ZTC Telecoms plc

Circular to Shareholders and

RNS Number : 6677P
ZTC Telecommunications plc
30 March 2009
 



ZTC Telecommunications Plc

('ZTC' or the 'Company')


Circular to Shareholders and Notice of Annual General Meeting


The Company has posted to shareholders a circular and notice of annual general meeting concerning fundamental change of business, investing strategy, share capital reorganisation, change of name, change of website and other matters.


Thannual general meeting of the Company is to be held at 10.00am on Tuesday 21 April 2009 at the offices of Pritchard Englefield, 14 New StreetLondon EC2M 4HE.


The Chairman's Letter to shareholders is set out below. The complete circular and notice of annual general meeting is available on the Company's website www.chinaevoline.com.


Contact:


ZTC Telecommunications plc

Frank Lewis, Chairman

+44 (0)7775 504 313


Fairfax I.S. PLC 

Nominated Adviser and Broker

Adam Hart / Laura Littley

+44 (0)207 598 5368



Chairman's Letter to Shareholders


Introduction

As previously announced on 10 November 2008, the Directors became aware that Charles Huang,

CEO, majority shareholder and major creditor of the Company's subsidiary Zhong Tian and Mr Yang Ruqiang, the Group's General Manager and Charles Huang's brother in law, had been absent from the Group's offices and factory in Longgang, Shenzhen (China) and had been uncontactable since 5 November 2008.


The unexplained absence of key personnel, in the highly charged economic environment of southern China, destabilised the Group's employees and creditors and, the Board believes, resulted in the unauthorised removal of some of Zhong Tian's assets from its factory site in Longgang, Shenzhen (China). The local authorities subsequently moved to take control of the situation and the People's Court sealed the factory and its buildings, sequestering all of the assets. Up to the date of this document, none of the Directors or employees of the Group have been able to gain access to the factory and its buildings which remain sealed. 


As a result of the management control issues arising and in order to ensure that an orderly market in the Company's shares was maintained, the Directors requested a suspension of trading in the Existing Ordinary Shares on AIM and such suspension was granted by the London Stock Exchange on 7 November 2008.


Further investigations by the Directors revealed that on 14 November 2008, the local government paid compensation to, and dismissed, a majority of the employees of Zhong Tian. It is believed that the People's Court subsequently auctioned the Group's remaining inventory and equipment for RMB1,220,765 (approximately £90,000) and this sum was, the Directors believe, credited against the government payments to employees (although this has not been capable of verification by the Directors).


The directors of Praise Ease, the Company's wholly-owned Hong Kong holding company and the sole shareholder of Zhong Tian, appointed China legal counsel on 12 November 2008 and instructed them to conduct legal due diligence, interacting with the local relevant authorities and other stakeholders including employees, debtors and creditors, and to provide an opinion as to the prospects of any economic recovery. Following the official authorisations and requisite payments, China legal counsel commenced its investigations on 25 November 2008.


China legal counsel found that as of 19 December 2008, 29 creditor claims had been lodged against Zhong Tian, totalling approximately RMB21m (approximately £2.2m). 


At the end of November 2008, it transpired that Tomorrow's Focus, the company which then held 68,000,000 Existing Ordinary Shares beneficially owned by Charles Huang, had, without the knowledge of the Company or the Directors and in contravention of the AIM Rules, entered into loan agreements with Maiden Undertaking. Documentation produced to the Company showed that Maiden Undertaking had lent an aggregate amount of HK$27,390,000 (approximately £2m) to Tomorrow's Focus and that the repayment of the loans was secured by the Charges against the Existing Ordinary Shares held by Tomorrow's Focus (representing approximately 62.57 per cent. of the Existing Ordinary Shares) and by personal guarantees given by Charles Huang in favour of Maiden Undertaking.


It further transpired during the preparations for putting the Proposals to Shareholders that Charles

Huang on 14 April 2008 had transferred his holding of shares in Pan Europe Capital Limited, the legal entity which held 12,750,000 Existing Ordinary Shares, amounting, at that time, to approximately 11.7 per cent. of the then issued Existing Ordinary Share capital, to Ms. Cheung Yiu Shan. The Company has tried to contact Ms. Cheung Yiu Shan to establish the basis for the transfer of the shares in Pan Europe Capital Limited to her and whether that shareholding is for the benefit of Ms. Cheung Yiu Shan or another person, but, as yet, has had no response to its enquiries. 


To date, the factory and all buildings remain under seal and all assets sequestered by the People's Court. All key management of the Subsidiaries have continued to take unexplained leave and all remaining employees have been dismissed. The whereabouts of Charles Huang and Mr Yang Ruqiang remain unknown.


While the Company's investigations continue, it is the Board's unanimous view that Zhong Tian is unlikely to be able to continue as a going concern. Following the alleged looting at the factory and the auction conducted by the People's Court, the quantity of remaining equipment and inventory is unknown and its value is likely to be negligible.


