SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant | |
Check the appropriate box:
| | Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e))
|X| Definitive Proxy Statement
| | Definitive Additional Materials
| | Soliciting material pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
ORALABS HOLDING CORP.
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(Name of Registrant as Specified in Charter)
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(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
| | No fee required
| | $125.00 per Exchange Act Rules O-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11
1) Title of each class of securities to which transaction applies:
Common Stock, $0.001 par value
------------------------------
2) Aggregate number of securities to which transaction applies:
25,741,335 shares
-----------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): Per share
price based upon average of the high and low prices (i.e., $3.29)
reported as of the close of trading on August 14, 2006
4) Proposed maximum aggregate value of transaction:
25,741,335 times $3.29 = $84,688,992
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5) Total fee paid:
$9,061.72 ($84,688,992 times 0.000107)
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Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount previously paid:
2) Form, Schedule or Registration Statement Number:
3) Filing party:
4) Date filed:
PROXY STATEMENT
ORALABS HOLDING CORP.
18685 E. Plaza Drive
Parker, Colorado 80134
Telephone (303) 783-9499
Dear Shareholder: November 27, 2006
You are cordially invited to attend the annual meeting of shareholders
of OraLabs Holding Corp. ("OraLabs" or the "Company") to be held at 18685 E.
Plaza Drive, Parker, Colorado on December 27, 2006 at 10:00 a.m., Mountain Time.
At the meeting you will be asked to consider and vote upon the matters
described in the accompanying notice and Proxy Statement. Whether or not you
plan to attend the annual meeting, please sign and date the enclosed Proxy card
and return it promptly in the enclosed postage-prepaid envelope.
Sincerely,
Your Board of Directors
The proposed transactions have not been approved or disapproved by the
Securities and Exchange Commission (the "Commission") or any state securities
regulator nor has the Commission or any state securities regulator passed upon
the fairness or merits of the proposed transactions or upon the accuracy or
adequacy of the information contained in this document. Any representation to
the contrary is unlawful.
This Proxy Statement and Proxy are being mailed to OraLabs'
shareholders on or about November 27, 2006.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE TRANSACTIONS, PASSED UPON THE MERITS
OR FAIRNESS OF THE STOCK EXCHANGE AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
THEREBY, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION CONTAINED IN
THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROXY STATEMENT
ORALABS HOLDING CORP.
18685 E. Plaza Drive
Parker, Colorado 80134
Telephone (303) 783-9499
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
December 27, 2006
At the annual meeting you will be asked to consider and vote upon the
following matters:
1. Approval of the issuance by OraLabs of shares representing 94% of the fully
diluted outstanding common stock of OraLabs (after giving effect to the
redemption and stock issuances described in proposals 2, 3 and 5 below) to
Mr. Wo Hing Li, Ms. Leada Tak Tai Li, Mr. Shu Keung Leung, Belmont Capital
Group Limited, Advanz Capital, Inc., and Edwon Inc., (collectively referred
to as the "PSHL Shareholders"), or their designees, in exchange for the
transfer to OraLabs of all of the ownership interests in Partner Success
Holdings Limited ("PSHL"), which are held by the PSHL Shareholders.
2. Approval of the redemption of all 3,629,350 of the common stock of OraLabs
held by its President, Gary H. Schlatter, individually, in exchange for the
transfer to Mr. Schlatter of all of the common stock held by OraLabs in its
wholly-owned subsidiary, OraLabs, Inc.
3. Approval of the 2006 Director Stock Plan (a copy of which is attached as
Annex 3 to the accompanying Proxy Statement) and the issuance under that
Plan of 200,000 shares to Michael I. Friess and 100,000 shares to Robert C.
Gust.
4. Approval to issue 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.
5. Approval of the sale to OraLabs, Inc., the wholly-owned subsidiary of
OraLabs, of up to 100,000 shares of OraLabs common stock to satisfy an
indemnity obligation of OraLabs, Inc. in connection with the closing of the
transactions described in this Proxy Statement.
6. Approval of the amendment to OraLabs' Articles of Incorporation to change
the name of the Company to China Precision Steel, Inc. and to increase the
number of authorized shares of common stock to 62,000,000.
7. Approval of the Amendment to OraLabs' Articles of Incorporation to increase
the number of authorized shares of preferred stock to 8,000,000.
8. 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,
China Precision Steel, Inc.
9. Approval of the 2006 Omnibus Long-Term Incentive Plan (a copy of which is
attached as Annex 4 to the accompanying Proxy Statement) 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.
10. Ratification of the appointment of Murrell, Hall, McIntosh & Co., PLLP as
our independent registered public accounting firm for fiscal year 2006.
11. To transact such other business as may properly come before the meeting or
any adjournments or postponements thereof.
All of the above transactions are contemplated by the Stock Exchange
Agreement ("Exchange Agreement"), dated as of March 31, 2006, as amended, by and
among OraLabs, PSHL and Wo Hing Li. None of the proposals will be given effect
unless all of the proposals are approved by the shareholders. In light of the
actual conflicting interest of Mr. Schlatter in the transactions, the Board of
Directors formed a Special Committee consisting of Michael I. Friess and Robert
C. Gust to evaluate the Exchange Agreement and to negotiate it on behalf of
OraLabs. The Board of Directors, considering among other things, the
recommendation of the Special Committee, has approved the Exchange Agreement and
the described transactions and determined them to be advisable. Approval of the
Board was unanimous except that Mr. Schlatter abstained from the vote. As the
two members of the Special Committee are each to receive shares of OraLabs
common stock at the Closing, the Special Committee retained the services of
Capitalink, L.C., the Special Committee's financial advisor, who provided its
written opinion that as of July 19, 2006, based on and subject to the
limitations, assumptions and qualifications stated in its opinion, the
completion of the transactions contemplated by the Exchange Agreement is fair to
OraLabs' nonaffiliated public shareholders from a financial point of view.
The Board of Directors has fixed the close of business on October 27,
2006 as the record date for determining all shareholders entitled to receive
notice of the annual meeting and to vote at such meeting or any adjournment(s)
thereof. A quorum of shareholders is necessary to hold a valid meeting. A quorum
will be present if shares representing a majority of the voting power of the
outstanding shares are represented by shareholders present at the meeting in
person or by proxy. The approval of Proposal 2 requires the affirmative vote of
the holders of at least the majority of the shares of our common stock entitled
to vote as of the record date. The approval of the other proposals requires the
affirmative vote of the votes cast at the meeting in person or by proxy for each
proposal.
The Board of Directors appreciates and welcomes shareholder
participation in OraLabs' affairs. Whether or not you plan to attend the annual
meeting, please vote by completing, signing and dating the enclosed Proxy and
returning it promptly to OraLabs in the enclosed self-addressed, postage-prepaid
envelope. If you attend the meeting, you may revoke your Proxy and vote your
shares in person.
The transactions are described in the accompanying Proxy Statement,
which you are urged to read carefully. A copy of the Stock Exchange Agreement as
amended is attached as Annex 1 to the accompanying Proxy Statement.
By Order of the Board of Directors
Michael I. Friess, Secretary
Parker, Colorado
November 27, 2006
TABLE OF CONTENTS
SUMMARY TERM SHEET................................................................................................1
QUESTIONS AND ANSWERS ABOUT THE PROPOSED TRANSACTIONS.............................................................5
SUMMARY...........................................................................................................6
Reasons for Engaging in the Transactions..........................................................................6
Recommendation of the Special Committee and Board of Directors....................................................7
Opinion of Capitalink, L.C........................................................................................7
OraLabs' Position as to the Fairness of the Proposed Transactions.................................................7
Plans for OraLabs After Closing of the Proposed Transactions......................................................8
Conditions to the Exchange Agreement..............................................................................9
Termination of the Exchange Agreement.............................................................................9
PSHL BUSINESS.....................................................................................................9
History and Development of PSHL...................................................................................9
General...........................................................................................................9
Products.........................................................................................................10
China Steel Industry.............................................................................................13
Competition......................................................................................................14
Intellectual Property............................................................................................15
Research and Development.........................................................................................16
Quality Control..................................................................................................16
Taxes............................................................................................................17
Employees........................................................................................................17
Property.........................................................................................................17
Legal Proceedings................................................................................................17
Risk Factors.....................................................................................................18
Risks Relating to this Transaction...............................................................................18
PSHL Directors, Officers and Key Employees.......................................................................24
Involvement in Certain Legal Proceedings.........................................................................25
Executive Compensation...........................................................................................26
SUMMARY HISTORICAL FINANCIAL DATA FOR ORALABS....................................................................27
SUMMARY HISTORICAL FINANCIAL DATA FOR PSHL.......................................................................27
PRO FORMA COMBINED SUMMARY OF HISTORICAL FINANCIAL DATA..........................................................28
PSHL'S MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS................................................29
Caution Regarding Forward-Looking Information....................................................................29
Introduction.....................................................................................................30
Plan of Operations...............................................................................................30
Liquidity and Capital Resources..................................................................................32
Contractual Obligations..........................................................................................34
Liquidity and Capital Resources..................................................................................35
INFORMATION CONCERNING THE ANNUAL MEETING........................................................................36
Time, Place and Date.............................................................................................36
Purpose of the Annual Meeting....................................................................................36
Record Date; Voting at the Meeting; Quorum.......................................................................36
Required Vote....................................................................................................36
Voting and Revocation of Proxies.................................................................................37
Action to be Taken at the Annual Meeting.........................................................................37
Proxy Solicitation...............................................................................................37
SPECIAL FACTORS..................................................................................................37
Background of the Proposed Transactions..........................................................................37
Recommendation of the Special Committee and Board of Directors; Fairness of the Proposed Transactions............42
OraLabs Board of Directors.......................................................................................43
Benefits and Detriments of the Proposed Transactions to OraLabs' Nonaffiliated Shareholders......................45
Opinion of Financial Advisor to the Special Committee of the Board of Directors..................................45
Interests of Certain Persons in the Proposed Transactions........................................................55
NASDAQ Listing...................................................................................................56
MARKET FOR THE COMMON STOCK......................................................................................57
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................58
Change in Control................................................................................................58
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: ORALABS..........................................................59
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: PSHL.............................................................60
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT................................................................61
EXECUTIVE COMPENSATION...........................................................................................61
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE PROPOSED TRANSACTIONS............................................61
Material Federal Income Tax Consequences to OraLabs Holding Corp.................................................62
FEES AND EXPENSES................................................................................................62
THE EXCHANGE AGREEMENT...........................................................................................63
The Stock Exchange...............................................................................................63
Conditions to the Closing of the Exchange Agreement..............................................................64
Representations and Warranties...................................................................................65
Covenants........................................................................................................65
Indemnification..................................................................................................65
Termination of the Exchange Agreement............................................................................66
Fees and Expenses................................................................................................66
Amendment/Waiver.................................................................................................66
Tax Indemnity....................................................................................................66
PROPOSAL 1.......................................................................................................68
PROPOSAL 2.......................................................................................................68
PROPOSAL 3.......................................................................................................68
PROPOSAL 4.......................................................................................................69
PROPOSAL 5.......................................................................................................70
PROPOSAL 6.......................................................................................................72
PROPOSAL 7.......................................................................................................72
PROPOSAL 8.......................................................................................................74
PROPOSAL 9.......................................................................................................79
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS........................................................80
FINANCIAL STATEMENTS.............................................................................................80
WHERE YOU CAN FIND MORE INFORMATION..............................................................................80
SHAREHOLDER MEETINGS AND PROPOSALS...............................................................................81
AVAILABLE INFORMATION............................................................................................81
SOLICITATION AND EXPENSES........................................................................................82
ORALABS CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT.........................................
ORALABS UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS................................................................
PSHL AUDITED FINANCIAL STATEMENTS..................................................................................
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS....................................................
ANNEXES............................................................................................................
1. STOCK EXCHANGE AGREEMENT, AS AMENDED
2. OPINION OF CAPITALINK, L.C.
3. 2006 DIRECTOR STOCK PLAN
4. 2006 OMNIBUS LONG-TERM INCENTIVE PLAN
5. ARTICLES OF AMENDMENT
6. TAX INDEMNITY AGREEMENT
ii
SUMMARY TERM SHEET
The following summarizes the principal terms of the proposed
transactions under which OraLabs Holding Corp., a Colorado corporation
("OraLabs" or the "Company"), will acquire the business of Partner Success
Holdings Limited ("PSHL") as a wholly-owned subsidiary of OraLabs. None of the
transactions will occur unless all of the transactions are approved by the
shareholders. At the same Closing, the ownership of OraLabs, Inc., the OraLabs'
operating subsidiary (the "Subsidiary") that conducts the Company's current
business, will be transferred to the President of the Company in exchange for
the redemption by OraLabs of all of the stock in OraLabs owned by him
individually. This Summary Term Sheet does not contain all of the information
that may be important for you to consider when evaluating the merits of the
transactions, and is qualified in its entirety by the more detailed information
contained elsewhere in this Proxy Statement, including the annexes to it. You
are encouraged to read this Proxy Statement and the annexes in their entirety
before voting. Section references are included below to direct you to a more
complete description of the topics discussed in this Summary Term Sheet.
The companies that are the parties to the proposed transactions are
OraLabs Holding Corp., 18685 E. Plaza Drive, Parker, Colorado 80134, telephone
(303) 783-9499, and Partner Success Holdings Limited, 8th Floor, Teda Building,
87 Wing Lok Street, Sheungwan, Hong Kong, the People's Republic of China. In
addition, Gary H. Schlatter, (18685 E. Plaza Drive, Parker, Colorado 80134,
telephone (303) 783-9499), will acquire sole ownership of OraLabs, Inc., the
Company's wholly-owned subsidiary, as part of closing the contemplated
transactions.
o You are being asked to approve the following transactions that are
described in the Stock Exchange Agreement ("Exchange Agreement"),
dated as of March 31, 2006, as amended:
o OraLabs' acquisition of all of the ownership of PSHL in exchange
for OraLabs' issuance to Mr. Wo Hing Li, Ms. Leada Tak Tai Li,
Mr. Shu Keung Leung, Belmont Capital Group Limited, Advanz
Capital, Inc., and Edwon Inc., (collectively referred to as the
"PSHL Shareholders") of 94% of all of the common stock of OraLabs
(under its new name, China Precision Steel, Inc.) outstanding
upon completion of the transactions;
o OraLabs' issuance to Gary H. Schlatter, OraLabs' President, of
the entire ownership of its Subsidiary and redemption by OraLabs
of Mr. Schlatter's shares of OraLabs owned by him individually;
o the 2006 Director Stock Plan and the issuance to non-employee
directors of 300,000 shares of OraLabs common stock
(approximately 1.1% of the number of shares to be outstanding
after completion of the proposed transactions);
o the authorization to issue 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 financings;
o the sale to OraLabs, Inc., the wholly-owned subsidiary of
OraLabs, of up to 100,000 shares of OraLabs common stock
(approximately 0.4% of the number of shares to be outstanding
after completion of the proposed transactions) to satisfy an
indemnity obligation of OraLabs, Inc. in connection with the
closing of the transactions described in this Proxy Statement;
o the amendment to OraLabs' Articles of Incorporation to change the
company name to China Precision Steel, Inc. and to increase its
authorized number of shares of common stock, par value $0.001 per
share, to 62,000,000 and the amendment to OraLabs' Articles of
Incorporation to increase its authorized number of shares of
preferred stock, par value $.001 per share, to 8,000,000;
o the 2006 Omnibus Long-Term Incentive Plan that will allow China
Precision Steel, Inc., to grant stock options and restricted
stock awards to qualified key employees;
o the election of directors and ratification of the Company's
auditors. See "Summary".
o The effect of these transactions will include that after the Closing,
OraLabs (under its new name, China Precision Steel, Inc.) will conduct
the business of PSHL rather than the OraLabs' business it previously
conducted.
o You will not receive any securities, money or any other consideration
as part of the Closing of the transactions, and the interest held by
nonaffiliated OraLabs shareholders, which is currently about 1,107,915
shares, or 22.8% of the OraLabs outstanding common stock, will be
reduced to approximately 4.1%. The total number of shares outstanding
upon Closing of the transactions will be approximately 27,065,250
assuming that 5,000 outstanding employee options and 5,000 director
options to be outstanding are exercised prior to Closing and that
OraLabs, Inc. purchases all 100,000 shares to satisfy an indemnity
obligation. See "The Exchange Agreement - The Stock Exchange".
o On July 19, 2006, Capitalink, L.C. rendered its opinion to the Special
Committee that, as of that date and subject to the assumptions,
qualifications and limitations set forth in its opinion, the
transactions contemplated by the Exchange Agreement were fair, from a
financial point of view, to the holders of OraLabs common stock other
than OraLabs' officers and directors and their affiliates. The
complete Capitalink opinion is attached to this Proxy Statement as
Annex 2. Any summary of Capitalink's opinion in this Proxy Statement
is qualified by reference to the full text of the Opinion that is
attached as Annex 2 and which we urge you to read carefully in its
entirety. The Opinion was directed to our Special Committee and does
not constitute a recommendation as to how any holder of our common
stock should vote on the proposed transactions. See "Special Factors -
Opinion of Financial Advisor to the Special Committee".
o The Special Committee consists of two members of the Board of
Directors, Mr. Friess and Mr. Gust. They are independent directors,
but as part of the Closing they will receive compensation in the form
of shares of common stock (see "Certain Relationships and Related
Transactions"). The Special Committee determined that the transactions
are fair to and in the best interests of our common shareholders,
other than our officers, directors and their affiliates, and has
recommended to our Board that the transactions should be completed
under the terms of the Exchange Agreement. See "Special Factors -
Recommendation of the Special Committee". Acting on the recommendation
of the Special Committee, our Board of Directors (with Mr. Schlatter
abstaining, the result of which is that the vote by the Board was made
by the same individuals who comprised the Special Committee) approved
the Exchange Agreement and authorized the transactions contemplated in
that document, and recommends that you vote for approval and adoption
of all of the transactions contemplated in that document. See "Special
Factors - OraLabs Board of Directors".
2
o After Closing, our current shareholders will no longer have an
interest in the business of OraLabs but instead will have an interest
in the business of PSHL (under its new name, China Precision Steel,
Inc.). As noted above, the current shareholders will sustain
considerable dilution as a result of closing the transactions, and
shareholders do not have appraisal rights. PSHL's business operations
are subject to numerous risks, including such risks as dependence on
certain customers, competition in the specialty precision steel
industry, rising prices of raw materials and PSHL's reliance on its
officers and key employees. The Chinese government could change its
policies, laws and regulations in a manner that would be detrimental
to PSHL's operations, and there are greater uncertainties relating to
the status of laws and regulations with respect to a company operating
in China than the laws and regulations to which OraLabs is subject to
by operating in the United States. PSHL's operations may not continue
to be profitable after the Closing of the transactions,
notwithstanding its profitable history during the past two years. In
addition, shareholders will face risks relating to foreign currency
exchange issues and dilution that may occur as a result of PSHL's
issuing additional shares to others. See "PSHL Business - Risk
Factors".
o As the following discussion indicates, Mr. Schlatter owns sufficient
shares to assure that a quorum of shareholders will be present at the
meeting and the requisite number of shares will approve all of the
proposed transactions. In order to approve and adopt the proposals, a
quorum of shareholders must be present in person or by proxy at the
meeting and the proposals must be approved by a majority of shares
entitled to vote (with respect to the redemption of Mr. Schlatter's
shares under Proposal 2) and by a majority of the votes cast at the
meeting with respect to the other proposals. Therefore, a non-vote
will have the same effect as a vote against Proposal 2 but will not
have an effect with respect to the other proposals. Gary H. Schlatter,
the President of the Company and the owner individually of
approximately 77% of the outstanding common stock, has agreed to vote
in favor of all of the matters to be conducted at the annual meeting.
If you vote by proxy, you have the right to attend the shareholders'
meeting and revoke your proxy at any time prior to the vote. However,
attendance at the meeting without casting a ballot will not, by
itself, constitute revocation of a proxy. See "Information Concerning
the Annual Meeting".
o The common stock of OraLabs is presently listed for public trading on
the NASDAQ Capital Market. Under NASDAQ rules, in order to maintain
the listing upon completion of the Closing, the Company must meet the
more strict listing requirements for a company applying to NASDAQ for
a new listing rather than the less strict requirements for a continued
listing. PSHL believes that upon completion of the Closing, the
Company will meet all of the requirements for a new listing. If upon
Closing, the Company does not meet the minimum bid price and all other
new listing requirements, OraLabs and PSHL expect that the Company's
common stock will be delisted from NASDAQ. In that event, OraLabs and
PSHL expect that the common stock will continue to be publicly traded
on the NASD Electronic Bulletin Board over-the-counter market (OTC-BB)
until it meets the listing requirements of the NASDAQ Capital Market,
if ever. PSHL intends to submit a listing application to the NASDAQ
Capital Market shortly after this Proxy Statement is filed. See
"Recommendation of the Special Committee and Board of Directors;
Fairness of the Proposed Transactions - NASDAQ Listing".
3
o Mr. Schlatter has an actual conflict of interest in that, upon
completion of the proposed transactions, he will become the sole owner
of OraLabs, Inc., which he intends to continue to operate as a private
company. Mr. Schlatter currently owns approximately 77% of the
outstanding shares of the Company (see, "Security Ownership of Certain
Beneficial Owners and Management"), and upon Closing he will own 100%
of OraLabs, Inc., so in essence he will be acquiring the additional
23% of OraLabs, Inc. in exchange for his relinquishment of his 77%
ownership interest in the Company. The Schlatter Family Partnership,
of which Mr. Schlatter and his spouse are the general partners, will
retain ownership of 100,000 shares (approximately 0.4% of the number
of shares to be outstanding after completion of the proposed
transactions) of the Company, the worth of which will depend upon the
price of the common stock immediately prior to the Closing. In
addition, it is expected that Oralabs, Inc. will purchase up to
100,000 shares of common stock of the Company as part of the Closing
in order to provide funds to the Company with respect to an estimated
income tax liability arising out of the closing of the transactions
(see Exchange Agreement - The Stock Exchange"). The remaining
directors, who are not employees of the Company, will cumulatively
receive 300,000 shares of OraLabs common stock (approximately 1.1% of
the number of shares to be outstanding after completion of the
proposed transactions) as part of the Closing, the value of which will
depend upon the price of the common stock on the date of Closing.
Accordingly, all of the directors have interests in the proposed
transactions that are in addition to or different from the interests
of our shareholders generally and such interests create actual or
potential conflicts of interest (see "Certain Relationships and
Related Transactions - OraLabs"). The Board of Directors formed a
Special Committee consisting of Messrs. Friess and Gust, who
negotiated the Exchange Agreement with PSHL, hired their own legal
counsel, and obtained a fairness opinion from an independent third
party. To review the factors considered by the Special Committee and
the Board of Directors in approving the Exchange Agreement, see
"Special Factors".
o Closing of the transactions is subject to the satisfaction or waiver
of various conditions described in the contract documents, including
conditions that are customary in transactions of this type.
Shareholders of the Company do not have appraisal rights in connection
with the proposed transactions. The Exchange Agreement may be
terminated at any time before the completion of the transactions by
the mutual written consent of its parties or by any party in certain
instances described in the Exchange Agreement. Any party can waive the
provisions of any condition that is for its benefit. If any material
condition is waived, the Company will recirculate a new proxy
statement and resolicit the vote prior to Closing. See "Termination of
the Exchange Agreement".
o The transactions will not be taxable to the public shareholders of
OraLabs. The transactions by which shares representing 94 percent of
the outstanding OraLabs shares will be issued to the PSHL Shareholders
in exchange for the Company's acquisition of all of the ownership
interests in PSHL will constitute a tax-free transaction. The
transaction by which ownership of the Subsidiary will be distributed
to Mr. Schlatter in consideration for the redemption of his shares
that he owns in the Company, will constitute a taxable event to
OraLabs, with respect to which OraLabs, Inc. has agreed to indemnify
the Company (see "Material Federal Income Tax Consequences of the
Proposed Transactions"). In addition, the transaction by which OraLabs
will acquire ownership of PSHL will be treated as a recapitalization
of PSHL for financial reporting purposes, which is not expected to
have a material impact upon the Company's financial statements.
4
o Upon consummation of the reverse merger, Belmont Capital Group Limited
("Belmont Capital"), a Hong Kong-based financial consulting firm
providing investment banking and related services to PSHL, is entitled
to receive, as partial compensation for its services rendered to PSHL
in connection with the proposed transactions, 8% of the common stock
of the Company, subject to certain adjustments, which may reduce or
increase such percentage to a maximum of 10%. Neither PSHL nor OraLabs
will issue new shares to Belmont Capital in connection with any such
compensation. Mr. Wo Hing Li, the principal shareholder of PSHL, has
agreed to transfer a requisite portion of his shareholding in the
Company to Belmont Capital in order to fulfill any such equity
compensation due to Belmont Capital. As a result, there will be no
dilution to shareholders in the Company as a result of such share
transfer. Belmont Capital is also entitled to certain cash payments in
the event that its consulting agreement with PSHL is terminated and in
certain other circumstances, which are described elsewhere in this
Proxy Statement.
QUESTIONS AND ANSWERS ABOUT THE PROPOSED TRANSACTIONS
Q: What happens to my stock ownership in OraLabs after the transactions are
closed?
A: Your stock ownership in OraLabs will not change. Nonaffiliated shareholders
of OraLabs will retain their current stock that consists of approximately
1,107,915 shares. If the transactions close, nonaffiliated shareholders who
own approximately 22.8% of the Company will instead own about 4.1% of the
then-outstanding shares. See "The Exchange Agreement - The Stock Exchange".
Q: Do shareholders of OraLabs have the right to dissent and seek appraisal of
the fair value of their shares if they do not approve the transactions?
A: No.
Q: When do you expect the transactions to close?
A: We are working to complete the transactions as quickly as possible. If the
proposed transactions are approved and the other conditions to Closing are
satisfied, we expect to complete the transactions in or about December
2006. However, there can be no assurance that the transactions will close
by that time, or at all.
Q: What vote of shareholders is required to approve the transactions?
A: A quorum of shareholders is necessary to hold a valid meeting. Mr.
Schlatter entered into a voting agreement pursuant to which he has agreed
to vote in favor of the proposals set forth in this Proxy Statement, and
his vote alone is sufficient to meet the quorum requirements and approve
all of the proposed transactions.
5
SUMMARY
The following summarizes the material aspects of the proposed
transactions and highlights selected information contained elsewhere in this
Proxy Statement. This summary may not contain all of the information that is
important to you, and is qualified in its entirety by the more detailed
information contained elsewhere in this Proxy Statement, including the annexes
to it. To understand the proposed transactions fully and for a more complete
description of the proposed transactions, you should carefully read this entire
Proxy Statement, including the annexes to it.
OraLabs will hold its annual meeting of shareholders of OraLabs at
10:00 a.m. Mountain Time on December 27, 2006 at the principal offices of
OraLabs, 18685 E. Plaza Drive, Parker, Colorado. Only OraLabs shareholders of
record at the close of business on the record date, October 27, 2006, will be
entitled to receive notice of, and to vote at, the annual meeting. On the record
date, there were 4,848,265 shares of common stock outstanding and entitled to
one vote per share at the annual meeting. OraLabs' shares are held by
approximately 869 shareholders of record as of October 27, 2006, although there
is an additional number of beneficial owners of our common stock that are held
in nominee names.
There are a number of factors that you should consider in connection
with deciding how to vote your shares. They include:
o the background of the transactions;
o the factors considered by the Special Committee and the Board of
Directors;
o the opinion of the financial advisor to the Special Committee;
o the recommendation of the Special Committee to the Board of Directors;
o the purpose and effect of the proposed transactions; and
o the conflict of interests of certain persons in the proposed
transactions.
These factors, in addition to several other factors to be considered in
connection with the proposed transactions, are described in this Proxy
Statement. For a detailed discussion of each of these factors, see "Special
Factors".
Reasons for Engaging in the Transactions (See "Special Factors - Background of
the Proposed Transactions")
The Company's operating subsidiary, OraLabs, Inc., has been in business
since 1990 and became public via a reverse merger in 1997. Prior to becoming
public, the sole owner of the subsidiary was Mr. Gary H. Schlatter, who believed
that by taking the Company public, the Company could use public shares to
facilitate its growth and that being public would facilitate providing ownership
interests to employees and others with an interest in the Company's business.
Those goals were not met. Historically, the trading volume of shares of the
public company has been extremely low, and the stock price remained at a level
substantially below that which would attract the interest of investors and other
members of the financial community (except for stock prices and volume relating
to announcements of significant transactions such as this transaction with
PSHL). In addition, there have been significant increases in the costs of being
a public company arising out of the Sarbanes-Oxley legislation and related rules
of the Securities and Exchange Commission ("SEC") and the National Association
of Securities Dealers ("NASD"). As noted in the discussion below of the factors
considered by the Special Committee (see "Special Factors"), the Special
Committee believed that a reorganization with a company such as PSHL that has
substantially larger amounts of revenues and which has historically obtained
significant net earnings would be beneficial to the nonaffiliated shareholders
of OraLabs.
6
PSHL is engaging in the stock exchange transaction with OraLabs because
Mr. Wo Hing Li desires to take PSHL public by way of a reverse merger with a
publicly-listed company in the United States to allow it to issue securities to
facilitate its corporate development plans in the People's Republic of China, to
increase production capacity, increase capital expenditures on plant and
machineries, to retire certain bank borrowings, to increase and improve research
and development, technological development and innovative capability to become a
market leader in the specialty precision steel industry in China. Further,
becoming a U.S. publicly-listed company provides PSHL with the ability to
provide ownership interests to employees and others with an interest in PSHL's
business.
Recommendation of the Special Committee and Board of Directors (See "Special
Factors - Recommendation of the Special Committee")
The Special Committee of our Board of Directors, consisting of two
non-employee directors, was formed to consider and evaluate the proposed
transactions. The Special Committee approved the Exchange Agreement and
determined that the proposed transactions are in the best interests of OraLabs
and its nonaffiliated shareholders. The Special Committee recommended to our
Board that the Board determine that the proposed transactions are advisable and
in the best interest of OraLabs and our nonaffiliated shareholders and that the
completion of the proposed transactions is fair to our nonaffiliated
shareholders. The Special Committee also recommended that the Board approve the
Exchange Agreement and that the Board submit the proposed transactions to our
shareholders and recommend that our shareholders vote to adopt the Exchange
Agreement. Even though our non-employee directors will be receiving shares at
the Closing, our Board determined that the proposed transactions are advisable
and in the best interests of and fair to OraLabs and our nonaffiliated
shareholders. Accordingly, our Board approved the Exchange Agreement and
recommends that you vote FOR the proposal to adopt the Exchange Agreement and
approve the proposed transactions.
Opinion of Capitalink, L.C. (See "Opinion of Financial Advisor to the Special
Committee" and Annex 2)
In connection with the proposed transactions, the Special Committee
considered the opinion of the Special Committee's financial advisor, Capitalink,
L.C., as to the fairness of the proposed transactions to our nonaffiliated
shareholders from a financial point of view. Capitalink delivered its opinion to
the Special Committee on July 19, 2006 that, as of July 19, 2006 and based on
and subject to the assumptions, limitations and qualifications stated in the
opinion, the transactions contemplated by the Exchange Agreement were fair, from
a financial point of view, to the holders of OraLabs common stock other than
OraLabs' officers and directors and their affiliates. The opinion was provided
for the information of the Special Committee and does not constitute a
recommendation to any shareholder with respect to any matter relating to the
proposed transactions. The full opinion of Capitalink, L.C. is attached as Annex
2.
OraLabs' Position as to the Fairness of the Proposed Transactions (See "Special
Factors - OraLabs Board of Directors")
We believe the proposed transactions to be fair to our nonaffiliated
shareholders. In reaching this determination we considered a number of factors,
including that:
7
o OraLabs has generated very little net income since the end of fiscal
year 2001, while on the other hand, the revenues and net income of
PSHL and its Subsidiary during the fiscal year ended June 30, 2005
were $53,144,601 and $6,366,441, respectively;
o OraLabs' common stock has historically traded at low prices that do
not attract the interest of the investment community and at very low
volumes so that there has been minimal liquidity for OraLabs'
shareholders even though the stock is traded on the NASDAQ Capital
Market;
o Capitalink delivered an opinion to the Special Committee to the effect
that as of July 19, 2006, and based on and subject to the limitations,
assumptions and qualifications contained in that opinion, the proposed
transactions were fair to the nonaffiliated shareholders of OraLabs
from a financial point of view;
o the proposed transactions were approved and recommended by the Special
Committee;
o the amount of dilution to the nonaffiliated shareholders of OraLabs;
o the possibility that the listing of the Company's common stock on the
NASDAQ Capital Market will be discontinued; and
o risks relating to the operations of the PSHL business after completion
of the Closing (see "PSHL Business-Risk Factors").
Shares Outstanding After Closing (See "Proposals One, Three and Five")
In the event the amendment to the Company's Articles of Incorporation
is approved, OraLabs' authorized capital will consist of 62,000,000 shares of
common stock, par value $.001 per share and 8,000,000 shares of preferred stock,
par value $.001 per share, and the Company will operate under the name China
Precision Steel, Inc. Upon Closing, there will be issued and outstanding
approximately 27,065,250 shares of common stock, if all outstanding employee
options and all director options are exercised prior to Closing and OraLabs,
Inc. purchases all 100,000 shares to satisfy an indemnity obligation (see
"Exchange Agreement - The Stock Exchange Agreement"). The remaining authorized
but unissued shares may be issued at any time after Closing as the Board of
Directors and/or officers of the Company determine from time to time and may
include, among others, equity financings such as private placements of shares,
offerings to the public, the issuance of shares in connection with stock options
or restricted stock awards, and the issuance of shares in connection with the
acquisition of other companies or their assets.
Plans for OraLabs, Inc. After Closing of the Proposed Transactions
After the Closing, the business of OraLabs, Inc., the public company's
current subsidiary, will continue to be operated as a private company that will
be wholly-owned by Mr. Schlatter. Mr. Schlatter does not have any plans or
proposals that would take place after the Closing. However, the private company,
OraLabs, Inc., may consider possibilities and alternatives that could arise
after Closing with respect to its operations and business activities. After the
Closing, the OraLabs shareholders will have no further interest in the
operations of OraLabs, Inc.
8
Conditions to the Exchange Agreement (See "The Exchange Agreement - Conditions
to the Closing of the Exchange Agreement")
Certain conditions must be satisfied or waived before the parties are
obligated to close the transactions under the Exchange Agreement, including the
following:
o the Exchange Agreement and all of the transactions contemplated
thereby must be approved by the shareholders of OraLabs;
o PSHL must receive a letter from OraLabs' attorneys, and OraLabs must
receive letters from PSHL's independent auditors and attorneys, that
are considered satisfactory by the receiving party; and
o There must be no legal action that prevents or restrains completion of
the proposed transactions.
In addition, other conditions, including the lack of any material
adverse change in the condition of the parties and compliance with
representations, warranties and covenants, must be satisfied or waived by the
parties before the other parties are obligated to complete the proposed
transactions.
Termination of the Exchange Agreement (See "The Exchange Agreement - Termination
of the Exchange Agreement")
Either party may terminate the Exchange Agreement if Closing does not
occur by January 15, 2007, or if PSHL or OraLabs breaches any of its
representations, warranties or agreements under the Exchange Agreement. The
parties may agree at any time (including any time after the annual meeting but
before consummation of the proposed transactions) to terminate the Exchange
Agreement.
PSHL BUSINESS
History and Development of PSHL
Partner Success Holdings Limited ("PSHL" or "Partner Success") was
incorporated as an international business company on April 30, 2002 under the
laws of the British Virgin Islands. Shanghai Chengtong Precision Strip Company
Limited ("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. For purposes of this section of this Proxy Statement, PSHL
refers collectively to Partner Success and Chengtong.
(1) General
PSHL is a niche precision steel processing company principally engaged
in the producing and selling high precision cold-rolled steel products and
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
tolereances of the above factors, espeically thickness tolerence.
9
PSHL's operation is currently located in China. However, PSHL intends
to expand overseas into Japan, Taiwan, Korea, the European Union and the United
States in the future. PSHL currently has 180 employees, including 22 senior
management and technical staff members and leases 10,000 square meters
production facilities in Jiading District, Shanghai, on 4 acres of property.
(2) 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 such end applications as appliances (refrigerators,
washers, dryers, and other small appliances), automobiles (exposed as well as
unexposed parts), 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.
PSHL 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, it is not yet established as an internationally recognized brand for
specialty precision steel products. As of March 31, 2006, Chengtong produces
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 June 30, 2006, PSHL has an annual production capacity of
approximately 100,000 tons. Following the installation of the 1400mm 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
10
anticipated that once all of the plant and equipment (1400mm width cold mill and
1700mm width cold mill) are installed in the new production facilities, PSHL'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 has installed one 1400mm width cold mill and
intends to install another 1700mm width cold-roll mill on or before June 30,
2007.. When the new production facilities commence operation, the two additional
rolling mills 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 PSHL's current rolling mill. PSHL's
existing facilities will primarily manufacture low carbon cold-rolled steel
products.
The 1400mm width cold mill has added 150,000 tons to PSHL's annual
production and when the 1700mm 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 PSHL believe that the increased production capacity will be fully
utilized within two years after commencement of operation. PSHL currently
produces extremely thin cold-rolled precision steel strips ranging from 3.0 mm
to 0.03 mm. PSHL 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, PSHL's specialty precision
products are mainly used in the manufacture of automobile parts and components,
saw blades, textile needles, microelectronics, packing and containers.
As of June 30, 2006 and September 30, 2006, PSHL manufactured
approximately 40 different types of precision steel products with a range of
over one hundred specifications. PSHL's precision steel products can be
categorized into the following five major categories:
Categories of Precision Steel Functions
Products:
1. Low carbon cold-rolled steel Food packaging, dry batteries,
electronic devises, kitchen tools
2. Low carbon acid wash steel Food packaging, dry batteries,
electronic devises, kitchen tools
3. Low carbon hard-rolled steel Food packaging, dry batteries,
electronic devises, kitchen tools
4. High carbon cold-rolled steel Automobile components, saw blades,
weaving needles, springs
5. High carbon hard-rolled steel Automobile components, saw blades,
weaving needles, springs
(3) Raw Materials
PSHL 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 PSHL. Some of the suppliers
are as follows:
% of direct % of direct
materials materials
Major suppliers 2006 consumed 2005 consumed
BaoSteel Trading Co. Ltd $7,138,845 33% $16,513,238 40%
Ningbo Dongming Co. Ltd 5,902,211 28% -*
Shangahi Baixing Co. Ltd 1,642,024 8% -*
Shanghai Bao Gang Dev Co. Ltd 1,389,221 6% -*
Shanghai Tianxing Co. Ltd 1,025,946 5% -*
Shanghai Jiesiyi International Trading * 4,723,981 11%
China Chengtong Metal (Group) * 3,156,359 8%
BaoSteel Capital Company * 2,218,776 5%
Shanghai Jingqi Trading * 1,225,998 3%
------------- ---------------
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
11
PSHL does not have any other material contract or agreement or equity
relationship, direct or indirect, with BaoSteel Group Corporation.
Based upon information obtained by PSHL 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 he amount of purchases that PSHL
must make at high prices during the high demand seasons), PSHL 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 PSHL may
build up its inventory during such periods when prices are low.
When sales orders are executed between the customers and Chengtong, the
selling price agreed to is based on the cost of raw material at that date,
effectively allowing Chengtong to pass incremental cost increases in raw
materials to its customers.
Regulation
PSHL is subject to numerous 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 PSHL to expend significant resources to comply
with new laws or regulations or changes to current requirements and could have a
material adverse effect on PSHL.
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 aim to secure the 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. PSHL
currently receives all its revenues in Renminbi and 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.
Following the closing of a proposed reverse merger with a listed company and
under the existing foreign exchange regulations in the PRC, PSHL will be 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.
12
PSHL is currently subject to numerous 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. PSHL's business and operating results
could be materially and adversely affected if PSHL were to increase expenditures
to comply with any new 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. PSHL believes that
its current production and operating activities of Chengtong Precision are in
compliance with the environmental protection requirements of the PRC. PSHL 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. PSHL 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 PSHL from
the CMI, PSHL 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. PSHL 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.
13
Based upon information obtained by PSHL from the CMI, PSHL 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 PSHL from the CMI, PSHL 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.
PSHL 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, PSHL 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
PSHL 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 steel giants such as BaoSteel Group Corporation and Maan Steel Group.
PSHL is not in direct competition with China's local steel giants 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 companies are then supplied as raw
materials to high precision steel manufacturers such as PSHL for cold reduction
processing to the desired thickness. Cold rolled products are then sold to
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 PSHL's competitors have financial
resources, staff and facilities substantially greater than PSHL's and PSHL may
be at a competitive disadvantage compared with larger steel companies. PSHL'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. PSHL'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 PSHL both
in China and internationally.
Baosteel Group Chaoyang Precision Strip Co., Ltd was a joint venture
between a local Chinese company and a subsidiary of Baosteel Group when it was
established. However, PSHL understands that four years ago, Baosteel Group sold
its equity interest in this company to the local company and this is no longer a
subsidiary of Baosteel Group although the company name remained unchanged. PSHL
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 PSHL does not believe that the two companies are in direct
competition.
14
Although there is intense competition in China's steel industry, this
impacts mostly low-end steel products. PSHL 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 400 mm.
Because PSHL's cold rolled steel rolls have a width of around 1,000 mm, these
products have different applications and are sold in different market segments
than that of PSHL and are not considered to be direct competitors to PSHL.
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 PSHL's existing cold-roll mill and, together with PSHL's internal know-how
complementary to the patented bearing, PSHL 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 PSHL and Shanghai Te'an - Yikai Bearing Co,
Limited. PSHL and Shanghai Te'an -Yikai Bearing Co., Limited jointly developed
the Envirnomental -conscious mill bearing with inner circular lubrication
project. Shanghai Te'an - Yikai Bearing Co., Limited retains the proprietary
right to the technology while PSHL has the exclusive right to the application of
the technology.
PSHL 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 PSHL processes. PSHL cannot assure that licenses would be
available if any of PSHL'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.
15
Research and Development
Since the establishment of Chengtong in July 2002, PSHL'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, PSHL's engineers are constantly
interacting with customers to detect changes in "patterns" and customers'
specifications arising from constantly changing industry's needs.
As of March 31, 2006, PSHL has three experienced engineers and
technicians in the research and development department and management. PSHL'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, PSHL 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, PSHL 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
PSHL's high precision steel products are sold directly to the end users
in various parts of China and PSHL's production is based on confirmed sales
orders. Generally, an initial deposit (approximately 30% of the aggregate
contracted sales amount) is pre-paid when the contract is signed. PSHL'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, PSHL has achieved a
customer base of approximately 200 entities and PSHL 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 industries are concentrated.
Below is a list of PSHL's major customers during the years ended June
30, 2006 and 2005:
Major customers 2006 % of sales 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
16
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 16.5% 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 PSHL shall be subject to the full tax rate of 33%.
Employees
As of September 30, 2006, PSHL had a total of 230 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.
PSHL's employees are not subject to collective bargaining agreements. PSHL
considers its global labor practices and employee relations to be good.
Property
PSHL leases for $1 per month the existing 10,000 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 PSHL upon approval from the relevant
governmental authority for the transformation into a WOFE. There is no formal
tenancy agreement between PSHL and Tuorong Precision for this lease. Receipt of
the approval for Shanghai Tuorong Precision Steel Company Limited to transfer
the land-use rights to Shanghai Chengtong is a long and involved process which
has been under process for some time. PSHL anticipates the transfer land use
rights will be completed by December 31, 2006. (See Note 9 to the PSHL Financial
Statements included in this Proxy Statement).
Two new Phase 2 production facilities and an office building were
completed in August 2006 and product trial runs commenced in September 2006. The
Company believes that actual production will commence in October 2006. The
installation of the 1700mm 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 Proxy Statement, there is no pending litigation
against PSHL nor was there any litigation initiated by PSHL.
17
Risk Factors
You should carefully consider the following risks, together with all
other information included in this Proxy Statement relating to the business of
PSHL. The realization of any of the risks described below could have a material
adverse effect on PSHL's business, results of operations and future prospects.
Risks Relating to this Transaction
Immediate and Substantial Dilution to Existing OraLabs Shareholders
As a result of completing the transactions contemplated by the Exchange
Agreement, the ownership by the nonaffiliated shareholders of OraLabs will be
significantly diluted from 22.8% before completion of the transactions to 4.1%
after completion of the transactions. Although a third-party advisor rendered
its opinion to the Special Committee of the Board that, as of July 19, 2006 and
subject to the assumptions, qualifications and limitations set forth in its
opinion, the transactions contemplated by the Exchange Agreement were fair, from
a financial point of view, to the nonaffiliated shareholders of OraLabs, there
can be no assurance as to the future performance of PSHL or of the post closing
common stock of the Company.
No Assurance of NASDAQ Listing.
The continued listing of the Company's common stock on NASDAQ is not a
condition of Closing the transactions contemplated by the Exchange Agreement.
There can be no assurance that the Company will meet all of the requirements for
listing, including without limitation the requirement that the minimum bid price
of the common stock must not be less than $4.00 per share. In the event that
OraLabs does not meet NASDAQ listing requirements upon the closing of the
transaction with PSHL, the common stock of the Company is expected to be
publicly traded on the NASD Electronic Bulletin Board over-the-counter market
(OTC-BB) until it meets the listing requirements of NASDAQ.
Risks Relating to PSHL'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 PSHL 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.
18
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 PSHL and its results of
operations.
Environmental compliance and remediation could result in substantially
increased capital requirements and operating costs.
PSHL is currently subject to numerous 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. PSHL's business and operating results
could be materially and adversely affected if PSHL were to increase expenditures
to comply with any new environmental regulations affecting its operations.
PSHL 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 PSHL's growth, production capability, and profitability. For PSHL 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 PSHL, 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.
PSHL faces significant competition from competitors who have greater
resources than PSHL has, and PSHL may not have the resources necessary to
successfully compete with them.
PSHL 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 couple 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. PSHL'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. PSHL's competitors may have financial resources, staff and
facilities substantially greater than PSHL's and PSHL may be at a competitive
disadvantage compared with larger companies.
19
PSHL 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, PSHL 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 March
31, 2006, PSHL offered more than 40 high precision steel products of over 100
specifications. Currently PSHL 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
PSHL's precision steel products may negatively impact PSHL'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 PSHL.
PSHL has Substantial Indebtedness with Floating Interest Rates.
At June 30, 2006, total outstanding indebtedness of PSHL was
$22,353,124, out of which interest-bearing bank borrowings amounted to
$21,934,023. Substantially about 85% of PSHL's indebtedness was floating-rate
debt with interest rates which vary with changes in standard rate set by the
People's Bank of China. To the extent interest rates increase, PSHL 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 PSHL'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 PSHL seeks to refinance short-term borrowings may increase the
cost of borrowings, which may adversely affect PSHL's earnings and cash
available for distribution to its shareholders.
PSHL 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 PSHL's future performance, including product development,
strategic plans, marketing and other objectives. PSHL's success depends to a
substantial extent not only on the ability and experience of its senior
management, but particularly upon PSHL's Chairman, Wo Hing Li, Chengtong's
General Manager Hai Sheng Chen and Chief Financial Officer, Leada Tak Tai Li.
PSHL 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
20
officers and directors would be unavailable to PSHL, PSHL 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 16.5% 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 PSHL shall be subject to the full tax rate of 33%. In the event
that PSHL 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, PSHL has no patents or licenses that protect its
intellectual property. Unauthorized parties may attempt to copy aspects of
PSHL's products or to obtain and use information that PSHL regards as
proprietary. Policing unauthorized use of PSHL's products is difficult. PSHL'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 PSHL
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, PSHL's means of
protecting its proprietary rights may not be adequate. In addition, the laws of
some foreign countries do not protect PSHL's proprietary rights to as great an
extent as do the laws of the United States. PSHL'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, PSHL's competitors may independently develop similar technology or
design around PSHL's proprietary intellectual property.
PSHL depends upon its largest customers for a significant portion of
its sales revenue, and PSHL cannot be certain that sales to these customers will
continue. if sales to these customers do not continue, then PSHL's sales may
decline and our business may be negatively impacted.
PSHL currently supplies its high precision steel products to 12 major
customers in the domestic market. For the years ended June 30, 2004 and 2005,
sales revenues generated from the top five major customers amounted to 70% and
62% of total sales revenues respectively; and sales to the largest single
customer for the same periods amounted to 28% and 33% of total sales
respectively. PSHL 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 PSHL's sales revenue and business.
21
Defects in PSHL's products could impair PSHL's ability to sell its
products or could result in litigation and other significant costs.
