SCHEDULE
14C INFORMATION
INFORMATION
STATEMENT PURSUANT TO SECTION 14(C) OF THE
SECURITIES
EXCHANGE ACT OF 1934
(Amendment
No. 3)
Check the
appropriate box:
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x
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Preliminary
Information Statement
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Confidential,
for Use of the Commission Only (as permitted by
Rule 14c-5(d)(2))
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Definitive
Information Statement
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KID
CASTLE EDUCATIONAL CORPORATION
(Name
of Registrant as Specified in Charter)
Payment
of Filing Fee (Check the appropriate box):
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o
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Fee
computed on table below per Exchange Act Rules 14c-5(g) and
0-11.
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(1)
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Title
of each class of securities to which transaction
applies:
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(2)
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Aggregate
number of securities to which transaction
applies:
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(3)
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Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was
determined):
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(4)
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Proposed
maximum aggregate value of
transaction:
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Fee
paid previously with preliminary
materials.
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Check
box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a) (2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its
filing.
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(1)
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Amount
Previously Paid:
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(2)
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Form,
Schedule or Registration Statement
No.:
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KID
CASTLE EDUCATIONAL CORPORATION
8th
Floor, No. 98 Min Chuan Road
Hsien
Tien, Taipei, Taiwan ROC
Taipei,
Taiwan
(886)
2-2218-5996
Dear
Shareholders:
The
purpose of this letter is to inform you that the requisite majority of the
shareholders of Kid Castle Educational Corporation has approved amendments to
the Company’s articles of incorporation that will effect a 5,000 for 1 reverse
stock split of the Company’s common stock, followed immediately by a 1 for 5,000
forward stock split. In conjunction with the reverse split, those
shareholders who will hold less than a full share after the reverse split
(because they held less than 5,000 shares before the reverse split) will receive
a cash payment of $0.18 per pre-split share in lieu of receiving a fractional
post-split share.
These
actions were recommended for approval on June 5, 2009 by a special Independent
Committee of the Board of Directors made up of members who are independent from
the management and the Company and have no economic interest in the transaction.
Based on the Independent Committee’s recommendation and its own evaluation, our
full Board of Directors approved these actions on June 11, 2009. Two
members of our senior management who collectively hold a majority in interest of
our issued and outstanding common stock approved this action by written consent
in lieu of a special meeting of our shareholders on June 17, 2009
in accordance with the
relevant sections of the Florida Business Corporations Act and our articles of
incorporation.
The
amendments will only be effective after they are filed with the Secretary of
State of Florida. We intend to file the amendments approximately 25 days after
the date that this Information Statement is first mailed to our
shareholders.
WE ARE
NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
No action
is required by you. The accompanying Information Statement is furnished only to
inform our shareholders of the actions described above before they take place in
accordance with Rule 14c-2 of the Securities Exchange Act of 1934. This
Information Statement is first made available to you by posting on the Internet
on or about
[ ],
2009.
Often
referred to as a “going-private transaction,” these corporate actions will
reduce the number of holders of record of our common stock to less than 300 and
enable us to terminate the registration of our common stock under Section 12(g)
of the Securities Exchange Act of 1934. The termination of our Exchange Act
registration will eliminate the significant expense required to comply with the
reporting and related requirements under these laws.
The
Independent Committee has reviewed the transaction and considered its fairness
to the unaffiliated shareholders of the Company (those who are not officers,
directors or hold 10% or more of the Company’s shares). After careful
consideration, the Independent Committee believes that the transaction is in the
best interests of the unaffiliated shareholders (including continuing as well as
cashed out shareholders) and that the per share cash amount to be paid to the
cashed out shareholders is fair.
The
attached document contains details on the transaction and we urge you to read it
very carefully.
You may
call us at (886) 2-2218-5996 Ext. 210 if you have any questions on the enclosed
Information Statement. We thank you for your continued interest in Kid
Castle.
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For
the Board of Directors of
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KID
CASTLE EDUCATIONAL
CORPORATION
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By:
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Min-Tan
Yang
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Chief Executive
Officer
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_____________,
2009
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TABLE
OF CONTENTS
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Page
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SUMMARY
TERM SHEET
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2
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The
Transaction
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2
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Purposes
of and Reasons for the Transaction
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3
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Effects
of the Transaction
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3
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Potential
Advantages of the Transaction
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4
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Potential
Disadvantages of the Transaction
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5
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Independent
Committee and Fairness
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6
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Potential
Conflicts of Interest
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7
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Determination
of Shareholders of Record
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7
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Payment
to Cashed Out Shareholders
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8
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Effective
Date of the Transaction
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8
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Financing
for the Transaction
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8
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Recent
Market Prices of the Company’s Common Stock
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9
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No
Appraisal or Dissenter Rights
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9
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Material
Federal Income Tax Consequences
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9
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Reservation
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9
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QUESTIONS
AND ANSWERS ABOUT THE TRANSACTION
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9
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What
does it mean to “deregister” our common stock?
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10
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What
are the Pink Sheets?
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10
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What
will I receive in the Transaction?
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10
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Why
wasn’t it necessary to hold a shareholders meeting to approve the
Transaction?
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10
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What
if I hold fewer than 5,000 shares of common stock and hold all of my
shares in “street name”?
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11
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What
happens if I own a total of 5,000 or more shares of common stock
beneficially, but I hold fewer than 5,000 shares of record in my name and
fewer than 5,000 shares of with my broker in street
name?
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11
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If
I own fewer than 5,000 shares of common stock, is there any way I can
continue to be a shareholder of the Company after the
Transaction?
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11
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Is
there anything I can do if I own 5000 or more shares of common stock, but
would like to take advantage of the opportunity to receive cash for my
shares as a result of the Transaction?
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12
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Should
I send in my certificates now?
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12
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What
is the total cost of the Transaction to the Company?
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12
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SPECIAL
FACTORS
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12
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Purpose
of and Reasons for the Transaction
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12
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Effects
of the Transaction
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14
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OTC
Bulletin Board; Pink Sheets Quotation
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20
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Independent
Committee Deliberations and Fairness
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21
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Board
of Directors’ Deliberations
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24
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Mr.
Yang’s Deliberations
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25
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Valuation
Report of Polaris Securities
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25
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Alternatives
to the Transaction
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29
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Potential
Conflicts of Interests of our Officers and Directors
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31
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Plans
for the Company after the Transaction
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33
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Material
Federal Income Tax Consequences
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34
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Effective
Date of Transaction
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41
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Exchange
of Certificates and Payment for Fractional Shares
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41
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No
Appraisal or Dissenters’ Rights
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43
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Escheat
Laws
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43
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Source
of Funds and Expenses
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43
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Reservation
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44
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INFORMATION
ABOUT THE COMPANY
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45
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Market
Price of Common Stock
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45
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Dividends
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46
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Trading
Volume
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46
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Shareholders
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46
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The
Filing Person
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46
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Stock
Purchases by Filing Parties
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47
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Directors
and Executive Officers
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47
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Information
Concerning the Board of Directors and Executive
Officers
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47
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Security
Ownership of Certain Beneficial Owners
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48
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SUMMARY
FINANCIAL INFORMATION
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49
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WHERE
YOU CAN FIND MORE INFORMATION
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51
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DOCUMENTS
INCORPORATED BY REFERENCE
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51
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EXHIBITS
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KID
CASTLE EDUCATIONAL CORPORATION
8th
Floor, No. 98 Min Chuan Road
Hsien
Tien, Taipei, Taiwan ROC
Taipei,
Taiwan
(886)
2-2218-5996
WE
ARE NOT ASKING YOU FOR A PROXY, AND YOU ARE REQUESTED NOT TO
SEND
US A PROXY.
GENERAL
On June
17, 2009, in accordance with the relevant sections of the Florida Business
Corporations Act and our articles of incorporation, two senior members of our
management who collectively own 67% of our common stock, acting in their
capacity as shareholders, approved amendments to our articles of incorporation
that will effect a 5,000 for 1 reverse stock split of our common stock, followed
immediately by a 1 for 5,000 forward stock split (the
“Transaction”). The two senior members of our management, who we
sometimes refer to as the “management group” are Mr. Suang-Yi Pai, our Chairman
of the Board of Directors, and Mr. Min-Tan Yang, our Chief Executive
Officer.
The
ability of the management group to take these actions without holding a
shareholders meeting is made possible by Section 607.0704 of the Florida
Business Corporations Act, which provides that shareholders holding at least the
minimum number of votes required to take action at a meeting may pass the action
by signing a written consent. In order to avoid the costs involved in
holding a special meeting of our shareholders, our Board of Directors voted to
utilize the written consent format.
This
Information Statement is first being made available on the Internet on or about
[___], 2009 to shareholders of record of the Company as of June 17,
2009. This Information Statement is being delivered only to inform
you of the corporate actions described herein before they take effect in
accordance with Rule 14c-2 of the Securities Exchange Act of 1934 as
amended (the “Exchange Act”).
The
entire cost of furnishing this Information Statement will be borne by the
Company. We will request brokerage houses, nominees, custodians, fiduciaries and
other like parties to forward this Information Statement to the beneficial
owners of our voting securities held of record by them, and we will reimburse
them for out-of-pocket expenses they incur in forwarding the Information
Statement.
Neither
the Securities and Exchange Commission (the “SEC”) nor any state securities
commission has (i) approved or disapproved of this transaction; (ii) passed
upon the merits or fairness of the transaction; or (iii) passed upon the
adequacy or accuracy of the disclosure in this Information Statement. Any
representation to the contrary is a criminal offense.
SUMMARY
TERM SHEET
This
summary highlights selected information from this Information Statement about
the Transaction. This summary may not contain all of the information that is
important to you. For a more complete description of the transaction, you should
carefully read this Information Statement and all incorporated documents in
their entity. For your convenience, we have directed your attention
to the location in this Information Statement where you can find a more complete
discussion of each item listed below.
As used
in this disclosure document, “Kid Castle,” “Company,” “we,” “ours” and “us”
refers to Kid Castle Educational Corporation and its
subsidiaries. References to the “common stock” refer to the Company’s
common stock.
The
Transaction
Pursuant
to the reverse stock split, each 5,000 outstanding shares of common stock will
be combined into one share of common stock. Fractional shares
will be permitted, but each shareholder holding fewer than 5,000 shares prior to
the reverse split will be “cashed out” by receiving $0.18 for each share held
prior to the reverse split.
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A
special committee of the Board of Directors comprised solely of
independent directors, which we refer to in this Information Statement as
the “Independent Committee,” and the Board of Directors has each reviewed,
recommended and authorized a 1 for 5,000 reverse stock split of our common
stock, followed immediately thereafter by a 5,000 for 1 forward stock
split of our common stock. Shareholders owning fewer than 5,000 shares at
the effective time of the reverse stock split, whom we refer to as “cashed
out shareholders,” will receive $0.18 in cash, without interest, for each
share held at the effective time of the reverse stock split, and they will
no longer be shareholders of the
Company.
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Shareholders
who own 5,000 or more shares at the effective time of the Transaction,
whom we refer to as “continuing shareholders,” will not be entitled to
receive any cash for their fractional share interests, if any, resulting
from the reverse stock split. The effective time of the
Transaction will be approximately 25 days after this Information Statement
(definitive version) has been filed with the
SEC.
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The
forward stock split that will immediately follow the reverse stock split
will reconvert whole shares and fractional share interests held by the
continuing shareholders back into the same number of shares of our common
stock that they held immediately before the effective time of the
Transaction. As a result, the total number of shares of our common stock
held by a continuing shareholder will not
change.
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See
“Effects of the Transaction” below in this summary beginning on page 3 and in
“SPECIAL FACTORS — Effects of the Transaction” beginning on page
14.
Purposes
of and Reasons for the Transaction
The
Company’s purpose and reasons for undertaking the Transaction at this time is to
reduce the costs and administrative burdens of maintaining public reporting
obligations in the United States while at the same time allowing shareholders
with small holdings in the Company to immediately realize the value of their
investment through their receipt of the per share Transaction consideration of
$0.18 in cash. This represents a premium of $0.13 over $0.05, which
was the last trade reported of our common stock on the OTCBB on June 2, 2009,
which was the last trade reported as of June 16, 2009. The
potential advantages of the transaction are enumerated in more detail
below. The purpose of and reasons for undertaking the Transaction for
our largest shareholder and Chief Executive Officer, Min-Tan Yang, are the same
as those of the Company. Mr. Yang is personally engaged in the
Transaction by virtue of his purchase of additional shares of our common stock
to finance the Transaction. Regarding Mr. Yang see “— Potential Conflicts of
Interests”, beginning on page 7 in this summary, and “SPECIAL FACTORS —
Potential Conflicts of Interests of our Officers and Directors” beginning on
page 30. Regarding the purposes of the transaction see also “SPECIAL
FACTORS — Purpose of and Reasons for the Transaction” beginning on page
12.
Effects
of the Transaction
The
Transaction will reduce the number of record holders of our common stock to less
than 300 as calculated under SEC Rule 12g5-1 and enable us to terminate the
registration of our common stock under Section 12(g) of the Exchange
Act. By terminating our registration with the SEC, we will no longer
be required to submit public disclosure documents with the SEC.
Other
Effects of the Transaction are:
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Our
common stock will no longer be quoted on the
OTCBB.
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We
will no longer be subject to the provisions of the Sarbanes-Oxley Act,
including the internal control provisions of that Act, and our chief
executive officer and chief financial officer will no longer be required
to certify our financial statements under that
Act.
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Our
officers, directors and 10% shareholders (referred to as “affiliates”)
will no longer be subject to the reporting requirements of Section 16
of the Exchange Act or be subject to the prohibitions against retaining
short-swing profits in connection with trades of our common
stock.
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Holders
of fewer than 5,000 shares of our common stock at the effective time of
the reverse stock split will receive a cash payment of $0.18, without
interest, for each share of common stock they hold, will no longer have
any ownership interest in us, and will cease to participate in any of our
future earnings and growth.
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Continuing
holders – those holding 5,000 or more shares of our common stock at the
effective time of the Transaction – will not receive any payment for their
shares and will continue to hold the same number of shares as before the
Transaction.
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Since
our obligation to file periodic and other filings with the SEC will be
suspended, continuing shareholders will no longer have access to publicly
filed audited financial statements, information about executive
compensation and other information about us and our business, operations
and financial performance.
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The
percentage of our common stock held by Mr. Yang, increased from 45% to 54%
as a result of his purchase of 5,000,000 shares of our common stock at
$0.18 per share to finance the Transaction and the operations of the
Company thereafter. An additional effect of the Transaction on
Mr. Yang is that it will reduce the number of minority
shareholders. See “SPECIAL FACTORS — Potential Conflicts of
Interests of our Officers and Directors” beginning on page
29.
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After
taking into account Mr. Yang’s purchase of 5,000,000 shares, the ownership
percentage of our common stock held by our directors and executive
officers will increase nominally as a result of the reduction of the
number of shares of common stock outstanding by approximately 1,683,333
shares pursuant to the fractional share cashout. See “SPECIAL
FACTORS — Potential Conflicts of Interests of our Officers and Directors”
beginning on page 29.
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Potential
Advantages of the Transaction
The
Independent Committee and the Board of Directors believes that the Transaction
may have the following advantages to the Company, among others:
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By
completing the Transaction, deregistering our shares and eliminating our
obligations under the Sarbanes-Oxley Act and our periodic reporting
obligations under the Exchange Act, we expect to save in excess of
$298,000 annually (which by way of illustration is an amount equal to
approximately 36% of our net income in
2008);
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We
will be able to eliminate the expense of approximately $6,000 per annum
associated with maintaining shareholder accounts for numerous shareholders
with small accounts;
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Small
shareholders will not be obligated to pay any commissions in connection
with the Transaction; however if you hold your shares through a nominee,
your nominee may charge you a fee;
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We
will be able to provide complete liquidity for the relatively large number
of record shareholders holding fewer than 5,000 shares, whereas there has
been limited liquidity available through the public market, and will be
able to do so through a transaction in which these cashed out shareholders
generally may be eligible to receive capital gains tax treatment for their
proceeds; and
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We
may benefit from not having to reveal detailed financial and operational
information to the public and our competitors in the
future.
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To Mr.
Yang, the Transaction has the foregoing advantages plus the additional advantage
that his share of ownership of the Company as a result of his purchase of
5,000,000 shares to finance the Transaction has increased from 45% to 54% and
the number of minority shareholders will be reduced as a result of the cashout
in conjunction with the Reverse Split. See also information under the
caption “SPECIAL FACTORS — Purposes of and Reasons for the Transaction”
beginning on page 13.
Potential
Disadvantages of the Transaction
The
Independent Committee and the Board of Directors believes that the Transaction
may have, among others, the following disadvantages to the Company:
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Shareholders
owning fewer than 5,000 shares of our common stock will not be able to
liquidate their shares at a time and for a price of their choosing;
instead, they will be cashed out, will no longer be shareholders of our
Company and will not have the opportunity to participate in or benefit
from any future potential appreciation in our
value;
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Shareholders
holding our common stock following the Transaction will no longer have
readily available to them all of the legally mandated information
regarding our operations and financial results that is currently available
in our filings with the SEC;
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It
will be more difficult for us to access the public capital markets in the
United States;
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The
termination of our Exchange Act registration will make many of the
provisions of the Exchange Act, such as certain short-swing profit
provisions of Section 16, the proxy solicitation rules under
Section 14 and the stock ownership reporting rules under
Section 13, no longer
applicable;
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The
Sarbanes-Oxley Act, which imposed many additional rules and
regulations on public companies that were designed to protect investors,
will no longer apply to us;
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Shareholders
will no longer have certain other rights and protections that the federal
securities laws give to shareholders of public
companies;
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Control
of the corporation is now more concentrated in Mr. Yang as a result of his
increase in percentage ownership of the Company from 45% to
54%.