Further legal opinion indicates that, in order for the Company to gain access to the assets of Zhong

Tian, it would have to replace Charles Huang as legal representative of Zhong Tian, a lengthy and expensive procedure, and then commence one of the following processes:


(i) The settlement of existing claims and/or appointment of a liquidation team (any voluntary liquidation process could take up to two years and would incur considerable expense including the payment of uncalled capital, being approximately RMB170m (£12.4m)); or


(ii) An involuntary winding up process initiated by the local relevant authority of Shenzhen, which the Directors believe, could also be very time consuming and the likely focus on tangible assets would mean that any proceeds are likely to be minimal.


After due investigations, taking into account the limited resources of the Company, the Directors have concluded that the Company's business in China will be unable to resume trading and, as such, the ability to realise any net assets for the benefit of Shareholders will be extremely difficult and not costeffective. Given the potentially long recovery procedures and the Company's limited resources, the Directors have concluded that the Subsidiaries of the Company have negligible or no recoverable value. In addition, the disposal of Praise Ease is also a condition precedent of the party wishing to assist in the refinancing of the Company (see below under the heading 'Fundamental Change of Business').


Following discussions between the Company and Maiden Undertaking and on the basis that there had been a breach of the terms of the two loan agreements dated 16 May 2008 and 3 June 2008 by

Tomorrow's Focus and Charles Huang, Maiden Undertaking is entitled, under the Charges, to retain the Charged Shares and register itself as owner of the Charged Shares or sell or dispose the Charge Shares in its absolute discretion. It was subsequently agreed that Maiden Undertaking would assert its rights under the Charges and assign the Charged Shares to Staybest and, subject to the passing of the Resolutions, that Staybest and Wellhigh (a company introduced to ZTC by the principals of Maiden Undertaking) would support the Company by making the Investment to allow it to continue to operate and in due course, seek to acquire new businesses. 


The Board has been advised that despite the Company being registered in the United Kingdom, it is not subject to the UK Takeover Code by virtue of the fact that it is managed outside the United KingdomAccordingly, the acquisition of shares carrying in excess of 30 per cent. of the voting rights in the Company by Staybest will not trigger a mandatory requirement to make an offer for the balance of the Company's Existing Ordinary Shares. 


On the basis that the Board has no reason to believe that the Charges are not enforceable and against appropriate indemnities received from Staybest, the Directors, pursuant to the Investment Agreement, on 27 March 2009 agreed to register Staybest as the holder of the Charged Shares. As a result of the discussions with Maiden Undertaking and conditional upon the passing of the Resolutions and Admission, Staybest and Wellhigh have agreed to make the Investment which will provide the Company with sufficient working capital to operate for at least the next 12 months so that, following the passing of the Resolutions, the Company will be able to instruct Fairfax to apply to the London Stock Exchange for the suspension of dealings in the Company's shares on AIM to be lifted.


The Directors believe that Charles Huang's personal guarantee and the indebtedness of his company to Maiden Undertaking may have been the reason for his sudden disappearance. As at the date of this document, the Directors, having made reasonable enquiries, are not aware of any other circumstances which may relate to his disappearance. 


Praise Ease must be disposed of as a condition of the Investment. Praise Ease is the intermediate holding company of Zhong Tian, and since Zhong Tian is no longer considered a going concern, the Directors have concluded to dispose of Praise Ease for a nominal sum, on the terms that the Company will participate in any economic recovery of Praise Ease.


The Directors believe, based on legal advice, that ZTC is not liable for any of the liabilities within Praise Ease's subsidiary, Zhong Tian. 


You will find below details of the Proposals and a notice convening an AGM at which the Resolutions will be considered.


The Proposals

The Proposals have been formulated on the basis that at the subscription price of 23 pence following the Share Capital Reorganisation, the Existing Ordinary Shares will have an aggregate valuation of approximately £50,000. The Directors consider this valuation as appropriate because it is the approximate value of the Company's net cash assets (attributing no value to the Company's holding in Praise Ease, as described below under the heading 'Fundamental Change of Business') as at the date that its shares were suspended from trading on AIM. Since that date, this cash has been expended, in large part, in putting together the Proposals for consideration by Shareholders.


The Subscription Shares

As detailed below under the heading 'Share Capital Reorganisation', the Share Capital Reorganisation would result in the Company's share capital being divided into the New Ordinary Shares (which would have a nominal value of 1 pence each) and deferred shares of £49.99 each (which, however, would for all practical purposes be worthless as set out below).


Under the terms of the Investment Agreement, subject to the passing of the Resolutions, Staybest will subscribe for the Subscription Shares at an issue price of 23 pence per share, i.e. an aggregate

subscription amount of £21,363.55. The Subscription Shares represent approximately 29.94 per cent. of the Enlarged Ordinary Share Capital.


By virtue of Staybest's substantial shareholding in the Company for the purpose of the AIM Rules, the subscription for New Ordinary Shares by Staybest is a transaction with a related party as defined in the AIM Rules. The Directors consider, having consulted Fairfax, the Company's nominated adviser, that the terms of the subscription are fair and reasonable insofar as the Shareholders are concerned.


The Convertible Loan Notes

In addition, under the terms of the Investment Agreement, Wellhigh will advance to the Company the principal amount of £258,636.45 and the Company will issue to Wellhigh the Convertible Loan Note. The Convertible Loan Note will carry interest at a rate of 2.5 per cent. per annum (only payable if the Convertible Loan Note is not converted), is unsecured and will be repayable 24 months after the date of issue unless prior to that time the Company successfully concludes a reverse takeover in accordance with the AIM Rules, in which case the Convertible Loan Note will be subject to compulsory conversion into an aggregate amount of 1,124,506 New Ordinary Shares at the exercise price of 23 pence per share.


