Friday, May 21, 2010

Details of Beijing Investment and Commitments

General Info (from the SEC filing)

On February 1, 2010, UTStarcom, Inc. (the “Company”) entered into an Agreement of Entry into the Zone (the “Campus Agreement”) with the Management Committee of Beijing Economic and Technology Development Zone (the “Zone”), an affiliate of Beijing E-town International Investment and Development Co., Ltd. (“BEIID”), pursuant to which the Company will move its operational headquarters to Beijing, China by forming a new wholly-owned subsidiary in the Zone (the “NewCo”), and authorizing the NewCo to be the Company’s new operational headquarters. After beginning production and generating tax revenue as provided in the Campus Agreement, the NewCo will be eligible to receive certain benefits and assistance from the Zone.

Why is it taking so long? The "PRC Approvals" ......

As a condition to the consummation of the Placement, the Investors must obtain the applicable authorizations, approvals or permits, especially, if applicable, from various government agencies of China, including, but not limited to, approvals and confirmations from the applicable levels of the National Development Reform Commission, State-owned Assets Supervision and Management Commission, the Ministry of Commerce, the National Development Reform Commission and State Administration of Foreign Exchange, that are required in connection with the lawful purchase of the Shares, and the purchase and procurement of the foreign exchange necessary for the payment of the Purchase Price pursuant to the Purchase Agreements.

UT will be getting the $25m in US dollars wired to them in the US. The other two "financial investors' - Ram and Shah will only be putting in their contributions once the Beijing investments are finalized.

UT Company description and product lineup:

UTStarcom is mainly engaged in the business of IP-based telecommunications with products and technologies covering areas including wireless, broadband, next generation networks and end-to-end networking, providing a variety of products and system solutions including TMRollingStream®IPTV and IP video information publishing solutions, Interactive iDTV, Mobile TV and OpticalXpressEPON system solutions that can be applied to broadcast and television industries, broadband integration and industry application solutions such as PTN/MSTP comprehensive solutions, NetRing next generation optical network systems, AN/iAN series new generation multi-service access platforms, EBox enterprise telecommunication systems, PDSN and CDMA,CMMB, TD-SCDMA and WiFi mobile phone terminals.

Seems like a good description so I added it so shareholders know where the revenues are going to come from.

UTStarcom is planning to set up a wholly foreign-owned enterprise (the “New WFOE”) in the Zone and authorize the New WFOE as its operational headquarters.

Here are the commitments of each of the "parties"....

II. Party A’s (Investor) support to Party B (UT).

1. As a newly registered foreign investment enterprise in the Mobile Silicon Valley Park, If New WFOE’s contracted foreign investment amount is more than US$15 million, then after it starts production and generating taxes within the first year from the date of its registration in the Zone, the New WFOE may apply for a financial support in an amount equal to 3% of the paid-in registered capital (as converted into RMB) up to a maximum amount of RMB 20 million.

2. As a newly introduced enterprise in the Mobile Silicon Valley Park, if the New WFOE leases the office facilities or real properties developed by the Head Company for its research, development and production, after it starts generating taxes, the New WFOE may apply for rent support. The term and amount of such support shall be based on the relevant encouraging policies of of Mobile Silicon Valley Park in Beijing Economic And Technology Development Zone (the “ Silicon Valley Encouraging Policies ”).

If the New WFOE meets both the conditions set forth in the subsections 1 and 2 above, it may choose to apply for only one of the two financial supports.

3. If the New WFOE qualifies for the support under the relevant provisions of thebn Management Measures for the Special Funds for Science and Innovation of Beijing Economic and Technology Development Zone , it may apply for the relevant monetary support.

4. The New WFOE may apply for the benefits of the support and financial encouragement policies applicable to the senior management and senior under the Silicon Valley Encouraging Policies.

5. As an enterprise registered in the Mobile Silicon Valley Park, the New WFOE may apply for the benefits of the relevant preferential policies according to the relevant Silicon Valley Encouraging Policies. Party A agrees to use its best efforts to help the New WFOE obtain the benefits of relevant preferential policies.

6. Party A may help Party B in developing markets in Beijing, coordinate with Party B regarding any issues relating to export credit, bank financing etc. and support Party B in obtaining the high-tech enterprise certificate.

7. Party A will render continuous support for the growth of Party B’s project, and provide high-quality services for the entry of Party B’s project into the Zone.

III. Party B’s Commitments

Party B agrees to make the following commitments:

1. Party B commits to initiate the application process for the incorporation of the New WFOE in the Zone within one month after the closing of the investment by Beijing Yizhuang International Investment and Development Corporation in Party B and register or move its operational headquarters in or to the Zone within three months following the completion of all procedures of various governmental approvals, registrations and filings related to the formation and funding of the New WFOE. The registered capital of the project shall reach US$15 million by the end of the six months after Party B completes the registration of the New WFOE.

2. Party B commits that, after establishing its operational headquarters in the Zone and approximately 5 years of such date (and shall take reasonable measures to ensure that such date is no later than the end of 2015), its accumulated sales revenue contribution to the Zone will reach approximately US$2.3 billion, and its accumulated paid taxes will reach approximately US$34.5 million (limited to various national and local taxes excluding customs duties).

3. Party B commits that its operation term in the Zone shall be no less than six (6) years from the date of registration.

This looks like a very complex process in nailing down the agreements with getting all the PRC (Peoples Republic of China) Approvals (thats why they had to extend the time period 30-days and may need to do it again soon) as well as the substantial support/commitments of each party. It also looks like the company is commiting to atleast $2.3B (or about 460m in revenue) out of that economic zone in the next 5 years.

This is interesting as their lease on their Hangzhou building is now very flexible (they can pay it off to move out completely).

I'm in the process of setting up a call with Peter Blackmore next week and might get to discuss the China deal and these various commitments. It would be a nice change to get major contracts and a sustainable base of business for the next few years and this move/agreement provides the opportunities for it. We'll see.

Have a good weekend.