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To Mr.
Yang, the Transaction has the foregoing disadvantages except that the increase
in his control power by virtue of his increase in percentage ownership and
removal of the requirement to comply with Sections 13, 14, and 16 of the
Exchange act are advantages, rather than a disadvantages to him. See
also information under the captions “SPECIAL FACTORS — Purpose of and Reasons
for the Transaction” beginning on page 13, “SPECIAL FACTORS — Effects of the
Transaction” beginning on page 14, “SPECIAL FACTORS — Independent Committee
Deliberations and Fairness” beginning on page 21 and “SPECIAL FACTORS —
Potential Conflicts of Interests of our Officers and Directors” beginning on
page 29.
Independent
Committee and Fairness
The
Transaction was approved by Mr. Yang and by the Board of Directors upon the
recommendation of the Independent Committee, which consists of directors
Ming-Tsung Shih and Robert Theng, neither of whom is an employee of the Company,
owns any Company shares, nor has any economic interest in the
Transaction. The Independent Committee was formed to evaluate the
feasibility and fairness of the Transaction from a financial point of view to
the unaffiliated cashed out shareholders as well as the unaffiliated continuing
shareholders. The Independent Committee’s recommendation was based in
part upon the valuation report provided to the Independent Committee by Polaris
Securities Co., Ltd. (“Polaris Securities”).
The
Independent Committee, the Board of Directors and Mr. Yang considered a number
of factors in reaching their respective determinations, including:
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the
information in the valuation report prepared by Polaris Securities and its
opinion that the fair value of our common stock is from $0.160 to $0.184
per share;
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the
limited trading volume and liquidity of our shares of common stock given
that the Transaction will enable our smallest shareholders, who represent
a disproportionately large number of our record holders, to liquidate
their holdings in shares of common stock and receive a premium over market
prices prevailing at the time of our public announcement of the
Transaction, without incurring brokerage
commissions;
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the
relatively small effect of the Transaction on the relative voting power of
continuing shareholders after the Capital Injection (as described below
under “Potential Conflicts of Interest” beginning on page
7);
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the
projected tangible and intangible cost savings to us by terminating our
status as an SEC reporting company;
and
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our
business and operations are expected to continue substantially as
presently conducted but with reduced cost
structure.
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See
“SPECIAL FACTORS — Valuation Report of Polaris Securities” beginning on page 24
and “SPECIAL FACTORS — Independent Committee Deliberations and Fairness”
beginning on page 21.
Potential
Conflicts of Interest
Our
only officers and directors who hold or beneficially own shares in the Company
are Mr. Suang-Yi Pai, our Chairman of the Board and acting CFO, and
Mr. Min-Tan Yang our CEO, a director and our largest
shareholder. No other shareholder beneficially owns more than 5% of
our stock. In this Information Statement we sometimes refer to Mr.
Pai and Mr. Yang together as the “management group”. On June 17,
2009, in order to finance the costs of the Transaction and the operations of the
Company following the Transaction, Mr. Yang purchased from us 5,000,000 shares
of our newly issued common stock at $0.18 per share for an aggregate purchase
price of $900,000. The purchase of stock by Mr. Yang (which we refer
to as the “Capital Injection”) was reviewed and approved by the Independent
Committee in conjunction with its overall review and approval of the
Transaction. As a result of the Capital Injection, Mr. Yang’s percentage share
of the Company’s voting stock increased from 45% to 54%. As of June
17, 2009, Messrs. Pai and Yang collectively owned 20,096,915 shares, or 67% of
our issued and outstanding shares eligible to vote to approve the
Transaction. Messrs. Pai and Yang each voted to approve the
Transaction. Because they will continue to be officers in the
Company, on the Board, and controlling shareholders after the Transaction,
Messrs. Pai and Yang have interests that are different from cashed out as well
as continuing unaffiliated shareholders, which interests may present a conflict.
Upon the effectiveness of the Transaction (and taking into account the Capital
Injection which closed on June 17, 2009), the aggregate number of shares of our
common stock owned by Messrs. Pai and Yang will not change but their
ownership percentage of eligible voting shares will increase slightly as a
result of the reduction of the number of shares of our common stock outstanding
by approximately 1,683,333 shares. The Independent Committee was
formed, and the services of Polaris Securities were obtained, to help ensure
that the Transaction is fair to all shareholders both procedurally and
substantively. See “SPECIAL FACTORS — Potential Conflicts of Interest
of our Officers and Directors” beginning on page 29.
Determination
of Shareholders of Record
In
determining whether the number of our shareholders of record falls below 300 as
a result of the Transaction, we will count shareholders of record in accordance
with Rule 12g5-1 under the Exchange Act and applicable SEC interpretations. Rule
12g5-1 provides, with certain exceptions, that in determining whether issuers,
including the Company, are subject to the registration provisions of the
Exchange Act, securities are considered to be “held of record” by each person
who is identified as the owner of such securities on the respective records of
security holders maintained by or on behalf of the issuers. However,
institutional depositories such as Cede & Co. are not considered a
single holder of record for purposes of these provisions. Rather,
Cede & Co.’s and similar depositories’ accounts are treated as the
individual holders of shares. Based on information available to us as of June
15, 2009, there were approximately 1,434 holders of record of our shares of
common stock counting in this manner. See “SPECIAL FACTORS — Effects
of the Transaction” beginning on page 14.
Payment
to Cashed Out Shareholders
Shareholders
holding less than 5,000 pre-split shares at the effective time of the
Transaction will receive a cash payment. Within one week that the
Transaction is effective, our transfer agent will mail to shareholders to be
cashed out a Letter of Transmittal that explains how they can surrender their
share certificates in exchange for their cash payment. Those
shareholders entitled to a cash payment should not turn in their share
certificates until they receive the Letter of Transmittal. We will
not pay interest on cash sums due to any shareholder in connection with the
Transaction. There will be an option in the Letter of Transmittal for
shareholders to elect to receive their payment in New Taiwan Dollars rather than
U.S. dollars. Payments in New Taiwan Dollars will be based on the
closing Taiwan Dollar-U.S. Dollar exchange rate published by The Wall Street
Journal on its public web page for the date when the Transaction is
effective.
If your
shares are held in a stock brokerage account or by a bank or other nominee, you
are considered the beneficial owner of shares held in “street name” with respect
to those shares, and this Information Statement is being forwarded to you by
your broker or other nominee. Your broker or other nominee is considered, with
respect to those shares, the shareholder of record. We will treat shareholders
holding common stock in street name in substantially the same manner as
shareholders whose shares are registered in their own names for purposes of the
Transaction. However, banks, brokers or other nominees may have different
procedures, and shareholders holding common stock in street name should contact
their bank, broker or nominee regarding the treatment of their shares. See
“SPECIAL FACTORS — Exchange of Certificates and Payment for Fractional Shares”
beginning on page 39.
Effective
Date of the Transaction
We will
file the amendments to our articles of incorporation with the Office of the
Secretary of State of Florida approximately 25 calendar days after the date of
this Information Statement (definitive version) is filed with the SEC and made
available to shareholders. The Transaction will be effective when the
amendments are accepted for filing by the Florida Secretary of
State. See “SPECIAL FACTORS — Effective Date of Transaction”
beginning on page 38.
Financing
for the Transaction
Based on
information we have received as of May 8, 2009 from Broadridge Corporate Issuer
Services and from our transfer agent, Securities Transfer Corporation, we
estimate that the total funds required to pay the consideration to cashed out
shareholders in the Transaction will be approximately $303,000. We expect to
incur additional expenses of $275,050 for a total cost of the Transaction
estimated to be $578,050. This total amount could be larger or
smaller depending on, among other things, the number of shares that will be
outstanding after the Transaction as a result of purchases, sales and other
transfers of our shares of common stock by our shareholders, or an increase in
the costs and expenses of the Transaction. To finance the transaction we will
use the $900,000 made available by the Capital Injection. See
“SPECIAL FACTORS — Source of Funds and Expenses” beginning on page
41.
Recent
Market Prices of the Company’s Common Stock
During
the third quarter of 2009, the price of our common stock (trades reported on the
OTCBB) ranged from $0.13 to $0.15. Since 2006, at low trading
volumes, the price of our stock has ranged between $0.04 and $0.40 per
share. See “INFORMATION ABOUT THE COMPANY — Market Price of Common
Stock” beginning on page 43, “INFORMATION ABOUT THE COMPANY — Dividends”
beginning on page 44 and “INFORMATION ABOUT THE COMPANY — Trading Volume”
beginning on page 44.
No
Appraisal or Dissenter Rights
Under
Florida law, shareholders are not entitled to appraisal or dissenter rights in
connection with the Transaction.
Material
Federal Income Tax Consequences
The tax
treatment of the receipt of cash by a cashed out shareholder will depend on
whether the cashed out shareholder is treated as continuing to hold common stock
after the Transaction. A cashed out shareholder who is not treated as
continuing to own common stock after the Transaction will recognize either gain
(or loss) for United States federal income tax purposes on the sale or exchange
of the common stock. If a shareholder who receives cash in the
Transaction is treated as continuing to hold common stock after the Transaction,
such shareholder may be required to treat the cash received as a dividend
distribution rather than as gain or loss from a sale or
exchange. Continuing shareholders who do not receive cash for a
fractional share as a result of the Transaction should not recognize gain or
loss for United States federal income tax purposes. See “SPECIAL
FACTORS — Material Federal Income Tax Consequences” beginning on page
32.
Reservation
We
reserve the right to abandon the Transaction at any time before the filing of
the necessary amendments to our articles of incorporation with the Secretary of
State of the State of Florida if the Board of Directors determines that
abandonment would be in the Company’s best interest based on a material change
in the Company’s valuation or prospects.
QUESTIONS
AND ANSWERS ABOUT THE TRANSACTION
The
following questions and answers briefly address some commonly asked questions
about the Transaction that are not addressed in the Summary. They may
not include all the information that is important to you. We urge you to read
this entire Information Statement carefully, including our financial statements
included with it.
What
does it mean to “deregister” our common stock?
Following
the Transaction, we expect to have fewer than 300 shareholders of record,
as calculated under the applicable SEC rule, which will enable us to take action
to cease registration of our common stock under the Exchange Act. Effective on
and following the termination of the registration of our common stock under the
Exchange Act, we will no longer be required to file annual, quarterly and other
reports with the SEC, and our executive officers, directors and 10% shareholders
will no longer be required to file reports relating to their transactions in our
common stock. As a result of the deregistration our common stock, we will no
longer be eligible for quotation on the OTCBB. Any trading in our
common stock will continue only in privately negotiated sales or
over-the-counter on the Pink Sheets.
What
are the Pink Sheets?
The Pink
Sheets is a listing service that offers financial and other information about
issuers of securities, like our common stock, and collects and publishes quotes
of market makers for over-the-counter securities through its website at
www.pinksheets.com
.
What
will I receive in the Transaction?
If you
own fewer than 5,000 shares of our common stock at the effective time of the
Transaction, you will receive $0.18 in cash, without interest, from us for each
pre-split share that you own. There will be an option in the Letter of
Transmittal for shareholders to elect to receive their payment in New Taiwan
Dollars rather than U.S. dollars. The amount paid will be based on
the exchange rate prevailing at the effective time of the
Transaction. If you own 5,000 shares or more of our common stock at
the effective time of the Transaction, you will not receive any cash payment for
your shares in connection with the Transaction and will continue to hold the
same number of shares of our common stock as you did before the
Transaction. If you own 5,000 shares or more of our common stock at
the effective time of the Transaction, upon completion of the Transaction, you
will not receive a new share certificate.
Why
wasn’t it necessary to hold a shareholders meeting to approve the
Transaction?
Under the
Florida Business Corporations Act and our articles of incorporation,
shareholders holding at least a majority in interest of our outstanding common
stock may approve the amendments to our articles of incorporation by written
consent in lieu of a special shareholders meeting. Under applicable
Florida laws and federal securities laws, this action will not be effective
until disclosed to shareholders in a document such as this Information
Statement, which is intended to meet the requirements of Section 14 of the
Securities and Exchange Act.
What
if I hold fewer than 5,000 shares of common stock and hold all of my shares in
“street name”?
If you
hold fewer than 5,000 shares of our common stock in street name, your broker,
bank or other nominee is considered to be the shareholder of record with respect
to those shares and not you. It is possible that your bank, broker or
other nominee also holds shares for other beneficial owners of our common stock
and that it may hold 5,000 or more total shares. Therefore, depending upon their
procedures, they may not be obligated to treat the Transaction as affecting
beneficial holders’ shares. It is our desire to treat shareholders holding fewer
than 5,000 shares of our common stock in street name through a nominee (such as
a bank or broker) in the same manner as shareholders whose shares are registered
in their name. However, we or our transfer agent, Securities Transfer
Corporation, may not have the necessary information to compare your record
holdings with any shares that you may hold in street name in a brokerage account
and these banks, brokers and other nominees may have different procedures for
processing the Transaction. Accordingly, if you hold your shares of our common
stock in “street name,” we encourage you to contact your bank, broker or other
nominee.
What
happens if I own a total of 5,000 or more shares of common stock beneficially,
but I hold fewer than 5,000 shares of record in my name and fewer than 5,000
shares with my broker in street name?
We may
not have the information to compare your holdings in two or more different
brokerage firms. As a result, if you hold more than the minimum number of
shares, you may nevertheless have your shares cashed out if you hold them in a
combination of accounts in several brokerage firms. If you are in this situation
and desire to remain a shareholder of the Company after the Transaction, we
recommend that you combine your holdings in one brokerage account or become a
record holder prior to the effective time of the Transaction. The effective time
is expected to be approximately 25 days after this Information Statement
(definitive version) has been filed with the SEC. You should be able
to determine whether your shares will be cashed out by examining your brokerage
account statements to see if you hold more than the minimum number of shares in
any one account. To determine the Transaction’s effect on any shares you hold in
street name (and possible payment of the cash consideration), you should contact
your broker, bank or other nominee.
If
I own fewer than 5,000 shares of common stock, is there any way I can continue
to be a shareholder of the Company after the Transaction?
If you
own fewer than 5,000 shares of our common stock before the Transaction, the only
way you can continue to be a shareholder of the Company after the Transaction is
to purchase, prior to the effective time of the Transaction, sufficient
additional shares to cause you to own a minimum of 5,000 shares at the effective
time of the Transaction. However, given the historically limited liquidity in
our stock, we cannot assure you that any shares will be available for purchase
and thus there is a risk that you may not be able to purchase sufficient shares
to exceed the required 5,000 shares. In that instance, you would no longer
remain a shareholder after the effective time of the Transaction.
Is
there anything I can do if I own 5,000 or more shares of common stock, but would
like to take advantage of the opportunity to receive cash for my shares as a
result of the Transaction?
If you
own 5,000 or more shares of our common stock before the Transaction, you can
only receive cash for all of your shares if, prior to the effective time of the
Transaction, you reduce your stock ownership to fewer than 5,000 shares by
selling or otherwise transferring shares. However, we cannot assure you that any
purchaser for your shares will be available.
Should
I send in my certificates now?
No. If
you own less than 5,000 shares of our common stock before the Transaction, you
will be receiving further instructions from us. We will send the instructions
after the reverse split is effective, which will be when the amendment to our
articles of incorporation to effect the reverse split has been filed with the
Florida Secretary of State. We expect to file the amendment approximately 25
days after this Information Statement (definitive version) has been filed with
the SEC.
What
is the total cost of the Transaction to the Company?
Since we
do not know how many record and beneficial holders of our common stock will be
cashed out, we do not know the exact cost of the Transaction. However, based on
information that we have received as of May 8, 2009 from Broadridge Corporate
Issuer Services and from our transfer agent, Securities Transfer Corporation,
with regard to the size of holdings of those who may hold our shares in “street
name,” as well our estimates of other Transaction expenses, we believe that the
total cash requirement of the Transaction to the Company will be approximately
$578,050. This amount includes approximately $303,000 needed to cash out
fractional shares, and approximately $275,050 of legal, accounting, and
financial advisory fees and other costs to effect the Transaction. This total
amount could be larger or smaller depending on, among other things, the number
of fractional shares that will be outstanding after the Transaction as a result
of purchases, sales and other transfers of our shares of common stock by our
shareholders.