In addition, the Convertible Loan Note holder shall have the right to convert any amount of the convertible principal amount of the Convertible Loan Note at any time within two years from the date of issue of the Convertible Loan Note into the relevant number of New Ordinary Shares and at the exercise price set out above.


The New Ordinary Shares to be issued on conversion of the Convertible Loan Note (assuming full conversion) would amount to approximately 78.38 per cent. of the Enlarged Ordinary Share Capital of the Company, as increased by the issue thereof.


Following completion of the Proposals (including the Share Capital Reorganisation), the shareholding structure of the Company going forward would be as follows:



Shareholder Name

Following the exercise of the Charges

Following the issue of the Subscription Shares

Following the conversion of the Convertible Loan Note (in due course)

No of New Ordinary Shares

Percent.

No of New Ordinary Shares

Percent.

No of New Ordinary Shares

Percent.

Pan Europe Capital Ltd1

25,500

11.73

25,500

8.22

25,500

1.78

Albany Capital Plc

10,880

5.01

10,880

3.51

10,880

0.76

Higher Performance Team Ltd2

8,500

3.91

8,500

2.74

8,500

0.59

Others

36,500

16.79

36,500

11.76

36,500

2.54

Staybest

136,000

62.56

228,885

73.77

228,885

15.95

Wellhigh 

-

0.00

-

0.00

1,124,506

78.38


217,380

100.00

310,265

100.00

1,434,771

100.00








1 The shares in Pan-Europe Capital Limited are registered in the name of Ms. Cheung Yiu Shan (previously beneficially owned by Mr. Charles Huang)

2 The shares in Higher Performance Team Limited are beneficially owned by Michael Liu 80 per cent.. Mark Syropoulo 10 per cent. and James Guo 10 per cent.


Under the terms of the Investment Agreement, the Company has agreed to reimburse Staybest and

Wellhigh for costs and expenses incurred in implementing the Investment up to a maximum aggregate amount of £30,000 (inclusive of any VAT).


Fundamental Change of Business

The Investment Agreement is conditional, amongst other things, upon the Company's disposal of

Praise Ease, its wholly owned Subsidiary (and thereby of Zhong Tian as the wholly owned Subsidiary of Praise Ease). The business of Praise Ease is that of a holding company, whereas Zhong Tian was, until November 2008, engaged in the assembly of mobile phones. The Company has no other businesses.


The profits attributable to Praise Ease, are as follows:



Going concern value at

Amounts written off

Written down value at


Year ended 30June 2008

Year ended 30June 2008

Year ended 30June 2008


RMB

RMB

RMB

Revenue

387,865,398

-

387,865,398 

Gross profit

81,019,467

-

81,019,467 

Profit before income tax

46,271,290

(260,017,018)

(213,745,728)

Profit for the year

42,763,052

(260,017,018)

(217,253,966)

Total assets

323,412,999

(260,017,018)

63,395,981 

Total liabilities

187,148,222

-

187,148,222 

Total net assets

136,264,777

(260,017,018)

(123,752,241)

Registered capital

30,348,000

-

30,348,000 

Retained earnings

95,322,669

(260,017,018)

(164,694,349)



As set out above under the heading 'Introduction', after due investigations, taking into account the limited resources of the Company, the Directors have concluded that the Company's business in China will be unable to resume trading. In addition, the nature of the sudden shutdown of operations prevented the prompt and orderly ability to realise net assets for the benefit of Shareholders. Given potentially long, expensive and difficult recovery procedures and the Company's limited resources, the Directors have concluded that the Subsidiaries of the Company are likely to have negligible recoverable value. Further, as a condition for making the Investment, Staybest and Wellhigh have required the sale of Praise Ease.


As a result, the Praise Ease Sale Agreement provides for the sale of the entire issued share capital of Praise Ease for a nominal consideration of HK$1.00, payable in cash upon the completion of the transaction. The purchaser of Praise Ease is Mr. Li Xin, a person unconnected with the Company or any of its Directors, Proposed Directors, Shareholders, Staybest or Wellhigh.


There is outstanding an intercompany loan owed by Praise Ease to the Company in the principal

amount of £2,079,751 which the Company has agreed will only be repayable to the extent that Praise Ease is able to recover any debts or assets owed to or held by Zhong Tian (and in which case the Company will be entitled to participate to 50 per cent. in such proceeds, to be set off against said intercompany loan). 


The Praise Ease Sale Agreement is governed by the laws of Hong Kong and subject to the nonexclusive jurisdiction of the courts of Hong Kong. 


The effect of the disposal of Praise Ease would be to divest the Company of all its business and would result in a fundamental change of business for the purpose of the AIM Rules and as such requires the consent of Shareholders at a general meeting. Resolution 5 is therefore proposed as an ordinary resolution to approve the sale of the entire issued share capital of Praise Ease pursuant to the terms of the Praise Ease Sale Agreement and the disposal of Praise Ease is not conditional on other aspects of the Proposals being approved by Shareholders.


