Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
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January
4, 2007 (December 28,
2006)
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Date
of Report (Date of earliest event
reported):
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CHINA
PRECISION STEEL,
INC.
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(Exact
name of registrant as specified in
charter)
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Colorado
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000-23039
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14-1623047
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(State
or other jurisdiction
of
incorporation)
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(IRS
Employer
Identification
No.)
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8th
Floor, Teda Building, 87 Wing Lok Street, Sheungwan
Hong
Kong, The People’s Republic of China
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(Address
of principal executive
offices)
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86-21-5994-8500
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Registrant’s
telephone number, including area
code:
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OraLabs
Holding Corp.
(Former
name or former address, if changed since last report.)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
o
Written communications
pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o
Soliciting material pursuant to Rule
14a-12 under the Exchange Act (17 CFR 240.14a-12)
o
Pre-commencement communications pursuant
to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o
Pre-commencement communications pursuant
to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 1.01. Entry
into a
Material Definitive Agreement
On
March
31, 2006, OraLabs Holding Corp (“OraLabs”) entered into a Stock Exchange
Agreement (the “Agreement”) under which all of the issued and outstanding shares
of Partner Success Holdings Limited (“PSHL”) would be acquired by OraLabs in
consideration for the issuance to the owner of PSHL and his designees (the
“PSHL
Shareholder”) of common stock representing a 94% ownership interest in OraLabs
(the “Share Exchange”). OraLabs filed a Current Report on Form 8-K on April 6,
2006 describing the material terms of the Agreement. The Agreement was
subsequently amended on July 20, 2006 (the “First Amendment”) and on October 12,
2006 (the “Second Amendment”). The Agreement was filed as Exhibit 2.1 to
OraLabs’ Current Report on Form 8-K filed on April 6, 2006 and is incorporated
herein by this reference. The First Amendment was filed as Exhibit 2.1 to
OraLabs’ Current Report on Form 8-K filed on July 25, 2006 and is incorporated
herein by this reference. The Second Amendment was filed as Exhibit 2.1 to
OraLabs’ Current Report on Form 8-K filed on October 17, 2006 and is
incorporated herein by this reference. On December 28, 2006, OraLabs and PSHL
held a closing on the Share Exchange (the “Closing”).
Pursuant
to the Agreement, OraLabs entered into a Redemption Agreement dated December
28,
2006 (the “Redemption Agreement”) with its President, Gary H. Schlatter,
individually (“Schlatter”), whereby OraLabs redeemed 3,629,350 shares of its
outstanding common stock owned by Schlatter in exchange for all of the issued
and outstanding shares of OraLabs, Inc., a wholly owned subsidiary of OraLabs.
A
copy of the Redemption Agreement is attached hereto as Exhibit 10.1 and is
incorporated herein by this reference.
On
December 27, 2006, OraLabs held its annual meeting of shareholders (the “Annual
Meeting”). At the Annual Meeting, shareholders owning a majority of the issued
and outstanding shares of OraLabs approved:
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·
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a
2006 Directors Option Plan and the and the issuance to non-employee
directors of 300,000 shares of OraLabs common
stock;
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·
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the
issuance of an undetermined number of shares of OraLabs common stock,
shares of preferred stock convertible into OraLabs common stock or
warrants to purchase OraLabs common stock, in an aggregate amount
of up to
22,600,000 shares of common stock, in connection with potential equity
financing from time to time;
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·
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the
sale to OraLabs, Inc., the wholly-owned subsidiary of OraLabs, of
up to
100,000 shares of OraLabs common stock to satisfy a tax indemnity
obligation of OraLabs, Inc. in connection with the closing of the
Share
Exchange. A
copy of the Tax Indemnity Agreement, dated December 28, 2006, is
attached
hereto as Exhibit 10.2 and incorporated herein by
reference;
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·
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the
amendment to OraLabs’ Articles of Incorporation to change the name of
OraLabs to China Precision Steel, Inc. and to increase the number
of
authorized shares of common stock to
62,000,000;
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·
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the
Amendment to OraLabs’ Articles of Incorporation to increase the number of
authorized shares of preferred stock to
8,000,000;
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·
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The
election of Mr. Wo Hing Li and Mr. Hai Sheng Chen as executive directors
and Mr. Che Kin Lui, Mr. David Peter Wong, and Mr. Tung Kuen Tsui,
the
individuals designated by PSHL, as independent non-executive directors
of
OraLabs;
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·
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The
approval of the 2006 Omnibus Long-Term Incentive Plan of OraLabs
that will
allow the Company to grant an aggregate of 2,165,220 shares of its
common
stock through stock options and restricted stock awards to qualified
key
employees; and
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·
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The
ratification of the appointment of Murrell, Hall, McIntosh & Co., PLLP
as the Company’s independent registered public accounting firm for fiscal
year 2006.
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On
December 28, 2006, OraLabs and PSHL closed on the Share Exchange and OraLabs’
name was changed to China Precision Steel, Inc. (the “Company”). At the Closing,
OraLabs issued to the sole owner of PSHL’s common stock and his designees an
aggregate of 25,363,002
shares
of common stock, which constitutes 94% of its total issued and outstanding
common stock. Upon the consummation of the Share Exchange, PSHL became a
wholly-owned subsidiary of the Company and the Company now owns 100% of the
issued and outstanding shares of PSHL’s common stock.
At
the
Closing, OraLabs, Inc., the wholly-owned subsidiary of OraLabs, purchased
100,000 shares of OraLabs common stock to satisfy a tax indemnity obligation
of
OraLabs, Inc. in connection with the closing of the Share Exchange and related
transactions. Further, prior to closing, OraLabs issued 300,000 shares to
OraLabs’ non-employee directors, Mr. Michael I. Friess and
Mr. Robert C. Gust pursuant to OraLabs 2006 Directors Option Plan.
At
the
Closing, Mr. Gary H. Schlatter, Mr. Michael I. Friess and Mr. Robert C. Gust
resigned as directors of OraLabs and were replaced by Mr. Wo Hing Li and Mr.
Hai
Sheng Chen, as executive directors, and Mr. Che Kin Lui, Mr. David Peter Wong,
and Mr. Tung Kuen Tsui, as independent non-executive directors of the Company.
Further, Gary H. Schlatter and Michael I. Friess resigned as officers of OraLabs
and Wo Hing Li was appointed the President of the Company and Leada
Tak
Tai Li the Chief Financial Officer, Secretary and Treasurer of the Company.
Further,
OraLabs
agreed to pay up to $10,000 to PSHL to defer certain costs of the
transaction to be incurred by PSHL, all costs and expenses incurred in
connection with the Exchange Agreement and the transactions contemplated
thereby.
The
foregoing summary description
of the Agreement and the transactions contemplated thereby is not intended
to be
complete and is qualified in its entirety by the complete text of the Agreement,
the First Amendment and the Second Amendment.
Item 2.01. Completion
of an Acquisition or Disposition of Assets.
As
described more fully under Item 1.01 above, on December 28, 2006,
OraLabs acquired 50,000 common shares of PSHL, representing 100% of the issued
and outstanding shares of PSHL from the PSHL Shareholders in accordance with
the
terms of the Agreement. In accordance with the terms of the Agreement, the
Company issued to the PSHL Shareholders and designees an aggregate of
25,363,002 shares of OraLabs common stock, which constitutes 94% of the
Company’s total issued and outstanding common stock.
Further,
pursuant to the Redemption Agreement, OraLabs redeemed 3,629,350 shares of
its
outstanding common stock owned by Schlatter in exchange for all of the issued
and outstanding shares of OraLabs, Inc., a wholly owned subsidiary of OraLabs.
THE
COMPANY’S BUSINESS
History
and Development of the Company
On
May 1,
1997, OraLabs, Inc., a privately held company, became a wholly-owned subsidiary
of SSI Capital Corp. (the predecessor of the Company) and the name of the
Company was changed from SSI Capital Corp. to OraLabs Holding Corp. and OraLabs,
Inc. became a wholly owned subsidiary of OraLabs. OraLabs was engaged in
the production and sale of consumer products relating to oral care and lip
care and to distribute nutritional supplements.
As
a
result of the Redemption, OraLabs redeemed 3,629,350 shares of its outstanding
common stock owned by Schlatter in exchange for all of the issued and
outstanding shares of OraLabs, Inc. owned by OraLabs. Upon the consummation
of
the Share Exchange, PSHL became a wholly-owned subsidiary of the Company and
the
Company now owns 100% of the issued and outstanding shares of PSHL’s Common
Stock. The “Company” refers to China Precision Steel, Inc., PSHL, the
Company’s wholly owned subsidiary, and Shanghai
Chengtong Precision Strip Company Limited (“Chengtong”), PSHL’s wholly owned
subsidiary. “PSHL” refers to Partner
Success Holdings Limited and, where the context
requires, Chengtong.
PSHL
was
incorporated as an international business company on April 30, 2002 under the
laws of the British Virgin Islands. Chengtong was registered on July 2, 2002
in
Jiading District, Shanghai, the People’s Republic of China and was granted a
fifty-year period of existence until July 1, 2052. Chengtong is a wholly-owned
foreign enterprise (“WOFE”) of PSHL.
General
The
Company is a niche precision steel processing company principally engaged in
the
production and the sale of high precision cold-rolled steel products and in
providing heat treatment and cutting medium and high carbon hot-rolled steel
strips and chrome series stainless steel. Specialty precision steel offers
specific control of thickness, shape, width, surface finish, and other special
quality features that compliment the emerging need for highly engineered end
use
applications. Precision steel pertains to the precision of measurements and
tolerances of the above factors, especially
thickness tolerance.
The
Company’s operations are conducted through PSHL in China. However, the Company
intends to expand overseas into Japan, Taiwan, Korea, Thailand, the Philippines,
the European Union and the United States in the future. The
Company currently has 280 employees, including 24 senior management and
technical staff members and leases 20,000 square meters production facilities
(including 10,000 square meters of the new Phase 2 production facilities) in
Jiading District, Shanghai, on 4 acres of property. During
the fiscal years ended June 30, 2006, 2005 and 2004, the Company earned net
income of $7,514,101, $6,366,441 and $198,776, respectively. During the quarters
ended September 30, 2006 and 2005, the Company earned net income of $2,809,248
and $2,283,122 respectively. At
September 30, 2006, the Company had total assets of
$63,193,618.
Products
Cold-rolled
specialty precision steel is a relatively new industry in China and
manufacturers of products that use specialty precision steel products have
traditionally imported precision steel products from Japan, Korea, the European
Union and the United States. Cold-rolled steel products represent hot-rolled
de-scaled (pickled) steel coils which are used as raw materials in the precision
steel industry which have been processed by cold reduction through a
cold-rolling mill to the desired thinness. The process does not involve heating
and the primary feature of cold reduction is to reduce the thickness of the
steel coils. However, because the cold reduction operation induces very
high strains (work hardening) into the steel sheet, the precision steel sheet
not only becomes thinner, but also becomes much harder, less ductile and
very difficult to form. Thus cold-reduced steel products are annealed (heated
to
high temperatures) to become soft and formable. Cold-rolled sheet products
are
used in a wide variety of end applications such as appliances
(refrigerators, washers, dryers, and other small appliances), automobiles
(exposed as well as unexposed parts), food packaging materials, electric motors
and bathtubs. Cold-rolled sheet products are used in these and many other areas
of manufacturing.
Hard-rolled
steel represents steel products manufactured from cold reduction to the desired
thinness without annealing. The product is very stiff; it is intended for flat
work where deformation is very minimal. This type of hard-rolled steel is most
often applied to further processing for applications such as continuous
galvanizing. Hard-rolled or cold-rolled steel with low carbon represents
hard-rolled or cold-rolled steel with carbon content of less than 0.1%. It
is a very versatile and useful material, easily machined and worked into complex
shapes, and has low cost and good mechanical properties. Hard-rolled or
cold-rolled steel with medium carbon represents hard-rolled or cold-rolled
steel
with carbon content of 0.30%. It is a typical engineered steel product.
Hard-rolled or cold-rolled steel with high carbon represents hard-rolled or
cold-rolled steel with a carbon content of 0.8% or more. This precision steel
product is very hard and also quite brittle and much less ductile than low
carbon steel. High carbon steel has good wear resistance, and is used for
railways as well as for cutting tools. Acid wash steel is also known as the
acid
pickling and refers to the process of using liquid acids, for example
hydrochloric acid, to remove rust or oxides from the surface of steel. Removing
rust prepares the surface for a protective coating.
Products
with greater width have more applications and intended uses. Width is an
important differentiation factor because certain end products such as washers
and automobiles require materials with a certain minimum width. Although
materials with smaller width could also be used for these applications through
jointing, this increases production cost and thus makes wider products more
flexible and cost efficient.
The
Company believes that generally, to date, the average quality and standards
of
China’s high precision steel industry lags behind the international norm.
Nonetheless, during the last three years, Chengtong believes that it has begun
to develop and establish itself as a nationally recognized brand in China,
however. Despite having exported some 242 tons of precision steel products
to Thailand and the Philippines during the quarter ended September 30, 2006,
it
is not yet established as an internationally recognized brand for specialty
precision steel products. As of November 30, 2006, Chengtong produced
approximately 40 high precision steel products covering a range of over one
hundred specifications. Currently, Chengtong produces precision steel products
which can be categorized into five major categories of products.
As
of
November 30, 2006, PSHL had an annual production capacity of approximately
250,000 tons. Following the installation of the 1,400mm cold mill after the
completion of Phase 2 of the new production facilities in August 2006, an
additional 150,000 tons was added to the annual production capacity. It is
anticipated that once all of the plant and equipment (1,400mm width cold mill
and 1,700mm width cold mill) are installed in the new production facilities,
the
Company’s annual production capacity will increase to 400,000 tons. The new
production facilities were completed in August 2006 and have added another
approximately 10,000 square meters of production area. In addition, with the
completion of the new production facilities, PSHL installed one 1,400mm width
cold mill and intends to install
another 1,700mm width cold-roll mill on or before June 30, 2007.
The new
production facilities will focus on the production of high carbon, high strength
cold-rolled steel products and the production of more complex precision steel
products that can not be manufactured in the Company’s current rolling mill. The
Company’s existing facilities will primarily manufacture low carbon cold-rolled
steel products.
The
1,400mm width cold mill has added 150,000 tons to the Company’s annual
production and when the 1,700mm width cold mill is installed on or before June
30, 2007, this will add another 150,000 tons to the annual production capacity,
totaling an additional annual aggregate production capacity of 300,000 tons.
The
directors of the Company believe that the increased production capacity will
be
fully utilized within two years after commencement of operation. The Company
currently produces extremely thin cold-rolled precision steel strips ranging
from 3.0 mm to 0.03 mm. The Company also currently provides heat treatment
and
cutting of medium and high carbon hot-rolled steel strips and chrome stainless
steel series of not exceeding 3.0 millimeters fineness. Currently, the Company’s
specialty precision products are mainly used in the manufacture of automobile
parts and components, food packaging materials, saw blades, textile needles,
microelectronics, packing and containers.
As
of
November 30, 2006 and September 30, 2006, PSHL manufactured approximately 40
different types of precision steel products with a range of over one hundred
specifications. The Company’s precision steel products can be categorized into
the following five major categories:
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Categories
of Precision Steel Products:
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Functions
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1.
Low carbon cold-rolled steel
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Food
packaging, dry batteries, electronic devices, kitchen
tools
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2.
Low carbon acid wash steel
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Food
packaging, dry batteries, electronic devices, kitchen
tools
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3.
Low carbon hard-rolled steel
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Food
packaging, dry batteries, electronic devices, kitchen
tools
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4.
High carbon cold-rolled steel
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Automobile
components, saw blades, weaving needles, springs
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5.