SPECIAL
FACTORS
Purpose
of and Reasons for the Transaction
The
Independent Committee, Mr. Yang, and the Board of Directors as a group, have
each determined that the costs of being an SEC reporting company currently
outweigh the benefits and, thus, it is no longer in our best interests or the
best interests of our shareholders, including our unaffiliated shareholders
(shareholders other than our executive officers and directors), for us to remain
an SEC reporting company. Neither the volume of public trading of the
Company’s stock nor the trading prices have reflected the Company’s potential or
its performance since the Company’s share exchange transaction in 2002 that
resulted in the current formation of the Company as a provider of English
language instruction in Taiwan and the PRC. Accordingly, one goal of
the Transaction is to afford the Company greater operating flexibility, allowing
management to concentrate on long-term growth and to reduce its focus on the
quarter-to-quarter performance often emphasized by the public
markets. The Transaction will also enable shareholders holding less
than 5,000 shares to realize immediately the value of their investments in the
Company through their receipt of the per share consideration of
$0.18. Although many of the aforementioned factors have existed for
some time, the costs of being an SEC reporting company have continued to
increase (particularly with the increasing costs of compliance with the
Sarbanes-Oxley Act, some provisions of which have only become applicable to the
Company as of this year). Given the current willingness of Mr. Yang
to finance the privatization through a capital injection, the Board determined
that now is a good time to propose the privatization plan. Mr. Yang’s
purposes in approving the transaction were the same as those of the
Company. Although the Capital Injection had the effect of increasing
Mr. Yang’s percentage ownership of the Company, Mr. Yang already exercised
control of the Company, acting as a voting group with Mr. Pai since they assumed
management of the Company in 2005.
Previous
Consideration; Revised Proposal and Appointment of Independent
Committee.
The
Board of Directors previously considered a privatization proposal that would
have financed the Transaction from available cash (would not have incorporated a
capital injection by CEO Yang.). In December 2008, the Board of
Directors appointed a special committee of the Board consisting of Directors
Ming-Tsung Shih, Robert Theng and Ping Hsiung Wang to consider a proposal to
take the Company private through a reverse stock split. A forward
stock split was not part of the proposal. This special committee of
the Board engaged Polaris Securities to prepare a report assessing the fair
value of the Company’s stock, which Polaris Securities delivered on March 16,
2009. The special committee approved that privatization Plan and
recommended it to the Board of Directors on April 2, 2009. The only
material difference in terms between the plan recommended by the special
committee on April 2, 2009 and the Transaction as finally approved by the Board
was the addition of the Capital Injection and the change in the estimated value
of the Company’s common stock in Polaris’s respective reports from a range of
$0.14 - $0.16 to a range of $0.16 - $0.184. Otherwise all of the
terms were the same, including the $0.18 per share cashout
price.
The
special committee’s role ended after it gave its recommendation to the
Board. Upon further assessment of the costs of the privatization
plan, the Board determined that the costs of the privatization plan would
require financing of some kind and withheld its approval of the privatization
plan. In May of 2009, the Board of Directors entered into discussions
with Mr. Yang, with respect to a purchase of stock to finance the privatization
plan. The Board determined that a stock purchase in the amount of the
$900,000 by Mr. Yang was advisable to finance the
privatization. Given the material change to the previous
privatization plan approved by the special committee, the Board determined to
establish another committee of independent board members to review the revised
privatization plan. On June 2, 2009, the Board of Directors appointed
the Independent Committee (consisting of Ming-Tsung Shih and Robert Theng) to
review a revised privatization plan, the current Transaction, which includes the
Capital Injection by Mr. Yang. Neither Mr. Shih nor Mr. Theng is an
employee of the Company, owns any Company shares, nor has any economic interest
in the Transaction. The Independent Committee was tasked with the
duty of reviewing the Transaction, including the Capital Injection by Mr. Yang,
at all times representing the interests of the unaffiliated shareholders (both
continuing and cashed out) with respect to the Transaction, and to make a
recommendation regarding the Transaction to the Board of
Directors.
Effects
of the Transaction
The
Transaction is designed to reduce the number of our shareholders of record below
300, which will allow us to terminate our reporting obligations with the SEC. In
determining whether the number of our shareholders of record falls below 300 as
a result of the Transaction, we will count shareholders of record in accordance
with Rule 12g5-1 under the Exchange Act. Rule 12g5-1 provides, with certain
exceptions, that in determining whether an issuer, such as the Company, is
subject to the registration provisions of the Exchange Act, securities are
considered to be “held of record” by each person who is identified as the owner
of such securities on the respective records of security holders maintained by
or on behalf of the issuer. However, institutional depositories such as
Cede & Co. are not considered a single holder of record for purposes of
these provisions. Rather, Cede & Co.’s and similar depositories’
accounts are treated as the record holder of our shares. On the records kept by
our transfer agent, Securities Transfer Corporation, we had 1,392 registered
shareholders as of June 15, 2009, one holder of which was Cede & Co., which
was registered as holding 3,175,046 shares. Based on the position
report provided by The Depository Trust Corporation as of June 15, 2009, 43
institutional custodians held our shares through Cede & Co. (Cede
& Co. is the nominee name for The Depository Trust Company, the largest
institutional depository.) Accordingly, when calculated according to
the manner set forth in Rule 12g5-1, the number of our registered shareholders
is 1,434. Based on information available to us received from
Broadridge Corporate Issuer Services as of May 8, 2009, we estimate that the
3,175,046 shares held by the 43 DTC participants are beneficially owned by
approximately 759 holders holding the shares in “street name”. We estimate that
there are approximately 1,934 holders who own fewer than 5,000 shares of our
common stock whose shares would be cashed out in the
Transaction. This total is made up of 1,269 registered holders and
approximately 665 holders in street name who hold fewer than 5,000
shares. We expect that as a result of the Transaction the number of
our shareholders of record as calculated per Rule 12g5-1 would be reduced from
1,434 to approximately 165. If street name shareholders are included,
the number of our shareholders will be reduced to approximately 259. In
considering the exchange ratio for the transaction, the Company reviewed data
from its transfer agent, from DTC, and from Broadridge Corporate Issuer Services
with respect to the Company’s registered shareholders, the number of DTC
participants, and street name shareholders. The Company desired a
split ratio that was a round number. An alternative ratio of 1 for
4,000 was considered, but the number of remaining shareholders would not have
been less than 300, which would have frustrated the Company’s purpose of
terminating the Company’s reporting obligations under the Exchange
Act.
We also
believe the Transaction will have the following additional
effects:
·
Termination of
Exchange Act Registration and Elimination of SEC Reporting Obligations.
Our common stock is currently registered under the Exchange Act. The
registration may be terminated upon application by us to the SEC if there are
fewer than 300 holders of record of our common stock as calculated under Rule
12g5-1. When we have less than 300 shareholders based that standard, we intend
to file with the SEC a Form 15 certifying to that effect. Our obligation to file
periodic and current reports as a result of our common stock’s registration
under those other provisions of the Exchange Act will be suspended immediately
upon filing the Form 15 with the SEC (which we anticipate we will file promptly
have we have been able to verify that we have less than 300 shareholders). After
the 90-day waiting period following the filing of the Form 15 (i) our
obligation to comply with the requirements of the proxy rules and to file
Information Statements under Section 14 of the Exchange Act will also be
terminated; (ii) our executive officers, directors and 10% shareholders
will no longer be required to file reports relating to their transactions in our
common stock with the SEC; (iii) our executive officers, directors and 10%
shareholders will no longer be subject to the recovery of profits provision of
the Exchange Act; and (iv) persons acquiring 5% of our common stock will no
longer be required to report their beneficial ownership under the Exchange Act.
However, following the filing of the Form 15 with the SEC, if on the first day
of any fiscal year we have more than 300 shareholders of record when calculated
according to Rule 12g5-1, we will once again become subject to the reporting
requirements of the Exchange Act. The Company will continue to be subject to the
general anti-fraud provisions of applicable federal and state securities
laws.
·
Reduced Costs and
Expenses.
Our direct, out-of-pocket costs resulting from our reporting
and other obligations under the Exchange Act and the Sarbanes-Oxley Act were
approximately $295,916 in fiscal 2007 and 282,045 in fiscal 2008. If
we do not consummate the Transaction we expect these costs to be approximately
$298,000 in fiscal 2009. We expect to save this amount or more on an annual
basis by becoming a non-reporting company, which would include reduced costs of
an annual financial statement audit by a public accounting firm, given the
reduced scope as a result of no longer being subject to SEC reporting
requirements. We also believe the Company will benefit because our management
team, which currently spends a significant amount of time on activities related
to compliance with the Exchange Act and Sarbanes-Oxley Act, will have more time
to devote to business development and revenue enhancing activities.
·
Financial Effect
of the Transaction
. Based on information we have received as of May 8,
2009 from Broadridge Corporate Issuer Services and from our transfer agent,
Securities Transfer Corporation, we estimate that the cost of payment to cashed
out shareholders will be approximately $303,000, and the amount of professional
fees and other expenses will total approximately $275,050. This total amount
could be larger or smaller depending on, among other things, the number of
fractional shares that will be outstanding after the Transaction as a result of
purchases, sales and other transfers of our shares of common stock by our
shareholders. The consideration to be paid to the cashed out shareholders and
the costs of the Transaction will be paid from cash raised in a private sale of
stock to our Chief Executive Officer and largest shareholder, Min-Tan Yang. See
“SPECIAL FACTORS—Source of Funds and Expenses” beginning on page 41. These costs
will be offset over time by the costs savings of approximately $298,000 per year
we estimate we expect to save as a result of a Transaction. See “SPECIAL FACTORS
— Purpose of and Reasons for the Transaction” beginning on page 13.
·
Conduct of our
Business after the Transaction
. We expect our business and operations to
continue substantially as they are currently conducted, and except as described
in this Information Statement, the Transaction is not expected to have any
material effect upon the conduct of our business. See “SPECIAL FACTORS — Plans
for the Company after the Transaction” beginning on page 31.
·
Aggregate
Shareholders’ Equity
. Our aggregate shareholders equity increased by
$900,000 as a result of the Capital Injection. Our aggregate shareholders’
equity will decrease from approximately $3,648,459 on September 30, 2009 to
approximately $3,070,409 as a result of the cashout payments on a pro forma
basis (after giving effect to payment of Transaction costs in the amount of
$578,050, consisting of approximately $303,000 to be paid to the cashed out
shareholders, and approximately $275,050 representing the amount of other costs
of the Transaction). See “SUMMARY FINANCIAL INFORMATION” beginning on
page 47.
·
Book Value Per
Share
. Just prior to the Capital Injection on June 17, 2009 our book
value per share was 0.08. As a result of the Capital Injection, our
book value per share increased to 0.12 on September 30, 2009. As a result
of the cashout, our book value per share of our common stock will decrease from
$0.
12
as of September 30, 2009 to
approximately $0.10 per share of common stock on a pro forma basis (after giving
effect to payment of Transaction costs in the amount of
$578,050). See “SUMMARY FINANCIAL INFORMATION” beginning on page
46.
Effect on Holders of Fewer than 5,000
Shares of Common Stock and Treatment of Multiple Accounts.
Following the
Transaction, holders of fewer than 5,000 shares of our common stock would
receive a cash payment of $0.18 per pre-split share, without interest, and would
cease to be shareholders of the Company. Cashed out shareholders will have no
further financial interest in us with respect to their cashed out shares and
thus will not have the opportunity to participate in the potential appreciation
in the value of such shares or our future growth.
The
number of shares held by a shareholder of record in two or more separate but
identical record holder accounts will be combined to determine the number of
shares of our common stock owned by that holder and, accordingly, whether the
holder will be a cashed out shareholder or a continuing shareholder. Shares held
by record holders in joint accounts, such as by a husband and wife, and shares
held in similar capacities will be treated separately, and will not be combined
with individual accounts in determining whether a holder will be a cashed out
shareholder or a continuing shareholder.
We intend
to treat shareholders holding our common stock in street name in the same manner
as record holders. Prior to the effective date of the Transaction, we will
conduct an inquiry of all brokers, banks and other nominees that hold shares of
our common stock in “street name,” ask them to provide us with information on
how many fractional shares will be cashed out, and request that they effect the
Transaction for their beneficial holders. However, these banks, brokers and
other nominees may have different procedures than registered shareholders for
processing the Transaction. As a result, a shareholder owning 5,000 or more
shares of common stock may nevertheless have those shares cashed out if the
shareholder holds shares in a combination of street name accounts and record
holder accounts, or holds shares in separate accounts in several brokerage
firms. If you are in this situation and desire to remain a shareholder of the
Company after the Transaction, you may consolidate your holdings into one
brokerage account or record holder account prior to the effective date.
Conversely, if you hold an account with less than 5,000 shares in street name
and want to ensure that your shares are cashed out, you may want to change the
manner in which your shares are held from street name into a record holder
account in your own name so that you will be a record owner of the
shares.
Examples
of the effect of the Transaction on both cashed out shareholders and continuing
shareholders are set forth below under the caption “Effects of the Transaction —
Examples” beginning on page 19.
Effect on Unaffiliated Shareholders
Who Own 5,000 or More Shares.
For those unaffiliated shareholders who own
5,000 or more shares of our common stock, the Transaction will subject them,
through their interest as shareholders, to the same effects
experienced by the Company discussed above – e.g., elimination of SEC reporting
obligations, no longer quoted on the OTCBB, reduced liquidity, cost savings to
the Company, reduction in book value per share. In addition,
continuing unaffiliated shareholders may experience the following
effects:
·
Reduction in
Publicly Available Information.
If we complete the Transaction as
described in this Information Statement, our common stock will no longer be
registered under the Exchange Act and we will no longer be a reporting company
under the Exchange Act. We will, therefore, cease to file annual, quarterly,
current, and other reports and documents with the SEC, and shareholders will
cease to receive annual reports and proxy statements. Persons that remain
shareholders after the Transaction is effected will, therefore, have access to
less information about the Company and our business, operations, and financial
performance.
·
Possible Decline
in the Value of Our Common Stock.
Because of the possible limited
liquidity for our common stock, the termination of our obligation to publicly
disclose financial and other information following the Transaction, and the
deregistration of our common stock under the Exchange Act, continuing
shareholders may experience a decrease in the value of their common
stock.
·
Voting power of
controlling shareholders increased
. The voting power of our
largest shareholder, CEO Yang, increased from 45% to 54% as a result of the
Capital Injection. The combined voting power of our two largest
shareholders, Mr. Yang and Mr. Suang-Yi Pai, our Chairman of the Board and
acting CFO, increased from 60% to 67%.
Effect on Affiliated
Shareholders.
Our only shareholders who hold or beneficially
own more than 5% of our stock are Mr. Suang-Yi Pai, our Chairman of the Board
and acting CFO, and Mr. Min-Tan Yang, our CEO and a director. As
of June 17, 2009 (after the Capital Injection), Messrs. Pai and Yang
collectively owned 20,096,915 shares, or 67% of our issued and outstanding
shares eligible to vote to approve the Transaction. Both Messrs. Pai
and Yang voted to approve the Transaction.
After
taking into account the Capital Injection that occurred on June 17, 2009, the
aggregate number of shares of our common stock owned by Messrs. Pai and Yang
will remain the same after the Transaction is contemplated. The ownership
percentage of the shares of our common stock held by Messrs. Pai and Yang will
increase nominally as a result of the reduction of the number of shares of our
common stock outstanding by up to 1,683,333 shares. The increase in the
ownership percentage of our shares of common stock held by Messrs. Pai and Yang
and the reduction in the number of shares outstanding following the completion
of the Transaction is based on record holder information that we received as of
May 8, 2009 from Broadridge Corporate Issuer Services and from our transfer
agent, Securities Transfer Corporation, a share range analysis we received,
reflecting the distribution of the accounts of our shareholders who hold shares
in “street name” through DTC participants. We have assumed for purposes of
determining ownership percentages and the reduction in the number of shares
outstanding following the Transaction, that all beneficial holders who hold
shares in street name shares will be informed by their custodian of the
opportunity to be cashed out and elect to do so. However, in all
likelihood, an undetermined percentage of the holders holding in street name
will not be cashed out in the Transaction. The effect will be that
the number of street name shares that are actually cashed out in the Transaction
will be lower with a corresponding increase in the ownership percentages of
continuing shareholders, including those of Messrs. Pai and Yang.
The
reduction in the number of shares outstanding following the Transaction will
also increase or decrease depending on purchases, sales and other transfers of
our shares of common stock by our shareholders prior to the effective time of
the Transaction, and the number of street name shares that are actually cashed
out in the Transaction. The ownership percentage of our shares of common stock
held by our officers and directors and the ownership percentage of the
continuing shareholders will proportionally increase or decrease as a result of
such purchases, sales and other transfers of our shares of common stock by our
shareholders prior to the effective time of the Transaction.
Our
directors and executive officers may have interests in the Transaction that are
different from your interests as a shareholder, and have relationships that may
present conflicts of interest. See “SPECIAL FACTORS — Potential
Conflicts of Interests of our Officers and Directors” beginning on page
29.
Our
direct, out-of-pocket costs resulting from our reporting and other obligations
under the Exchange Act and the Sarbanes-Oxley Act were approximately $295,916 in
fiscal 2007, 282,045 in fiscal 2008, and we expect these costs to be
approximately $298,000 in fiscal 2009 if we do not complete the Transaction.
Therefore we ultimately expect to realize recurring annual cost savings as a
result of the Transaction of at least $298,000 in coming years (an amount that
for illustration purposes would have represented 36% of our net income in 2008).
Our continuing shareholders, including our affiliated shareholders, will be the
beneficiaries of these savings. See “SPECIAL FACTORS — Purpose of and Reasons
for the Transaction” beginning on page 13.
Examples.
The effect of the
Transaction on both cashed out shareholders and continuing shareholders may be
illustrated, in part, by the following examples:
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Mr. Chen
is a registered shareholder who holds 4,000 shares of our common stock of
record in his name at the effective time of the Transaction. Mr. Chen
holds no other shares
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Mr. Chen
will receive cash in the amount of $720, without interest, for the 4,000
shares of common stock held prior to the reverse stock
split.