Detection of any significant defects in PSHL'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 PSHL's reputation, or increased costs to correct such defects. Defects could
harm PSHL's reputation, which could result in significant costs to PSHL 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 PSHL'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 PSHL's products are currently manufactured at its existing
facilities located in the Jiading District in Shanghai, China. Two additional
production facilities comprised of 10,000 square meters and one administrative
building are under construction and are expected to be completed on or about
August 31, 2006. Fire fighting and disaster relief or assistance in China may
not be as developed as in Western countries. While PSHL 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 PSHL's financial condition, results of operations, business and prospects.
PSHL's board of directors has the ability to amend its memorandum and
articles of association, as well as the certificate of incorporation and bylaws
for China Precision Steel, Inc., without shareholder approval which could have
anti-takeover effects that could prevent a change in control.
As permitted by the law of the British Virgin Islands, PSHL's
Memorandum and Articles of Association, which are the terms used in the British
Virgin Islands for a corporation's articles of incorporation and bylaws, may be
amended by PSHL's Board of Directors without shareholders' approval. This
includes amendments to increase or reduce PSHL's authorized capital stock.
PSHL's Board of Directors' ability to amend its charter documents without
shareholders' approval could have the effect of delaying, deterring or
preventing a change in control of PSHL, including a tender offer to purchase
China Specialty Steel, Inc.'s common shares after the transaction at a premium
over the then current market price.
Judgments Against PSHL And Management May Be Difficult To Obtain Or
Enforce.
PSHL's principal executive offices are located in Jiading District,
Shanghai, PRC. Outside the United States, it may be difficult for investors to
enforce judgments obtained against PSHL in actions brought in the United States,
including actions predicated upon the civil liability provisions of federal
securities laws. In addition, most of PSHL'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 PSHL or these persons judgments predicated upon the liability provisions
of United States federal securities laws.
22
PSHL may not pay dividends in the future.
PSHL 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
PSHL 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.
PSHL's manufacturing facility is located in China. As of June 30, 2006,
all of PSHL's assets are located in China and all of its sales revenues are
generated in China and, accordingly, PSHL'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. Consequently, PSHL's
operations and assets are subject to significant political, economic, legal and
other 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
PSHL. 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 PSHL's business could be adversely affected. PSHL could even be
subject to the risk of nationalization, which could result in the total loss of
investment in that country. 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 PSHL. 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 PSHL's common stock.
All of PSHL's revenue is 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. 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 PSHL are 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.
23
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. PSHL'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 shares following the consummation of this transaction.
Future changes in the labor laws in the PRC may result in the continued
increase in labor costs.
PSHL has recently experienced an increase in the cost of labor. Any
future changes in the labor laws in China could result in PSHL 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 PSHL's business and
results of operations.
PSHL Directors, Officers and Key Employees
Wo Hing Li, Chairman
Mr. Wo Hing Li, age 59, has been the Chairman and Executive Director of
PSHL and its subsidiaries since their formation in July 2002. After the closing
of the reverse merger with OraLabs Holding Corp., he will assume the position of
Chairman and Executive Director of the Company. 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.
24
Hai Sheng Chen, General Manager, Senior Engineer
Mr. Hai Sheng Chen, age 43, is one of the founders of and has been the
General Manager of Chengtong since July 2002. After the Closing of the reverse
merger with OraLabs Holding Corp., Mr. Chen will serve as an Executive Director
and General Manager of the Company. 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
Ms. Leada Tak Tai Li, age 26, has been the Chief Financial Officer of
PSHL since October 2005. Ms. Li is responsible for overseeing the financial and
administrative matters of PSHL and after the Closing of the reverse merger with
OraLabs Holding Corp. will serve as Chief Financial Officer of the Company. 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.
Gou Di Lu, Assistant to General Manager
Mr. Gou Di Lu has been the Assistant to the General Manager of
Chengtong since July 2002. After the Closing of the reverse merger with OraLabs
Holding Corp., Mr. Lu will serve as the Deputy General Manager of the Company.
Mr. Lu served as Department Head of the Quality Control Department of Shanghai
Pudong Steel Group, Ltd. from November 1998 to July 2002. Mr. Lu holds a
Bachelor Degree in Business Administration from Shanghai No. 2 University of
Industry and a Bachelor Degree in metallic pressure processing from Shanghai
Metallurgical College.
See Proposal 8 for identification of persons who will serve as
additional directors of China Precision Steel, Inc. if the transactions
described in this Proxy Statement are consummated.
Involvement in Certain Legal Proceedings
During the past ten years, none of PSHL'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).
25
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.
--------------------------------------------------------------------------------------------------------------------
Long Term Compensation
Annual Compensation
--------------------------------------------------------------------------------------------------------------------
Name and Principal Position Restricted Securities
Stock Underlying
Fiscal Year Salary Bonuses Other Award Options
--------------------------------------------------------------------------------------------------------------------
Wo Hing Li, Chairman (2) 2006 $- $- $- -0- -0-
2005 $200,000 $- $- -0- -0-
2004 $200,000 $- $- -0- -0-
--------------------------------------------------------------------------------------------------------------------
Hai Sheng Chen, Director
and General Manager of 2006 $6,683 $- $- -0- -0-
Chengtong 2005 $6,522 $- $- -0- -0-
2004 $6,522 $- $- -0- -0-
--------------------------------------------------------------------------------------------------------------------
Leada Tak Tai Li, Chief
Financial Officer and 2006 $- $- $- -0- -0-
Controller of PSHL 2005 $- $- $- -0- -0-
(1)(2) 2004 $- $- $- -0- -0-
--------------------------------------------------------------------------------------------------------------------
Gou Di Lu, Assistant to the
General Manager of Chengtong 2006 $4,641 $- $- -0- -0-
2005 $4,348 $- $- -0- -0-
2004 $4,348 $- $- -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.
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.
Director Compensation
Except as set forth on the table above, there are no other arrangements
to compensate the current 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.
26
SUMMARY HISTORICAL FINANCIAL DATA FOR ORALABS
Set forth below are highlights from OraLabs Holding Corp. audited
historical consolidated financial statements and related notes as of and for
each of the years ended December 31, 2003 through 2005 and the unaudited
financial statements for the nine months ended September 30, 2006 and 2005.
OraLabs Holding Corp.'s consolidated financial statements as of, and for the
years ended, December 31, 2003 through 2004 were audited by Ehrhardt Keefe
Steiner & Hottman, PC., and for the year ended December 31, 2005 were audited by
GHP Horwath, P.C.
You should read the following information together with OraLabs Holding
Corp.'s consolidated financial statements, the notes related thereto and the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained in OraLabs Holding Corp.'s annual report on
Form 10-KSB for the fiscal year ended December 31, 2005 and the quarterly report
on Form 10-QSB for the quarter ended September 30, 2006, which are enclosed with
this Proxy Statement and have been filed with the SEC.
Nine Months Ended September Years Ended December 31
2006 2005 2005 2004 2003
(In Thousands - except per (In Thousands - except
share amounts) per share amounts)
Statement of Operations Data: (Unaudited)
Revenues 13,304 9,069 13,585 13,131 14,068
Expenses 11,882 9,364 13,497 14,042 14,284
Net Income/(Loss) 943 -19 94 (565) 1
Net Income/(Loss) available to Common 943 -19 94 (565) 1
Shareholders
Net Income/(Loss) per Common Share 0.20 * 0.02 (0.12) 0.00
Balance Sheet Data:
Cash and Cash Equivalents 1,204 731 1,834 866 2,561
Current Assets 7,628 5,681 6,617 6,059 7,539
Total Assets 9,711 7,622 8,655 7,773 8,405
Current Liabilities 1,660 1,327 2,101 1,357 1,611
Non-current Liabilities 65 7 7 12 66
Total Liabilities 1,725 1,334 2,108 1,369 1,677
Shareholder's Equity 7,986 6,288 6,547 6,404 6,727
*Less than $(.01)
SUMMARY HISTORICAL FINANCIAL DATA FOR PSHL
The following table sets forth selected consolidated financial data for
PSHL and its subsidiary as of and for each of the three years ended June 30,
2006. 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.
27
Fiscal Years Ended June 30
2006 2005 2004
----------------------- ---------------------- ----------------------
Statement of Operations Data:
Sales Revenue 34,881,141 53,144,601 17,417,005
Cost of Goods Sold 24,892,154 45,562,070 16,409,829
Net Income 8,259,684 6,366,441 198,776
Balance Sheet Data:
Cash and Equivalents 186,955 3,133,326 237,790
Current Assets 23,154,115 13,028,918 4,292,834
Total Assets 45,571,486 25,489,475 12,490,700
Current Liabilities 30,737,911 14,354,780 11,596,058
Non-current Liabilities 3,152,415 7,713,219 --
Total Shareholder's Equity 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 Partner Success
Holdings Limited and Subsidiary's historical consolidated statement of
operations data for the six months ended June 30, 2006 and the year ended
December 31, 2005, 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 June 30, 2006 for purposes of preparing the June 30,
2006 pro forma balance sheet and as of January 1, 2005 for purposes of preparing
the pro forma income statements for the six months and twelve months periods
ended June 30, 2006 and December 31, 2005 respectively.
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 OraLabs
and PSHL.
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 Proxy Statement,
the separate historical consolidated financial statements and accompanying notes
of OraLabs Holdings Corp. contained in this Proxy Statement and the historical
consolidated financial statements and accompanying notes of Partner Success
Holdings Limited and its Subsidiary contained in this Proxy Statement. See the
section below entitled "Where You Can Find More Information".
28
Six Months Ended Twelve Months Ended
June 30, 2006 December 31, 2005
Statement of Operations Data:
Sales Revenues 19,275,893 50,400,860
Cost of Good Sold 12,857,789 39,697,493
Net Income 2,801,952 9,503,841
Balance Sheet Data:
As of
June 30, 2006
Cash and Equivalents 586,955
Current Assets 23,554,115
Total Assets 45,971,486
Current Liabilities 31,137,911
Non-current Liabilities 3,152,415
Total Shareholder's Equity 11,681,160
PSHL'S MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Caution Regarding Forward-Looking Information
When used in this Proxy Statement, 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
Proxy Statement 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.
29
Introduction
The following discussion should be read in conjunction with our
consolidated audited financial statements and the related notes that appear
elsewhere in this Proxy Statement. 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 June 30, 2006 and
changes in its financial condition since June 30, 2005, the end of the prior
fiscal year. It also covers PSHL and its subsidiary's results of operation for
the fiscal years ended June 30, 2006 and June 30, 2005. The following discussion
and analysis should be read in conjunction with the financial statements and the
related notes included elsewhere in this Proxy Statement.
Plan of Operations
Partner Success 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 Proxy
Statement, PSHL refers collectively to Partner Success 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),
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, 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 1400mm mill and 1700mm 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.
The new production facility consists of two cold roll mills and
installation of the first mill - 1400mm cold roll mill was completed in August
2006. The installation of the second mill - 1700mm cold roll mill is expected to
be put into production by 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
machineries is estimated to be approximately $25 million. As of June 30, 2006,
capital expenditures totalling $13,752,954 had been recorded. The capital
expenditures already incurred on the new production facility and plant and
equipment for the 1400mm and 1700 mm mills were funded internally and through
two external bank borrowings of $8 million on October 14, 2004 and another loan
of $8.4 million on September 22, 2005 totaling $16.4 million.
30
After the closing of the reverse merger, PSHL intends to raise funds to
fund part of the cost of the new production facilites and working capital
requirements. If for any reason the proposed financing is not closed, PSHL
intends to use internally generated resources and external borrowings to fund
the remaining of the construction expenditure.
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:
o 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.
o 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%.
o 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.
o 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.
o 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.
o 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.
31
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 anticipated 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, was 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.
Liquidity and Capital Resources
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 increase of $500,881. This increase 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.
32
The following table lists PSHL's existing indebtedness as of June 30, 2006:
Bank Loan dates Interest rate Loan amount At Jun 30, 2006
---- ---------- ------------- ----------- ---------- ----
Agricultural Bank of China Oct 21, 2005 5.58% 1,248,439 1,248,439
Agricultural Bank of China Nov 11, 2005 5.58% 1,248,439 1,248,439
Agricultural Bank of China Dec 12, 2005 5.58% 1,747,815 1,747,815
Agricultural Bank of China May 19, 2006 5.58% 1,498,127 1,498,127
Raiffeisen Zentralbank Oct 14, 2004 3% on 10% p.a. of the 8,000,000 7,973,215
standard rate set by the
People's Bank of China
Raiffeisen Zentralbank Sep 22, 2005 15% p.a. over the standard 9,700,000 4,119,850
rate set by the People's
Bank of China
Raiffeisen Zentralbank Sep 22, 2005 15% p.a. over the standard 8,400,000 4,098,139
rate set by the People's
Bank of China
Other loan
Chen Hai Sheng January 2003 Non-interest bearing 419,101 419,101
As of June 30, 2006, the bank borrowings are secured as follows:
Loans from Agricultural Bank of China:
With respect of the local bank borrowings totaling $5,742,821, a
related company, Hainan Pharmacy Company Limited and the Bank entered into a
Loan Guarantee Agreement dated October 20, 2005 under which Hainan Sida agreed
to guarantee the short-term borrowings to a maximum guarantee amount of
$6,242,197 for a period of 1 year.
Loans from Raiffeisen Zentralbank:
In accordance with the terms and conditions of the Loan Guarantee
Agreement between the Company and Raiffeisen Zentralbank on October 14, 2004 and
September 22, 2005, plant and machinery at a value of $5,824,927 were pledged as
security to the Bank in respect of the short-term borrowings of $17,700,000 and
long-term borrowings of $8,400,000.
When PSHL and Raiffeisen Zentralbank entered into Loan Guarantee
Agreement dated October 14, 2004 and September 22, 2005, PSHL agreed to pledge
all of its equity holdings in Chengtong Precision as security for the borrowings
of $17,700,000 and long-term borrowings of $8,400,000 and a shareholder of PSHL
also agreed to pledge all of his 50,000 issued shares to secure a short-term
bank loan of $8,000,000 on October 14, 2004 and a long-term bank loan of
$8,400,000 on September 23, 2005. A deed of release was obtained on April 10,
2006 under which Raiffeisen Zentralbank agreed to release all the previously
pledged registered capital in Chengtong Precision and shares in PSHL.
33
Contractual Obligations
The following table is a summary of PSHL's contractual obligations as
of June 30, 2006:
Payments Due by Period
Contractual Obligations Total Less than 1 Year 2-3 Years 4-5 Years
----------------------- ------------- ------------- ---------- ----------
Notes payable $ 17,835,886 $ 17,835,886 $ - $ -
Long-term debt 4,098,139 945,724 2,521,928 630,487
Purchase obligation for
construction projects 6,154,276 6,154,276 - -
------------- ------------- ---------- ----------
$ 28,088,301 $ 24,935,886 $2,521,928 $ 630,487
============= ============= ========== ==========
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:
o Sales volume increased due to increasing sales orders from many
existing customers and new customers introduced by the company's sales
representatives.
o 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.
o 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.
o 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.
o 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.
o 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.
34
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 used in operating activities for the year ended June 30,
2005, was $147,735 compared with $1,791,511 provided by operations for the year
ended June 30, 2004, for a net decrease of $1,939,246. 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 $3,249,967 for the year ended June 30, 2004.
The increase in investment activity of $1,583,034 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 $1,613,163 for the year ended June 30,
2004. The increase of $6,263,109 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.
35
INFORMATION CONCERNING THE ANNUAL MEETING
Time, Place and Date
This Proxy Statement is furnished in connection with the solicitation
by the Board of Directors of proxies from OraLabs shareholders for use at the
annual meeting of shareholders to be held at 10:00 a.m., Mountain Time on
December 27, 2006, at OraLabs' offices at 18685 E. Plaza Drive, Parker, Colorado
80134, or at any adjournment or postponement thereof, pursuant to the enclosed
Notice of Annual Meeting of Shareholders.
Purpose of the Annual Meeting
At the annual meeting, the shareholders of OraLabs will be asked to
consider and vote upon the approval of the Exchange Agreement and the
transactions contemplated thereby. A copy of the Exchange Agreement, as amended,
is attached to this Proxy Statement as Annex 1. Based on the factors described
below under "Special Factors--Recommendation of the Special Committee and Board
of Directors" and on the unanimous recommendation of its Special Committee, the
Board of Directors of OraLabs recommends that shareholders vote "FOR" approval
of the Exchange Agreement and the transactions contemplated thereby.
Record Date; Voting at the Meeting; Quorum
The Board has fixed the close of business on October 27, 2006 as the
record date for the annual meeting. Only shareholders of record as of the close
of business on the record date will be entitled to notice of and to vote at the
annual meeting. As of the close of business on the record date, OraLabs had
outstanding 4,848,265 shares of its common stock, held of record by
approximately 869 registered holders, although OraLabs believes it has other
beneficial owners of its common stock. Holders of the common stock are entitled
to one vote per share. The presence in person or by proxy of the holders of not
less than a majority of the voting power of the outstanding common stock
entitled to vote at the annual meeting constitutes a quorum. Broker non-votes
and shares present or represented but as to which a shareholder abstains from
voting will be included in determining whether there is a quorum at the annual
meeting.
Required Vote
Under Colorado law and the Company's governing documents, the
transaction concerning the conveyance to Mr. Schlatter of all of OraLabs' shares
in OraLabs, Inc. in exchange for the redemption by OraLabs of all of the shares
of common stock in OraLabs owned by Mr. Schlatter requires the affirmative vote
of the majority of all of the shares entitled to vote on the matter. The
remaining proposed transactions require the affirmative vote of a majority of
the votes cast at the annual meeting. The proposed transactions are not
structured so that approval of at least a majority of unaffiliated shareholders
is required. Gary H. Schlatter currently owns 3,629,350 shares of common stock
of OraLabs in his individual capacity, representing approximately 77% of our
outstanding shares of common stock as of the record date. Mr. Schlatter has
entered into a voting agreement pursuant to which he has agreed to vote in favor
of the proposals, which would satisfy both the quorum and affirmative vote
requirements. Robert C. Gust, a director, intends to vote his 11,000 shares in
favor of the transactions. As Mr. Schlatter owns more than fifty percent (50%)
of the voting power, OraLabs is considered a "Controlled Company" for purposes
of Rule 4350(c)(5) promulgated by the National Association of Securities
Dealers, Inc.
36
Voting and Revocation of Proxies
The enclosed proxy is solicited on behalf of OraLabs' Board of
Directors. The giving of a proxy does not preclude the right to vote in person
should any shareholder giving the proxy so desire. Shareholders have an
unconditional right to revoke their proxy at any time prior to its exercise,
either by filing with OraLabs' secretary at OraLabs' principal executive offices
a written revocation or a duly executed proxy bearing a later date or by voting
in person at the annual meeting. Attendance at the annual meeting without
casting a ballot will not, by itself, constitute revocation of a proxy. Any
written notice revoking a proxy should be sent to Corporate Stock Transfer,
Inc., 3200 Cherry Creek So. Drive, Suite 430, Denver, CO 80209.
Action to be Taken at the Annual Meeting
All shares of common stock represented at the annual meeting by
properly executed proxies received prior to or at the annual meeting, unless
previously revoked, will be voted at the annual meeting in accordance with the
instructions on the proxies. Unless contrary instructions are indicated, proxies
will be voted FOR the approval of the Exchange Agreement and the transactions
contemplated thereby. OraLabs does not know of any matters, other than as
described in the Notice of Annual Meeting of Shareholders, which are to come
before the annual meeting. If any other matters are properly presented at the
annual meeting for action, the persons named in the enclosed proxy card and
acting thereunder generally will have discretion to vote on such matters in
accordance with their best judgment. Pursuant to our bylaws, an adjournment of
the annual meeting may be made by an announcement made at the annual meeting
prior to adjournment. We do not anticipate an adjournment of the meeting.
Proxy Solicitation
OraLabs is requesting that banks, brokers and other custodians,
nominees and fiduciaries forward copies of the proxy material to their
principals and request authority for the execution of proxies. OraLabs may
reimburse such persons for their expenses in so doing. No person is authorized
to give any information or make any representation not contained in this Proxy
Statement, and if given or made, such information or representation should not
be relied upon as having been authorized. OraLabs shareholders should not send
any certificates representing shares of common stock with their proxy card.
SPECIAL FACTORS
Background of the Proposed Transactions
OraLabs, Inc., the operating subsidiary ("Subsidiary") of OraLabs,
began its business in 1990. Gary H. Schlatter, President of OraLabs, was the
sole owner of the Subsidiary until 1997. In 1997, Mr. Schlatter made the
decision that it would be beneficial for the Subsidiary to operate as a public
company because of his beliefs that it would facilitate the use of public stock
to finance the growth of OraLabs, that he would have a mechanism such as a stock
option plan to facilitate giving his employees an ownership interest in OraLabs
with the opportunity to profit by a rising stock price, and that he would have
some liquidity with respect to his ownership of the Company. In that year,
OraLabs, Inc. completed a reverse merger under which it became the wholly-owned
operating subsidiary of a public company whose name was changed to OraLabs
Holding Corp.
After several years of being public, Mr. Schlatter determined that
operating the Subsidiary as part of a public company did not achieve the
benefits that he sought. As part of investigating transactions from time to time
for which Mr. Schlatter sought to use public stock as part of the payment
consideration, Mr. Schlatter found that due to his overwhelming percentage of
stock owned, third parties were treating OraLabs as if it were still a private
company without any premium for the fact that it was public. Mr. Schlatter did
not obtain the interest of the investment community in OraLabs and as a result,
the price of its stock drifted lower and the volume of shares traded remained so
low that there was very little liquidity.
37
In early 2001, one of the non-employee directors of OraLabs was
presented with a proposal concerning a company that was interested in becoming
public through a reverse merger. The business of that company was unrelated to
the Subsidiary's business. The non-employee directors of OraLabs considered the
proposal and discussed with Mr. Schlatter whether he would be interested in
pursuing the transaction under which his shares in OraLabs would be exchanged
for OraLabs' shares in the Subsidiary, contingent upon the simultaneous
acquisition by OraLabs of the other company. Mr. Schlatter said that he would be
interested in considering that type of transaction. The non-employee directors
of OraLabs continued discussions with Mr. Schlatter as well as with the other
company, which resulted in the other company's tender to OraLabs of a
non-binding letter of intent concerning the transactions. The Board (with Mr.
Schlatter abstaining) authorized the execution of the letter of intent, but
despite the efforts of the non-employee directors during the next couple of
months to move the transaction toward the preparation of a definitive agreement,
the other company changed its mind about proceeding with the transaction and the
discussions between the parties terminated.
As a result of Mr. Schlatter's consideration of that proposal and
because of the concurrence by the non-employee directors with Mr. Schlatter's
belief that the operations of the Subsidiary as a public company were not
providing material benefits to the OraLabs' shareholders, OraLabs continued to
be receptive to reorganization transactions with third parties that could
enhance the public shareholders' value. The non-employee directors sought such
transactions by directly contacting business associates who could have knowledge
of such opportunities as well as by placing ads from time to time in the Wall
Street Journal.
In May 2001, OraLabs received a letter of intent from another company
that followed some very preliminary discussions with the non-employee directors
of OraLabs. However, the non-employee directors believed that execution of a
letter of intent was premature. Mr. Friess, one of the non-employee directors,
was authorized to continue discussions with the company and determine in his
discretion whether or not to recommend that a letter of intent be executed. Mr.
Friess ultimately concluded that it was not in the interest of OraLabs to
proceed with that transaction, and negotiations terminated.
No material discussions about proposed transactions occurred for some
time after that. In the Spring of 2002, the directors took note of the fact that
the costs of operating as a public company, which were significant in relation
to the size of OraLabs and which included both the legal fees involved in
OraLabs' public reporting and compliance as well as the auditing fees, could be
expected to substantially increase as the result of pending legislation that
ultimately was adopted as the Sarbanes-Oxley Act. At that time the Board
appointed Messrs. Friess and Gust as a special committee to evaluate any
proposals that may be presented to the Company with respect to a corporate
reorganization.
In the late Spring and Summer of 2002, a proposed reverse merger was
reviewed by the independent committee. A Memorandum of Understanding and a
Non-disclosure Agreement were executed by Mr. Friess based upon the
recommendation of the Special Committee and the authorization of the Board of
Directors. The Memorandum was subject to customary conditions as well as the
agreement that it was nonbinding and that an acceptable agreement was required
to be reached between OraLabs and Mr. Schlatter concerning the transaction.
After the execution of the Memorandum of Understanding, the Special Committee
retained separate counsel to assist it in the negotiation of a definitive
agreement. However, as a result of various issues that arose between OraLabs and
the other company during the course of negotiating the definitive agreement, the
negotiations became protracted to the extent that OraLabs' Board of Directors,
upon the recommendation of the Special Committee, terminated the negotiations in
the early Fall of 2002.
38
In late 2002, Mr. Friess, acting on behalf of the Special Committee,
advised the OraLabs Board of Directors that he had had discussions during the
past several weeks with two separate companies who were interested in pursuing a
reorganization with OraLabs. He presented information about both companies and
their proposed transactions, and the Board of Directors recommended that he
proceed with one of the company's proposal. In early 2003, the Special Committee
and Mr. Schlatter each retained separate legal counsel to assist in the
negotiations of a definitive agreement. Mr. Friess also made preliminary contact
with companies engaged in the business of providing fairness opinions so that
one could be chosen if a definitive agreement were executed. At and about the
same time, negotiations continued concerning a definitive agreement,
specifically including the effect, if any, that OraLabs' loss of its NASDAQ
listing might have upon the transaction. This discussion was prompted by the
price of OraLabs' common stock falling below one dollar and the value of the
public float of the Company's common stock falling below the NASDAQ listing
requirement. (During the period from August 2002 to late 2003, the NASD sent
several notices to OraLabs that its common stock was subject to delisting from
the NASDAQ Capital Market.
During the next several months, issues arose that caused revisions to
be made in the proposed terms of the definitive agreement, mostly relating to
the financial performance of the other company. The Special Committee
recommended to the Board that various terms of the definitive agreement should
be renegotiated to take account of those issues. Finally, in October 2003,
because all conditions to the execution and delivery of a definitive agreement
still were not satisfied, the Board of Directors, upon the recommendation of the
Special Committee, terminated the negotiations between the parties.
Commencing in late 2003 and continuing sporadically throughout 2004, a
representative of various companies located in China presented information to
the non-employee directors about companies that OraLabs might consider for
purposes of a corporate reorganization. As information was presented to OraLabs
from time to time about the companies, the directors requested additional
information when they believed it was appropriate to pursue investigating a
company, but none of these discussions proceeded beyond the preliminary
investigation level. In October 2004, a financial summary and brief description
of NVC Lighting Holdings Limited ("NVC") was presented to OraLabs. After
meetings between various representatives of NVC and representatives of OraLabs,
and the exchange of certain preliminary information, a letter of intent was
executed on December 27, 2004. After negotiations between NVC representatives
and the OraLabs Special Committee, a Stock Exchange Agreement was entered into
between NVC and OraLabs on February 18, 2005. OraLabs filed a Preliminary Proxy
Statement with the Securities and Exchange Commission on August 12, 2005. The
parties were in the process of responding to comments from the staff of the SEC
when NVC advised OraLabs on November 9, 2005 that it was terminating the Stock
Exchange Agreement.
A couple of weeks later, Gary Schlatter was planning a business trip to
China on other OraLabs business unrelated to NVC. On November 29, 2005, Mr.
Schlatter wrote to Mr. Henny Wee, who on behalf of Henny Wee & Co. had acted as
NVC's accounting firm, to ask whether NVC might be having second thoughts about
terminating its transaction with OraLabs and whether it would serve any useful
purpose to schedule a meeting with the directors of NVC. Mr. Wee forwarded Mr.
Schlatter's e-mail to Ms. Tracy Hung Wan, a representative of Belmont Capital
Group Limited ("Belmont") who had acted as NVC's consultant in connection with
its proposed transaction with OraLabs. Mr. Wee advised Mr. Schlatter that NVC
had determined to proceed differently, and that a proposed meeting with NVC
would not serve any useful purpose. In addition, he suggested to Mr. Schlatter
that another company, referred by Mr. Eddie Wong, may be interested in pursuing
a transaction with OraLabs. Mr. Wong has been a director of Belmont since August
2001. In September 2005, Mr. Wong became aware that PSHL was interested in
pursuing a listing in the United States by way of a reverse merger. Mr. Wong
then arranged an introductory meeting between Belmont and representatives of
PSHL. Several other meetings occurred between representatives of PSHL and
Belmont between September and November 2005.
39
In November 2005, Belmont entered into a Consulting Agreement (the
"Belmont Consulting Agreement") with PSHL whereby Belmont would assist PSHL in
the preparation for and the acquisition of a U.S. publicly-listed shell company
on the over-the-counter bulletin board or on the NASDAQ for the purpose of
conducting a reverse merger as well as assist PSHL in raising capital (the "PSHL
Financing"). Pursuant to the Belmont Consulting Agreement, Belmont may also
provide additional option services to PSHL. Pursuant to the Belmont Consulting
Agreement, Belmont is to be paid $400,000 upon completion of the first tranche
of the PSHL Financing. Belmont is also entitled to 8% of the equity in the
merged entity, which amount will not be diluted in the PSHL Financing. Further,
Belmont is entitled to 50% of the difference between the negotiated actual
dilution with the existing shareholders of the merged entity and 10%. If PSHL
fails to raise $20,000,000 in the PSHL Financing, Belmont's equity in the merged
entity shall be reduced by 2%. If PSHL raises $30,000,000 or more in the PSHL
Financing, Belmont is entitled to 10% of the equity in the merged entity.
Pursuant to the Belmont Consulting Agreement, Belmont is to be paid a 2%
commission of the capital raised by PSHL Financing. Further, pursuant to the
Belmont Consulting Agreement, PSHL has agreed to grant Belmont a three-year
option (the "Belmont Option") to invest up to $2,000,000 in PSHL at the initial
valuation used in the PSHL Financing. The Belmont Option has piggy back
registration rights and may be extended for an additional year upon the written
request of Belmont and the written consent of the merged entities board of
directors, which consent shall not be unreasonably withheld. If PSHL terminates
the Belmont Consulting Agreement prior to the closing of the reverse merger,
PSHL is required to pay Belmont $100,000. If PSHL terminates the Belmont
Consulting Agreement after the closing of a reverse merger, PSHL is required to
pay Belmont $400,000 and the full amount of equity in the Company. As
compensation for his efforts in bringing the consulting business to Belmont and
for on-going liaison services that he will have to render between Belmont and
PSHL, Belmont agreed to pay a referral fee to Mr. Eddie Wong's personal
investment and service company, Edwon Inc.
A few days after Mr. Wee mentioned another company to Mr. Schlatter,
Mr. Wee provided some preliminary, approximate summary financial information
about it. On December 2, 2005, Mr. Schlatter met with Mr. Wee and Ms. Wan in
Hong Kong, which was followed by a meeting in China on December 3, 2005 between
Mr. Schlatter, Mr. Wo Hing Li, the President of PSHL, and Ms. Leada Li. After
the December 3, 2005 meeting, information was received by OraLabs from Belmont
to determine if a potential business combination would be considered advisable
by the parties. The OraLabs' Board of Directors reaffirmed the designation of
the Special Committee to play the primary role in negotiating the terms of any
proposed transaction with PSHL. While the Special Committee relied upon Mr.
Schlatter's personal introduction to representatives of PSHL and his physical
viewing of PSHL's facilities, the Special Committee conducted substantially all
of the additional due diligence with particular emphasis on PSHL's financial
condition and performance. During the remainder of December and beginning of
January, the Special Committee devoted time to reviewing PSHL financial
statements, obtaining information from PSHL about its historical and expected
financial performance, discussing with PSHL a structure by which PSHL could
obtain control of the public company and operate the PSHL business as part of
the public company without operating any of the OraLabs business, and
negotiating the ownership percentages to be retained by OraLabs shareholders and
to be issued to PSHL shareholders or designees. Ultimately, based upon both Mr.
Schlatter's tour of PSHL's facilities and the information received by the
Special Committee, a non-binding letter of intent was executed by the parties as
of January 9, 2006. Among its non-binding provisions, the letter of intent
provided for a 94%-6% split of ownership percentages, a due diligence period for
both parties, that the financial statements of PSHL would be subject to the
satisfaction of OraLabs, and that either party would have the right to terminate
a definitive agreement if it were not satisfied with the results of its due
diligence. OraLabs proposed that the public company issue 94 percent control on
a fully-diluted basis to PSHL shareholders or designees after comparing OraLabs'
flat revenue growth during the previous years and the anticipated breakeven
income for 2005 that followed a large loss in 2004, to PSHL's significant
revenue growth from 2004 to 2005 and its substantial net income. In addition,
OraLabs took into account that PSHL's status as a significantly larger business
than OraLabs could be expected to allow PSHL to enjoy benefits of being a public
company that had eluded OraLabs, and to provide for greater liquidity on a
regular basis for its shareholders than had been the case for OraLabs. PSHL
agreed that the 94%-6% split was a fair apportionment of ownership.
40
The parties began the negotiations of a definitive agreement shortly
after the letter of intent was executed. The negotiations extended over a period
of approximately two and one-half months, during which numerous redrafts of an
agreement were circulated among the parties and their counsel. Neither PSHL nor
the Special Committee required that unaffiliated shareholders of the Company
should have a separate vote to approve or disapprove the proposed transactions.
The Special Committee believed that because the Closing would be conditioned
upon the receipt of a fairness opinion from a third party, such a vote was not
necessary. After the letter of intent was signed, the Special Committee made
preliminary contacts with Capitalink, L.C., the firm who had been retained to
render a fairness opinion with respect to the previous transaction between
OraLabs and NVC, to discuss whether it would be available to provide the same
services with respect to the PSHL transaction. The Special Committee retained
independent legal counsel and Capitalink, L.C., as its advisors with respect to
the transactions. The Board of Directors of the Company requested the Company's
counsel to continue to represent the Company with respect to the transactions.
As noted above, PSHL had no interest in operating any of the business
of OraLabs that is now being conducted by the subsidiary, OraLabs, Inc. PSHL was
not seeking to acquire any cash as a part of the proposed transactions, and was
interested in minimizing the number of shares to be held by OraLabs shareholders
upon completion of the closing so as to minimize the total number of shares
outstanding after 94 percent control is issued to PSHL. To accomplish this, the
parties agreed that the public company would acquire Mr. Schlatter's shares at
closing and transfer to him all of the public company's shares in its operating
subsidiary. As a result, Mr. Schlatter will become the 100 percent owner of
OraLabs, Inc. as he was prior to it becoming public.
Ultimately, the Stock Exchange Agreement (attached to this Proxy
Statement as Annex 1) was signed as of March 31, 2006. After the Stock Exchange
Agreement was executed, discussion arose about potential tax liability to the
public company with respect to the acquisition of Mr. Schlatter's shares in
exchange for the transfer to him of ownership of the Company's subsidiary, which
resulted in the negotiation of an agreement about the terms of a tax indemnity
that is included in the First Amendment to the Exchange Agreement (see "Exchange
Agreement-Tax Indemnity").
After execution of the Stock Exchange Agreement, the Special Committee
engaged Capitalink to render a fairness opinion with respect to the PSHL
transaction. Capitalink is a nationally recognized investment banking and
advisory firm. Capitalink, as part of its investment banking and financial
advisory business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers, acquisitions and private placements. The
June 15, 2006 engagement letter with Capitalink provides for a negotiated fixed
fee in the amount of $50,000, with $25,000 payable at commencement of the
engagement and the balance payable upon completion of the engagement and
delivery of the opinion. An additional $10,000 is payable if Capitalink is
requested to perform an evaluation of OraLabs, Inc. as of the Closing Date. The
fee is payable without regard to the conclusions reached in the opinion. Under
the engagement letter, the Company also agreed to reimburse Capitalink for its
reasonable and customary out-of-pocket expenses related to the work, and to
indemnify Capitalink against certain losses or claims. Capitalink has consented
to the inclusion of the description of its engagement in this Proxy Statement
and has also approved the inclusion of the opinion as an annex to this Proxy
Statement. There is no material relationship that existed during the past two
years or that is contemplated between Capitalink and OraLabs, PSHL or any of
their affiliates, except for the rendering of its opinion in connection with the
proposed transactions and its services provided in connection with the NVC
transaction described above.
41
Recommendation of the Special Committee and Board of Directors; Fairness of the
Proposed Transactions
Special Committee
In recommending approval of the Exchange Agreement and the proposed
transactions to the full OraLabs' Board of Directors in late March 2006, the
Special Committee considered a number of factors. The material factors, both
negative and positive are summarized below.
The material positive factors considered include: the nonaffiliated
shareholders of OraLabs will own an interest in PSHL, a much larger company that
has exhibited recent growth that exceeds the financial results of OraLabs; the
larger size of PSHL may result in more exposure to the financial marketplace
than is the case with OraLabs, possibly enhancing the liquidity of an investment
in the Company over that which has historically been the case with OraLabs; the
presentation and opinion of Capitalink as to the fairness, from a financial
point of view, of the transaction to the nonaffiliated shareholders; OraLabs has
generated very little net income since fiscal year 2002; and OraLabs has not
received material benefits of being a public company, while it has borne the
financial and personnel burden of operating as a public company.
The material potential negative factors considered include: the
ownership of the nonaffiliated shareholders in the public company will be
significantly diluted from their current 22.8% ownership interest to
approximately a 4.1% interest in the Company; all of the directors of OraLabs
have an interest in closing the transactions, in that (i) Mr. Schlatter will
acquire sole ownership of OraLabs, Inc., (ii) the two non-employee directors
will be issued a total of 300,000 shares of common stock immediately prior to
the Closing (approximately 1.1% of the number of shares to be outstanding after
completion of the proposed transactions), (iii) OraLabs, Inc. will purchase up
to 100,000 shares of common stock to satisfy an indemnity obligation and (iv)
shareholders of the public company will have no further interest or opportunity
to participate in any growth of OraLabs, Inc., should it occur after the
closing, while Mr. Schlatter will receive all of such benefits as the sole owner
of OraLabs, Inc.
As part of its consideration, the Special Committee recognized the
possibility that the shares of the Company would be delisted from the NASDAQ
Capital Market, although PSHL believes that it will qualify for continued
listing. The Special Committee believed that because of the financial
performance of OraLabs, the historical small volume of shares traded and the
treatment of OraLabs by others as essentially a private company due in part to
Mr. Schlatter's sizeable share ownership, the loss of the NASDAQ Capital Market
listing would not be materially adverse to the public shareholders of Company.
The Special Committee also believed that, if the Company's common stock is
delisted upon the occurrence of the Closing, the Company could have the
opportunity of restoring the listing on the NASDAQ Capital Market at some time
after the Closing if the financial performance of PSHL and the trading of the
common stock based upon the PSHL business would support the listing.
The Special Committee also considered that, subject to approval and
consummation of the transactions contemplated by the Exchange Agreement, the
authorized capital of the Company would be increased to consist of 62,000,000
shares of common stock, par value $.001 per share, and 8,000,000 shares of
preferred stock, par value $.001 per share. The Special Committee believed that
PSHL should have the flexibility to issue additional shares to support its
future business activities, and that subsequent dilution from the issuance of
42
additional shares would apply equally to the PSHL shareholders and the
nonaffiliated shareholders. In addition, the Special Committee considered the
position of PSHL that it did not want OraLabs to require a separate affirmative
vote of its unaffiliated shareholders, but rather wanted to proceed on the basis
that the results of the vote would be assured as a result of Mr. Schlatter
voting in favor of the proposed transactions. The Special Committee believed
that as a result of the history of OraLabs' net income ($1,480,058 in 2001,
$431,911 in 2002, $1,222 in 2003, a loss of $565,108 in 2004, with income of
only $93,992 in 2005), the continuing increase in costs incurred by OraLabs by
reason of being a public company, the relatively small percentage of shares of
OraLabs owned by the nonaffiliated shareholders, and the anticipated receipt of
a fairness opinion with respect to the transaction, this PSHL requirement was
reasonable.
The Special Committee believed that a structure under which 94 percent
control of the public company would be issued to the PSHL Shareholders was a
suitable structure to accomplish PSHL's goal of being a publicly-listed company
in the United States with the Special Committee's goal of maintaining or
improving the value of the interest held by the unaffiliated shareholders in a
larger company that may attract greater interest by the investment community and
that may product better long-term financial results than would be expected of
OraLabs. The Special Committee did not seek to create a structure (such as an
issuer tender offer) under which the unaffiliated shareholders could elect cash
as part of the transaction, as Mr. Schlatter was unwilling to use cash from the
subsidiary's operations that would be necessary for the continued operations of
the subsidiary as a private company, and the Special Committee did not believe
that such a structure would be necessary to make the transactions fair to the
unaffiliated shareholders from a financial point of view.
The foregoing discussion of the information and factors considered by
the Special Committee is not meant to be exhaustive, but includes all material
factors, both positive and negative, considered by the Special Committee to
support its decision to recommend the approval of the Exchange Agreement and to
determine that the transactions contemplated thereby are in the best interest of
OraLabs and fair to OraLabs' nonaffiliated shareholders. The Special Committee
did not assign relative weights or other quantifiable values to the above
factors. Rather, the Special Committee viewed its position and recommendations
as being based on the totality of the information presented to and considered by
them, and that on balance, the positive factors discussed above outweighed the
negative factors discussed above. The Special Committee believes that the terms
of the Exchange Agreement are fair, in part based on the opinion of Capitalink
as to the fairness, from a financial point of view, of the proposed
transactions. The Special Committee also believes the process that followed in
approving the Exchange Agreement was procedurally fair because, even though
additional compensation will be paid to the non-employee directors at Closing
and an unaffiliated representative was not retained to act solely on behalf of
unaffiliated shareholders for purposes of negotiating the transactions, the
Special Committee retained independent legal and financial advisors that
assisted it in its evaluation of the Exchange Agreement.
OraLabs Board of Directors
The Board formed the Special Committee to act solely on behalf of the
nonaffiliated shareholders of OraLabs for purposes of considering and
negotiating the Exchange Agreement and related matters. The Board appointed
Messrs. Friess and Gust to the Special Committee. Mr. Friess has been a director
of OraLabs since 1997 and Mr. Gust has been a director since 2000. After
formation of the Special Committee, the Special Committee retained Capitalink as
its financial advisor and Capitalink provided its opinion to the Special
Committee as to the fairness from a financial point of view of the proposed
transactions to OraLabs' nonaffiliated shareholders as of July 19, 2006 subject
to the limitations, assumptions and qualifications stated therein.
43
The Board reviewed each of the factors presented by the Special
Committee as described above and considered the Special Committee's process and
actions in arriving at its recommendation to the Board. In reaching its
determination, the Board considered the Special Committee's determinations,
recommendations, approval of the Exchange Agreement, and determination of the
Exchange Agreement's advisability. It also carefully considered the report and
fairness opinion delivered by Capitalink to the Special Committee.
OraLabs is undertaking the transaction with PSHL at this time as a
result of the Special Committee's consideration of the factors outlined above
relating to the limitations on OraLabs' growth as a public company, its
financial performance, the long-standing concerns of the entire Board (including
the Special Committee) regarding the historical low price and illiquidity of
OraLabs' common stock, and the weakness in the market for its stock. OraLabs is
also undertaking the transaction at this time because it is straining its
financial and personnel resources to: (1) continue to comply on a timely basis
with its periodic reporting requirements under the Securities Exchange Act of
1934; and (2) comply with the requirements of the Sarbanes-Oxley Act of 2002. In
this regard, OraLabs estimates that the annual expenses it pays in connection
with its public reporting responsibilities exceeds approximately $192,000.00.
These expenses include fees of an outside accountant, annual audit and quarterly
review fees of its independent auditor, directors fees, stock transfer fees,
legal fees, and filing costs.
The Board believes that sufficient procedural safeguards to ensure
fairness of the transaction and to permit the Special Committee to effectively
represent the interests of the holders of OraLabs' nonaffiliated shareholders
were present. The Board recognized that the members of the Special Committee
will benefit by the issuance to one of them of 100,000 shares and to the other
of 200,000 shares of OraLabs common stock. The Board believes that the issuances
of the stock are reasonable and appropriate under the circumstances because the
directors are very active in analyzing and pursuing the PSHL transaction and
because of their service on the Special Committee for the PSHL transaction.
Those 300,000 shares (approximately 1.1% of the number of shares to be
outstanding after completion of the proposed transactions) will be issued under
the 2006 Director Stock Plan to be approved by the shareholders and will be
registered under a Registration Statement on Form S-8 to be filed by OraLabs
with the SEC prior to Closing (see, "Proposal 3"). The 300,000 shares are
separate and apart from shares that may be issued under the proposed 2006
Omnibus Long-Term Incentive Plan that is also being presented to shareholders
for approval. In addition it is expected that Oralabs, Inc. will purchase up to
100,000 shares (approximately 0.4% of the number of shares to be outstanding
after completion of the proposed transactions) of common stock of the Company as
part of the Closing, in order to provide funds to the Company with respect to an
estimated income tax liability arising out of the closing of the transactions
(see "Exchange Agreement - The Stock Exchange"). The Board otherwise believes
that the procedural safeguards of the Special Committee are sufficient because
the Special Committee retained independent financial advisors and legal counsel
and the fact that the Special Committee, even though consisting of directors of
OraLabs, is a mechanism well-recognized under corporate law to provide for
fairness in transactions of this type. The Exchange Agreement was approved by
the two members of the Special Committee. OraLabs does not believe that any
material federal or state regulatory approvals, filings or notices are required
by OraLabs in connection with the proposed transactions, other than such
clearances, approvals, filings or notices required pursuant to federal and state
securities laws.
The Board believes that the proposed transactions are advisable, and
are fair to and in the best interests of OraLabs and its nonaffiliated
shareholders and, based upon the analysis and the opinion of the Special
Committee's financial advisor as set forth above (which the Board adopted) and
on the recommendation of the Special Committee, recommends to OraLabs'
nonaffiliated shareholders that they vote FOR approval of the proposed agreement
transactions.
44
Benefits and Detriments of the Proposed Transactions to OraLabs' Nonaffiliated
Shareholders
OraLabs believes that the primary benefit of the proposed transactions
to its nonaffiliated shareholders is the possibility of a future increase in the
value of their investments in the public company as a result of their ownership
in a company whose business is significantly larger than that of OraLabs and
whose prospects for growth may exceed that which is expected of OraLabs' current
business. The primary detriments of the proposed transactions to OraLabs'
nonaffiliated shareholders are that such shareholders will cease to participate
in any future earnings of OraLabs, Inc. or to benefit from any increase in its
value, they will sustain considerable dilution upon closing of the transactions,
there are significant risks to PSHL's business operations (see, "PSHL
Business-Risk Factors"), and operations of a business in China as opposed to in
the United States is subject to very different laws, regulations and policies.
Opinion of Financial Advisor to the Special Committee of the Board of Directors
The Special Committee of the Board of Directors engaged Capitalink,
L.C. ("Capitalink") to provide financial advisory services to the Special
Committee with its consideration of the transactions contemplated by the Stock
Exchange Agreement, as amended (the "Transaction"). Pursuant to its engagement,
Capitalink made a presentation to the Special Committee on July 19, 2006.
Capitalink subsequently delivered its written opinion to the Independent
Committee, which stated that, as of July 19, 2006, and based upon and subject to
the assumptions made, matters considered, and limitations on its review as set
forth in the opinion, the Transaction is fair, from a financial point of view,
to OraLabs' nonaffiliated shareholders. All figures in this section are as of
July 19, 2006 unless otherwise stated. The full text of the written opinion of
Capitalink is attached as Annex 2 and is incorporated by reference into this
Proxy Statement.
o You are urged to read the Capitalink opinion carefully and in its entirety
for a description of the assumptions made, matters considered, procedures
followed and limitations on the review undertaken by Capitalink in
rendering its opinion.
o The Capitalink opinion is not intended to be, and does not constitute, a
recommendation to you as to how you should proceed with respect to the
Transaction.
Capitalink was not requested to opine as to, and the opinion does not
in any manner address, the relative merits of the Transaction as compared to any
alternative business strategy that might exist for OraLabs, OraLabs' underlying
business decision to proceed with or effect the Transaction, and other
alternatives to the Transaction that might exist for OraLabs.
In arriving at its opinion, Capitalink took into account an assessment
of general economic, market and financial conditions, as well as its experience
in connection with similar transactions and securities valuations generally. In
so doing, among other things, Capitalink:
o Reviewed the Exchange Agreement.
o Reviewed publicly available financial information and other data with
respect to OraLabs, including the Annual Report on Form 10-KSB for the year
ended December 31, 2005, the Quarterly Report on Form 10-QSB for the three
months ended March 31, 2006, the Current Report on Form 8-K filed April 6,
2006.
o Reviewed non-public information and other data with respect to OraLabs,
including various internal financial management reports.