Change of Name and Website

Following the sale of Praise Ease, the Directors believe that it is appropriate to change the name of the Company and a resolution to change the name to China Evoline plc is being proposed at the AGM.


The Company has established a new website containing information in compliance with Rule 26 of the AIM Rules at www.chinaevoline.com.


Investing Strategy of the Company following the Proposals

Assuming the Proposals are implemented, the strategy of the Directors and Proposed Directors will be for the Company to invest in one or more companies established in the Asia Pacific region, but which have a significant focus on the PRC (assets, customers or suppliers) and have the need for capital prior to them achieving a flotation on the public markets, either within or outside the PRC, or achieving a trade sale in due course. Such companies will be sourced largely through the contacts of the Directors and the Proposed Directors, and any funding required by the Company to make such an investment will be raised prior thereto. While the Company is not currently able to identify the specific types of businesses which it might invest in, it is more likely than not that the sectors which will be targeted will be resources, technology and property - all areas where the Board and the Proposed Directors have existing knowledge and contacts.


The Board believes that the Directors and Proposed Directors have relevant experience in identifying, assessing, and negotiating such acquisitions. The Directors and Proposed Directors believe that their broad collective experience in acquisitions, accounting, corporate and financial management together with their wide industry contacts will enable the Company to achieve its objectives. 


Investment propositions will be considered when the Directors and Proposed Directors consider that enhanced values may be achieved. A particular consideration will be to identify investments where the Directors and Proposed Directors believe that their expertise and experience can be deployed to facilitate growth or unlock value. There is no limit to the number of projects in which the Company may invest. 


The Directors and Proposed Directors will conduct initial due diligence appraisals of potential projects and where they believe further investigation is warranted they will appoint suitably qualified, and where appropriate independent persons to conduct further due diligence.


The Company, as currently proposed, is unlikely to have sufficient cash resources to expend in undertaking due diligence on any potential projects. In the event that a suitable project is identified, the Company would either seek to raise further funds in order to finance any due diligence and acquisition costs or seek to pass on the costs to a third party, possibly in return for a success-related fee payable in shares or in cash. Staybest and Wellhigh have indicated that they would be willing to participate in the funding of such costs.


The Proposed Directors intend to take an active role in assessing and management of any investment that the Company may make. Accordingly, the Company is likely to seek participation in the board of directors of any company which the Company acquires with a view to improving its performance and using of its assets in such ways as should result in an increase in the value of such a company. The Directors and Proposed Directors hope that the resulting benefit would provide a satisfactory return to the Company's Shareholders.


In the event no substantial acquisition is made within 12 months of the date of the 2009 AGM, namely 21 April 2010, in accordance with the AIM Rules for Companies, trading in the Company's shares will be suspended and if no reverse transaction is achieved in the following 6 months, the London Stock Exchange will cancel the admission of the shares. 


Under the AIM Rules, the Investing Strategy requires shareholder approval and the Directors therefore propose that Resolution 6 be passed at the AGM.


Directors and Proposed Directors

Following the AGM, Frank Lewis will remain in his position as non-executive Chairman of the

Company, Mark Syropoulo and Michael Liu (subject to being re-elected at the AGM following his retirement by rotation in accordance with the Existing Articles) will remain Directors but in a nonexecutive capacity.


It is proposed that Yumao Zheng, Jian (aka Jeffery) Xin and Xuedong (aka Louge) Lou are appointed as new non-executive directors of the Company following the conclusion of the AGM.


Yumao Zheng, Proposed non-executive director of the Company (Age: 53)


Mr. Zheng holds a bachelor's degree in surveying from the Institution of Telecommunication

Engineering of Chengdu (now called University of Electronic Science and Technology of China) which was obtained in 1980. Mr. Zheng is currently a senior economist and the general manager of Shenzhen Zhenhua Telecommunication Equipment Limited. Mr. Zheng has over 27 years of experience in the electronics industry and is experienced in corporate management, production and financial management and investment appraisals for electronic projects. Mr. Zheng has worked with the Zhenhua Group which is principally engaged in the electronics production business, since 1980. Mr. Zheng holds or has held the following directorships or has been a partner in the following partnerships within the five years prior to the date of this document:


Current Directorships: 

Shenzhen Zhenhua Telecommunication Equipment Limited

Guizhou Zhenhua Digital Science & Technology Limited

Guizhou Zhenhua Tiantong Telecommunications Equipment Limited


Previous Directorships:

None


Jian (aka Jeffery) Xin, Proposed non-executive director of the Company (Age: 49)


Mr. Xin was educated as an electrical engineer at Tsinghua University, one of China's most renowned universities. Mr. Xin also gained an MBA from the same institution.His career to date has been primarily focused on research and development in wireless communications.

Mr. Xin is currently General Manager at Zhu Zhou Shi Jun Investments & Sponsion Co. Limited, a guarantee company which is 40 per cent. state-owned.