High carbon hard-rolled steel
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Automobile
components, saw blades, weaving needles,
springs
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Raw
Materials
The
Company is not dependent on any one single supplier for supply of hot-rolled
de-scaled (pickled) coils and steel sheet. Over 40 steelmakers supply hot-rolled
de-scaled (pickled) coils and steel sheets to the Company. The major
suppliers as of June 30, 2006 are as follows:
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Major
suppliers
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June
30,
2006
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%
of direct
materials
consumed
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June
30,
2005
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%
of direct
materials
consumed
|
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BaoSteel
Trading Co. Ltd
|
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$
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7,138,845
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|
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33%
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$
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16,513,238
|
|
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40%
|
|
|
Ningbo
Dongming Co. Ltd
|
|
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5,902,211
|
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28%
|
|
|
-*
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|
|
|
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Shanghai
Baixing Co. Ltd
|
|
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1,642,024
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|
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8%
|
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-*
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|
|
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Shanghai
Bao Gang Dev Co. Ltd
|
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1,389,221
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|
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6%
|
|
|
-*
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|
|
|
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Shanghai
Tianxing Co. Ltd
|
|
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1,025,946
|
|
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5%
|
|
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-*
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|
|
|
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Shanghai
Jiesiyi International Trading
|
|
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*
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|
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|
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4,723,981
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11%
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China
Chengtong Metal (Group)
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|
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*
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|
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3,156,359
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|
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8%
|
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BaoSteel
Capital Company
|
|
|
*
|
|
|
|
|
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2,218,776
|
|
|
5%
|
|
|
Shanghai
Jingqi Trading
|
|
|
*
|
|
|
|
|
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1,225,998
|
|
|
3%
|
|
| |
|
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17,098,247
|
|
|
80%
|
|
|
27,838,352
|
|
|
67%
|
|
|
Other
suppliers
|
|
|
4,319,672
|
|
|
20%
|
|
|
13,951,127
|
|
|
33%
|
|
| |
|
|
21,417,919
|
|
|
100%
|
|
|
41,789,479
|
|
|
100%
|
|
*Not
major customers
The
Company does not have any other material contract or agreement or equity
relationship, direct or indirect, with BaoSteel Group Corporation.
Based
upon information obtained by the Company from the China Metallurgical Industry
Planning and Research Institute (“CMI”), in 2006 the price of steel has
generally decreased. However, the cost of imported iron-ores has increased
substantially. This apparent anomaly was due to excess supplies arising from
excess capacities of the steel producers and, as a result of the downwards
pressure on the price of steel, the cost of steel rolls have generally decreased
in 2005 and 2006. The CMI website may be viewed in English and the website
URL
is www.metal.net.cn.
The
prices of steel rolls are very competitive, very volatile and dependent on
supplies and demands. To provide some protection from the pressure and
volatility of the market (i.e., to minimize the amount of purchases that the
Company must make at high prices during the high demand seasons), the Company
makes bulk purchases after taking into account customers’ orders on hand
whenever steel prices are considered to be lower in the market. As steel rolls
have an extremely long shelf-life, obsolescence is not a major concern and
the
Company may build up its inventory during such periods when prices are
low.
When
sales orders are executed between the customers and Chengtong, the
agreed selling price is based on the cost of raw material at that date,
effectively allowing Chengtong to pass incremental cost in raw materials to
its
customers.
Regulation
The
Company is subject to numerous Chinese provincial and local laws and
regulations, which may be changed from time to time in response to economic
or
political conditions and have a significant impact upon overall operations.
Changes in these regulations could require the Company to expend significant
resources to comply with new laws or regulations or changes to current
requirements and could have a material adverse effect on the
Company.
The
China
Central Government has promulgated a series of ongoing macro-control policies
which focus on the improvement of the country’s investment structure, with the
goal to secure a fast and sound development of the national economy. Excessive
investment in certain sectors is placed under stringent control on one hand
while incentives are given to other sectors.
Renminbi
is not a freely convertible currency at this time. Save for receiving its export
sales revenues in United States dollars, the Company currently receives all
its
local sales revenues in Renminbi. If and when the Company needs to make payments
of dividends and other expenditures in foreign currencies outside China,
conversion of Renminbi into other currencies will be necessary. The Company
is
able to make payments in foreign currencies (including dividends) on
presentation of business documents through banks in the PRC authorized to
conduct foreign currency transactions without the prior approval from The PRC
State Administration of Foreign Exchange (“SAFE”). The PRC government has
indicated that it will consider allowing the free conversion of Renminbi into
other currencies. However, there is no assurance that the PRC government will
not exercise foreign exchange controls on normal transactions in the
future.
The
Company is currently subject to numerous Chinese provincial and local laws
and
regulations relating to the protection of the environment. These laws continue
to evolve and are becoming increasingly stringent. The ultimate impact of
complying with such laws and regulations is not always clearly known or
determinable because regulations under some of these laws have not yet been
promulgated or are undergoing revision. The Company’s business and operating
results could be materially and adversely affected if the Company were to
increase expenditures to comply with any new Chinese environmental regulations
affecting its operations. The State Environmental Protection Administration
Bureau is responsible for the supervision of environmental protection in,
implementation of national standards for environmental quality and discharge
of
pollutants for and supervision of the environmental management system of the
PRC. Environmental protection bureaus at the county level or above are
responsible for environmental protection within their
jurisdictions.
The
laws
and regulations on environmental protection require each company to prepare
environmental impact statements for a construction project to the environmental
protection bureaus at the county level. These must be prepared prior to when
the
construction, expansion or modification commences.
The
“Environment Protection Law” requires production facilities that may cause
pollution or produce other toxic materials to take steps to protect the
environment and establish an environmental protection and management system.
The
system includes the adopting of effective measures to prevent and control
exhaust gas, sewage, waste residues, dust and other waste materials. Entities
discharging pollutants must register with the relevant environmental protection
authorities.
Penalties
for breaching the Environmental Protection Law include a warning, payment of
a
penalty calculated on the damage incurred, or payment of a fine. When an entity
has failed to adopt preventive measures or control facilities that meet the
requirements of environmental protection standards, it may be liable to
suspension of its production or operations and for payment of a fine. Material
violations of environmental laws and regulations causing property damage or
casualties may be subject to criminal liabilities. The Company believes that
its
current production and operating activities of Chengtong are in compliance
with
the environmental protection requirements of the PRC. The Company has never
been
penalized as a result of any breach of the laws and regulations on environmental
protection.
China
Steel Industry
The
following industry information has been obtained from various sources. The
Company believes it is the most updated information available on this subject
and that it is widely available and reliable.
According
to the International Iron and Steel Institute, China is the largest steel
producing country. In 2005, China produced 349.4 million metric tons of steel,
up 24.6% from 2004. Japan, the second largest producer, produced 112.7 metric
tons of steel.
Steel
products can be categorized as low-end (long products such as pipes, tubes,
wires and rods) and high end (flat products such as hot-rolled steel or
cold-rolled steel sheets). Based upon information obtained by the Company from
the CMI,
the
Company believes that approximately 65% of China’s steel production are low-end
long products and approximately 35% are high-end high value cold-rolled steel
sheets. The Company operates in the high-end category of this market with its
niche precision steel processing and produces and sells high precision
cold-rolled and hot-rolled steel products and provides heat treatment and
cutting of medium and high carbon hot-rolled steel strips and chrome series
stainless steel.
Based
upon information obtained by the Company from the CMI, the Company believes
that
the estimated market size for cold-rolled steel sheets is approximately
20,000,000 tons, with ultra-thin products making up approximately 2,000,000
tons.
Based
upon information obtained by the Company from the CMI, the Company believes
that
the production of cold-rolled precision steel strips accounted for less than
15%
of Chinese demands and, accordingly, imports of stainless steel sheets,
galvanized sheets, cold-rolled sheets, cold-rolled silicon steels, and color
coated sheets of between 85% to 90% were required to make up the short-fall.
The
Company believes that the average quality and standards of China’s high
precision steel industry lags behind the international norm. During the last
three years, Chengtong believes that it has begun to develop a nationally
recognizable brand in China, however, it has not yet established an
internationally recognizable brand for its specialty precision steel products.
Export led demands coupled with nationwide demands for automobile parts and
components, saw blades, textile needles, microelectronics, packing and
containers in China’s booming economy had and are expected to continue to
require increasing quantities of high precision steel products. Arising from
the
increasing demands for high precision steel products and limited production
in
China, the Company believes that China’s manufacturers have had to import
millions of tons of cold-rolled steel rolls and sheets from Japan, Korea, the
European Union and the United States.
Competition
The
Company concentrates in the niche ultra-thin cold-rolled precision steel and
high-carbon, high strength cold-rolled steel and low carbon super-thin
cold-rolled steel processing and is not in direct competition with such local
Chinese steelmakers as BaoSteel Group Corporation and Maan Steel Group. The
Company is not in direct competition with China’s local steelmakers because
these companies concentrate on the production of hot rolled de-scaled (pickled)
steel coils and steel sheets from iron ores imported from Brazil and Australia.
Steel sheets produced by these local Chinese steelmakers are then supplied
as
raw materials to high precision steel manufacturers such as the Company for
cold
reduction processing to the desired thickness. Cold-rolled products are then
sold to manufacturers/customers in the appliance and automobile industries.
However,
its business is in an industry that is becoming increasingly competitive and
capital intensive, and competition comes from local manufacturers and importers.
Some of the Company’s competitors have financial resources, staff and facilities
substantially greater than the Company’s and the Company may be at a competitive
disadvantage compared with larger steel companies. The Company’s competitors in
China’s precision steel market include: China Special Steel Co., Limited, Henan
Green Complex Material Co., Limited, Qinghuangdao Longteng Precision Strip
Co.,
Limited and BaoSteel Group Chaoyang Precision Strip Co., Limited. The Company’s
overseas’ competitors include: Ton Yi Industrial Corp., and Shinwha Special
Steel Co., Limited. Further, there are additional competitors who are currently
constructing mills that will be in competition with the Company both in China
and internationally.
BaoSteel
Group Chaoyang Precision Strip Co., Limited was a joint venture between a local
Chinese company and a subsidiary of BaoSteel Group when it was established.
However, the Company understands that four years ago BaoSteel Group sold its
equity interest in this joint venture to the local company and this is no longer
a subsidiary of BaoSteel Group although the company name remained unchanged.
The
Company further understands that BaoSteel Group is now focusing on the
production of cold-rolled stainless steel products which belong to a different
market segment. The management of the Company does not believe that the two
companies are in direct competition.
Although
there is intense competition in China’s steel industry, this impacts mostly
low-end steel products. The Company believes that there are only two companies
with similar product categories in the PRC, BaoSteel Group Chaoyang Precision
Strip Co., Limited and Qinghuangdao Longteng Precision Strip Co., Limited,
which
produce cold steel rolls with widths of approximately 400mm. Because the
Company’s cold-rolled steel rolls have a width of around 1,000mm, these products
have different applications and are sold in different market segments than
that
of the Company and are not considered to be direct competitors to the
Company.
Intellectual
Property
On
December 8, 2004, the State Intellectual Property Office in China granted a
ten-year patent right to the “Environment-Conscious Mill Bearing with Inner
Circulation Lubricant” to Shanghai Chengtong Precision Strip Co., Limited and
Shanghai Te’an-Yikai Bearing Co., Limited. The patented bearing is installed in
the Company’s existing cold-roll mill and, together with the Company’s internal
know-how complementary to the patented bearing, the Company believes it
addresses a number of issues associated with the bearing lubrication in
cold-rolling and ensures smooth and effective operation of the cold-roll mill.
There is no direct or indirect affiliation between the Company and Shanghai
Te’an-Yikai Bearing Co, Limited. The Company and Shanghai Te’an-Yikai Bearing
Co., Limited jointly developed the environment-conscious mill bearing with
inner
circular lubrication project. Shanghai Te’an-Yikai Bearing Co., Limited retains
the proprietary right to the technology while the Company has the exclusive
right to the application of the technology.
The
Company and Chengtong’s management has deliberately elected not to register any
other patents and internally developed know how because of the uncertainty
over
the protection of intellectual property rights in China. Chengtong also protects
its internally developed know-how and production process (such as system
pressure, cleanliness of the lubrication, temperature control, appropriate
allocation of oil supply and retrieving which are vital in providing a radical
solution to the difficulties associated with lubricating rolling mills’ backing
bearing) by requiring all key personnel (production engineers and management
staff members) to sign non-disclosure and confidentiality contracts.
There
can
be no assurance that third parties will not assert infringement or other claims
against the Company with respect to any existing or future products or the
Company’s processes. The Company cannot assure that licenses would be available
if any of the Company’s technology was successfully challenged by a third party,
or if it became desirable to use any third-party technology to enhance the
Company products. Litigation to protect the Company’s proprietary information or
to determine the validity of any third-party claims could result in a
significant expense and divert the efforts of the Company’s technical and
management personnel, whether or not such litigation is determined in its
favor.
While
we
have no knowledge that we are infringing upon the proprietary rights of any
third party, there can be no assurance that such claims will not be asserted
in
the future with respect to existing or future products. Any such assertion
by a
third party could require us to pay royalties, to participate in costly
litigation and defend licensees in any such suit pursuant to indemnification
agreements, or to refrain from selling an alleged infringing
product.
Research
and Development
Since
the
establishment of Chengtong in July 2002, the Company’s management has developed
strategies and focused on the research and development of the cold-rolled and
hot-rolled precision steel production processing techniques and production
of
the special ultra thin but sturdy cold-rolled precision steel products with
a
ratio of width to thickness of 10,000 times. In addition to the traditional
research and development activities, the Company’s engineers are constantly
interacting with customers to detect changes in “patterns” and customers’
specifications arising from constantly changing industry’s needs.
As
of
November 30, 2006, the Company has three experienced engineers and technicians
in the Research and Development Department and management. The Company’s
Research and Development Department focuses on the manufacturing of ultra high
strength cold-rolled steel strip and the advancement and improvement in
manufacturing technique for cold-rolled steel rolls with a ratio of width to
thickness at 10,000 times. Further, the Company is working on research and
development projects involving coiled springs for automotive seat belts and
steel for igniters in automotive air bag inflation devices. The amount spent
on
research and development activities each year is at approximately 1% of its
revenue for such year. In addition, the Company has budgeted 1% of revenues
to
be spent for research and development activities beginning in the year ending
June 30, 2007.
Quality
Control
Following
the accreditation of the International Organization for Standardization (“ISO”)
Technical Standards (“TS”) 16949 on October 8, 2004, Chengtong implemented the
Quality Handbook in October 2004. This Quality Handbook was prepared on the
basis and standards of the ISO/TS16949 specifications and which ISO Technical
Specifications are compatible with existing
American (QS-9000), German (VDA6.1), French (EAQF) and Italian (AVSQ) automotive
quality systems standards within the global automotive industry. Together with
ISO 9001:2000, ISO/TS 16949 specifies the quality system requirements for the
design, development, production, installation and servicing of automotive
related products.
Sales
and Marketing
The
Company’s high precision steel products are sold directly to the end-users in
various parts of China and the Company’s production is based on confirmed sales
orders. Generally, an initial deposit (approximately 30% of the aggregate
contracted sales amount) is pre-paid when a contract is signed. The Company’s
major customers are located in Shanghai, Zhejiang, Jiangsu, Hubei, Guangdong,
Beijing, Shandong, Hebei, Tianjin, Guangxi, Fujian, Liaoning, Anhui, Hunan,
Shanxi, Yunnan, Jiangxi and Sichuan. During the last three years, the Company
has achieved a customer base of approximately 200 entities and the Company
intends to further add to its customer base by expanding into the lucrative
markets in Guangdong Province where there is a heavy concentration of light
industries and into the Northeastern region of China where the automotive
industry is concentrated.