45
o Reviewed financial information and other data with respect to PSHL,
including the audited financial report for the two years ended June 30,
2005, management-prepared financial statements for the nine months ended
March 31, 2006, and the Business Memorandum dated April 2006 prepared by
Belmont Capital Group.
o Reviewed the Transaction's pro forma impact on OraLabs' securities
outstanding and nonaffiliated shareholders' ownership interest in OraLabs.
o Considered the historical financial results and present financial condition
of OraLabs and PSHL.
o Reviewed and compared the trading of, and the market for, the common stock
of OraLabs.
o Reviewed and compared the OraLabs nonaffiliated shareholders' aggregate
indicated value on a pre-Transaction basis to the nonaffiliated
shareholders' aggregate indicated value on a post-Transaction basis.
o Reviewed and analyzed certain financial characteristics of publicly-traded
companies that were deemed to have characteristics comparable to each of
OraLabs and PSHL.
o Reviewed and analyzed certain financial characteristics of target companies
in transactions where such target company was deemed to have
characteristics comparable to those of each of OraLabs and PSHL.
o Reviewed and analyzed PSHL's projected unlevered free cash flows and
prepared a discounted cash flow analysis.
o Reviewed and analyzed the control premiums paid in certain other
transactions.
o Reviewed and discussed with representatives of OraLabs and PSHL certain
financial and operating information furnished by them, including financial
analyses with respect to their respective business and operations.
o Performed such other analyses and examinations as were deemed appropriate.
In arriving at its opinion, Capitalink relied upon and assumed the
accuracy and completeness of all of the financial and other information that was
used without assuming any responsibility for any independent verification of any
such information. Further, Capitalink relied upon the assurances of OraLabs and
PSHL management that they were not aware of any facts or circumstances that
would make any such information inaccurate or misleading. With respect to the
financial information and projections utilized, Capitalink assumed that such
information has been reasonably prepared on a basis reflecting the best
currently available estimates and judgments, and that such information provides
a reasonable basis upon which it could make an analysis and form an opinion.
Capitalink did not make a physical inspection of the properties and facilities
of OraLabs and PSHL and did not make or obtain any evaluations or appraisals of
their respective assets and liabilities (contingent or otherwise). In addition,
Capitalink did not attempt to confirm whether OraLabs and PSHL had good title to
their respective assets. Capitalink assumed that the Transaction will be
consummated in a manner that complies in all respects with the applicable
provisions of the Securities Act of 1933, as amended, the Securities Exchange
Act of 1934, as amended, and all other applicable international, federal and
state statutes, rules and regulations. Capitalink assumes that the Transaction
will be consummated substantially in accordance with the terms set forth in the
Exchange Agreement, without any further amendments thereto, and that any
amendments, revisions or waivers thereto will not be detrimental to the
nonaffiliated shareholders of OraLabs.
46
Capitalink's opinion is necessarily based upon market, economic and
other conditions as they existed on, and could be evaluated as of, July 19,
2006. Accordingly, although subsequent developments may affect its opinion,
Capitalink has not assumed any obligation to update, review or reaffirm its
opinion.
In connection with rendering its opinion, Capitalink performed certain
financial, comparative and other analyses as summarized below. Each of the
analyses conducted by Capitalink was carried out to provide a different
perspective on the Transaction, and to enhance the total mix of information
available. Capitalink did not form a conclusion as to whether any individual
analysis, considered in isolation, supported or failed to support an opinion as
to the fairness, from a financial point of view, of the Transaction to OraLabs'
nonaffiliated shareholders. Further, the summary of Capitalink's analyses
described below is not a complete description of the analyses underlying
Capitalink's opinion. The preparation of a fairness opinion is a complex process
involving various determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to the particular
circumstances and, therefore, a fairness opinion is not readily susceptible to
partial analysis or summary description. In arriving at its opinion, Capitalink
made qualitative judgments as to the relevance of each analysis and factor that
it considered. In addition, Capitalink may have given various analyses more or
less weight than other analyses, and may have deemed various assumptions more or
less probable than other assumptions, so that the range of valuations resulting
from any particular analysis described above should not be taken to be
Capitalink's view of the value of PSHL and OraLabs' assets. The estimates
contained in Capitalink's analyses and the ranges of valuations resulting from
any particular analysis are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. In addition, analyses relating to the value of
businesses or assets neither purports to be appraisals nor do they necessarily
reflect the prices at which businesses or assets may actually be sold.
Accordingly, Capitalink's analyses and estimates are inherently subject to
substantial uncertainty. Capitalink believes that its analyses must be
considered as a whole and that selecting portions of its analyses or the factors
it considered, without considering all analyses and factors collectively, could
create an incomplete and misleading view of the process underlying the analyses
performed by Capitalink in connection with the preparation of its opinion.
The analyses performed were prepared solely as part of Capitalink's
analysis of the fairness, from a financial point of view, of the Transaction to
OraLabs' nonaffiliated shareholders, and were provided to the Special Committee
in connection with the delivery of Capitalink's opinion. The opinion of
Capitalink was just one of the many factors taken into account by the Special
Committee in making its determination to approve the Transaction, including
those described elsewhere in this Statement.
It is noted that OraLabs is proposing to increase its authorized shares
from 25 million to 62,000,000 shares of common stock par value $0.001 per share
and from 1,000,000 to 8,000,000 shares of preferred stock, par value $0.001.
Capitalink does not believe this, if approved, will impact OraLabs' value or the
fairness opinion, for the following reasons. Authorized but unissued shares
represent a future, potential dilution to all of the Company's shareholders, not
just the nonaffiliated OraLabs shareholders. However, that potential dilution is
on a percentage ownership basis, not on a valuation basis. Only if the directors
issue the unissued shares below the then fair value would there be any dilutive
effect to all the then-existing shareholders. The Company is seeking the
approval of the increase in the number of authorized shares of common stock and
states that a number of such shares could be issued in connection with potential
equity financings. Therefore, if, at any time in the future, the Company decides
to issue additional shares, it is likely that it will receive consideration
(cash, etc.) that would increase the value of the Company, offsetting the
dilution to its nonaffiliated shareholders caused by the issuance of shares.
47
Valuation Overview
Based upon a review of the historical and projected financial data and
certain other qualitative data for OraLabs and PSHL, Capitalink utilized several
valuation methodologies and analyses to determine a range of values for each
company. Capitalink utilized comparable company and comparable transaction
analyses (all of which are discussed in more detail hereafter) for the valuation
of OraLabs and discounted cash flow, comparable company and comparable
transaction analyses for the valuation of PSHL.
In arriving at an indicated valuation range for OraLabs, Capitalink
weighted the comparable company and the comparable transaction analyses equally
and determined an indicated value of between approximately $8.0 million and
approximately $9.1 million for OraLabs. The nonaffiliated shareholders'
pre-Transaction ownership interest of 21.7% in OraLabs represents an aggregate
value of between approximately $1.7 million and approximately $2.0 million.
Capitalink noted that the nonaffiliated shareholders' aggregate market value was
approximately $1.8 million based on the average share price for the period
following the termination of the stock exchange agreement with NVC Lighting
Investment Holdings Limited and prior to the announcement of the Transaction.
In arriving at an indicated valuation range for PSHL, Capitalink
weighted the discounted cash flow, the comparable company and the comparable
transaction analyses equally and determined an indicated value of between
approximately $42.6 million and approximately $59.0 million for PSHL. The
nonaffiliated shareholders' post-Transaction ownership interest of 3.9% in
OraLabs represent an aggregate value of between approximately $1.7 million and
approximately $2.3 million.
Based on the above, Capitalink noted that the value of the
nonaffiliated shareholders' post-Transaction ownership interest is in the range
of the value of their pre-Transaction ownership interest.
OraLabs Financial Performance Review
Capitalink undertook a review of the OraLabs' historical financial data
in order to understand and interpret its operating and financial performance and
strength. Capitalink reviewed OraLabs' historical financial data for the five
years ended December 31, 2005 and the three months ended March 31, 2006 and
noted the following:
o OraLabs derives approximately 80% of its revenue from its lip balm business
and believes that this category will continue to be its primary business.
o Revenue was relatively stable over the review period with a low of
approximately $13.1 million in fiscal year ("FY") 2004 to a high of $15.4
million in FY2001. Over the review period, OraLabs experienced declining
revenue with a compound annual growth rate of (1.4%), however revenue
increased in the latest twelve month ("LTM") period ended March 31, 2006 by
6.9% compared to FY2005.
o OraLabs' gross profit margin gradually decreased over the review period
from approximately 39.9% in FY2001 to approximately 29.1% in FY2004. Gross
margin increased somewhat to 36.7% for the LTM period ended March 31, 2006
as a result of OraLabs' investment in a highly automated facility in FY2004
that made a positive impact on labor costs. In addition, a greater
concentration of sales were to higher margin customers resulting in
increased gross profit margin.
48
o Earnings before interest, taxes, depreciation and amortization ("EBITDA")
decreased from approximately $2.3 million in FY2001 to approximately $1.4
million for the LTM period ended March 31, 2006 reflecting decreasing sales
over the review period.
PSHL Financial Performance Review
Capitalink undertook a review of PSHL's historical financial data in
order to understand and interpret its operating and financial performance and
strength. Capitalink reviewed PSHL's historical financial data for the two
fiscal years ended June 30, 2005 and the nine months ended March 31, 2006 and
noted the following:
o Revenue has increased significantly over the review period from
approximately $17.4 million in FY2004 to approximately $44.7 million in the
LTM period ended March 31, 2006 representing a compound annual growth rate
of 71.3%. The LTM period revenue however was down from approximately $53.1
million, or approximately (15.9%), reflecting a decrease in production from
73,894 in FY2005 to 57,741 in the LTM period, representing a drop of
approximately 21.9%. This decrease in output and revenue is a result of
Chengtong's decision to shift production from low carbon to high carbon
products, which require longer processing time and a more complex
production process.
o EBITDA grew from approximately $0.9 million in FY2004 to approximately
$12.0 million in the LTM period ended March 31, 2006, representing a margin
increase from approximately 4.9% to approximately 26.9%. Despite the
decrease in revenue from FY2005 to the LTM period, EBITDA has increased by
approximately 64.3% from approximately $7.3 million, reflecting the shift
to higher margin high carbon products.
Country and Industry Overview
PSHL operates, manufactures and sells its products in the PRC. Despite
the considerable growth potential of the country and its low cost base, PRC
remains a risky environment. Capitalink noted the following significant risk
factors:
o Foreign exchange regulations;
o Political and legal risk;
o Lack of accounting transparency;
o Limitations and restrictions on dividend repatriation;
o Geographic concentration.
China is by far the largest steel producing country with twice of the
steel output of Japan, the second largest producer. According to the
International Iron and Steel Institute, in 2005, China produced 349.4 million
metric tons of steel, up 24.6% from 2004. In comparison, world production was up
by only 6.1% in 2005.
The International Iron and Steel Institute forecasts that the total use
of finished steel products continues to show strong growth in all regions of the
world, especially in China. The global outlook for steel demand remains positive
and the largest factor in this growth is the influence of China. Even with a
slowing of Chinese steel demand, double digit growth in China is still predicted
at 13.0% for 2006 and 12.1% in 2007.
49
OraLabs Stock Price Performance Review
Capitalink reviewed the daily closing market price and trading volume
of OraLabs common stock since the announcement of the Transaction on April 6,
2006, over the five month period between the termination of the NVC agreement
and the announcement of the Transaction (November 10, 2005 to April 5, 2006) and
over the twenty-four month period ended on July 7, 2006. Capitalink noted the
following:
o OraLabs' stock had limited liquidity prior to the announcement of the
Transaction with the median number of shares traded at approximately
7,380 and 6,265 over the five-month and twenty-four month period,
respectively. Since the announcement, the median number of shares
traded was 100,420.
o Over the five-month period prior to the announcement of the
Transaction, OraLabs' mean share price was approximately $1.77 and
ranged from a high of $2.23 to a low of $1.51.
Capitalink did not consider the loss of liquidity or market value
resulting from a potential de-listing from NASDAQ, as OraLabs' stock has
historically had (pre-announcement) a very low liquidity with an extremely low
volume of shares traded daily. The Company announced the contemplated
transaction on April 6, 2006. Capitalink reviewed the Company's trading volume
prior to that date and noted that the liquidity of the Company's shares was low
during the preceding twelve and twenty-four months, as evidenced by a median
daily volume of 7,380 and 6,265 shares, respectively. The trading volume prior
to the announcement of the previously contemplated transaction (with NVC
Lighting) was even lower during the preceding twelve and twenty-four months, as
evidenced by a median daily volume of 1,320 and 400 shares, respectively.
OraLabs Comparable Company Analysis
Capitalink located four companies that it deemed comparable to OraLabs
with respect to their industry sector and operating model (the "OraLabs
Comparable Companies"). All of the OraLabs Comparable Companies manufacture and
distribute personal care products. They are classified under SIC codes 5122
(Drugs, Proprietaries, and Sundries), 2844 (Toilet Preparations), 2833
(Medicinals and Botanicals) and 2834 (Pharmaceutical Preparations).
Three of the OraLabs Comparable Companies are substantially larger than
OraLabs in terms of revenue, with LTM revenue ranging from approximately $7.7
million to approximately $151.8 million, compared with approximately $14.5
million for OraLabs.
Capitalink noted that two of the Comparable Companies are more
profitable than OraLabs, with EBITDA margins ranging from approximately (1.4%)
to approximately 18.2%, compared with approximately 9.5% for OraLabs.
The OraLabs Comparable Companies have all exhibited low single-digit or
negative revenue and EBITDA growth for their last fiscal year period, compared
with OraLabs' approximately 3.5% revenue growth and high EBITDA growth
(increasing from approximately $(0.3) million to approximately $0.8 million).
50
Multiples utilizing market value and enterprise value were used in the
analyses. With respect to the multiples generated, Capitalink noted that the
enterprise value to LTM EBITDA multiple ranged from 6.2 times to 8.5 times, with
a mean of 7.3 times.
Capitalink also reviewed the historical multiples generated for the
OraLabs Comparable Companies, and noted that the mean enterprise value to LTM
EBITDA multiple over the last ten years was 7.6 times.
Capitalink selected an appropriate multiple range for OraLabs by
examining the range indicated by the OraLabs Comparable Companies and taking
into account certain company-specific factors. Capitalink expects OraLabs'
valuation multiples to be somewhat below the mean of the OraLabs Comparable
Companies due to its similar revenue growth, smaller size and higher capital
expenditure requirements.
Based on the above factors, Capitalink applied a multiple range of
between 5.0 and 6.0 times LTM EBITDA to OraLabs' LTM EBITDA and five-year
average EBITDA.
Based on the selected multiple ranges, Capitalink calculated a range of
enterprise values for OraLabs and added net cash of approximately $1.9 million
(which includes approximately $1.9 million in cash and negligible interest
bearing debt) to derive an indicated equity value range of approximately $7.8
million to approximately $9.0 million. The indicated value derived from this
approach was used in the determination of the aggregate pre-Transaction
indicated equity value for the nonaffiliated shareholders.
None of the OraLabs Comparable Companies have characteristics identical
to OraLabs. An analysis of publicly traded comparable companies is not
mathematical; rather it involves complex consideration and judgments concerning
differences in financial and operating characteristics of the OraLabs Comparable
Companies and other factors that could affect the public trading of the OraLabs
Comparable Companies.
OraLabs Comparable Transaction Analysis
Capitalink located seven transactions announced since January 2004
involving target companies involved in personal care product manufacturing and
distribution (the "OraLabs Comparable Transactions") and for which detailed
financial information was available.
Based on the information disclosed with respect to the targets in the
each of the OraLabs Comparable Transactions, Capitalink calculated and compared
the enterprise values as a multiple of LTM revenue and EBITDA.
Capitalink noted the following with respect to the multiples generated:
o The enterprise value to LTM revenue multiple ranged from 0.97 times to
1.96 times, with a mean of 1.47 times.
o The enterprise value to LTM EBITDA multiple ranged from 7.6 times to
12.8 times, with a mean of 10.3 times.
Capitalink expects OraLabs to be valued below the mean of the OraLabs
Comparable Transactions multiples due to its smaller size and lower
profitability.
51
Capitalink determined a range of indicated enterprise values for
OraLabs by selecting a range of valuation multiples based on the OraLabs
Comparable Transactions, and then applied them to OraLabs' LTM revenue and LTM
EBITDA:
o Between 0.60 and 0.70 times LTM revenue.
o Between 6.0 and 7.0 times LTM EBITDA.
Based on the selected multiple ranges, Capitalink calculated a range of
enterprise values for OraLabs by weighting the above indications equally.
Capitalink then added net cash of approximately $1.9 million to derive an
indicated equity value range on a marketable controlling interest basis of
approximately $10.5 million to approximately $11.9 million.
Capitalink applied a minority discount of 23.0% in order to obtain an
equity value range for OraLabs on a marketable minority basis of between
approximately $8.1 million and approximately $9.2 million. The selected minority
discount is based on a premiums paid analysis involving transactions where a
controlling interest was acquired in a public company by a minority shareholder.
The indicated value derived from this approach was used in the determination of
the aggregate pre-Transaction indicated equity value for the nonaffiliated
shareholders.
None of the target companies in the OraLabs Comparable Transactions
have characteristics identical to OraLabs. Accordingly, an analysis of
comparable business combinations is not mathematical; rather it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the target companies in the OraLabs Comparable Transactions
and other factors that could affect the respective acquisition values.
PSHL Discounted Cash Flow Analysis
A discounted cash flow analysis estimates value based upon a company's
projected future free cash flow discounted at a rate reflecting risks inherent
in its business and capital structure. Unlevered free cash flow represents the
amount of cash generated and available for principal, interest and dividend
payments after providing for ongoing business operations.
While the discounted cash flow analysis is the most scientific of the
methodologies, it is dependent on projections and is further dependent on
numerous industry-specific and macroeconomic factors.
Capitalink utilized the forecasts provided by PSHL management, which
project strong future growth in revenues from FY2006 to FY2010 from
approximately $40.1 million to $140.0 million, respectively. This represents a
CAGR of approximately 36.7% over the period. The projections assume that the new
production facility with an annual production capacity of 300,000 tons will be
completed by the end of 2006. PSHL plans to spend approximately $5.1 million in
capital expenditure related to the new facility.
The projections also forecast an improvement in EBITDA from FY2006 to
FY2010, from approximately $10.4 million to $36.7 million, respectively. This
represents a slightly improving EBITDA margin from approximately 25.9% to
approximately 26.2% and a CAGR of 37.0%. Prior to the shareholders meeting that
is the subject of this Proxy Statement, OraLabs will provide a copy of the
projections to shareholders who make a written request to the Company.
52
In order to arrive at a present value, Capitalink utilized discount
rates ranging from 21.0% to 23.0%. This was based on PSHL's estimated weighted
average cost of debt of 12.5% and a 24.1% estimated cost of equity. The cost of
equity calculation was derived utilizing the Ibbotson build up method utilizing
appropriate industry risk and size premiums, a country risk premium of 1.4% and
a projection risk premium of 5.0%, reflecting the risk associated with achieving
the forecasted growth and margins.
Capitalink presented a range of terminal values at the end of the
forecast period by applying a range of long term perpetual growth rates.
Utilizing long term perpetual growth rates of between 5.0% and 6.0%, Capitalink
calculated a range of indicated enterprise values.
Capitalink then deducted net debt of approximately $34.8 million (which
includes approximately $22.0 million in interest bearing debt, approximately
$13.0 million amount due to directors and approximately $0.3 million in cash) to
derive an indicated equity value range of approximately $51.3 million to
approximately $70.2 million. The indicated value derived from this approach was
used in the determination of the aggregate post-Transaction indicated equity
value for the nonaffiliated shareholders.
PSHL Comparable Company Analysis
Capitalink located seven companies that it deemed comparable to PSHL
with respect to their industry sector and operating model (the "PSHL Comparable
Companies"). All of the PSHL Comparable Companies are involved in manufacture
and sale of steel products and are located in China. They are classified under
SIC codes 3315 (Steel Wire and Related Products), 3312 (Blast Furnaces and Steel
Mills), 3316 (Cold Finishing of Steel Shapes), and 3317 (Steel Pipe and Tubes).
All of the PSHL Comparable Companies are larger than PSHL, with LTM
revenue ranging from approximately $89.7 million to approximately $27.7 billion,
compared with approximately $44.7 million for PSHL.
Capitalink noted that only two of the PSHL Comparable Companies are
more profitable than PSHL, with EBITDA margins ranging from approximately 7.0%
to approximately 34.5%, compared with approximately 26.9% for PSHL.
PSHL's historical and projected EBITDA growth is higher than all of the
PSHL Comparable Companies, reflecting the additional capacity and the shift to
higher margin steel products.
Multiples utilizing market value and enterprise value were used in the
analyses. Capitalink noted the following with respect to the multiples
generated:
o The enterprise value to LTM EBITDA multiple ranged from 2.5 times to
12.6 times, with a mean of 6.8 times.
o The enterprise value to CY2006 EBITDA multiple ranged from 3.5 times
to 6.9 times, with a mean of 4.8 times.
o The enterprise value to CY2007 EBITDA multiple ranged from 2.9 times
to 6.3 times, with a mean of 4.2 times.
Capitalink also reviewed the historical multiples generated for the
PSHL Comparable Companies, and noted that the mean enterprise value to LTM
EBITDA multiple over the last ten years was 6.0 times.
53
Capitalink selected an appropriate multiple range for PSHL by examining
the range indicated by the PSHL Comparable Companies and taking into account
certain company-specific factors. Capitalink expects PSHL's valuation multiples
to be significantly above the mean of the PSHL Comparable Companies due to its
higher projected revenue and EBITDA growth, and higher EBITDA margins.
Based on the above factors, Capitalink applied the following multiple
range to PSHL's LTM, CY2006 and CY2007 EBITDA.
o Between 6.5 and 8.0 times LTM EBITDA.
o Between 5.5 and 7.0 times CY2005 EBITDA.
o Between 4.0 and 5.0 times CY2006 EBITDA.
Based on the selected multiple ranges, Capitalink calculated a range of
enterprise values for PSHL by weighting the above indications equally and then
deducted net debt of approximately $34.8 million to derive an indicated equity
value range of approximately $39.0 million to approximately $57.5 million. The
indicated value derived from this approach was used in the determination of the
aggregate post-Transaction indicated equity value for the nonaffiliated
shareholders.
None of the PSHL Comparable Companies have characteristics identical to
PSHL. An analysis of publicly traded comparable companies is not mathematical;
rather it involves complex consideration and judgments concerning differences in
financial and operating characteristics of the PSHL Comparable Companies and
other factors that could affect the public trading of the PSHL Comparable
Companies.
PSHL Comparable Transaction Analysis
Capitalink located 11 transactions announced since January 2004
involving target companies in the steel production business (the "PSHL
Comparable Transactions") and for which detailed financial information was
available. None of the target companies in the PSHL Comparable Transactions are
located in China.
Based on the information disclosed with respect to the targets in the
each of the PSHL Comparable Transactions, Capitalink calculated and compared the
enterprise values as a multiple of LTM EBITDA.
With respect to the multiples generated, Capitalink noted that the
enterprise value to LTM EBITDA multiple ranged from 2.0 times to 10.6 times,
with a mean of 5.4 times.
Capitalink expects PSHL to be valued above the mean of the PSHL
Comparable Transactions multiples due to its higher profitability and higher
expected growth. The PSHL Comparable Transactions are all located in countries
other than China, with a significantly lower expected GDP growth.
Capitalink determined a range of indicated enterprise values for PSHL
by selecting a range of valuation multiples of between 6.0 and 7.0 times based
on the PSHL Comparable Transactions, and then applied them to PSHL's LTM EBITDA.
Based on the selected multiple ranges, Capitalink calculated a range of
enterprise values for PSHL and then deducted net debt of approximately $34.8
million to derive an indicated equity value range of approximately $37.4 million
to approximately $49.4 million. The indicated value derived from this approach
was used in the determination of the aggregate post-Transaction indicated equity
value for the nonaffiliated shareholders.
54
None of the target companies in the PSHL Comparable Transactions have
characteristics identical to PSHL. Accordingly, an analysis of comparable
business combinations is not mathematical; rather it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the target companies in the PSHL Comparable Transactions and
other factors that could affect the respective acquisition values.
Based on the information and analyses set forth above, Capitalink
delivered its written opinion to the Special Committee, which stated that, as of
July 19, 2006, based upon and subject to the assumptions made, matters
considered, and limitations on its review as set forth in the opinion the
Transaction is fair, from a financial point of view, to OraLabs' nonaffiliated
shareholders. Capitalink is an investment banking firm that, as part of its
investment banking business, regularly is engaged in the evaluation of
businesses and their securities in connection with mergers, acquisitions,
corporate restructurings, private placements, and for other purposes. OraLabs
determined to use the services of Capitalink because it is a recognized
investment banking firm that has substantial experience in similar matters.
Capitalink has received a fee in connection with the preparation and issuance of
its opinion. In addition, OraLabs has agreed to indemnify Capitalink for certain
liabilities that may arise out of the rendering of the opinion. Capitalink does
not beneficially own any interest in OraLabs and has not provided any other
services except with respect to the terminated transaction.
Interests of Certain Persons in the Proposed Transactions
In considering the recommendation of the Special Committee and the
Board of Directors with respect to the proposed transactions, you should be
aware that all members of the Board have interests that present actual or
potential conflicts of interest in connection with the transactions. The Special
Committee and the Board were aware of these potential or actual conflicts of
interest and considered them with other matters described under "Special Factors
- Recommendation of the Special Committee and Board of Directors". Upon Closing,
Mr. Schlatter will own all of the outstanding stock of OraLabs, Inc., the
operating subsidiary of the public company, and therefore will participate in
all of its future earnings and any increase in value. As Mr. Schlatter currently
owns approximately 77% of the outstanding shares of common stock of the Company
(see "Security Ownership of Certain Beneficial Owners and Management"), in
effect Mr. Schlatter will be acquiring the remaining 23% ownership interest in
the operating subsidiary in exchange for the relinquishment by him of all of his
shares in the Company, the value of which will be based in part upon the price
of the common stock on the date of Closing. Upon Closing, none of the current
directors of OraLabs will be an officer or director of the public company, but
the directors other than Mr. Schlatter will cumulatively receive 300,000 shares
of common stock (approximately 1.1% of the number of shares to be outstanding
after completion of the proposed transactions) of OraLabs at the time of the
Closing of the proposed transactions, the value of which will be based upon the
price of the common stock on the date of Closing. An affiliate of Mr. Schlatter,
The Schlatter Family Partnership, owns 100,000 shares (approximately 0.4% of the
number of shares to be outstanding after completion of the proposed
transactions) of OraLabs common stock, which will not be redeemed by OraLabs as
part of the Closing, the value of which will be based upon the price of the
common stock on the date of Closing. In addition, it is expected that Oralabs,
Inc. will purchase up to 100,000 shares of common stock of the Company as part
of the Closing, in order to provide funds to the Company with respect to an
estimated income tax liability arising out of the closing of the transactions
(see "Exchange Agreement - The Stock Exchange").
55
NASDAQ Listing
OraLabs common stock is currently listed for trading on the NASDAQ
Capital Market. Continued listing on the Capital Market after the Closing is
conditional upon the Company, obtaining approval from the NASD to such listing.
Because the current business of OraLabs will no longer be operated by the
Company after the Closing, and the business of PSHL will then be the only
business of the Company, continued listing is conditional upon the Company's
compliance with NASD rules that apply to making a new application to the NASD
for NASDAQ listing. The financial requirements for initial listing on the NASDAQ
Capital Market and whether PSHL, following the consummation of this transaction,
would meets such standards are set forth below:
---------------------------------------- --------------------------------------
Requirement PSHL's Status
---------------------------------------- --------------------------------------
Stockholders' equity of $5 million or PSHL earned $7,514,101 during the
market value of listed securities of fiscal year ended June 30, 2006
$50 million or net income from
continuing operations of $750,000
---------------------------------------- --------------------------------------
At least 1,000,000 publicly held shares PSHL will have more than 1,100,000
shares held by non-affiliates as of the
Closing of this transaction
---------------------------------------- --------------------------------------
Market value of publicly held shares PSHL believes that market value of its
must be at least $5 million publicly held shares will exceed $5
million
---------------------------------------- --------------------------------------
Bid Price of $4 The closing Bid Price on November
15, 2006 was $5.56.
---------------------------------------- --------------------------------------
At least 400 round lot holders Approximately 662
---------------------------------------- --------------------------------------
Market makers PSHL intends to have three market
markets prior to the closing of this
transaction
---------------------------------------- --------------------------------------
Operating History of 1 year or market PSHL was incorporated on April 30, 2002
value of listed securities of $50
million
---------------------------------------- --------------------------------------
Corporate Governance PSHL intends to comply with the
NASDAQ Capital Market corporate
governance standards
---------------------------------------- --------------------------------------
PSHL believes that upon completion of the Closing, the Company will
meet all of the requirements for a new listing, but there can be no assurance
that the requirements will be met at that time or that, even if all requirements
are met, that the NASD will approve the application on or before the time of
Closing. OraLabs does not currently comply with the continued listing
requirements of the NASDAQ Capital Market, as a result of a resignation in
February 2006 of one of the Company's independent directors. By reason of the
resignation, OraLabs only has two independent directors who serve on the
Company's audit committee rather than three directors as required by the
continued listing rules (see "Special Factors - NASDAQ Listing"). OraLabs has
until the earlier to occur of the annual meeting of its shareholders or February
2007 within which to cure the noncompliance. It is expected that by reason of
the closing of the transactions described in this Proxy Statement, the Company
will meet the requirements concerning the composition of its audit committee.
Although the public company will technically be noncompliant with the continued
listing rules during the period from the completion of the shareholders' annual
meeting until the date of closing the transactions contemplated by this Proxy
Statement (which is not expected to be longer than a period of one week),
OraLabs does not believe its common stock will be delisted during that period
provided that the Company receives the approval of NASDAQ to the Company's
listing application prior to the date of the annual meeting.
56
Assuming that the common stock of the Company is delisted from the
NASDAQ Capital Market, the Company would remain a public company but trading of
the common stock would be conducted instead on the OTC Bulletin Board until such
time as the Company complies with the listing qualifications for the NASDAQ
Capital Market or another national exchange. Stocks displayed on the OTC
Bulletin Board have less visibility in the investment community than stocks that
are listed on the NASDAQ Capital Market. Because the volume of OraLabs' stock
traded each day on the NASDAQ Capital Market has historically been very low, the
Company cannot predict whether a delisting of the common stock from NASDAQ and
display of trading of the stock on the OTC Bulletin Board would cause the stock
price to decrease or the liquidity for the stock to be more impaired. PSHL has
advised OraLabs that it is committed to seeking the listing on the NASDAQ
Capital Market as soon as it can, should delisting occur.
MARKET FOR THE COMMON STOCK
The common stock of OraLabs trades on the NASDAQ Small Cap 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 and 2005, and for
the first three quarters of calendar year 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
On November 15, 2006, the high bid was $5.69 and the low bid was $5.34. The
quotations reflect inter-dealer prices, without adjustment for retail mark-up,
markdown or commission and may not necessarily present actual transactions.
As of October 27, 2006, there were approximately 869 record holders of
the common stock of OraLabs. OraLabs has not paid any cash dividends and it is
not intended that any cash dividends will be paid in the foreseeable future.
57
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of November 15, 2006, there were 4,848,265 shares of OraLabs common
stock, par value $0.001 outstanding. The following table sets forth, as of
October 27, 2006, information regarding the beneficial ownership of OraLabs
common stock (i) by each Director, (ii) by each Executive Officer listed in the
Summary Compensation table below, (iii) by all Directors and current Executive
Officers as a group (five persons), and (iv) by each person or group known by
the Company to own beneficially in excess of five percent (5%) of the Common
Stock:
Name and Address Amount and Nature of
of Beneficial Owner(2) Beneficial Ownership Percent of Class
---------------------- -------------------- ----------------
Gary H. Schlatter 3,729,350 shares(1) 76.92%
18685 East Plaza Drive
Parker, Colorado 80134
Michael I. Friess 0 0
5353 Manhattan Circle
Suite 101
Boulder, Colorado 80303
Robert C. Gust 11,000 shares *
7N551 Cloverfield Circle
St. Charles, IL 60175
Emile Jordan
18685 East Plaza Drive
Parker, CO 80134 0 0
All directors and executive 3,740,350 shares (1), (2) 77.15%
officers as a group (four persons)
* Less than one percent
------------------
(1) Includes 100,000 shares (approximately 0.4% of the number of shares to be
outstanding after completion of the proposed transactions) held by The Schlatter
Family Partnership, of which Gary H. Schlatter and his spouse are the general
partners. Mr. Schlatter's spouse may be deemed the beneficial owner of some or
all of the shares. Does not include up to 100,000 shares that OraLabs, Inc. may
purchase at Closing.
(2) Unless otherwise noted, the shareholders identified in this table have sole
voting and investment power. The sole person known to the Company to be the
beneficial owner of more than five percent (5%) of the class of outstanding
stock is Gary H. Schlatter, whose address is c/o OraLabs Holding Corp., 18685
East Plaza Drive, Parker, Colorado 80134.
Change in Control
Upon closing of the transactions contemplated by the Exchange
Agreement, there will be a change in control of the Company. Gary Schlatter will
no longer have any interest in the Company except for the interests described in
Note 1 to the above table. Instead, the Company will be controlled by the
principals of PSHL as described in more detail in the following table.
58
The following table sets forth certain information regarding the
OraLabs common stock beneficially owned after giving effect to the Closing, for
(i) each shareholder known to be the beneficial owner of 5% or more of the
OraLabs outstanding common stock, (ii) each executive officer and director, and
(iii) all executive officers and directors as a group. Unless otherwise
indicated, each person in the table has sole voting and investment power with
respect to the shares shown. The table assumes a total of 27,065,250 shares of
OraLabs common stock outstanding after the Closing:
Name and Address Amount and Nature of
of Beneficial Owner Title of Class Beneficial Ownership Percent of Class
------------------------------------------- -------------------------- ----------------------- ---------------------
Wo Hing Li Common Stock 74.6%
Flat F.29/F Tower 1, Central Park
18 Hoi Ting Road
Kowloon, Hong Kong
Leada Tak Tai Li Common Stock 4.7%
Flat F.29/F Tower 1, Central Park
18 Hoi Tink Road
Kowloon, Hong Kong
Shu Keung Leung Common Stock 4.7%
Room 515, Lai Huen House
Lai Kok Estate, Shamsui
Kowloon, Hong Kong
Che Kin Lui Common Stock 0%
Flat 1402, Block J
Amoy Gardens
Kowloon, Hong Kong
David Peter Wong Common Stock 0%
80 E. Sir Francis Drake Blvd.
Larkspur, CA 94939
Tung Kuen Tsui Common Stock 0%
Flat E5, 11th Floor, Block E
Mount Parker Lodge
10 Kong Pak Path
Quarry Bay, Hong Kong
Executive Officers and Directors as a Common Stock 84%
Group (six persons)
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: ORALABS
Gary H. Schlatter, through an affiliated entity, is the owner of the
property leased by OraLabs, Inc., (OraLabs' subsidiary) that serves as OraLabs'
headquarters, manufacturing facility and warehouse facility. The lease expires
on September 30, 2009. Total rent paid by OraLabs for rent of the facility in
2005 was $446,088. OraLabs believes that its rental rate is comparable to that
which would be paid to unaffiliated parties, and OraLabs believes that if the
lease is not renewed, OraLabs Inc. could obtain alternative space. Upon Closing
of the Exchange Agreement, Gary H. Schlatter will acquire sole ownership of
59
OraLabs, Inc. the operating subsidiary of the public company, in consideration
for the redemption by OraLabs of the 3,629,350 shares of the Company owned by
Mr. Schlatter in his individual capacity. As Mr. Schlatter currently owns
approximately 77% of the outstanding shares of common stock of OraLabs (see,
"Security Ownership of Certain Beneficial Owners and Management"), in effect Mr.
Schlatter will be acquiring the remaining 23% ownership interest in the
operating subsidiary in exchange for the relinquishment by him of all of his
shares in OraLabs, the value of which will be based in part upon the price of
the common stock on the date of Closing. In addition it is expected that
Oralabs, Inc. will purchase up to 100,000 shares (approximately 0.4% of the
number of shares to be outstanding after completion of the proposed
transactions) of common stock of the Company as part of the Closing, in order to
provide funds to the Company with respect to an estimated income tax liability
arising out of the closing of the transactions (see "Exchange Agreement - The
Stock Exchange"). Also, each of the other two directors, both of whom are
non-employee directors, will receive collectively 300,000 shares (approximately
1.1% of the number of shares to be outstanding after completion of the proposed
transactions) of OraLabs' common stock under the 2006 Director Stock Plan
(200,000 shares to Mr. Friess and 100,000 shares to Mr. Gust) for which approval
by the shareholders is requested at the annual meeting, the value of which will
be based upon the price of the common stock on the date of Closing. Finally,
2,500 options will be issued to Mr. Friess and Mr. Gust two business days after
the shareholders meeting, with an exercise price at the then market price.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: PSHL
The amount due from a related company as of June 30, 2006, and June 30,
2005, are as follows:
Balance at
Maximum
Outstanding
Name June 30, 2006 June 30, 2005 Balance Security
(Audited) (Audited) During Year Held
-----------------------------------------------------
Shanghai Tuorong Precision Strip Co., Ltd $5,435,474 $3,249,852 $5,435,474 None
============================
As of June 30, 2006, and as of June 30, 2005, PSHL had the following
balances due to its officers and directors:
Name June 30, 2006 June 30, 2005
(Audited) (Audited) Security Held
----------------------------------------------------
Wo Hing Li $10,900,381 $11,106,036 None
Hai Sheng Chen 12,935 12,513 None
----------------------------
$10,913,316 $11,118,549
============================
Amounts due to directors, net of advances, are $5,477,842. Amounts due
are unsecured, interest free and have no fixed repayment terms.
Mr. Wo Hing Li has entered into an agreement with Chengtong Precision
giving Chengtong Precision the legal right of offset against amounts due to him
with respect to advances made by Chengtong Precision to Shanghai Tuorong
Precision Strip Co., Ltd. Mr. Li is the principal shareholder in both Shanghai
Tuorong Precision Strip Co., Ltd. and Partner Success Holdings Limited, the
parent company of Chengtong Precision.
60
Pursuant to a Loan Agreement (the "Agreement") in January 2003 between
a director, Hai Sheng Chen, and the Subsidiary, Chengtong Precision, 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.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities and Exchange Commission requires our
directors, executive officers and holders of more than 10% of our common stock
to file with the Securities and Exchange Commission reports regarding their
ownership and changes in ownership of our securities. OraLabs believes that
during fiscal year 2005, its directors, executive officers and 10% owners
complied with all Section 16(a) filing requirements.
OraLabs' amended Code of Ethics was filed as an exhibit attached to
Form 8-K filed by OraLabs on August 24, 2005.
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation for services
rendered, in all capacities, awarded or paid to or earned by the Chief Executive
Officer of OraLabs during the last three fiscal years and earned by Emile Jordan
in fiscal years 2005 and 2004. No other executive officer of the Company
received a total annual salary and bonus in excess of $100,000 during any of the
last three fiscal years.
Summary Compensation Table
----------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
----------------------------------------------------------------------------------------------------------------------
Name and Principal Position Year Salary ($) Bonuses ($) Other ($) Other Shares Underlying
Options
---------------------------- ------- --------------- --------------- -------------- ------------ ---------------------
Gary H. Schlatter, CEO 2005 411,673 (1) 0 18,000 0 30,500 (1)
2004 393,105 (1) 0 22,699 0 30,500 (1)
2003 370,346 (1) 0 22,339 0 30,500 (1)
Emile Jordan, CFO 2005 102,000 15,000 0 0 38,125
2004 109,400 0 0 0 25,500
----------------------------------------------------------------------------------------------------------------------
(1) Includes 30,500 shares underlying 30,500 options granted to Mr. Schlatter's
spouse that she sold in 2006, and a $10,000 annual salary to the spouse.
Beneficial ownership of such securities and spouse's salary is disclaimed by Mr.
Schlatter.
For a discussion of certain compensation matters relating to directors,
executive officers and certain shareholders of PSHL, please see "PSHL Business -
Executive Compensation".
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE PROPOSED TRANSACTIONS
The following discussion is a summary of the material federal income
tax consequences expected to result to OraLabs Holding Corp. There will be no
tax consequences to OraLabs shareholders from completion of the proposed
transactions. This summary does not purport to be a complete analysis of all
potential tax effects of the proposed transactions. For example, the summary
does not consider the effect of any applicable state, local or foreign tax laws.
In addition, the summary does not address all aspects of federal income taxation
that may affect particular shareholders in light of their particular
circumstances and is not intended for shareholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
shareholders who hold their common stock as part of a hedge, straddle or
conversion transaction, shareholders who acquired their common stock pursuant to
61
the exercise of an employee stock option or otherwise as compensation, and
shareholders who are not citizens or residents of the United States or that are
foreign corporations, foreign partnerships or foreign estates or trusts as to
the United States) that may be subject to special federal income tax rules not
discussed below. The following summary also does not address tax consequences to
OraLabs, Inc., PSHL or the PSHL Shareholders.
This summary is based on the current provisions of the Code, applicable
Treasury Regulations, judicial authority and administrative rulings and
practice. No ruling from the IRS has been or will be sought nor will an opinion
of counsel be obtained with respect to any aspect of the transactions described
herein. Accordingly, there can be no assurance that the IRS will not challenge
the tax consequences expressed in this discussion or that a court would not
sustain this type of challenge. Future legislative, judicial or administrative
changes or interpretations could alter or modify the statements and conclusions
set forth herein, and any such changes or interpretations could be retroactive
and could affect the tax consequences of the proposed transactions to
shareholders. We cannot predict at this time whether any current proposed tax
legislation will be enacted or, if enacted, whether any tax law changes
contained therein would affect the tax consequences of the proposed transactions
to shareholders. It is therefore possible that the federal income tax treatment
may differ from that described below.
State and local income tax laws vary from state to state and this
discussion does not address state or local tax issues.
Material Federal Income Tax Consequences to OraLabs Holding Corp.
It is expected that the distribution of the Subsidiary by OraLabs to
the President of OraLabs, in consideration for the redemption of the shares he
owns in OraLabs, will constitute a taxable event to OraLabs. Section 355(e) of
the Code provides that if as is the case here, the distribution of the
Subsidiary is part of a plan (or series of related transactions) pursuant to
which one or more persons acquire directly or indirectly stock representing a
50% or greater interest in OraLabs within two years prior or two years after the
distribution of the Subsidiary, then the distribution of the Subsidiary is a
taxable event to OraLabs. As a result, Section 355(e) requires OraLabs to report
the amount of any gain (but not loss) on account of the distribution of the
Subsidiary.
Under Section 355(e) and other provisions of the Code, if the fair
market value of the Subsidiary exceeds OraLabs' tax basis in the Subsidiary,
then to the extent of the excess, gain will be required to be recognized for
federal income tax purposes. The Subsidiary has agreed to indemnify OraLabs
against any tax liability with respect to such gain, under the provisions of a
Tax Indemnity Agreement to be executed at Closing (see "Exchange Agreement -Tax
Indemnity").
The transactions described in Proposal 1 by which shares representing
94% of the outstanding OraLabs shares will be issued to the PSHL Shareholders in
exchange for all of the ownership interests in PSHL will constitute a tax-free
transaction under Section 351 of the Code.
See the discussion below of the Reincorporation Proposal described in
Proposal 6 with respect to material tax consequences of that transaction.
FEES AND EXPENSES
Whether or not the proposed transactions are consummated, all of the
fees and expenses incurred in connection therewith will be paid by the party
(either OraLabs or PSHL) incurring such fees and expenses. Estimated fees and
expenses (rounded to the nearest thousand, except for the SEC filing fee)
incurred or to be paid by OraLabs in connection with the proposed transactions
are as follows:
62
Description Dollar Amount
Special Committee's Financial Advisor's Fees and Expenses $60,000.00
Special Committee's Legal and Accounting Fees and Expenses $20,000.00
OraLabs' Legal and Accounting Fees and Expenses $110,000.00
Printing and Mailing Fees and Expenses $20,000.00
SEC Filing Fees $9,000.00
Total $219,000.00
THE EXCHANGE AGREEMENT
The following is a summary of the material provisions of the Exchange
Agreement as amended, a copy of which is attached as Annex 1 to this Proxy
Statement. This summary is qualified in its entirety by reference to the full
text of the Exchange Agreement, which for purposes of this Section includes the
First Amendment, Second Amendment and letter agreement.
The Stock Exchange
The Exchange Agreement provides that at its Closing, a series of
transactions will become effective. If the Exchange Agreement is approved at the
annual meeting by the shareholders of OraLabs, and the other conditions to
Closing are satisfied or waived, it is anticipated that we will consummate the
transactions in December 2006. However, there can be no assurance as to the
timing of the Closing or that the consummation of the proposed transactions will
occur. Upon the completion of the Closing, the following transactions will have
occurred in the following order:
o the 2006 Director Stock Plan will be approved and 300,000 shares will
have been issued under the Plan to the non-employee directors of
OraLabs;
o OraLabs, Inc. may have purchased up to 100,000 shares of OraLabs
common stock (under its new name, China Precision Steel, Inc.) to
satisfy an indemnity obligation;
o the name of the Company will be China Precision Steel, Inc. with an
authorized capital consisting of 62,000,000 shares of common stock,
par value $.001 per share and 8,000,000 shares of preferred stock, par
value $.001 per share (the parties agreed to waive the requirement in
the First Amendment that OraLabs change its domicile from Colorado to
Delaware);
o OraLabs will be the 100% owner of PSHL, and the PSHL Shareholders
(and/or their designees) will be the owners of 94% of all of the
issued and outstanding common stock of OraLabs (under its new name,
China Precision Steel, Inc.) after giving effect to the redemption and
all stock issuances described herein;
o the 3,629,350 shares of OraLabs common stock owned individually by
Gary H. Schlatter will have been redeemed by OraLabs and all of the
shares owned by OraLabs of its wholly-owned subsidiary, OraLabs, Inc.,
will be owned by Mr. Schlatter;
63
o the current directors of the public company will resign and be
replaced by Mr. Wo Hing Li, Mr. Hai Sheng Chen, Mr. Che Kin Lui, Mr.
David Peter Wong and Mr. Tung Kuen Tsui;
o the current officers of OraLabs will resign and be replaced by
officers chosen by the new directors of the Company;
o the 2006 Omnibus Long-Term Incentive Plan covering 2,165,220 shares of
common stock of OraLabs (under its new name, China Precision Steel,
Inc.) will be approved; and
o the authorization for OraLabs to issue 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, will be approved
by the shareholders.
This paragraph explains the approximate number of shares to be
outstanding upon completion of the Closing. The nonaffiliated shareholders of
OraLabs currently own approximately 1,107,915 shares. Those shares will be
retained by them. Affiliates of OraLabs own 111,000 shares and an additional
300,000 shares (approximately 1.1% of the number of shares to be outstanding
after completion of the proposed transactions) will be issued to the
non-employee directors, resulting in affiliate ownership of 411,000 shares.
OraLabs, Inc. may purchase up to 100,000 shares (approximately 0.4% of the
number of shares to be outstanding after completion of the proposed
transactions) to satisfy the tax indemnity described above. If all of the 5,000
director options to be issued are exercised, the total of all of the above
figures will equal 6% of the outstanding shares upon completion of the Closing.
Therefore, the principals of PSHL or their designees will be issued 25,441,335
shares, or 94% of the total number of 27,065,250 shares to be outstanding.
Conditions to the Closing of the Exchange Agreement
The respective obligations of OraLabs, PSHL and the PSHL Shareholders
to consummate the transactions under the Exchange Agreement are subject to the
fulfillment or waiver at or prior to Closing of certain conditions including the
following:
o all of the transactions contemplated by the Exchange Agreement must be
approved by the shareholders of OraLabs or none of the transactions
will be given effect;
o OraLabs must receive a comfort letter from PSHL's independent
auditors, within ten days prior to the proposed Closing date, that is
satisfactory to OraLabs' counsel;
o OraLabs must receive a legal opinion from an attorney authorized to
practice in the British Virgin Islands as to the legal effect of
certain matters, including that the exchange of the stock owned by the
PSHL Shareholders for stock in OraLabs is legally binding upon them,
and PSHL must receive a legal opinion from OraLabs' counsel as to the
legal effect of certain matters; and
o the absence of any material adverse change in the condition of either
OraLabs or PSHL.