In 2005 Mr. Xin founded Jiu Ding Tech Co. Ltd, a company specialising in R&D for cellphone design which partnered with the Cellon Group in Canada. In late 2007 Mr Xin sold the company to Nasdaqlisted, Qiao Xing Universal Telephone Inc. From 2000 to 2005 Mr. Xin was Vice President at CEC Wireless R&D Centre Ltd (CECW), a company funded by the government that had Microsoft, Philips, Motorola and Siemens as partners. CECW was successful in introducing new wireless technologies to the Chinese market. Mr. Xin holds or has held the following directorships or has been a partner in the following partnerships within the five years prior to the date of this document:


Current Directorships:

Jiu Ding Tech Limited 

China Milestone Limited

Zhu Zhou Shi Jun Investments & Sponsion Co. Ltd.


Previous Directorships:

None


Xuedong (aka Louge) Lou, Proposed non-executive director of the Company (Age: 41)


Mr. Lou holds a Bachelor's degree in Process Equipment Design from Zhejiang University, a university regarded highly in China. In his early career (1989-1993) Mr. Lou worked with state owned companies, mainly in plastics, where he held positions as an engineer and in management.

In 1994 Mr. Lou established his own business, Hangzhou Guangsha Plastic Product Co. Ltd. Which manufactured plastic components for phones. He also founded Hangzhou Tianyin Electronic Co. Ltd. in 1996, which is primarily involved in the distribution of mobile phones. In addition, Mr. Lou owns the mobile phone brand name GML. To date he estimates that his group has RMB200m in total assets. The group has 30 stores and approximately 1200 employees and total registered capital of RMB30m. Mr. Lou has substantial commercial experience, having built up these businesses in a challenging industry over the past ten years. Mr. Lou holds or has held the following directorships or has been a partner in the following partnerships within the five years prior to the date of this document:


Current Directorships: 

Hangzhou Changjiang Tianyin Electronic Co. Ltd. 

Germany Sixq International Technology Limited

France Reyn International Holding Limited


Previous Directorships:

Hangzhou Changjiang Tianyin Trade Co. Ltd.


Save as disclosed above none of the Proposed Directors has:

(i) any unspent convictions in relation to indictable offences;

(ii) had any bankruptcy order made against him or entered into any voluntary arrangements;

(iii) been a director of a company which has been placed in receivership, compulsory liquidation, administration, been subject to a voluntary arrangement or any composition or arrangement with its creditors generally or any class of its creditors whilst he was a director of that company or within the 12 months after he ceased to be a director of that company;

(iv) been a partner in any partnership which has been placed in compulsory liquidation, administration or been the subject of a partnership voluntary arrangement whilst he was a

partner in that partnership or within the 12 months after he ceased to be a partner in that partnership;

(v) been the owner of any assets or a partner in any partnership which has been placed in receivership whilst he was a partner in that partnership or within the 12 months after he ceased to be a partner in that partnership;

(vi) been publicly criticised by any statutory or regulatory authority (including recognised professional bodies); or

(vii) been disqualified by a court from acting as a director of any company or from acting in the management or conduct of the affairs of a company.


Directors' Remuneration

Due to the limited resources available to the Company, Frank Lewis has agreed that following the

AGM, his annual remuneration in respect of services to the Company shall be reduced to £25,000 per annum until the first reverse takeover by the Company. It is intended that Mark Syropoulo, Michael Liu and the Proposed Directors will each be paid a minimal annual remuneration of £5,000 per annum on the anniversary of their appointment until the first reverse takeover by the Company, payable in New Ordinary Shares (at a subscription price of 23 pence per New Ordinary Share) or cash at their individual discretion and subject to the availability of cash in the Company at the time payment is to be made. It is proposed that all Directors' remuneration will be reconsidered following the first reverse takeover of the Company.


Waiver of Warrants and Options

Further to the Proposals, certain holders of outstanding warrants and options to subscribe for Existing

Ordinary Shares in the Company, as set out in the table below, have waived their rights thereto.


Name

Number of warrants/options held

Exercise price per Existing Ordinary Share

Oliver Vaughan

1,406,250

20 pence

Edward Vandyk

1,406,250

20 pence

Blue Oar Securities Plc

2,810,475

20 pence

Frank Lewis

100,000

20 pence

Mark Syropoulo

500,000

20 pence

Michael Liu

500,000

20 pence



In addition, a total of 1,272,500 warrants and options to subscribe for Existing Ordinary Shares at an exercise price of 20 pence per share have not been waived. Following the Share Capital Reorganisation, this equates to a total of 2,545 warrants and options to subscribe for New Ordinary Shares and the Directors consider an adjusted exercise price of £100.00 per share to be fair and reasonable. The adjusted exercise price is, however, subject to auditors' certification.

The latest date that the warrants have to be exercised by is 31 March 2010 and the latest date by which the options may be exercised is 14 May 2009 (save in respect of 500,000 options held by Charles Huang which have to be exercised by 21 July 2009).


Share Capital Reorganisation

Under the Companies Act 1985, a company may not issue shares below its par value. The Existing

Ordinary Shares have a par value of 10 pence and therefore no new Existing Ordinary Shares can be issued at a price below 10 pence. The Proposals provide for an issue of new shares at a substantial discount to 10 pence. Further, due to the fundamental change of business of the Company and the limited resources available to fund the administrative costs of the Company in dealing with its members, the Company is proposing to reorganise its share capital. This will have the effect of reducing the number of Shareholders by eliminating all those Shareholders with a shareholding of less than 10,000 Existing Ordinary Shares and reducing the par value per share, allowing for new shares to be issued, as follows:


Consolidation

It is proposed that as a first step every 10,000 issued and unissued Existing Ordinary Shares are

consolidated into 1 ordinary share of £1,000 (each a 'Consolidated Ordinary Share') so that holders of Existing Ordinary Shares will then hold one ordinary share of £1,000 for every 10,000 Existing Ordinary Shares (the 'Consolidation').