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Ms. Garcia
holds 4,500 shares of our common stock in a brokerage account at the
effective time of the Transaction. Ms. Garcia holds no other
shares.
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We
intend to treat shareholders holding common stock in street name in the
same manner as shareholders whose shares are registered in their own
names, and will ask banks, brokers and nominees holding these shares to
effect the Transaction for their beneficial holders. Assuming that they do
so, Ms. Garcia will receive cash in the amount of $810, without
interest, for the 4,500 shares of common stock held prior to the reverse
stock split. If the bank, broker or nominee holding Ms. Garcia’
shares have different procedures, or do not provide us with sufficient
information on Ms. Garcia’ holdings, then Ms. Garcia may or may
not receive cash for her shares depending on the number of shares held by
the bank, broker or other nominee, which is the actual record holder of
her shares.
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Mr. Brown
holds 4,000 shares of our common stock of record in his name and 4,500
shares in a brokerage account at the effective time of the Transaction.
Mr. Brown holds no other shares.
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Each
of Mr. Brown’s holdings will be treated separately. Accordingly,
assuming the brokerage firm that holds Mr. Brown’s shares in street
name effects the Transaction for its beneficial holders, Mr. Brown
will receive cash in the amount of $1,530, without interest, for the 8,500
shares of common stock held prior to the reverse stock
split.
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Ms. Johnson
holds 6,000 shares of our common stock in her name and 8,000 shares in a
brokerage account at the effective time of the
Transaction.
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Ms. Johnson
will continue to hold 6,000 shares of common stock in her own name and
8,000 shares in a brokerage account after the
Transaction.
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Mr. Schwartz
holds 4,000 shares of common stock in one brokerage account and 4,000
shares in another brokerage account at the effective time of the
Transaction.
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Each
of Mr. Schwartz’ holdings will be treated separately. Assuming each
of the brokerage firms with whom Mr. Schwartz holds his shares in
street name effect the Transaction for their beneficial holders,
Mr. Schwartz will receive cash in the amount of $1,440, without
interest, for the 8,000 shares of common stock held prior to the reverse
stock split.
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Ms. Tanaka
holds 4,000 shares in one record holder account and 4,000 shares in
another identical record holder account at the effective time of the
Transaction.
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Ms. Tanaka
will continue to hold 8,000 shares of common stock after the reverse stock
split.
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Mr. Lee
and Ms. Lee each hold 8,000 shares in separate, individual record
holder accounts, but also hold 4,000 sharers of common stock jointly in
another record holder account.
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Shares
held in joint accounts will not be added to shares held individually in
determining whether a shareholder will be a cashed out shareholder or a
continuing shareholder. Accordingly, Mr. Lee and Ms. Lee will
each continue to own 8,000 shares of common stock after the Transaction in
their separate accounts, but will receive $720, without interest, for the
shares held in their joint
account.
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OTC
Bulletin Board; Pink Sheets Quotation
Our
common stock is currently quoted on the OTC Bulletin Board (also referred to as
the OTCBB). To obtain the cost savings we anticipate by no longer preparing and
filing annual, periodic and current reports with the SEC, our common stock will
no longer be eligible for quotation on the OTC Bulletin Board.
Following
the Transaction, our shares are expected to be quoted in the “Pink Sheets” at
www.pinksheets.com
,
an electronic interdealer quotation service. The Pink Sheets are not a stock
exchange and we do not have the ability to list on, or control whether our
shares are quoted on Pink Sheets. The price may be more or less than the current
price on the OTC Bulletin Board. In addition, the spread between the bid and
asked prices of our common stock may be wider than on OTC Bulletin Board and the
liquidity of our shares may be lower. There is no assurance, however, that there
will be any Pink Sheets quotations after the Transaction or that, if quotations
begin, they will continue for any length of time.
Independent
Committee Deliberations and Fairness
The
Independent Committee met on June 2 and June 5 of 2009 to evaluate the
Transaction. To assist it in its evaluation it engaged independent
financial advisor Polaris Securities. After receiving the report of Polaris
Securities and following its further deliberations, the Independent Committee
unanimously approved the Capital Injection and the Transaction and recommended
to our Board of Directors that it should be submitted to the shareholders of the
Company for approval.
In the
course of reaching its determination, the Independent Committee considered the
following substantive factors and potential benefits of the Transaction, each of
which the Independent Committee believed supported its decision:
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Its
belief, after a thorough, independent review, that the Transaction was
more favorable to cashed out as well as continuing shareholders than the
potential value that might result from remaining a reporting
company;
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Its
belief that the cashout price of $0.18 per share allows the cashed out
shareholders to realize in the near term a fair value, in cash, for their
investment and provides such shareholders certainty of value for their
shares;
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Its
familiarity with the business, operations, properties and assets,
financial condition, business strategy, and prospects of the Company (as
well as the risks involved in achieving those prospects), the nature of
the markets in which the Company competes, industry trends, and economic
and market conditions, both on a historical and on a prospective
basis;
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The
current and historical market prices of the Company common stock relative
to those of other industry participants and general market indices,
including the fact that the Company’s stock price traded for more than
$0.18 in the year previous to the Independent Committee’s decision
(trading prices for the Company’s stock as reported on the OTCBB ranged
from $0.04 to $0.23 from May 28, 2008 to June 2,
2009);
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the
fact that the $0.18 cashout price represents a premium of $0.13 over
$0.05, the price of the last trade of the Company’s common stock reported
as of June 2, 2009, the last trade reported when the Independent Committee
deliberated on June 5, 2009;
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the
fact that in the last two years Mr. Yang has purchased Company common
stock for as little as $0.15 per share and for as much as $0.25 per share
(refer to page 30 for a table showing all of Mr. Yang’s
purchases);
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The
financial presentations of Polaris Securities and its opinion that, as of
June 6, 2009, a fair price for the Company’s stock is in the range of
$0.160 to $0.184 per share; and that the $0.18 cashout price represents
the high range of its valuation;
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The
fact that the stock split ratio was set at a point that would ensure that
the Company accomplished its goal of ending up with less than 300
shareholders, while minimizing the number of minority shareholders who
would be cashed out;
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It’s
belief, based upon the fairness of the cashout price, that the stock split
ratio is fair to the cashed out shareholders as well as the continuing
shareholders (or in other words that a higher cashout price would have
been unfair to the continuing shareholders, and lower share cashout price
would have been unfair to the cashed out
shareholders);
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The
fact that the Company has been profitable since 2007, primarily as a
result of changes in strategy and practices implemented after Mr. Yang and
Mr. Pai took over management;
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Management’s
stated intention to continue to run the Company in essentially the same
manner after the Transaction; and
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Approximately
$298,000 in auditing, legal and other costs of maintaining reporting
company status will be avoided annually (an amount that for illustration
purposes would have represented approximately 36% of net income in
2008).
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The
Independent Committee also considered a number of factors relating to the
procedural safeguards involved in the negotiation of the Transaction, including
those discussed below, each of which it believed supported its decision and
provided assurance of the fairness of the Transaction to the unaffiliated
shareholders of the Company:
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the
fact that the Independent Committee is comprised solely of independent
directors who are not employees of the Company and who have no financial
interest in the Transaction;
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the
fact that Messrs. Pai and Yang did not participate in any way in the
deliberations of the Independent
Committee;
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the
fact that the Independent Committee had ultimate authority to decide
whether or not to proceed with the Transaction or any alternative to it,
subject to our Board of Directors’ ratifying approval;
and
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the
fact that the Independent Committee consulted with and relied on the
valuation report of Polaris Securities, an outside financial
consultant.
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The
Independent Committee also considered a variety of risks and other potentially
negative factors concerning the Transaction, including the
following:
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the
fact that the cashed out shareholders will not participate in any future
earnings or growth of the Company and will not benefit from any
appreciation in the value of the Company, including any value that could
be achieved in the event the Company is acquired in the future by a
strategic buyer;
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the
fact the Transaction was not structured so that approval of at least a
majority of the unaffiliated shareholders was required for
approval;
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the
fact that, although the Independent Committee was charged with
representing the interests of the unaffiliated shareholders, the
Independent Committee did not retain an unaffiliated representative to act
solely on behalf of the unaffiliated shareholders for purposes of
negotiating the terms of the Transaction;
and
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the
fact that the cashout payment would be taxable to the Company’s
shareholders who are U.S. persons for U.S. federal income tax purposes,
and may be taxable for U.S. federal income tax purposes in certain cases
to the Company’s shareholders who are not U.S.
persons.
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In the
course of reaching its decision to recommend to our Board of Directors that the
Board approve the Transaction, the Independent Committee did not consider the
liquidation value of the Company’s assets because it considers the Company to be
a viable going concern business based on the turn around effected since Messrs.
Pai and Yang took over management and the Company’s recent financial results and
balance sheet. Further, the Independent Committee did not consider net book
value, which is an accounting concept, as a factor because it believed that net
book value is not a material indicator of the value of the Company as a going
concern but rather is indicative of historical costs. The Company’s net book
value per share as of March 31, 2009 was $0.08 and $0.12 as of September 30,
2009. This is significantly below the $0.18 per share cashout
consideration.
In making
its determination that $0.18 is a fair price for the cashout despite the fact
that the Company’s shares traded for higher than that amount during the past
year, the Independent Committee noted that the Company’s publicly traded stock
price had generally trended downward since May of 2008, that more recently
prices were lower than $0.18, and that the volume of sales was sporadic and
low. The Independent Committee determined that it was more
appropriate to give greater weight to the valuation analysis conducted by
Polaris Securities, which incorporated book value as a component of
valuation.
In the
course of making its valuation decision, the Independent Committee was aware
that the special committee, in approving a prior privatization plan on April 2,
2009, had determined that a fair cashout price was $0.18 per share, and that the
special committee made this determination based on the estimated valuation range
of $0.14 to $0.16 in Polaris’s March report. In contrast, Polaris’s
June report, available to the Independent Committee, estimated a valuation range
of $0.16 to $0.184 for the Company. The Independent Committee was
aware that when Polaris prepared its March report, first quarterly financial
data were unavailable to Polaris that were available to the special committee
when it made its valuation determination on April 2, 2009. They were
also aware that first quarter financial results were available to and considered
by the special committee in approving the previous transaction. (Two
of the members of the special committee were also on the Independent Committee.)
First quarter financial data was available to Polaris when it issued its June
report. Considering all of the data, the Independent committee
determined that a value of $0.18 was fair.
The
foregoing discussion summarizes the material factors considered by the
Independent Committee in its consideration of the Transaction. After considering
these factors, the Independent Committee concluded that the positive factors
relating to the Transaction outweighed the potential negative factors. In view
of the wide variety of factors considered by the Independent Committee, and the
complexity of these matters, the Independent Committee did not find it
practicable to quantify or otherwise assign relative weights to the foregoing
factors. In addition, individual members of the Independent Committee may have
assigned different weights to various factors.
Based
on the totality of the foregoing factors the Independent Committee determined
that the Transaction is substantively and procedurally fair to the unaffiliated
shareholders (including cashed out and continuing shareholders. The Independent
Committee recommended the Transaction based upon the totality of the information
presented to and considered by it.
The
Independent Committee determined that the Transaction is procedurally fair even
though it was not structured so that approval of at least a majority of the
unaffiliated shareholders was required for approval or the fact that the
Independent Committee did not retain an unaffiliated representative to act
solely on behalf of the unaffiliated shareholders for purposes of negotiating
the terms of the Transaction. The Independent Committee determined
this, notwithstanding the decision not to implement the foregoing procedural
safeguards, based on the following procedural safeguards that were
implemented:
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the
fact that the Independent Committee is comprised solely of independent
directors who are not employees of the Company and who have no financial
interest in the Transaction;
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the
fact that Messrs. Pai and Yang did not participate in any way in the
deliberations of the Independent
Committee;
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the
fact that the Independent Committee had ultimate authority to decide
whether or not to proceed with the Transaction or any alternative to it,
subject to our Board of Directors’ ratifying approval;
and
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the
fact that the Independent Committee consulted with and relied on the
valuation report of Polaris Securities, an outside financial
consultant.
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The
foregoing discussion summarizes the material factors considered by the
Independent Committee in its consideration of the Transaction. In view of the
wide variety of factors considered by the Independent Committee, and the
complexity of these matters, it did not find it practicable to quantify or
otherwise assign relative weights to the foregoing factors. In addition,
individual members of the Independent Committee may have assigned different
weights to various factors.
Board
of Directors’ Deliberations
Our
Board of Directors, acting in large part upon the unanimous recommendation of
the Independent Committee, at a meeting on June 11, 2009 (i) determined
that the Transaction is advisable, fair to and in the best interests of the
Company and our unaffiliated shareholders (both continuing and cashed out
shareholders); and (ii) approved the Transaction. In reaching these
determinations, our Board considered (i) the financial presentation of
Polaris Securities which was delivered to the Board of Directors at the request
of the Independent Committee, as well as the fact that the Independent Committee
received and reviewed Polaris Securities’ valuation report; and (ii) the
unanimous recommendation and analysis of the Independent Committee, as described
above, and adopted that recommendation and analysis in reaching its
determinations.
The
foregoing discussion summarizes the material factors considered by our Board of
Directors in its consideration of the Transaction. In view of the wide variety
of factors considered by our Board of Directors, and the complexity of these
matters, our Board of Directors did not find it practicable to quantify or
otherwise assign relative weights to the foregoing factors. In addition,
individual members of our Board of Directors may have assigned different weights
to various factors. The Board of Directors approved and recommends the
Transaction based upon the totality of the information presented to and
considered by it.
Mr.
Yang’s Deliberations
As a
member of the Board of Directors, Mr. Yang deliberated with the
Board. In making his personal decision to approve the Transaction, he
considered the same information considered by the Board, based his information
on the same factors, and adopted the same analysis (and by extension, adopted
the recommendation and analysis of the Independent Committee). Mr.
Yang’s personal determination is that the Transaction is advisable, fair to and
in the best interests of the Company and its unaffiliated shareholders (both
continuing and cashed out shareholders).
Valuation
Report of Polaris Securities
The
Independent Committee retained Polaris Securities to act as its financial
advisor in connection with the Transaction. In connection with Polaris
Securities’ engagement, the Independent Committee requested that Polaris
Securities analyze and give its opinion as to the fair value of the Company’s
common stock. The Independent Committee met with Polaris Securities
on June 2, 2009 and June 5, 2009 to review their valuation analysis. During this
meeting, Polaris Securities reviewed with the Independent Committee certain
financial analyses, as described below, and rendered its oral opinion to the
Independent Committee, which was subsequently confirmed in writing, that, as of
June 6, 2009, and based upon and subject to the various considerations and
assumptions described in the opinion, the fair value of the Company’s common
stock was $0.160 to $0.184 per share.
The full
text of Polaris Securities’ report, dated June 6, 2009 (revised August 11,
2009), which sets forth the procedures followed, assumptions made, matters
considered and limitations on the review undertaken, is attached as Exhibit A
and is incorporated into this Information Statement by reference. Holders of
Company common stock are encouraged to read this report carefully in its
entirety. The report delivered by Polaris Securities dated June 6,
2009 (revised August 11, 2009) is an update of a previous report delivered on
March 16, 2009 to the Board of Directors and the Company in connection with an
earlier proposal by the Board of Directors to go private. In the
March 16, 2009 report, Polaris Securities estimated the value of the Company’s
common stock to be between $0.14 and $0.16 per share.
The June
6, 2009 Polaris report was revised August 11, 2009 to correct a mathematical
error that incorrectly misstated the low range of the valuation estimate at
$0.148, rather than $0.16. It was possible to calculate the correct
valuation range based on the other values set forth in the
report. The high end of the valuation range – $0.184 per share – was
not affected by the mathematical error. After the mathematical error
was discovered, the Independent Committee, the Board, and Mr. Yang each
considered whether the error required an adjustment in the cashout
price. Each decision maker noted that the error did not involve the
analytical method or subjective factors considered by
Polaris. Moreover, the mathematical error only effected the lower
range of values put forth by Polaris, and the Independent Committee had selected
a cashout price that was on the high end of the valuation
range. Consequently, none of the decision makers felt that it was
necessary to revisit the valuation discussion.
Polaris
Securities’ opinion was provided to the Independent Committee in connection with
its evaluation of the Transaction consideration to be paid to the Company’s
cashed out shareholders. It does not address any other aspect of the
Transaction, relates only to the value, from a financial point of view, of the
common stock, and does not constitute a recommendation to any shareholder as to
how that shareholder should vote or act with respect to any matters relating to
the Transaction. The following is a summary of the Polaris Securities valuation
report, which you are encouraged to read in its entirety.
In
arriving at its opinion, Polaris Securities reviewed certain publicly available
business and financial information relating to the Company and the comparison
companies in the report. This information consisted of publicly
available reports filed with the SEC by us and by the comparison companies
referenced in the report, those companies’ websites, and the websites of
agencies, such as Bloomberg, Yahoo Finance, that report on the stock prices and
other financial metrics of public companies. Polaris Securities also
met with management to discuss the business and prospects of the Company.
Polaris Securities also considered certain financial and stock market data of
the Company, compared that data with similar data for other publicly held
companies in businesses Polaris Securities deemed similar to that of the
Company, and considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria that it deemed
relevant. In connection with its review, Polaris Securities did not assume any
responsibility for independent verification of any of the foregoing information
and relied on such information being complete and accurate in all material
respects.