Below
is
a list of the Company’s major customers during the years ended June 30, 2006 and
2005:
|
Major
customers
|
|
June
30,
2006
|
|
%
of sales
|
|
June
30,
2005
|
|
%
of sales
|
|
|
Jiangsu
Kaiteer Industrial Stove Co. Ltd
|
|
|
5,212,171
|
|
|
15
|
|
|
14,880,488
|
|
|
28
|
|
|
Shanghai
Ruixuefeng Metals Co. Ltd
|
|
|
4,634,521
|
|
|
13
|
|
|
4,251,568
|
|
|
8
|
|
|
Shanghai
Yiyi Industrial Co. Ltd
|
|
|
4,305,918
|
|
|
12
|
|
|
9,034582
|
|
|
17
|
|
|
Ningbo
Eco and Tech Shuntong Trading Co. Ltd
|
|
|
2,042,191
|
|
|
6
|
|
|
-*
|
|
|
-*
|
|
|
Shanghai
Bayou Industrial Co. Ltd
|
|
|
1,555,204
|
|
|
4
|
|
|
-*
|
|
|
-*
|
|
|
BaoSteel
Trading Co. Ltd
|
|
|
-*
|
|
|
-*
|
|
|
6,048,153
|
|
|
11
|
|
|
Shanghai
Bayou Industrial Co. Ltd
|
|
|
-*
|
|
|
-*
|
|
|
2,579,680
|
|
|
5
|
|
|
Hangzhou
Xinri Steel Materials Co. Ltd
|
|
|
-*
|
|
|
-*
|
|
|
3,888,720
|
|
|
7
|
|
|
Huangshi
Dongshan Steel Industry Co. Ltd
|
|
|
-*
|
|
|
-*
|
|
|
3,143,596
|
|
|
6
|
|
|
Jiashan
Zhongwei Co. Ltd
|
|
|
-*
|
|
|
-*
|
|
|
3,076,274
|
|
|
6
|
|
| |
|
|
17,750,005
|
|
|
50
|
|
|
46,903,061
|
|
|
88
|
|
|
Others
|
|
|
17,956,524
|
|
|
50
|
|
|
6,241,541
|
|
|
12
|
|
| |
|
|
35,706,529
|
|
|
100
|
|
|
53,144,602
|
|
|
100
|
|
*
Not
major customers for the relevant years
Taxes
As
a
wholly-owned foreign enterprise, Chengtong is entitled to preferential tax
advantages, including full tax exemption on the enterprise income tax that
was
generated in the first two years after the recoveries of previous losses and
a
one-half reduction in the enterprise income tax to a rate of 13.5% for the
next
3 years. The full tax exemption for the enterprise income tax expired on
December 31, 2005 and the right to a one-half reduction on the enterprise income
tax will expire on December 31, 2008. After such tax holidays, the profits
generated by the Company shall be subject to the full tax rate of
27%.
Employees
As
of
November 30, 2006, the Company had a total of 280 employees. The management
team
comprises 24 employees with a General Manager, an Assistant General Manager,
8
staff members in the Sales and Logistics Division, 5 staff members in
Cold-Rolling Production Division, 6 staff members in the Maintenance Department
and 3 staff members in the Research and Development Department. The Company’s
employees are not subject to collective bargaining agreements. The Company
considers its global labor practices and employee relations to be
good.
Property
The
Company leases for $1 per month the existing 20,000 square meters of production
and office facilities in Jiading District, Shanghai on 4 acres of property
held
by a related company, Shanghai Tuorong Precision Steel Company Limited, which
will become a subsidiary of the Company upon approval from the relevant
governmental authority for the transformation into a WOFE. There is no formal
tenancy agreement between the Company and Tuorong Precision for this lease.
Receipt of the approval for Shanghai Tuorong Precision Steel Company Limited
to
transfer the land-use rights to Chengtong is a long and involved process which
has been under process for some time. The Company anticipates the transfer
of
land use rights will be completed in 2007.
Two
new
Phase 2 production facilities and an office building were completed in August
2006 and product trial runs commenced in September 2006. Actual
production commenced in October 2006. The installation of the 1,700mm cold
roll mill is expected to be completed and actual production is expected in
the
second quarter of 2007.
Legal
Proceedings
As
of the
date of this Current Report, there is no pending litigation against the Company
nor was there any litigation initiated by the Company.
Risk
Factors
You
should carefully consider the following risks, together with all other
information included in this Current Report on Form 8-K relating to the Company.
The realization of any of the risks described below could have a material
adverse effect on the Company’s business, results of operations and future
prospects.
Risks
Relating to the Company’s Business
Steel
consumption is cyclical and worldwide overcapacity in the steel industry and
the
availability of alternative products has resulted in intense competition, which
may have an adverse effect on profitability and cash flow.
Steel
consumption is highly cyclical and generally follows general economic and
industrial conditions both worldwide and in various smaller geographic areas.
The steel industry has historically been characterized by excess world supply.
This has led to substantial price decreases during periods of economic weakness,
which have not been offset by commensurate price increases during periods of
economic strength. Substitute materials are increasingly available for many
steel products, which may further reduce demand for steel. Additional
overcapacity or the use of alternative products could have a material adverse
effect upon the Company and its results of operations.
Rapidly
growing demand and supply in China and other developing economies may result
in
additional excess worldwide capacity and falling steel prices.
Over
the
last several years steel consumption in China and other developing economies
such as India has increased at a rapid pace. Steel companies have responded
by
developing plans to rapidly increase steel production capability in these
countries and entered into long-term contracts with iron ore suppliers in
Australia and Brazil. Steel production, especially in China, has been expanding
rapidly and could be in excess of Chinese demand depending on continuing demand
growth rates. Because China is now the largest worldwide steel producer, any
significant Chinese capacity excess could have a major impact on world steel
trade and prices if excess production is exported to other markets.
Increases
in prices and limited availability of raw materials and energy may constrain
operating levels and reduce profit margins.
Steel
producers require large amounts of raw materials - iron ore or other iron
containing material, steel scrap, coke and coal as well as large amounts of
energy. Over the last several years, prices for raw materials and energy, in
particular natural gas and oil, have increased significantly. In many cases
these price increases have been a greater percentage than price increases for
the sale of steel products. Steel producers have periodically been faced with
problems in receiving sufficient raw materials and energy in a timely manner,
resulting in production curtailments. These production curtailments and
escalated costs have reduced profit margins and may continue to do so in the
future, which could have a material adverse effect upon the Company and its
results of operations.
Environmental
compliance and remediation could result in substantially increased capital
requirements and operating costs.
The
Company is currently subject to numerous Chinese provincial and local laws
and
regulations relating to the protection of the environment. These laws continue
to evolve and are becoming increasingly stringent. The ultimate impact of
complying with such laws and regulations is not always clearly known or
determinable because regulations under some of these laws have not yet been
promulgated or are undergoing revision. The Company’s business and operating
results could be materially and adversely affected if the Company were to
increase expenditures to comply with any new environmental regulations affecting
its operations.
The
Company may require additional capital in the future and we cannot assure you
that capital will be available on reasonable terms, if at all, or on terms
that
would not cause substantial dilution to your stockholdings.
The
development of high quality specialty precision steel require substantial funds.
Sourcing external capital funds for product development and requisite capital
expenditures are key factors that have and may in the future constrain the
Company’s growth, production capability, and profitability. For the Company to
achieve the next phase of its corporate growth, increased production capacity,
successful product development and additional external capital will be
necessary. There can be no assurance that such capital will be available in
sufficient amounts or on terms acceptable to the Company, if at all. Any sale
of
a substantial number of additional shares of common stock or securities
convertible into common stock will cause dilution to the holders of the
Company’s common stock and could also cause the market price of its common stock
to decline.
The
Company faces significant competition from competitors who have greater
resources than the Company, and the Company may not have the resources necessary
to successfully compete with them.
The
Company is one of a few manufacturers of specialty precision steel products
in
China. Differences in the type and nature of the specialty precision steel
products in China’s steel industry are relatively small and, coupled with
intense competition from international and local suppliers, to a limited extent,
consumers’ demand is rather price sensitive. Competitors may increase their
market share through pricing strategies. The Company’s business is in an
industry that is becoming increasingly competitive and capital intensive, and
competition comes from manufacturers located in China as well as from
international competition. The Company’s competitors may have financial
resources, staff and facilities substantially greater than the Company’s and the
Company may be at a competitive disadvantage compared with larger
companies.
The
Company produces a limited number of products.
Cold-rolled
specialty precision steel is a relatively new industry in China and
manufacturers previously relied on imports from Japan, Korea, the European
Union
and the United States. Accordingly, the average quality and standards of China’s
high precision steel industry lags behind the international norm. During the
last three years, the Company believes that it has developed a nationally
recognizable brand, however, it has not yet established an internationally
recognizable brand for its specialty steel products. As of November 30, 2006,
PSHL offered more than 40 high precision steel products of over 100
specifications. Currently the Company produces five major categories and over
ten types of high precision steel products. However, there are many other
specialty precision steel products of similar nature in the market and the
narrow band of the Company’s precision steel products may negatively impact the
Company’s financial performance should there be drastic changes in the market
demands and/or competition.
Increased
imports of steel products into China could negatively affect domestic steel
prices and demand levels and reduce profitability of domestic producers.
In
2004,
China’s total production of cold-rolled steel sheets was approximately 10.55
million tons and imports accounted for approximately 6.91 million tons. Foreign
competitors may have lower labor costs, and are often owned, controlled or
subsidized by their governments, which allows their production and pricing
decisions to be influenced by political and economic policy considerations
as
well as prevailing market conditions. Import levels may also be impacted by
decisions of government agencies under trade laws. Increases in future levels
of
imported steel could negatively impact future market prices and demand levels
for steel produced by the Company.
The
Company has substantial indebtedness with floating interest
rates.
At
November 30, 2006, total outstanding indebtedness of PSHL was $26,840,404,
out
of which interest-bearing bank borrowings amounted to $26,209,091. Substantially
about 85% of PSHL’s indebtedness was floating-rate debt with interest rates
which vary with changes in the standard rate set by the People’s Bank of China.
To the extent interest rates increase, the Company will be liable for higher
interest payments to its lenders. For the current financial year, annual
interest on loans is approximately $2.1 million. The impact of a 1% increase
in
interest rates will increase interest expense by approximately $161,900. As
the
Company’s short-term borrowings mature, it will be required to either repay or
refinance these borrowings. An increase in short-term interest rates at the
time
that the Company seeks to refinance short-term borrowings may increase the
cost
of borrowings, which may adversely affect the Company’s earnings and cash
available for distribution to its shareholders.
The
Company depends upon its key personnel and the loss of any key personnel, or
its
failure to attract and retain key personnel, could adversely affect its future
performance, strategic plans, and other objectives.
The
loss
or failure to attract and retain key personnel could significantly impede the
Company’s future performance, including product development, strategic plans,
marketing and other objectives. The Company’s success depends to a substantial
extent not only on the ability and experience of its senior management, but
particularly upon the Company’s Chairman, Wo Hing Li, Chengtong’s General
Manager Hai Sheng Chen and Chief Financial Officer, Leada Tak Tai Li. The
Company does not currently have in place key man life insurance on Wo Hing
Li,
Hai Sheng Chen or Leada Tak Tai Li. To the extent that the services of these
officers and directors would be unavailable to the Company, the Company would
be
required to recruit other persons to perform the duties performed by Wo Hing
Li,
Hai Sheng Chen and Leada Tak Tai Li. We may be unable to employ other qualified
persons with the appropriate background and expertise to replace these officers
and directors on terms suitable to us.
Termination
of preferential taxation policy may negatively impact our profitability
As
a
wholly-owned foreign enterprise, Chengtong is entitled to preferential tax
advantages, including full tax exemption on the enterprise income tax that
was
generated in the first two years after the recoveries of previous losses and
a
one-half reduction in the enterprise income tax to a rate of 13.5% for the
next
3 years. The full tax exemption for the enterprise income tax expired on
December 31, 2005 and the one-half reduction on the enterprise profit tax will
expire on December 31, 2008. After such tax holidays, profits generated by
the
Company shall be subject to the full tax rate of 27%. In the event that the
Company no longer receives the preferential tax treatment, it would have a
material adverse effect on the results of its operations.
Protection
and infringement of intellectual property.
Except
for a patent on the Environment-Conscious Mill Bearing with Inner Circular
Lubrication, the Company has no patents or licenses that protect its
intellectual property. Unauthorized parties may attempt to copy aspects of
the
Company’s products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company’s products is difficult.
The Company’s experienced core key engineers and management staff are
extensively involved in all facets of research, designs, craftworks, styling
and
development of the specialty precision products. Potential risks on the
divulgence of skills and the development of new products increase should these
employees resign, as the Company relies heavily on them. Chengtong has also
elected to protect internally developed know-how and production process (such
as
system pressure, cleanliness of the lubrication, temperature control,
appropriate allocation of oil supply and retrieving, which are vital in
providing a radical solution to the difficulties associated with lubricating
rolling mills’ backing bearing) by requiring all key personnel (production
engineers and management staff) to sign non-disclosure and confidentiality
contracts. However, the Company’s means of protecting its proprietary rights may
not be adequate. In addition, the laws of some foreign countries do not protect
the Company’s proprietary rights to as great an extent as do the laws of the
United States. The Company’s failure to adequately protect its proprietary
rights may allow third parties to duplicate its products, production process
or
develop functionally equivalent or superior technology. In addition, the
Company’s competitors may independently develop similar technology or design
around the Company’s proprietary intellectual property.
The
Company depends upon its largest customers for a significant portion of its
sales revenue, and the Company cannot be certain that sales to these customers
will continue. If sales to these customers do not continue, then the Company’s
sales may decline and our business may be negatively impacted.
The
Company currently supplies its high precision steel products to 12 major
customers in the domestic market. For the years ended June 30, 2006 and 2005,
sales revenues generated from the top five major customers amounted to 50%
and
88% of total sales revenues respectively; and sales to the largest single
customer for the same periods amounted to 15% and 28% of total sales revenues
respectively. The Company does not enter into long-term contracts with its
customers, and therefore cannot be certain that sales to these customers will
continue. The loss of any of our largest customers would likely have a material
negative impact on the Company’s sales revenues and business.
Defects
in the Company’s products could impair the Company’s ability to sell its
products or could result in litigation and other significant costs.
Detection
of any significant defects in the Company’s precision steel products may result
in, among other things, delay in time-to-market, loss of market acceptance
and
sales of its products, diversion of development resources, injury to the
Company’s reputation, or increased costs to correct such defects. Defects could
harm the Company’s reputation, which could result in significant costs to the
Company and could impair its ability to sell its products. The costs it may
incur in correcting any product defects may be substantial and could decrease
its profit margins.
If
the Company’s sole factory were destroyed or significantly damaged as a result
of fire or some other natural disaster, it would be adversely
affected.
All
of
the Company’s products are currently manufactured at its existing facilities
located in the Jiading District in Shanghai, China. Fire fighting and disaster
relief or assistance in China may not be as developed as in Western countries.
While the Company maintains property damage insurance aggregating approximately
$18.5 million covering its raw materials, finished goods, equipment and
buildings and another $10.5 million insurance against equipment breakdown,
it
does not maintain business interruption insurance. Investors are cautioned
that
material damage to, or the loss of, its production factory facilities due to
fire, severe weather, flood or other act of God or cause, even if insured,
could
have a material adverse effect on the Company’s financial condition, results of
operations, business and prospects.
Judgments
against the Company and management may be difficult to obtain or
enforce.
The
Company’s principal executive offices are located in Hong Kong, PRC.
Outside the United States, it may be difficult for investors to enforce
judgments obtained against the Company in actions brought in the United States,
including actions predicated upon the civil liability provisions of federal
securities laws. In addition, most of the Company’s officers and directors
reside outside the United States and the assets of these persons are located
outside of the United States. As a result, it may not be possible for investors
to effect service of process within the United States upon these persons, or
to
enforce against the Company or these persons judgments predicated upon the
liability provisions of United States federal securities laws.
The
Company may not pay dividends in the future.
The
Company may not be able to declare dividends or the Board of Directors may
decide not to declare dividends in the future.