64
Representations and Warranties
The Exchange Agreement contains representations and warranties by the
parties. These include, among other things, the following:
o their respective organization and qualification to do business;
o their authority to enter into and consummate the Exchange Agreement
and the transactions contemplated thereby;
o the absence of a conflict between the Exchange Agreement and the
transactions contemplated thereby, with laws applicable to, and
material agreements of, the respective parties;
o the consents and filings required with respect to the Exchange
Agreement and the transactions contemplated thereby;
o the accuracy of the information provided by the parties for inclusion
in this Proxy Statement and in filings to be made with the SEC with
respect thereto;
o the absence of undisclosed liabilities and changes in the business of
the parties;
o the status of litigation;
o compliance with respect to taxes, employee plans and environmental
matters; and
o title to properties.
Covenants
The parties have agreed to operate, and to cause their subsidiaries to
operate, their respective businesses in the ordinary and usual course prior to
Closing of the Exchange Agreement. Specifically, the parties have agreed to:
o conduct their businesses in the ordinary and usual course of business
and consistent with past practice;
o conduct the business of PSHL after Closing as it had been conducted
prior to Closing;
o not make any change in their organizational documents, borrow any
funds outside of the ordinary course of business or pay any material
obligation or liability not otherwise in the ordinary course of
business; and
o not issue, deliver or agree to issue or deliver any stock, bonds or
other corporate securities.
Indemnification
PSHL, the PSHL Shareholders, and OraLabs agreed to certain
indemnification obligations under the Exchange Agreement. PSHL and the PSHL
Shareholders have agreed to indemnify OraLabs and its representatives against
any loss that may be incurred and which arises out of or is based on any default
65
under the Exchange Agreement or any inaccuracy or misrepresentation made by PSHL
in the Exchange Agreement. OraLabs agreed to indemnify PSHL and its
representatives, as well as the PSHL Shareholders, against any loss that they
may incur arising out of or based on any default under the Exchange Agreement or
any inaccuracy or misrepresentation made by OraLabs under the Exchange
Agreement. OraLabs also agree to cause its subsidiary, OraLabs, Inc., to
indemnify the Company from any loss that may exist immediately prior to the
Closing or that may be asserted after the Closing regarding any claim or
liability arising from the operations of OraLabs or any other matter prior to
the Closing. The obligations of OraLabs, Inc. will be under a form of
indemnification agreement that is attached as Exhibit 1 to the Exchange
Agreement attached to this Proxy Statement as Annex 1.
Furthermore, OraLabs, Inc. is obligated to indemnify the Company for
the amount of the excess (if any) of the finally determined amount of a
specified tax liability over the amount of such tax liability funded by the
Subsidiary at Closing (see "Exchange Agreement -Tax Indemnity").
Termination of the Exchange Agreement
The Exchange Agreement may be terminated and the transactions abandoned
at any time prior to completion of the Closing (notwithstanding any approval of
any of the transactions by the shareholders of OraLabs);
o by written consent of the parties;
o by any party if the Closing does not occur by January 15, 2007, which
may be extended only by mutual agreement of the parties; or
o by either party if the other failed to comply in any material respect
with any of its covenants or agreements contained in the Exchange
Agreement or if any of the representations or warranties shall be
inaccurate in any material respect.
Fees and Expenses
Except for $30,000 being paid to PSHL by OraLabs 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
will be paid by the party incurring such expenses, including without limitation
its attorneys fees. Further, there are no payments due from one party to the
other in connection with a termination.
Amendment/Waiver
At any time prior to Closing, the Exchange Agreement may be amended by
a writing signed by all of the parties thereto, with respect to any of the terms
contained in the Exchange Agreement, and any term or condition of the Exchange
Agreement may be waived or the time for performance of any such term or
condition may be extended by a writing signed by the party for whose benefit the
provision is intended.
Tax Indemnity
Under the First Amendment to the Stock Exchange Agreement and letter agreement
attached to this Proxy as part of Annex 1 and a separate Tax Indemnity Agreement
to be executed at Closing (a copy of which is attached to this Proxy as Annex
6), the parties agreed that the amount of tax obligated to be paid by the public
company with respect to the gain arising from the redemption of Mr. Schlatter's
shares in OraLabs in exchange for the transfer to him of OraLabs' shares in its
66
Subsidiary (the "Spinoff Tax Liability") will be the obligation of the
Subsidiary in accordance with the terms of those documents. Based upon an
estimated fair market value of the Subsidiary and an estimated tax basis
determined prior to Closing, the estimated amount of the Spinoff Tax Liability
will be funded by the Subsidary at Closing. The Subsidiary will purchase up to
100,000 restricted shares (with piggyback registration rights) of the Company
for a purchase price, only if PSHL receives approval from NASDAQ for listing the
Common Stock as of the Closing Date, equal to the greater of $4.00 or the
average price (the "Average Price") of the Company's common stock during the
five trading days preceding the date that is two business days prior to Closing.
If such approval is not obtained from NASDAQ as of the Closing Date, the
purchase price will be the Average Price. To the extent that the total estimated
Spinoff Tax Liability is not satisfied through the purchase of 100,000 shares,
the Subsidiary will pay the difference (the "Balance") at Closing plus a
gross-up amount to cover income taxes assessed on the payment of the Balance.
The Tax Indemnity Agreement attached to this Proxy Statement as Annex 6
describes the method by which the Subsidiary will be obligated to pay any
additional amount that is subsequently finally determined to be the amount of
the Spinoff Tax Liability in excess of the estimated amount paid by the
Subsidiary at Closing.
67
PROPOSAL 1: APPROVAL OF THE TRANSACTIONS BY WHICH ORALABS (UNDER ITS NEW NAME,
CHINA PRECISION STEEL, INC.) WILL ISSUE 94% OF ITS OUTSTANDING SHARES TO THE
PSHL SHAREHOLDERS OR THEIR DESIGNEES IN EXCHANGE FOR ALL OF THE OWNERSHIP
INTERESTS IN PARTNER SUCCESS HOLDINGS LIMITED.
The adoption of this Proposal is conditioned upon the approval by the
OraLabs shareholders of all of the other Proposals described in this Proxy
Statement. Based upon the information set forth in the sections of this Proxy
Statement entitled "SPECIAL FACTORS" and "RECOMMENDATION OF THE SPECIAL
COMMITTEE AND BOARD OF DIRECTORS; FAIRNESS OF THE PROPOSED TRANSACTIONS", it is
the intention of the persons named in the accompanying form of proxy to vote
such proxy "For" approval of Proposal 1, unless shareholders specifically
indicate in their proxies that they desire to vote against or abstain from
voting for Proposal 1. Approval requires an affirmative vote of the votes cast
in person or by proxy at the annual meeting. Management recommends that the
shareholders vote "For" approval of Proposal 1.
PROPOSAL 2: REDEMPTION OF ALL OF THE SHARES OF ORALABS HOLDING CORP. OWNED
INDIVIDUALLY BY GARY H. SCHLATTER IN EXCHANGE FOR THE ISSUANCE TO HIM OF THE
ENTIRE OWNERSHIP OF THE OPERATING SUBSIDIARY, ORALABS, INC., HELD BY ORALABS
HOLDING CORP.
The adoption of this Proposal is conditioned upon the approval by the
OraLabs shareholders of all of the other Proposals described in this Proxy
Statement. Based upon the information set forth in the sections of this Proxy
Statement entitled "SPECIAL FACTORS" and "RECOMMENDATION OF THE SPECIAL AND
BOARD OF DIRECTORS; FAIRNESS OF THE PROPOSED TRANSACTIONS", it is the intention
of the persons named in the accompanying form of Proxy to vote such Proxy "For"
approval of Proposal 2, unless shareholders specifically indicate in their
proxies that they desire to vote against or abstain from voting for Proposal 2.
Approval requires an affirmative vote of a majority of the shares entitled to
vote at the annual meeting. Management recommends that the shareholders vote
"For" approval of Proposal 2.
PROPOSAL 3: APPROVAL OF THE 2006 DIRECTOR STOCK PLAN AND THE ISSUANCE TO ROBERT
C. GUST OF 100,000 SHARES AND MICHAEL I. FRIESS OF 200,000 SHARES UNDER THAT
PLAN.
The adoption of this Proposal is conditioned upon the approval by the
OraLabs shareholders of all of the other Proposals described in this Proxy
Statement. The shareholders will be asked to approve the proposed 2006 Director
Stock Plan (a copy of which is attached as Annex 3 to this Proxy Statement) and
the issuance of 300,000 shares under that plan to the two non-employee directors
of OraLabs as specified. As of March 1, 2006, the Board of Directors adopted the
2006 Director Stock Plan, subject to approval of the OraLabs' shareholders.
The following is a summary of information regarding the Plan.
Material Features of the Plan.
The Plan permits the Company, acting through its Board of Directors as
the administrator of the Plan, to give bonus compensation to directors in the
form of common stock of the Company, provided that a maximum of 1,000,000 shares
may be issued under the Plan (subject to adjustment as discussed below). The
300,000 shares are the only shares intended to be issued under the 2006 Director
Stock Plan. The Board of Directors currently consists of three persons. The
Board of Directors may issue shares pursuant to the Plan at any time and from
time to time as the Board considers to be warranted or justified for the purpose
of compensating directors, and shares may be issued either with or without
restrictions upon transferability. No options, warrants or other rights will be
issued under the Plan.
68
Plan Benefits
Shareholders are being asked to approve the issuance of a total of
300,000 shares under the Plan as more particularly described in the following
table:
-------------------------------------------------------------------------------------------------------------------------
NEW PLAN BENEFITS
2006 Director Stock Plan
-------------------------------------------------------------------
Name and Position Dollar Value ($) Number of Shares
----------------- ---------------- ----------------
Gary H. Schlatter, CEO and Director None
Michael I. Friess, Director * 200,000
Robert C. Gust, Director * 100,000
Executive Group None
Non-Executive Director Group * 300,000
Non-Executive Officer Employee Group None
------------------------------------------------- --- -------------------- --------------------- ------------------------
* The dollar value of the shares will be based upon the price of the common
stock issued under the Plan as of the date of issuance.
Adjustments, Termination and Amendment.
The number of 1,000,000 shares that are authorized under the Plan will
be proportionately adjusted for such items as stock splits, reverse stock
splits, stock dividends or other combinations or reclassifications of the
Company's common stock. The Plan terminates on December 31, 2011, unless the
Board of Directors suspends or terminates the Plan at any earlier time. The
Board of Directors may amend the Plan, except that to the extent that
shareholder approval is necessary for any amendment in order to satisfy the
requirements of applicable law or regulations, the amendment will not be
effective until shareholder approval is obtained.
Based upon the information set forth in the sections of this Proxy
Statement entitled "SPECIAL FACTORS" and "RECOMMENDATION OF THE SPECIAL AND
BOARD OF DIRECTORS; FAIRNESS OF THE PROPOSED TRANSACTIONS", it is the intention
of the persons named in the accompanying form of proxy to vote such proxy "For"
approval of Proposal 3, unless shareholders specifically indicate in their
proxies that they desire to vote against or abstain from voting for Proposal 3.
Approval requires an affirmative vote of a majority of the votes cast in person
or by proxy at the annual meeting. Management recommends that the shareholders
vote "For" approval of Proposal 3.
PROPOSAL 4: APPROVAL OF THE SALE TO ORALABS, INC., THE WHOLLY-OWNED SUBSIDIARY
OF ORALABS, OF UP TO 100,000 SHARES OF ORALABS COMMON STOCK TO SATISFY AN
INDEMNITY OBLIGATION OF ORALABS, INC. IN CONNECTION WITH THE CLOSING
OF THE TRANSACTIONS DESCRIBED IN THIS PROXY STATEMENT.
The terms under which and the price applicable to shares that may be purchased
by OraLabs, Inc. to satisfy the indemnity obligation are set forth in "The
Exchange Agreement-Tax Indemnity". The Tax Indemnity Agreement is attached to
this Proxy as Annex 6. The adoption of this Proposal is conditioned upon the
approval by the OraLabs shareholders of all of the other Proposals described in
this Proxy Statement. Based upon the information set forth in the sections of
this Proxy Statement entitled "SPECIAL FACTORS" and "RECOMMENDATION OF THE
SPECIAL AND BOARD OF DIRECTORS; FAIRNESS OF THE PROPOSED TRANSACTIONS", it is
the intention of the persons named in the accompanying form of proxy to vote
such proxy "For" approval of Proposal 4, unless shareholders specifically
indicate in their proxies that they desire to vote against or abstain from
voting for Proposal 4. Approval requires an affirmative vote of the votes cast
in person or by proxy at the annual meeting. Management recommends that the
shareholders vote "For" approval of Proposal 4.
69
PROPOSAL 5: TO AUTHORIZE ORALABS (UNDER ITS NEW NAME, CHINA PRECISION STEEL,
INC.) TO ISSUE 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 A POTENTIAL EQUITY FINANCING.
The Board of Directors of OraLabs has approved, subject to shareholder approval,
this Proposal 5 authorizing OraLabs (under this new name, China Precision Steel,
Inc.) to issue an undetermined number of shares of OraLabs common stock, shares
of Preferred Stock convertible into OraLabs common stock ("New Convertible
Preferred Stock") or warrants to purchase OraLabs common stock, in an aggregate
amount of up to 22,600,000 shares of OraLabs common stock in connection with a
potential private equity financing.
Description of the Financing
OraLabs, under its new name, China Precision Steel, Inc., is contemplating
entering into a transaction to raise up to $50 million in new capital through
the issuance of OraLabs common stock, the New Convertible Preferred Stock or
warrants to purchase OraLabs common stock. OraLabs will issue the OraLabs common
stock, the New Convertible Preferred Stock, the warrants or some combination
thereof to the purchasers in the potential financing. The issuance would be made
in a private placement to one or more accredited investors, as defined in Rule
501 of Regulation D pursuant to the Securities Act of 1933, as amended. The
terms of the financing have not been determined. The Board of Directors is
seeking approval to issue an undetermined number of shares of OraLabs common
stock, shares of the New Convertible Preferred Stock or warrants to purchase
OraLabs common stock in an aggregate amount of up to 22,600,000 shares of
OraLabs common stock. The price of any combination or class of the securities
issued will be determined by the Board of Directors of OraLabs at the time of
the financing. The price of the newly-issued OraLabs common stock, New
Convertible Preferred Stock and warrants will have no pricing correlation to the
publicly-traded shares of the OraLabs common stock today. This price may be at,
above or beneath the price of the OraLabs common stock at the time of the
financing.
The terms of the potential financing as well as the combination of securities to
be issued have not been determined. However if OraLabs were to issue shares of
the New Convertible Preferred Stock, the rights and privileges of the holders of
the New Convertible Preferred Stock will be superior to those of holders of the
OraLabs common stock. The Board of Directors will be able to determine the terms
of the New Convertible Preferred Stock pursuant to OraLabs (under its new name,
China Precision Steel, Inc.) Certificate of Designation. OraLabs anticipates
that the New Convertible Preferred Stock and warrants will convert into OraLabs
common stock at a conversion rate that may be subject to adjustment in certain
circumstances, including in the event of an additional issuance of equity
securities by OraLabs at a consideration per share below the then-effective
conversion rate. OraLabs anticipates that the aggregate number of shares of
OraLabs common stock issued (assuming the conversion of the New Convertible
Preferred Stock, if issued, or the exercise of the warrants, if issued, into
shares of OraLabs common stock) will be in excess of 20 percent of the OraLabs
70
common stock and 20 percent of the voting power of OraLabs outstanding before
the issuance. In addition to the superior rights that the New Convertible
Preferred Stock may have over the OraLabs common stock, which are discussed
above, the issuance of the New Convertible Preferred Stock, if any, will also
have the effect of dilution on the outstanding OraLabs common stock, reducing
the voting power held by existing shareholders.
Purpose of Financing
The principal purposes of the financing are to obtain funds needed to support
PSHL's business plan, to expand the company's sales and distribution networks
and to continue the operations of OraLabs under its new name China Precision
Steel, Inc. In addition, we believe that it is in OraLabs' best interest to
reduce the level of Shanghai Chengtong Precision Strip Co., Ltd.'s indebtedness
and we expect to use approximately 70% of the net proceeds of the potential
equity financing to repay outstanding debt with Raiffeisen Zentralbank
Osterreich AG. Reducing the company's indebtedness should improve our balance
sheet, reduce financial costs and permit the company additional financial
flexibility.
Necessity for Shareholder Approval
Because the OraLabs common stock is listed on the NASDAQ SmallCap Market,
OraLabs is subject to NASDAQ Marketplace Rules. NASDAQ Marketplace Rule
4350(i)(1)(D)(ii) requires that a company listed on NASDAQ obtain shareholder
approval in connection with a transaction (other than a public offering)
involving the potential issuance of common stock (or securities convertible into
or exercisable for common stock) equal to 20 percent or more of its common stock
or 20 percent or more of its voting power outstanding before the issuance for
less than the greater of book or market value of the stock as of the date of the
transaction. To the extent that a NASDAQ listed company does not obtain
shareholder approval to such an arrangement, that company may be subject to the
delisting of its securities from NASDAQ.
OraLabs anticipates that the aggregate number of shares of the OraLabs common
stock issued (including conversion of the New Convertible Preferred Stock and
the exercise of the warrants, if any are to be issued, into shares of the
OraLabs common stock) may be in excess of 20 percent of the OraLabs common stock
and 20 percent of the voting power of OraLabs outstanding before the issuance of
the securities. The price of any OraLabs common stock, the conversion rate of
any New Convertible Preferred Stock and the applicable exercise price of any
warrants may also be set beneath the market price of the OraLabs common stock at
the closing of the sale, which would be less than the greater of book or market
value of the stock as of the date of the transaction. Because of these
possibilities, OraLabs has submitted this Proposal for shareholder approval in
accordance with NASDAQ Marketplace Rule 4350(i)(1)(D)(ii).
The adoption of this Proposal is conditioned upon the approval by the
OraLabs shareholders of all of the other Proposals described in this Proxy
Statement. Based upon the information set forth in the sections of this Proxy
Statement entitled "SPECIAL FACTORS" and "RECOMMENDATION OF THE SPECIAL
COMMITTEE AND BOARD OF DIRECTORS; FAIRNESS OF THE PROPOSED TRANSACTIONS", it is
the intention of the persons named in the accompanying form of proxy to vote
such proxy "For" approval of Proposal 5, unless shareholders specifically
indicate in their proxies that they desire to vote against or abstain from
voting for Proposal 5. Approval requires an affirmative vote of the votes cast
in person or by proxy at the annual meeting. Management recommends that the
shareholders vote "For" approval of Proposal 5.
71
PROPOSAL 6: AMENDMENT TO ORALABS' ARTICLES OF INCORPORATION TO CHANGE NAME AND
INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK.
The adoption of this Proposal is conditioned upon the approval by the
OraLabs shareholders of all of the other Proposals described in this Proxy
Statement. Management requests shareholder approval to amend the Articles of
Incorporation to change the name of the Company to China Precision Steel, Inc.
and to increase the number of authorized shares of common stock. The name change
is recommended to reflect the new business direction of OraLabs upon completion
of the proposed transactions. The Amendment will increase the number of shares
of authorized common stock from 25,000,000 to 62,000,000. The increase in number
of shares of authorized common stock is necessary in part to complete the
transactions described in this Proxy Statement, and management of the Company
believes that the additional increase is advisable to provide flexibility in the
event that the issuance of additional shares of the Company's authorized common
stock will further the business of the Company. A vote in favor of this Proposal
is a vote to approve the Articles of Amendment attached to this Proxy as Annex 5
with respect to the matters described in this Proposal.
It is the intention of the persons named in the accompanying form of
Proxy to vote such proxy "For" Proposal 6 unless shareholders specifically
indicate in their proxies that they desire to vote against or abstain from
voting for approval of Proposal 6. Approval requires an affirmative vote of the
votes cast in person or by proxy at the Annual Meeting. Management recommends
that shareholders vote "For" approval of Proposal 6.
PROPOSAL 7: AMENDMENT TO ORALABS' ARTICLES OF INCORPORATION TO INCREASE THE
NUMBER OF AUTHORIZED SHARES OF PREFERRED STOCK.
The adoption of this Proposal is conditioned upon the approval by the
OraLabs shareholders of all of the other Proposals described in this Proxy
Statement. Management requests shareholder approval to amend the Articles of
Incorporation to increase the number of authorized shares of preferred stock
from 1,000,000 to 8,000,000. An increase in the number of authorized shares of
preferred stock may be necessary if the Company chooses to engage in a potential
equity financing such as that described in Proposal 5. The Company believes that
the increase in the number of authorized shares of preferred stock above the
number of shares that may be issued in a transaction described in Proposal 5 is
advisable to provide the Company with flexibility if the issuance of additional
preferred shares is useful to further the business of the Company. The terms and
conditions of any such preferred shares are not described in the Company's
Articles of Incorporation, but instead will be specified in one or more
Certificates of Designation that would be created at the time that additional
shares of preferred stock are intended to be issued. Because the terms of any
such preferred shares are not specified at this time, and because any such
preferred shares may have rights superior to those of common shares, the
issuance of such preferred shares could have a material adverse affect upon
owners of common stock.
It is the intention of the persons named in the accompanying form of
Proxy to vote such proxy "For" Proposal 7 unless shareholders specifically
indicate in their proxies that they desire to vote against or abstain from
voting for approval of Proposal 7. Approval requires an affirmative vote of the
votes cast in person or by proxy at the Annual Meeting. Management recommends
that shareholders vote "For" approval of Proposal 7.
72
PROPOSAL 8: ELECTION OF DIRECTORS.
The adoption of this Proposal is conditioned upon the approval by the
OraLabs shareholders of all of the other Proposals described in this Proxy
Statement. OraLabs' Board of Directors consists of Messrs. Schlatter, Friess and
Gust, who will all resign effective upon completion of the Closing of the
proposed transactions. OraLabs currently has a standing Audit Committee but does
not have nominating or compensation committees. The Audit Committee consists of
Michael I. Friess and Robert C. Gust. It consisted of three members until one of
the independent members of the Board resigned in February 2006. The Audit
Committee reviews the consolidated financial statements and independent
auditors' reports, including recommendations from the independent auditors
regarding internal controls and other matters. The Audit Committee held one
meeting during fiscal year 2005 to discuss the financial statements to be part
of the Company's Form 10-KSB for fiscal year 2004, and held another meeting
during fiscal year 2005 with the Company's independent auditors with respect to
the Company's forthcoming Annual Report on Form 10-KSB for fiscal year 2005.
There were several informal meetings as well, all of which were held by
telephone conference call. A copy of the written charter of the Audit Committee
is included as an appendix to the Company's Proxy Statement filed on November
23, 2005. The members of the Audit Committee are independent as required by
NASDAQ listing standards.
The Company's Board of Directors believes that it is appropriate for
the Company not to have nominating or compensation committees due to the
Company's small size and because the members of the Board of Directors have
remained substantially the same since the Company became public in 1997. All
directors would participate in the consideration of future director nominees.
During the fiscal year ended December 31, 2005, the Company's Board of Directors
did not meet in person but met six times by telephone conference, and each
director participated in the meetings. PSHL intends to fully comply with NASDAQ
corporate governance requirements. In this regard, the PSHL intends to establish
a nominating and compensation committee composed of the independent
non-executive directors following the consummation of the transaction. The three
independent non-executive directors will also be the members of the audit
committee.
There is no formal process for security holders to send communications
to the Company's Board of Directors. Due to the small size of the Company, the
Board does not believe that any formal process is necessary. Board members are
not obligated to attend the annual meetings of shareholders. One Board member
attended last year's annual meeting.
There are five nominees for directors, Messrs. Wo Hing Li, Hai Sheng
Chen, Che Kin Lui, David Peter Wong and Tung Kuen Tsui, of whom the latter three
are independent non-executive directors. Each director to be elected will hold
office until the next annual meeting of shareholders and until his successor is
elected, or until the director's death, resignation or removal.
The nominees for the Board of Directors of OraLabs are as follows:
Name Age Proposed Positions
Wo Hing Li 59 President
Hai Sheng Chen 43 Executive Director
Che Kin Lui 44 Director
David Peter Wong 50 Director
Tung Kuen Tsui 61 Director
See "PSHL Business - PSHL Directors and Management" for information
about Wo Hing Li and Hai Sheng Chen.
Che Kin Lui
Che Kin 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
David P. 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
Tung Kuen 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.
73
It is the intention of the persons named in the accompanying form of
Proxy to vote such proxy "For" the election of the persons listed above, unless
shareholders specifically indicate in their proxies that they desire to vote
against or abstain from voting for the electing of any such director to office.
Each nominee must be approved by receiving the highest number of affirmative
votes of the votes cast in person or by proxy at the annual meeting. Management
recommends that shareholders vote "For" the election of the nominees.
PROPOSAL 9: APPROVAL OF THE CHINA PRECISION STEEL, INC. 2006 OMNIBUS LONG-TERM
INCENTIVE PLAN.
The Board of Directors has adopted the 2006 Omnibus Long-Term Incentive
Plan (the "Long-Term Incentive Plan") and recommends it for shareholder approval
at the forthcoming Special Meeting. The Board of Directors believes it to be in
the best interests of the Company to adopt the Long-Term Incentive Plan to
promote our long-term growth and profitability by providing our key employees,
our consultants and our directors with incentives to improve the value of our
common stock. We are seeking your approval so that we may use the Long-Term
Incentive Plan to grant incentive stock options (options that enjoy certain
favorable tax treatment under Sections 421 and 422 of the Internal Revenue Code
of 1986, as amended (the "Code")).
The Long-Term Incentive Plan is intended to encourage the key employees,
consultants and directors of the Company (and certain of our affiliated
companies) to own our common stock and to provide additional incentive to those
employees and directors of the Company whose contributions are essential to the
growth and success of the Company's business, in order to strengthen the
commitment of such persons to the Company, motivate such persons to faithfully
and diligently perform their responsibilities and attract and retain competent
and dedicated persons whose efforts will result in the long-term growth and
profitability of the Company.
Vote Required
The affirmative vote of a majority of the shares present in person or by proxy
at the Special Meeting and entitled to vote on this proposal is required for
approval of the Long-Term Incentive Plan. In tabulating the vote, abstentions
will have the same effect as voting against the proposal and broker non-votes
will be disregarded and have not effect on the outcome of the vote.
The Board of Directors unanimously recommends that you vote FOR approval of the
adoption of the Long-Term Incentive Plan.
Long-Term Incentive Plan Description
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 Proxy Statement as Annex 4.
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.
74
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:
o stock options, including incentive stock options and non-qualified
stock options;
o restricted stock;
o restricted stock units;
o stock appreciation rights;
o unrestricted stock grants; and
o 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, after we become a
publicly held company, 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
75
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. As of October 27, 2006, the closing market price of
our common stock on the NASDAQ Capital Market was $6.11.
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.
76
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:
o in cash or cash equivalents,
o the surrender of previously acquired shares of our common stock,
o authorization for us to withhold a number of shares otherwise payable
pursuant to the exercise of an option, or
o 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
77
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
78
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.
The adoption of this Proposal is conditioned upon the approval by the OraLabs
shareholders of all of the other Proposals described in this Proxy Statement.
Based upon the information set forth in the sections of this Proxy Statement
entitled "SPECIAL FACTORS" and "RECOMMENDATION OF THE SPECIAL AND BOARD OF
DIRECTORS; FAIRNESS OF THE PROPOSED TRANSACTIONS", it is the intention of the
persons named in the accompanying form of proxy to vote such proxy "For"
approval of Proposal 9, unless shareholders specifically indicate in their
proxies that they desire to vote against or abstain from voting for Proposal 9.
Approval requires an affirmative vote of the votes cast in person or by proxy at
the annual meeting. Management recommends that the shareholders vote "For"
approval of Proposal 9.
PROPOSAL 10: ELECTION OF INDEPENDENT AUDITORS.
The adoption of this Proposal is conditioned upon the approval by the
OraLabs shareholders of all of the other Proposals described in this Proxy
Statement. Conditioned upon the approval of all of the other Proposals by the
shareholders, the Board of Directors has nominated Murrell, Hall, McIntosh &
Co., PLLP as the independent auditors to audit the books and accounts of the
Company for the fiscal year ending December 31, 2006. GHP Horwath, P.C. ("GHP")
has served as the independent auditors since November 17, 2005. A representative
of Murrell, Hall, McIntosh & Co., PLLP is expected to attend the Annual Meeting
and will be available to respond to appropriate questions. The following table
presents fees for professional audit services rendered by GHP and by OraLabs'
previous auditors, Ehrhardt Keefe Steiner & Hottman P.C. ("EKS&H"), for the
audit of OraLabs' annual financial statements for the years ended December 31,
2005 and December 31, 2004, and the reviews of the financial statements included
in each of our quarterly reports on Form 10-QSB during the fiscal years ended
December 31, 2005 and 2004:
2005 2004
Audit Fees $142,695 $65,500
Audit-Related Fees $0 $0
Tax Fees $0 $0
All Other Fees $0 $0
Audit Fees are fees incurred in connection with the audit of OraLabs
and its subsidiary's consolidated annual financial statements and the review of
financial statements in the Company's quarterly reports on Form 10-QSB. All
Other Fees are incurred for services other than those described above. The Audit
Committee will pre-approve the performance by GHP of any services other than
those relating to the audit or review of the Company's financial statements, but
no other services are anticipated at this time.
79
It is the intention of the persons named in the accompanying form of
Proxy to vote such proxy "For" Proposal 10 unless shareholders specifically
indicate in their proxies that they desire to vote against or abstain from
voting for Proposal 10. Approval of Proposal 10 requires an affirmative vote of
the votes cast in person or by proxy at the annual meeting. Management
recommends that shareholders vote "For" Proposal 10.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Proxy Statement contains and incorporates by reference certain
forward-looking statements and information relating to OraLabs that are based on
the beliefs of management as well as assumptions made by and information
currently available to OraLabs. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance,
and underlying assumptions and other statements that are other than statements
of historical facts, including statements regarding the completion of the
proposed transactions to be considered by the OraLabs shareholders at the Annual
Meeting. When used in this document, the words "anticipate," "believe,"
"estimate," "expect," "plan," "intend," "project," "predict," "may," and
"should" and similar expressions are intended to identify forward-looking
statements. Such statements reflect a current view of OraLabs with respect to
future events, including the closing upon the proposed transactions, and are
subject to numerous risks, uncertainties and assumptions. Many factors could
cause the actual results, performance or achievements of OraLabs to be
materially different from any future results, performance or achievements that
may be expressed or implied by such forward-looking statements, including
without limitation the failure for any reason of the proposed transactions to
close, the failure of OraLabs to maintain its NASDAQ listing for its common
stock, competition, problems accompanying the management of manufacturing and
growth, dependence on key personnel, government regulation, dependence upon
significant distributors and retailers, dependence upon third-party suppliers
and no assurances of proprietary protection.
Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those described in this Proxy Statement as anticipated,
believed, estimated, expected, planned or intended. OraLabs does not intend, or
assume any obligation, to update these forward-looking statements to reflect
actual results, changes in assumptions or changes in the factors affecting such
forward-looking statements.
FINANCIAL STATEMENTS
OraLabs' Consolidated Financial Statements and Independent Auditors'
Report dated December 31, 2005, in OraLabs' Form 10-KSB filed for the fiscal
year ended December 31, 2005, and its unaudited financial statements in its Form
10-QSB filed for the quarter ended September 30, 2006 are included in this Proxy
Statement immediately following the section entitled "Solicitation and
Expenses". PSHL's Consolidated Financial Statements as of June 30, 2006,
including the Report of its Independent Registered Public Accounting Firm, and
Pro Forma Condensed Consolidated Financial Statements follow the OraLabs
financial statements.
WHERE YOU CAN FIND MORE INFORMATION
The following documents previously filed by OraLabs with the SEC are
included with this Proxy Statement for your convenient review.
80
Form 10-KSB filed by OraLabs for the fiscal year ended December 31,
2005; Form 10-QSB filed by OraLabs for the quarter ended September 30, 2006.
SHAREHOLDER MEETINGS AND PROPOSALS
OraLabs postponed its annual meeting of shareholders that regularly
occurs in late May to the newly scheduled date to avoid incurring the expense of
notifying the shareholders for two separate meetings. Assuming that the
transactions contemplated by the Exchange Agreement are consummated, it is
intended that the next annual meeting of shareholders of OraLabs, under its new
name of China Precision Steel, Inc., will be held on November 12, 2007.
Shareholders of OraLabs wishing to include proposals in the proxy material
relating to the Annual Meeting of Shareholders of OraLabs in 2007 must submit
the same in writing so as to be received at the principal executive office of
OraLabs (to the attention of the Secretary) on or before July 14, 2007 for such
proposal to be considered for inclusion in the proxy statement for such meeting.
Such proposals must also meet the other requirements of the rules of the
Securities and Exchange Commission relating to shareholder proposals.
Shareholders who wish to submit any items of business to be addressed
at an annual meeting of shareholders (rather than include the item in the proxy
material) must make the submission in a timely manner as provided in OraLabs'
Second Amended and Restated Bylaws. The Bylaws provide that only timely
submissions of business items will be considered as proper business at the
meeting. To be timely, a shareholder's written submission must be delivered to
or mailed and received at, the principal business offices of OraLabs at least
sixty (60) days in advance of the date that OraLabs' proxy statement was
released to shareholders in connection with the previous year's annual meeting
of shareholders. As this proxy statement for the 2006 annual meeting is being
released on approximately November 28, 2006, the deadline for submissions of
business items for the 2007 annual meeting will be September 29, 2007. The
Bylaws also specify what must be included in the written notice of submission in
order for the submission to be considered timely and to be considered proper
business to be conducted at the annual meeting. This paragraph does not apply if
closing occurs under the Exchange Agreement.
AVAILABLE INFORMATION
No person is authorized to give any information or to make any
representations, other than as contained in this Proxy Statement, in connection
with the Exchange Agreement or the transactions contemplated thereby, and if
given or made, such information or representations may not be relied upon as
having been authorized by OraLabs or PSHL. The delivery of this Proxy Statement
shall not, under any circumstances, create any implication that there has been
no change in the information set forth herein or in the affairs of OraLabs or
PSHL since the date hereof.
OraLabs is currently subject to the information requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith files
periodic reports, proxy statements and other information with the SEC relating
to its business, financial and other matters. Copies of such reports, proxy
statements and other information, and the exhibits thereto, may be copied (at
prescribed rates) at the Public Reference Room maintained by the SEC at Room
1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements,
and other information filed electronically with the SEC by OraLabs. A copy of
the OraLabs Annual Report for fiscal year 2004 accompanies this Proxy Statement.
Copies of any exhibits thereto will be furnished to any shareholder of OraLabs
upon the payment of a reasonable duplicating charge. Written requests for any
exhibit should be directed to OraLabs Holding Corp., 18685 East Plaza Drive,
Parker, Colorado 80134, Attention: Investor Relations.
81
SOLICITATION AND EXPENSES
OraLabs will bear the cost of the Annual Meeting and the cost of soliciting
proxies, including the cost of mailing the proxy materials. In addition to
solicitation by mail, Directors, officers and regular employees of OraLabs (who
will not be specifically compensated for such services) may solicit proxies by
telephone or otherwise. Arrangements will be made with brokerage houses and
other custodians, nominees and fiduciaries to forward proxies and proxy material
to their principals and OraLabs will reimburse them for their expenses.
82
Consolidated Financial Statements And Independent Auditors' Report December 31,
2005
ORALABS HOLDING CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
Report of Independent Registered Public Accounting Firm - GHP Horwath, P.C. 1
Report of Independent Registered Public Accounting Firm -
Ehrhardt Keefe Steiner & Hottman P.C.....................................2
Consolidated Financial Statements
Consolidated Balance Sheet...............................................3
Consolidated Statements of Operations....................................4
Consolidated Statements of Changes in Stockholders' Equity...............5
Consolidated Statements of Cash Flows....................................6
Notes to Consolidated Financial Statements.................................7-15
83
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
OraLabs Holding Corp.
We have audited the accompanying consolidated balance sheet of OraLabs Holding
Corp. and subsidiaries (the "Company") as of December 31, 2005, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of OraLabs Holding
Corp. and subsidiaries as of December 31, 2005, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
/S/ GHP HORWATH, P.C.
Denver, Colorado
April 12, 2006
Page 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders OraLabs Holding Corp. Parker,
Colorado
We have audited the consolidated balance sheet of OraLabs Holding Corp. and
Subsidiaries as of December 31, 2004 and 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial condition of OraLabs Holding
Corp. and Subsidiaries, as of December 31, 2004, and the results of their
operations and their cash flows for the years ended December 31, 2004 and 2003,
in conformity with accounting principles generally accepted in the United States
of America.
EHRHARDT KEEFE STEINER & HOTTMAN PC
April 8, 2005
Denver, Colorado
Page 2
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2005
Assets
Current assets
Cash $ 1,834,144
Accounts receivable-trade, net of allowance for doubtful
accounts of $86,639 1,795,898
Inventories 2,555,634
Prepaid expenses 173,533
Deposits and other assets 257,949
-------------------
Total current assets 6,617,158
-------------------
Deferred tax assets, net 179,000
Property and equipment, net 1,858,754
-------------------
Total non-current assets 2,037,754
-------------------
Total assets $ 8,654,912
===================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable - trade $ 1,021,153
Deferred revenue 630,000
Accrued liabilities 121,321
Reserve for returns 100,810
Current portion of long-term debt 6,300
Deferred tax liability 221,724
-------------------
Total current liabilities 2,101,308
-------------------
Long-term debt, less current portion 6,825
-------------------
Total non-current liabilities 6,825
-------------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par value, 1,000,000 authorized;
none issued and outstanding -
Common stock, $.001 par value; 25,000,000 shares
authorized; 4,693,015 issued and outstanding
(2005) and 4,668,615 issued and outstanding (2004) 4,693
Additional paid-in capital 1,511,820
Retained earnings 5,030,266
-------------------
Total stockholders' equity 6,546,779
-------------------
Total liabilities and stockholders' equity $ 8,654,912
===================
See notes to consolidated financial statements.
Page 3
ORALABS HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
2005 2004
-------------------- -------------------
Product sales $ 13,585,165 $ 13,130,579
Cost of goods sold 8,867,622 9,315,940
-------------------- -------------------
Gross profit 4,717,543 3,814,639
-------------------- -------------------
Operating expenses
Engineering 218,009 319,828
Selling and marketing 1,324,648 1,325,935
General and administrative 3,036,827 3,047,940
Other 49,797 32,218
-------------------- -------------------
Total operating expenses 4,629,281 4,725,921
-------------------- -------------------
Income (loss) from operations 88,262 (911,282)
-------------------- -------------------
Other income (expense)
Interest and other income 68,617 110,965
Other expense (35,359)
-------------------- -------------------
Total other income (expense) 68,617 75,606
-------------------- -------------------
Income (loss) before income taxes 156,879 (835,676)
-------------------- -------------------
Income tax (expense) benefit
Current 194,648
Deferred (62,887) 75,920
-------------------- -------------------
Total income tax (expense) benefit (62,887) 270,568
-------------------- -------------------
Net income (loss) $ 93,992 $ (565,108)
==================== ===================
Basic weighted average common shares
outstanding 4,681,116 4,668,615
==================== ===================
Basic income (loss) per common share $ 0.02 $ (0.12)
==================== ===================
Diluted weighted average common shares
outstanding 4,702,820 4,668,615
==================== ===================
Diluted income (loss) per common share $ 0.02 $ (0.12)
==================== ===================
See notes to consolidated financial statements.
Page 4
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2005 and 2004
Additional Total
Common Stock Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
----------- ----------- ----------- ----------- -----------
Balance - December 31, 2003 4,580,615 $ 4,581 $ 1,221,484 $ 5,501,382 $ 6,727,447
Stock options exercised, net
of tax benefit 88,000 88 241,560 241,648
Net loss - - - (565,108) (565,108)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 2004 4,668,615 $ 4,669 $ 1,463,044 $ 4,936,274 $ 6,403,987
Stock options exercised, net
of tax benefit 24,400 24 48,776 48,800
Net Income - - - 93,992 93,992
----------- ----------- ----------- ----------- -----------
Balance - December 31, 2005 4,693,015 $ 4,693 $ 1,511,820 $ 5,030,266 $ 6,546,779
=========== =========== =========== =========== ===========
See notes to consolidated financial statements.
Page 5
ORALABS HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
2005 2004
------------ ------------
Cash flows from operating activities
Net income (loss) $ 93,992 $ (565,108)
------------ ------------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation 556,592 380,022
Allowance for doubtful accounts (258,538) (70,244)
Deferred tax liability and asset 373,177 (151,464)
Loss on sale of assets 11,211
Changes in assets and liabilities
Accounts receivable - trade (261,539) 691,096
Income taxes receivable 329,648 (194,168)
Inventories 323,121 (456,601)
Prepaid expenses and deposits (8,311) (161,866)
Accounts payable - trade 170,994 (195,108)
Deferred revenue 630,000
Accrued liabilities (10,490) (14,519)
Reserve for returns (261,531) (34,077)
Income taxes receivable (payable) 107,508
------------ ------------
1,583,123 (88,210)
------------ ------------
Net cash provided by (used in) operating
activities 1,677,115 (653,318)
------------ ------------
Cash flows from investing activities
Purchase of property and equipment (746,672) (1,194,484)
------------ ------------
Net cash used in investing activities (746,672) (1,194,484)
------------ ------------
Cash flows from financing activities
Payments of principal on long-term debt (11,531) (22,874)
Stock options exercised 48,800 176,000
------------ ------------
Net cash provided by financing activities 37,269 153,126
------------ ------------
Net increase (decrease) in cash and cash equivalents 967,712 (1,694,676)
Cash and cash equivalents - beginning of year 866,432 2,561,108
------------ ------------
Cash and cash equivalents - end of year $ 1,834,144 $ 866,432
============ ============
Supplemental disclosure of non-cash transactions:
During 2005 and 2004, the Company received a tax benefit of $12,777 and $65,448,
respectively related to the exercise of options.
See notes to consolidated financial statements
Page 6
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OraLabs Holding Corp. and Subsidiaries, (the Company), was formed in June 1997.
SSI Capital Corp. (SSI) a New York Corporation was incorporated on January 30,
1981. Effective August 22, 1997, SSI was merged into the Company and the
outstanding shares of SSI were converted to shares of the Company on one-for-two
basis. In December, 2003, the Company effected a one-for-two reverse stock
split. All references to common stock in the Company's financial statements have
been retroactively adjusted for the merger and the two separate one-for-two
reductions in shares outstanding.
OraLabs Inc. (ORALABS), a Colorado corporation was incorporated on August 10,
1990. ORALABS is in the business of manufacturing and distributing lip balm,
fresh breath and other products. ORALABS is a wholly owned subsidiary of the
Company.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
ORALABS and the accounts of SSI since the date of the reverse acquisition and
the accounts of OL Sub Corp. (an inactive entity) since inception. The Company
established a 90% owned subsidiary of OraLabs, Inc. in Brazil during 2003, with
no business activity during that year. The activity during the 2004 year was
minimal and therefore immaterial to the overall business. There was no activity
during 2005 and the Company did not follow through with its plans to close the
subsidiary by the end of the second quarter 2005. Plans for 2006 are under
consideration.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents. The Company continually
monitors its positions with, and the credit quality of, the financial
institutions it invests with. As of the balance sheet date, and periodically
during the year, the Company has maintained balances in various operating
accounts in excess of federally insured limits.
ACCOUNTS RECEIVABLE
Accounts receivable represents receivables from customers for product purchased.
Such amounts are recorded gross of any discounts. Promotional discounts and bad
debts are estimated and accounted for in the allowance for doubtful accounts.
Management continually monitors and periodically adjusts the allowances
associated with these receivables based upon its loss history and aging
analysis. After all attempts to collect a receivable have failed, the receivable
is written off against the allowance.
INVENTORIES
Inventories consist of raw materials, work-in-process and finished goods, and
are stated at the lower of cost or market, determined using the lower of cost or
market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets, ranging
from 5 to 7 years, and the related lease terms for leasehold improvements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the criteria set forth in
Statement of Financial Accounting Standards ("SFAS") No. 48 "Revenue Recognition
When right of Return Exists". Revenue is recognized as product is shipped, net
of estimated returns. The Company allows for returns for defective product and
records an estimate of these returns based on historical operations and
experience. Occasionally the Company receives deposits in advance of delivering
the product. Deposits are recorded as deferred revenue until the product is
shipped and title has passed to the customer.
INCOME TAXES
The Company recognizes deferred tax liabilities and assets based on the
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years.
Page 7
ADVERTISING COSTS
The Company expenses advertising costs as incurred.
Advertising expenses were as follows:
For the Year Ended December 31,
2005 $ 69,065
2004 $ 79,883
RESEARCH AND DEVELOPMENT COSTS
Expenditures made for research and development are charged to expense as
incurred. Total research and development costs of $27,329 and $16,946 for
December 31, 2005 and 2004, respectively, were expensed in operations.
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
For the years ended December 31, 2005 and 2004, The Company had 169,000 and
147,900 stock options outstanding, respectively. In 2004, these options were not
included in the computation of (loss) per share because their effect was
anti-dilutive; however, in 2005, the stock options have a dilutive effect and
were therefore included in the computation of diluted earnings per share using
the treasury stock method.
STOCK-BASED COMPENSATION
The Company has determined the value of stock-based compensation arrangements
under the provisions of Accounting Principles Board No. 25 "Accounting for Stock
Issued to Employees" (APB No. 25); and makes pro forma disclosures required
under SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123
permits the use of either a fair value based method of the method defined in
APB No. 25 which requires the disclosure of pro forma net income (loss) and
earnings per share that would have resulted from the use of the fair value based
method.
For the Year Ended
December 31,
2005 2004
----------------- ----------------
Net income (loss) available to common shareholders-as reported $ 93,992 $ (565,108)
Total stock-based employee compensation expense determined under
fair market value method for an award (107,098) (7,581)
----------------- ----------------
Net loss available to common shareholders-pro forma $ (13,106) $ (572,689)
Basic and diluted income (loss) per common share- as reported $ 0.02 $ (0.12)
Basic and diluted income (loss) per common share- pro forma $ * $ (0.12)
* Amount is less than $(0.01) per share
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. All options are granted with an exercise
price equivalent to market price on the date of the grant. No options have been
re-priced or had their maturities extended during 2005. In terms of the
provisions of our Incentive Option Plan, employees, with vested options, who
leave the employment of the Company, are required to exercise or forfeit their
options within 90 days after leaving employment regardless of the exercise
period of the initial grant.
The following are the weighted-average assumptions used at December 31, 2005 and
2004 for all Black-Scholes calculations in the financial statements:
For the Year Ended
December 31,
2005 2004
----------- -----------
Approximate risk free rate 6.00% 3.74%
Average expected life 5 years 5 years
Dividend yield 0% 0%
Volatility 80% 73%
Page 8
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
123R "Share-Based Payment," a revision to FASB No 123. SFAS 123R replaces
existing requirements under SFAS No. 123 and APB No. 25, and requires public
companies to recognize a compensation expense an amount equal to the fair value
of share-based payments granted, such as employee stock options. This is based
on the grant-date fair value of those instruments. SFAS 123R also affects the
pattern in which compensation cost is recognized, the accounting for employee
share purchase plans, and the accounting for income tax effects of share-based
payment transactions. For small-business filers, SFAS 123R will be effective for
interim periods beginning after December 15, 2005. The Company is currently
determining what impact the proposed statement would have on its results of
operations and financial position. The impact will largely be due to the
selection of either the Black-Scholes or the binominal lattice model for valuing
options, which may be material.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43. This statement requires that certain abnormal costs associated with
the manufacturing, freight, and handling costs associated with inventory be
charged to current operations in the period in which they are incurred. The
adoption of this statement did not have a material effect on the Company's
results of operations, cash flows or financial position.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and long-term debt
approximated fair value as of December 31, 2005 because of the relatively short
maturity of these instruments.
CONCENTRATION OF BUSINESS AND CREDIT RISK
The Company is engaged primarily in the manufacture and sale of lip balm, fresh
breath and other products throughout North America and Internationally. The
potential for severe financial impact can result from negative effects of
economic conditions within the market or geographic area. Since the Company's
products are inexpensive, the potential negative effect of changes in economic
conditions are less than would be expected for higher priced products of other
industries.
NOTE 2 - BALANCE SHEET DISCLOSURES
Inventories are summarized as follows at December 31, 2005:
Raw materials $ 1,432,211
Work in process and finished goods 1,123,423
-------------------
$ 2,555,634
===================
Property and equipment consist of the following at December 31, 2005:
Machinery and equipment $ 3,906,315
Leasehold improvements 146,211
-------------------
4,052,526
Less accumulated depreciation (2,193,772)
-------------------
$ 1,858,754
===================
Page 9
NOTE 3 - LINE-OF-CREDIT
The Company has a $2,000,000 line-of-credit with a bank secured by substantially
all of the Company's assets. The line matures in September 2006. Interest is at
a variable rate tied to LIBOR and is periodically adjusted. As of December 31,
2005 the Company had no outstanding balance on this line-of-credit.