Polaris
Securities also assumed, with the consent of the Independent Committee, that in
the course of obtaining any regulatory or third party consents, approvals or
agreements in connection with the Transaction, no modification, delay,
limitation, restriction or condition will be imposed that would have an adverse
effect on the Company or the Transaction. Polaris Securities valuation opinion
was with respect to the Company’s common stock, and in conjunction therewith,
with the Company as a whole. Polaris Securities was not requested to
make, and did not make, an independent evaluation or appraisal of specific
assets or liabilities (contingent or otherwise) of the Company, nor was Polaris
Securities furnished with any such evaluations or appraisals. Polaris
Securities’ opinion was necessarily based upon information made available to it
as of the date of the report and upon financial, economic, market and other
conditions as they existed and could be evaluated on that date. Polaris
Securities’ opinion did not address the relative merits of the Transaction as
compared to alternative transactions or strategies that might have been
available to the Company, nor did it address the underlying business decision of
the Company to proceed with the Transaction.
The
Independent Committee selected Polaris Securities as its financial advisor based
on Polaris Securities’ qualifications, experience and reputation. Polaris
Securities is a recognized investment banking firm and is regularly engaged in
the valuation of businesses and securities in connection with acquisitions,
leveraged buyouts, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. Polaris Securities and its
affiliates have in the past provided, and in the future may provide, investment
banking and other financial services to the Company for which Polaris Securities
has received, and would expect to receive, compensation. During the past two
years, Polaris Securities has not provided financial advisory or financing
services to the Company or its affiliates other than with respect to the
services it rendered to the Independent Committee in connection with the
Transaction, including the services rendered in connection with its first report
dated March 16, 2009. Polaris Securities does not hold any equity,
debt or other financial interest in the Company.
For
preparing its report, we paid Polaris Securities $22,500, $15,000 of which was
for the March 16, 2009 report, and $7,500 of which was for the June 6, 2009
report. In the past two years, we have paid Polaris Securities a
total of $16,000 for financial advice on other matters. In addition, the Company
has agreed to reimburse Polaris Securities for its fees and expenses, including
reasonable attorney’s fees, incurred in connection with its engagement and to
indemnify Polaris Securities and related parties against liabilities, including
liabilities under the federal securities laws, arising out of its
engagement.
Financial
Analyses
In
preparing its valuation report, Polaris Securities performed a variety of
financial and comparative analyses, including those described below. The summary
of the analyses described below is not a complete description of the analyses
underlying its opinion. The preparation of a valuation 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 valuation opinion is not readily
susceptible to partial analysis or summary description. In arriving at its
opinion, Polaris Securities made qualitative judgments as to the significance
and relevance of each analysis and factor that it considered. Polaris Securities
arrived at its ultimate opinion based on the results of all analyses undertaken
and assessed as a whole and did not draw, in isolation, conclusions from or with
regard to any one factor or method of analysis. Accordingly, Polaris Securities
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors or focusing on information presented in
tabular format, without considering all analyses and factors or the narrative
description of the analyses, could create a misleading or incomplete view of the
processes underlying its analyses and opinion.
In its
analyses, Polaris Securities considered industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of the Company. No company, transaction or business used in
Polaris Securities’ analyses as a comparison is identical to the Company, its
business or the Transaction, and an evaluation of the results of those analyses
is not entirely mathematical. Rather, the analyses involve complex
considerations and judgments concerning financial and operating characteristics
and other factors that could affect the acquisition, public trading or other
values of the companies, business segments or transactions analyzed. The
estimates contained in the analyses of Polaris Securities and the ranges of
valuations resulting from any particular analysis are not necessarily indicative
of actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by the analyses. In
addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, the estimates used in, and the
results derived from, Polaris Securities’ analyses are inherently subject to
substantial uncertainty.
Polaris
Securities provided advice to the Independent Committee regarding the fair value
of the Company’s stock. Polaris Securities did not recommend any specific type
of cashout consideration to the Independent Committee. The opinion and financial
analyses of Polaris Securities were only one of many factors considered by the
Independent Committee in its evaluation of the Transaction and should not be
viewed as determinative of the views of the Independent Committee, the Board of
Directors or Mr. Yang with respect to the Transaction or the fractional share
consideration.
The
following is a summary of the analyses that underlie the opinion of Polaris
Securities and which were reviewed with the Independent Committee on June 5,
2009. The financial analyses summarized below include information presented in
tabular format. In order to fully understand Polaris Securities’ financial
analyses, the tables must be read together with the text of each summary. The
tables alone do not constitute a complete description of the financial analyses.
Considering the data in the tables below without considering the full narrative
description of the financial analyses, including the methodologies and
assumptions underlying the analyses, could create a misleading or incomplete
view of Polaris Securities’ financial analyses. In addition to the
analytical methods used below, Polaris Securities also considered but rejected
as inappropriate a discounted cash flow for Kid Castle in this
context. Polaris opinion, as expressed to the Independent Committee,
is that discounted cash flow provides meaningful results only to the extent that
the discount rate and other parameters are accurate and based on good
information. Small changes in inputs can result in large changes in the value of
a company. Discounted cash flow provides the best valuations when there is a
high degree of confidence about future cash flows. This is not the case with
companies like Kid Castle where it is difficult to predict sales and cost trends
with certainty. The Independent Committee agreed with Polaris’s
analysis.
Market Comparison
Analysis.
Using publicly available information, Polaris Securities
reviewed the market values and trading multiples of the following
publicly-traded companies in the education and training services
sector:
Nobel
Learning Communities Inc. (NLCI, NASDAQ)
Princeton
Review Inc. (REVU, NASDAQ)
Ambassadors
Group, Inc. (EPAX, NASDAQ)
Universal
Technical Institute Inc. (UTI, NYSE)
Lincoln
Educational Services Corporation (LINC, NASDAQ)
This
list was narrowed down from a larger list of companies that were chosen using a
fee-based market analysis service that derives a list of competitors based on
industry type, capital structure and operating performance. Polaris
believes that the comparison companies, though larger and more advanced in their
growth, are comparable to Kid Castle in terms of its managerial skills, growth
prospects and risk to a company like Kid Castle with a book value $1.95
million. Polaris Securities reviewed and compared five financial
ratios among the comparison companies and Kid Castle. The five
financial ratios are as follows: P/S is share price divided by sales per share,
P/B is share price divided by book value per share, P/E is share price divided
by earnings per share, EV/EBITDA is enterprise value divided by earnings before
interest, tax, depreciation and amortization, and EV/EBIT is enterprise value
divided by earning before interest and tax. Enterprise value is
defined as market capitalization plus debt, minority interest and preferred
shares, minus total cash and cash equivalents. Polaris determined
that the P/B (price to book value) ratio was most applicable to Kid Castle.
Polaris’s basis for this view, as indicated in its report, is that financial
ratios based on income and sales figures were less useful as financial
comparisons than book value, which is more consistent. This analysis
indicated the following implied per share equity reference range for the
Company, as compared to the per-share Transaction
consideration:
|
Implied Per Share Equity
Reference Range For the
Company
|
|
Per
Share
Transaction Consideration
|
|
$
|
0.24
|
|
$
|
0.18
|
|
Market
Price Analysis
Polaris
Securities reviewed the average market prices of Kid Castle stock (as reported
on the OTC Bulletin Board) over the last 10, 15, 30, and 60 days preceding the
date of their report.
This
analysis indicated the following implied per share equity reference range for
the Company, as compared to the per share cashout consideration:
|
Implied Per Share Equity
Reference Range For the
Company
|
|
Per
Share
Transaction Consideration
|
|
$0.05
- $0.08
|
|
$
|
0.18
|
|
Polaris
Securities determined the weighted average of the valuations derived by its
market comparison and market price methods, resulting in a valuation of $0.145
to $0.16. Then Polaris calculated alternative price ranges based on
adding a 10% premium and 15% premium for non-quantitative considerations based
on the Company’s past financial performance, management capability, market
position, potential future industry growth and potential controlling
premium. This resulted in Polaris’s final price valuation range of
$0.160 to $0.184.
Alternatives
to the Transaction
In making
their determinations to proceed with the Transaction, the Independent Committee
and the Board of Directors considered other methods of effecting a
deregistration transaction, including an issuer tender offer and an odd-lot
tender offer, as well as maintaining the status quo. There was no consideration
to any alternatives that were not related to deregistration. When considering
the various alternatives to the Transaction, the primary focus was the level of
assurance that the selected alternative would result in the Company having fewer
than 300 record owners of its common stock, thus allowing us to achieve our
objective, the time frame within which such alternative could reasonably be
expected to be achieved, again relative to the other alternatives under
consideration, as well as the potential costs of the alternative
transactions.
Issuer Tender
Offer
.
In this
alternative, we would offer to purchase a set number of shares within a specific
timetable. The results of an issuer tender offer would be unpredictable,
however, due to its voluntary nature, and we would have no assurance that enough
shareholders would tender all of their shares of our common stock to reduce the
number of record owners of our common stock to fewer than 300 (as calculated
under SEC Rule 12g5-1). In addition, the rules governing tender offers require
equal treatment of all shareholders, including pro rata acceptance of offers
from shareholders. The Independent Committee and the Board of Directors
considered that since they could not guarantee or predict with certainty how
many shares would be tendered, the possibility existed that such a transaction
would not reduce the number of holders of record to below 300, and the estimated
costs of this type of transaction potentially could be higher than the costs of
the Transaction. The cost of funding the purchase of shares in an issuer tender
offer would be in the same range as the cost of the reverse split method,
however, additional costs of communicating with shareholders and increased legal
fees are estimated to be about $75,000 to $150,000 more than the privatization
transaction. More importantly, if the tender offer were
undersubscribed, the Company may be forced to repeat the tender offer, resulting
in additional transaction costs. As a result of these disadvantages,
the Independent Committee and the Board of Directors determined not to pursue
this alternative.
Maintaining the
Status Quo.
The Independent Committee and the Board of Directors also
considered maintaining the status quo. In that case, the Company would continue
to incur the significant expenses of being an SEC reporting company without
enjoying what it believes to be the benefits traditionally associated with SEC
reporting company status, including, but not limited to, raising capital in the
public markets, stock liquidity, business credibility and the ability to use its
common stock as currency for acquisitions. However, the Independent Committee
and the Board of Directors believed that becoming a private company would be in
the best interests of the Company and its shareholders and rejected this
alternative.
Alternatives to
Capital Injection
. The Board of Directors and the Independent
Committee considered financing the Transaction through borrowing, rather than
through a capital injection. A bank loan for $900,000 principal amount would
cost the Company approximately $50,000 to $60,000 per year in interest payments
depending on the interest rate available, assuming the availability of a
loan. (The average interest rate for our bank loans in 2009 was
5.86%.) Increasing the Company’s debt level is contrary to the Company’s
business plan of reducing its debt load and applying its capital resources to
expand its operations in the PRC. The Board determined that a capital
investment by CEO Yang at the same price per share as the price paid to cashed
out shareholders would represent a better opportunity for the Company to
implement its business plan and represent a better opportunity for the
continuing shareholders.
After
carefully reviewing all the aforementioned alternatives, for the reasons
discussed above, the Independent Committee recommended the Transaction, and the
Board of Directors approved it, as the most expeditious and economical way of
changing our status from that of a reporting company to that of a non-reporting
company.
Potential
Conflicts of Interests of our Officers and Directors
Mr.
Pai and Mr. Yang are our only officers and directors who hold or beneficially
own shares in the Company. No other shareholder beneficially owns
more than 5% of our stock. We have never issued stock options, so
consequently there are no options outstanding. The stock held by
Messrs. Pai and Yang is common stock. It carries with it no rights or
benefits not shared on a pro rata basis by all other holders of our common
stock. Mr. Pai and Yang have also personally guaranteed a loan of
$1,542,401 from Union Bank of Taiwan. For more information on the loan, refer to
Note 12 to the Company’s 2008 financial statements in the Company’s Form 10-K
for the period ended December 31, 2008, filed with the SEC on March 17,
2009.
On
June 17, 2009, in order to finance the costs of the Transaction and the
operations of the Company following the Transaction, Mr. Yang, pursuant to the
previously discussed Capital Injection, purchased from us 5,000,000 newly issued
shares of our common stock at $0.18 per share for an aggregate purchase price of
$900,000. The following chart shows all Company shares acquired
or deemed beneficially owned by Mr. Yang, the prices paid, and his aggregate
holdings as of the respective dates.
|
Date
|
|
Shares
acquired
|
|
|
Price
(US$)
|
|
|
Aggregate
holdings
after
transaction
|
|
|
June
25, 2009
|
|
|
5,000,000
|
|
|
|
0.18
|
|
|
|
16,255,538
|
|
|
March
19, 2009*
|
|
|
1,080,000
|
|
|
|
0.15
|
|
|
|
11,255,538
|
|
|
February
5, 2009
|
|
|
1,000,000
|
|
|
|
0.15
|
|
|
|
10,175,538
|
|
|
July
25, 2008
|
|
|
10,000
|
|
|
|
0.25
|
|
|
|
9,175,538
|
|
|
December
28, 2006
|
|
|
4,000,000
|
|
|
|
0.15
|
|
|
|
9,165,538
|
|
|
September
26, 2006
|
|
|
3,024,000
|
|
|
|
0.18
|
|
|
|
5,165,538
|
|
|
December
31, 2005
|
|
|
1,641,538
|
|
|
|
0.35
|
|
|
|
2,141,538
|
|
|
December
31, 2005*
|
|
|
500,000
|
|
|
|
0.35
|
|
|
|
500,000
|
|
*Shares
acquired and held by Mr. Yang’s spouse.
The
purchase of 5,000,000 shares of stock by Mr. Yang was reviewed and approved by
the Independent Committee in conjunction with its overall review and approval of
the Transaction. As a result of the Capital Injection, Mr. Yang’s percentage
share of the Company’s voting stock increased from 45% to 54%. The
following table compares the change in various metrics before and after the
Capital Injection and the Reverse Spit cashout, respectively. For the
Company, it shows outstanding shares, net book value, and earnings per
share. For Mr. Yang it shows his percentage ownership, attributable
share of net book value, and share of interest in net income (pro
forma).
|
|
|
Capital Injection
|
|
|
Reverse Split Cashout
|
|
|
|
|
Before
|
|
|
After
|
|
|
Before
|
|
|
After
a
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Outstanding Shares
|
|
|
25,000,000
|
|
|
|
30,000,000
|
|
|
|
30,000,000
|
|
|
|
28,316,667
|
|
|
Net
Book Value
|
|
|
1,945,256
|
|
|
|
2,720,820
|
|
|
|
2,720,820
|
|
|
|
2,142,770
|
|
|
Book
value per share
|
|
|
.08
|
|
|
|
.09
|
|
|
|
.09
|
|
|
|
.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Yang
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
held by Yang
|
|
|
11,255,538
|
|
|
|
16,255,538
|
|
|
|
16,255,538
|
|
|
|
16,255,538
|
|
|
Yang
percentage ownership
|
|
|
45
|
%
|
|
|
54
|
%
|
|
|
54
|
%
|
|
|
57
|
%
|
|
Yang
share of net book value
|
|
|
875,365
|
|
|
|
1,469,243
|
|
|
|
1,469,243
|
|
|
|
1,221,379
|
|
|
Yang’s
share of net income
b
|
|
|
377,536
|
|
|
|
453,043
|
|
|
|
453,043
|
|
|
|
478,212
|
|
a
All
values in column are estimates based on projected cashout of approximately
1,683,333 shares.
b
Values in
row reflect pro-forma example based on hypothetical net income of
$838,969. This example is provided pursuant to SEC disclosure
rules. It reflects what Mr. Yang’s share of net income would be if
2009 net income is the same as in 2008, and if the Company elected to make a
distribution of surplus to shareholders. It does not imply that any
distributions of income to shareholders have been or will be
made. The Company has never distributed surplus to shareholders, by
dividend or otherwise.
Under our
articles of incorporation and Florida law, certain significant actions of the
Company such as merger, sale of substantially all of the assets of the Company,
and amendment of our articles of incorporation require the approval of the
holders of 50% or more of our common stock. As a result of this increase in Mr.
Yang’s ownership percentage, he now beneficially owns a sufficient number of
shares to approve these transactions by himself.
As of
June 17, 2009, Messrs. Pai and Yang collectively owned 20,096,915 shares, or 67%
of our issued and outstanding shares eligible to vote to approve the
Transaction. Messrs. Pai and Yang, acting together, have sufficient
voting power to, and did in fact vote to approve the
Transaction. Because they will continue to be officers, directors,
and controlling shareholders after the Transaction, Messrs. Pai and Yang have
interests that are different from both cashed out and continuing unaffiliated
shareholders, which interests may present a conflict. Upon the effectiveness of
the Transaction, the aggregate number of shares of our common stock owned by
Messrs. Pai and Yang will not change but their ownership percentage of eligible
voting shares will increase to approximately 71% as a result of the reduction of
the number of shares of our common stock outstanding by approximately 1,683,333
shares. The Independent Committee was formed (and the services of
Polaris Securities were obtained) to ensure that the Transaction is fair to all
shareholders both procedurally and substantively.
