from related parties. If the Company is unsuccessful in obtaining approval for the acquisition of Tai Ao, this reserve estimate could change significantly. The management of the Company plans to resolve the related party transaction as of June 30, 2011, either effectuating the acquisition or settling the related party receivables.
ADVANCES TO RELATED PARTIES
The Company and Tai Ao Expressway Co., Ltd. have the same chairman, Li Xipeng. Li Xipeng owns 51% of the shares of Tai Ao. The Company made payments to suppliers on behalf of Tai Ao for the purchase of construction materials commencing in 2006 in order to assist Tai Ao with its working capital needs. For the nine months ended March 31, 2011, the payments to Tai Ao amounted to $11,064,405, and the repayments from Tai Ao amounted to $5,655,846. The balances of $39,524,453 and $32,732,531 at March 31, 2011 and June 30, 2010, respectively, are unsecured, interest free and due on demand.
On September 27, 2009, the board of directors of the Company approved a share purchase resolution. Pursuant to a letter of intent, the Company shall purchase at least 51% of Tai Ao. The consideration for such purchase will be settled first with the note receivable from Xinyang, and the remainder in cash. The advance to Tai Ao will also be involved in the Company’s acquisition of Tai Ao. The collectibility of the notes receivables from related parties to a large extent depends on completion of the share purchase resolution.
Henan Hairun Trade Co., Ltd. is substantially controlled by Ms. Lin Jie, the Vice President of Operations of the Company. The Company made payments to Hairun for its working capital needs. Hairun repaid the amount during the nine months ended March 31, 2011. The Company also borrowed working capital from Hairun. For the nine months ended March 31, 2011, the working capital borrowed from Hairun was $2,251,914, and the Company repaid the amount during the nine months ended March 31, 2011.
The Company and Xinyang Hongqiao Heat Co., Ltd. have the same chairman, Li Xipeng. Li Xipeng owns 92% of the shares of Xinyang Hongqiao Heat Co., Ltd. The Company made payments to Xinyang Hongqiao Heat Co., Ltd. for its working capital needs. The balance of $458,008 at March 31, 2011 is unsecured, interest free and due on demand.
The Company and Zhengzhou Zhengdong Thermoelectricity Co., Ltd. (“Zhengdong”) have the same chairman, Li Xipeng. Li Xipeng owns 80% of the shares of Zhengzhou Zhengdong Thermoelectricity Co., Ltd. The Company made payments to Zhengzhou Zhengdong Thermoelectricity Co., Ltd. for its working capital needs. For the nine months ended March 31, 2011, the payments to Zhengdong were $2,237,102, and the repayments from Zhengdong were $1,351,148. The balance at March 31, 2011 was $900,953. The balance at March 31, 2011 is unsecured, interest free and due on demand. For the nine months ended March 31, 2011, the working capital borrowed from Zhengzhou Zhengdong Thermoelectricity Co., Ltd. was $12,010,209 and the Company repaid the amount during the nine months ended March 31, 2011.
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