As part of the Share Capital Reorganisation the Company intends to reduce the number of

Shareholders of the Company. Therefore, any holding of less than 1 Consolidated Ordinary Share will, following the Consolidation, be aggregated and sold in the market for the benefit of the Company in accordance with article 54 of the Existing Articles. This will in particular affect Shareholders holding less than 10,000 Existing Ordinary Shares who will, following the Consolidation, cease to be Shareholders. On the basis of an estimated value of 23 pence per New Ordinary Share, the maximum capital loss which a shareholder holding fewer than 10,000 Existing Ordinary Shares may incur is £4.60.


In considering this capital loss to Shareholders of less than 10,000 Existing Ordinary Shares, the

Directors considered the fact that following the Share Capital Reorganisation, many Shareholders

would be left with a shareholding that would be so small it would be unlikely to be worth selling in the market and that the share price would have to appreciate very significantly in order for such

Shareholders to be able to sell without dealing costs absorbing a very large proportion of any consideration due. Also, the Directors believe that such Shareholders may be better served by the

Company if they are able to realise their losses for tax purposes. The Directors are satisfied that the savings in administrative costs to the Company in dealing with its members will benefit the Company in the long term.


The costs of distribution of small sums to Shareholders are significant and therefore, having considered the situation carefully and having made enquiries of the registrars to the Company as to the cost of producing and distributing cheques, Fairfax, as the Company's nominated adviser, has given permission, in accordance with Article 54 of the Existing Articles that an amount greater than £3, which would otherwise be distributable to a member as a result of the Consolidation, may be retained by the Company for its benefit.


The Consolidation will also reduce the number of Shareholders in the Company, thus reducing its administrative costs.


In order to ensure that the number of authorised but unissued Existing Ordinary Shares prior to the

Share Capital Reorganisation is divisible by a factor of 10,000, it is proposed to initially increase the authorised share capital of the Company from £17,980,850 to £17,981,000 by the creation of 1,500 Existing Ordinary Shares.


In addition, Higher Performance Team Limited, a company beneficially owned by Michael Liu 80 per cent. Mark Syropoulo 10 per cent. and James Guo 10 per cent., has agreed to subscribe for 4,990 Existing Ordinary Shares and Frank Lewis has agreed to subscribe for 2,494 Existing Ordinary Shares in order to ensure that the number of Existing Ordinary Shares in issue prior to the Share Capital Reorganisation is divisible by a factor of 10,000. Higher Performance Team Limited and Frank Lewis have agreed to subscribe for those shares at a subscription price of 10 pence per Existing Ordinary Share, despite the fact that they will be 'lost' following the consolidation as described above. The Board is authorised to issue shares to Higher Performance Team Limited and Frank Lewis for the purpose of sections 80 and 95 of the Companies Act 1985 pursuant to resolutions passed by the Company on 17 January 2008 (and which authorities will expire on 17 April 2009).


First Sub-Division

It is further proposed that as a second step following the Consolidation every issued and unissued

Consolidated Ordinary Share is sub-divided and converted into 20 ordinary shares of £50.00 each, credited as fully paid up (the 'First Sub-Division').


The combined outcome of the Consolidation and the First Sub-Division of the Existing Ordinary Shares is an effective one for 500 share consolidation.


Second Sub-Division

As a third step, it is proposed that every ordinary share of £50.00 each (both issued and unissued) following the Consolidation and the First Sub-Division be sub-divided and converted into 1 ordinary share of 1 pence and 1 deferred share of £49.99 each, credited as fully paid up (the 'Second Sub- Division').


Accordingly, as a result, for each ordinary share of £50.00 held by Shareholders following the

Consolidation and First Sub-Division, they will, following the Second Sub-Division, hold 1 ordinary share of 1 pence and 1 deferred share of £49.99 in the capital of the Company. 


The reason behind the proposed Second Sub-Division is that section 100 of the Companies Act 1985 provides that a company may not allot shares at a discount to their nominal value and in the event of a contravention the allottee will remain liable to pay the company an amount equal to the amount of the discount, with interest at the appropriate rate. 


As a result, the Company would only be able to raise further funds by issuing shares at or above their nominal value of £50.00 per share (which would not be realistic given that the Directors consider a market value of 23 pence per share to be appropriate as described above).


It is therefore proposed that every ordinary share of £50.00 following the first Sub-Division be subdivided and converted into 1 New Ordinary Share of 1 pence and 1 deferred share of £49.99.


The New Ordinary Shares

The New Ordinary Shares will have the same rights as those currently accruing to the existing ordinary shares under the Existing Articles, including those relating to voting dividends and return of capital and the way in which Shareholders buy or sell ordinary shares will not be affected by the approval of the Share Capital Reorganisation. The deferred shares of £49.99 each will have no real rights as to dividends, voting or capital and will for all practical purposes be worthless. The deferred shares will not be listed or quoted on any recognised investment exchange and it is the Company's intent in due course to make arrangements for the cancellation of the deferred shares.