The
increase in the ownership percentage of our shares of voting stock held by
Messrs. Pai and Yang and the reduction in the number of shares outstanding
following the completion of the Transaction is based on record holder
information that we received as of May 8, 2009 from our transfer agent,
Securities Transfer Corporation, and a share range analysis we received from
Broadridge Corporate Issuer Services, reflecting the distribution of the
accounts of our shareholders who hold shares in “street name” according to
predefined ranges based on share amount. We have assumed for purposes of
determining ownership percentages and the reduction in the number of shares
outstanding following the Transaction, that all beneficial holders who hold
shares in street name will be informed by their custodian of the opportunity to
be cashed out and will elect to do so. However, in all likelihood, an
undetermined percentage of the street name shareholders will not be given the
opportunity by their custodian or elect not to be cashed out in the
Transaction. The effect will be that the number of street name shares
that are actually cashed out in the Transaction will be lower with a
corresponding increase in the ownership percentages of continuing shareholders,
including those of Messrs. Pai and Yang.
The
ownership percentage and the reduction in the number of shares outstanding
following the Transaction may increase or decrease depending on purchases, sales
and other transfers of our shares of common stock by our shareholders prior to
the effective time of the Transaction. The ownership percentage of our shares of
common stock held by Messrs. Pai and Yang and the ownership percentage of the
continuing shareholders will proportionally increase or decrease as a result of
such purchases, sales and other transfers of our shares of common stock by our
shareholders prior to the effective time of the Transaction. See “SPECIAL
FACTORS —Effects of the Transaction — Effect on Affiliated Shareholders”
beginning on page 17.
Plans
for the Company after the Transaction
The
primary purpose of the Transaction is to avoid the administrative and other
costs associated with being a public Company, it being determined that the
significant costs outweigh the benefits of being a public
company. For the cashed out shareholders, the Transaction will have
an additional benefit, allowing them to immediately realize the value of their
investment in the Company through their receipt of the per share cashout
consideration of $0.18. This represents a $0.13 premium over $0.05, the last
reported trade of the Company’s common stock on the OTCBB on June 2, 2009, which
was the last trade reported as of June 16, 2009. In this respect, the
Board of Directors believes that the Transaction was more favorable to the
cashed out as well as the other unaffiliated shareholders than the potential
value that might result from remaining a public company. For these reasons, and
the other reasons discussed under “SPECIAL FACTORS — Purpose of and Reasons for
the Transaction” beginning on page 13 and “SPECIAL FACTORS — Independent
Committee Deliberations and Fairness” beginning on page 21, the Board of
Directors of the Company has determined that the Transaction, upon the terms and
conditions set forth in the Information Statement, are advisable, fair to and in
the best interests of the Company and its unaffiliated
shareholders.
It is
expected that, upon consummation of the Transaction, the operations of the
Company will be conducted substantially as they currently are being conducted
except that the Company common stock will cease to be publicly traded. Based on
its estimate of Transaction expenses, the Company expects to have approximately
$321,950 in leftover cash from the Capital Injection after payment of
Transaction expenses that will be used primarily to expand the Company’s
operations in the PRC and for other working capital
purposes. Following the closing of the Transaction, the registration
of the Company’s common stock and the Company’s reporting obligation under the
Exchange Act with respect to our common stock will be terminated upon
application to the SEC. In addition, upon consummation of the Transaction, the
Company’s common stock will no longer be quoted on the OTCBB, nor will it be
listed on any securities exchange. The Company will not be subject to
the obligations and constraints, and the related direct and indirect costs
associated with having publicly traded equity securities.
If the
Transaction is not completed for any reason, no shareholders will receive any
payment for their shares in connection with the Transaction. Instead, the
Company will remain an independent public company and our common stock will
continue to be quoted on the OTCBB. In addition, if the Transaction is not
completed, we expect that management will continue to operate the business in a
manner similar to that in which it is being operated today and that our
shareholders will continue to be subject to the same risks and opportunities as
they currently are, including, among other things, the nature of the child
English-language teaching and educational services industry on which the
Company’s business largely depends, and general industry, economic, regulatory
and market conditions. Accordingly, if the Transaction is not consummated, there
can be no assurance as to the effect of these risks and opportunities on the
future value of your shares. From time to time, the Company’s Board of Directors
will evaluate and review, among other things, the business operations,
properties, dividend policy and capitalization of the Company, and make such
changes as are deemed appropriate and continue to seek to identify strategic
alternatives to enhance shareholder value.
Material
U.S. Federal Income Tax Consequences
The
following is a summary of material U.S. federal income tax consequences to the
Company and its shareholders resulting from the Transaction. This
summary addresses only those shareholders who have held their shares as capital
assets. This discussion does not address all U.S. federal income tax
considerations that may be relevant to particular shareholders in light of their
individual circumstances. Many types of shareholders (such as financial
institutions, tax-exempt organizations (including private foundations),
insurance companies, dealers in securities, foreign investors, and partnerships
and their partners, holders that received their shares pursuant to the exercise
of employee stock options or otherwise as compensation, and investors that hold
the shares as part of a straddle, hedge, conversion, constructive sale, or other
integrated transaction for U.S. federal income tax purposes) may be subject to
special tax rules.
For
purposes of this summary, we use the term “U.S. Shareholder” to mean a
shareholder who is:
|
|
·
|
a
citizen or individual resident of the United States for U.S. federal
income tax purposes;
|
|
|
·
|
a
corporation or an entity taxable as a corporation for U.S. federal income
tax purposes, created or organized under U.S. law (federal or
state);
|
|
|
·
|
an
estate the income of which is subject to U.S. federal income taxation
regardless of its sources; or
|
|
|
·
|
a
trust if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have authority to
control all substantial decisions of the
trust.
|
A
“Non-U.S. Shareholder” is a shareholder of our common stock (other than an
entity treated as a partnership for U.S. federal income tax purposes) that is
not a U.S. Shareholder.
The
following summary is based upon the Internal Revenue Code of 1986, as amended
(the “Code”), applicable Treasury regulations promulgated thereunder,
administrative rulings and judicial decisions, as currently in effect, all of
which are subject to differing interpretations or change, possibly on a
retroactive basis, and does not address any state, local, foreign, or other tax
considerations, including without limitation, U.S. federal gift tax and estate
tax. No assurance can be given that possible changes in such U.S. federal income
tax laws or interpretations will not adversely affect this summary. This summary
is not binding on the Internal Revenue Service.
If a
shareholder of our common stock is an entity treated as a partnership for U.S.
federal income tax purposes, the tax treatment of a partner will depend on the
status of the partners and the activities of the
partnership. Shareholders who are a partner of a partnership holding
our common stock are urged to consult with their own tax advisors.
NO
RULING FROM THE INTERNAL REVENUE SERVICE OR OPINION OF COUNSEL HAS BEEN OR WILL
BE OBTAINED REGARDING THE U.S. FEDERAL INCOME TAX CONSEQUENCES TO SHAREHOLDERS
IN CONNECTION WITH THE TRANSACTION. ACCORDINGLY, EACH SHAREHOLDER IS ENCOURAGED
TO CONSULT ITS OWN TAX ADVISOR AS TO THE PARTICULAR FEDERAL, STATE, LOCAL,
FOREIGN, AND OTHER TAX CONSEQUENCES OF THE TRANSACTION, IN LIGHT OF ITS
INDIVIDUAL CIRCUMSTANCES.
The
Company
.
The
Company will not recognize taxable income, gain or loss in connection with the
Transaction.
U.S.
Shareholders
. The U.S. federal income tax consequences of the
Transaction for our U.S. Shareholders will differ depending on the number of
shares of common stock owned and, in some cases, constructively owned by such
U.S. Shareholders. As set forth in more detail below, U.S.
Shareholders who receive no cash as a result of the Transaction, and continue to
hold shares of common stock immediately after the Transaction, will not
recognize any gain, loss or dividend income as a result of the
Transaction. The tax treatment of a U.S. Shareholder who receives
cash will depend on whether such U.S. Shareholder continues to own common stock
following the Transaction (or is treated as continuing to own common stock under
certain constructive ownership rules that are described below). If a
U.S. Shareholder does not actually or constructively own common stock following
the Transaction, such U.S. Shareholder who receives cash as a result of the
Transaction will recognize gain or loss upon the sale or exchange of the common
stock. In contrast, if a U.S. Shareholder actually or constructively
owns common stock following the Transaction, such U.S. Shareholder may be
required to treat any cash received as a dividend distribution rather than as
gain or loss from a sale or exchange.
U.S. Shareholders
Who Do Not Receive Cash in the Transaction
.
If a U.S.
Shareholder receives no cash as a result of the Transaction, but continues to
hold shares of common stock immediately after the Transaction, such U.S.
Shareholder should not recognize any gain or loss or dividend income for U.S.
federal income tax purposes as a result of the Transaction. The aggregate
adjusted tax basis of the shares that U.S. Shareholder holds immediately after
the Transaction will equal the aggregate adjusted tax basis of the shares such
U.S. Shareholder held immediately prior to the Transaction, and the holding
period in those shares will be the same as immediately prior to the
Transaction.
U.S. Shareholders
Who Receive Cash in the Transaction
.
A U.S.
Shareholder who receives cash in the Transaction will be treated as having such
shares redeemed in a taxable transaction governed by Section 302 of the Code
and, depending on the U.S. Shareholder’s situation, the Transaction will be
treated as either:
|
|
·
|
a
sale or exchange of the redeemed shares, in which case the U.S.
Shareholder will recognize gain or loss equal to the difference between
the cash payment and the U.S. Shareholder’s tax basis for the redeemed
shares; or
|
|
|
·
|
a
cash distribution that is treated: (i) first, as a taxable
dividend to the extent of allocable current and accumulated earnings and
profits of the Company, if any; (ii) second, as a tax-free return of
capital to the extent of the U.S. Shareholder’s tax basis in the redeemed
shares; and (iii) finally, as gain from the sale or exchange of the
redeemed shares.
|
Amounts
treated as gain or loss from the sale or exchange of redeemed shares will be
capital gain or loss. Capital gain or loss recognized will be
long-term if your holding period with respect to the common stock redeemed is
more than one year at the time of the Transaction. The deductibility of capital
loss is subject to limitations. If you are an individual, long-term capital gain
is subject to a maximum marginal federal income tax rate of 15%.
Dividends
are taxed at ordinary income rates. However, you may qualify for a 15% federal
income tax rate on any cash received in the Transaction that is treated as a
dividend as described above, if (i) you are an individual or other
non-corporate shareholder; (ii) you have held the common stock with respect
to which the dividend was received for more than 60 days during the 121-day
period beginning on the date which is 60 days before the date on which such
shares become ex-dividend with respect to such dividend; and (iii) you were
not obligated during such period (pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or related
property. You should consult with your tax advisor regarding your eligibility
for such lower tax rates on dividend income. A corporation (other
than an S corporation) may be allowed a deduction, subject to applicable
limitations and other special rules, with respect to a dividend
received.
Under Section 302 of the Code, a
redemption of shares from a U.S. Shareholder as part of the Transaction will be
treated as a sale or exchange of the redeemed shares if:
|
|
·
|
the
Transaction results in a “complete termination” of such U.S. Shareholder’s
ownership interest in the Company;
|
|
|
·
|
the
receipt of cash is “substantially disproportionate” with respect to the
U.S. Shareholder; or
|
|
|
·
|
the
receipt of cash is “not essentially equivalent to a dividend” with respect
to the U.S. Shareholder.
|
Determining Ownership of Common
Stock.
These
three tests are applied by taking into account not only shares that a U.S.
Shareholder actually owns, but also shares that the U.S. Shareholder
constructively owns pursuant to Section 318 of the Code. Under these
constructive ownership rules, a U.S. Shareholder is deemed to own constructively
shares owned by certain related individuals and entities in which the U.S.
Shareholder has an interest in addition to shares directly owned by the U.S.
Shareholder. For example, an individual U.S. Shareholder is
considered to own shares owned by or for his or her spouse and his or her
children, grandchildren and parents (“family attribution”). To
illustrate, if you own fewer than 5,000 shares in your own name (for which you
will receive cash) and your spouse owns 5,000 or more shares (which will
continue to be held following the completion of the Transaction), you will be
treated as constructively owning the shares owned by your spouse.
In addition, a U.S. Shareholder is
considered to own a proportionate number of shares owned by estates or certain
trusts in which the U.S. Shareholder has a beneficial interest, by partnerships
in which the U.S. Shareholder is a partner, and by corporations in which 50% or
more in value of the stock is owned directly or indirectly by or for such U.S.
Shareholder. Similarly, shares directly or indirectly owned by
beneficiaries of estates or certain trusts, by partners of partnerships and,
under certain circumstances, by shareholders of corporations may be considered
owned by these entities (“entity attribution”). A U.S. Shareholder is
also deemed to own shares that the U.S. Shareholder has the right to acquire by
exercise of an option or by conversion or exchange of a
security. Constructively owned shares may be reattributed to another
taxpayer. For example, shares attributed to one taxpayer as a result
of entity attribution may be reattributed from that taxpayer to another taxpayer
through family attribution.
A U.S. Shareholder who receives cash in
the Transaction and would only constructively own shares of common stock
following the completion of the Transaction as a result of attribution may be
able to avoid constructive ownership of such shares by waiving attribution,
provided certain conditions are met.
In addition to constructively owning
common stock by attribution following the Transaction, you may be entitled to
receive cash in the Transaction for shares of common stock you hold in one name
or capacity, but continue to hold shares in another name or capacity. For
example, you may own fewer than 5,000 shares in your own name (for which you
will receive cash) and own 5,000 or more shares that are held in your brokerage
account in street name.
Complete Termination of
Interest
. A U.S. Shareholder who receives cash in the
Transaction and does not actually or constructively own any shares of common
stock immediately after the Transaction will have his, her or its interest in
the Company completely terminated by the Transaction. Such a U.S.
Shareholder will recognize gain or loss equal to the difference between the cash
payment and the U.S. Shareholder’s adjusted tax basis for his, her or its shares
of common stock.
“Substantially Disproportionate”
Test.
If a U.S. Shareholder receives cash as a result of the
Transaction, but is treated as continuing to own shares of common stock as
described above, such U.S. Shareholder will recognize capital gain or loss for
U.S. federal income tax purposes equal to the difference between the cash
received for the shares of common stock and the aggregate adjusted tax basis in
those shares, provided that the receipt of cash constitutes a “substantially
disproportionate redemption of stock,” as described below.
Under this test, a U.S. Shareholder who
receives cash in the Transaction and immediately after the Transaction actually
or constructively continues to own shares of common stock must compare (i) his,
her or its percentage ownership immediately before the Transaction (i.e., the
number of voting shares actually or constructively owned by him, her or it
immediately before the Transaction, divided by the number of voting shares
outstanding immediately before the Transaction) with (ii) his, her or its
percentage ownership immediately after the Transaction. If the
shareholder’s post-Transaction ownership percentage is less than 80% of the U.S.
Shareholder’s pre-Transaction ownership percentage, the receipt of cash is
“substantially disproportionate” with respect to the U.S.
Shareholder. The U.S. Shareholder will, therefore, receive sale or
exchange treatment on the portion of his, her or its shares of common stock
exchanged for cash and will recognize gain or loss equal to the difference
between the cash payment and the U.S. Shareholder’s adjusted tax basis for his,
her or its shares of common stock.
“Not Essentially Equivalent to a
Dividend
” Test. If the receipt of cash by the shareholder
fails the “substantially disproportionate” test, the receipt of cash may
constitute an “exchange” under the “not essentially equivalent to a dividend”
test. The receipt of cash by a U.S. Shareholder will be “not
essentially equivalent to a dividend” if the redemption results in a “meaningful
reduction” of the shareholder’s proportionate interest in the
Company. If (i) the U.S. Shareholder exercises no control over the
affairs of the Company (e.g., is not an officer, director or high-ranking
employee), (ii) the U.S. Shareholder’s relative stock interest in the Company is
minimal, and (iii) the U.S. Shareholder’s post-Transaction ownership percentage
is less than the U.S. Shareholder’s pre-Transaction ownership percentage, the
receipt of cash should not be essentially equivalent to a dividend with respect
to the U.S. Shareholder and the U.S. Shareholder should, therefore, receive sale
or exchange treatment on the portion of his, her or its shares of
pre-Transaction common stock exchanged for cash.
* * *
If the
cash received by a U.S. Shareholder is not treated as a sale or exchange because
the U.S. Shareholder immediately after the Transaction actually or
constructively continues to own shares of post-Transaction common stock and
neither of the two tests outlined above are met, the cash will be treated: (i)
first, as a taxable dividend to the extent of allocable current and accumulated
earnings and profits of the Company, if any; (ii) second, as a tax-free return
of capital to the extent of the U.S. Shareholder’s tax basis in the redeemed
shares; and (iii) finally, as gain from the sale or exchange of the redeemed
shares.
IF
YOU ARE A U.S. SHAREHOLDER AND YOU, OR A PERSON OR ENTITY WHOSE OWNERSHIP OF
SHARES WOULD BE ATTRIBUTED TO YOU, WILL CONTINUE TO HOLD COMMON STOCK
IMMEDIATELY AFTER THE TRANSACTION, YOU ARE URGED TO CONSULT WITH YOUR TAX
ADVISOR AS TO THE PARTICULAR FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF THE TRANSACTION, IN LIGHT OF YOUR SPECIFIC
CIRCUMSTANCES.