NOTE 4 - INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the differences between the financial statement and tax basis of assets
and liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that based on available
evidence, are not expected to be realized. As of December 31, 2005, the Company
had a Federal net operating loss ("NOL") carry forward of approximately $585,000
that will expire in 2024 and 2025 and state net operating loss carry forwards of
approximately $1,362,000 that will expire between 2023 and 2025.
The net current and long-term deferred tax assets and liabilities in the
accompanying balance sheet include the following at December 31, 2005:
Current deferred tax assets $ 86,000
Current deferred tax liability (307,724)
-------------------
Net current deferred tax liability $ (221,724)
===================
Long-term deferred tax assets $ 234,000
Long-term deferred tax liability (55,000)
-------------------
Net long-term deferred tax assets $ 179,000
===================
Temporary differences giving rise to a significant portion of deferred tax
assets (liabilities) are as follows at December 31, 2005:
Deferred tax assets:
Reserves for returns and other $ 52,000
Net operating loss carryforward 228,000
Allowance for doubtful accounts 34,000
Contributions carried forward 6,000
--------------------
Total deferred tax assets $ 320,000
Deferred tax liabilities:
Property and equipment (55,000)
Prior year refunds received and deferred (307,724)
-------------------
Net deferred tax liability $ (42,724)
===================
Page 10
The deferred tax liability of $307,724 relates to refunds received in 2005 in
excess of expected amounts. The amount received was recorded as a liability in
2005 as the Company determines the final status of its tax filings for 2001
through 2004.
The following is a reconciliation of the statutory federal income tax rate
applied to pre-tax accounting net income compared to the income taxes in the
consolidated statements of income:
For the Years Ended
December 31,
2005 2004
------------ -----------
Income tax expense (benefit) at the
statutory rate $ 53,339 $ (284,129)
Change resulting from:
State and local income taxes, net of
federal income tax 5,177 (27,516)
Non-deductible expenses 920 713
Foreign tax credits and income
Exclusions - (22,739)
Other 3,451 63,103
------------ -----------
$ 62,887 $ (270,568)
============ ===========
NOTE 5 - LONG-TERM DEBT
At December 31, 2005 long-term debt consists of:
Note payable to a financing company with interest at 0%.
The note calls for monthly principal payments of $525
and matures December 2007. Collateralized by vehicle. $ 13,125
--------
13,125
Less current portion ( 6,300)
--------
$ 6,825
========
Maturities of long-term obligations are as follows:
Year Ending December 31,
------------------------
2006 $ 6,300
2007 6,825
--------
$ 13,125
========
Page 11
NOTE 6 - COMMITMENTS AND CONTINGENCIES
RELATED PARTY OPERATING LEASES
The Company leases office and manufacturing facilities under an operating lease
for property controlled by the Company's President, which expires in September
2006. Rent expense recorded in 2005 was 446,088 under this related party lease.
OTHER
The Company also has one operating lease for a vehicle, which expires in June
2010. Payments under this lease are $723 per month.
Expense for these leases was:
Year Ending December 31,
2005 $ 454,769
2004 $ 529,859
LITIGATION
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact either
individually or in the aggregate on consolidated results of operations,
financial position or cash flows of the Company.
DEPOSITS
At December 31, 2005 and 2004, the Company had deposits of approximately
$257,949 and $158,720, respectively for orders of production materials.
NOTE 7 - STOCKHOLDERS' EQUITY
STOCK OPTIONS
In 1997, the Company adopted an incentive stock option plan for employees
concerning a maximum of 250,000 shares. The options vest on an annual basis. As
of December 31, 2005, the Company had 131,500 incentive options outstanding
under this plan, with exercise prices ranging from $2.00 to $2.40 per share.
In September 1997, the Company adopted a Non-Employee Directors' Option Plan.
The Board approved a program to grant certain directors the right to purchase
common stock of the Company. The options vest on an annual basis. As of December
31, 2005, the Company had 37,500 options outstanding under this plan with
exercise prices ranging from $1.32 to $5.00 per share.
Page 12
The following table presents the activity for options outstanding:
Incentive Non-qualified Average
Stock Stock Exercise
Options Options Price
------------- ------------- -------------
Outstanding - December 31, 2003 210,900 40,000 $ 2.15
Granted - 7,500 1.79
Forfeited/canceled (17,500) (5,000) 2.22
Exercised (88,000) - 2.00
------------- ------------- -------------
Outstanding - December 31, 2004 105,400 42,500 $ 2.15
Granted 50,500 7,500 2.23
Forfeited/canceled - (12,500) 2.44
Exercised (24,400) - 2.00
------------- ------------- -------------
Outstanding - December 31, 2005 131,500 37,500 $ 2.18
============= ============= =============
The following table presents the composition of options outstanding and
exercisable:
Options Outstanding Options Exercisable
Range of Exercise Prices Number Price* Life* Number Price*
---------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
$1.32 - $1.79 22,500 $ 1.62 2.00 5,625 $ 1.48
$2.00 81,000 2.00 1.11 81,000 2.00
$2.01 - $3.00 58,000 2.32 8.45 56,125 2.32
$3.01 - $5.00 7,500 4.75 0.42 7,500 4.75
---------------- ---------------- ---------------- ---------------- ----------------
Total - December 31, 2005 169,000 $ 2.18 3.72 150,250 $ 2.26
================ ================ ================ ================ ================
Price and life reflect the weighted average exercise price and weighted average
remaining contractual life, respectively.
Page 13
NOTE 8 - INCOME PER SHARE
The following table sets forth the computation for basic and diluted earnings
per share:
For the Years Ended
December 31,
2005 2004
------------- ------------
Numerator for basic income (loss) per share $ 93,992 $ (565,108)
============= =============
Numerator for diluted income (loss) per
common share $ 93,992 $ (565,108)
============= =============
Denominator for basic earnings per share -
weighted average shares outstanding 4,681,116 4,668,615
Effect of dilutive securities - options 21,704 -
------------- -------------
Denominator for diluted income (loss) per share -
adjusted weighted average shares outstanding 4,702,820 4,668,615
============= =============
Diluted income (loss) per common share $ 0.02 $ (0.12)
============= =============
Where the inclusion of potential common shares is anti-dilutive, such shares are
excluded from the computation.
NOTE 9 - STOCK EXCHANGE AGREEMENT
The Company entered into a Stock Exchange Agreement (the "Agreement") dated as
of March 31, 2006 with Partner Success Holdings Limited ("PSHL") under which all
of the issued and outstanding shares of PSHL are to be acquired by the Company
in consideration for the issuance to the owners of PSHL of common stock
representing a 94% ownership interest in the Company, after giving effect to a
redemption by the Company of 3,629,350 shares of its outstanding common stock
owned individually by its President, Gary H. Schlatter. The redemption is to be
in consideration for the transfer to Mr. Schlatter of all of the Company's
outstanding common stock of its wholly-owned operating subsidiary, OraLabs, Inc.
The 94% ownership interest in the Company is to be determined on a fully-diluted
basis that will take into account the issuance of 300,000 shares to the
non-employee directors of the Company prior to closing and after receiving
shareholder approval, and any options that may be exercised by employees prior
to the closing. If the closing of the Agreement occurs, PSHL will become a
wholly-owned subsidiary of the Company. The closing of the Agreement is
conditioned upon, among other things, customary closing conditions, including
the satisfaction of both the Company and PSHL with their due diligence
investigations of the other party and the receipt by the Board of Directors of
the Company of a fairness opinion. There can be no assurance that closing of the
transactions described in the Agreement will occur.
Page 14
NOTE 10 - MAJOR CUSTOMERS
The Company had two major customers that accounted for net sales of
approximately $2,400,000 and $1,600,000, respectively, of which $406,578 was due
from these customers and included in accounts receivable at year end. For the
year ended December 31, 2004, two customers accounted for net sales of
approximately $1,950,000 and $1,400,000, respectively, of which $174,805 was due
from those customers and included in accounts receivable at December 31, 2004.
NOTE 11 - EXPORT SALES
During the year ended December 31, 2005 and 2004, the Company had export sales
of approximately $1,055,397 and $918,000, or 8% and 7% of product sales,
respectively. All of the Company's export business is transacted in U.S. dollars
and the Company had no foreign currency translation adjustments.
NOTE 12 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
In the fourth quarter for the year ended December 31, 2005, the Company adjusted
its reserves related to promotional expenses and returns and allowances as a
result of changes in estimates based on management evaluation and historical
sales analysis. The adjustment increased income by approximately $273,000.
NOTE 13- 401K PLAN
During 2005, the Company began to offer a 401(k) retirement plan (the "Plan")
which covers all employees. Employees are eligible to participate after one year
of service. Employees may contribute amounts based on the limits established by
the Internal Revenue Service. Employer discretionary payments, as well as
certain matching contributions, may be made as determined by the Board of
Directors. The discretionary and matching contributions vest immediately. During
2005, the Company contributed approximately $44,979 to the Plan.
Page 15
OraLabs Holding Corp. and Subsidiaries
Table of Contents
Part I. Financial Information
Item 1. Financial Statement Page
Consolidated Balance Sheets as of September 30, 2006
(Unaudited) and December 31, 2005........................... 2
Consolidated Statements of Operations, Three Months
and Nine Months Ended September 30, 2006 and 2005
(Unaudited)................................................. 3
Consolidated Statement of Stockholders' Equity, Nine Months
Ended September 30, 2006 (Unaudited)........................ 4
Consolidated Statements of Cash Flows, Nine Months Ended
September 30, 2006 and 2005 (Unaudited)..................... 5
Notes to Consolidated Financial Statements................... 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition And Results of Operations..................... 10-13
Item 3. Controls and Procedures.................................. 13
Part II. Other Information.......................................... 14-15
Signatures........................................................... 16
Exhibit Index........................................................ 16
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2006 December 31, 2005
------------------- -----------------
Unaudited
Assets
Current assets
Cash and cash equivalents $ 1,204,142 $ 1,834,144
Accounts receivable-trade, net of allowance for
doubtful accounts of $68,686 (2006) and $86,639 (2005) 2,434,113 1,795,898
Inventories 3,398,068 2,555,634
Prepaid expenses 174,014 173,533
Deposits and other assets 417,907 257,949
----------------- -----------------
Total current assets 7,628,244 6,617,158
----------------- -----------------
Non-current assets
Deferred tax assets, net 179,000
Property and equipment, net 2,083,242 1,858,754
----------------- -----------------
Total non-current assets 2,083,242 2,037,754
----------------- -----------------
Total assets $ 9,711,486 $ 8,654,912
================= =================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable - trade $ 901,120 $ 1,021,153
Deferred revenue 88,848 630,000
Accrued liabilities 296,671 121,321
Reserve for returns 52,810 100,810
Income tax payable 66,211
Current portion of long-term debt 6,300 6,300
Deferred tax liability - current 248,178 221,724
----------------- -----------------
Total current liabilities 1,660,138 2,101,308
----------------- -----------------
Non-current liabilities
Long-term debt, less current portion 2,100 6,825
Deferred tax liability - long-term 63,034
----------------- -----------------
Total non-current liabilities 65,134 6,825
----------------- -----------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par value, 1,000,000 shares
authorized; none issued and outstanding
Common stock, $.001 par value; 25,000,000 shares
authorized, 4,848,265 (2006) and 4,693,015 (2005)
issued and outstanding 4,848 4,693
Additional paid-in capital 2,008,141 1,511,820
Retained earnings 5,973,225 5,030,266
----------------- -----------------
Total stockholders' equity 7,986,214 6,546,779
----------------- -----------------
Total liabilities and stockholders' equity $ 9,711,486 $ 8,654,912
================= =================
See Notes to Consolidated Financial Statements
2
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 2006 and September 30, 2005
Unaudited
--------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
09/30/06 09/30/05 09/30/06 09/30/05
--------------------------------------------------------------------------------------------------------
Product sales, net $4,385,608 $2,944,492 $13,304,462 $9,068,516
Cost of sales 2,826,257 1,920,431 7,940,115 5,898,903
---------- ---------- ---------- ----------
Gross profit 1,559,351 1,024,061 5,364,347 3,169,613
---------- ---------- ---------- ----------
Operating Expenses:
Engineering 71,889 40,312 145,653 168,021
Selling and marketing costs 435,501 406,184 1,299,943 1,062,595
General and administrative 835,542 792,638 2,453,346 2,195,761
Other 13,404 12,768 43,462 38,675
---------- ---------- ---------- ----------
Total operating expenses 1,356,336 1,251,902 3,942,404 3,465,052
---------- ---------- ---------- ----------
Net operating income (loss) 203,015 (227,841) 1,421,943 (295,439)
Interest and other income 40,692 13,113 76,035 53,371
---------- ---------- ---------- ----------
Income (loss) before provision for
income taxes 243,707 (214,728) 1,497,978 (242,068)
Income tax (expense) benefit (88,635) 68,710 (555,019) 77,459
---------- ---------- ---------- ----------
Net income (loss) $ 155,072 $ (146,018) $ 942,959 $ (164,609)
========== ========== ========== ==========
Basic and diluted income (loss) per
common share $ .03 $ (.03) $ .20 $ (.04)
========== ========== ========== ==========
Weighted average shares outstanding
- basic 4,812,866 4,693,015 4,761,415 4,677,195
========== ========== ========== ==========
Weighted average shares outstanding
- diluted 4,832,779 4,693,015 4,800,618 4,677,195
========== ========== ========== ==========
See Notes to Consolidated Financial Statements
3
ORALABS HOLDING CORP AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 2006
Unaudited
Additional
Common Paid-In Retained
Shares Amount Capital Earnings Total
------------------------------------------------------------------
Balance at December 31, 2005 4,693,015 $4,693 $1,511,820 $5,030,266 $6,546,779
Stock options exercised 155,250 155 327,026 327,181
Tax benefit on exercise
of stock options (Note 2) 155,320 155,320
Stock-based compensation expense 13,975 13,975
Net income 942,959 942,959
------------------------------------------------------------------
Balance at September 30, 2006 4,848,265 $4,848 $2,008,141 $5,973,225 $7,986,214
==================================================================
See Notes to Consolidated Financial Statements
4
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2006 and 2005
Unaudited
2006 2005
---- ----
Cash flows from operating activities:
Net income (loss) $ 942,959 $ (164,609)
----------------- -----------------
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation 409,134 420,049
Allowance for (recovery of) doubtful accounts 12,689 (133,438)
Deferred income taxes 268,488 (31,830)
Stock-based compensation expense 13,975
Changes in assets and liabilities:
Accounts receivable - trade (650,904) 61,048
Inventories (842,434) (305,263)
Prepaid expenses, deposits and other assets (160,439) 244,608
Accounts payable - trade (120,033) (43,477)
Deferred revenue (541,152)
Accrued liabilities 175,350 130,081
Reserve for returns (48,000) (112,439)
Income taxes payable/receivable 66,211 329,648
----------------- -----------------
(1,417,115) 558,987
----------------- -----------------
Net cash (used in) provided by operating activities (474,156) 394,378
----------------- -----------------
Cash flows from investing activities:
Investment in property and equipment (633,622) (569,569)
----------------- -----------------
Net cash used in investing activities (633,622) (569,569)
----------------- -----------------
Cash flows from financing activities:
Payment of long term debt (4,725) (8,869)
Stock options exercised 327,181 48,800
Tax benefit on exercise of stock options (Note 2) 155,320
----------------- -----------------
Net cash provided by financing activities 477,776 39,931
----------------- -----------------
Net decrease in cash and cash equivalents (630,002) (135,260)
Cash and cash equivalents, beginning of the period 1,834,144 866,432
----------------- -----------------
Cash and cash equivalents, end of the period $ 1,204,142 $ 731,172
================= =================
Cash paid for income taxes $ 65,000
=================
See Notes to Consolidated Financial Statements
5
ORALABS HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. This report should, therefore, be read in
conjunction with the Annual Report on Form 10-KSB for the year ended December
31, 2005 (the "2005 Form 10-KSB") of OraLabs Holding Corp. and Subsidiaries (the
"Company").
The information included in this report is unaudited but reflects all
adjustments which, in the opinion of management, are necessary to a fair
statement of the results of the interim periods covered thereby. All adjustments
are of a normal and recurring nature except as described herein.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which is a revision of SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS 123R supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95,
"Statement of Cash Flows". SFAS 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions and requires all share-based payments to employees, including
grants of employee stock options, to be recognized as additional compensation
expense in the financial statements based on the calculated fair value of the
awards. SFAS 123R also requires the benefits of tax deductions in excess of
recognized compensation costs to be reported as a financing cash flow. This
excess amount was $155,320 for the nine months ended September 30, 2006 and is
shown as "Tax benefit on exercise of stock options" in the Statement of Cash
Flows. We adopted this statement effective for our fiscal year beginning January
1, 2006. We have described the impact of adopting SFAS 123R in Note 6 to the
consolidated financial statements.
In March, 2005, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 107 regarding the Staff's interpretation of SFAS
No. 123(R). This interpretation provides the Staff's views regarding
interactions between SFAS No. 123(R) and certain SEC rules and regulations and
provides interpretations of the valuation of share-based payments for public
companies. The interpretive guidance is intended to assist companies in applying
the provisions of SFAS No. 123(R) and investors and users of the financial
statements in analyzing the information provided. The Company followed the
guidance prescribed in SAB No. 107 in connection with its adoption of SFAS No.
123(R).
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", which changes the requirements for the accounting and reporting of
a change in accounting principle and applies to all voluntary changes in
accounting principles. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. APB No. 20
"Accounting Changes" required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principles. This
statement requires retrospective application to prior period financial
statements of changes in accounting principles, unless it is impracticable to
determine either the period-specific effects of the cumulative effect of the
change. The provisions of SFAS No. 154 are effective for fiscal years beginning
after December 15, 2005. The adoption of SFAS No. 154 by the Company did not
have an impact on its consolidated financial statements.
In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109". This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in an entity's financial statements in accordance with SFAS No. 109,
"Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and
measurement principles for financial statement disclosure of tax positions taken
or expected to be taken on a tax return. This interpretation is effective for
fiscal years beginning after December 15, 2006. The Company is currently
assessing the impact the adoption of FIN 48 will have on its consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles and expands disclosures about fair
value measurements. This statement applies under other accounting pronouncements
that require or permit fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. The Company is currently
assessing the impact the adoption of SFAS No. 157 will have on its consolidated
financial statements.
In September 2006, the SEC issued SAB No. 108 in order to eliminate the
diversity of practice surrounding how public companies quantify financial
statement misstatements. In SAB 108, the SEC staff established an approach that
requires quantification of financial statement misstatements based on the
effects of the misstatements on each of the company's financial statements and
related financial statement disclosures. SAB 108 is effective for fiscal years
ending after November 15, 2006. The Company is currently assessing the impact
the adoption of SAB No. 108 will have on its consolidated financial statements.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 2006:
Machinery and equipment $ 4,021,495
Construction in progress 504,629
Leasehold improvements 160,025
------------
4,686,149
Less accumulated depreciation (2,602,907)
------------
$ 2,083,242
============
6
NOTE 4 - LINE-OF-CREDIT
The Company has a $2,000,000 line-of-credit agreement with a bank secured by
substantially all of the Company's assets. The line of credit expires in
September 2008. As of September 30, 2006, the Company had no outstanding balance
on this line-of-credit.
NOTE 5 - RESERVE FOR RETURNS AND ALLOWANCES
The reserve for returns and allowances is calculated as a percentage of sales
with a consideration of historical returns. The reserve was decreased in 2005
following an evaluation of historical returns as well as an analysis of current
outstanding accounts receivable and future return estimates. The rate of returns
decreased during 2005 and through the first nine months of 2006.
NOTE 6 - STOCK-BASED COMPENSATION
The Company has two stock option plans, the 1997 Stock Option Plan (the "1997
Plan"), and the 1997 Non-Employee Directors' Option Plan (the "1997 Directors'
Plan"), (collectively, the "Plans"). Under the 1997 Plan, grants of incentive
stock options are permitted. Incentive stock options may only be granted to
employees of the Company, including officers and directors who are also
employees. Under the 1997 Directors' Plan, non-qualified options may be issued
to directors of the Company. The exercise price of incentive stock options
granted under the 1997 Plan must be at least 100% of the fair market value of
the Company's stock at the grant date. The exercise price of non-qualified
options is at the fair market value of the Company's stock at the grant date.
Aggregate common shares of 250,000 are reserved for issuance under the 1997
Plan. Shares forfeited can be reissued under the 1997 Plan. Options issued under
the 1997 Plan vest over five years and expire ten years from the date of grant.
Options issued under the 1997 Directors' Plan vest over four years and expire
five years from the date of grant.
Effective January 1, 2006, the Company adopted SFAS 123R, using the modified
prospective method. SFAS 123R requires the recognition of the cost of employee
services received in exchange for an award of equity instruments in the
financial statements and is measured based on the grant date fair value of the
award. SFAS 123R also requires the stock option compensation expense to be
recognized over the period during which an employee is required to provide
service in exchange for the award (the vesting period). Prior to adopting SFAS
123R, the Company accounted for its stock-based compensation plans under
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"). Under APB 25, generally no compensation expense is
recorded when the terms of the award are fixed and the exercise price of the
employee stock option equals or exceeds the fair value of the underlying stock
on the date of grant. The Company adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
For the nine months ended September 30, 2006, the Company calculated
compensation expense of $13,975 related to stock options.
For options granted subsequent to the adoption date of SFAS 123R on January 1,
2006, the fair value of each stock option grant is estimated on the date of
grant using the Black-Scholes option pricing model. The Company had no stock
option grants during the nine months ended September 30, 2006 and granted 50,500
stock options during the nine months ended September 30, 2005. The weighted
average fair value of stock options at the date of grant during the nine months
ended September 30, 2005 was $1.52 per option.
The expected life of stock options represents the period of time that the stock
options granted are expected to be outstanding based on historical exercise
trends. The expected volatility is based on the historical price volatility of
the Company's common stock. The risk-free interest rate represents the U.S.
Treasury bill rate for the expected life of the related stock options. The
dividend yield represents the Company's anticipated cash dividend over the
expected life of the stock options.
The following are the weighted-average assumptions used for options granted
during the nine months ended September 30, 2005:
Approximate risk free rate 3.74%
Average expected life 5 years
Dividend yield 0%
Volatility 78%
7
A summary of stock option activity for the nine months ended September 30, 2006
is presented below:
Weighed
Weighted Average
Shares Average Remaining Aggregate
Under Exercise Contractual Intrinsic
Option Price Life Value
----------- ----------- ----------- -----------
Outstanding at January 1, 2006 169,000 $ 2.21
Exercised (155,250) 2.11
Forfeited (6,250) 1.75
Expired (7,500) 4.75
-----------
Outstanding at September 30, 2006 --
===========
Exercisable at September 30, 2006 --
===========
A summary of the status of the Company's non-vested stock options as of and for
the nine months ended September 30, 2006 is presented below:
Non-vested Weighted
Shares Average
Under Grant Date
Option Fair Value
------------ ------------
Non-vested at January 1, 2006 18,750 $ 1.67
Vested (12,500) 1.67
Forfeited (6,250) 1.67
------------
Non-vested at September 30, 2006 --
============
During the quarter ended September 30, 2006, the board of directors authorized
the Company to accelerate the vesting of all remaining non-vested stock options.
As a result, during the quarter ended September 30, 2006, all remaining
compensation cost related to stock options was recognized.
Prior to January 1, 2006, the Company determined the value of stock-based
compensation arrangements under the provisions of APB 25 and made pro forma
disclosures required under SFAS No. 123. SFAS No. 123 permitted the use of
either a fair value based method or the method defined in APB No. 25 which
required the disclosure of pro forma net income (loss) and earnings per share
that would have resulted from the use of the fair value based method. Had
compensation expense for stock option grants been determined based on the fair
value at the grant dates consistent with the method prescribed in FASB 123, the
Company's net loss and net loss per share would have been adjusted to the pro
forma amounts below for the three- month and nine-months ended September 30,
2005, as indicated below:
Three months ended Nine months ended
9/30/05 9/30/05
---------- -----------
Net loss, as reported $ (146,018) $ (164,609)
Total stock-based employee compensation
expense determined under fair market value
method for an award -- (98,931)
---------- -----------
Net loss available to common shareholders-
pro forma $ (146,018) $ (263,540)
========== ===========
Basic and diluted loss per common share-
as reported $ (.03) $ (.04)
Basic and diluted loss per common share-
pro forma $ (.03) $ (.06)
NOTE 7 - CUSTOMER CONCENTRATIONS
The Company's revenues are generated from customers located in the United
States. The following table summarizes sales to individual customers that
comprised more than 10% of the Company's sales for the periods ended September
30.
3 months ended 9 months ended
--------------- --------------
Customer 9/30/06 9/30/05 9/30/06 9/30/05
-------- ------- ------- ------- -------
A 29% 6% 16% 12%
B 4% 16% 6% 16%
C - - 10% -
As of September 30, 2006, two customers comprised approximately 45% and 10%,
respectively of the Company's accounts receivable. As of September 30, 2005 one
customer comprised approximately 10% of the Company's accounts receivable.
8
NOTE 8 - COMMITMENTS AND CONTINGENCIES
RELATED PARTY OPERATING LEASES
The Company leases office and manufacturing facilities under an operating lease
for property controlled by the Company's President, which expires in September
2009. Rent expense recorded during both the three and nine months ended
September 30, 2006 and 2005 was $111,522 and $334,566, respectively, under this
related party lease.
OTHER
The Company has one operating lease for a vehicle, which expires in June 2010.
Payments under this lease are $723 per month.
LITIGATION
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact either
individually or in the aggregate on consolidated results of operations,
financial position or cash flows of the Company.
DEPOSITS
At September 30, 2006 the Company had deposits of $417,907 for orders of
production materials.
NOTE 9 - STOCK EXCHANGE AGREEMENT
The Company entered into a Stock Exchange Agreement (the "Agreement") dated as
of March 31, 2006, as amended on July 20, 2006, and October 12, 2006 with
Partner Success Holdings Limited ("PSHL") under which all of the issued and
outstanding shares of PSHL are to be acquired by the Company in consideration
for the issuance to the owners of PSHL of common stock representing a 94%
ownership interest in the Company, after giving effect to a redemption by the
Company of 3,629,350 shares of its outstanding common stock owned individually
by its President, Gary H. Schlatter. The redemption is to be in consideration
for the transfer to Mr. Schlatter of all of the Company's outstanding common
stock of its wholly-owned operating subsidiary, OraLabs, Inc. The 94% ownership
interest in the Company is to be determined on a fully-diluted basis that will
take into account the issuance of 300,000 shares to the non-employee directors
of the Company prior to closing and after receiving shareholder approval, and
all options that were available to be exercised by employees prior to the
closing (all employee options have been exercised). The Agreement also provides
that the domicile of the Company will be changed from Colorado to Delaware and
the number of authorized shares of the Company will be increased to 62,000,000.
OraLabs, Inc. will pay certain tax liabilities arising out of closing the
transactions and will fund all or a part of the payment by purchasing up to
100,000 shares of the Company. If the closing of the Agreement occurs, PSHL will
become a wholly-owned subsidiary of the Company. Either party may terminate the
Agreement if the closing does not occur by January 15, 2007. The closing of the
Agreement is conditioned upon, among other things, customary closing conditions,
including the satisfaction of both the Company and PSHL with their due diligence
investigations of the other party and the receipt by the Board of Directors of
the Company of a fairness opinion. There can be no assurance that closing of the
transactions described in the Agreement will occur.
PARTNER SUCCESS HOLDINGS LIMITED
AND SUBSIDIARY
FINANCIAL STATEMENTS
June 30, 2006 and 2005
PARTNER SUCCESS HOLDINGS LIMITED
TABLE OF CONTENTS
JUNE 30, 2006
PAGE
NUMBER
INDEPENDENT AUDITORS' REPORT.........................................................................1
FINANCIAL STATEMENTS
Consolidated Balance Sheets
June 30, 2006 and 2005......................................................................2
Consolidated Statements of Operations for the Years Ended
June 30, 2006 and 2005......................................................................3
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended June 30, 2006 and 2005..................................................4
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2006 and 2005......................................................................5
NOTES TO THE FINANCIAL STATEMENTS...........................................................7
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Partner Success
Holdings Limited and Subsidiary (the "Company") as of June 30, 2006 and 2005 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with standards of the Public Companies
Accounting Oversight Board (United States). The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purposes of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statements presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Partner
Success Holdings Limited and Subsidiary as of June 30, 2006 and 2005, and the
consolidated results of their operations and cash flows for the years then ended
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Murrell, Hall, McIntosh & Co. PLLP
--------------------------------------
Oklahoma City, Oklahoma
October 30, 2006
Partner Success Holdings Limited and Subsidiary
Consolidated Balance Sheets
June 30, 2006 and 2005
(Expressed in US dollars)
2006 2005
---- ----
Assets
Current assets
Cash and equivalents $ 186,955 $ 3,133,326
Accounts receivable 13,399,003 6,194,993
Other receivables 69,913 44,010
Inventory 6,283,910 2,060,201
Deposits 75,575 -
Advances to suppliers 3,138,759 1,596,388
----------------- -----------------
Total current assets 23,154,115 13,028,918
----------------- -----------------
Property and equipment
Property and equipment, net 8,664,417 8,882,140
Construction-in-progress 13,752,954 3,578,417
----------------- -----------------
22,417,371 12,460,557
----------------- -----------------
Total assets $ 45,571,486 $ 25,489,475
================= =================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 1,793,116 $ 1,002,162
Other payables 8,350 305,239
Advances from customers 1,859,773 502,497
Tax payables 2,398,118 164,470
Amounts due to directors 5,477,842 7,868,697
Current portion of long-term debt 8,918,939 -
Notes payable 10,281,773 4,511,715
----------------- -----------------
Total current liabilities 30,737,911 14,354,780
----------------- -----------------
Long-term debt, net of current portion shown above 3,152,415 7,713,219
----------------- -----------------
Stockholders' equity:
Ordinary stock: $1 par value, 50,000 shares authorized,
issued and outstanding at June 30, 2006 and 2005 50,000 50,000
Additional paid-in capital 950,000 950,000
Accumulated other comprehensive income 745,583 -
Retained earnings 9,935,577 2,421,476
----------------- -----------------
Total stockholders' equity 11,681,160 3,421,476
----------------- -----------------
Total liabilities and stockholders' equity $ 45,571,486 $ 25,489,475
================= =================
The accompanying notes are an integral part of these financial statements.
2
Partner Success Holdings Limited and Subsidiary
Consolidated Statements of Operations
For the Years Ended June 30, 2006 and 2005
(Expressed in US dollars)
2006 2005
---- ----
Revenues
Sales revenues $ 34,881,141 $ 53,144,601
Cost of goods sold 24,892,154 45,562,070
----------------- -----------------
Gross profit 9,988,987 7,582,531
----------------- -----------------
Operating expenses
Selling expenses 122,220 86,592
Administrative expenses 505,764 544,171
Depreciation and amortization expense 40,005 142,127
----------------- -----------------
Total operating expenses 667,989 772,890
----------------- -----------------
Income from operations 9,320,998 6,809,641
Other income (expense)
Other revenues - 12,077
Interest and finance costs (271,693) (455,277)
----------------- -----------------
Total other income (expense) (271,693) (443,200)
----------------- -----------------
Net income before income tax 9,049,305 6,366,441
Provision for income tax (1,535,204) -
----------------- -----------------
Net Income $ 7,514,101 $ 6,366,441
================= =================
Basic and diluted earnings per share $ 150.28 $ 127.33
================= =================
Basic and diluted weighted average shares outstanding 50,000 50,000
================= =================
The Components of comprehensive income:
Net income $ 7,514,101 $ 6,366,441
Foreign currency translation adjustment 745,583 -
----------------- -----------------
Comprehensive income $ 8,259,684 $ 6,366,441
================= =================
The accompanying notes are an integral part of these financial statements.
3
Partner Success Holdings Limited and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended June 30, 2006 and 2005
(Expressed in US dollars)
Accumulated
Ordinary Shares Additional Other Total
----------------------- Paid-in Comprehensive Retained Stockholders'
Share Amount Capital Income Earnings Equity
---------- ----------- ------------- -------------------- --------------- ------------------
Balance at June 30, 2004 50,000 $ 50,000 $ 950,000 $ - $ (105,358) $ 894,642
Dividend declared - - - - (3,839,607) (3,839,607)
Net income for the year - - - - 6,366,441 6,366,441
---------- ----------- ------------- -------------------- --------------- ------------------
Balance at June 30, 2005 50,000 50,000 950,000 - 2,421,476 3,421,476
Foreign currency translation
adjustment - - - 745,583 745,583
Net income for the year - - - - 7,514,101 7,514,101
---------- ----------- ------------- -------------------- --------------- ------------------
Balance at June 30, 2006 50,000 $ 50,000 $ 950,000 $ 745,583 $ 9,935,577 $ 11,681,160
========== =========== ============= ==================== =============== ==================
The accompanying notes are an integral part of these financial statements.
4
Partner Success Holdings Limited and Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended June 30 , 2006 and 2005
(Expressed in US dollars)
2006 2005
---- ----
Cash flows from operating activities
Net Income $ 7,514,101 $ 6,366,441
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Depreciation 823,862 507,710
Net changes in assets and liabilities:
Accounts receivable, net (7,229,913) (5,808,987)
Inventories (4,223,709) 5,931
Advances to suppliers (1,542,371) (185,323)
Deposits (75,575) -
Accounts payable and accrued expenses 494,065 655,076
Advances from customers 1,357,276 (2,000,883)
Taxes payable 2,233,648 312,300
----------------- -----------------
Net cash provided by (used in) operating activities (648,616) (147,735)
----------------- -----------------
Cash flows from investing activities
Construction-in-progress (10,174,537) (2,440,092)
Purchases of fixed assets (606,241) (2,392,909)
----------------- -----------------
Net cash (used in) investing activities (10,780,778) (4,833,001)
----------------- -----------------
Cash flows from financing activities
Advances from directors, net (2,391,155) (320,041)
Long-term loan proceeds 4,098,139 10,212,162
Long-term loan repayments - (2,498,944)
Notes payable proceeds 9,862,672 4,106,282
Notes payable repayments (3,832,216) (3,623,187)
----------------- -----------------
Net cash provided by financing activities 7,737,440 7,876,272
----------------- -----------------
Effect of exchange rate 745,583 -
----------------- -----------------
Net increase (decrease) in cash (2,946,371) 2,895,536
Cash and cash equivalents, beginning of year 3,133,326 237,790
----------------- -----------------
Cash and cash equivalents, end of year $ 186,955 $ 3,133,326
================= =================
Supplemental disclosure of cash flow information
Interest paid, including capitalized interest $ 834,986 $ 395,134
================= ================
Taxes paid $ - $ -
================= ================
Noncash transactions
Payment of dividend included in amount due to
related party $ - $ 3,839,607
================= ================
Director's compensation included in amount due to
related party $ 100,000 $ 200,000
================= ================
Acquisition of property and equipment from
related party $ - $ 2,665,315
================= ================
The accompanying notes are an integral part of these financial statements.
5
Partner Success Holdings Limited and Subsidiary
Notes to Consolidated Financial Statements
(Expressed in US dollars)
1. Description of Business
Nature of Organization - Partner Success Holdings Limited ("Partner
Success") was registered on April 30, 2002 in the Territory of the British
Virgin Islands and was classified as an International Business Company. It
had registered capital of $50,000 as of June 30, 2006 and 2005. It has one
wholly-owned subsidiary, Shanghai Chengtong Precision Strip Company Limited
("Chengtong Precision") which it acquired in a series of transactions. This
acquisition was recorded using purchase accounting and resulted in an
increase of $1,086,262 in the carrying amount of property and equipment for
financial reposting purposes.
Chengtong Precision was registered on July 2, 2002 in Shanghai, in the
People's Republic of China ("PRC") with a registered capital of $3,220,000
and a defined period of existence of 50 years from July 2, 2002 to July 1,
2052. The Company was classified as a Sino-foreign joint venture enterprise
with limited liabilities. On August 22, 2005, the authorized registered
capital was increased to $15,220,000 of which $6,900,000 had been
funded/contributed as of June 30, 2006.
Pursuant to the document issued by the District Council to Xuhang Town
Council on June 28, 2004, the equity transfers from China Chengtong Metal
Group Limited and Eastreal Holdings Company Limited to Partner Success was
approved and the transformation of Chengtong Precision from a Sino-foreign
joint investment enterprise to a wholly-owned foreign enterprise (WOFE) was
granted.
Partner Success and Chengtong Precision are hereinafter collectively
referred to as the "Company".
Description of Business - Partner Success' principal activities are
investment holdings and its Subsidiary is engaged in manufacture and sales
of cold-rolled and hot-rolled precision steel products and plates for down
stream applications in the automobile industry (components and spare
parts), kitchen tools and functional parts of electrical appliances. Raw
materials, hot-rolled de-scaled (pickled) steel coils, will go through
certain cold reduction processing procedures to give steel rolls and plates
in different cuts and thickness for deliveries in accordance with
customers' specifications.
2. Basis of Preparation of Financial Statements
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The
financial statements are prepared under the historical cost convention.
This basis of accounting differs from that used in the preparation of the
Company's statutory financial statements, which are prepared on a cash
basis, and are prepared in accordance with generally accepted accounting
principles and the relevant financial regulations applicable to enterprises
in the PRC.
Audited financial statements for the year ended June 30, 2006 and 2005,
prepared under generally accepted accounting principles in the United
States of America, are prepared for overseas consolidation purpose.
3. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies:
Cash and Equivalents - The Company considers all highly liquid debt
instruments purchased with maturity period of three months or less to be
cash equivalents. The carrying amounts reported in the accompanying
consolidated balance sheet for cash and cash equivalents approximate their
fair value.
The accompanying notes are an integral part of these financial statements.
6
Partner Success Holdings Limited and Subsidiary
Notes to Consolidated Financial Statements
(Expressed in US dollars)
3. Summary of Significant Accounting Policies (Continued)
Accounts Receivable - The Company provides an allowance for doubtful
accounts equal to the estimated uncollectible amounts. It is reasonably
possible that the Company's estimate of the allowance will change. At June
30, 2006 and 2005, the Company had an allowance for doubtful accounts
totalling $526,043 and $0, respectively.
Inventory - Inventory is stated at the lower of cost or market. Cost is
determined using the weighted average method. Market value represents the
estimated selling price in the ordinary course of business less the
estimated costs necessary to complete the sale.
The cost of inventories comprises all costs of purchases, costs of
conversion and other costs incurred in bringing the inventories to their
present location and condition. The costs of conversion of inventories
include fixed and variable production overheads, taking into account the
stage of completion.
Property, Plant and Equipment - Property, plant and equipment are stated at
cost less accumulated depreciation. The cost of an asset comprises its
purchase price and any directly attributable costs of bringing the asset to
its present working condition and location for its intended use.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the related assets for financial reporting purposes. The estimated
useful lives for significant property and equipment are as follows:
Buildings 25 years
Office equipment 5 years
Motor vehicles 5 years
Machinery 10 years
Repairs and maintenance costs are normally charged to the statement of
operations in the year in which they are incurred. In situations where it
can be clearly demonstrated that the expenditure has resulted in an
increase in the future economic benefits expected to be obtained from the
use of the asset, the expenditure is capitalized as an additional cost of
the asset.
Property, plant and equipment are evaluated annually for any impairment in
value. Where the recoverable amount of any property and equipment is
determined to have declined below its carrying amount, the carrying amount
is reduced to reflect the decline in value. There were no property and
equipment impairments recognized during the year ended June 30, 2006 and
2005.
Capitalized Interest - The Company capitalizes interest cost on borrowings
incurred during the new construction or upgrade of qualified assets.
Capitalized interest is added to the cost of the underlying assets and is
amortized over the useful lives of the assets. During the fiscal years
ended June 30, 2006 and 2005, the Company capitalized $749,914 and $ 0 of
interest to construction in progress.
Construction-in-Progress - Properties currently under development are
accounted for as construction-in-progress. Construction-in-progress is
recorded at acquisition cost, including land rights cost, development
expenditure, professional fees and the interest expenses capitalized during
the course of construction for the purpose of financing the project. Upon
completion and readiness for use of the project, the cost of
construction-in-progress is to be transferred to properties held for sale.
The accompanying notes are an integral part of these financial statements.
7
Partner Success Holdings Limited and Subsidiary
Notes to Consolidated Financial Statements
(Expressed in US dollars)
3. Summary of Significant Accounting Policies (Continued)
Construction-in-progress is valued at the lower of cost or market.
Management evaluates the market value of its properties on a quarterly
basis by comparing selling prices of its properties with those of other
equivalent properties in the vicinity offered by other developers reduced
by anticipated selling costs and associated taxes. In the case of
construction in progress, management takes into consideration the estimated
cost to complete the project when making the lower of cost or market
calculation.
Contingent Liabilities and Contingent Assets - A contingent liability is a
possible obligation that arises from past events and whose existence will
only be confirmed by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the Company. It
can also be a present obligation arising from past events that is not
recognized because it is not probable that outflow of economic resources
will be required or the amount of obligation cannot be measured reliably.
A contingent liability is not recognized but is disclosed in the notes to
the financial statements. When a change in the probability of an outflow
occurs so that outflow is probable, they will then be recognized as a
provision.
A contingent asset is a possible asset that arises from past events and
whose existence will be confirmed only by the occurrence or non-occurrence
of one or more uncertain events not wholly within the control of the
Company.
Contingent assets are not recognized but are disclosed in the notes to the
financial statements when an inflow of economic benefits is probable. When
inflow is virtually certain, an asset is recognized.
Advances from customers - Revenue from the sale of goods or services is
recognized at the time that goods are delivered or services are rendered.
Receipts in advance for goods to be delivered or services to be rendered in
the subsequent year are carried forward as deferred revenue.
Revenue Recognition - Revenue from the sale of goods and services is
recognized on the transfer of risks and rewards of ownership, which
generally coincides with the time when the goods are delivered to customers
and the title has passed and services have been rendered and invoiced.
Other income is recognized when it is earned.
Foreign Currencies - The Company's principal country of operations is in
The People's Republic of China. The financial position and results of
operations of the Company are determined using the local currency
("Renminbi" or "Yuan") as the functional currency. The results of
operations denominated in foreign currency are translated at the average
rate of exchange during the reporting period. Assets and liabilities
denominated in foreign currencies at the balance sheet date are translated
at the market rate of exchange ruling at that date. The registered equity
capital denominated in the functional currency is translated at the
historical rate of exchange at the time of capital contribution. All
translation adjustments resulting from the translation of the financial
statements into the reporting currency ("US Dollars") are dealt with as an
exchange fluctuation reserve in shareholders' equity.
The accompanying notes are an integral part of these financial statements.
8
Partner Success Holdings Limited and Subsidiary
Notes to Consolidated Financial Statements
(Expressed in US dollars)
3. Summary of Significant Accounting Policies (Continued)
Taxation - Taxation on overseas profits has been calculated on the
estimated assessable profits for the year at the rates of taxation
prevailing in the country in which the Company operates.
Provision for the People's Republic of China enterprise income tax is
calculated at the prevailing rate based on the estimated assessable profits
less available tax relief for losses brought forward.
Enterprise income tax
Under the Provisional Regulations of the People's Republic of China
Concerning Income Tax on Enterprises promulgated by the State Council and
which came into effect on January 1, 1994, income tax is payable by
enterprises at a rate of 33% of their taxable income. Preferential tax
treatment may, however, be granted pursuant to any law or regulations from
time to time promulgated by the State Council. Specialty steel company's
enterprise income tax rate is 27%.
Enterprise income tax ("EIT") is provided on the basis of the statutory
profit for financial reporting purposes, adjusted for income and expense
items, which are not assessable or deductible for income tax purposes.
Value added tax
The Provisional Regulations of the People's Republic of China Concerning
Value Added Tax promulgated by the State Council came into effect on
January 1, 1994. Under these regulations and the Implementing Rules of the
Provisional Regulations of the PRC Concerning Value Added Tax, value added
tax is imposed on goods sold in or imported into the PRC and on processing,
repair and replacement services provided within the PRC.
Value added tax payable in the People's Republic of China is charged on an
aggregated basis at a rate of 13% or 17% (depending on the type of goods
involved) on the full price collected for the goods sold or, in the case of
taxable services provided, at a rate of 17% on the charges for the taxable
services provided, but excluding, in respect of both goods and services,
any amount paid in respect of value added tax included in the price or
charges, and less any deductible value added tax already paid by the
taxpayer on purchases of goods and services in the same financial year.
Retirement Benefit Costs - According to The People's Republic of China
regulations on pension, the Company contributes to a defined contribution
retirement scheme organized by municipal government in the province in
which the Company was registered and all qualified employees are eligible
to participate in the scheme. Contributions to the scheme are calculated at
23.5% of the employees' salaries above a fixed threshold amount and the
employees contribute 2% to 8% while the Company contributes the balance
contribution of 21.5%% to 15.5%. The Company has no other material
obligation for the payment of retirement benefits beyond the annual
contributions under this scheme.
For the year ended June 30, 2006 and 2005, the Company's pension cost
charged to the statements of operations under the scheme amounted to
$76,480 and $54,285, respectively. As of June 30, 2006 and 2005, the
Company's pension contributions of $76,480 and $54,285, respectively, have
been paid to the State Pension Fund.
The accompanying notes are an integral part of these financial statements.
9
Partner Success Holdings Limited and Subsidiary
Notes to Consolidated Financial Statements
(Expressed in US dollars)
Fair Value of Financial Instruments - The carrying amounts of certain
financial instruments, including cash, accounts receivable, other
receivables, accounts payable, accrued expenses, and other payables
approximate their fair values as of June 30, 2006 and 2005 because of the
relatively short-term maturity of these instruments.
Use of Estimates - The preparation of financial statements in accordance
with generally accepted accounting principles require management to make
estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Recent Accounting Pronouncements - In November 2004, the FASB issued SFAS
No. 151, Inventory Costs - an amendment of ARB No. 43, Chapter 4. SFAS No.
151 requires that certain abnormal costs associated with the manufacturing,
freight, and handling costs associated with inventory be charged to current
operations in the period in which they are incurred. The adoption of SFAS
151 had no impact on the Company's financial position, results of
operations, or cash flows.
In December 2004, the FASB issued a revision of SFAS No. 123, Share-Based
Payment. The statement establishes standards for the accounting for
transactions in which an entity exchanges its equity investments for goods
and services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair
value of the entity's equity instruments or that may be settled by the
issuance of those equity instruments. The statement does not change the
accounting guidance for share-based payments with parties other than
employees.
The statement requires a public entity to measure the cost of employee
service received in exchange for an award of equity instruments based on
the grant-date fair value of the award (with limited exception). That cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award (usually the vesting period). A
public entity will initially measure the cost of employee services received
in exchange for an award of liability instrument based on its current fair
value; the fair value of that award will be re-measured subsequently at
each reporting date through the settlement date. Changes in fair value
during the requisite service period will be recognized as compensation over
that period.
The grant-date for fair value of employee share options and similar
instruments will be estimated using option-pricing models adjusted for the
unique characteristics of these instruments. The statement is effective for
the quarter beginning January 1, 2006.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets-amendment of APB Opinion No. 29. Statement 153 eliminates the
exception to fair value for exchanges of similar productive assets and
replaces it with a general exception for exchanged transactions that do not
have a commercial substance, defined as transactions that are not expected
to result in significant changes in the cash flows of the reporting entity.
This statement is effective for exchanges of non-monetary assets occurring
after June 15, 2005.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3.
Statement 154 requires retrospective application to prior periods'
financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the
cumulative effect of the change. The statement is effective for accounting
changes and corrections of errors made in fiscal years beginning after
December 15, 2005.
The accompanying notes are an integral part of these financial statements.
10
Partner Success Holdings Limited and Subsidiary
Notes to Consolidated Financial Statements
(Expressed in US dollars)
3. Summary of Significant Accounting Policies (Continued)
SFAS No. 152 "Accounting for Real Estate Time-Sharing Transactions - an
amendment of FASB Statements No. 66 and 67", SFAS No. 155 "Accounting for
Certain Hybrid Financial Instruments - an amendment of FASB Statements No.
133 and No. 140", SFAS No. 156 "Accounting for Servicing of Financial
Assets - an amendment of FASB Statement No. 140", SFAS No. 157 "Fair Value
Measurement", and SFAS 158 "Employer's Accounting for Defined Benefit and
Other Postretirement Plans" were recently issued. SFAS No. 152, 155, 156,
and 158 have no current applicability to the Company and have no
significant effect on the consolidated financial statements.