Risks
relating to China
The
Company faces significant risks if the Chinese government changes its policies,
laws, regulations, tax structure, or its current interpretations of its laws,
rules and regulations relating to our operations in China.
The
Company’s manufacturing facility is located in China. As of November 30, 2006,
all of the Company’s assets are located in China and, save for a small volume of
exports to Thailand and the Philippines for the quarter ended September 30,
2006
totaling $155,181, all of its sales revenues are generated in
China. Accordingly, the Company’s results of operations, financial state of
affairs and future growth are to a significant degree subject to China’s
economic, political and legal development and related
uncertainties. Changes in policies by the Chinese government resulting in
changes in laws or regulations or the interpretation of laws or regulations,
confiscatory taxation, changes in employment restrictions, restrictions on
imports and sources of supply, import duties, corruption, currency revaluation
or the expropriation of private enterprise could materially and adversely affect
the Company. Over the past several years, the Chinese government has pursued
economic reform policies including the encouragement of private economic
activities and greater economic decentralization. If the Chinese government
does
not continue to pursue its present policies that encourage foreign investment
and operations in China, or if these policies are either not successful or
are
significantly altered, then the Company’s business could be adversely affected.
The Company could even be subject to the risk of nationalization, which could
result in the total loss of investment. Following the Chinese government’s
policy of privatizing many state-owned enterprises, the Chinese government
has
attempted to augment its revenues through increased tax collection. Continued
efforts to increase tax revenues could result in increased taxation expenses
being incurred by the Company. Economic development may be limited as well
by
the imposition of austerity measures intended to reduce inflation, the
inadequate development of infrastructure and the potential unavailability of
adequate power and water supplies, transportation and communications.
Fluctuations
in exchange rates of the Renminbi could adversely affect the value of and
dividends, if any, payable of shares of the Company’s common stock.
Save
for
the recent exports to Thailand and the Philippines for the quarter ended
September 30, 2006, all of the Company’s local sales revenues are collected in
and substantially all of its expenses are paid in the Chinese Renminbi. The
Chinese Renminbi had remained stable against the U.S. Dollar at approximately
8.28 Yuan to 1.00 U.S. Dollar for several years and it was not until July 21,
2005 that the Chinese currency regime was altered, with a 2.1% revaluation
versus the United States Dollar. This move initially values the Renminbi at
8.11
per United States Dollar. In addition, the Renminbi will no longer be linked
to
the U.S. currency but rather to a basket of currencies with a 0.3% margin of
fluctuation. However, there remains international pressure on the Chinese
government to adopt an even more flexible currency policy and as of November
30,
2006 the exchange rate was 7.8466 Yuan to 1.00 U.S. Dollar. The exchange rate
of
Renminbi is subject to changes in China’s government policies which are to a
large extent dependent on the economical and political development both
internationally and locally and the demand and supply of Renminbi in the
domestic market. There can be no assurance that such exchange rate will continue
to remain stable in the future amongst the volatility of currencies,
globalization and the unstable economies in recent years. Since (i) the income
and profit of the Company are mainly denominated in Renminbi, and (ii) the
payment of dividends will be in U.S. dollars, if any, any exchange fluctuation
of the Renminbi against other foreign currencies would adversely affect the
value of the shares and dividends payable to shareholders, in foreign currency
terms.
Uncertainty
relating to the laws and regulations in China.
The
Chinese legal system is a civil law system based on written statutes. Unlike
common law systems, it is a system in which decided legal cases have little
precedential value. In 1979, the Chinese government began to promulgate a
comprehensive system of laws and regulations governing economic matters in
general. Legislation over the past 25 years has significantly enhanced the
protections afforded to various forms of foreign investment in China.
Enforcement of existing laws or agreements may be sporadic and implementation
and interpretation of laws inconsistent. The Chinese judiciary is relatively
inexperienced in enforcing the laws that exist, leading to a higher than usual
degree of uncertainty as to the outcome of any litigation. Even where adequate
law exists in China, it may not be possible to obtain swift and equitable
enforcement of that law. The legal system in China cannot provide shareholders
with the same level of protection as in the United States. The Company’s
subsidiary, Chengtong, is governed by the laws and regulations generally
applicable to local enterprises and those laws and regulations have been
recently introduced and remain experimental in nature and subject to changes
and
further amendments.
Controversies
affecting China’s trade with the United States could depress the Company’s stock
price following this transaction.
While
China has been granted permanent most favored nation trade status in the United
States through its entry into the World Trade Organization, controversies and
trade disagreements between the United States and China may arise that have
a
material adverse effect upon the Company’s stock price following this
transaction. Political or trade friction between the United States and China,
whether or not actually affecting its business, could also materially and
adversely affect the prevailing market price of the Company’s common
stock.
Future
changes in the labor laws in the PRC may result in the continued increase in
labor costs.
The
Company has recently experienced an increase in the cost of labor. Any future
changes in the labor laws in China could result in the Company having to pay
increased labor costs. There can be no assurance that the labor laws will not
change, which may have a material adverse effect upon the Company’s business and
results of operations.
Risks
Relating to our Common Stock
The
market price for shares of our common stock could be volatile; the sale of
material amounts of our common stock could reduce the price of our common stock
and encourage short sales.
The
market price for the shares of our common stock may fluctuate in response to
a
number of factors, many of which are beyond our control. Such factors may
include, without limitation, the general economic and monetary environment,
quarter-to-quarter variations in our anticipated and actual operating results,
future financing activities and the open-market trading of our shares in
particular.
The
trading market in our common stock is limited and illiquid and may cause
volatility in the market price.
As
of the
date of this Current Report, there are only 6% of the issued and
outstanding shares of our common stock that are not owned by the PSHL
Shareholders, or 1,618,915 shares. Thus, the market price for our common
stock
is subject to volatility and holders of common stock may be unable to resell
their shares at or near their original purchase price or at any price. In
the
absence of an active trading market:
• investors
may have difficulty buying and selling or obtaining market
quotations;
• market
visibility for our common stock may be limited; and
• a
lack of
visibility for our common stock may have a depressive effect on the market
for
our common stock.
Our
common stock price is volatile and could decline in the
future.
The
stock
market, in general, has experienced extreme stock price fluctuations. In some
cases, these fluctuations have been unrelated to the operating performance
of
the affected companies. Many Chinese companies have experienced dramatic
volatility in the market prices of their common stock. We believe that a number
of factors, both within and outside of our control, could cause the price of
our
common stock to fluctuate, perhaps substantially. Factors such as the following
could have a significant adverse impact on the market price of our common
stock:
| • |
our
ability to obtain additional financing and, if available, the terms
and
conditions of the financing;
|
| • |
our
financial position and results of
operations;
|
| • |
period-to-period
fluctuations in our operating
results;
|
| • |
changes
in estimates of our performance by any securities
analysts;
|
| • |
new
regulatory requirements and changes in the existing regulatory
environment;
|
| • |
the
issuance of new equity securities in a future
offering;
|
| • |
changes
in interest rates; and
|
| • |
general
economic and other national
conditions.
|
Shares
eligible for future sale may adversely affect the market price of our common
stock.
From
time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in
the
open market pursuant to Rule 144 promulgated under the Securities Act of 1933,
as amended, subject to certain limitations. In general, pursuant to Rule 144,
a
stockholder (or stockholders whose shares are aggregated) who has satisfied
a
one-year holding period may, under certain circumstances, sell within any
three-month period a number of securities which does not exceed the greater
of
1% of the then outstanding shares of common stock or the average weekly trading
volume of the class during the four calendar weeks prior to such sale. Rule
144
also permits, under certain circumstances, the sale of securities, without
any
limitations, by a non-affiliate of our company that has satisfied a two-year
holding period. Any substantial sale of common stock pursuant to Rule 144 or
pursuant to this resale prospectus may have an adverse effect on the market
price of our common stock.
One
stockholder exercises significant control over matters requiring shareholder
approval.
After
giving effect to the issuance of all the shares of common stock pursuant to
the
Share Exchange, Wo Hing Li has voting power equal to approximately 74.6% of
our
voting securities. As a result, Wo Hing Li, through such stock ownership,
exercises significant control over all matters requiring shareholder approval,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership in Wo Hing Li may also have the
effect of delaying or preventing a change in control of us that may be otherwise
viewed as beneficial by shareholders other than Wo Hing Li.
We
may incur significant costs to ensure compliance with U.S. corporate governance
and accounting requirements.
We
may
incur significant costs associated with our public company reporting
requirements, costs associated with newly applicable corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002 and
other rules implemented by the SEC. We expect all of these applicable rules
and
regulations to increase our legal and financial compliance costs and to make
some activities more time-consuming and costly. We also expect that these
applicable rules and regulations may make it more difficult and more expensive
for us to obtain director and officer liability insurance and we may be required
to accept reduced policy limits and coverage or incur substantially higher
costs
to obtain the same or similar coverage. As a result, it may be more difficult
for us to attract and retain qualified individuals to serve on our board of
directors or as executive officers. We are currently evaluating and monitoring
developments with respect to these newly applicable rules, and we cannot predict
or estimate the amount of additional costs we may incur or the timing of such
costs.
We
may be required to raise additional financing by issuing new securities with
terms or rights superior to those of our shares of common stock, which could
adversely affect the market price of our shares of common
stock.
We
may
require additional financing to fund future operations, including expansion
in
current and new markets. We may not be able to obtain financing on favorable
terms, if at all. If we raise additional funds by issuing equity securities,
the
percentage ownership of our current shareholders will be reduced, and the
holders of the new equity securities may have rights superior to those of the
holders of shares of common stock, which could adversely affect the market
price
and the voting power of shares of our common stock. If we raise additional
funds
by issuing debt securities, the holders of these debt securities would similarly
have some rights senior to those of the holders of shares of common stock,
and
the terms of these debt securities could impose restrictions on operations
and
create a significant interest expense for us.
We
may have difficulty raising necessary capital to fund operations as a result
of
market price volatility for our shares of common stock.
In
recent
years, the securities markets in the United States have experienced a high
level
of price and volume volatility, and the market price of securities of many
companies have experienced wide fluctuations that have not necessarily been
related to the operations, performances, underlying asset values or prospects
of
such companies. For these reasons, our shares of common stock can also be
expected to be subject to volatility resulting from purely market forces over
which we will have no control. If our business development plans are successful,
we may require additional financing to continue to develop and exploit existing
and new technologies and to expand into new markets. The exploitation of our
technologies may, therefore, be dependent upon our ability to obtain financing
through debt and equity or other means.
Standards
for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain,
and if we fail to comply in a timely manner, our business could be harmed and
our stock price could decline.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting,
and
attestation of our assessment by our independent registered public accountants.
The standards that must be met for management to assess the internal control
over financial reporting as effective are new and complex, and require
significant documentation, testing and possible remediation to meet the detailed
standards and will impose significant additional expenses on us. We may
encounter problems or delays in completing activities necessary to make an
assessment of our internal control over financial reporting. In addition, the
attestation process by our independent registered public accountants is new
and
we may encounter problems or delays in completing the implementation of any
requested improvements and receiving an attestation of our assessment by our
independent registered public accountants. If we cannot assess our internal
control over financial reporting as effective, or our independent registered
public accountants are unable to provide an unqualified attestation report
on
such assessment, investor confidence and share value may be negatively
impacted.
We
do
not foresee paying cash dividends in the foreseeable future.
We
have
not paid cash dividends on our stock and we do not plan to pay cash dividends
on
our stock in the foreseeable future.
Additional
Information
We
are
obligated to file reports with the SEC pursuant to the Securities Exchange
Act
of 1934, as amended. The public may read and copy any materials that we file
with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. The public may obtain information on the operation
of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC. The address of that site is http://www.sec.gov.
SUMMARY
HISTORICAL FINANCIAL DATA FOR PSHL
The
following table sets forth selected consolidated financial data for the
Company’s wholly owned subsidiary, PSHL and its subsidiary as of and for the
quarter ended September 30, 2006 and for each of the three years ended June
30, 2006, 2005 and 2004. PSHL’s consolidated financial statements as of, and for
the years ended June 30, 2005 and 2004 were audited by Murrell, Hall, McIntosh
& Co. PLLP.
You
should read the following information together with PSHL’s consolidated
financial statements, the notes related thereto and the section entitled “PSHL -
Management’s Discussion and Analysis of Financial Condition and Results of
Operations”
below.
| |
|
Quarter
Ended
September
30
|
|
Fiscal
Year Ended June 30,
|
|
| |
|
2006
|
|
2006
|
|
2005
|
|
2004
|
|
|
Statement
of Operations Data:
|
|
|
|
(in
U. S. dollars)
|
|
|
Sales
Revenue
|
|
|
10,503,348
|
|
|
34,881,141
|
|
|
53,144,601
|
|
|
17,417,005
|
|
|
Cost
of Goods Sold
|
|
|
6,800,098
|
|
|
24,892,154
|
|
|
45,562,070
|
|
|
16,409,829
|
|
|
Net
Income
|
|
|
2,809,248
|
|
|
7,514,101
|
|
|
6,366,441
|
|
|
198,776
|
|
|
Balance
Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Equivalents
|
|
|
882,016
|
|
|
186,955
|
|
|
3,133,326
|
|
|
237,790
|
|
|
Current
Assets
|
|
|
35,807,395
|
|
|
23,154,115
|
|
|
13,028,918
|
|
|
4,292,834
|
|
|
Total
Assets
|
|
|
63,193,618
|
|
|
45,571,486
|
|
|
25,489,475
|
|
|
12,490,700
|
|
|
Current
Liabilities
|
|
|
45,453,023
|
|
|
30,737,911
|
|
|
14,354,780
|
|
|
11,596,058
|
|
|
Non-current
Liabilities
|
|
|
3,152,415
|
|
|
3,152,415
|
|
|
7,713,219
|
|
|
--
|
|
|
Total
Shareholder’s Equity
|
|
|
14,588,180
|
|
|
11,681,160
|
|
|
3,421,476
|
|
|
894,642
|
|
PRO
FORMA COMBINED SUMMARY OF HISTORICAL FINANCIAL DATA
The
following selected unaudited pro forma condensed consolidated financial data
were prepared as a recapitalization of PSHL. OraLabs’ historical condensed
consolidated statement of operations is combined with PSHL and Chengtong’s
historical consolidated statement of operations data for the three months ended
September 30, 2006 and the year ended June 30, 2006, giving effect to the
redemption of 3,629,350 shares of the Company’s common stock in exchange for the
transfer to Gary H. Schlatter of all the Company’s stock that it owns in its
wholly-owned subsidiary, OraLabs, Inc., as if it had occurred on
September 30, 2006 and June 30, 2006, respectively. The September
30, 2006 pro forma balance sheet assumes
that the transactions occurred on September 30, 2006.
The
selected unaudited pro forma condensed consolidated financial data is based
on
estimates and assumptions that are preliminary. The data are presented for
informational purposes only and is not intended to represent or be indicative
of
the consolidated results of operations or financial condition of OraLabs and
PSHL that would have been reported had the transactions been completed as of
the
dates presented, and should not be taken as representative of future
consolidated results of operations or financial condition of the
Company.