Backup
Withholding for U.S. Shareholders
.
If you are to receive cash
as a result of the Transaction, you will be required to provide your social
security or other U.S. taxpayer identification number (or, in some instances,
additional information) in connection with the Transaction to avoid backup
withholding requirements that might otherwise apply. The letter of transmittal
and other documentation we will send to you after the Transaction will require
you to deliver such information when the common stock certificates are
surrendered following the effective time of the Transaction. Failure to provide
such information may result in backup withholding. Backup withholding is not an
additional tax. Rather, the amount of the backup withholding can be credited
against your U.S. federal income tax liability provided that the required
information is given to the IRS. If backup withholding results in an overpayment
of tax, a refund can be obtained upon filing an appropriate income tax return on
a timely basis.
Non-U.S.
Shareholders.
A Non-U.S. Shareholder who receives cash in the
Transaction will be treated as having his, her or its shares of common stock
redeemed in a taxable transaction under Section 302 of the
Code. Therefore, such Non-U.S. Shareholder must determine whether,
based on his, her or its situation, the Transaction will be treated as (i) a
sale or exchange of the redeemed shares, or (ii) a cash
distribution. This determination is based upon the same rules
described above for U.S. Shareholders.
If the
Transaction is treated as a sale or exchange of the redeemed shares, then any
gain realized on the receipt of cash in the Transaction by a Non-U.S.
Shareholder will not be subject to U.S. federal income tax unless:
|
|
·
|
the
gain is effectively connected with a trade or business of the Non-U.S.
Shareholder in the United States (and, if required by an applicable income
tax treaty, the gain is attributable to a U.S. permanent establishment of
the Non-U.S. Shareholder);
|
|
|
·
|
the
Non-U.S. Shareholder is an individual who is present in the United States
for 183 days or more in the taxable year of the Transaction, and certain
other conditions are met; or
|
|
|
·
|
we
are or have been a “United States real property holding corporation” for
U.S. federal income tax purposes at any time during the five years
preceding the Transaction.
|
An individual Non-U.S. Shareholder
described in the first bullet point immediately above will be subject to tax on
his or her net gain in the same manner as if he or she were a U.S. Shareholder,
discussed above. If a Non-U.S. Shareholder that is a foreign
corporation falls under the first bullet point immediately above, it will be
subject to tax on its net gain in the same manner as if it were a U.S.
Shareholder, discussed above, and, in addition, may be subject to the branch
profits tax equal to 30 percent of its effectively connected earnings and
profits (including such gain) or at such lower as may be specified by an
applicable income tax treaty.
An individual Non-U.S. Shareholder
described in the second bullet point immediately above will be subject to a flat
30 percent tax (or lower income tax treaty rate) on the gain derived from the
Transaction, which may be offset by U.S.-source capital losses, even though the
individual is not considered a resident of the United States.
We believe we are not, have not been
and do not anticipate becoming a “United States real property holding
corporation” for U.S. federal income tax purposes.
Alternatively, if the Transaction is
treated as a cash distribution, a Non-U.S. Shareholder’s receipt of cash in the
Transaction will be treated: (i) first, as a taxable dividend to the
extent of allocable current and accumulated earnings and profits of the Company,
if any; (ii) second, as a tax-free return of capital to the extent of the
Non-U.S. Shareholder’s tax basis in the redeemed shares; and (iii) finally, as
gain from the sale or exchange of the redeemed shares. With respect
to the portion of the distribution treated as a taxable dividend, a Non-U.S.
Shareholder will be subject to a flat 30 percent tax (or lower income tax treaty
rate) on such dividend to the extent the dividend is from U.S. sources
(dividends paid by U.S. corporations generally are from U.S. sources) and is not
effectively connected with the conduct of a trade or business in the United
States by the Non-U.S. Shareholder.
Notwithstanding the foregoing, if a
dividend is not effectively connected with the conduct of a trade or business in
the United States by the recipient Non-U.S. Shareholder and at least 80 percent
of our gross income from all sources constitutes “active foreign business
income,” as defined by the Code, for a period of three years ending on the date
of the Transaction, then the dividend will be exempt from tax to the extent of
the percentage that our foreign-source gross income (both active foreign
business income and other types of foreign-source gross income) for the
three-year period ending on the date of the Transaction is of our total gross
income from all sources for that period. If, however, the 80 percent
threshold is not met, none of the dividends paid will qualify for the exemption,
and such amounts will be taxable according to the rules discussed
above.
Based on the relevant information and
our expectations up through the date of the Transaction, we believe that more
than 80 percent of our gross income from all sources during the three-year
period ending on the date of the Transaction should constitute "active foreign
business income" for U.S. federal income tax purposes.
Any portion of a dividend that is
treated as gain from the sale or exchange of the redeemed shares is subject to
the same rules that govern Non-U.S. Shareholders with respect to whom the
Transaction is treated as a sale or exchange of the redeemed shares, discussed
above.
Information
Reporting and Backup Withholding for Non-U.S.
Shareholders.
Cash received by Non-U.S. Shareholders in the
Transaction also will be subject to information reporting, unless an exemption
applies. Moreover, backup withholding of tax at a rate of 28 percent
may apply to cash received by Non-U.S. Shareholders in the Transaction, unless
the holder or other payee establishes an exemption in a manner satisfactory to
the paying agent and otherwise complies with the backup withholding
rules. Backup withholding is not an additional tax and any amounts
withheld under the backup withholding rules may be refunded or credited against
a Non-U.S. Shareholder’s U.S. federal income tax liability, if any, provided
that such Non-U.S. Shareholder furnishes the required information to the IRS in
a timely manner.
ALL
NON-U.S. SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE
THEIR PARTICULAR TAX CONSEQUENCES, INCLUDING THE APPLICATION AND EFFECT OF ANY
STATE, LOCAL, OR FOREIGN INCOME AND OTHER TAX LAWS, OF THE RECEIPT OF CASH UPON
THE COMPLETION OF THE TRANSACTION.
Effective
Date of Transaction
The
Transaction will become effective as of the date that the Company amends its
articles of incorporation through the filing of articles of amendment to the
articles of incorporation with the State of Florida to effectuate the reverse
stock split and the forward stock split. We intend to effect the Transaction
approximately 25 days after this Information is mailed to our shareholders. Our
common stock acquired by us in connection with the Transaction will be restored
to the status of authorized but unissued shares. The suspension of our
obligation to file periodic reports and other documents under the Exchange Act
will become effective after the filing with the SEC of a certification and
notice of termination of registration on Form 15. The deregistration
of our common stock under the Exchange Act will become effective 90 days after
the filing of the Form 15. See “SPECIAL FACTORS — Effects of the Transaction —
Termination of Exchange Act Registration and Elimination of SEC Reporting
Obligations” beginning on page 15.
Exchange
of Certificates and Payment for Fractional Shares
Our
transfer agent, Securities Transfer Corporation, will act as our agent for
purposes of exchanging certificates and paying for fractional shares in
connection with the Transaction. Shareholders who will be
cashed out will be mailed letters of transmittal and other documents to tender
their share certificates for payment within one week of that the filing of the
articles of amendment are effective. Shareholders will be mailed
checks for the cash payments within two weeks from the date that their correctly
completed letter of transmittal and stock certificates have has been received by
Securities Transfer Corporation.
No
service charge, brokerage commission, or transfer tax will be payable by any
holder of an old certificate evidencing shares of our common stock in connection
with the issuance of a new certificate in respect for it, except that if any new
certificate is to be issued in a name other than that in which the certificate
to surrendered for exchange is registered, the replacement certificate will not
be issued unless: (i) the person requesting such issuance pay to us any
transfer taxes payable by reason of such transfer (or any prior transfer of such
surrendered certificate, if any) or establish to our satisfaction that such
taxes have been paid or are not payable; and (ii) the surrendered
certificate has been properly endorsed and otherwise in proper form for
transfer.
If any
certificate evidencing shares of our common stock has been lost or destroyed, we
may in our discretion accept in lieu of it a duly executed affidavit and
indemnity agreement in a form satisfactory to us. If your certificate has been
lost or destroyed you must submit, in addition to (i) the letter of
transmittal sent by us, (ii) the above-referenced affidavit, (iii) the
above-referenced indemnity agreement, and (iv) any other document required
by us, which may include a bond or other security indemnifying us and our agents
against any losses incurred as a consequence of issuing a certificate evidencing
new shares of our common stock or paying cash in lieu of issuing fractional
shares of our common stock in exchange for the existing shares of our common
stock evidenced or purported to be evidenced by such lost or destroyed
certificate. Additional instructions with respect to lost or destroyed
certificates will be included with the letter of transmittal that we will send
to shareholders after the effective date of the Transaction.
Shareholders
owning less than 5,000 shares on the effective date of the Transaction will
receive $0.18 for each pre-split share of common stock, without interest. There
will be an option in the Letter of Transmittal for shareholders to elect to
receive their payment in New Taiwan Dollars rather than U.S.
dollars. Payments in New Taiwan Dollars will be based on the closing
Taiwan Dollar-U.S. Dollar exchange rate published by The Wall Street Journal on
its public web page for the date when the Transaction is effective. Shareholders
who own 5,000 or more shares at the effective date of the Transaction will not
be entitled to receive any cash for their fractional share interests resulting
from the reverse stock split. The forward stock split that will immediately
follow the reverse stock split will reconvert their whole shares and fractional
share interests back into the same number of shares of our common stock they
held immediately before the effective time of the Transaction. As a result, the
total number of shares held by such a shareholder will not change after
completion of the Transaction, and the shareholder will not receive new
certificates for his or her shares of our common stock.
For
purposes of determining ownership of shares of our common stock on the effective
date of the Transaction, shares will be considered held by the person in whose
name they are registered on our transfer agent’s records. Upon effecting the
Transaction, we intend to treat shareholders holding shares of our common stock
in street name in the same manner as registered shareholders whose shares are
registered in their names. Prior to the effective date of the Transaction, we
will conduct an inquiry of all brokers, banks and other nominees that hold
shares of our common stock in street name. We will ask them to effect the
Transaction for their beneficial holders holding shares of our common stock in
street name. We will rely on these brokers, banks and other nominees to provide
us with information on how many fractional shares will be cashed out. However,
these brokers, banks and other nominees may have different procedures than
registered shareholders for processing the Transaction. If you hold your shares
in street name with a bank, broker or other third party, and if you have any
questions in this regard, we encourage you to contact your bank, broker or
nominee.
Promptly
after the effective date of the Transaction, we will send to each holder of
record of our common stock, and to brokers, banks and other nominees, based on
information we receive from them in response to our inquiries, for each owner of
our common stock held in street name, instructions for surrendering any
certificates held thereby representing shares of our common stock which will be
converted to a right to receive cash as a result of the Transaction. Only
holders of 4,999 or fewer shares of our common stock immediately prior to the
Transaction should surrender their shares. Holders of 5,000 or more shares
should not surrender their shares. Such instructions will include a letter of
transmittal to be completed and returned to the Transfer Agent by the holder of
such certificates, together with such certificates. The shares we acquire in the
Transaction will be held in treasury.
Within
two weeks after the Transfer Agent receives any surrendered certificate from a
holder of 4,999 or fewer shares of our common stock immediately prior to the
Transaction, together with a duly completed and executed letter of transmittal
with respect thereto and such other documents as we may require, the Transfer
Agent will deliver to the person payment in an amount equal to $0.18, without
interest, for each pre-split share of common stock that is represented by
the fractional share.
There
will be no differences between the respective rights, preferences or limitations
of our common stock prior to the Transaction and our common stock after the
Transaction. There will be no differences with respect to dividend, voting,
liquidation or other rights associated with our common stock.
DO
NOT SEND SHARE CERTIFICATES TO THE COMPANY OR OUR TRANSFER AGENT UNTIL AFTER YOU
HAVE RECEIVED A LETTER OF TRANSMITTAL AND ANY ACCOMPANYING
INSTRUCTIONS.
No
Appraisal or Dissenters’ Rights
Under
Florida law, our articles of incorporation and our bylaws, no appraisal or
dissenters’ rights are available to shareholders of the Company who dissent from
the Transaction. We are aware of no other rights available under
applicable Florida law to shareholders that object to the
transaction.
Escheat
Laws
The
unclaimed property and escheat laws of each state provide that under
circumstances defined in that state’s statutes, holders of unclaimed or
abandoned property must surrender that property to the state. Persons whose
shares are cashed out and whose addresses are unknown to us, or who do not
return their stock certificates and request payment for their cashed-out shares,
generally will have a certain period of years from the effective date of the
Transaction in which to claim the cash payment payable to them. For example,
with respect to shareholders whose last known addresses are in New York, as
shown by our records, the period is three years. Following the expiration of
that three-year period, the Unified Disposition of Unclaimed Property Act of New
York would likely cause the cash payments to escheat to the State of New York.
For shareholders who reside in other states or whose last known addresses, as
shown by our records, are in states other than New York, such states may have
abandoned property laws which call for such state to obtain either
(i) custodial possession of property that has been unclaimed until the
owner reclaims it; or (ii) escheat of such property to the
state.
Source
of Funds and Expenses
Based
on information we have received as of May 8, 2009 from Broadridge Corporate
Issuer Services, reflecting the distribution of the accounts of our shareholders
who hold shares in street name, and from our transfer agent, Securities Transfer
Corporation, as to holdings of our record holders, as well our estimates of
other Transaction expenses, we believe that the total cash requirement of the
Transaction to the Company will be approximately $578,050. This amount includes
approximately $303,000 needed to cash out fractional shares (although this
amount could be larger or smaller depending on, among other things, the number
of fractional shares that will be outstanding at the time of the Transaction as
a result of purchases, sales and other transfers of our shares of common stock
by our shareholders, and the number of street name shares that are actually
cashed out in the Transaction), and approximately $275,050 of legal, accounting,
and financial advisory fees and other costs to effect the Transaction as
follows:
|
Legal
Fees
|
|
|
200,000
|
|
|
Investment
Banker/Valuation Report
|
|
|
23,500
|
*
|
|
Accounting
Fees
|
|
|
-
|
|
|
Transfer
Agent Fees
|
|
|
50,350
|
|
|
Printing
Costs
|
|
|
2,200
|
|
|
Miscellaneous
Other
|
|
|
-
|
|
|
|
|
|
|
|
|
Total
Expenses
|
|
$
|
275,050
|
|
*Includes
cost of both March 16, 2009 report and June 6, 2009 reports provided by Polaris
Securities.
We expect
that the consideration to be paid to the cashed out shareholders and the costs
of the Transaction will be paid from cash on hand and from a private sale of
common stock to our largest shareholder and Chief Executive Officer, Min-Tan
Yang. On June 17, 2009, Mr. Yang acquired 5,000,000 newly issued shares of the
Company’s common stock for $0.18 per share (
i.e
, the same
valuation as the cashout price) for an aggregate purchase price of
$900,000. The Company will use the majority of the $900,000 to pay
for the costs of the Transaction and the balance will be used for operating
capital to implement the Company’s business plan after the Transaction is
completed.
Reservation
Although
the Transaction has been approved by the controlling shareholders, the minority
shareholders have no statutory or contractual right to cause the Transaction to
go forward or to terminate it. The Company reserves the right to
abandon the Transaction at any time before the filing of the necessary
amendments to our articles of incorporation with the Florida Secretary of State
if the Board of Directors determines that abandonment would be in the best
interest of the Company and its shareholders. The Board has indicated
that most likely it would only make that determination if there were a material
change in the Company’s value or prospects. The Company would
disclose an abandonment of the Transaction by means of a press release and
Current Report on Form 8-K, both of which would be available on the Company’s
website at
http://www.kidcastle.com/InvestorInfo.htm
.
CAUTIONARY
STATEMENT REGARDING
FORWARD-LOOKING
STATEMENTS
This
Information Statement contains certain forward-looking statements concerning,
among other things, our anticipated results, and future plans and objectives
that are or may be considered to be “forward-looking statements.” These
forward-looking statements are subject to a number of known and unknown risks
and uncertainties that could cause our actual results, performance or
achievements to differ materially from those described or implied in the
forward-looking statements, including, but not limited to, general economic and
business conditions, and effects of the world-wide recession. In
light of the uncertainty inherent in our forward-looking statements, you should
not consider their inclusion to be a representation that the forward-looking
matters will be achieved. In evaluating forward-looking statements, you should
consider all these risks and uncertainties, together with any other risks
described in our other reports and documents furnished or filed with the SEC,
and you should not place undue reliance on those statements. We assume no
obligation for updating any forward-looking statements, whether as a result of
new information, future events, or otherwise. However, to the extent that there
are any material changes in the information contained in this Information
Statement, the Company will promptly disclose the changes as and to the extent
required by applicable law and the rules and regulations of the
SEC.