As all Existing Ordinary Shares will be consolidated and converted, the percentage interest of each shareholder in the entire issued share capital of the Company immediately before and after the Share Capital Reorganisation will be unchanged, save for any entitlement of Shareholders to fractions of Consolidated Ordinary Shares which will be sold for the benefit of the Company. 


The existing share certificates relating to the Existing Ordinary Shares will cease to be valid following the Share Capital Reorganisation. New share certificates representing the New Ordinary Shares will be issued to Shareholders following the Share Capital Reorganisation. In the case of uncertificated holders of ordinary shares, Euroclear (as the operator of CREST) will be instructed to credit the Shareholders' CREST accounts with the New Ordinary Shares. No share certificates will be sent to Shareholders in respect of the deferred shares. 


It is further proposed that, following the Share Capital Reorganisation, that the authorised share capital of the Company is to be further increased by £30,000 by the creation of 3,000,000 New Ordinary Shares.


Adoption of New Articles

It is proposed that New Articles are adopted to replace the Existing Articles in order to reflect the provisions of the Companies Act 2006 and the Share Capital Reorganisation.


Loss of Capital

The losses incurred in the period and subsequent to 30 June 2008 have resulted in the net assets of the Company, as at the date of this document, being less than half of the Company's paid-up share capital. Section 142 of the Companies Act 1985 requires the Directors to convene a general meeting of the Company for the purpose of considering whether any, and if so what, measures should be taken to deal with the situation.


While there can be no certainty that the Company will be successful in achieving its aims, the Board has no alternative proposals to place before Shareholders at the present time other than the Proposals and believes that its plans as set out in this document represent the best available strategy to deal with the loss of capital. Accordingly, the Directors do not consider that any further steps need to be taken at present to deal with the Company's net asset situation, although Shareholders will nonetheless have an opportunity at the Annual General Meeting to raise any matters relevant to the loss of capital.


Annual General Meeting

There is attached to this document the Notice convening an Annual General Meeting of the Company to be held on 21 April 2009 at which the Resolutions will be proposed to, amongst other things, approve the Praise Ease Sale Agreement, the Investing Strategy, to increase the authorised share capital, to restructure the share capital, to give the Directors authority to issue the New Ordinary Shares, to adopt the New Articles and to change the name of the Company.


The Resolutions that are to be proposed at the AGM can be summarised as follows:


Resolutions 1 to 4 - Ordinary business

Resolutions 1 to 4 will be proposed to transact the ordinary business of the Company in accordance with article 61 of the Existing Articles.

Resolution 5 - To approve the Praise Ease Sale Agreement

This resolution is to be proposed at the AGM as an ordinary resolution for the Shareholders to approve the disposal of Praise Ease pursuant to the Praise Ease Sale Agreement.


Resolution 6 - To approve the Company's Investing Strategy

This resolution is to be proposed at the AGM as an ordinary resolution for the Shareholders to approve the Company's Investing Strategy.


Resolution 7 - Share Capital Reorganisation

This resolution is to be proposed at the AGM as an ordinary resolution to implement the Share Capital Reorganisation.


Resolution 8 - To further increase the authorised share capital

This resolution to be proposed at the AGM is an ordinary resolution to increase the Company's authorised share capital by £30,000 by the creation of 3,000,000 New Ordinary Shares.


If Resolution 7 is not passed and, as a result, the Share Capital Reorganisation does not take place, the Chairman of the AGM will propose to the meeting that the authorised share capital of the Company be increased by the issue of the relevant amount of Existing Ordinary Shares to reflect the fact that the nominal amount of each ordinary share remains 10 pence.


Resolution 9 - Authority to allot shares

Under the Companies Act 1985, the directors of a company may only allot unissued shares if authorised to do so by the shareholders in general meeting. Resolution 9 renews the Directors' existing authority by authorising the Directors to allot shares up to an aggregate nominal amount of £29,956.52. 


The authority will expire on whichever is the earlier of the date of the next annual general meeting of the Company or the date falling 15 months after the passing of the resolution. This represents 2,995,652 ordinary shares of 1 pence each (following the Share Capital Reorganisation) in the capital of the Company and is equivalent to approximately 33.12 per cent. of the Company's current issued ordinary share capital as enlarged by the allotment of ordinary shares following the satisfaction of all of the Company's outstanding contractual commitments to allot shares, the exercise of all outstanding employee and external share options (and following the Share Capital Reorganisation).


If Resolution 7 is not passed and, as a result, the Share Capital Reorganisation does not take place, the Chairman of the AGM will propose to the meeting that the aggregate nominal amount of the authority be proportionally increased by way of amendment to the Resolution proposed to reflect the fact that the nominal amount of each ordinary share remains 10 pence.


Resolution 10 - Limited authority to allot shares for cash

The Directors may only allot shares for cash otherwise than on a non pre-emptive basis to existing Shareholders in the Company if authorised to do so by the Shareholders in general meeting.