This
selected unaudited pro forma condensed consolidated financial data should be
read in conjunction with the summary selected historical consolidated financial
data and the unaudited pro forma condensed consolidated financial statements
and
accompanying notes contained elsewhere in this Current Report, and the
historical consolidated financial statements and accompanying notes of PSHL
and
Chengtong’s contained in this Current Report.
| |
|
Three
Months
Ended
September
30,
2006
|
|
Twelve
Months
Ended
June
30,
2006
|
|
| |
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
Sales
Revenues
|
|
$ |
10,503,348
|
|
$ |
34,400,860
|
|
|
Cost
of Good Sold
|
|
|
6,800,098
|
|
|
24,892,154
|
|
|
Net
Income
|
|
|
2,809,248
|
|
|
7,514,101
|
|
Balance
Sheet Data:
| |
|
|
As
of September
30,
2006
|
|
|
| |
|
|
|
|
|
|
|
Cash
and Equivalents
|
|
$ |
1,282,016
|
|
|
|
|
Current
Assets
|
|
|
36,207,395
|
|
|
|
|
Total
Assets
|
|
|
63,593,618
|
|
|
|
|
Current
Liabilities
|
|
|
45,853,023
|
|
|
|
|
Non-current
Liabilities
|
|
|
3,152,415
|
|
|
|
|
Total
Shareholder’s Equity
|
|
|
14,588,180
|
|
|
|
PSHL’S
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Caution
Regarding Forward-Looking Information
When
used
in this Current Report on Form 8-K, the words “may,” “will,” “expect,”
“anticipate,” “continue,” “estimate,” “project,” “intend,” and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934 regarding events, conditions, and
financial trends that may affect PSHL’s future plans of operations, business
strategy, operating results, and financial position. Persons reviewing this
Current Report on Form 8-K are cautioned that any forward-looking statements
are
not guarantees of future performance and are subject to risks and uncertainties
and that actual results may differ materially from those included within the
forward-looking statements as a result of various factors. These risks and
uncertainties, many of which are beyond PSHL’s control, include (i) the
sufficiency of existing capital resources and PSHL’s ability to raise additional
capital to fund cash requirements for future operations; (ii) volatility of
the
stock market; and (iii) general economic conditions. Although PSHL believes
the
expectations reflected in these forward-looking statements are reasonable,
such
expectations may prove to be incorrect.
While
these forward-looking statements, and any assumptions upon which they are based,
are made in good faith and reflect PSHL’s current judgment regarding the
direction of its business, actual results will almost always vary, sometimes
materially, from any estimates, predictions, projections, assumptions or other
future performance suggested herein. PSHL undertakes no responsibility or
obligation to update publicly these forward-looking statements, but may do
so in
the future in written or oral statements. Investors should take note of any
future statements made by or on its behalf.
Introduction
The
following discussion and analysis should be read in conjunction with our
consolidated audited financial statements and the related notes that appear
elsewhere in this Current Report on Form 8-K. Our consolidated audited financial
statements are stated in United States Dollars and are prepared in accordance
with United States Generally Accepted Accounting Principles. The following
discussion and analysis covers PSHL’s plan of operation for the next twelve
months. It discusses PSHL and its subsidiary’s financial condition at September
30, 2006 and changes in its financial condition since June 30, 2006, the end
of
the prior fiscal year. It also covers PSHL and its subsidiary’s results of
operation for the three months ended September 30, 2006 and fiscal years ended
June 30, 2006, 2005 and 2004.
Plan
of Operations
PSHL
was
registered on April 30, 2002, in the Territory of the British Virgin Islands
and
was classified as an International Business Company.
PSHL
has
one wholly-owned subsidiary, Shanghai Chengtong Precision Strip Company Limited
(“Chengtong”). For purposes of this section of this Current Report on Form 8-K,
“PSHL” refers collectively to PSHL and Chengtong.
The
operations of PSHL are conducted primarily through Chengtong which was
registered on July 2, 2002, in Shanghai, China. PSHL is engaged in the
manufacturing and selling of cold-rolled and hot-rolled precision steel products
and plates primarily for the automobile industry (components and spare parts),
food packaging materials, kitchen tools and electrical appliances. Chengtong
is
located in China and its products are currently primarily sold to manufacturers
in the automotive industry in China.
PSHL’s
plan of operation is to continue its current operations and to gain a greater
market share in China. PSHL also intends to expand into overseas markets, such
as Japan, Taiwan, Korea, Thailand, the Philippines, the European Union and
the
United States.
New
Production Facility
In
2005,
the directors of PSHL determined that PSHL’s production facilities were not
capable of meeting the production requirements and specifications demanded
by
existing and potential customers. PSHL decided to construct a new production
facility and to install a 1,400mm mill and 1,700mm mill to specifically address
the customers’ demands for higher profit margin precision steel products such as
high carbon cold-rolled steel products and expand production capacity.
In
addition, with the completion of the new production facilities, PSHL installed
one 1,400mm width cold mill and intends to install
another 1,700mm width cold-roll mill on or before June 30, 2007.
When the
two mills in the new production facility are fully utilized, it is expected
to
increase annual production by 300,000 tons per year.
Total
cost of the new production facility including the plant and machinery is
estimated to be approximately $25 million. As of September 30, 2006, capital
expenditures totalling $23,796,067 had been recorded. The capital expenditures
already incurred on the new production facility and plant and equipment for
the
1,400mm and 1,700mm mills were funded internally and through external bank
borrowings.
The
Company intends to raise funds privately to finance part of the costs of
the new production facilites and working capital requirements. If for any reason
the proposed financing is not closed, the Company intends to use internally
generated resources and external borrowings to finance the remainder of the
construction expenditure.
Three
months ended September 30, 2006 compared to the three months ended September
30,
2005
Results
of Operations
Net
income for the three months ended September 30, 2006 was $2,809,248, as compared
to the three months ended September 30, 2005, which was $2,283,122.
Components of sales and expenses resulting in this increase in net income are
discussed below.
Sales
revenues in 2006 increased $2,800,459, or 36%, to $10,503,348 from $7,702,889
in
2005. The reasons for the increase in sales revenues for the three months ended
September 30, 2006, were as follows:
· Sales
volume decreased by 901 tons, or 8%, to 9,859 tons for the three months ended
September 30, 2006, compared to 2005 of 10,760 tons when PSHL shifted to produce
high precision steel products, which require additional production time, during
the three months ended September 30, 2006, compared to the same corresponding
period in 2005, when low precision steel products were produced.
· Average
selling price per ton increased by an average of $349 per ton, or 48%, to $1,065
per ton for the three months ended September 30, 2006, compared to the same
corresponding period in 2005 of $716 per ton. This increase mitigated the
decrease in sales volume arising from changes to the sales/production mix with
concentration on high carbon cold-rolled steel and high carbon hot-rolled steel
making up 47% of the sales mix compared to the same corresponding period in
2005
of 30%.
· Significant
increase in average selling price of high
carbon cold-rolled steel products as
products sold in this category increased by $2,173 per ton, or 125%
quarter-on-quarter, to $3,918 per ton for the quarter ended September 30, 2006
compared to the same corresponding quarter in 2005 of $1,745 per ton,
representing an increase in average sales of $2,546,065, or
110% quarter-on-quarter, to $4,866,413 for the quarter ended September 30,
2006, compared to the same corresponding quarter in 2005 of $2,320,348.
The increase in average selling price was mainly attributable to change in
specifications and types of additional coating on steel surfaces, increasing
the
cost and the selling price accordingly.
· Change
in
sales mix where high carbon hot-rolled steel products only contributed 34%
of
the current sales mix at an average selling price of $612 per ton for the
quarter ended September 30, 2006 compared to the same corresponding quarter
in
2005 of 45% at an average selling price per ton of $555. The sales mix switched
to the fast emerging high carbon cold-rolled steel, as the product accounted
for
47% (2005: 30%) of the market at $3,918 per ton for the quarter ended September
30, 2006 compared to $1,745 in 2005.
Cost
of
goods increased by $1,621,555, or 31%, to $6,800,098 for the three months ended
September 30, 2006, from $5,178,543 in 2005. The increase is due in part to
a
36% increase in sales.
· Raw
materials (principally hot-rolled de-scaled (pickled) steel coils) consumed
increased by $1,293,682, or 29% quarter-on-quarter, to $5,717,139 for the
quarter ended September 30, 2006 compared to the same corresponding quarter
in
2005 of $4,423,457. The increase in cost of materials exceeded decreases in
the
raw materials contents of cost of sales by 1,171 tons, or 11%
quarter-on-quarter, to 9.859 tons (average cost of raw materials consumed was
$579 per ton) for the quarter ended September 30, 2006 compared to the same
corresponding period in 2005 of 10,760 tons. The average cost of raw materials
consumed was $411 per ton.
Gross
profit margin increased to 35% for the three months ended September 30, 2006,
compared to the three months ended September 30, 2005 of 33%. This increase
is
due largely to the higher profit margins generated on increased sales of high
carbon cold-rolled steel products.
Selling
expenses increased by $17,615, or 80%, to $39,697 for the quarter ended
September 30, 2006, compared to $22,082 for the quarter ended September 30,
2005. The increase was due primarily to increases in traveling expense of $7,523
and transportation of $8,909.
Administrative
expenses increased by $121,715, or 189%, to $186,188 for the three months ended
September 30, 2006, compared to $64,473 for the three months ended September
30,
2005. The increase was due to increases in legal and professional expenses
of
$48,924 and directors’ fees of $50,046. The increase in the legal and
professional fees was due to costs incurred in connection with the reverse
merger.
Depreciation
expense, a portion of which is included as a component of cost of goods sold,
increased by $50,521 or 24%, to $260,892 in 2006, from $210,371 in 2005, due
primarily to an increase in depreciable assets in 2006 when compared to 2005
due
to the upgrading of the production facilities.
For
the
quarters ended September 30, 2006 and 2005, the Company incurred $396,106 and
$146,198, respectively, in interest and financing costs associated with debts.
Interest costs of $192,767 incurred during the quarter ended September 30,
2006
were capitalized as part of the construction-in-progress, leaving $203,339
in
interest expense. This increase was due primarily to increased borrowings to
finance the construction in progress and plant and machinery, specifically
for
the purpose of increasing production capacity by 300,000 tons.
For
the
quarters ended September 30, 2006 and 2005, the Company incurred $454,361 and
$0, respectively in enterprise income tax expense. This increase was due to
the
expiration of the 100% tax holiday period as of June 30, 2006. The Company
currently is still enjoying the benefits of a 50% enterprise income tax holiday
which will expire on June 30, 2009.
Net
income increased by $526,126, or 23%, to $2,809,248 for the three months ended
September 30, 2006, compared to $2,283,122 for the three months ended September
30, 2005. The favorable variance in net income was mainly due to the increase
in
gross profit by $1,178,904, offset by an increase in operating expenses of
$141,276.
Fiscal
year ended June 30, 2006 compared to the fiscal year ended June 30,
2005
Results
of Operations
Net
income for the year ended June 30, 2006 was $7,514,101, as compared to the
year
ended June 30, 2005, which was $6,366,441. Components of sales and expenses
resulting in this increase in net income are discussed below.
Sales
revenues in 2006 decreased $18,263,460, or 34%, to $34,881,141 from $53,144,601
in 2005. The reasons for the decrease in sales revenues for the year ended
June
30, 2006, were as follows:
· Sales
volume decreased by 31,734 tons, or 43%, to 42,160 tons for the year ended
June
30, 2006, compared to 2005 of 73,894 tons when PSHL shifted to produce high
precision steel products, which require additional production time, during
the
year ended June 30, 2006, compared to the same corresponding period in 2005,
when low precision steel products were produced.
· Average
selling price per ton increased by an average of $128 per ton, or 18%, to $847
per ton for the year ended June 30, 2006, compared to the same corresponding
period in 2005 of $719 per ton. This increase mitigated the decrease in sales
volume arising from changes to the sales/production mix with concentration
on
high carbon cold-rolled steel and high carbon hot-rolled steel making up 62%
of
the sales mix compared to the same corresponding period in 2005 of
27%.
· Temporary
suspension of low carbon acid wash steel resulted in no production for the
year
ended June 30, 2006, compared to the same corresponding period in 2005 of 9,124
tons.
· Significant
decrease in low carbon hard-rolled steel products sold in this category
decreased by 32,407 tons, or 91%, to 3,238 tons for the year ended June 30,
2006, compared to the same corresponding period in 2005 of 35,645 tons. The
decrease is due to PSHL’s decision to specialize in production of higher gross
profit margin products which require more time and precision to produce. This
also resulted in lower production capacities as measured in tons of
production.
· Sales
mix
also changed significantly. Low carbon hard-rolled steel products were 5% of
the
current sales mix at an average selling price of $522 per ton for the year
ended
June 30, 2006, compared to the same corresponding period in 2005 of 45% at
an
average selling price per ton of $667.
Cost
of
goods decreased by $20,669,916, or 45%, to $24,892,154 for the year ended June
30, 2006 from $45,562,070 in 2005. The decrease is due in part to a 34% decrease
in sales combined with a 23% per ton average decrease in raw materials costs.
· Average
unit cost of raw materials decreased by $58 per ton, or 10%, period-on-period
to
$508 per ton for the year ended June 30, 2006, compared to the same
corresponding period in 2005 of $566 per ton.
Gross
profit margin increased to 29% for the year ended June 30, 2006, compared to
the
year ended June 30, 2005 of 14%. This increase is due largely to the favorable
variance in cost of sales by 44% in relation to the decrease in sales revenue
by
34%.
Selling
expenses increased by $35,628, or 41%, to $122,220 for the year ended June
30,
2006, compared to $86,592 for the year ended June 30, 2005. The increase was
due
to increases in wages of $13,609, welfare expenses of $4,891, traveling expense
of $12,078 and other costs of $5,050.
Administrative
expenses decreased by $38,407, or 7%, to $505,764 for the year ended June 30,
2006, compared to $544,171 for the year ended June 30, 2005. The decrease was
due to increases in legal and professional expenses of $163,286 offset by
decreases in directors’ remunerations of $199,546. The increase in the legal and
professional fees was due to costs incurred in connection with the reverse
merger.
Depreciation
expense, a portion of which is included as a component of cost of goods sold,
increased by $356,702 or 58%, to $823,862 in 2006, from $582,448 in
2005, due primarily to an increase in depreciable assets in 2006 when
compared to 2005 due to the upgrading of the production facilities.
For
the
years ended June 30, 2006 and 2005, PSHL incurred $1,021,607 and $508,313,
respectively, in interest and financing costs associated with debts. Interest
costs of $749,914 incurred during the year ended June 30, 2006 were capitalized
as part of the construction-in-progress leaving $271,693 in interest expense.
This increase was due primarily to increased borrowings to finance the
construction in progress and plant and machinery, specifically for the purpose
of increasing production capacity by 300,000 tons.
Net
income increased by $1,147,660, or 18%, to $7,514,101 for the year ended June
30, 2006, compared to $6,366,441 for the year ended June 30, 2005. The favorable
variance in net income was mainly due to the increase in gross profit by
$2,406,456.
Fiscal
year ended June 30, 2005 compared to fiscal year ended June 30,
2004
Results
of Operations
Net
income for the year ended June 30, 2005 was $6,366,441 as compared to the year
ended June 30, 2004, which was $198,776. Components of sales and expenses
resulting in this increase in net income are discussed below.
Sales
revenues in 2005 increased $35,727,596, or 205%, to $53,144,601 from $17,417,005
in 2004. The reasons for the favorable variance in sales revenues for the year
ended June 30, 2005, were as follows:
· Sales
volume increased due to increasing sales orders from many existing customers
and
new customers introduced by the company’s sales representatives.
· Production
capacity increased through purchases of advanced state-of-the-art plant and
machinery, extending the existing production factory floor areas, and
outsourcing certain complex processes.
· Significant
increases in average selling price per ton of product of $237 per ton, or 49%,
to $719 per ton for the year ended June 30, 2005 from $482 per ton in
2004.
· Increase
in sales of high carbon hot-rolled steel products by 1,142 tons, or 40.5%,
to
3,964 tons for the year ended June 30, 2005 from 2,822 tons in
2004.
· Significant
increase in low carbon cold-rolled steel products by 12,386 tons, or 4,455%,
to
12,664 tons for the year ended June 30, 2005 from 278 tons in 2004.
· Introduction
of a new production processing plant to provide soothing and “sponge down” of
rust on uneven steel surface of steel rolls and plates which enabled the Company
to increase its selling price.
Cost
of
goods increased by $29,152,241, or 177.7%, to $45,562,070 for the year ended
June 30, 2005 from $16,409,829 in 2004. The increase in cost of goods sold
of
178% for the year ended June 30, 2005 over 2004 was due primarily to a 205%
increase in sales revenues offset in part by a significant improvement in gross
profit margins.