Management is currently assessing the effect, if any that the adoption of
SFAS 157 "Fair Value Measurement" will have on the reporting of future
operations.
4. Concentrations of Business and Credit Risk
Substantially all of the Company's bank accounts are in banks located in
the PRC and are not covered by any type of protection similar to that
provided by the FDIC on funds held in U.S. banks.
The Company provides credit in the normal course of business. The Company
performs ongoing credit evaluations of its customers and clients and
maintains allowances for doubtful accounts based on factors surrounding the
credit risk of specific customers and clients, historical trends, and other
information. Accounts receivable totaled $12,872,960 and $6,194,993, net of
allowance for doubtful accounts of $526,043 and $0, as of June 30, 2006 and
2005, respectively.
The Company's list of customers whose purchases exceeded 10% of total sales
during the year ended June 30, 2006 and 2005 were as follows:
Customers 2006 % to sales 2005 % to sales
Jiangsu Kaiteer Industrial Stove Co. Ltd 5,212,171 15 -* -*
Shanghai Ruixuefeng Metals Co. Ltd 4,634,521 13 -* -*
Shanghai Yiyi Industrial Co. Ltd 4,305,918 12 -* -*
BaoSteel Trading Co. Ltd -* -* 6,048,153 11
Payments of dividends may be subject to some restrictions; therefore in
accordance with Rule 504/4.08 (e) (3) of Regulation S-X, the following are
condensed parent company only financial statements for the two years ended
June 30, 2006.
The accompanying notes are an integral part of these financial statements.
11
Partner Success Holdings Limited and Subsidiary
Notes to Consolidated Financial Statements
(Expressed in US dollars)
4. Concentrations of Business and Credit Risk (Continued)
PARTNER SUCCESS HOLDING LIMITED
CONDENSED PARENT COMPANY ONLY BALANCE SHEETS
JUNE 30, 2006 AND 2005
2006 2005
---- ----
Investment in subsidiary, reported on equity method $17,159,002 $ 7,292,639
Advances to subsidiary -- 3,917,126
----------- -----------
Total assets $17,159,002 $11,209,765
=========== ===========
Current liabilities:
Advances from directors $5,477,842 $7,856,183
----------- -----------
Total current liabilities 5,477,842 7,856,183
----------- -----------
Stockholders' equity:
Ordinary stock, $1 par value; 50,000 shares authorized;
issued and outstanding at June 30, 2006 and 2005 50,000 50,000
Additional paid-in capital 950,000 950,000
Retained earnings 10,681,160 2,353,582
----------- -----------
Total stockholders' equity 11,681,160 3,353,582
----------- -----------
Total liabilities and stockholders' equity $17,159,002 $11,209,765
=========== ============
The accompanying notes are an integral part of these financial statements.
12
Partner Success Holdings Limited and Subsidiary
Notes to Consolidated Financial Statements
(Expressed in US dollars)
4. Concentrations of Business and Credit Risk (Continued)
PARTNER SUCCESS HOLDINGS LIMITED
CONDENSED PARENT COMPANY ONLY INCOME STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
2006 2005
---- ----
SALES $ -- $ --
-------------- --------------
OPERATING AND ADMINISTRATIVE
EXPENSES:
General and administrative expenses 160,827 201,896
-------------- --------------
Income from operations (160,827) (201,896)
-------------- --------------
OTHER INCOME (EXPENSE):
Equity in earnings of unconsolidated subsidiary 7,674,928 6,568,337
-------------- --------------
INCOME BEFORE INCOME TAXES 7,514,101 6,366,441
(PROVISION FOR) BENEFIT FROM
INCOME TAXES -- --
-------------- --------------
NET INCOME $7,514,101 $6,366,441
============== ==============
The accompanying notes are an integral part of these financial statements.
13
Partner Success Holdings Limited and Subsidiary
Notes to Consolidated Financial Statements
(Expressed in US dollars)
4. Concentrations of Business and Credit Risk (Continued)
PARTNER SUCCESS HOLDINGS LIMITED
CONDENSED PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
2006 2005
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,514,101 $ 6,366,441
Adjustments to reconcile net income to operating activities -
Less: Equity in earnings of unconsolidated subsidiary (7,674,928) (6,568,337)
------------ ------------
Net cash (used in) operating activities (160,827) (201,896)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiary (1,465,652) (114,187)
------------ -----------
Net cash (used in) investing activities (1,465,652) (114,187)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from director (205,654) 3,456,966
Advances to subsidiary 1,832,133 (3,140,883)
------------ ------------
Net cash provided by financing activities 1,626,479 316,083
------------ -------------
Effect of exchange rate change on cash and cash equivalents -- --
------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -- --
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ -- $ --
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid, net of capitalized amounts $ -- $ --
Income taxes paid $ -- $ --
Partner Success Holdings Limited
Notes to Condensed Parent Company Only Financial Statements
Note 1 - These condensed parent company only financial statements should be
read in connection with the Company's consolidated financial statements and
notes thereto.
The accompanying notes are an integral part of these financial statements.
14
Partner Success Holdings Limited and Subsidiary
Notes to Consolidated Financial Statements
(Expressed in US dollars)
5. Inventory
As of June 30, 2006 and 2005, inventory consisted of the following:
2006 2005
---- ----
Raw materials $ 3,688,773 $ 1,222,189
Work in progress 573,465 452,285
Finished goods 2,021,672 385,727
--------------- -------------
$ 6,283,910 $ 2,060,201
=============== =============
6. Property, Plant and Equipment
Property, plant and equipment, stated at cost less accumulated
depreciation, consisted of the following:
(4(5) (6(7)(8) (9)
22006 22005
----- -----
Plant and machinery $ 7,526,395 $ 7,129,017
Buildings 2,755,157 2,665,315
Motor vehicles 239,219 107,007
Office equipment 51,281 37,021
-------------- ------------
10,572,052 9,938,360
Less: Accumulated depreciation ( 1,907,635 ) ( 1,056,220 )
-------------- ------------
$ 8,664,417 $ 8,882,140
============== ============
As of June 30, 2006 and 2005, plant and machinery at a net book value of
$5,781,416 (Rmb.46,309,142) and land and buildings at a value of $2,697,154
(Rmb.21,604,204) have been pledged as securities to short-term borrowings
of $8,000,000 (Rmb.64,080,000) and $9,700,000 (Rmb.77,697,000) and a
long-term bank loan of $8,400,000 (Rmb.67,284,000).
Depreciation expense related to manufacturing is included as a component of
cost of goods sold. During the fiscal years ended June 30, 2006 and 2005,
depreciation totaling $783,677 and $365,583, respectively, was included as
a component of cost of goods sold.
The accompanying notes are an integral part of these financial statements.
15
Partner Success Holdings Limited and Subsidiary
Notes to Consolidated Financial Statements
(Expressed in US dollars)
7. Construction-In-Progress
As of June 30, 2006 and 2005, construction-in-progress consisted of the
following:
2006 2005
---- ----
Additional works on existing factory and warehouse $ - $ 12,509
Construction costs of plant and machinery 7,059,943 3,565,908
Construction on factory building (Phase 2) 6,693,011 -
-------------------------------- -------------------------
$ 13,572,954 $ 3,578,417
================================ =========================
Construction-in-progress represents construction and installations of the
new plant and machinery and administration and factory buildings. Included
in construction in progress is $749,914 of capitalized interest as of June
30, 2006.
8. Advances from Customers
Advances from customers represent advance cash receipts from new customers
and for which goods have not been delivered as of the balance sheet dates.
Advances from customers for goods to be delivered or services to be
rendered in the subsequent year are carried forward as deferred revenue. As
of June 30, 2006 and 2005, there were advances from customers of $1,859,773
and $502,497, respectively.
9. Transactions with Related Parties
Amounts due to directors as of June 30, 2006 and 2005 are as follows:
Balance at June 30
----------------------------------------------------------
Name 2006 2005
------------------------- ---------------------------
Wo Hing Li $ 10,900,381 $ 11,106,036
Hai Sheng Chen
12,935 12,513
Less: Advances to Shanghai
Tuorong Precision Strip Co., Ltd.
(5,435,474) (3,249,852)
------------------------- ---------------------------
Amounts due to directors, net $ 5,477,842 $ 7,868,697
========================= ===========================
Amounts due to directors are non-interest bearing and due on demand.
Mr. Wo Hing Li has entered into an agreement with Chengtong Precision giving
Chengtong Precision the legal right of offset against amounts due to him with
respect to advances made by Chengtong Precision to Shanghai Tuorong Precision
Strip Co., Ltd. Mr. Li is the principal shareholder in both Shanghai Tuorong
Precision Strip Co., Ltd. and Partner Success Holdings Limited, the parent
company of Chengtong Precision.
The accompanying notes are an integral part of these financial statements.
16
Partner Success Holdings Limited and Subsidiary
Notes to Consolidated Financial Statements
(Expressed in US dollars)
10. Short-Term Loans
Short-term loans consisted of the following as of June 30, 2006 and 2005:
2006 2005
---- ----
Bank loan dated December 14, 2004, rolled over October 21, 2005, due in one
year with a interest rate of 5.58%, guaranteed by a related company $ 1,248,439 $ 1,207,729
Bank loan dated December 14, 2004, rolled over November 11, 2005, due in one
year with a interest rate of 5.58%, guaranteed by a related company 1,248,439 1,207,729
Bank loan dated December 14, 2004, rolled over December 12, 2005, due in one
year with a interest rate of 5.58%, guaranteed by a related company - 1,207,729
Bank loan dated March 11, 2004, rolled over December 12, 2005, due in one year
with a interest rate of 5.58%, guaranteed by a related company - 483,093
Bank loan dated December 12, 2005, due in one year with a interest rate of
5.58%, guaranteed by a related company 1,747,815 -
Bank loan dated May 19, 2006, due in one year with a interest rate of 5.85%,
guaranteed by a related company 1,498,129 -
Bank loan dated September 22, 2005, due December 31, 2006 with a interest
rate of 15% over the standard market rate set by the People's Bank of China
for Renmindi loans, secured by land, buildings and machinery 4,119,850 -
Loan from a director, dated January 2003, interest free with no fixed payment
terms, unsecured. 419,101 405,435
--------------- -------------
$ 10,281,773 $ 4,511,715
=============== =============
The accompanying notes are an integral part of these financial statements.
17
Partner Success Holdings Limited and Subsidiary
Notes to Consolidated Financial Statements
(Expressed in US dollars)
11. Long-Term Debts - Secured
Long-term debt consisted of the following as of June 30, 2006 and 2005:
2006 2005
---- ----
Bank loan dated October 14, 2004, due July 31, 2006, at an interest rate of
3% over the 10% of the standard market rate set by the People's Bank of
China for Renminbi loans, secured by land, buildings and machinery $ 7,973,215 $ 7,713,218
Bank loan dated September 22, 2005, payable over 4 years ending August 31,
2009, at an interest rate of 15% the standard market rate set by the
People's Bank of China for Renminbi loans, secured by land, buildings and
machinery 4,098,139 --
---------------- -------------
Total long-term debt 12,071,354 7,713,218
Less: Current portion of long-term debts 8,918,939 --
---------------- -------------
Long-term debts $ 3,152,415 $ 7,713,219
================ =============
Maturities on long-term debt for each of the next five years and thereafter
are as follows:
2007 $ 8,918,939
2008 1,260,964
2009 1,260,964
2010 630,487
2011 --
-------------------
$12,071,354
12. Income Tax
For EIT reporting purposes, the Company reports income and expenses on a
cash basis and is required to compute a 10% salvage value when computing
depreciation expense. For financial reporting purposes, the Company reports
income and expenses on the accrual basis and does not take into account a
10% salvage value when computing deprecation expense.
The cash basis method used for EIT tax reporting purposes differs from the
accrual basis by reporting accounts receivable as income when collected and
accounts payable as expense when paid. Advances from customers are not
recognized as income for either EIT tax reporting purposes or financial
reporting purposes until such time as the goods are delivered.
No accrual for deferred taxes was required for the fiscal year ended June
30, 2005 as all material timing differences would reverse within one year
with the exception of depreciation which resulted in a small deferred tax
asset which was deemed to be immaterial by the Company and was not recorded
at that time.
As of June 30, 2006, the Company had utilized all of its 100% tax holiday,
therefore any timing differences reversing within the next three years
would be tax at 50% of the statutory rate of 27%. Therefore, it was
necessary for the Company to record a deferred income tax liability and
offsetting deferred income tax expense of $1,535,204 as of June 30, 2006.
The accompanying notes are an integral part of these financial statements.
18
Partner Success Holdings Limited and Subsidiary
Notes to Consolidated Financial Statements
(Expressed in US dollars)
12. Income Tax (Continued)
A reconciliation of the provision for income taxes with amounts determined
by applying the statutory U.S. federal income tax rate to income before
income taxes is as follows:
Year Ended June 30,
2006 2005
---- ----
Computed tax at the federal statutory rate of 34% $3,133,000 $2,244,000
Less adjustment to EIT statutory rate of 27% (645,000) (462,000)
Benefit from tax holiday (952,796) (1,782,000)
------------ -----------
Income tax expense per books $1,535,204 $ --
============ ===========
The tax holiday resulted in tax savings as follows:
Year Ended June 30,
2006 2005
---- ----
Approximate tax savings $952,796 $1,782,000
Benefit per share:
Basic $19.06 $35.64
Diluted $19.06 $35.64
As explained above, there were not significant deferred tax assets or
liabilities as of June 30, 2005. Significant components of the Company's
deferred tax assets and liabilities as of June 30, 2006 are as follows:
Deferred tax assets:
Book depreciation in excess of tax depreciation $ 25,753
Deferred tax liability:
Timing differences resulting form cash basis reporting
for tax purposes (1,560,957)
-----------
Net deferred income tax (liability) $(1,535,204)
============
13. Commitments
As of June 30, 2006 and 2005, the Company had $6,154,276 and $1,470,212,
respectively, in commitments for capital expenditures for contractual
commitments of the construction projects.
14. Subsequent Events
Pursuant to the Bank Loan Agreement (the "Agreement) dated July 27, 2006
between Raiffeisen Zentralbank Osterreich AG, Beijing Branch (Raiffeisen
Zentralbank) and Chengtong Precision, Raiffeisen Zentralbank agreed to
extend a maximum secured loan amount of $7,800,000 (Rmb.62,478,000) without
limit to the number of draw downs made.
The loan is repayable (loan period of 1 year commencing on July 27, 2006)
on July 31, 2007 at an interest rate of 3% on the 10% of the standard
market rate as set by the People's Bank of China for Renminbi loans.
The accompanying notes are an integral part of these financial statements.
19
ORALABS HOLDING CORP.
Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
On March 31, 2006, OraLabs Holding Corp. ("OraLabs" or the "Company") entered
into a Stock Exchange Agreement (the "Agreement") under which all of the issued
and outstanding shares of Partner Success Holdings Limited ("PSHL") will be
acquired by OraLabs in consideration for the issuance to the owners of PSHL of
common stock representing a 94 percent ownership interest in the Company, after
giving effect to a redemption by the Company of 3,629,350 shares of its
outstanding common stock owned individually by its President, Gary H. Schlatter.
The redemption will be in consideration for the transfer to Mr. Schlatter of all
of the Company's outstanding common stock of OraLabs, Inc., the Company's
wholly-owned operating subsidiary. The 94% ownership interest in OraLabs will be
determined on a fully diluted basis that will take into account the issuance of
300,000 shares to the non-employee directors of OraLabs prior to Closing upon
receiving shareholder approval, and any options that may be exercised by
employees prior to Closing. In addition, the Company anticipates selling up to
an additional 100,000 shares of restricted common stock to OraLabs, Inc. for a
purchase price that under certain circumstances will not be less than $4.00 per
share. For purposes of these Pro Forma statements, it is assumed that 100,000
shares will be sold for a total purchase price of $400,000. This cash is
intended to apply toward a projected tax liability associated with the spin off
of OraLabs, Inc. If the closing of the Agreement occurs, PSHL will become a
wholly-owned subsidiary of the Company.
For financial reporting purposes, this acquisition will be treated as a
so-called "reverse acquisition", whereby PSHL will account for the transaction
as a recapitalization of PSHL. As a recapitalization transaction, the historical
stockholders' equity of PSHL, the accounting acquirer, is retroactively restated
for the equivalent number of shares received by PSHL's shareholders in the
merger, and the historical retained earnings/deficit of PSHL are carried
forward.
The accompanying condensed consolidated financial statements illustrate the
effect of the acquisition (pro forma) on the Company's financial position and
results of operations. The condensed consolidated balance sheet as of June 30,
2006, is based on the historical balance sheets of the Company and PSHL as of
that date and assumes the acquisition took place on that date. The condensed
consolidated statement of income for the six months ended June 30, 2006, and the
year ended December 31, 2005, are based on the historical statements of income
of the Company and PSHL for those periods. The pro forma condensed consolidated
statement of income assumes the acquisition took place on January 1, 2005.
The pro forma adjustments reflect the spin off of all the operations of OraLabs,
Inc. as stated above.
The unaudited pro forma condensed consolidated financial statements may not be
indicative of the actual results of the acquisition.
The accompanying condensed consolidated pro forma financial statements should be
read in connection with the historical financial statements of the Company and
PSHL.
ORALABS HOLDING CORP. AND SUBSIDIARIES
PROFORMA BALANCE SHEETS
JUNE 30, 2006
(UNAUDITED)
ASSETS
Partner
OraLabs Success Adjustments Proforma
---------- --------- ----------- -------
Current assets:
Cash and cash equivalents $2,578,696 $ 186,955 1,3,4 $(2,178,696) $ 586,955
Accounts receivable, net 1,181,107 13,399,003 1 (1,181,107) 13,399,003
Inventory 2,812,677 6,283,910 1 (2,812,677) 6,283,910
Advances to suppliers 3,138,759 3,138,759
Prepaid expenses 204,401 1 (204,401) --
Deposits and other assets 324,137 145,488 1 (324,137) 145,488
---------- ----------- ----------- -----------
Total Current Assets 7,101,018 23,154,115 (6,701,018) 23,554,115
---------- ----------- ----------- -----------
Property and equipment:
Property and equipment, net 2,115,348 8,664,417 1 (2,115,348) 8,664,417
Construction-in-progress - non-current 13,752,954 13,752,954
---------- ---------- ----------- -----------
2,115,348 22,417,371 (2,115,348) 22,417,371
---------- ----------- ----------- -----------
Total Assets $9,216,366 $45,571,486 $(8,816,366) $45,971,486
========== =========== =========== ===========
See accompanying note to pro forma financial statements
2
ORALABS HOLDING CORP. AND SUBSIDIARIES
PROFORMA BALANCE SHEETS
JUNE 30, 2006
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Partner
OraLabs Success Adjustments Proforma
---------- ---------- ------------- -----------
Current liabilities:
Accounts payable $ 836,652 $ 1,801,466 1 $ (836,652) $ 1,801,466
Deferred revenue 85,148 1,859,773 1 (85,148) 1,859,773
Amounts due to directors 10,913,316 10,913,316
Accrued liabilities 177,779 1 (177,779) 0
Reserve for returns 50,188 1 (50,188) 0
Short-term loans 4,846,299 4,846,299
Current portion of long-term debt 6,300 8,918,939 1 (6,300) 8,918,939
Deferred tax liability current 248,016 1 (248,016) 0
Other taxes payable 130,365 2,398,118 1,3 269,635 2,798,118
---------- ----------- ----------- -----------
Total current liabilities 1,534,448 30,737,911 (1,134,448) 31,137,911
---------- ----------- ----------- -----------
Long-term debt:
Long-term debt, net of current portion 3,675 3,152,415 1 (3,675) 3,152,415
Deferred tax liability long-term 26,618 1 (26,618) 0
---------- ----------- ----------- -----------
Total liabilities 1,564,741 33,890,126 (1,164,741) 34,290,126
---------- ----------- ----------- -----------
Stockholders' equity:
Common stock - .001 par value, 62,000,000 shares
authorized, 27,062,250 issued after
recapitalization and new issue of 400,000 shares
to directors, and exercise of 64,250 options 4,789 50,000 1,2,3,4 (27,724) 27,065
Preferred stock 0 0
Additional paid-in capital 1,828,683 950,000 1,2,3,4 (1,405,748) 1,372,935
Retained earnings 5,818,153 9,935,577 1,3 (6,218,153) 9,535,577
Other comprehensive income -exchange rate
fluctuation 745,583 745,583
---------- ----------- ----------- -----------
Total stockholders' equity 7,651,625 11,681,160 (7,651,625) 11,681,160
---------- ----------- ----------- -----------
Total liabilities and stockholders' equity $9,216,366 $45,571,486 $(8,816,366) $45,971,486
========== =========== =========== ===========
See accompanying note to pro forma financial statements
3
ORALABS HOLDING CORP. AND SUBSIDIARIES
PROFORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2006
(UNAUDITED)
Partner
OraLabs Success Adjustments Proforma
---------- ---------- ------------- -----------
Sales Revenues $8,918,855 $17,275,893 5) $(8,918,855) $17,275,893
Cost of goods sold 5,113,858 12,857,789 5) (5,113,858) 12,857,789
---------- ---------- ------------- -----------
Gross profit 3,804,997 6,418,104 (3,804,997) 6,418,104
---------- ---------- ------------- -----------
Selling, General and Administrative Expenses:
Selling expenses 864,442 79,842 5) (864,442) 79,842
General and administrative expenses 1,617,804 295,493 5) (1,617,804) 295,493
Other 103,823 20,003 5) (103,823) 20,003
0
---------- ---------- ------------- -----------
Total Expenses 2,586,069 395,337 (2,586,069) 395,337
---------- ---------- ------------- -----------
Income from operations 1,218,928 4,651,524 (1,218,928) 4,651,524
---------- ---------- ------------- -----------
Other income (expense)
Other revenues 35,343 -- 5) (35,343) --
Interest and finance costs 80,969 80,969
---------- ---------- ------------- -----------
Total other income (expense) 35,343 80,969 (35,343) 80,969
---------- ---------- ------------- -----------
Income before income taxes 1,254,271 4,337,156 (1,254,271) 4,337,156
(Provision for) benefit from income taxes (466,384) (1,535,204) 5) 466,384 (1,535,204)
---------- ---------- ------------- -----------
Net income 787,887 2,801,952 (787,887) 2,801,952
Other comprehensive income - exchange
rate fluctuation 342,867 342,867
---------- ---------- ------------- -----------
Total comprehensive income $ 787,887 $3,144,819 $ (787,887) $ 3,144,819
========== ========== ============= ===========
Basic and diluted earning per share $ 0.17 $ 62.90 $ 0.12
========== ========== ============= ===========
Basic weighted average shares outstanding 4,735,263 50,000 27,062,250
========== ========== ============= ===========
Diluted weighted average shares outstanding 4,778,253 50,000 27,062,250
========== ========== ============= ===========
See accompanying note to pro forma financial statements
4
ORALABS HOLDING CORP. AND SUBSIDIARIES
PROFORMA STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2005
(UNAUDITED)
Partner
OraLabs Success Adjustments Proforma
---------- ----------- ------------- -----------
Sales Revenues $13,585,165 $50,400,860 6) $(13,585,165) $50,400,860
Cost of goods sold 8,867,622 39,697,493 6) (8,867,622) 39,697,493
0
---------- ----------- ------------- -----------
Gross profit 4,717,543 10,703,367 (4,717,543) 10,703,367
---------- ----------- ------------- -----------
Selling, General and Administrative Expenses:
Selling expenses 1,324,648 102,949 6) (1,324,648) 102,949
General and administrative expenses 3,036,827 807,353 6) (3,036,827) 807,353
Other 267,806 99,774 6) (267,806) 99,774
0
---------- ----------- ------------- -----------
Total Expenses 4,629,281 1,010,076 (4,629,281) 1,010,076
---------- ----------- ------------- -----------
Income from operations 88,262 9,693,291 (88,262) 9,693,291
---------- ----------- ------------- -----------
Other income (expense)
Other revenues 68,617 154,170 6) (68,617) 154,170
Interest and finance costs (341,609) (341,609)
Other expenses (2,011) (2,011)
---------- ----------- ------------- -----------
Total other income (expense) 68,617 (189,450) (68,617) (189,450)
---------- ----------- ------------- -----------
Income before income taxes 156,879 9,503,841 (156,879) 9,503,841
(Provision for) benefit from income taxes (62,887) 6) 62,887 0
---------- ----------- ------------- -----------
Net income 93,992 9,503,841 (93,992) 9,503,841
Other comprehensive income - exchange
rate fluctuation 443,106 443,106
---------- ----------- ------------- -----------
Total comprehensive income $ 93,992 $9,946,947 $ (93,992) $ 9,946,947
========== ========== ============= ===========
Basic and diluted earning per share $ 0.02 $ 190.08 $ 0.37
========== ========== ============= ===========
Basic weighted average shares outstanding 4,681,116 50,000 27,062,250
========== ========== ============= ===========
Diluted weighted average shares outstanding 4,702,820 50,000 27,062,250
========== ========== ============= ===========
See accompanying note to pro forma financial statements
5
ORALABS HOLDING CORP.
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
Condensed Consolidated Balance Sheet Pro Forma Adjustments
The pro forma adjustments to the consolidated balance sheet are:
1. To remove the assets, liabilities, and equity of OraLabs, Inc. to be spun
off to former shareholder, Gary Schlatter.
Current liabilities 1,534,448
Long-term debt 3,675
Deferred tax liability long-term 26,618
Capital stock 4,789
Additional paid in capital 1,828,683
Retained earnings 5,818,153
Cash 2,578,696
Accounts receivable 1,181,107
Inventory 2,812,677
Prepaid 204,401
Deposits & other 324,137
Property and equipment 2,115,348
2. To record effect of recapitalization of PSHL
Common stock 25,479
Paid in capital 25,479
3. To record issuance of additional 100,000 shares of restricted common stock
to OraLabs, Inc. for $400,000 cash and 1,566,667 to Partners Success
shareholders to maintain a 94% ownership interest. To record anticipated
tax liability associated with the spin off of OraLabs, Inc.
--------------------------------------------------------------------------------
Cash 400,000
--------------------------------------------------------------------------------
Common stock 1,667
--------------------------------------------------------------------------------
Additional paid in capital 398,333
--------------------------------------------------------------------------------
Retained earnings 400,000
--------------------------------------------------------------------------------
Income taxes payable 400,000
--------------------------------------------------------------------------------
6
4. To record the exercise of 131,500 employee options and 28,750 director
options. Partners Success shareholders to maintain a 94% ownership
interest.
--------------------------------------------------------------------------------
Cash 128,500
--------------------------------------------------------------------------------
Common stock 877
--------------------------------------------------------------------------------
Additional paid-in capital 127,623
--------------------------------------------------------------------------------
Additional paid-in capital 128,500
--------------------------------------------------------------------------------
Cash 128,500
--------------------------------------------------------------------------------
Condensed Consolidated Statements of Operations Pro Forma Adjustments
The pro forma adjustments to the consolidated statements of operations are:
5. To remove activity attributable to spun off operations for the six months
ended June 30, 2006:
Sales revenues 8,918,855
Other revenues 35,343
Cost of goods sold 5,113,858
Selling expenses 864,442
General and administrative expenses 1,617,804
Other expense 103,823
Provision for income taxes 466,384
To balance - net income 787,887
6. To remove activity attributable to spun off operations for the twelve
months ended December 31, 2005:
Sales revenues 13,585,165
Other revenues 68,617
Cost of goods sold 8,867,622
Selling expenses 1,324,648
General and administrative expenses 3,036,827
Other expenses 267,806
Provision for income taxes 62,887
To balance - net income 93,992
7. Partners Success enjoyed the benefits of a 100% exemption from Enterprise
Income Taxes ("EIT") for the fiscal years ended June 30, 2006 and 2005. In
the future, Partners Success will not enjoy the benefits of this 100% tax
exemption and future earnings will be subject to EIT taxes. Therefore,
future tax provisions are expected to differ materially from the historical
tax provisions.
7
ANNEX 1
(Stock Exchange Agreement)
THE SECURITIES TO BE ISSUED BY ORALABS HOLDING CORP. ("ORALABS") UNDER THIS
STOCK EXCHANGE AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND WILL BE ISSUED IN RELIANCE UPON
REGULATION S AND OTHER EXEMPTIONS UNDER THE SECURITIES ACT. INVESTORS SHOULD BE
AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT
FOR AN INDEFINITE PERIOD OF TIME. THE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING
AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY
OR INADEQUACY OF THIS STOCK EXCHANGE AGREEMENT AND OTHER RELATED DOCUMENTS. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
STOCK EXCHANGE AGREEMENT
THIS STOCK EXCHANGE AGREEMENT (hereinafter referred to as this
"Agreement"), is entered into as of this 31st day of March 2006, by and among
OraLabs Holding Corp., a Colorado corporation ("OraLabs"); Partner Success
Holdings Limited, a British Virgin Islands international business company
("PSHL"), and each of the shareholders of PSHL ( the "Shareholders").
RECITALS
A. OraLabs is presently a registered public company with the United States
Securities and Exchange Commission (the "SEC") under the Securities Exchange Act
of 1934, as amended (Commission File No. 000-23039).
B. The Shareholders own all 50,000 of the issued and outstanding ordinary
shares of PSHL (the "PSHL Stock").
C. The Shareholders have agreed to transfer to OraLabs, and OraLabs has
agreed to acquire the PSHL Stock from the Shareholders in exchange (the "Stock
Exchange") for the number of shares of OraLabs $0.001 par value common stock
(the "OraLabs Stock") that represents ninety-four percent (94%) of the total
fully diluted issued and outstanding shares of OraLabs common stock calculated
after giving effect to the OraLabs Redemption (as defined below), the issuance
of 300,000 shares to the non-employee directors prior to the Closing, as
described in Section 6.4 of this Agreement, and the exercise of any options
prior to the Closing Date, subject to and pursuant to the terms and conditions
set forth in this Agreement.
D. Immediately following the Closing (defined in Section 2.3) of the Stock
Exchange, OraLabs will redeem all 3,629,350 shares of OraLabs common stock owned
by Gary H. Schlatter in his individual name in exchange for the issuance to Gary
Schlatter of all 100 shares of OraLabs, Inc. $0.001 par value common stock (the
"OraLabs Redemption"). The OraLabs Redemption will be affected pursuant to the
terms and conditions of the OraLabs Redemption Agreement.
E. PSHL will become a wholly-owned subsidiary of OraLabs upon closing of
the Stock Exchange.
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements stated in the Recitals (which are incorporated herein) and as
hereinafter set forth and the mutual benefits to the Parties to be derived
herefrom, it is hereby agreed as follows:
ARTICLE I
DEFINITIONS
In addition to terms defined elsewhere in this Agreement, the following
terms when used in this Agreement shall have the meanings indicated below:
"Affiliate" shall mean with respect to a specified Person, any other Person
which, directly or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with such Person, and without limiting
the generality of the foregoing, includes, with respect to a Person (a) any
other Person which beneficially owns or holds ten percent (10%) or more of any
class of voting securities or other securities convertible into voting
securities of such Person or beneficially owns or holds ten percent (10%) or
more of any other equity interests in such Person, (b) any other Person with
respect to which such Person beneficially owns or holds ten percent (10%) or
more of any class of voting securities or other securities convertible into
voting securities of such Person, or owns or holds ten percent (10%) or more of
the equity interests of the other Person, and (c) any director or senior officer
of such Person. For purposes of this definition, the term "control" (including,
with correlative meanings, the terms "controlled by" and "under common control
with"), as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities or
by contract or otherwise.
"Agreement" shall mean this Stock Exchange Agreement together with all
exhibits and schedules referred to herein, which exhibits and schedules are
incorporated herein and made a part hereof.
"Certificates" shall have the meaning set forth in Section 2.1.
"Closing" shall have the meaning set forth in Section 2.3.
"Closing Date" shall mean the date that the Closing takes place.
"Environmental Laws" shall mean all laws, regulations and other federal,
state or local governmental requirements, and all applicable judgments, orders,
writs, notices, decrees, permits, licenses, approvals, consents or injunctions
relating to the generation, management, handling, transportation, treatment,
disposal, storage, delivery, discharge, release or emission of any waste,
pollutant or toxic or hazardous substance (including, without limitation,
asbestos, radioactive material and pesticides).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Knowledge" shall mean, in the case of any Person who is an individual,
knowledge that a reasonable individual under similar circumstances would have
after such reasonable investigation and inquiry as such reasonable individual
would under such similar circumstances make, and in the case of a Person other
than an individual, the knowledge that a senior officer, director or manager of
such Person, or any other Person having responsibility for the particular
subject matter at issue of such Person, would have after such reasonable
investigation and inquiry as such senior officer, director, manager or
responsible Person would under such similar circumstances make.
"Material Adverse Effect" shall mean any event or condition of any
character which has had or could reasonably be expected to have a material
adverse effect on the condition (financial or otherwise), results of operations,
assets, liabilities, properties, or business of PSHL, the PSHL Subsidiary,
OraLabs or the OraLabs Subsidiaries, as applicable.
2
"OraLabs Common Stock" shall mean the shares of OraLabs $0.001 par value
per share common stock.
"OraLabs Contracts" shall have the meaning set forth in Section 5.18.
"OraLabs Exchange Documents" shall have the meaning set forth in Section
5.2.
"OraLabs Financial Statements" shall mean all of the financial statements
included in the SEC Reports filed with the SEC since December 31, 2002.
"OraLabs Redemption" shall have the meaning set forth in the recitals.
"OraLabs Stock" shall have the meaning set forth in the recitals.
"OraLabs Subsidiaries" shall mean OraLabs, Inc. and O.H. Sub Corp.
"Ordinary Course of Business" shall mean the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Parties" shall mean OraLabs and the OraLabs Subsidiaries and PSHL and the
PSHL Subsidiary.
"Person" shall mean any natural person, corporation, unincorporated
organization, partnership, association, limited liability company, joint stock
company, joint venture, trust or government, or any agency or political
subdivision of any government or any other entity.
"PSHL Exchange Documents" shall have the meaning set forth in Section 3.2.
"PSHL Financial Statements" shall mean PSHL and the PSHL Subsidiary's (i)
consolidated audited balance sheets at June 30, 2005 and 2004, and the related
audited consolidated statements of operations, stockholders' equity and cash
flows for the years ended June 30, 2005 and 2004, together with notes to such
statements and the opinion of Murrell, Hall, McIntosh & Company, PLLP and Henny
Wee & Co., independent certified public accountants, with respect thereto and
(ii) unaudited consolidated balance sheets, statements of operations,
stockholders' equity and cash flows for the half year ended December 31, 2005
and any other such unaudited consolidated balance sheets and statements and pro
forma information that PSHL delivers to OraLabs prior to the Closing.
"PSHL Contracts" - shall have the meaning set forth in Section 3.14.
"PSHL Schedules" shall mean each of the schedules from PSHL attached hereto
and incorporated herein to this Agreement.
"PSHL Stock" shall have the meaning set forth in the recitals.
"PSHL Subsidiary" shall mean Shanghai Chengtong Precision Strip Co.,
Limited. When official approval for the transformation of Shanghai Tuorong
Precision Strip Co., Limited, organized in Shanghai, in the People's Republic of
China, is obtained, Shanghai Tuorong Precision Strip Co., Limited into a foreign
investment enterprise, which will become a subsidiary of PSHL and will
thereafter be included in the term "PSHL Subsidiary".
3
"PSHL Tax Returns" has the meaning set forth in Section 3.7.
"SEC" shall mean the United States Securities and Exchange Commission.
"SEC Reports" shall mean the Forms 10-KSB, 10-QSB, 8-K, proxy
statements, S-8 and other SEC filings required by the Exchange Act and
Securities Act which have been filed by OraLabs with the SEC for the period
beginning on January 1, 2002 and ending at the Closing Date.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Stock Exchange" shall have the meaning set forth in the recitals.
The words "hereof", "herein" and "hereunder" and the words of similar
import shall refer to this Agreement as a whole and not to any particular
provision of this Agreement. The terms defined in the singular shall have a
comparable meaning when used in the plural and vice versa.
ARTICLE II
PLAN OF EXCHANGE
2.1 The Stock Exchange. At the Closing (as defined in Section 2.3 below),
(a) the Shareholders hereby agree to assign, transfer, and deliver to
OraLabs, free and clear of all liens, pledges, encumbrances, charges,
restrictions, or claims of any kind, nature, or description, each
certificate or certificates which represents the PSHL Stock (the
"Certificates"), duly endorsed for transfer to OraLabs or accompanied
by stock powers executed in blank by the Shareholders.
(b) OraLabs agrees to acquire the PSHL Stock and shall at the Closing
issue and deliver in exchange therefor the OraLabs Stock. The OraLabs
Stock will be issued to the Shareholders and their designees in the
names and denominations as set forth on Schedule 2.1 hereto. The
OraLabs Stock shall be issued with a restrictive legend as set forth
in Section 4.2 of this Agreement.
(c) Any fractional shares that will result due to such distribution will
be rounded up to the next highest whole number.
(d) As a result of the Stock Exchange, PSHL will become a wholly-owned
subsidiary of OraLabs and the Shareholders and their designees will
own ninety-four percent (94%) of the then fully diluted issued and
outstanding common stock of OraLabs after giving effect to the OraLabs
Redemption and the issuance of shares pursuant to the exercise of any
options prior to the Closing Date.
2.2 Anti-Dilution. The number of shares of OraLabs Stock shall be
appropriately adjusted to take into account any stock split, stock dividend,
reverse stock split, recapitalization, or similar change in the OraLabs common
stock which may occur between the date of the execution of this Agreement and
the Closing, provided that the redemption shall not require any adjustment.
4
2.3. Time and Place of Closing. The Closing means the completion of the
Stock Exchange. The Closing of the Stock Exchange will take place at 10:00 A.M.
on the date (the "Closing Date") following the satisfaction or waiver of all
conditions to the obligations of the Parties to consummate the transactions
contemplated hereby as set forth in Articles IX and X (other than conditions
with respect to actions the respective parties will take at the Closing itself).
Immediately following the Closing, the following transactions will also be
completed on the Closing Date: the OraLabs Redemption will occur, the directors
of OraLabs will resign and the new directors listed in Section 6.4(a) below will
begin serving as the directors of OraLabs. It is the intent of the Parties that
the Closing shall be within forty-five days after the mailing date of the
Schedule 14A Proxy Statement to the shareholders of OraLabs after it has been
cleared by the SEC, unless extended in writing by the Parties. The Closing shall
be held at the offices of Koff, Corn & Berger, P.C., 303 E. 17th Street, Suite
940, Denver, Colorado 80263, or at such other location or time as may be
mutually agreed upon by the Parties. Notwithstanding the foregoing, if this
Agreement does not close by October 15, 2006, either party may terminate this
Agreement as set forth in Section 11.1(e) of this Agreement.
2.4 Closing Events. At the Closing, each of the respective Parties hereto
shall execute, acknowledge, and deliver (or shall cause to be executed,
acknowledged, and delivered) any and all stock certificates, officers'
certificates, opinions, financial statements, schedules, agreements,
resolutions, rulings, or other instruments required by this Agreement to be so
delivered at or prior to the Closing, together with such other items as may be
reasonably requested by the parties hereto and their respective legal counsel in
order to effectuate or evidence the transactions contemplated hereby. If agreed
to by the parties, the Closing may take place through the exchange of documents
by fax, email and/or express courier.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PSHL
As an inducement to enter into this Agreement and to consummate the
transactions contemplated hereby, and to obtain the reliance of OraLabs, PSHL
represents and warrants to OraLabs as follows:
3.1 Organization. PSHL is a British Virgin Islands international business
company duly organized, validly existing and in good standing under the laws of
the British Virgin Islands. Attached hereto as Schedule 3.1 are true, correct
and complete copies of PSHL's Memorandum and Articles of Association, as amended
and in effect on the date hereof. PSHL owns 100% of the equity of the PSHL
Subsidiary. PSHL has the power and is duly authorized, qualified, franchised,
and licensed under all applicable laws, regulations, ordinances, and orders of
public authorities to own all of its properties and assets and to carry on its
business in all material respects as it is now being conducted, including
qualification to do business as a foreign corporation in jurisdictions in which
the character and location of the assets owned by it or the nature of the
business transacted by it requires qualification, except where the failure to so
qualify would not have a Material Adverse Effect on PSHL.
3.2 Authorization; Enforceability. The execution, delivery and performance
of this Agreement by PSHL and all other agreements to be executed, delivered and
performed by PSHL pursuant to this Agreement (collectively, the "PSHL Exchange
Documents") and the consummation by PSHL of the transactions contemplated hereby
and thereby have been duly authorized by all requisite corporate action on the
part of PSHL. This Agreement and the PSHL Exchange Documents have been duly
executed and delivered by PSHL and constitute the legal, valid and binding
obligation of PSHL, enforceable in accordance with their respective terms,
except to the extent that their enforcement is limited by bankruptcy,
insolvency, reorganization or other laws relating to or affecting the
enforcement of creditors' rights generally and by general principles of equity.
5
3.3 No Violation or Conflict. The execution and delivery of this Agreement
(i) does not, and the consummation of the transactions contemplated by this
Agreement in accordance with the terms hereof will not, violate any provision of
PSHL's Memorandum and Articles of Association and (ii) will not result in the
breach of any term or provision of, or constitute an event of default under, any
material indenture, mortgage, deed of trust, or other material contract,
agreement, or instrument to which PSHL and the PSHL Subsidiary, are parties or
to which any of their properties or operations are subject, other than
instruments or agreements as to which consent shall have been obtained at or
prior to the Closing.
3.4 Capitalization. The authorized capitalization of PSHL consists solely
of 50,000 shares of ordinary stock, par value $1.00, of which 50,000 ordinary
shares are issued and outstanding. All issued and outstanding shares of PSHL are
owned by the Shareholders and are legally issued, fully paid, and non-assessable
and were not issued in violation of the pre-emptive or other rights of any
person.
3.5 Options or Warrants. There are no existing options, warrants, calls,
or commitments of any character relating to the issuance of PSHL Stock.
3.6 Consents of Governmental Authorities and Others. To the Knowledge of
PSHL, other than in connection with the provisions of the British Virgin Islands
International Business Companies Act, the Exchange Act, and the Securities Act,
no consent, approval, order or authorization of, or registration, declaration,
qualification or filing with any federal, state or local governmental or
regulatory authority, or any other Person, is required to be made by PSHL in
connection with the execution, delivery or performance of this Agreement by PSHL
or the consummation by PSHL of the transactions contemplated hereby, excluding
the execution, delivery and performance of this Agreement by OraLabs.
3.7 Taxes.
(a) PSHL and the PSHL Subsidiary have filed, as appropriate, all
national, province, and local income tax returns (collectively the "PSHL
Tax Returns") required to be filed from inception to the date hereof and
all taxes have been paid when due. None of the PSHL Tax Returns have been
audited by any government or taxing authority in the British Virgin
Islands, the Peoples' Republic of China or by any other regulatory
authority. Each of the PSHL Tax Returns reflect the taxes due for the
period covered thereby, except for amounts which in the aggregate are
immaterial.
(b) PSHL and the PSHL Subsidiary do not owe any unpaid national,
province, county, local, or other taxes (including any deficiencies,
interest, or penalties), except for taxes accrued but not yet due and
payable, for which PSHL and the PSHL Subsidiary may be liable in their own
right or as a transferee of the assets of, or as a successor to, any other
corporation or entity. Furthermore, except as accruing in the Ordinary
Course of Business, PSHL and the PSHL Subsidiary do not owe any past due
accrued and unpaid taxes.
(c) PSHL and the PSHL Subsidiary acknowledge and agree that they are
relying solely upon their own analysis of the tax consequences to them and
to OraLabs upon completion of the transactions contemplated by this
Agreement and are not relying upon OraLabs or any of its officers,
directors, attorneys or agents with respect thereto.
3.8 No Material Contingent Liabilities. Except as set forth on Schedule
3.8, PSHL and the PSHL Subsidiary have no material contingent liabilities,
direct or indirect, matured or unmatured, contingent or otherwise. PSHL and the
PSHL Subsidiary have no Knowledge of any circumstances, events or arrangements
which have occurred that may hereafter give rise to any material contingent
liabilities of PSHL or the PSHL Subsidiary.
6
3.9 Information. The information concerning PSHL and the PSHL Subsidiary
set forth in this Agreement and in the PSHL schedules and exhibits attached
hereto and incorporated herein by this reference are complete and accurate in
all material respects and do not contain any untrue statement of a material fact
or omit to state a material fact required to make the statements made, in light
of the circumstances under which they were made, not misleading. All English
translations and English summaries of documents provided by PSHL under this
Agreement that were originally in a language other than English are accurate
summaries or translations of the original documents.
3.10 Absence of Certain Changes or Events. Except as set forth in this
Agreement or Schedule 3.10, since December 31, 2005,
(a) there has not been
(i) any change that would have a Material Adverse Effect in the
business, operations, properties, assets, or financial condition of PSHL
and the PSHL Subsidiary; or
(ii) any damage, destruction, or loss to PSHL and the PSHL Subsidiary
(whether or not covered by insurance) that would have a Material Adversely
Effect on the business, operations, properties, assets, or financial
condition of PSHL and the PSHL Subsidiary;
(iii) any waiver of rights of value which in the aggregate are
material considering the business of PSHL and the PSHL Subsidiary;
(b) PSHL and the PSHL Subsidiary have not
(i) borrowed or agreed to borrow any funds or incurred, or become
subject to, any material obligation or liability (absolute or contingent)
not otherwise in the Ordinary Course of Business, and except for capital
raised by issuance of debt or equity in a private placement or other
capital raising transaction deemed advisable by PSHL;
(ii) paid any material obligation or liability not otherwise in the
Ordinary Course of Business (absolute or contingent) other than current
liabilities reflected in or shown on PSHL's consolidated balance sheet
dated December 31, 2005, and current liabilities incurred since that date
in the Ordinary Course of Business and professional and other fees and
expenses incurred in connection with the preparation of this Agreement and
the consummation of the transactions contemplated hereby;
(iii) sold or transferred, or agreed to sell or transfer, any of its
assets, properties, or rights not otherwise in the Ordinary Course of
Business (except assets, properties, or rights not used or useful in its
business which, in the aggregate have a value of less than $250,000), or
canceled, or agreed to cancel, any debts or claims (except debts or claims
which in the aggregate are of a value of less than $250,000);
(iv) made or permitted any amendment or termination of any contract,
agreement, or license to which they are a party not otherwise in the
Ordinary Course of Business if such amendment or termination is material,
considering the business of PSHL and the PSHL Subsidiary;
7
(v) issued, delivered, or agreed to issue or deliver any stock, bonds
or other corporate securities including debentures (whether authorized and
unissued or held as treasury stock); or
(vi) to their Knowledge, become subject to any law or regulation which
materially and adversely affects, or in the future may adversely affect,
the business, operations, properties, assets, or financial condition of
PSHL and the PSHL Subsidiary.
3.11 Title and Related Matters.
(a) Except as set forth on Schedule 3.11(a), PSHL and the PSHL
Subsidiary have a valid leasehold interest in their land use rights,
inventory, interests in the land use rights and buildings thereon, and
assets, real and personal, which will be reflected in the most recent PSHL
condensed consolidated balance sheet dated December 31, 2005 (except
properties, interests in properties, and assets sold or otherwise disposed
of since such date in the Ordinary Course of Business), free and clear of
all liens, pledges, charges, or encumbrances except:
(i) as such assets may be affected by laws of the British Virgin
Islands and The People's Republic of China;
(ii) statutory liens or claims not yet delinquent;
(iii) such imperfections of title and easements as do not and
will not materially detract from or interfere with the
present or proposed use of the properties subject thereto or
affected thereby or otherwise materially impair present
business operations on such properties; and
(b) Except as set forth on Schedule 3.11(b), PSHL and the PSHL
Subsidiary own, free and clear of any liens, claims, encumbrances, royalty
interests, or other restrictions or limitations of any nature whatsoever,
any and all properties it is currently constructing and all procedures,
techniques, marketing plans, business plans, methods of management, or
other information utilized in connection with PSHL and the PSHL Subsidiary;
and no third party has any right to, and PSHL and the PSHL Subsidiary have
not received any written notice of infringement of or conflict with
asserted rights of others with respect to any product, technology, data,
trade secrets, know-how, proprietary techniques, trademarks, service marks,
trade names, or copyrights which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling, or finding, would have a
Material Adverse Effect on the business, operations, financial condition,
income, or business prospects of PSHL and the PSHL Subsidiary.