This resolution renews power for the Directors to allot New Ordinary Shares for cash and/or sell or transfer shares held by the Company in treasury without first offering them to existing members up to an aggregate nominal amount of £24,372.10. This will allow the Company to issue 2,437,210 New Ordinary Shares to be subscribed for by Staybest under the terms of the Investment Agreement and issue shares to Wellhigh in the event of conversion of the Convertible Loan Note and to issue further shares to fund the costs of investigating and acquiring potential targets in order to implement the Investing Strategy. 


This authority will represent 2,437,210 ordinary shares of 1 pence each (following the Share Capital Reorganisation), being equivalent to approximately 10 per cent. of the Company's current issued ordinary share capital as enlarged by the allotment of ordinary shares following the satisfaction of all of the Company's outstanding contractual commitments to allot shares, the exercise of all outstanding employee and external share options (and following the Share Capital Reorganisation). The Directors will use such authority in the circumstances where it is in the best interest of the Company to issue small amounts of shares other than to existing Shareholders.


The resolution also enables the Directors to modify the strict requirements for a rights issue in circumstances where they consider it necessary or expedient. 


The authority will expire on whichever is the earlier of the date of the next Annual General Meeting of the Company or the date following 15 months after the passing of the resolution. 


If Resolution 7 is not passed and, as a result, the Share Capital Reorganisation does not take place, the Chairman of the AGM will propose to the meeting that the aggregate nominal amount of the authority be proportionally increased by way of amendment to the Resolution proposed to reflect the fact that the nominal amount of each ordinary share remains 10 pence.


Resolution 11 - Purchase of the Company's own shares

This resolution renews and extends authority from Shareholders for the Company to purchase up to 32,585 ordinary shares of 1 pence each (following the Share Capital Reorganisation), an aggregate nominal amount of £325.85, which is equivalent to approximately 14.99 per cent. of the Company's current issued ordinary share capital (following the Share Capital Reorganisation).


The authority will expire at the end of the next Annual General Meeting and the resolution specifies the maximum and minimum prices at which the ordinary shares may be bought. Other investment opportunities, appropriate gearing levels and the overall financial position of the Company will be taken into account before deciding upon this course of action. Any ordinary shares purchased in this way will be held by the Company in treasury and may then be sold for cash, transferred to an employee share scheme or cancelled. The Board has no immediate intention of exercising the proposed authority when it becomes effective, but believes that the ability of the Company to buy its own ordinary shares when, in the Board's opinion, market prices do not reflect the Company's worth, will be in the best interests of the Company and its Shareholders. 


If Resolution 7 is not passed and, as a result, the Share Capital Reorganisation does not take place, the Chairman of the AGM will propose to the meeting that the reference to the nominal amount of the ordinary shares subject to the authority, the maximum number of ordinary shares and the minimum price which may be paid for an ordinary share be amended to reflect the fact that the nominal amount of each ordinary share remains 10 pence.


Resolution 12 - Change of name

It is proposed that the name of the Company is to be changed to China Evoline Plc.


Resolution 13 - Adoption of New Articles

It is proposed in Resolution 13 to adopt the New Articles in order to update the Existing Articles primarily to take account of changes in English company law brought about by the Companies Act

2006. The principal changes introduced in the New Articles are summarised in the Explanatory Notes to Resolution 13 on page 39 of the circular. Other changes, which are of a minor, technical or clarifying nature and also some more minor changes which merely reflect changes made by the Companies Act 2006 have not been noted in the Appendix. The New Articles showing all the changes to the Existing Articles and a copy of the New Articles will be available for inspection between the hours of 10 a.m. and 12 noon on any weekday (Saturdays, Sundays and public holidays excepted) at the Company's registered office at 14 New Street, London EC2M 4HE from the date of this notice until the date of the AGM and at the AGM itself.


ACTION TO BE TAKEN

The Form of Proxy for use by Shareholders at the Annual General Meeting is enclosed. If you are

unable to be present at the Annual General Meeting, please complete and sign the Form of Proxy and return it to the Company's registrars, Capita Registrars, The Registry, 34 Beckenham Road,

Beckenham, Kent BR3 4TU, to be received as soon as possible and, in any event, by no later than 10.00 a.m. 19 April 2009.


You are entitled to appoint a proxy to attend and to exercise all or any of your rights to vote and to speak at the Annual General Meeting instead of you. However, the completion and return of the Form of Proxy will not prevent you from attending the Annual General Meeting and voting in person if you wish to do so. Your attention is drawn to the notes to the Form of Proxy.


The Directors consider that the proposals outlined in this letter are in the interests of Shareholders and recommend that Shareholders vote in favour of the Resolutions as those of the directors who hold Existing Ordinary Shares propose to do in respect of all of their holdings of Existing Ordinary Shares, amounting in total to 4,257,494 Existing Ordinary Shares which represents to 3.91 per cent. of the issued Existing Ordinary Shares. 


Staybest has irrevocably undertaken to vote the Charged Shares in favour of the Resolutions (representing approximately 62.57 per cent. of the Existing Ordinary Shares). In addition, Albany Capital plc has given a similar undertaking to vote in favour of the Resolutions (representing approximately 5.01 per cent. of the Existing Ordinary Shares).


Yours sincerely


Frank Lewis

Chairman


This information is provided by RNS
The company news service from the London Stock Exchange
 
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