Gross
profit margins increased from 5.78% in 2004 to 14.27% in 2005. This represents
a
8.49% increase in gross profit margins. This increase is due largely to
increased sales volume and average unit selling price. This increase was due
to
improved market conditions and increase in sale of high carbon steel products
which have higher gross profit margins.
Selling
expenses increased by $41,248, or 91%, to $86,592 for the year ended June 30,
2005, compared to $45,344 for the year ended June 30, 2004. The increase was
due
to increases in wages of $35,450 and other costs of $5,798.
Administration
expenses increased by $102,010, or 23.07%, to $544,171 for the year ended June
30, 2005, compared to $442,161 for the year ended June 30, 2004. The increase
was due to increases in salaries and wages of $26,404, valuation fees of $26,550
and other costs of $49,056.
Depreciation
and amortization expense of $365,583 and $332,191 in 2005 and 2004,
respectively, which was included as a component of cost of goods sold, increased
by $91,249 or 22% from $416,461 in 2004 to $507,710 in 2005. This increase
is
due primarily to the additional fixed assets purchased during 2004 and 2005.
Additions to fixed assets totaled $1,647,777 and $2,392,909 in 2004 and 2005,
respectively.
Other
revenues increased by $12,077, or 100%, to $12,077 for the year ended June
30,
2005, as no amount was reported for the year ended June 30, 2004. Other revenue
represented subsidies received from the Chinese Government to improve the
existing technology used in the production process.
For
the
years ended June 30, 2005 and 2004, PSHL incurred $455,277 and $236,625,
respectively, in interest and financing costs associated with debts. The
increase was due to additional debt incurred in connection with new construction
and additional fixed assets purchases, specifically for the purpose of
increasing production capacity by 300,000 tons.
Liquidity
and Capital Resources
Net
cash
flows provided by operating activities for the quarter ended September 30,
2006
was $5,488,715 as compared with $2,372,735 used by operating activities for
the
quarter ended September 30, 2005, for a net increase of $7,861,450. This
increase was due primarily to a $981,606 decrease in accounts receivable
combined with an $8,236,768 increase in inventories, an increase in net
income of $526,128, an increase in accounts payables and accrued expenses of
$10,805,570, an increase in advances by customers of $2,976,867 and an increase
in taxes payable of $594,357 in 2006.
Net
cash
flows used in investing activities for the quarter ended September 30, 2006
was
$5,230,112 compared to $363,017 for the quarter ended September 30, 2005. The
increase in investing activity was due to substantial increases in the amount
spent on construction-in-progress during 2006.
Net
cash
flows provided by financing activities for the quarter ended September 30,
2006
was $338,686 compared to $126,632 for the quarter ended September 30, 2005.
Both
years reflect substantial borrowing which was incurred for expansion of the
operations and to finance the construction in progress on new
facilities.
Current
liabilities exceeded current assets by $9,645,628 at September 30, 2006. The
working capital deficit was incurred primarily due to the short-term nature
of
certain construction financing combined with advances from directors used to
finance working capital needs.
Net
cash
flows used in operating activities for the year ended June 30, 2006 was $648,616
as compared with $147,735 for the year ended June 30, 2005, for a net decrease
of $500,881. This decrease was due primarily to a $6,703,870 increase in
accounts receivable combined with a $4,223,709 increase in inventories offset
by
an increase in net income of $1,494,357, an increase in advances by customers
of
$1,357,276 and an increase in taxes payable of $2,233,648 in 2006.
Net
cash
flows used in investing activities for the year ended June 30, 2006 was
$10,780,778 compared to $4,833,001 for the year ended June 30, 2005. The
increase in investing activity was due to substantial increases in the amount
spent on construction-in-progress during 2006.
Net
cash
flows provided by financing activities for the year ended June 30, 2006 was
$7,737,440 compared to $7,876,272 for the year ended June 30, 2005. Both years
reflect substantial borrowing which was incurred for expansion of the operations
and to finance the construction in progress on new facilities.
Current
liabilities exceeded current assets by $7,583,796 at June 30, 2006. The working
capital deficit was incurred primarily due to the short-term nature of certain
construction financing combined with advances from directors used to finance
working capital needs.
Net
cash
flows used by operating activities for the year ended June 30, 2005 was $147,735
compared with $286,034 for the year ended June 30, 2004, for a net decrease
of
$138,299. The decrease was due primarily to a $5,808,987 increase in accounts
receivable combined with a $2,000,883 decrease in advances from customers which
more than offset the $6,167,665 increase in net income.
Net
cash
flows used by investing activities for the year ended June 30, 2005 was
$4,833,001 compared to $2,661,699 for the year ended June 30, 2004. The increase
in investment activity of $2,171,302 was due largely to construction and
acquisition costs of plant and machinery.
Net
cash
flows provided by financing activities for the year ended June 30, 2005 was
$7,876,272 compared to $3,102,440 for the year ended June 30, 2004. The increase
of $4,773,832 is due largely to additional loan proceeds in excess of
repayments.
Current
liabilities exceeded current assets by $1,325,862 at June 30, 2005. This change
was due largely to increases in amounts due to directors in excess of the
increase in cash equivalents and accounts receivable from
customers.
Contractual
Obligations
The
following table is a summary of PSHL’s contractual obligations as of September
30, 2006:
| Payments
Due by Period |
| |
|
|
|
|
|
|
|
|
|
|
Contractual
Obligations
|
|
Total
|
|
Less
than 1 Year
|
|
2-3
Years
|
|
4-5
Years
|
|
| Notes
payable |
|
$ |
14,377,852 |
|
$ |
14,377,852 |
|
$ |
- |
|
$ |
- |
|
| Long-term
debt |
|
|
12,208,527 |
|
|
9,056,112 |
|
|
2,521,928
|
|
|
630,487 |
|
|
Advances
from customers
|
|
|
4,836,640 |
|
|
4,836,640 |
|
|
-
|
|
|
-
|
|
|
Purchase
obligation for construction projects
|
|
|
4,747,172
|
|
|
4,747,172
|
|
|
-
|
|
|
-
|
|
| |
|
$
|
36,170,191
|
|
$
|
33,017,776
|
|
$
|
2,521,928
|
|
$
|
630,487
|
|
The
Company’s Directors, Officers and Key Employees
All
of
our directors hold office until the next annual general meeting of the
shareholders or until their successors are elected and qualified. Our officers
are appointed by our board of directors and hold office until their earlier
death, retirement, resignation or removal.
The
Company’s directors and executive officers, their ages, positions held are as
follows:
|
Name
|
Age
|
Positions
|
| |
|
|
|
Wo
Hing Li
|
59
|
Chairman
of the Board, President
|
| |
|
|
|
Hai
Sheng Chen
|
43
|
Executive
Director, Vice-President
|
| |
|
|
|
Leada
Tak Tai Li
|
26
|
Chief
Financial Officer, Secretary and Treasurer
|
| |
|
|
|
Che
Kin Lui
|
44
|
Director
|
| |
|
|
|
David
Peter Wong
|
50
|
Director
|
| |
|
|
|
Tung
Kuen Tsui
|
61
|
Director
|
Wo
Hing Li, Chairman and President
Mr.
Wo
Hing Li is the Chairman of the Board and President of the Company. Mr.
Li has served as the Chairman and Executive Director of PSHL and its
subsidiaries since their formation in July 2002. Mr. Li is also a Non-Executive
Director of China Petrotech Holdings Limited, an oil software and exploration
company listed on the Singapore Stock Exchange. Since October 2001, Mr. Li
has
served as a director of Medical China Limited, a company listed on the GEM
Board
of Hong Kong Stock Exchange. From 1997 to 2001, Mr. Li served as a director
of
Teda (HK) Holdings Limited. Mr. Li served in various positions within the Grand
Finance Group between 1984 and 1997, serving the last seven years as the General
Manager of its subsidiary, Grand International (China) Investment Holding Co.,
Limited. Mr. Li has a Master Degree in Business Administration from the Murdoch
University of Australia, and a PhD in Management, a program co-organized by
the
University of International Business & Economics of China and the European
University of Ireland.
Hai
Sheng Chen, Director, Vice-President, and General Manager, Senior
Engineer
Mr.
Hai
Sheng Chen is an Executive Director, Vice-President, and General Manager of
the Company. He is a founder of and has been the General Manager of Chengtong
since July 2002. From July 2001 to July 2002, Mr. Chen was the Managing Director
of Shanghai Krupp Stainless Steel Co. Limited, a steel processing company.
From
August 1999 to May 2001, Mr. Chen was the Deputy General Manager of PuDong
Steel
Co. Limited, a subsidiary of the BaoSteel Group, a steel processing company.
Mr.
Chen has an Executive MBA Degree from China Europe International Business School
and a Bachelors Degree in Metallic Pressure Processing from the Beijing
University of Science and Technologies.
Leada
Tak Tai Li, Chief Financial Officer, Secretary and
Treasurer
Ms.
Leada
Tak Tai Li is the Chief Financial Officer, Secretary and Treasurer of the
Company. Ms. Li has served as the Chief Financial Officer of PSHL since October
2005 and as Secretary and Treasurer since December 28, 2006. Ms. Li is
responsible for overseeing the financial and administrative matters of PSHL.
From June 2004 to October 2005, Ms. Li was Assistant to the Chairman of STAR
Pharmaceutical Limited, a pharmaceutical manufacturing company listed on the
main board of the Singapore Stock Exchange. At STAR Pharmaceutical Limited,
Ms.
Li was responsible for investor relations and assisting in the annual audits.
From May 2004 to November 2003, Ms. Li was an audit assistant at KPMG, Hong
Kong. From January 2002 to September 2002, Ms. Li was an Investment Analyst
at
Suez Asia Holdings (HK) Limited. Ms. Li holds a Bachelor of Commerce Degree
with
a dual major in Accounting and Finance from the University of Melbourne in
Australia and a Master of Science Degree in Accounting and Finance from the
Napier University in the United Kingdom. Ms Li is the daughter of Mr. Wo Hing
Li.
Che
Kin Lui, Director
Che
Kin
Lui is a Director of the Company. Mr. Lui has served
as a
consultant for Synthesis Consultancy Limited since July 2002. From June 1999
to
July 2002, Mr. Lui served as a manager for MVP (HK) Industries Limited, a
company engaged in manufacturing household tools. Mr. Lui is also a director
and
serves on the audit committee of China Petrotech Holdings Limited, an oil
software and exploration company listed on the Singapore Stock Exchange. Mr.
Lui
has a Master in Business Administration from the University of Ballarat,
Australia and a degree in Business Administration from Hong Kong Shu Yan
College.
David
Peter Wong, Director
David
P.
Wong
is a
Director of the Company. Mr. Wong
is the
Chief Financial Officer of Private Wealth Partners, LLC, a registered investment
adviser in California. Mr. Wong served as the Corporate Controller for H&Q
Asia Pacific, a Asian Private Equity firm from November 1, 2002 to November
2005. Mr. Wong was the Corporate Controller of Hellman & Friedman, a private
equity firm from January 2002 to September 2002. Mr. Wong is a U.K. Chartered
Accountant with six years of public accounting experience with Ernst & Young
in London and PriceWaterhouseCoopers in Hong Kong. Mr. Wong has a Bachelor
of
Arts degree in Economics and Geography from Leeds University in the United
Kingdom.
Tung
Kuen Tsui, Director
Tung
Kuen
Tsui is
a
Director of the Company. Mr. Tsui has
been
retired since 1998. From 1995 to 1998, Mr. Tsui served as a Senior Credit
Controller for PricewaterhouseCoopers. Prior to working as the Senior Credit
Controller, Mr. Tsui held a variety of positions with PricewaterhouseCoopers,
including Senior Manager, Information System. Mr. Tsui has a Master of Business
Administration from the University of Macau. Mr. Tsui graduated as an Associate
Member of Chartered Institute of Secretaries and Administrators in the United
Kingdom.
Involvement
in Certain Legal Proceedings
During
the past ten years, none of the Company’s Directors or Management is or have
been involved in any legal proceeding concerning (i) any bankruptcy petition
filed by or against any business of which such person was a general partner
or
executive officer either at the time of the bankruptcy or within two years
prior
to that time; (ii) any conviction in a criminal proceeding or being subject
to a
pending criminal proceeding (excluding traffic violations and other minor
offenses); (iii) being subject to any order, judgment or decree, not
subsequently reversed, suspended, or vacated, of any court of competent
jurisdiction permanently or temporarily enjoining, barring, suspending or
otherwise limiting involvement in any type of business, securities or banking
activity; or (iv) being found by a court, the SEC or the Commodity Futures
Trading Commission to have violated a federal or state securities or commodities
law (and the judgment has not been reversed, suspended or vacated).
Executive
Compensation
The
following table sets forth the annual and long-term compensation for services
in
all capacities to PSHL in the fiscal years ended June 30, 2006, 2005 and 2004
of
Wo Hing Li, Hai Sheng Chen, Leada Tak Tai Li and Gou Di Lu, PSHL’s executive
officers.
| |
Annual
Compensation
|
Long
Term Compensation
|
|
Name
and Principal Position
|
Fiscal
Year
|
Salary
|
Bonuses
|
Other
|
Restricted
Stock
Award
|
Securities
Underlying
Options
|
|
Wo
Hing Li, Chairman and President (2)
|
2006
2005
2004
|
$-
$200,000
$200,000
|
$-
$-
$-
|
$-
$-
$-
|
-0-
-0-
-0-
|
-0-
-0-
-0-
|
|
Hai
Sheng Chen, Director and Vice-President, and General
Manager
|
2006
2005
2004
|
$6,683
$6,522
$6,522
|
$-
$-
$-
|
$-
$-
$-
|
-0-
-0-
-0-
|
-0-
-0-
-0-
|
|
Leada
Tak Tai Li, Chief Financial Officer, Secretary and Treasurer
(1)(2)
|
2006
2005
2004
|
$-
$-
$-
|
$-
$-
$-
|
$-
$-
$-
|
-0-
-0-
-0-
|
-0-
-0-
-0-
|
|
Gou
Di Lu, Assistant to the General Manager
|
2006
2005
2004
|
$4,641
$4,348
$4,348
|
$-
$-
$-
|
$-
$-
$-
|
-0-
-0-
-0-
|
-0-
-0-
-0-
|
(1)
Ms.
Li became the Chief Financial Officer of PSHL in October 2005.
(2)
Wo
Hing Li and Leada Tak Li waived compensation for the year ended June 30,
2006.
Director
Compensation
Except
as
set forth in the table above, as of June 30, 2006, there were no other
arrangements to compensate PSHL’s directors for services rendered or to be
rendered.
Employment
Agreements
PSHL
has
no employment agreements, compensatory plans or arrangements with its officers,
directors or senior management officials.
Option/SAR
Grants in Last Fiscal Year
PSHL
did
not grant any options or stock appreciation rights during the fiscal year ended
June 30, 2006.
Long
Term Incentive Plan
The
Company’s board of directors has adopted a 2006 Omnibus Long-Term Incentive Plan
(the “Long-Term Incentive Plan”) and, at the Annual Meeting, a majority of the
shareholders approved the Long-Term Incentive Plan. The
following is a brief description of the principal features of the Long-Term
Incentive Plan. It does not purport to be complete and is qualified in its
entirety by the full text of the Long-Term Incentive Plan, which is attached
to
this Current Report as Exhibit 10.2.
General.
We have
reserved for issuance under the Long-Term Incentive Plan a maximum of 2,165,220
shares of the Company’s common stock, all subject to adjustment as described in
the Long-Term Incentive Plan. If an award granted under the Long-Term Incentive
Plan expires or is terminated, the shares of our common stock underlying the
award will again be available for issuance under the Long-Term Incentive Plan.
In addition, to the extent shares of our common stock are tendered to exercise
any award under the Long-Term Incentive Plan or to pay required taxes on any
award, an equal number of shares will remain available for issuance under the
Long-Term Incentive Plan.