3.12 Litigation and Proceedings. Except as set forth on Schedule 3.12,
there are no actions, suits, proceedings, or investigations pending or, to the
knowledge of PSHL, threatened in writing by or against PSHL and the PSHL
Subsidiary, or affecting PSHL and the PSHL Subsidiary, or their properties, at
law or in equity, before any court or other governmental agency or
instrumentality, domestic or foreign, or before any arbitrator of any kind.
3.13. Brokers. Except for compensation to Belmont Capital Group Limited,
PSHL has not employed any broker or finder, nor has it nor will it incur
directly or indirectly, any broker's, finder's, investment banking or similar
fees, commissions or expenses in connection with the transactions contemplated
by this Agreement or the PSHL Exchange Documents.
8
3.14 Contracts.
(a) Attached hereto as Schedule 3.14, are all material contracts,
agreements, franchises, license agreements, or other commitments to which
PSHL and the PSHL Subsidiary, are parties or by which they or any of their
assets, products, technology, or properties are bound (the "PSHL
Contracts");
(b) the PSHL Contracts are valid and enforceable by PSHL and the PSHL
Subsidiary in all respects, except as limited by bankruptcy and insolvency
laws and by other laws affecting the rights of creditors generally;
(c) to their Knowledge, neither PSHL nor the PSHL Subsidiary are in
default in any material respect under the terms of any outstanding
contract, agreement, lease, or other commitment which is material to the
business, operations, properties, assets, or financial condition of PSHL
and the PSHL Subsidiary; and
(d) to their Knowledge, neither PSHL nor the PSHL Subsidiary are
obligated or under any liability to make any payments by way of royalties,
fees or otherwise to any owner or licensor of, or other claimant to, any
patent, trademark, trade name, copyright or other intangible asset with
respect to the use thereof, in connection with the conduct of its business
or otherwise.
3.15 Compliance With Laws and Regulations. To their Knowledge, PSHL and the
PSHL Subsidiary: (i) have complied with all applicable statutes and regulations
of any national, province, county, or other governmental entity or agency
thereof, except to the extent that noncompliance would not have a Material
Adverse Effect on the business, operations, properties, assets, or financial
condition of PSHL and the PSHL Subsidiary, or except to the extent that
noncompliance would not result in the incurrence of any material liability for
PSHL or the PSHL Subsidiary, (ii) are not in any default on its part with
respect to any judgment, order, writ, injunction, decree, award, rule, or
regulation of any court, arbitrator, or governmental agency or instrumentality,
and management has no Knowledge of any circumstances which, after reasonable
investigation, would result in the discovery of such a default, (iii) are not
and will not be infringing on or otherwise acting adversely to the rights of any
person under or in respect of any patent, trademark, service mark, trade name,
copyright, license, franchise, permission or other intangible right, and (iv)
have not received written notice of any conditions which may reasonably be
expected to materially interfere with or adversely affect their compliance with
any Environmental Laws.
3.16 Approval of Agreement. The board of directors of PSHL has authorized
the execution and delivery of this Agreement by PSHL and has approved this
Agreement and the transactions contemplated hereby.
3.17 Material Transactions or Affiliations. Set forth on Schedule 3.17, is
a brief description or summary of every material contract, agreement, or
arrangement between PSHL and the PSHL Subsidiary, and any predecessor and any
person who was at the time of such contract, agreement, or arrangement an
officer, director, or person owning of record, or known by PSHL to own
beneficially, 10% or more of the issued and outstanding PSHL Stock and which is
to be performed in whole or in part after the date hereof or which was entered
into not more than three years prior to the date hereof. In all of such
transactions, the amount paid or received, whether in cash, in services, or in
kind, is, had been during the full term thereof, and is required to be paid
during the unexpired portion of the term thereof, no less favorable to PSHL and
the PSHL Subsidiary, than terms available from otherwise unrelated parties in
arm's length transactions. Except as set forth on Schedule 3.17, no officer,
director, or 10% shareholder of PSHL has any material interest, direct or
indirect, in any material transaction with PSHL or the PSHL Subsidiary. There
are no written commitments by PSHL and the PSHL Subsidiary to lend any funds to,
borrow any money from, or enter into any other material transaction with, any
such affiliated person.
9
3.18 Listing of OraLabs Common Stock. PSHL acknowledges that the current
listing of the OraLabs Common Stock on the NASDAQ Capital Market will cease upon
the occurrence of the Closing unless PSHL chooses to submit a new listing
application and such application is approved prior to Closing. PSHL agrees that
it will be solely responsible for the filing of any such new listing application
and that even if PSHL submits the new listing application as soon as possible
after the date of this Agreement, there can be no assurance that approval by
NASDAQ will occur prior to Closing. PSHL agrees that the continued listing of
the OraLabs Common Stock on the NASDAQ Capital Market or on any other exchange
is not a condition to PSHL's closing of the transactions contemplated by this
Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
THE SHAREHOLDERS
As an inducement to, and to obtain reliance of OraLabs, each of the
Shareholders represent and warrant to OraLabs as follows:
4.1 Ownership of PSHL Shares. The Shareholders, with respect to the PSHL
Stock owned by them, are the legal and beneficial owners of the number and
percentage of PSHL Stock set forth on Schedule 2.1 of this Agreement, free and
clear of any claims, charges, equities, liens, security interests, and
encumbrances whatsoever, and the Shareholders have full rights, powers, and
authority to transfer, assign, convey, and shall deliver the PSHL Stock held by
such Shareholders to OraLabs at the Closing with good and marketable title to
such stock free and clear of any claims, charges, equities, liens, security
interests, and encumbrances whatsoever.
4.2 Restricted Stock. The Shareholders understand that the OraLabs Stock
to be acquired pursuant to this Agreement has not been registered under the
Securities Act with the SEC, and is being issued in reliance upon the exemption
from the registration requirements thereof afforded by Regulation S and/or other
exemptions under the Securities Act, or with any state securities commission or
agency. The Shareholders agree and acknowledge that OraLabs will issue stop
transfer instructions to its registrar and transfer agent prohibiting the
transfer of the OraLabs Stock delivered under this Agreement. The Shareholders
and their designees understand that the OraLabs Stock to be issued to them will
have the following restrictive legend or similar legend affixed thereto:
"These Shares have not been registered under the Securities Act of 1933
(the "Securities Act"), and have been issued pursuant to an exemption
pursuant to Regulation S under the Securities Act. Until one year after the
date of purchase, no amount of the Shares may be offered, sold, or
transferred to any U.S. Person and no hedging transactions involving these
securities may be conducted during this period. Offers, sales, or transfers
in the U.S. or to a U.S. person (as defined in Regulation S promulgated
under the Securities Act) or for the account and benefit of a U.S. person
are not permitted, except as provided in said Regulation S, unless the
Shares are registered under the Securities Act or an exemption from such
registration under the Securities Act is applicable."
4.3 Citizenship and Residency. Each of the Shareholders are citizens and
residents of The People's Republic of China, and are not United States Persons
within the meaning of Rule 902(a) of Regulation S.
10
4.4 Restrictions on Transfer. The Shareholders agree that the OraLabs
Stock acquired by the Shareholders and/or by them pursuant to this Agreement
shall not be voluntarily sold, transferred or otherwise disposed of in the
United States or to any U.S. Person except pursuant to the United States
securities laws or by registration of the OraLabs Stock under the Securities Act
and any applicable state securities laws.
4.5 Transfers. The Shareholders understand that any disposition of the
OraLabs Stock in violation of this Agreement shall be null and void. No transfer
of the OraLabs Stock shall be made by OraLabs' registrar and transfer agent upon
OraLabs' transfer books or records unless there has been compliance with the
terms of this Agreement, including the above provisions. The Shareholders agree
to indemnify and hold OraLabs and OraLabs, Inc. harmless from and against
liabilities, claims, damages and expenses (including reasonable attorneys fees)
that may result from or arise out of any disposition thereof in violation of
this Agreement.
4.6 Non-U.S. Transactions. In connection with the transactions that are
the subject of this Agreement, the Shareholders acknowledge that offers
respecting the sale of the OraLabs Shares directed by OraLabs were received
outside of the United States and that the Shareholders have not and are not
engaged in or directed any unsolicited offers to buy the OraLabs Stock into the
United States or to any United States person.
4.7 Investment Intent. The Shareholders are acquiring the OraLabs Stock
only for their own account and not on behalf of any United States person, and no
sale by the Shareholders has been pre-arranged with any prospective buyer in the
United States.
4.8 Taxes. The Shareholders acknowledge and agree that they are relying
solely upon their own analysis of the tax consequences to them upon completion
of the transactions contemplated by this Agreement and are not relying upon
OraLabs or any of its officers, directors, attorneys or agents with respect
thereto.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ORALABS
As an inducement to, and to obtain the reliance of PSHL and the
Shareholders, OraLabs and the OraLabs Subsidiaries represent and warrant to PSHL
and the Shareholders as follows:
5.1 Organization. OraLabs is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Colorado. Attached
hereto as Schedule 5.1 are complete and correct copies of the Articles of
Incorporation and all amendments thereto and the Bylaws of OraLabs, and all
amendments thereto, as in effect on the date hereof. OraLabs owns 100% of the
issued and outstanding shares of the OraLabs Subsidiaries. OraLabs has the
corporate power and is duly authorized, qualified, franchised, and licensed
under all applicable laws, regulations, ordinances, and orders of public
authorities to own all of its properties and assets and to carry on its business
in all material respects as it is now being conducted, and there is no
jurisdiction in which it is not qualified in which the character and location of
the assets owned by it or the nature of the business transacted by it requires
qualification, except where the failure to so qualify would not have a Material
Adverse Effect on OraLabs.
5.2 Authorization; Enforceability. The execution, delivery and performance
of this Agreement by OraLabs and the OraLabs Exchange Documents to be executed,
delivered and performed by OraLabs pursuant to this Agreement and the
consummation by OraLabs of the transactions contemplated hereby and thereby,
including but not limited to the OraLabs Redemption, have been duly authorized
by all requisite corporate action on the part of OraLabs. This Agreement and the
OraLabs Exchange Documents and the documents evidencing the OraLabs Redemption
11
have been duly executed and delivered by OraLabs and constitute the legal, valid
and binding obligation of OraLabs, enforceable in accordance with their
respective terms, except to the extent that their enforcement is limited by
bankruptcy, insolvency, reorganization or other laws relating to or affecting
the enforcement of creditors' rights generally and by general principles of
equity.
5.3 No Violation or Conflict. The execution and delivery of this Agreement
(i) does not, and the consummation of the transactions contemplated by this
Agreement in accordance with the terms hereof will not, violate any provision of
OraLabs' Articles of Incorporation or Bylaws and (ii) will not result in the
breach of any term or provision of, or constitute an event of default under, any
material indenture, mortgage, deed of trust, or other material contract,
agreement, or instrument to which OraLabs or the OraLabs Subsidiaries are a
party or to which any of their properties or operations are subject, other than
instruments or agreements as to which consent shall have been obtained at or
prior to the Closing.
5.4 Capitalization. OraLabs' authorized capitalization includes 25,000,000
shares of common stock, par value $0.001, of which 4,693,015 shares are issued
and outstanding as of the date of this Agreement (plus shares that may be issued
upon exercise of options described in Schedule 5.11 and the shares to be issued
to non-employee directors prior to the Closing Date as described in Section 6.4
below). All presently issued and outstanding shares are legally issued, fully
paid, and non-assessable and not issued in violation of the pre-emptive or other
rights of any person. OraLabs authorized capitalization includes 1,000,000
shares of preferred stock, $.001 par value, of which no preferred shares are
issued and outstanding.
5.5 Subsidiaries. Except OraLabs, Inc. and O.H. Sub Corp., OraLabs does
not have any subsidiaries and does not own, beneficially or of record, any
shares of any other corporation.
5.6 Consents of Governmental Authorities and Others. To the Knowledge of
OraLabs, other than in connection with the provisions of the provisions of the
Colorado Business Corporation Act, the Exchange Act, and the Securities Act, no
consent, approval, order or authorization of, or registration, declaration,
qualification or filing with any federal, state or local governmental or
regulatory authority, or any other Person, is required to be made by OraLabs or
the OraLabs Subsidiaries in connection with the execution, delivery or
performance of this Agreement by OraLabs or the consummation by OraLabs of the
transactions contemplated hereby, excluding the execution, delivery and
performance of this Agreement by PSHL.
5.7 Financial Statements. Attached hereto as Schedule 5.7 are the OraLabs'
Financial Statements. The OraLabs' Financial Statements (a) have been prepared
in accordance with the books of account and records of OraLabs; (b) fairly
present, and are true, correct and complete statements in all material respects
of OraLabs' financial condition and the results of its operations at the dates
and for the periods specified in those statements; and (c) have been prepared in
accordance with GAAP consistently applied with prior periods. OraLabs did not
have as of the date of any such OraLabs' balance sheet, except as and to the
extent reflected or reserved against therein, any liabilities or obligations
(absolute or contingent) which should be reflected in a balance sheet or the
notes thereto prepared in accordance with GAAP, and all assets reflected therein
are properly reported and present fairly the value of the assets of OraLabs, in
accordance with GAAP. The statements of operations, stockholders' equity, and
cash flow reflect fairly the information required to be set forth therein by
GAAP.
5.8 Taxes.
(a) OraLabs and the OraLabs Subsidiaries have filed all federal,
state, or local income tax returns (the "OraLabs Tax Returns") required to
12
be filed them from inception to the date hereof and all taxes have been
paid when due. None of the OraLabs Tax Returns have been examined by the
Internal Revenue Service or any state regulatory authority. Each of the
OraLabs' Tax Returns reflect the taxes due for the period covered thereby,
except for amounts which, in the aggregate, are immaterial.
(b) OraLabs and the OraLabs Subsidiaries have no liabilities with
respect to the payment of any federal, state, county, local, or other taxes
(including any deficiencies, interest, or penalties), except for taxes
accrued but not yet due and payable. Furthermore, except as accruing in the
Ordinary Course of Business, OraLabs and the OraLabs Subsidiaries do not
owe any past due accrued and unpaid taxes.
(c) OraLabs and the OraLabs Subsidiaries acknowledge and agree that
they are relying solely upon their own analysis of the tax consequences to
them upon completion of the transactions contemplated by this Agreement and
are not relying upon the Shareholders, PSHL or any of its officers,
directors, attorneys or agents with respect thereto.
5.9 No Material Contingent Liabilities. Except as set forth in Schedule
5.9, OraLabs and the OraLabs Subsidiaries have no material contingent
liabilities, direct or indirect, matured or unmatured, contingent or otherwise.
OraLabs and the OraLabs Subsidiaries have no Knowledge of any circumstances,
conditions, events or arrangements which have occurred that may hereafter give
rise to any material contingent liabilities of OraLabs resulting from or
relating to the OraLabs Subsidiaries. Notwithstanding the previous sentence,
OraLabs is not liable for any liability, obligation, or claim of the OraLabs
Subsidiaries or that may be made against the OraLabs Subsidiaries under any
guaranty, indemnity or otherwise, whether direct or indirect, matured or
unmatured, contingent or otherwise.
5.10 Information. The information concerning OraLabs and the OraLabs
Subsidiaries set forth in this Agreement and the OraLabs schedules and exhibits
attached hereto and any other documents incorporated herein by reference are and
will be complete and accurate in all material respects and do not contain any
untrue statement of a material fact or omit to state a material fact required to
make the statements made, in light of the circumstances under which they were
made, not misleading.
5.11 Options or Warrants. Except as set forth in Schedule 5.11, there are
no outstanding (a) securities or instruments convertible into or exercisable for
any of the capital stock or other equity interests of OraLabs or the OraLabs
Subsidiaries; (b) options, warrants, subscriptions, puts, calls, or other rights
to acquire capital stock or other equity interests of OraLabs or the OraLabs
Subsidiaries; or (c) commitments, agreements or understandings of any kind,
including employee benefit arrangements, relating to the issuance or repurchase
by OraLabs or the OraLabs Subsidiaries of any capital stock or other equity
interests of OraLabs or the OraLabs Subsidiaries, or any instruments convertible
or exercisable for any such securities or any options, warrants or rights to
acquire such securities. All outstanding stock options and warrants, and any
other convertible securities, if any, not exercised prior to the Closing Date,
will be terminated and cancelled as of the Closing Date.
5.12 Absence of Certain Changes or Events. Except as set forth in Schedule
5.12, since December 31, 2005:
(a) there has not been (i) any change in the business, operations,
properties, assets, or financial condition of OraLabs and the OraLabs
Subsidiaries (whether or not covered by insurance) which would a Material
Adverse Effect upon the business, operations, properties, assets, or
financial condition of OraLabs and the OraLabs Subsidiaries;
13
(b) OraLabs and the OraLabs Subsidiaries have not (i) amended their
respective Certificate of Incorporation or Bylaws; (ii) declared or made,
or agreed to declare or make any payment of dividends or distributions of
any assets of any kind whatsoever to stockholders or purchased or redeemed,
or agreed to purchase or redeem, any of its capital stock; (iii) waived any
rights of value which in the aggregate are material considering the
business of OraLabs(iv) made any material change in its method of
management, operation, or accounting; or (v) entered into any other
material transactions.
(c) OraLabs and the OraLabs Subsidiaries have not:
(i) granted or agreed to grant any options, warrants, or other
rights for its stocks, bonds, or other corporate securities
calling for the issuance thereof;
(ii) borrowed or agreed to borrow any funds or incurred, or
become subject to, any material obligation or liability (absolute
or contingent) except liabilities incurred in the Ordinary Course
of Business;
(iii) paid or agreed to pay any material obligation or liability
(absolute or contingent) other than current liabilities reflected
in or shown on the most recent OraLabs' balance sheet and current
liabilities incurred since that date in the Ordinary Course of
Business and professional and other fees and expenses incurred in
connection with the preparation of this Agreement and the
consummation of the transactions contemplated hereby; or
(iv) issued, delivered, or agreed to issue or deliver any stock,
bonds, or other corporate securities including debentures
(whether authorized and unissued or held as treasury stock),
except in connection with this Agreement; and
(d) to their Knowledge, OraLabs and the OraLabs Subsidiaries have not
become subject to any law or regulation which materially and adversely
affects, or in the future may adversely affect, the business, operations,
properties, assets, or financial condition of OraLabs or the OraLabs
Subsidiaries.
5.13 Title and Related Matters. Except as set forth on Schedule 5.13,
OraLabs and the OraLabs Subsidiaries have good and marketable title to all of
its properties, interest in properties, and assets, real and personal, which are
reflected in the OraLabs' balance sheet dated September 30, 2005 (except
properties, interest in properties, and assets sold or otherwise disposed of
since such date in the Ordinary Course of Business), free and clear of all
liens, pledges, charges, or encumbrances except
(a) statutory liens or claims not yet delinquent;
(b) such imperfections of title and easements as do not and will not
materially detract from or interfere with the present or proposed use of
the properties subject thereto or affected thereby or otherwise materially
impair present business operations on such properties.
5.14 Real Property. OraLabs does not own any fee simple interest in real
property and does not lease, sublease, or have any other contractual interest in
any real property.
5.15 Benefit Plans and Agreements. Except as set forth on Schedule 5.15,
OraLabs and the OraLabs Subsidiaries are not a party to any benefit plan or
14
employment agreement under which OraLabs and the OraLabs Subsidiaries currently
has an obligation to provide benefits to any current or former employee,
officer, director, consultant or advisor of OraLabs and the OraLabs
Subsidiaries.
5.16 Environmental Matters. No real property used by OraLabs and the
OraLabs Subsidiaries presently or in the past has been used to manufacture,
treat, store, or dispose of any hazardous substance except in accordance with
applicable law and such property is free of all such substances such that the
condition of the property is in compliance with applicable Environmental Laws.
To the Knowledge of OraLabs, OraLabs and the OraLabs Subsidiaries are in
compliance with all Environmental Laws applicable to OraLabs, the OraLabs
Subsidiaries or their businesses as a result of any hazardous substance utilized
by OraLabs and the OraLabs Subsidiaries in their businesses or otherwise placed
at any of the facilities owned, leased or operated by OraLabs and the OraLabs
Subsidiaries, or in which OraLabs and the OraLabs Subsidiaries have a
contractual interest. OraLabs and the OraLabs Subsidiaries have not received any
written complaint, notice, order, or citation of any actual, threatened or
alleged noncompliance by OraLabs and the OraLabs Subsidiaries with any
Environmental Laws, and to the Knowledge of OraLabs, there is no Litigation
pending or threatened against OraLabs and the OraLabs Subsidiaries with respect
to any violation or alleged violation of the Environmental Laws, and to OraLabs'
Knowledge, there is no reasonable basis for the institution of any such
Litigation.
5.17 Litigation and Proceedings. Except as set forth on schedule 5.17, to
the Knowledge of OraLabs there are no actions, suits, proceedings or
investigations pending or threatened in writing by or against or affecting
OraLabs and the OraLabs Subsidiaries, or affecting OraLabs and the OraLabs
Subsidiaries, or their properties, at law or in equity, before any court or
other governmental agency or instrumentality, domestic or foreign, or before any
arbitrator of any kind.
5.18 Contracts.
(a) Attached hereto as Schedule 5.18 are copies of all material
contracts, agreements, franchises, license agreements, or other commitments
to which OraLabs and the OraLabs Subsidiaries, are parties or by which they
or any of their assets, products, technology, or properties are bound (the
"OraLabs Contracts");
(b) the OraLabs Contracts are valid and enforceable by OraLabs and
the OraLabs Subsidiaries in all respects, except as limited by bankruptcy
and insolvency laws and by other laws affecting the rights of creditors
generally.
(c) to their Knowledge, neither OraLabs nor the OraLabs Subsidiaries
are in default in any material respect under the terms of any outstanding
contract, agreement, lease, or other commitment which is material to the
business, operations, properties, assets, or financial condition of OraLabs
and the OraLabs Subsidiaries.
(d) to their Knowledge, neither OraLabs nor the OraLabs Subsidiaries
are obligated or under any liability to make any payments by way of
royalties, fees or otherwise to any owner or licensor of, or other claimant
to, any patent, trademark, trade name, copyright or other intangible asset
with respect to the use thereof, in connection with the conduct of its
business or otherwise.
5.19 Brokers. OraLabs has not employed any broker or finder, nor has it nor
will it incur directly or indirectly, any broker's, finder's, investment banking
or similar fees, commissions or expenses in connection with the transactions
contemplated by this Agreement or the OraLabs Exchange Documents.
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5.20 SEC Reports. All of the SEC Reports and other filings required to be
filed by OraLabs have been filed with the SEC for the periods indicated in the
definition of SEC Reports, and as of the date filed, each of the SEC Reports
were true, accurate and complete in all material respects and did not omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading.
5.21 Governmental Authorizations.
(a) To their Knowledge, OraLabs and the OraLabs Subsidiaries have all
licenses, franchises, permits, and other government authorizations, that
are legally required to enable it to conduct its business operations in all
material respects as conducted on the date hereof. Except for compliance
with federal and state securities or corporation laws, as hereinafter
provided, no authorization, approval, consent, or order of, or
registration, declaration, or filing with, any court or other governmental
body is required in connection with the execution and delivery by OraLabs
of this Agreement and the consummation by OraLabs of the transactions
contemplated hereby.
(b) To their Knowledge, OraLabs and the OraLabs Subsidiaries have
complied with all applicable statutes and regulations of any federal,
state, or other applicable governmental entity or agency thereof, except to
the extent that noncompliance would not materially and adversely affect the
business, operations, properties, assets, or financial condition of OraLabs
and the OraLabs Subsidiaries or except to the extent that noncompliance
would not result in the incurrence of any material liability. This
compliance includes, but is not limited to, the filing of all reports to
date with the SEC and state securities authorities.
5.22 Approval of Agreement. The board of directors of OraLabs has
authorized the execution and delivery of this Agreement by OraLabs and has
approved this Agreement and the transactions contemplated hereby.
5.23 Material Transactions of Affiliations. Except as set forth in the SEC
Reports, there exists no material contract, agreement, or arrangement between
OraLabs, the OraLabs Subsidiaries and any Person who was at the time of such
contract, agreement, or arrangement an officer, director, or person owning of
record or known by OraLabs to own beneficially, 10% or more of the issued and
outstanding common stock of OraLabs and which is to be performed in whole or in
part after the date hereof or was entered into not more than three years prior
to the date hereof, neither any officer, director, nor 10% shareholder of
OraLabs has, or has had during the last preceding full fiscal year, any known
interest in any material transaction with OraLabs or the OraLabs Subsidiaries
which was material to the business of OraLabs or the OraLabs Subsidiaries; and
OraLabs has no commitment, whether written or oral, to lend any funds to, borrow
any money from, or enter into any other material transaction with any such
affiliated person.
5.24 Listing on NASDAQ Capital Market. OraLabs is listed on the NASDAQ
Capital Market and except as set forth on Schedule 5.24, is in compliance with
the listing standards, rule and regulations of the NASDAQ Capital Market.
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ARTICLE VI
PRE-CLOSING COVENANTS
6.1 Access to Properties and Records. OraLabs and PSHL will each afford to
the officers and authorized representatives of the other full access to the
properties, books, and records of OraLabs, the OraLabs Subsidiaries, PSHL or the
PSHL Subsidiary, as the case may be, in order that each may have full
opportunity to make such reasonable investigation as it shall desire to make of
the affairs of the other, and each will furnish the other with such additional
financial and operating data and other information as to the business and
properties of OraLabs, the OraLabs Subsidiaries, PSHL or the PSHL Subsidiary, as
the case may be, as the other shall from time to time reasonably request.
6.2 Stand-Still Agreement. From and after the date of this Agreement and
up to and including the Closing of this Agreement, the parties agree not to
directly or through intermediaries solicit, entertain or otherwise discuss with
any Person any other similar transaction, except that the OraLabs Board of
Directors may respond to unsolicited offers from third parties to the extent
necessary to comply with its fiduciary duties upon advice of OraLabs' legal
counsel.
6.3 Third Party Consents and Certificates. OraLabs and PSHL agree to
cooperate with each other in order to obtain any required third party consents
to this Agreement and the transactions herein and therein contemplated.
6.4 Submission to OraLabs Shareholders. As soon as practicable following
the execution of this Agreement, and the clearance by the SEC of the Proxy
Statement submitted by OraLabs to the SEC, OraLabs shall cause to have approved
the following proposals at a meeting of the shareholders of OraLabs, at which a
quorum, as set forth in OraLabs' Bylaws are present and the holders of a
majority of the outstanding shares of common stock of OraLabs approve such
proposals. The proposals are set forth below.
(a) the election of Wo Hing Li, Leada Tak Tai Li and Shu Keung Leung
as directors of OraLabs effective on the Closing Date upon completion of
all of the transactions contemplated by this Agreement;
(b) the amendment to the Certificate of Incorporation of OraLabs to
change its name to "Ameriasia Steel, Inc." or such other name to be
determined by PSHL (the "New Name"), and to increase the authorized number
of shares of OraLabs from 25,000,000 to 200,000,000 shares;
(c) the approval of this Agreement and the transactions contemplated
herein, and the OraLabs Redemption Agreement, and the transactions
contemplated therein;
(d) the approval of OraLabs' 2006 Director Stock Plan and issuance of
300,000 shares thereunder to OraLabs non-employee directors, Michael I.
Friess and Robert C. Gust prior to the Closing; and
(e) to take such other actions as the shareholders of OraLabs may
determine are necessary or appropriate.
6.5 Trading. PSHL and the Shareholders agree that until the earlier
to occur of (i) the date that is three months after the termination of this
Agreement, or (ii) the date of the Closing of this Agreement, they will not,
without the prior written consent of OraLabs:
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(a) acquire, offer to acquire, or agree to acquire, directly or
indirectly, by purchase or otherwise, any voting securities or direct or
indirect rights to acquire any voting securities of OraLabs or the OraLabs
Subsidiaries thereof, or of any successor to or person in control of
OraLabs, or any assets of OraLabs, the OraLabs Subsidiaries or any division
thereof or of any such successor or controlling person;
(b) make or in any way participate, directly or indirectly, in any
"solicitation" or "proxies" to vote (as such terms are used in the rules of
the SEC), or seek to advise or influence any person or entity with respect
to the voting of any voting securities of OraLabs;
(c) make any public announcement with respect to, or submit a
proposal for, or offer of (with or without conditions) any extraordinary
transaction involving OraLabs or its securities or assets;
(d) form, join or in any way participate in a "group" as defined in
Section 13(d)(3) of the Exchange Act, in connection with any of the
foregoing; or
(e) otherwise act, alone or in concert with others, to seek to
control the management, board of directors, or policies of OraLabs.
6.6 Actions Prior to Closing.
(a) From and after the date of this Agreement until the Closing Date
and except as permitted or contemplated by this Agreement, OraLabs, the
OraLabs Subsidiaries, PSHL and the PSHL Subsidiary, will each:
(i) carry on its business in substantially the same manner as it
has heretofore;
(ii) maintain and keep its properties in states of good repair
and condition as at present, except for depreciation due to
ordinary wear and tear and damage due to casualty;
(iii) maintain in full force and effect insurance comparable in
amount and in scope of coverage to that now maintained by it;
(iv) perform in all material respects all of its obligation under
material contracts, leases, and instruments relating to or
affecting its assets, properties, and business;
(v) use its reasonable best efforts to maintain and preserve its
business organization intact, to retain its key employees, and to
maintain its relationship with its material suppliers and
customers; and
(vi) fully comply with and perform in all material respects all
obligations and duties imposed on it by all federal and state
laws and all rules, regulations, and orders imposed by federal or
state governmental authorities.
(b) From and after the date of this Agreement until the Closing Date,
neither OraLabs nor PSHL and the PSHL Subsidiary will:
(i) make any change in their respective Articles of Incorporation
or Bylaws or its Memorandum and Articles of Association;
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3
(ii) take any action described in section 3.10 in the case of
PSHL and the PSHL Subsidiary, or in section 5.12, in the case of
OraLabs or the OraLabs Subsidiaries (all except as permitted
therein or as disclosed in the applicable party's schedules); or
(iii) enter into or amend any material contract, agreement, or
other instrument of any of the types described in such party's
schedules, except that a party may enter into or amend any
contract, agreement, or other instrument in the Ordinary Course
of Business involving the sale of goods or services.
6.7 PSHL Financial Statements. PSHL acknowledges that timely receipt of
its PSHL Financial Statements for the annual period ended June 30, 2005 and the
half year ended December 31, 2005 will be necessary in order for OraLabs to seek
a timely fairness opinion and in order for OraLabs to make a timely filing of
its Proxy Statement or Information Statement with the SEC. Accordingly, PSHL
agrees that the statements for the year June 30, 2005, and the half year ended
December 31, 2005 will be delivered to OraLabs by April 15, 2006. In addition,
PSHL will provide to OraLabs such unaudited financial information and pro forma
financial information as may be necessary for OraLabs to file any Form 8-K
current report and the Proxy Statement or Information Statement in accordance
with the requirements of the SEC. PSHL acknowledges that its financial
statements for the quarter ended March 31, 2006 will be required in order to
complete the process by which the Proxy Statement is reviewed by the SEC.
6.8 Voting Agreement. Within 5 days of the date of this Agreement, PSHL
shall have received a voting agreement from Gary H. Schlatter and the Schlatter
Family Partnership, substantially in the form attached hereto as Schedule 6.8
pursuant to which Gary H. Schlatter and the Schlatter Family Partnership agree
to vote in favor of the proposals set forth in the Proxy Statement to be
furnished to the shareholders of OraLabs pursuant to Section 6.4 above.
6.9 Cashiers Check to be delivered at Closing. PSHL shall have received a
cashier's check from OraLabs in the amount of $30,000. The $30,000 is being paid
to PSHL by OraLabs to defer certain costs of the transaction to be incurred by
PSHL.
ARTICLE VII
POST-CLOSING COVENANTS
7.1 Sales Under Rules 144 or 145, If Applicable.
(a) OraLabs will use its reasonable best efforts at all times to
comply with the reporting requirements of the Exchange Act, and the rules
and regulations promulgated thereunder.
(b) Upon being informed in writing by any person holding restricted
stock of OraLabs as of the date of this Agreement that such person intends
to sell any shares under Rule 144 or Rule 145 promulgated under the
Securities Act (including any rule adopted in substitution or replacement
thereof), OraLabs will certify in writing to such person that it has filed
all of the reports required to be filed by it under the Exchange Act to
enable such person to sell such person's restricted stock under Rule 144 or
145, as may be applicable in the circumstances, or will inform such person
in writing that it has not filed any such report or reports.
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4
(c) If any certificate representing any such restricted stock is
presented to OraLabs' transfer agent for registration of transfer in
connection with any sale theretofore made under Rule 144 or 145, provided
such certificate is duly endorsed for transfer by the appropriate person(s)
or accompanied by a separate stock power duly executed by the appropriate
person(s) in each case with reasonable assurances that such endorsements
are genuine and effective, and is accompanied by an opinion of counsel
satisfactory to OraLabs and its counsel that such transfer has complied
with the requirements of Rule 144 or 145, as the case may be, OraLabs will
promptly instruct its transfer agent to register such transfer and to issue
one or more new certificates representing such shares to the transferee
and, if appropriate under the provisions of Rule 144 or 145, as the case
may be, free of any stop transfer order or restrictive legend.
7.2 Delivery of Additional Instruments on Request. Each party agrees to
execute and deliver or cause to be executed and delivered at the Closing and at
such other times and places as shall be reasonably agreed, such additional
instruments as it may reasonably request for the purpose of fully effecting the
transactions contemplated by this Agreement.
7.3 Continued Operations. After Closing, OraLabs will continue to actively
conduct the business of PSHL as it had been conducted prior to Closing.
7.4 Dissenters. As used in this paragraph, OraLabs, Inc. will be referred
to as the Subsidiary. If the holders of any shares exercise dissenters rights,
then after the Closing Date OraLabs will permit the Subsidiary and its
representatives to actively participate in the process of determining the amount
payable to dissenters as determined under applicable Colorado law. On the first
business day following payment by OraLabs of amounts due to dissenters, the
Subsidiary will pay such amount to OraLabs in consideration for the issuance by
OraLabs to the Subsidiary of the number of shares of OraLabs common stock
calculated under the following sentence. The purchase price per share issued to
the Subsidiary will equal the average of the closing bid and ask price of the
common stock of OraLabs as of the close of trading on the business day preceding
the date that payment is made by the Subsidiary to OraLabs. The parties agree
that the shares of OraLabs issuable to the Subsidiary will be restricted
securities. OraLabs and the Subsidiary agree that in the event that 37,500
shares or more are issued to the Subsidiary in consideration for the payment to
dissenters by Subsidiary in accordance with this Section 7.4, the Subsidiary
shall be granted a one time demand registration right pursuant to which OraLabs
will, upon written request by the Subsidiary use its commercially reasonable
best efforts to have a registration statement filed with and declared effective
by the SEC to register the sale of the shares issued to the Subsidiary pursuant
to this Section 7.4. In the event that Subsidiary provides notice that it
intends to exercise such demand right and later withdraws such demand
registration request, Subsidiary shall lose such demand registration right.
Subsidiary shall advance payment of all reasonable expenses estimated to be
incurred by OraLabs in its sole discretion in connection with the preparation of
and filing of the registration statement, including, but not limited to all
legal fees, accounting fees, filing fees, edgarization fees, applicable blue sky
fees and other out of pocket costs incurred by OraLabs. Applicable Blue Sky laws
will be complied with so as to permit sales and resales of those shares that are
registered under the Registration Statement within the State of Colorado and any
other states chosen by the Subsidiary. OraLabs shall be under no obligation to
file or maintain an effective registration statement that includes shares issued
to the Subsidiary pursuant to this Section 7.4, if such shares may then be sold
pursuant to Rule 144 or any similar provision then in effect under the
Securities Act in the opinion of counsel to Subsidiary.
7.5 Confidentiality. OraLabs on the one hand, and PSHL and the
Shareholders on the other hand, agree that for a period of five (5) years from
and after the date of this Agreement (regardless of whether the transactions
contemplated hereby are consummated), each will hold, and will cause its
directors, officers, employees, Affiliates, consultants and advisers
20
(collectively, "Representatives") to hold, in confidence all documents and
information furnished to it (the "Receiving Party") by or on behalf of the other
party (the "Disclosing Party") either before or after such date, in connection
with the transactions contemplated by this Agreement (the "Confidential
Material"). Each party agrees that it will use the Confidential Material solely
for the purpose of the transactions contemplated by this Agreement (including
without limitation descriptions or attachments of Confidential Material in any
press releases and public filings that OraLabs determines are necessary or
advisable to comply with applicable securities laws or as required by law) and
it will not use the Confidential Material in any way detrimental to the other
party. In the event that either party is requested in any proceeding to disclose
any Confidential Material, such party shall give the other party prompt notice
of such request so that the other party may seek an appropriate protective
order. If, in the absence of a protective order, a party is nonetheless
compelled to disclose Confidential Material, such party may disclose such
information without liability hereunder; provided, however, that such party will
give the other party written notice of the information to be disclosed as far in
advance of its disclosure as is practicable and, upon the request of and at the
expense of such other party, such party will use commercially reasonable efforts
to obtain assurances that confidential treatment will be accorded to such
information. The term "Confidential Material" shall not include information that
was or becomes generally available on a non-confidential basis provided that the
source of such information was not bound by a confidentiality agreement. Without
granting any right or license, the Disclosing Party agrees that the foregoing
shall not apply to any information that the Receiving Party can document: (i) is
(through no improper action or inaction by the Receiving Party or any affiliate,
agent, consultant or employee) generally available to the public, or (ii) was in
its possession or known by it prior to receipt from the Disclosing Party, or
(iii) was rightfully disclosed to it by a third party without restriction,
provided the Receiving Party complies with any restrictions imposed by the third
party, or (iv) was independently developed without use of any Confidential
Material of the Disclosing Party by employees of the Receiving Party who have
had no access to such information. The parties agree that because money damages
may not be a sufficient remedy for any breach of the foregoing covenants and
agreements, the Disclosing Party shall be entitled to specific performance and
injunctive and other equitable relief as a remedy for any such breach of this
Agreement in addition to all monetary remedies available at law or in equity.
ARTICLE VIII
INDEMNIFICATION
8.1 Survival of the Representations and Warranties. No claims may be
asserted under the representations, warranties and covenants set forth in this
Agreement after the expiration of twelve (12) months from the Closing Date,
except that claims may be asserted under the provisions of Sections 3.7, 5.8,
and 5.16 until the expiration of their applicable statute of limitations. The
provisions of Section 7.5 will survive for five years from the date of this
Agreement. No claim with respect to breaches of covenants, representations or
warranties, including without limitation claims for indemnification, may be
brought by any party hereto, other than a claim for fraud, after expiration of
the applicable periods set forth in the first sentence of this Section 8.1.
8.2 Investigation. The representations, warranties, covenants and
agreements set forth in this Agreement shall not be affected or diminished in
any way by any investigation (or failure to investigate) at any time by or on
behalf of the party for whose benefit such representations, warranties,
covenants and agreements were made. All statements contained herein or in any
schedule, certificate, exhibit, list or other document required to be delivered
pursuant hereto, shall be deemed to be representations and warranties for
purposes of this Agreement; provided, that any knowledge or materiality
qualifications contained herein shall be applicable to such other documents.
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8.3 Indemnification.
(a) OraLabs Indemnification. PSHL and the Shareholders hereby agree
to indemnify OraLabs and each of the officers, agents and directors of
OraLabs as of the date of execution of this Agreement against any loss,
liability, claim, damage, or expense (including, but not limited to, any
and all expense whatsoever reasonably incurred in investigating, preparing,
or defending against any litigation, commenced or threatened, or any claim
whatsoever) (collectively a "OraLabs Loss"), to which it or they may become
subject arising out of (a) any breach or default in the performance by PSHL
or the Shareholder of any covenant or agreement made by in this Agreement;
(b) any breach of any representation or warranty made by PSHL and the
Shareholders in this Agreement; and (c) any and all litigation incident to
any of the foregoing. Subject to Section 8.1, the indemnification provided
for in this paragraph shall survive the Closing and consummation of the
transactions contemplated hereby and termination of this Agreement.
(b) PSHL and the Shareholders Indemnification. OraLabs hereby agrees
to indemnify PSHL and each of the officers, agents and directors of PSHL as
of the date of execution of this Agreement and the Shareholders against any
loss, liability, claim, damage, or expense (including, but not limited to,
any and all expense whatsoever reasonably incurred in investigating,
preparing, or defending against any litigation, commenced or threatened, or
any claim whatsoever) (collectively a "PSHL Loss"), to which it or they may
become subject arising out of (a) any breach or default in the performance
by OraLabs or the OraLabs Subsidiaries of any covenant or agreement made by
in this Agreement; (b) any breach of any representation or warranty made by
OraLabs or the OraLabs Subsidiaries in this Agreement; and (c) any and all
litigation incident to any of the foregoing. Subject to Section 8.1, the
indemnification provided for in this paragraph shall survive the Closing
and consummation of the transactions contemplated hereby and termination of
this Agreement.
(c) OraLabs, Inc. agrees to enter into an indemnification agreement
substantially in the form attached hereto as Exhibit A on the Closing Date.
(d) Indemnity Procedure. A party or parties hereto agreeing to be
responsible for or to indemnify against any matter pursuant to this
Agreement is referred to herein as the "Indemnifying Party" and the other
party or parties claiming indemnity is referred to as the "Indemnified
Party".
(i) An Indemnified Party under this Agreement shall, with respect
to claims asserted against such party by any third party, give
written notice to the Indemnifying Party of any liability which
might give rise to a claim for indemnity under this Agreement
within thirty (30) calendar days of the receipt of any written
claim from any such third party, but not later than twenty (20)
days prior to the date any answer or responsive pleading is due,
and with respect to other matters for which the Indemnified Party
may seek indemnification, give prompt written notice to the
Indemnifying Party of any liability which might give rise to a
claim for indemnity; provided, however, that any failure to give
such notice will not waive any rights of the Indemnified Party
except to the extent the rights of the Indemnifying Party are
materially prejudiced.
(ii) The Indemnifying Party shall have the right, at its
election, to take over the defense or settlement of such claim by
giving written notice to the Indemnified Party at least fifteen
(15) days prior to the time when an answer or other responsive
pleading or notice with respect thereto is required. If the
Indemnifying Party makes such election, it may conduct the
22
defense of such claim through counsel of its choosing (subject to
the Indemnified Party's approval of such counsel, which approval
shall not be unreasonably withheld), shall be solely responsible
for the expenses of such defense and shall be bound by the
results of its defense or settlement of the claim. The
Indemnifying Party shall not settle any such claim without prior
notice to and consultation with the Indemnified Party, and no
such settlement involving any equitable relief or which might
have an adverse effect on the Indemnified Party may be agreed to
without the written consent of the Indemnified Party (which
consent shall not be unreasonably withheld). So long as the
Indemnifying Party is diligently contesting any such claim in
good faith, the Indemnified Party may pay or settle such claim
only at its own expense and the Indemnifying Party will not be
responsible for the fees of separate legal counsel to the
Indemnified Party, unless the named parties to any proceeding
include both parties and representation of both parties by the
same counsel would be inappropriate. If the Indemnifying Party
does not make such election, or having made such election does
not, in the reasonable opinion of the Indemnified Party proceed
diligently to defend such claim, then the Indemnified Party may
(after written notice to the Indemnifying Party), at the expense
of the Indemnifying Party, elect to take over the defense of and
proceed to handle such claim in its discretion and the
Indemnifying Party shall be bound by any defense or settlement
that the Indemnified Party may make in good faith with respect to
such claim. In connection therewith, the Indemnifying Party will
fully cooperate with the Indemnified Party should the Indemnified
Party elect to take over the defense of any such claim.
(iii) The Parties agree to cooperate in defending such third
party claims and the Indemnified Party shall provide such
cooperation and such access to its books, records and properties
as the Indemnifying Party shall reasonably request with respect
to any matter for which indemnification is sought hereunder; and
the parties hereto agree to cooperate with each other in order to
ensure the proper and adequate defense thereof.
(v) With regard to claims of third parties for which
indemnification is payable hereunder, such indemnification shall
be paid by the Indemnifying Party upon the earlier to occur of:
(i) the entry of a judgment against the Indemnified Party and the
expiration of any applicable appeal period, or if earlier, five
(5) days prior to the date that the judgment creditor has the
right to execute the judgment; (ii) the entry of an unappealable
judgment or final appellate decision against the Indemnified
Party; or (iii) a settlement of the claim. Notwithstanding the
foregoing, provided that there is no dispute as to the
applicability of indemnification, the reasonable expenses of
counsel to the Indemnified Party shall be reimbursed on a current
basis by the Indemnifying Party if such expenses are a liability
of the Indemnifying Party.
(vi) With regard to other claims for which indemnification is
payable hereunder, such indemnification shall be paid within
thirty (30) calendar days by the Indemnifying Party upon demand
by the Indemnified Party.
8.4 General. In case at any time after the Closing Date any further action
is necessary to carry out the purposes of this Agreement, each of the Parties
23
will take such further action (including the execution and delivery of such
further instruments and documents) as any other Party reasonably may request,
all at the sole cost and expense of the requesting Party (unless the requesting
Party is entitled to indemnification therefor under Article VIII).
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF ORALABS
The obligations of OraLabs under this Agreement are subject to the
satisfaction (or waiver by OraLabs of any one or more of the following
conditions in the exercise of its sole discretion), at or before the Closing
Date, of the following conditions, and if OraLabs shall not consummate the
transactions contemplated by this Agreement by reason of the failure of any of
such conditions to be met, OraLabs will have no liability to PSHL or its
Shareholders:
9.1 Accuracy of Representations. The representations and warranties made
by PSHL and the Shareholders in this Agreement were true when made and shall be
true as of the Closing Date with the same force and effect as if such
representations and warranties were made at and as of that time (except for
changes therein permitted by this Agreement), and PSHL and the Shareholders
shall have performed or complied with all covenants and conditions required by
this Agreement to be performed or complied with by PSHL and the Shareholders
prior to or at the Closing.
9.2 Officer's Certificates. OraLabs shall have been delivered a
certificate from PSHL and the Shareholders addressed to OraLabs, dated the
Closing Date, certifying that the conditions specified in Section 9.1 above have
been fulfilled.
9.3 No Material Adverse Change. Prior to the Closing Date, there shall not
have occurred any change that would have Material Adverse Effect in the
financial condition, business, or operations of PSHL and the PSHL Subsidiary,
nor shall any event have occurred which, with the lapse of time or the giving of
notice, may cause or create any Material Adverse Effect in the financial
condition, business, or operations of PSHL and the PSHL Subsidiary.
9.4 Officer and Director Questionnaires. OraLabs shall have received
officer and director questionnaires completed and signed by each executive
officer and director of PSHL in form and substance reasonably satisfactory to
OraLabs and its counsel which shall contain information for use by OraLabs in
reporting the transaction contemplated hereby on Form 8-K and in Schedule 14A or
14C to be filed with the SEC.
9.5 PSHL Financial Statements. OraLabs shall have received the PSHL
Financial Statements. The PSHL Financial Statements shall (a) have been prepared
in accordance with the books of account and records of OraLabs; (b) fairly
present, and are true, correct and complete statements in all material respects
of OraLabs' financial condition and the results of its operations at the dates
and for the periods specified in those statements; and (c) have been prepared in
accordance with GAAP consistently applied with prior periods. OraLabs shall have
received all other financial information and pro formas as required under the
provisions of this Agreement.
9.6 Consents. All consents to the consummation of the transactions
contemplated by this Agreement that are required in order to prevent a breach of
or a default under the terms of any instrument to which PSHL or the Shareholders
is a party or is bound shall have been obtained by PSHL.
9.7 Approval by OraLabs Shareholders. The transactions contemplated by
this Agreement shall have been approved at a shareholder meeting of OraLabs as
set forth in Section 6.4 of this Agreement and all applicable filings with the
SEC shall have been made in connection with the approval by OraLabs
Shareholders.
24
9.8 Due Diligence. OraLabs must be satisfied in its sole and absolute
discretion with the results of its due diligence investigation of PSHL. Failure
to notify PSHL within 45 days following OraLabs' receipt of the audited PSHL
Financial Statements for the year ended June 30, 2005 and the unaudited
financial statements for the half year ended December 31, 2005, that OraLabs is
not satisfied with the results of its due diligence investigation of PSHL, shall
constitute a waiver of this paragraph.
9.9 Accountant's Letter. OraLabs shall have received a "comfort" letter
from PSHL's independent auditors, Murrell, Hall, McIntosh & Company PLLP
covering the period from the last day of PSHL's most recent fiscal year until a
day that is no more than ten days prior to the date of Closing, in a form
reasonably satisfactory to counsel for OraLabs.