INFORMATION
ABOUT THE COMPANY
Market
Price of Common Stock
Our
common stock is quoted on the OTCBB under the symbol “KDCE.” The following table
sets forth the high and low closing sales prices reported by the OTCBB for our
common stock for our two most recent fiscal years:
|
|
|
High
($)
|
|
Low
($)
|
|
Fiscal Year Ended December 31,
2009
|
|
|
|
|
|
|
|
First
quarter
|
|
0.16
|
|
|
0.06
|
|
|
Second
quarter
|
|
0.07
|
|
|
0.04
|
|
|
Third
quarter
|
|
0.15
|
|
|
0.13
|
|
|
Fiscal Year Ended December 31,
2008
|
|
|
|
|
|
|
|
First
quarter
|
|
0.30
|
|
|
0.16
|
|
|
Second
quarter
|
|
0.40
|
|
|
0.20
|
|
|
Third
quarter
|
|
0.20
|
|
|
0.16
|
|
|
Fourth
quarter
|
|
0.19
|
|
|
0.16
|
|
|
Fiscal Year Ended December 31,
2007
|
|
|
|
|
|
|
|
First
quarter
|
|
0.11
|
|
|
0.10
|
|
|
Second
quarter
|
|
0.30
|
|
|
0.10
|
|
|
Third
quarter
|
|
0.20
|
|
|
0.20
|
|
|
Fourth
quarter
|
|
0.20
|
|
|
0.17
|
|
As of
June 16, 2009, the price of the last reported trade of our common stock was
$0.015 (one and one-half cent). As of October 28, 2009, the price of
the last reported trade of our common stock was $0.12.
Dividends
We did
not pay cash dividends during fiscal 2008 or 2007 and do not anticipate paying
cash dividends in the foreseeable future.
Trading
Volume
The trading volume of our stock has
been low since we became quoted on the OTCBB in 2002. In 2007 and
2008, the average daily trading volume of our stock was 403 and 3,358 shares,
respectively. The average daily trading volume during the first
four months of 2009 was 509 shares.
Shareholders
As of
June 15, 2009 there were 1,392 holders of record of our common stock on the
records of our transfer agent, Securities Transfer Corporation, and there were
1,434 holders of record of our common stock as calculated under SEC Rule 12g5-1
and applicable SEC interpretations.
The
Filing Person
There are
two filing persons for purposes of this Information Statement – the Company and,
by virtue of his role in the Capital Injection, Mr. Yang.
The
Company and Mr. Yang can both be reached at 8th Floor, No. 98 Min Chuan
Road, Hsien Tien, Taipei, Taiwan, Republic of China.
Neither
the Company nor any of the Company’s directors or executive officers has been
convicted in any criminal proceeding, including but not limited to during the
past five years (excluding traffic violations or similar misdemeanors) or has
been a part to any judicial or administrative proceeding during the past five
years (except for matters that were dismissed without sanction or settlement)
that resulted in a judgment, decree or final order enjoining the person from
future violations or, or prohibiting activities subject to, federal or state
securities laws, or a finding of any violation of federal or state securities
laws.
Stock
Purchases by Filing Parties
The
Company has not purchased any shares of its common stock during the past two
years.
Directors
and Executive Officers
The
following sets forth certain information concerning our current directors and
executive officers:
|
Name
|
|
Age
|
|
Position within the Company
|
|
Mr. Suang-Yi
Pai
|
|
48
|
|
Chairman,
Director and Acting Chief Financial Officer
|
|
Mr. Min-Tan
Yang
|
|
43
|
|
Chief
Executive Officer and Director
|
|
Mr. Ming-Tsung
Shih
|
|
40
|
|
Director
|
|
Mr. Robert
Theng
|
|
47
|
|
Director
|
|
Mr. Ping
Hsiung Wang
|
|
44
|
|
Director
|
Information
Concerning the Board of Directors and Executive Officers
Mr. Pai
was elected to replace Mr. Kuo An Wang as the Chairman of the Board on
November 2, 2005. Mr. Pai has served as a director of the Company since
October 2002. Since 1998, Mr. Pai has served as the general manager of Chin
Yi Fung Enterprises Co., Ltd. (address: No. 1-3, Alley 80, Lane Kuan-Yin Huatan
Shiang Changhua, Taiwan, R.O.C), a privately held company engaged in the
manufacture of sandals.
Mr. Yang was elected by the
Board of Directors to fill an existing vacancy and appointed chief executive
officer on November 2, 2005. He has a master’s degree from the Department of
Business Administration of Da-Yeh University. Mr. Yang was engaged in various
activities in the child-education sector. He served as a director of
Shanghai Taiwan Businessmen Elementary School (address: No.888 Jinhui Rd.,
Minhang District, Shanghai) from January 2005, and as a director of Global
International Education Ltd (address: Beaufort House P.O. Box 438 Road
Town Tortola. British Virgin Islands) since July 2001. In 2002, Mr. Yang
was appointed as chairman of two Company schools in Taiwan and currently serves
as chairman of four Company schools. Mr. Yang’s service as chairman
of our schools is set forth in more detail in our 10-K for the year ended
December 31, 2008 under Note 19 of the Financial Statements, “Related Party
Transactions”.
Mr. Shih
has served as a director since 2003. He is a part-time lecturer in Tunghai
University (address: 181, Section 3, Taichung Harbor Road, Taichung, Taiwan,
R.O.C) since 2003 and has been employed by Wuxi Paiho Textile Ltd.
(address: No.18 HeXin Road, Dongting Town, Xishan District, Wuxi City,
Jiangsu, PRC) as a Financial Manager since 2007. From 2003 to 2007,
he also served as Financial Manager of Sunspring Metal Corporation (address: No.
122-19, Section 2, Taichung Harbor Road, Taichung, Taiwan,
R.O.C).
Mr. Theng
has served as a director since 2003. He has been a full-time
professor at Dayeh University of Taiwan (address: No. 112 Shanjeau Rd, Datsuen,
Changhua, Taiwan, R.O.C) since 1996 and the Vice President of Strategic
Planning and Control of CV Sinar Jaya, Indonesia (address: No. 741 Jalan Kebumen
Darat, Palembang, Indonesia), a general contractor and real estate developer,
since 2005.
Mr. Wang
has served as a director since April 2008. He has a master degree from the
Department of Business Management of Da-Yeh University. Mr. Wang has served
as the chairman of two of our pre-schools in Taiwan since 1992 and as a director
of two of our pre-schools in Shanghai, People’s Republic of China since 2001.
From January to December 2004, Mr. Wang was the vice-president of the
Pre-School Educational and Protection Association of Tucheng City in Taipei
County, Republic of China. Mr. Wang has also been an employee of the
Company since April 2008, serving as assistant to the Chief Executive
Officer.
None of
our directors are related to any of our other directors and none have any
pending legal claims or litigation against them.
Except
Mr. Robert Theng, who is a citizen of the Republic of Indonesia, all of our
officers and directors are citizens of The Republic of China.
Security
Ownership of Certain Beneficial Owners
The
following table sets forth as of June 17, 2009, the number and percentage of our
30,000,000 outstanding shares of common stock that were beneficially owned by
(i) each person who is currently a director, (ii) each executive officer, (iii)
all current directors and executive officers as a group, and (iv) each person
who, to the knowledge of the Company, is the beneficial owner of more than 5% of
the outstanding common stock.
The
number of shares beneficially owned by each 5% holder, director or executive
officer is determined by the rules of the SEC, and the information does not
necessarily indicate beneficial ownership for any other purpose. Under the
rules, beneficial ownership includes any shares over which the person or entity
has sole or shared voting power or investment power and also any shares that the
person or entity can acquire within 60 days of the effective date of the
Transaction through the exercise of any stock option or other right. For
purposes of computing the percentage of outstanding shares of common stock held
by each person or entity, any shares that the person or entity has the right to
acquire within 60 days after the effective date of the Transaction are deemed to
be outstanding with respect to such person or entity but are not deemed to be
outstanding for the purpose of computing the percentage of ownership of any
other person or entity. Unless otherwise indicated, each person or entity has
sole investment and voting power (or shares such power with his or her spouse)
over the shares set forth in the following table. As of date this Information
Statement was first made available on the Internet, there were 30,000,000 shares
of common stock issued and outstanding and no other classes of stock
outstanding.
|
Name and Address of Beneficial Owner
(1)
|
|
Number of
Shares
|
|
Percent of
Class
(2)
|
|
Mr. Suang-Yi
Pai / 8th Floor, No. 98 Min Chuan Road, Hsien Tien Taipei, Taiwan,
R.O.C .
|
|
|
3,841,377
|
|
12.8
|
|
|
|
|
|
|
|
|
Mr. Min-Tang
Yang / 8th Floor, No. 98 Min Chuan Road, Hsien Tien Taipei, Taiwan,
R.O.C
|
|
|
16,255,538
|
|
54.2
|
|
|
|
|
|
|
|
|
Mr. Ming-Tsung,
Shih / No. 29 Yongdong Street Yushun Villiage, Lukang Township Chang
Hua, Taiwan, R.O.C
|
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
Mr. Robert
Theng / 3 Ally 21 Ln 36 Chieh Shou S. Rd. Changhua 500, Taiwan,
R.O.C.
|
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
Mr. Ping
Hsiung Wang / 11F., No.34, Lane 126, Sec. 1, Xuefu Rd., Tucheng City,
Taipei County, Taiwan, (R.O.C.)
|
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
All
officers and directors as a group (5 persons)
|
|
|
20,096,915
|
|
67.0
|
|
(1)
|
Unless
otherwise indicated, the address of each person listed is 8th Floor,
No. 98 Min Chuan Road, Hsien Tien, Taipei, Taiwan, Republic of
China.
|
|
(2)
|
Based
on 30,000,000 shares of common stock
outstanding.
|
During
the sixty days preceding the date this Information Statement was made available
to shareholders on the Internet, neither the Company nor any of its officers and
directors engaged in any transaction in the Company’s securities, other than the
Capital Injection, as described above.
SUMMARY
FINANCIAL INFORMATION
The
following summary of consolidated financial information was derived from our
audited consolidated financial statements as of and for each of the years ended
December 31 2007 and 2008 and from unaudited consolidated interim financial
statements as of and for the six months ended September 30, 2009. This financial
information is only a summary and should be read in conjunction with our
historical financial statements and the accompanying footnotes. Please see the
information set forth below under the captions “WHERE YOU CAN FIND MORE
INFORMATION” beginning on page 49 and “DOCUMENTS INCORPORATED BY REFERENCE”
beginning on page 49.
|
|
|
Fiscal Year Ended December
31
|
|
|
Nine Months Ended
September
30
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed
in US Dollars)
|
|
|
Sales
of goods
|
|
$
|
7,905,949
|
|
|
$
|
7,671,392
|
|
|
$
|
6,774,260
|
|
|
$
|
6
,907,232
|
|
|
Franchise
income
|
|
|
2,380,930
|
|
|
|
2,205,668
|
|
|
|
2,080,551
|
|
|
|
1,633,713
|
|
|
Other
operating revenue
|
|
|
2,558,232
|
|
|
|
1,359,552
|
|
|
|
856,772
|
|
|
|
2,200,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating revenue
|
|
|
12,845,111
|
|
|
|
11,236,612
|
|
|
|
9,711,583
|
|
|
|
10,741,267
|
|
|
Operating
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
(3,357,441
|
)
|
|
|
(3,154,509
|
)
|
|
|
(2,684,650
|
)
|
|
|
(2,772,082
|
)
|
|
Cost
of franchising
|
|
|
(368,061
|
)
|
|
|
(451,469
|
)
|
|
|
(337,986
|
)
|
|
|
(244,427
|
)
|
|
Other
operating costs
|
|
|
(1,777,862
|
)
|
|
|
(491,869
|
)
|
|
|
(616,102
|
)
|
|
|
(1,771,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating costs
|
|
|
(5,503,364
|
)
|
|
|
(4,097,847
|
)
|
|
|
(3,638,738
|
)
|
|
|
(4,787,670
|
)
|
|
Gross
profit
|
|
|
7,341,747
|
|
|
|
7,138,765
|
|
|
|
6,072,845
|
|
|
|
5,953,597
|
|
|
Advertising
costs
|
|
|
(22,735
|
)
|
|
|
(29,241
|
)
|
|
|
(21,833
|
)
|
|
|
(24,.412
|
)
|
|
Other
operating expenses
|
|
|
(6,272,753
|
)
|
|
|
(5,342,216
|
)
|
|
|
(5,526,318
|
)
|
|
|
(4,208,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
from operations
|
|
|
1,046,259
|
|
|
|
1,767,308
|
|
|
|
524,694
|
|
|
|
1,720,979
|
|
|
Interest
expense, net
|
|
|
(89,761
|
)
|
|
|
(90,299
|
)
|
|
|
(179,825
|
)
|
|
|
(35,746
|
)
|
|
Share
of profit (loss) of investments
|
|
|
5,109
|
|
|
|
27,007
|
|
|
|
(39,489
|
)
|
|
|
(17,164
|
)
|
|
Other
non-operating income (loss), net
|
|
|
24,789
|
|
|
|
552,611
|
|
|
|
(153,803
|
)
|
|
|
129,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
before income taxes and minority interest income
|
|
|
986,396
|
|
|
|
2,256,627
|
|
|
|
151,577
|
|
|
|
1,797,616
|
|
|
Income
taxes expense benefit
|
|
|
(106,215
|
)
|
|
|
(278,191
|
)
|
|
|
(173,325
|
)
|
|
|
(247,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) after income taxes
|
|
|
880,181
|
|
|
|
1,978,436
|
|
|
|
(21,748
|
)
|
|
|
1,549,632
|
|
|
Minority
interest income
|
|
|
(41,212
|
)
|
|
|
(101,287
|
)
|
|
|
(24,463
|
)
|
|
|
(11,538
|
)
|
|
Net
income (loss)
|
|
|
838,969
|
|
|
|
1,877,149
|
|
|
|
(46,211
|
)
|
|
|
1,538,094
|
|
|
Income
(loss) per share*
－
basic and
diluted
|
|
|
0.034
|
|
|
|
0.075
|
|
|
|
(0.002
|
)
|
|
|
0.058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares used to compute loss per share
－
basic and
diluted
|
|
|
25,000,000
|
|
|
|
25,000,000
|
|
|
|
25,000,000
|
|
|
|
26,666,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of earnings to fixed charges
|
|
|
10.67
|
|
|
|
21.71
|
|
|
|
1.78
|
|
|
|
51.29
|
|
*Post-Transaction
proforma income per share: $0.009. Pro-forma income per share based
on assuming income of $838,969 (i.e., 1988 levels) reduced by Transaction
expenses of $578,050, and 1,683,333 shares cashed out in the Transaction leaving
a total of 28,316,667 shares outstanding.
|
|
|
Fiscal
Year Ended December 31,
|
|
|
Nine
Months
Ended
September
30,
|
|
|
Effect
of
Transation
Pro-Forma*
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2009
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
11,587,302
|
|
|
$
|
11,161,285
|
|
|
$
|
9,373,223
|
|
|
$
|
15,538,225
|
|
|
$
|
14,960,175
|
|
|
Long-term
debt, less current portion
|
|
|
3,912,877
|
|
|
|
3,908,410
|
|
|
|
3,208,113
|
|
|
|
4,369,320
|
|
|
|
4,369,320
|
|
|
Stockholders’
equity
|
|
|
1,212,819
|
|
|
|
520,002
|
|
|
|
(634,753
|
)
|
|
|
3,648,459
|
|
|
|
3,070,409
|
|
|
Book
Value Per Share
|
|
|
0.05
|
|
|
|
0.02
|
|
|
|
(0.025
|
)
|
|
|
0.12
|
|
|
|
0.10
|
|
*Shows
effect of Transaction using September 30, 2009 values as
baseline.
WHERE
YOU CAN FIND MORE INFORMATION
The
Transaction is a “going private” transaction subject to Rule 13e-3 of the
Exchange Act. The Company has filed a Rule 13e-3 Transaction Statement on
Schedule 13E-3 under the Exchange Act with respect to the Transaction. The
Schedule 13E-3 contains additional information about the Company. Copies of
the Schedule 13E-3 are available for inspection and copying at the
principal executive offices of the Company during regular business hours by any
interested shareholder of the Company, or a representative who has been so
designated in writing, and may be inspected and copied, or obtained by mail, by
written request directed to the attention of Emma Tseng, Corporate Secretary at
the following address: 8th Floor, No. 98 Min Chuan Road, Hsien Tien, Taipei,
Taiwan ROC, or calling (886) 2-2218-5996 Ext. 210.
The
Company is currently subject to the information requirements of the Exchange Act
and files periodic reports, proxy statements and other information with the SEC
relating to its business, financial and other matters.
We file
annual, quarterly, and special reports, proxy statements, and other information
with the SEC. Our SEC filings are available to the public over the Internet from
the SEC’s website at http://www.sec.gov. You may also read and copy any document
we file at the SEC’s public reference room at 100F Street, NE, Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. Our website address is
http://www.kidcastle.com.
DOCUMENTS
INCORPORATED BY REFERENCE
In
filings with the SEC, information is sometimes incorporated by reference. That
means that we are referring you to information that we have filed separately
with the SEC. The information incorporated by reference should be considered
part of this Information Statement, except for any information superseded by
information contained directly in this Information Statement.
The
Company’s audited financial statements for the fiscal years ended December 31,
2006, 2007and 2008 are included in the Company’s Form 10-K for the period ended
December 31, 2008 filed with the SEC on March 17, 2009, which are incorporated
into this Information Statement by reference. The Company’s unaudited
financial statements for the quarter ended September 30, 2009 are included in
the Company’s form 10-Q for the period ended September 30, 2009 filed with the
SEC on November 13, 2009, which are incorporated into this Information Statement
by reference.
EXHIBITS
Exhibit
A Valuation Report of Polaris Securities dated June
6, 2009 (revised on August 11, 2009 to correct mathematical
error).
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