No
individual may be granted awards under the Long-Term Incentive Plan in any
calendar year covering more than 216,522 shares.
In
the
event of any change in the Company’s capitalization or in the event of a
corporate transaction such as a merger, consolidation or similar event, the
Long-Term Incentive Plan provides for appropriate adjustments in the number
and
class of shares of our common stock available for issuance or grant and in
the
number and/or price of shares subject to awards. Any such adjustment shall
be
effected in a manner intended to satisfy any applicable requirements of Section
409A and 424 of the Code (relating, respectively, to certain limitations imposed
on deferred compensation and incentive stock options).
Types
of Awards.
The
following awards may be granted under the Long-Term Incentive Plan:
|
|
• |
stock
options, including incentive stock options and non-qualified stock
options;
|
|
|
• |
restricted
stock units;
|
|
|
• |
stock
appreciation rights;
|
|
|
• |
unrestricted
stock grants; and
|
|
|
• |
performance
and annual incentive awards.
|
Deferral
Arrangements.
The
Board of Directors may permit or require deferral of any award payment into
a
deferred compensation arrangement.
Administration.
The
Long-Term Incentive Plan will be administered by the Compensation Committee
of
the Board of Directors unless the Board of Directors in its discretion appoints
another person or entity to administer the Long-Term Incentive Plan. The Board
anticipates that the Compensation Committee will administer the Long-Term
Incentive Plan. For convenience, the administrator of the Long-Term Incentive
Plan will be referred to below as the Committee.
The
Committee may, subject to the provisions of the Long-Term Incentive Plan,
determine the persons to whom awards will be granted, the type of awards to
be
granted, the exercise price, and the number of shares to be made subject to
awards. The Committee may also condition the award on the attainment of certain
goals, determine other terms and conditions that shall apply to awards,
interpret the Long-Term Incentive Plan and prescribe, amend and rescind rules
and regulations relating to the Long-Term Incentive Plan. The Committee may
delegate its authority to a subcommittee of its members and may delegate to
any
of our senior management the authority to make grants of awards to our employees
who are not our executive officers or directors. The terms and conditions of
each award granted under the Long-Term Incentive Plan will be set forth in
a
written award agreement relating to the award.
In
the
event that the Committee grants an award that is intended to constitute
qualified performance-based compensation within the meaning Section 162(m)
of
the Code (which otherwise generally limits to $1,000,000 the amount of annual
remuneration for certain executive officers that a public corporation may deduct
for federal income tax purposes), the Committee in its discretion may condition
payment under the award in whole or in part on the attainment over a specified
period of (or a specified increase or decrease in) one or more of the following
business criteria as applied to an award recipient under the Long-Term Incentive
Plan and/or a business unit of the Company or its affiliates on an absolute
or
relative basis or in comparison to a peer group or other market measure: (1)
total shareholder return; (2) such total shareholder return as compared to
total
return (on a comparable basis) of a publicly available index such as, but not
limited to, the Standard & Poor’s 500 Stock Index; (3) net income; (4)
pretax earnings; (5) earnings before interest expense, taxes, depreciation
and
amortization; (6) pretax operating earnings after interest expense and before
bonuses, service fees, and extraordinary or special items; (7) operating margin;
(8) earnings per share; (9) return on equity; (10) return on capital; (11)
return on investment; (12) operating earnings; (13) working capital; (14) ratio
of debt to shareholders’ equity and (15) revenue.
Payments
under such awards will be made, in the case of employees covered under Section
162(m) of the Code, solely on account of the attainment of such performance
goals established in writing by the Committee not later than the date on which
25% of the period of service to which the award relates has elapsed.
To
the
extent provided in an award agreement, the Committee may, without amendment
to
the Long-Term Incentive Plan, (i) accelerate the date on which any option or
stock appreciation right becomes exercisable, waive or amend the operation
of
provisions respecting exercise after termination of employment or otherwise
adjust any of the terms of such option or stock appreciation right, and (ii)
accelerate the lapse of restrictions imposed under the Long-Term Incentive
Plan,
or waive any other condition imposed under the Long-Term Incentive Plan, with
respect to any restricted stock, restricted stock units, stock bonus or other
awards or otherwise adjust any of the terms applicable to any such award,
provided that the Committee may not adversely affect any outstanding award
without the consent of the holder thereof.
Eligibility.
Awards
may be granted under the Long-Term Incentive Plan to our employees, consultants
and directors (or employees, consultants or directors of our affiliates), as
selected by the Committee in its sole discretion. Grants under the Long-Term
Incentive Plan will be made in the discretion of the Committee and, accordingly,
are not yet determinable. In addition, benefits under the Long-Term Incentive
Plan will depend on a number of factors, including the fair market value of
our
common stock on future dates and the exercise decisions made by the
participants. Consequently, it is not possible to determine the benefits that
might be received by participants under the Long-Term Incentive Plan.
Stock
Options.
Stock
options granted under the Long-Term Incentive Plan may be either “incentive
stock options,” as that term is defined in Section 422 of the Code, or
non-qualified stock options (i.e., any option that is not such an incentive
stock option). The exercise price of a stock option granted under the Long-Term
Incentive Plan will be determined by the Committee at the time the option is
granted, the exercise price may or may not be the fair market value of our
common stock (i.e., the closing sale price reported for a share on the national
securities exchange or national market system on which such stock is principally
traded on the last day preceding such date on which a sale was reported, or
if
the shares of common stock are not then listed on a national securities exchange
or national market system, or the value of such shares is not otherwise
determinable, such value as determined by the Committee in good faith in its
sole discretion (in any event fair market value is determined within the meaning
of Section 409A of the Code (“FMV”)). Stock options are exercisable at the times
and upon the conditions that the Committee may determine, as reflected in the
applicable option agreement. The Committee will also determine the maximum
duration of the period in which the option may be exercised, which may not
exceed ten years from the date of grant. All of the shares available for
issuance under the Long-Term Incentive Plan may be made subject to incentive
stock options.
The
option exercise price must be paid in full at the time of exercise, and is
payable (in the discretion of the Committee) by any one of the following methods
or a combination thereof:
|
|
• |
in
cash or cash equivalents,
|
|
|
• |
the
surrender of previously acquired shares of our common
stock,
|
|
|
• |
authorization
for us to withhold a number of shares otherwise payable pursuant
to the
exercise of an option, or
|
|
|
• |
to
the extent permitted by applicable law, through any other procedure
acceptable to the Committee.
|
Restricted
Stock.
The
Long-Term Incentive Plan provides for awards of our common stock that are
subject to restrictions on transferability imposed under the Long-Term Incentive
Plan and other restrictions that may be determined by the Committee in its
discretion. Such restrictions will lapse on terms established by the Committee.
Except as may be otherwise provided under the award agreement relating to the
restricted stock, a participant granted restricted stock will have all the
rights of a shareholder (for instance, the right to receive dividends on the
shares of restricted stock and the right to vote the shares).
Restricted
Stock Units.
The
Long-Term Incentive Plan provides for awards of restricted stock units which,
upon vesting, entitle the participant to receive an amount in cash or common
stock (as determined by the Committee and set forth in the applicable award
agreement) equal to the fair market value of the number of shares made subject
to the award. Vesting of all or a portion of a restricted stock unit award
may
be subject to terms and conditions established by the Committee.
Stock
Appreciation Rights (“SARs”).
The
Long-Term Incentive Plan provides that the Committee, in its discretion, may
award SARs, either in tandem with stock options or freestanding and unrelated
to
options. The grant price of a freestanding SAR will be at FMV. The grant price
of tandem SARs may equal the exercise price of the related option. Tandem SARs
and freestanding SARs may be exercised upon whatever terms and conditions the
Committee imposes.
Unrestricted
Stock Grants; Other Awards.
The
Long-Term Incentive Plan provides that the Committee, in its discretion, may
award shares of our common stock that are not subject to restrictions imposed
under the Plan on transferability or otherwise. In addition, the Committee
may
grant other awards valued in whole or in part, by reference to, or otherwise
based on, our common stock.
Change
in Control.
The
Committee in its discretion may provide that, in the event of a change in
control (as defined in the Long-Term Incentive Plan), whether alone or in
combination with other events, the vesting and exercisability restrictions
imposed under the Long-Term Incentive Plan on any outstanding award that is
not
yet fully vested and exercisable may lapse in part or in full. The Committee
is
permitted to take certain actions with respect to outstanding awards upon the
occurrence of a Change in Control, including, but not limited to, accelerated
vesting, termination or assumption.
Termination
of Employment.
Unless
otherwise determined by the Committee, the termination of a participant’s
employment or service will immediately cancel any unvested portion of awards
granted under the Long-Term Incentive Plan. At the time of grant, the Committee
in its discretion may provide that, if a participant’s employment or service
terminates other than because of cause, death or disability, all options that
are exercisable at the time of termination may be exercised by the participant
for no longer than 90 days after the date of termination (or such other period
as it determines). If a participant’s employment or service terminates for
cause, all options held by the participant will immediately terminate. The
Committee may provide that, if a participant’s employment or service terminates
as a result of death, all options that are exercisable at the time of death
may
be exercised by the participant’s heirs or distributees for a period of one year
(or such other period as it determines). The Committee may provide that, if
a
participant’s employment or service terminates because of disability, all
options that are exercisable at the time of termination may be exercised for
a
period of one year (or such other period as it determines). However, in no
case
may an option be exercised after it expires.
Amendment
and Termination of the Long-Term Incentive Plan.
The
Board of Directors may modify or terminate the Long-Term Incentive Plan or
any
portion of the Long-Term Incentive Plan at any time (subject to participant
consent where such change would adversely affect an award previously granted
to
the participant), except that an amendment that requires shareholder approval
in
order for the Long-Term Incentive Plan to continue to comply with any law,
regulation or stock exchange requirement will not be effective unless approved
by the requisite vote of our shareholders. In addition, the Long-Term Incentive
Plan or any outstanding option may not be amended to effectively decrease the
exercise price of any outstanding option unless first approved by the
shareholders. No awards may be granted under the Long-Term Incentive Plan after
the day prior to the tenth anniversary of its adoption date, but awards granted
prior to that time can continue after such time in accordance with their terms.
Certain
Federal Income Tax Consequences of Options.
The
following is a discussion of certain federal income tax effects currently
applicable to stock options granted under the Plan. The discussion is a summary
only, and the applicable law is subject to change. Reference is made to the
Code
for a complete statement of all relevant federal tax provisions.
Nonqualified
Stock Options (“NSOs”). An
optionee generally will not recognize taxable income upon the grant of an NSO.
Rather, at the time of exercise of such NSO, the optionee will recognize
ordinary income for income tax purposes in an amount equal to the excess of
the
fair market value of the shares purchased over the exercise price. The Company
will generally be entitled to a tax deduction at such time and in the same
amount that the optionee recognizes ordinary income.
If
shares
acquired upon exercise of an NSO are later sold or exchanged, then the
difference between the amount received upon such sale, exchange or disposition
and the fair market value of such stock on the date of such exercise will
generally be taxable as long-term or short-term capital gain or loss (if the
stock is a capital asset of the optionee) depending upon the length of time
such
shares were held by the optionee.
Incentive
Stock Options (“ISOs”). An
optionee will not recognize any ordinary income (and the Company will not be
permitted any deduction) upon the grant or timely exercise of an ISO. However,
the amount by which the fair market value of our common stock on the exercise
date of an ISO exceeds the purchase price generally will constitute an item
which increases the optionee’s “alternative minimum taxable income.”
Exercise
of an ISO will be timely if made during its term and if the optionee remains
an
employee of the Company or a subsidiary at all times during the period beginning
on the date of grant of the ISO and ending on the date three months before
the
date of exercise (or one year before the date of exercise in the case of a
disabled optionee, and without limit in the case of death). The tax consequences
of an untimely exercise of an ISO will be determined in accordance with the
rules applicable to NSOs, discussed above.
If
stock
acquired pursuant to the timely exercise of an ISO is later disposed of, and
if
the stock is a capital asset of the optionee, the optionee generally will
recognize short-term or long-term capital gain or loss (depending upon the
length of time such shares were held by the optionee) equal to the difference
between the amount realized upon such sale and the exercise price. The Company,
under these circumstances, will not be entitled to any income tax deduction
in
connection with either the exercise of the ISO or the sale of such stock by
the
optionee.
If,
however, stock acquired pursuant to the exercise of an ISO is disposed of by
the
optionee prior to the expiration of two years from the date of grant of the
ISO
or within one year from the date such stock is transferred to him or her upon
exercise (a “disqualifying disposition”), any gain realized by the optionee
generally will be taxable at the time of such disqualifying disposition as
follows: (i) at ordinary income rates to the extent of the difference between
the exercise price and the lesser of the fair market value of the stock on
the
date the ISO is exercised or the amount realized on such disqualifying
disposition and (ii) if the stock is a capital asset of the optionee, as
short-term or long-term capital gain (depending upon the length of time such
shares were held by the optionee) to the extent of any excess of the amount
realized on such disqualifying disposition over the sum of the exercise price
and any ordinary income recognized by the optionee. In such case, the Company
may claim an income tax deduction at the time of such disqualifying disposition
for the amount taxable to the optionee as ordinary income.
As
of the
date of this Current Report, no options or other awards have been granted under
the Long-Term Incentive Plan.
Certain
Relationships and Related Transactions
The
amount due from a related company as of June 30, 2006, and June 30, 2005, are
as
follows:
| |
|
Balance
at
|
|
|
|
|
|
|
Name
|
|
|
|
|
|
Maximum
Outstanding
Balance
During
Year
|
|
|
|
|
Shanghai
Tuorong Precision Strip Co., Ltd
|
|
$
|
5,435,474
|
|
$
|
3,249,852
|
|
$
|
5,435,474
|
|
|
None
|
|
There
were no amounts due from Shanghai Tuorong Precision Strip Co., Ltd as of
September 30, 2006.
As
of
September 30, 2006, June 30, 2006, and as of June 30, 2005, PSHL had the
following balances due to its officers and directors:
|
Name
|
|
September
30,
2006
(Unaudited)
|
|
June
30,
2006
(Audited)
|
|
June
30,
2005
(Audited)
|
|
Security
Held
|
|
|
Wo
Hing Li
|
|
$
|
1,569,826
|
|
$
|
5,464,907
|
|
$
|
7,856,184
|
|
|
None
|
|
|
Hai
Sheng Chen
|
|
|
436,946
|
|
|
432,036
|
|
|
417,948 |
|
|
None
|
|
| |
|
$
|
2,006,772
|
|
$
|
5,896,943
|
|
$
|
8,274,132
|
|
|
|
|
Mr.
Wo
Hing Li has entered into an agreement with Chengtong giving Chengtong the legal
right of offset against amounts due to him with respect to advances made by
Chengtong to Shanghai Tuorong Precision Strip Co., Ltd. Mr. Li is the principal
shareholder in both Shanghai Tuorong Precision Strip Co., Ltd. and PSHL, the
parent company of Chengtong.
Pursuant
to a Loan Agreement (the “Agreement”) in January 2003 between a director, Hai
Sheng Chen, and Chengtong, Hai Sheng Chen agreed to provide an unsecured loan
with a maximum drawdown of $616,523 (Rmb.5,000,000) to the Company for business
development purposes. The loan is unsecured, interest free and has no fixed
terms of repayment. The outstanding balance at June 30, 2006, was $419,101
(Rmb.3,368,590) and $405,435 (Rmb.3,357,000) at June 30, 2005.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth, as of December 28, 2006, certain information with
respect to the beneficial ownership of the Company’s Common Stock by each
stockholder known by us to be the beneficial owner of more than 5% of the
Company’s common stock and by each of our current directors and executive
officers. Each person has sole voting and investment power with respect to
the
shares of common stock, except as otherwise indicated. Beneficial ownership
consists of a direct interest in the shares of common stock, except as otherwise
indicated.
|
Name
and Address
of
Beneficial Owner
|
Amount
and Nature of
Beneficial Ownership
|
Percent
of Class
|
|
Wo
Hing Li
Flat
F.29/F Tower 1, Central Park
18
Hoi Ting Road
Kowloon,
Hong Kong
|
20,128,510
|
74.6%
|
|
Leada
Tak Tai Li
Flat
F.29/F Tower 1, Central Park
18
Hoi Tink Road
Kowloon,
Hong Kong
|
1,268,150
|
4.7%
|
|
Shu
Keung Leung
Room
515, Lai Huen House
Lai
Kok Estate, Shamsui
Kowloon,
Hong Kong
|
1,268,150
|
4.7%
|
|
Name
and Address
of
Beneficial Owner
|
Amount
and Nature of
Beneficial
Ownership
|
Percent
of Class
|
|
Hai
Sheng Chen
123
Loadong Rd. Xuhang
Jiading
District
Shanghai,
China 201809
|
0
|
0%
|
|
Che
Kin Lui
Flat
1402, Block J
Amoy
Gardens
Kowloon,
Hong Kong
|
0
|
0%
|
|
David
Peter Wong
80
E. Sir Francis Drake Blvd.
Larkspur,
CA 94939
|
0
|
0%
|
|
Tung
Kuen Tsui
Flat
E5, 11th
Floor, Block E
Mount
Parker Lodge
10
Kong Pak Path
Quarry
Bay, Hong Kong
|
0
|
0%
|
|
Hung
Wan (1)
Suite
C, 20th
Floor Neich Tower
128
Gloucester Road
Wanchai,
Hong
Kong Special Administrative Region
The
People’s Republic of China
|
2,293,462
|
8.5%
|
|
Executive
Officers and Directors as a Group (seven persons)
|
22,664,810
|
84%
|
(1)
Includes 1,146,731 shares held by Belmont Capital Group Limited and 1,146,731
shares held by Advanz Capital, Inc. over which Hung Wan has voting and
dispositive power.
Description
of Our Capital Stock
The
Company’s authorized capital consists of 62,000,000 shares of Common Stock,
$0.001 par value and 8,000,000 shares of Preferred Stock, $0.001 par value.
As
of December 28, 2006, there were 26,981,917
shares
of
the Company’s Common Stock issued and outstanding and no shares of the Company’s
Preferred Stock issued and outstanding.
Each
share of Common Stock is entitled to one vote at all meetings of shareholders.
All shares of Common Stock are equal to each other with respect to liquidation
rights and dividend rights. There are no preemptive rights to purchase any
additional shares of Common Stock. In the event of liquidation, dissolution
or
winding up of the Company, holders of shares of Common Stock will be entitled
to
receive on a pro rata basis all assets of the Company remaining after
satisfaction of all liabilities and all liquidation preferences, if any, granted
to holders of our Preferred Stock.
The
holders of outstanding shares of Common Stock are entitled to receive dividends
out of assets legally available therefore at such times and in such amounts
as
our board of directors may from time to time determine. Holders of Common Stock
will share equally on a per share basis in any dividend declared by the board
of
directors. We have not paid any dividends on our Common Stock and do not
anticipate paying any cash dividends on such stock in the
foreseeable
future.
In
the
event of a merger or consolidation, all holders of Common Stock will be entitled
to receive the same per share consideration.
Market
for Common Equity and Related Stockholder Matters.
The
common stock of China Precision Steel, Inc. trades on the NASDAQ Capital Market
under the symbol “CPSL.” Prior to the Share Exchange, OraLabs’ common stock
traded on the NASDAQ Capital Market under the symbol “OLAB.” The
following sets forth the range of high and low bid information for OraLabs’
common stock for fiscal years 2004, 2005, and 2006. The source of such
information is as reported by NASDAQ.
| |
|
Reported
High
Bid
|
|
Reported
Low
Bid
|
|
|
First
quarter, fiscal 2004
|
|
$
|
2.80
|
|
$
|
1.50
|
|
|
Second
quarter, fiscal 2004
|
|
$
|
2.28
|
|
$
|
1.47
|
|
|
Third
quarter, fiscal 2004
|
|
$
|
2.03
|
|
$
|
1.36
|
|
|
Fourth
quarter, fiscal 2004
|
|
$
|
5.20
|
|
$
|
1.03
|
|
|
First
quarter, fiscal 2005
|
|
$
|
3.70
|
|
$
|
1.96
|
|
|
Second
quarter, fiscal 2005
|
|
$
|
4.53
|
|
$
|
1.25
|
|
|
Third
quarter, fiscal 2005
|
|
$
|
3.19
|
|
$
|
2.00
|
|
|
Fourth
quarter, fiscal 2005
|
|
$
|
4.02
|
|
$
|
1.49
|
|
|
First
quarter, fiscal 2006
|
|
$
|
2.97
|
|
$
|
1.50
|
|
|
Second
quarter, fiscal 2006
|
|
$
|
8.97
|
|
$
|
1.65
|
|
|
Third
quarter, fiscal 2006
|
|
$
|
7.84
|
|
$
|
2.51
|
|
|
Fourth
quarter, fiscal 2006 *
|
|
$
|
13.73
|
|
$
|
4.02
|
|
*
OraLabs
ceased trading on December 28, 2006 under the symbol OLAB and China Precision
Steel commenced trading on December 29, 2006 under the symbol CPSL.
The
closing price of our common stock on January 3, 2007 was $13.45.
As
of
December 20, 2006, there were approximately 1001 record holders of the common
stock of OraLabs.
The
Company does not intend to pay any cash dividends on its common stock in the
foreseeable future.
Transfer
Agent
Corporate
Stock Transfer, 3300 Cherry Creek Drive South, Suite 430, Denver, Colorado
80209, currently acts as the Company’s transfer agent and
registrar.
Recent
Sales of Unregistered Securities
For
recent sales of unregistered securities, see Item 3.02 Unregistered Sales of
Equity Securities below.
Indemnification
and Limitation on Liability of Directors
The
Company’s Amended and Restated Articles of Incorporation provide that the
Company shall indemnify, to the maximum extent permitted by law, any person
who
is or was a director, officer, agent, fiduciary or employee of the Company
against any claim, liability or expense arising against or incurred by such
person made party to a proceeding because he or she is or was a director,
officer, agent, fiduciary or employee of the corporation or because he or she
is
or was serving another entity or employee benefit plan as a director, officer,
partner, trustee, employee, fiduciary or agent at the Company’s request. The
Company further has the authority to the maximum extent permitted by law to
purchase and maintain insurance providing such indemnification.
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
For
changes in and disagreements with Accountants on Accounting and Financial
Disclosure, see Item 4.01 Changes in Registrant’s Certifying Accountant
below.
Item
3.02. Unregistered Sales of
Equity Securities.
On
December 28, 2006, pursuant to the terms of the Agreement described in Items
1.01, 2.01 and 5.01, the Company issued to the PSHL Shareholders an aggregate
of
25,363,002
shares
of common stock in exchange for all of the issued and outstanding shares of
PSHL. The shares of common stock issued under the Agreement were not registered
under the Securities Act of 1933, as amended (the “Securities Act”), and bear
restrictive legends that reflect this status.
The
securities were issued to the PSHL Shareholders in reliance on the exemption
from registration provided by Regulation S promulgated under the Securities
Act.
In connection with this issuance, each person represented that (i) such person
is not a US Person within the meaning of Regulation S, (ii) the securities
such
person is acquiring cannot be resold except pursuant to a effective registration
under the Securities Act or in reliance on an exemption from the registration
requirements of the Securities Act, and that the certificates representing
such
securities bear a restrictive legend to that effect and (iii) such person
intends to acquire the securities for investment only and not with a view to
the
distribution thereof.
On
December 28, 2006, OraLabs, Inc., the wholly-owned subsidiary of OraLabs,
purchased up to 100,000 shares of OraLabs common stock to satisfy an indemnity
obligation of OraLabs, Inc. in connection with the closing of the Share Exchange
and related transactions. Further, prior to closing, OraLabs issued 300,000
shares thereunder to OraLabs non-employee directors, Michael I. Friess and
Robert C. Gust pursuant to OraLabs 2006 Directors Option Plan. These securities
were offered and sold in reliance upon Section 4(2) of the Securities
Act.
Item
4.01. Changes in
Registrant’s Certifying Accountant
In
connection with the Share Exchange, effective December 28, 2006, the Company
dismissed GHP Horwath, P.C. (“GHP”), as the Company’s independent
registered public accounting firm and PSHL’s independent accountants
were appointed the Company’s independent registered public accounting firm.
The Company’s board of directors recommended the dismissal of GHP as a result of
the Share Exchange.
GHP
had
served as the independent auditors of OraLabs Holding Corp.
(“OraLabs”) since November 17, 2005. The reports by GHP on OraLabs’
consolidated financial statements since November 17, 2005
through December 28, 2006 contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope,
or
accounting principles.
Since
November 17, 2005 and through December 28, 2006, there were no disagreements
between OraLabs and GHP on any matter of accounting principles or practices,
financial statement disclosure, or audit scope or procedure, which, if not
resolved to GHP’s satisfaction, would have caused GHP to make reference to the
subject matter of the disagreements in connection with GHP’s reports on OraLabs’
consolidated financial statements.
On
December 28, 2006, GHP furnished to the Company a letter addressed to the
Securities and Exchange Commission stating it agrees with the
above statements made by the Company. A copy of the GHP letter is included
as Exhibit 16.1.
On
December 28, 2006, the board of directors of the Company appointed Murrell,
Hall, McIntosh & Co., PLLP as the Company’s independent registered public
accounting firm for fiscal year 2006. The shareholders of the Company ratified
the selection of Murrell, Hall, McIntosh & Co., PLLP as the Company’s
independent registered public accounting firm for fiscal year 2006 at the Annual
Meeting. During the preceding two fiscal years and through December 28, 2006,
OraLabs has not consulted with Murrell, Hall, McIntosh & Co., PLLP regarding
the matters described in, and required to be disclosed pursuant to Item
304(a)(2)(i) or Item 304(a)(2)(ii) of Regulation S-K.
Item
5.01. Changes in Control of
the Registrant
On
December 28, 2006, the Company acquired 100% of the issued and outstanding
shares of PSHL’s Common Stock from the shareholder of PSHL in accordance with
the terms of the Agreement more particularly described in Item 1.01 and
incorporated herein by reference. In accordance with the terms of the Agreement,
in exchange for 50,000 shares of PSHL common shares, which represented 100%
of
the issued and outstanding shares of PSHL’s common shares, the Company issued to
the shareholder of PSHL and his designees an aggregate of 25,363,002
shares
of common stock, which constitutes 94% of its total issued and outstanding
common stock. Wo Hing Li, President of the Company, beneficially owns 74.6%
of
the Company’s issued and outstanding common stock.
Other
than the transactions and agreements disclosed in this Form 8-K, the Company
knows of no other arrangements which may result in a change of control of the
Company.
Item
5.02. Departure of
Directors or Principal Officers; Election of Directors; Appointment of Principal
Officers.
At
the
Closing, Messrs. Gary H. Schlatter, Michael I. Friess and Robert C. Gust
resigned as directors of OraLabs and were replaced by Mr. Wo Hing Li and Mr.
Hai
Sheng Chen as executive directors and Mr. Che Kin Lui, Mr. David Peter Wong,
and
Mr. Tung Kuen Tsui, as independent non-executive directors of the Company.
Further, Gary H. Schlatter and Michael I. Friess resigned as officers of OraLabs
and Wo Hing Li was appointed the President of the Company and Leada
Tak
Tai Li the Chief Financial Officer, Secretary and Treasurer of the
Company.
For
further information see “Directors, Executive Officers, Promoters and Control
Persons,” as referenced above.
Item
5.03. Amendment
to Articles of Incorporation or Bylaws; Change in Fiscal
Year
In
connection with the Closing of the Share Exchange, on December 28, 2006, OraLabs
filed an Amended and Restated Articles of Incorporation with the Colorado
Secretary of State changing its name to China Precision Steel, Inc. At the
Annual Meeting, shareholders owning a
majority
of the issued and outstanding shares of the Company’s common stock approved the
amendment to OraLabs’ Articles of Incorporation to change the name from OraLabs
Holding Corp. to China
Precision Steel, Inc. A copy of the Amended and Restated Articles of
Incorporation is attached hereto as Exhibit 3.1.
Further,
at
the
Annual Meeting, shareholders owning a
majority
of the issued and outstanding shares of the Company’s common stock approved an
increase the number of shares that are authorized for issuance under the
Articles of Incorporation from 25,000,000 shares of $0.001 par value common
stock to 62,000,000 shares of $0.001 par value common stock and to increase
the
number of authorized preferred shares to 8,000,000.
In
connection with the Share Exchange, the Company’s Board of Directors
changed the
fiscal year end from December 31 to June 30.
The
change in fiscal year will be
reflected the Company’s Form 10-Q for the quarter ended
December 31, 2006.
Item
8.01. Other
Events
On
December 28, 2006 OraLabs issued a press release to announce the consummation
of
the Share Exchange and certain other matters. A copy of this release is
included as Exhibit 99.3.
Item
9.01. Financial
Statement and Exhibits
| |
(a)
|
Financial
Statements of Business Acquired. (Included as Exhibit 99.1)
PSHL
Balance Sheet as of September 30, 2006, June 30, 2006 and
2005
PSHL
Statement of Operations for the Quarters ending September 30, 2006
and
2005 and for the Fiscal Years ending June 30, 2006, 2005 and
2004
PSHL
Statement of Cash Flows for the Quarters ending September 30, 2006
and
2005 and the Fiscal Years Ending June 30, 2006, 2005 and
2004
Notes
to Financial Statements
|
| |
(b)
|
Pro
Forma Financial Information (Included as Exhibit 99.2)
Pro
Forma Consolidated Balance Sheet as of September 30,
2006
Pro
Forma Consolidated Statement of Operations for the Three Months ended
September 30, 3006 and the Twelve Months Ended June 30,
2006
Notes
to Pro Forma Condensed Consolidated Financial
Statements
|
| |
3.1
|
China
Precision Steel, Inc. Amended and Restated Articles of
Incorporation
|
| |
10.1
|
Redemption
Agreement, dated December 28, 2006
|
| |
10.2
|
Tax
Indemnity Agreement, dated December 28,
2006
|
| |
10.3
|
2006
Long Term Incentive Plan
|
| |
10.4
|
Equipment
Mortgage Agreement between Chengtong and Raisffesien Zentralbank
Oesterreich AG, dated January 12,
2005
|
| |
10.5
|
Mortgage
Agreement on Immovables between Shanghai Tuorong Precision Steel
Company
Limited and Raisffesien Zentralbank Oesterreich AG, dated January
12,
2005
|
| |
10.6
|
Letter
of Offer between Chengtong and Raisffesien Zentralbank Oesterreich
AG,
dated October 14, 2004
|
| |
10.7
|
Amendment
No. 1 to Letter of Offer between Chengtong and Raisffesien Zentralbank
Oesterreich AG, dated December 28,
2004
|
| |
10.8
|
Amendment
No. 2 to Letter of Offer between Chengtong and Raisffesien Zentralbank
Oesterreich AG, dated May 10, 2005
|
| |
10.9
|
Amendment
No. 3 to Letter of Offer between Chengtong and Raisffesien Zentralbank
Oesterreich AG, dated July 26, 2005
|
| |
16.1 |
Letter from GHP
Horwath, P.C., dated December 28, 2006 |
| |
99.1 |
Report
of Murrell, Hall, McIntosh & Co.,
PLLP
|
| |
99.2 |
Pro
Forma Combined Summary of Historical Financial
Data
|
| |
99.3 |
Press
Release, dated December 28, 2006.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
| |
|
|
| Date:
January 4, 2007 |
CHINA
PRECISION
STEEL, INC. |
|
|
|
|
|
By: |
/s/
Wo Hing Li |
| |
Wo
Hing Li, President |
| |
|