9.10 Legal Opinion. OraLabs shall have received a legal opinion from an
attorney authorized to practice in the British Virgin Islands, that (i) PSHL is
a company duly organized, validly existing, and in good standing under the laws
of the British Virgin Islands International Business Companies Act; (ii) the
execution and delivery of this Agreement does not, and the consummation of the
transactions contemplated by this Agreement in accordance with the terms hereof
will not, violate any provision of PSHL's organizational documents; (iii) PSHL
has taken all action required by laws, its articles of organization, certificate
of business registration, or otherwise to authorize the execution and delivery
of this Agreement; and (iv) PSHL has full power, authority, and legal right and
has taken all action required by law, and otherwise to consummate the
transactions herein contemplated and the closing of the transactions will be
legally binding upon PSHL.
9.11 Special Covenants Regarding the OraLabs Stock. OraLabs shall have
received letters from each of the Shareholders, substantially in the form
attached hereto as Exhibit B, that the issuance of the OraLabs Stock to the
Shareholders as contemplated hereby, constitutes the offer and sale of
securities under the Securities Act and any applicable state statutes and that
it is the intent that such transactions shall be consummated in reliance on
Regulation S and other exemptions from the registration requirements of such
statutes.
9.12 Board Approval. OraLabs shall have received from PSHL certificates
dated the Closing Date, of an officer of PSHL setting forth that authorizing
resolutions were adopted by PSHL Board of Directors, approving the terms and
conditions of this Agreement and the other documents contemplated hereby and the
transactions contemplated hereby and thereby.
9.13 Certificates. The Shareholders shall have delivered the Certificates
to OraLabs pursuant to Section 2.1 of this Agreement.
9.14 Number of Dissenters. The number of shares that shall be the subject
of Dissenters' Rights exercised by any of the shareholders of OraLabs shall not
cumulatively exceed 75,000.
9.15 Fairness Opinion. The Board of Directors of OraLabs shall have
received a fairness opinion reasonably satisfactory to it that remains in effect
as of the time of Closing.
Any of the above conditions can be waived by OraLabs in its sole and
absolute discretion.
25
ARTICLE X
CONDITIONS PRECEDENT TO OBLIGATIONS OF
PSHL AND THE SHAREHOLDERS
The obligations of PSHL and the Shareholders under this Agreement are
subject to the satisfaction (or waiver by PSHL and the Shareholders of any one
or more of the following conditions in the exercise of their sole discretions),
at or before the Closing Date, of the following conditions, and if PSHL and the
Shareholders shall not consummate the transactions contemplated by this
Agreement by reason of the failure of any of such conditions to be met, they
will have no liability to OraLabs:
10.1 Accuracy of Representations. The representations and warranties made
by OraLabs in this Agreement were true when made and shall be true immediately
prior to commencement of the Closing (except for changes therein permitted by
this Agreement) with the same force and effect as if such representations and
warranties were made at and as of that time, and OraLabs shall have performed
and complied with all covenants and conditions required by this Agreement to be
performed or complied with by OraLabs and the OraLabs Subsidiaries prior to or
at the Closing.
10.2 Officer's Certificates. PSHL shall have been delivered a certificate
from OraLabs addressed to PSHL, dated the Closing Date, certifying that the
conditions specified in Section 10.1 above have been fulfilled.
10.3 No Material Adverse Change. Prior to the Closing Date, there shall not
have occurred any change that would have Material Adverse Effect in the
financial condition, business, or operations of OraLabs, nor shall any event
have occurred which, with the lapse of time or the giving of notice, may cause
or create any Material Adverse Effect in the financial condition, business, or
operations of OraLabs.
10.4 Delivery of Books and Records. At the Closing, OraLabs shall deliver
to Schlueter & Associates P.C., legal counsel of PSHL, the originals of the
corporate minute books, books of account, contracts, records, and all other
books or documents of OraLabs now in the possession or control of OraLabs or its
representatives and agents. Such minute books shall contain accurate records of
all meetings and other corporate actions of the board of directors, committees
of the board of directors, incorporators and shareholders of OraLabs from the
date of their incorporation to the date hereof which were memorialized in
writing.
10.5 Approval by OraLabs Shareholders. The transactions contemplated by
this Agreement shall have been approved at a shareholder meeting or shareholder
consent of OraLabs pursuant to Section 6.4 of this Agreement and all applicable
filings with the SEC shall have been made in connection with the approval by
OraLabs Shareholders.
10.6 Good Standing. OraLabs shall have received a certificate of good
standing from OraLabs prepared by the Secretary of State of the State of
Colorado or other appropriate office, dated as of a date within ten days prior
to the Closing Date certifying that OraLabs is in good standing as a corporation
in the State of Colorado.
10.7 Shareholders List. PSHL shall have received a shareholders' list from
OraLabs prepared by its transfer agent, current at least within ten (10) days
prior to Closing, containing the name, address and number of shares held by each
such OraLabs shareholder, certified by a representative of the transfer agent as
being true, complete and accurate.
26
10.8 Consents. All consents to the consummation of the transactions
contemplated by this Agreement that are required in order to prevent a breach of
or a default under the terms of any instrument to which OraLabs is a party or is
bound shall have been obtained by OraLabs.
10.9 Due Diligence. PSHL must be satisfied in its sole and absolute
discretion with the results of its due diligence investigation of OraLabs.
Failure to notify OraLabs within 45 days following mutual execution of this
Agreement, that PSHL is not satisfied with the results of its due diligence
investigation of OraLabs, shall constitute a waiver of this paragraph.
10.10 Intentionally Omitted.
10.11 Legal Opinion. PSHL shall have received a legal opinion from an
attorney authorized to practice in the state of Colorado, that (i) OraLabs is a
company duly organized, validly existing, and in good standing under the
Colorado Business Companies Act; (ii) the execution and delivery of this
Agreement does not, and the consummation of the transactions contemplated by
this Agreement, including the OraLabs Redemption, in accordance with the terms
hereof will not, violate any provision of OraLabs organizational documents;
(iii) OraLabs has taken all action required by laws, its articles of
organization, certificate of business registration, or otherwise to authorize
the execution and delivery of this Agreement; and (iv) OraLabs has full power,
authority, and legal right and has taken all action required by law, and
otherwise to consummate the transactions herein contemplated and the closing of
the transactions will be legally binding upon OraLabs, the OraLabs Subsidiaries
and Gary H. Schlatter.
10.12 Board Approval. PSHL shall have received from OraLabs certificates
dated the Closing Date, of an officer of OraLabs setting forth that authorizing
resolutions were adopted by OraLabs' Board of Directors, approving the terms and
conditions of this Agreement and the other documents contemplated hereby and the
transactions contemplated hereby and thereby.
10.13 OraLabs Stock. The Shareholders shall have received the shares of
OraLabs Stock pursuant to section 2.1 of this Agreement.
10.14 OraLabs Redemption. OraLabs shall have consummated the OraLabs
Redemption and the redeemed shares of OraLabs shall have been cancelled on the
stock transfer records of OraLabs or returned to the status of authorized by
unissued.
10.15 Name Change. OraLabs shall have filed with the Secretary of State of
Colorado a Certificate of Amendment to its Articles of Incorporation to change
its name to Ameriasia Steel, Inc.
10.16 Fairness Opinion. The Board of Directors of OraLabs shall have
delivered to PSHL a fairness opinion that provides that the transactions
contemplated by this Agreement are fair to the shareholders of OraLabs from a
financial standpoint, that is reasonably satisfactory to PSHL and that remains
in effect as of the time of Closing.
10.17 Number of Dissenters. The number of shares that shall be the subject
of Dissenters' Rights exercised by any of the shareholders of OraLabs shall not
cumulatively exceed 75,000, unless OraLabs, Inc. agrees that it will purchase
additional shares from OraLabs in accordance with the provisions of Section 7.4
for all of the shares that are the subject of Dissenters Rights.
10.18 Cashiers Check. PSHL shall have received a cashier's check from
OraLabs in the amount of $30,000 in accordance with the provisions of Section
6.9.
27
Any of the above conditions can be waived by PSHL or the Shareholders in
their sole and absolute discretion.
ARTICLE XI
TERMINATION
11.1 Termination.
(a) This Agreement may be terminated at any time prior to the Closing
by OraLabs if the representations or warranties of PSHL or the PSHL
Subsidiary in this Agreement are not in all material respects true,
accurate and complete or if PSHL or the PSHL Subsidiary breach in any
material respect any covenant contained in this Agreement, provided that
such misrepresentation or breach is not cured within ten (10) business days
after notice thereof, but in any event prior to the Outside Termination
Date defined below. If this Agreement is terminated pursuant to this
paragraph (a) of section 11.1, this Agreement shall be of no further force
or effect, and no obligation, right, or liability shall arise hereunder,
except that PSHL shall bear its own costs in connection with the
negotiation, preparation, and execution of this Agreement, subject to
Section 12.4.
(b) This Agreement may be terminated at any time prior to the Closing
by PSHL if the representations or warranties of OraLabs or the OraLabs
Subsidiaries in this Agreement are not in all material respects true,
accurate and complete or if OraLabs or the OraLabs Subsidiaries breach in
any material respect any covenant contained in this Agreement, provided
that such misrepresentation or breach is not cured within ten (10) business
days after notice thereof, but in any event prior to the Outside
Termination Date defined below. If this Agreement is terminated pursuant to
this paragraph (b) of section 11.1, this Agreement shall be of no further
force or effect, and no obligation, right, or liability shall arise
hereunder, except that OraLabs shall bear its own costs incurred in
connection with the negotiation, preparation, and execution of this
Agreement, subject to Section 12.4.
(c) This Agreement and the transactions contemplated hereby may be
terminated at any time by the written mutual consent of the Parties hereto.
If this Agreement is terminated pursuant to this paragraph (c) of section
11.1, this Agreement shall be of no further force or effect, and no
obligation, right, or liability shall arise hereunder.
(d) If this Agreement is terminated pursuant to Section 11.1(a),
11.1(b), or 11.1(c), written notice thereof shall promptly be given by the
party or parties electing such termination to the other party or parties
and, subject to the expiration of the cure periods provided therein, if
any, this Agreement shall terminate without further actions by the Parties
and no party shall have any further obligations under this Agreement.
Notwithstanding the preceding sentence, the respective obligations of the
Parties under Section 7.5 shall survive the termination of this Agreement.
(e) This Agreement may be terminated by either party if the
transactions shall not have been consummated by October 15, 2006 (the
"Outside Termination Date") provided the failure of the Closing to occur by
such date is not the result of the failure of the party seeking to
terminate this Agreement to perform or fulfill any of its obligations
hereunder.
(f) This Agreement may be terminated by either party if within the
45-day period that is applicable to the party under Section 9.8 (with
respect to OraLabs) and 10.9 (with respect to PSHL), such party gives
written notice to the other that it is not satisfied, in its sole and
absolute discretion, with the results of its due diligence investigation of
the other party pursuant to Sections 9.8 and 10.9.
28
ARTICLE XII
MISCELLANEOUS
12.1 Governing Law. This Agreement shall be governed by, enforced, and
construed under and in accordance with the laws of the United States of America
and, with respect to matters of state law, with the internal laws of the State
of Colorado without giving effect to its choice of law rules. Except as stated
at the end of this paragraph, any dispute, controversy or claim arising under or
in any way related to this Agreement or the breach thereof shall only be
submitted to and settled by binding arbitration before a single arbitrator by
the American Arbitration Association in accordance with the Association's
commercial rules then in effect. The arbitration (or legal proceedings described
at the end of this paragraph) will only be conducted in Denver, Colorado, which
the parties agree is the exclusive venue for the proceedings. Judgment upon the
award rendered by the arbitrators may be entered in any court having
jurisdiction thereof. The arbitrator may award reasonable attorneys fees to the
prevailing party, or if the arbitrator believes that more than one party has
prevailed in separate aspects of the arbitration, the arbitrator may award
attorneys fees as it deems appropriate. Notwithstanding the foregoing, either
party may institute litigation in connection with seeking to enforce rights
under Section 7.5.
12.2 Notices. Any notices or other communications required or permitted
hereunder shall only be sufficiently given if in writing and hand delivered to
it, sent by overnight delivery by a courier service of United States and
international recognition (such as Federal Express, DHL or UPS) that provides
international delivery, expenses prepaid, or by facsimile addressed as follows:
If to OraLabs, to: OraLabs Holding Corp.
c/o Michael Friess, Authorized Director
5353 Manhattan Circle, Suite 101 Boulder, CO 80303
Telephone: (303) 499-6000 x18
Facsimile: (303) 499-6666
Email: friessco@aol.com
With copies to: Douglas B. Koff, Esq.
Koff, Corn & Berger, P.C.
303 E. 17th Street, Suite 940
Denver, Colorado 80203-1262
Telephone: 303.861.1166
Facsimile: 303.861.0601
Email: dkoff@wckblaw.com
If to PSHL, or any one or
More Shareholders, to:
Mr. Wo Hing Li
8th Floor Teda Building
8th Floor Teda Building
87 Wing Lok Street, Sheungwan
Hong Kong Special Administrative Region
The People's Republic of China
Telephone: (852)
Facsimile: (852)
Sales revenues
29
With copies to: Henry F Schlueter
Schlueter & Associates P.C.
1050 Seventeenth Street, Suite 1750
Denver, Colorado 80265
Telephone: (303) 292 3883
Facsimile: (303) 296 8880
Email: hfschlueter@hotmail.com
Tracy Hung Wan
Belmont Capital Group Limited
Suite C, 20th Floor, Neich Tower
128 Gloucester Road, Wanchai
Hong Kong Special Administrative Region
The People's Republic of China
Telephone: (852) 2517 6262
Facsimile: (852) 2548 7788
Email: tracyyun@bcghk.com
or such other addresses as shall be furnished in writing by any party in the
manner for giving notices hereunder. Each notice or other communication shall
only be effective and deemed to have been received (i) if given by facsimile,
one business day after such facsimile is transmitted to the facsimile number
specified above, and confirmation of delivery by the sender's machine is given,
(ii) if given by hand delivery, the date of delivery as evidenced by a written
receipt, or (iii) if given by a courier service, the third business day
following the business day of deposit with such service, with shipping charges
for the most expedited delivery prepaid or prearranged. As used herein, a
"business day" means Mondays through Fridays, excluding days (at the location
where the notice is to be delivered) that are national bank holidays. Notice to
PSHL shall be deemed to be notice to all Shareholders for all purposes.
12.3 Attorneys' Fees. In the event that any party institutes any
arbitration proceeding or a litigation proceeding under Section 12.1 to
interpret or to enforce this Agreement or the rights of the parties hereunder,
the non-prevailing party shall pay to the prevailing party in any such
proceeding a reasonable sum for the prevailing party's attorneys' fees and all
other reasonable costs and expenses incurred in such action or suit.
12.4 Expenses of Stock Exchange. OraLabs and PSHL agree that they will each
bear their own costs and expenses in negotiating and closing the transactions
contemplated by this Agreement, including but not limited to, attorneys' fees,
except as otherwise expressly provided in this Agreement.
12.5 Third Party Beneficiaries. This contract is solely between OraLabs,
PSHL and the Shareholders and, except as specifically provided, no director,
officer, stockholder, member, employee, agent, independent contractor, or any
other person or entity shall be deemed to be a third party beneficiary of this
Agreement.
12.6 Entire Agreement; Incorporation. This Agreement and the documents and
instruments and other agreements among the parties hereto as contemplated by or
referred to herein contain every obligation and understanding between the
parties relating to the subject matter hereof and merges all prior discussions,
negotiations, agreements and understandings, both written and oral, if any,
between them, and none of the parties shall be bound by any conditions,
definitions, understandings, warranties or representations other than as
expressly provided or referred to herein. All schedules, exhibits and other
documents and agreements executed and delivered pursuant hereto are incorporated
herein as if set forth in their entirety herein.
30
12.7 Intentionally Omitted.
12.8 Severability. In the event that any one or more of the provisions
contained in this Agreement, or the application thereof, shall be declared
invalid, void or unenforceable by a court of competent jurisdiction, the
remainder of this Agreement shall remain in full force and effect and the
application of such provision to other Persons or circumstances will be
interpreted so as reasonably to effect the intent of the parties hereto. The
parties further agree to replace such invalid, void or unenforceable provision
with a valid and enforceable provision that will achieve, to the extent
possible, the economic, business and other purposes of such invalid, void or
unenforceable provision.
12.9 Headings. The table of contents and the section and other headings
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of any provisions of this Agreement.
12.10 Other Remedies; Injunctive Relief. Except as otherwise provided in
this Agreement, any and all remedies herein expressly conferred upon a party
will be deemed cumulative with and not exclusive of any other remedy conferred
hereby, or by law or equity upon such party, and the exercise by a party of any
one remedy will not preclude the exercise of any other remedy. The parties
hereto agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity. In any action at law or suit in equity to enforce this Agreement or the
rights of the parties hereunder, the prevailing party in any such action or suit
shall be entitled to receive a reasonable sum for its attorneys' fees and all
other reasonable costs and expenses incurred in such action or suit.
12.11 Intentionally Omitted.
12.12 Participation of Parties. The Parties hereby agree that they have
been represented by counsel during the negotiation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding,
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
12.13 Publicity. No public announcement or other publicity concerning this
Agreement or the transactions contemplated hereby shall be made without the
prior written consent of both PSHL and OraLabs as to form, content, timing and
manner of distribution. Nothing contained herein shall prevent OraLabs from
making any filing required by federal or state securities laws or stock exchange
rules.
12.14 Counterparts/Facsimile Copies. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original and all of
which taken together shall be but a single instrument. The Parties agree that
facsimile copies of this Agreement and any signature thereon shall be as legally
binding and enforceable as the original or copy original of this Agreement or
any signatures thereof.
12.15 Amendment or Waiver. Every right and remedy provided herein shall be
cumulative with every other right and remedy, whether conferred herein, at law,
or in equity, and may be enforced concurrently herewith, and no waiver by any
party of the performance of any obligation by the other shall be construed as a
waiver of the same or any other default then, theretofore, or thereafter
occurring or existing. At any time prior to the Closing Date, this Agreement may
be amended by mutual written consent of all the Parties, with respect to any of
the terms contained herein, and any term or condition of this Agreement may be
waived or the time for performance hereof may be extended by a writing signed by
the party or parties for whose benefit the provision is intended.
31
12.16 Assignability. This Agreement shall not be assignable by either party
without the prior written consent of the other party, which may be withheld in
the other party's exercise of its sole discretion. This Agreement shall inure to
the benefit of and be enforceable by the permitted successors and assigns of the
parties.
32
IN WITNESS WHEREOF, the corporate parties hereto have caused this Agreement
to be executed by their respective officers, hereunto duly authorized, as of the
date first above-written.
ORALABS HOLDING CORP.
ATTEST: By: /s/ Michael I. Friess
---------------------------------
Michael I. Friess,
authorized director
By:________________________
Secretary
PARTNER SUCCESS HOLDINGS LIMITED
By: /s/ Wo Hing Li,
---------------------------------
Wo Hing Li, President and CEO
PSHL Shareholders: /s/ Wo Hing Li
---------------------------------
Wo Hing Li
---------------------------------
---------------------------------
---------------------------------
---------------------------------
The signature of the undersigned is to evidence its obligation to comply with
the provisions of this Agreement that are applicable to it.
ORALABS, INC., a Colorado corporation
/s/ Gary H. Schlatter
-------------------------------------
Gary H. Schlatter, President
The signature of the undersigned is solely for the purpose of evidencing his
obligation to comply with the provisions of Recital D and Section 6.8 applicable
to him, and the undersigned makes no other representations, warranties or
indemnities of any kind:
GARY H. SCHLATTER, Individually
/s/ Gary H. Schlatter
-------------------------------------
Gary H. Schlatter
33
Schedule 2.1
PSHL SHAREHOLDERS AND ORALABS SHARES TO BE RECEIVED
The following persons are the sole members and owners of the ordinary
shares of PSHL, which are all of the outstanding securities of PSHL:
Name Percent of Ownership OraLab Shares
---- -------------------- -------------
1. Wo Hing Li 100%
2. __________ ______%
3. __________ ______%
Schedule 3.1
PSHL MEMORANDUM AND ARTICLES OF ASSOCIATION
Schedule 3.8
MATERIAL CONTINGENCIES OF PSHL
to
STOCK EXCHANGE AGREEMENT
Dated March 31, 2006
Schedule 3.10
CERTAIN CHANGES OR EVENTS
to
STOCK EXCHANGE AGREEMENT
Dated March 31, 2006
Schedules 3.11(a) and Schedule 3.11(b)
TITLE AND RELATED MATTERS
to
STOCK EXCHANGE AGREEMENT
Dated March 31, 2006
Schedule 3.12
PSHL LITIGATION AND PROCEEDINGS
to
STOCK EXCHANGE AGREEMENT
Dated March 31, 2006
Schedule 3.14
PSHL MATERIAL AGREEMENTS
to
STOCK EXCHANGE AGREEMENT
Dated March 31, 2006
Schedule 3.17
CERTAIN CHANGES OR EVENTS
to
MATERIAL TRANSACTIONS OR AFFILIATIONS
Dated March 31, 2006
Schedule 5.1
ORALABS ARTICLES OF INCORPORATION AND BYLAWS
to
STOCK EXCHANGE AGREEMENT
Dated March 31, 2006
Schedule 5.7
ORALABS FINANCIAL STATEMENTS
to
STOCK EXCHANGE AGREEMENT
Dated March 31, 2006
Schedule 5.11
ORALABS OPTIONS OR WARRANTS
to
STOCK EXCHANGE AGREEMENT
Dated March 31, 2006
Schedule 5.12
ORALABS CERTAIN CHANGES OR EVENTS
to
STOCK EXCHANGE AGREEMENT
Dated March 31, 2006
Schedule 5.13
ORALABS TITLE AND RELATED MATTERS
to
STOCK EXCHANGE AGREEMENT
Dated March 31, 2006
Schedule 5.15
ORALABS BENEFIT PLANS AND AGREEMENTS
to
STOCK EXCHANGE AGREEMENT
Dated March 31, 2006
Schedule 5.17
ORALABS LITIGATION AND PROCEEDINGS
to
STOCK EXCHANGE AGREEMENT
Dated March 31, 2006
Schedule 5.24
LISTING ON NASDAQ CAPITAL MARKET
As a result of the resignation of the third independent director of
OraLabs, OraLabs does not comply with the requirement that there be three
independent directors on the Audit Committee.
Schedule 10.7
FORM OF VOTING AGREEMENT WITH GARY H. SCHLATTER
to
STOCK EXCHANGE AGREEMENT
Dated March 31, 2006
EXHIBIT A
(form of indemnification agreement)
INDEMNIFICATION AGREEMENT
This Agreement is made and entered into this 31st day of March 2006, by
and between Partner Success Holdings Limited ("PSHL"), and OraLabs, Inc. (the
"Company"), a wholly-owned subsidiary of OraLabs Holding Corp. ("OraLabs").
WHEREAS, PSHL and OraLabs have entered into a Stock Exchange Agreement
dated March 31, 2006, in which all of the issued and outstanding stock of PSHL
was acquired by OraLabs in exchange for 94% of the total issued and outstanding
shares of Common Stock of OraLabs on a fully diluted basis (the "Exchange
Agreement").
WHEREAS, pursuant to the Exchange Agreement, the Company has agreed to
indemnify OraLabs from certain liability as set forth in the Exchange Agreement
and herein.
NOW, THEREFORE, in consideration of the foregoing, it is hereby agreed
as follows:
1. The Company hereby agrees to indemnify OraLabs and each of the
officers, agents and directors of OraLabs following the Closing, from any
liabilities of any kind or nature, direct or indirect, known or unknown,
contingent or otherwise, that may exist immediately prior to the Closing or that
may be asserted after the Closing Date regarding any claim or liability arising
from the operations of OraLabs or any other matter prior to the Closing, (ii)
any breach or default in the performance by OraLabs, of any covenant or
agreement made by OraLabs or OraLabs, Inc. in the Exchange Agreement; (b) any
breach of any representation or warranty made by OraLabs or OraLabs, Inc. in the
Exchange Agreement; (c) any loss, liability, claim, damage, or expense
(including, but not limited to, any and all expense whatsoever reasonably
incurred in investigating, preparing, or defending against any litigation,
commenced or threatened, or any claim whatsoever) relating to the OraLabs
Redemption; and (d) any and all litigation incident to any of the foregoing.
2. The Company further agrees to perform its obligations under the
terms of Section 7.4 of the Exchange Agreement regarding payments to the holders
of dissenters' shares, such terms being hereby incorporated herein by reference.
3. Any notices or other communications required or permitted hereunder
shall be addressed as follows:
If to the Company: OraLabs, Inc.
c/o Mr. Gary H. Schlatter, President
18685 East Plaza Drive
Parker, Colorado 80134
Telephone: 303.783.9499
Facsimile: 303.499.6666
With copies to: Douglas B. Koff, Esq.
Koff, Corn & Berger, P.C.
303 E. 17th Street, Suite 940
Denver, Colorado 80203-1262
Telephone: 303.861.1166
Facsimile: 303.861.0601
Email: dkoff@wckblaw.com
If to OraLabs or PSHL: Mr. Wo Hing Li
Partner Success Holdings Limited
8th Floor Teda Building
87 Wing Lok Street, Sheungwan
Hong Kong Special Administrative Region
The People's Republic of China
Telephone: (852)
Facsimile: (852)
Email:
With copies to: Henry F Schlueter
Schlueter & Associates P.C.
1050 Seventeenth Street, Suite 1750
Denver, Colorado 80265
Telephone: (303) 292 3883
Facsimile: (303) 296 8880
Email: hfschlueter@hotmail.com
Tracy Hung Wan
Belmont Capital Group Limited
Suite C, 20th Floor, Neich Tower
128 Gloucester Road, Wanchai
Hong Kong Special Administrative Region
The People's Republic of China
Telephone: (852) 2517 6262
Facsimile: (852) 2548 7788
Email: tracyyun@bcghk.com
or such other addresses as shall be furnished in writing by any party in the
manner for giving notices hereunder. Each notice or other communication shall
only be effective and deemed to have been received (i) if given by facsimile,
one business day after such facsimile is transmitted to the facsimile number
specified above, and confirmation of delivery by the sender's machine is given,
(ii) if given by hand delivery, the date of delivery as evidenced by a written
receipt, or (iii) if given by a courier service, the third business day
following the business day of deposit with such service, with shipping charges
for the most expedited delivery prepaid or prearranged. As used herein, a
"business day" means Mondays through Fridays, excluding days (at the location
where the notice is to be delivered) that are holidays for national banks in the
United States.
4. The Parties agree that facsimile copies of this Agreement and any
signature thereon shall be as legally binding and enforceable as the original or
copy original of this Agreement or any signatures thereof.
5. The Parties agree that this Agreement shall be construed in
accordance with the laws of the State of Colorado and that exclusive
jurisdiction and venue for any controversy, claim or suit arising out of or
connected with this Agreement shall be in the courts located in Denver,
Colorado.
2
6. Nothing in this instrument shall be construed to obligate the
Company to indemnify OraLabs or its officers, agents or directors with respect
to any matter caused by PSHL, any of its Shareholders defined in the Exchange
Agreement or any of their respective affiliates, officers, employees, agents, or
representatives.
7. The provisions of this instrument automatically expire and this
instrument is then of no further force or effect as of the date that is twelve
months after the Closing Date under the Exchange Agreement, except with respect
to claims made under this instrument on or before said date.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
PSHL: Partner Success Holdings Limited
By: /s/ Wo Hing Li
-------------------------------------
Wo Hing Li, President and CEO
The Company: OraLabs, Inc.
By: /s/ Gary H. Schlatter
-------------------------------------
Gary H. Schlatter, President
3
EXHIBIT B
SHAREHOLDER REPRESENTATION LETTER
FIRST AMENDMENT TO STOCK EXCHANGE AGREEMENT
This First Amendment to Stock Exchange Agreement ("First Amendment") is
dated July 20, 2006, and is by and between OraLabs Holding Corp., a Colorado
corporation ("OraLabs"), Partner Success Holdings Limited, a British Virgin
Islands international business company ("PSHL"), and Mr. Wo Hing Li, sole
shareholder of PSHL (the "Shareholder").
WHEREAS, the parties entered into a Stock Exchange Agreement (the
"Exchange Agreement") dated as of March 31, 2006; and
WHEREAS, a form of Indemnification Agreement ("Prior Indemnification
Agreement") is attached to the Exchange Agreement as Exhibit A and the parties
wish to modify the obligations of OraLabs, Inc. (the "Subsidiary") under the
Prior Indemnification Agreement; and
WHEREAS, the parties agree that the form of a revised indemnification
agreement ("New Indemnification Agreement") attached to this First Amendment as
Exhibit 1 and made a part hereof will be signed at Closing under the Exchange
Agreement and will supersede the Prior Indemnification Agreement; and
WHEREAS, by signature below, OraLabs, Inc. (the "Subsidiary") agrees
upon the terms and provisions of the New Indemnification Agreement and the
provisions of this First Amendment applicable to it; and
WHEREAS, the parties wish to make other modifications to the Exchange
Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which is
acknowledged, the parties agree as follows:
1. Except as expressly modified by this First Amendment, the provisions
of the Exchange Agreement remain in full force and effect. In the event of a
conflict between any provision of this First Amendment and any provision of the
Exchange Agreement, the provision of this First Amendment shall prevail.
Capitalized terms not otherwise defined in this First Amendment will have the
meanings specified for them in the Exchange Agreement.
2. A. The parties acknowledge and agree that under existing provisions
of the Internal Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder (the "Code"), a tax may be payable by OraLabs after
Closing with respect to the portion ("Spinoff Transaction") of the Closing
transactions whereby OraLabs redeems all of its common stock, par value $0.001
per share (the "Common Stock"), owned individually by Gary H. Schlatter in
exchange for the conveyance to Mr. Schlatter of all of the common stock that
OraLabs owns in its Subsidiary. The parties agree that an amount determined by
the excess, if any, of the value of the Subsidiary (the "Subsidiary Value") on
the date of Closing over OraLabs' basis in the common stock of the Subsidiary on
the date of Closing (the "Basis"), multiplied by 34% plus the state income tax
rate, if applicable (the "Spinoff Tax Liability"), will be paid by Subsidiary to
OraLabs as set forth in paragraphs 3 and 5 herein. Prior to Closing, OraLabs
will advise PSHL of the amounts of the estimated Basis and Subsidiary Value.
B. The parties acknowledge that Capitalink, L.C. will determine a
range of values for the Subsidiary as part of its rendering a fairness opinion
as contemplated by the Exchange Agreement. For purposes of this First Amendment,
the parties agree that a value selected by Mr. Schlatter in the top half of the
range stated by Capitalink will be the estimated Subsidiary Value for purposes
of calculating the estimated Spinoff Tax Liability to be paid by OraLabs at
Closing. The percentage income tax rate to be applied to any excess of the
Subsidiary Value over the Basis, solely for purposes of Subsidiary making a
payment to OraLabs of such estimated tax liability at Closing, will be 34%. The
Subsidiary acknowledges and agrees that the amount of its estimated Spinoff Tax
Liability is calculated without regard to the actual income tax, if any, that
may be payable by OraLabs for any tax period.
3. In order to provide OraLabs with the funds with which to pay the
estimated Spinoff Tax Liability, OraLabs agrees to sell and the Subsidiary
agrees to purchase on the date of Closing such number of shares of Common Stock
(the "Purchased Shares") at a price per share (the "Purchase Price"), determined
in accordance with this Paragraph 3, that is the lesser of (i) such number of
shares of Common Stock that, in the aggregate, have a total Purchase Price equal
to the amount of the Spinoff Tax Liability, or (ii) 100,000 shares of Common
Stock. The Purchase Price per share will be equal to the greater of (iii) $4.00
per share, or (iv) the average of the high and low bid prices for the Common
Stock during the consecutive five (5) day trading period that ends on the date
that is two business days prior to Closing. The PSHL designees will be issued at
Closing such additional number of shares of Common Stock as necessary to retain
a 94% interest in OraLabs after giving effect to the acquisition of the
Purchased Shares. If the aggregate Purchase Price of 100,000 shares of Common
Stock is less than the estimated Spinoff Tax Liability (the "Shortfall Amount"),
the Subsidiary will, at the Closing and simultaneously with the Subsidiary's
acquisition of the Purchased Shares, pay to OraLabs in cash the Shortfall Amount
plus such additional sum (the "Gross-Up Amount") so as to enable OraLabs to net
the Shortfall Amount after paying United States federal and any state income tax
due (giving effect to any reduction of federal taxes due to the payment of state
taxes) with respect to the Subsidiary's payment to OraLabs of the Shortfall
Amount. The Gross-Up Amount shall be calculated by using a 34% federal income
tax rate plus the state income tax rate, if applicable and shall be determined
without regard to the actual income tax that may be payable with respect to such
Shortfall Amount.
4. The Purchased Shares will be "restricted securities". If at any time
during the period of 12 months following the date of Closing under the Exchange
Agreement, OraLabs shall file any registration statement under the Securities
Act of 1933, as amended, with respect to its common stock, OraLabs will notify
the Subsidiary thereof in writing not less than fifteen (15) days prior to
filing the registration statement with the SEC, and the Subsidiary (or its
assigns) will have the right to register all of the Purchased Shares as part of
the registration statement by notifying OraLabs in writing within ten (10) days
after the Subsidiary receives OraLabs' notice. In the Subsidiary's notice to
OraLabs that the Purchased Shares will be included in the registration
statement, the Subsidiary will specify the intended method of distribution of
such shares and such other information as OraLabs or its counsel will reasonably
require. Such registration will be without cost to the Subsidiary except for its
counsel fees and its sales commissions incurred if the Purchased Shares are
sold.
5. The provisions of a Tax Indemnity Agreement that will be separately
negotiated and executed by OraLabs, PSHL and the Subsidiary by no later than
July 14, 2006, and that will be attached to this First Amendment as Exhibit 2,
will govern all matters concerning determinations of the amount of the Spinoff
Tax Liability that occur after Closing.
6. The parties agree that the New Indemnification Agreement attached to
this First Amendment will be executed at Closing and will replace and supersede
the Prior Indemnification Agreement.
7. The parties agree that the shareholders of OraLabs will be asked to
approve the change of OraLabs' domicile from Colorado to Delaware, changes to
OraLabs' Articles of Incorporation to be included in a new Certificate of
Incorporation (collectively, the "Reincorporation"), and a long-term incentive
plan. The parties also agree that the Reincorporation, including the increase in
the number of authorized shares of Common Stock from 25,000,000 to up to
200,000,000, shall be the first item deemed to be completed at Closing.
2
8. This First Amendment may be executed in counterparts, each such
counterpart being deemed to be an original instrument, and all of such
counterparts shall together constitute one and the same instrument, and
facsimile signatures will be accepted as originals.
[Remainder of page intentionally left blank. Signatures on following page.]
3
IN WITNESS WHEREOF, the undersigned have executed this First Amendment
on the dates specified below.
ORALABS HOLDINGS CORP., a Colorado corporation
By: /s/ Michael I. Friess /s/ Wo Hing Li
-------------------------------------- -----------------------------
Michael I. Friess, Authorized Director Wo Hing Li, Individually
Date: Date:
-------------------------------------- -----------------------------
The signature of the undersigned is to evidence its PARTNER SUCCESS HOLDINGS
LIMITED, a British Virgin obligation to comply with the provisions of this First
Islands international business company Amendment that are applicable to it.
ORALABS, INC., a Colorado corporation
By: /s/ Gary H. Schlatter By: /s/ Wo Hing Li
-------------------------------------- -----------------------------
Gary H. Schlatter, President Wo Hing Li, President and CEO
Date: Date:
-------------------------------------- -----------------------------
EXHIBIT 1
INDEMNIFICATION AGREEMENT
This Agreement is made and entered into this _____ day of ___________
2006, by and between Partner Success Holdings Limited ("PSHL"), OraLabs Holding
Corp. ("OraLabs"), and OraLabs, Inc. (the "Company"), a wholly-owned subsidiary
of OraLabs.
WHEREAS, PSHL and OraLabs have entered into a Stock Exchange Agreement
dated March 31, 2006, as amended, pursuant to which among other things, all of
the issued and outstanding stock of PSHL was acquired by OraLabs in exchange for
the issuance to PSHL's designees of 94% of the total issued and outstanding
shares of Common Stock of OraLabs on a fully diluted basis (the "Exchange
Agreement"); and
WHEREAS, pursuant to the Exchange Agreement, the Company has agreed to
indemnify OraLabs from certain liability as set forth in the Exchange Agreement
and herein.
NOW, THEREFORE, in consideration of the foregoing, it is hereby agreed
as follows:
1. The Company hereby agrees to indemnify OraLabs, PSHL and each of
their respective officers, agents and directors following the Closing, from any
liabilities of any kind or nature, direct or indirect, known or unknown,
contingent or otherwise, that may exist immediately prior to the Closing or that
may be asserted after the Closing Date regarding any claim or liability arising
from the operations of OraLabs or any other matter prior to the Closing,
including without limitation any liability under applicable environmental laws;
(ii) any breach or default in the performance by OraLabs of any covenant or
agreement made by OraLabs or OraLabs, Inc. in the Exchange Agreement; (b) any
breach of any representation or warranty made by OraLabs or OraLabs, Inc. in the
Exchange Agreement; (c) any loss, liability, claim, damage, or expense
(including, but not limited to, any and all expense whatsoever reasonably
incurred in investigating, preparing, or defending against any litigation,
commenced or threatened, or any claim whatsoever) relating to the OraLabs
Redemption defined in the Exchange Agreement; and (d) any and all litigation
incident to any of the foregoing.
2. Notwithstanding the foregoing, the indemnity by the Company with
respect to the Spinoff Tax Liability defined in the First Amendment to Stock
Exchange Agreement ("First Amendment"), is not governed by this Agreement.
Instead, any such liability will be determined under and governed solely by the
provisions of a Tax Indemnity Agreement attached to the First Amendment as
Exhibit 2. In the event of a conflict between any provision of this Agreement
and any provision of said Tax Indemnity Agreement, the provision of the Tax
Indemnity Agreement controls.
3. The Company further agrees to perform its obligations under the
terms of Section 7.4 of the Exchange Agreement regarding payments to the holders
of dissenters' shares, such terms being hereby incorporated herein by reference.
4. Any notices or other communications required or permitted hereunder
shall be addressed as follows:
If to the Company: OraLabs, Inc.
c/o Mr. Gary H. Schlatter, President
18685 East Plaza Drive
Parker, Colorado 80134
Telephone: 303.783.9499
Facsimile: 303.499.6666
With copies to: Douglas B. Koff, Esq.
Koff, Corn & Berger, P.C.
303 E. 17th Street, Suite 940
Denver, Colorado 80203-1262
Telephone: 303.861.1166
Facsimile: 303.861.0601
Email: dkoff@wckblaw.com
If to OraLabs or PSHL: Mr. Wo Hing Li
Partner Success Holdings Limited
8th Floor Teda Building
87 Wing Lok Street, Sheungwan
Hong Kong Special Administrative Region
The People's Republic of China
Telephone: (852)
Facsimile: (852)
Email:
With copies to: Henry F Schlueter
Schlueter & Associates P.C.
1050 Seventeenth Street, Suite 1750
Denver, Colorado 80265
Telephone: (303) 292 3883
Facsimile: (303) 296 8880
Email: hfschlueter@hotmail.com
-----------------------
Barbara A. Jones
Kirkpatrick & Lockhart Nicholson Graham LLP
599 Lexington Avenue
New York, New York 10022
Telephone: (212) 536-4898
Facsimile: (212) 536-3901
Email: bjones@klng.com
Tracy Hung Wan
Belmont Capital Group Limited
Suite C, 20th Floor, Neich Tower
128 Gloucester Road, Wanchai
Hong Kong Special Administrative Region
The People's Republic of China
Telephone: (852) 2517 6262
Facsimile: (852) 2548 7788
Email: tracyyun@bcghk.com
or such other addresses as shall be furnished in writing by any party in the
manner for giving notices hereunder. Each notice or other communication shall
only be effective and deemed to have been received (i) if given by facsimile,
one business day after such facsimile is transmitted to the facsimile number
specified above, and confirmation of delivery by the sender's machine is given,
(ii) if given by hand delivery, the date of delivery as evidenced by a written
receipt, or (iii) if given by a courier service, the third business day
following the business day of deposit with such service, with shipping charges
for the most expedited delivery prepaid or prearranged. As used herein, a
"business day" means Mondays through Fridays, excluding days (at the location
where the notice is to be delivered) that are holidays for national banks in the
United States.
2
5. The Parties agree that facsimile copies of this Agreement and any
signature thereon shall be as legally binding and enforceable as the original or
copy original of this Agreement or any signatures thereof. This Agreement may be
executed in any number of counterparts, each such counterpart being deemed to be
an original instrument, and all of such counterparts shall together constitute
one and the same instrument.
6. The Parties agree that this Agreement shall be construed in
accordance with the laws of the State of Colorado and that exclusive
jurisdiction and venue for any controversy, claim or suit arising out of or
connected with this Agreement shall be in the courts located in Denver,
Colorado.
7. Nothing in this instrument shall be construed to obligate the
Company to indemnify OraLabs or its officers, agents or directors with respect
to any matter caused by PSHL, any of its Shareholders defined in the Exchange
Agreement or any of their respective affiliates, officers, employees, agents, or
representatives.
8. Except with respect to the indemnity described in section 2, the
provisions of this instrument automatically expire and this instrument is then
of no further force or effect as of the date that is twelve months after the
Closing Date under the Exchange Agreement, except with respect to claims made
under this instrument on or before said date.
9. This Agreement supersedes in its entirety the executed
Indemnification Agreement attached to the Stock Exchange Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
PSHL: Partner Success Holdings Limited
By: /s/ Wo Hing Li
------------------------------------------
Wo Hing Li, President and CEO
The Company: OraLabs, Inc.
By: /s/ Gary H. Schlatter
------------------------------------------
Gary H. Schlatter, President
OraLabs: OraLabs Holding Corp.
By: /s/ Michael I. Friess
------------------------------------------
3
EXHIBIT 2
(Tax Indemnity Agreement)
ORALABS HOLDING CORP.
August 18, 2006
VIA E-MAIL
----------
Partner Success Holdings Limited
Attn: Mr. Wo Hing Li
VIA E-MAIL
----------
Wo Hing Li
Dear Mr. Li:
OraLabs Holding Corp., PSHL and you have agreed that the second
sentence of Section 3 of the First Amendment to Stock Exchange Agreement will be
deleted and replaced with the following:
"If and only if PSHL receives approval from NASDAQ for listing its
Common Stock as of the Closing Date, the Purchase Price per share will
be equal to the greater of (x) $4.00 per share, or (y) the average of
the high and low bid prices (the "Average Price") for the Common Stock
during the consecutive five (5) day trading period that ends on the
date that is two business days prior to Closing. If such approval as of
the Closing Date is not obtained from NASDAQ, the Purchase Price per
share will be the Average Price."
Please sign below to confirm your agreement with the terms of this
letter and return a signed copy back to us.
/s/ Michael I. Friess
--------------------------------------
Michael I. Friess, Authorized Director
APPROVED AND AGREED UPON:
PARTNER SUCCESS HOLDINGS LIMITED
By: /s/ Wo Hing Li
--------------------------
Wo Hing Li
SHAREHOLDER
/s/ Wo Hing Li
--------------------------------
Wo Hing Li, individually
SECOND AMENDMENT TO STOCK EXCHANGE AGREEMENT
This Second Amendment to Stock Exchange Agreement ("Second Amendment")
is dated October 12, 2006, and is by and between OraLabs Holding Corp., a
Colorado corporation ("OraLabs"), Partner Success Holdings Limited, a British
Virgin Islands international business company ("PSHL"), and Mr. Wo Hing Li, sole
shareholder of PSHL (the "Shareholder").
WHEREAS, the parties entered into a Stock Exchange Agreement dated as
of March 31, 2006 (the "Exchange Agreement"), as amended by First Amendment to
Stock Exchange Agreement dated July 20, 2006; and
WHEREAS, the parties wish to replace a date in the Exchange Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which is
acknowledged, the parties agree as follows:
1. Except as expressly modified by this Second Amendment, the
provisions of the Exchange Agreement remain in full force and effect. In the
event of a conflict between any provision of this Second Amendment and any
provision of the Exchange Agreement, the provision of this Second Amendment
shall prevail. Capitalized terms not otherwise defined in this Second Amendment
will have the meanings specified for them in the Exchange Agreement.
2. The parties agree that the date of October 15, 2006 that appears in
Sections 2.3 and 11.1(e) of the Exchange Agreement is hereby changed to January
15, 2007.
3. This Second Amendment may be executed in counterparts, each such
counterpart being deemed to be an original instrument, and all of such
counterparts shall together constitute one and the same instrument, and
facsimile signatures will be accepted as originals.
IN WITNESS WHEREOF, the undersigned have executed this Second Amendment
on the dates specified below.
ORALABS HOLDINGS CORP., a Colorado
corporation
By: /s/ Michael I. Friess /s/ Wo Hing Li
--------------------- -----------------
Michael I. Friess, Authorized Director Wo Hing Li, Individually
Date: October 12, 2006 Date: October 12, 2006
---------------- ----------------
The signature of the undersigned is to PARTNER SUCCESS HOLDINGS LIMITED,
evidence its consent to the foregoing a British Virgin Islands
revision. international business company
ORALABS, INC., a Colorado corporation
By: /s/ Gary H. Schlatter By: /s/ Wo Hing Li
--------------------- --------------
Gary H. Schlatter, President Wo Hing Li, President and CEO
Date: October 12, 2006 Date: October 12, 2006
---------------- ----------------
ANNEX 2
[CAPITALINK LOGO]
July 19, 2006
The Special Committee
of the Board of Directors
OraLabs Holding Corp.
18685 East Plaza Drive
Parker, CO 80134
Gentlemen:
We have been advised that, pursuant to the Stock Exchange Agreement dated March
31, 2006 and the draft First Amendment to Stock Exchange Agreement dated on or
about July 19, 2006 (collectively referred to as the "Exchange Agreement"), by
and among OraLabs Holding Corp. ("OraLabs"), Partner Success Holdings Limited
("PSHL"), and the shareholders of PSHL (the "PSHL Shareholders"), the following
transactions are contemplated:
(i) The redemption of 3,629,350 shares representing all of the common
stock of OraLabs held by its President, Gary H. Schlatter,
individually, in exchange for the transfer to Mr. Schlatter of all of
the common stock held by OraLabs in its wholly-owned operating
subsidiary, OraLabs, Inc.;
(ii) The issuance of 300,000 shares of OraLabs common stock to the
non-employee directors of OraLabs;
(iii) The issuance of a maximum of 100,000 shares of OraLabs common stock
to OraLabs, Inc. as more fully described below; and
(iv) the issuance by OraLabs of shares representing approximately 94% of
the fully diluted outstanding common stock of OraLabs (after giving
effect to the redemption and stock issuances described in (i) (ii) and
(iii) above) in exchange for the transfer to OraLabs of 100% of
ownership interests in PSHL, which is held by the PSHL Shareholders.
The items set forth in (i), (ii), (iii) and (iv), are hereinafter, the
"Transaction".
With respect to i) above, an income tax may be payable by OraLabs. OraLabs Inc.
agreed to provide OraLabs with the funds with which to pay the estimated tax
liability by buying a maximum of 100,000 shares of OraLabs common stock. If PSHL
receives approval from NASDAQ for listing its Common Stock as of the closing,
the purchase price will be equal to the greater of (i) $4.00 per share, or (ii)
the average of the high and low bid prices (the "Average Price") for the OraLabs
common stock during the consecutive five (5) day trading period that ends on the
date that is two business days prior to closing of the Transaction. If NASDAQ
approval is not obtained, the purchase price per share will be the Average
Price. If the purchase price of 100,000 shares is less than the estimated tax
liability, OraLabs, Inc. will pay the difference at the time of close of the
Transaction.
The Special Committee of the Board of Directors
OraLabs Holding Corp.
July 19, 2006
Page 2
The Special Committee of the Board of Directors of OraLabs has retained
Capitalink, L.C. ("Capitalink") to render an opinion as to whether, on the date
of such opinion, the Transaction is fair, from a financial point of view, to the
nonaffiliated shareholders of OraLabs.
We were not asked to consider, and our opinion does not address, the relative
merits of the Transaction as compared to any alternative business strategy that
might exist for OraLabs. We were not engaged to seek alternatives to the
Transaction that might exist for OraLabs. The financial and other terms of the
Transaction was determined pursuant to negotiations between OraLabs, PSHL, Mr.
Schlatter and each of their respective advisors, and not pursuant to our
recommendations.
In arriving at our opinion, we took into account an assessment of general
economic, market and financial conditions as well as our experience in
connection with similar transactions and securities valuations generally and,
among other things:
o Reviewed the Exchange Agreement.
o Reviewed publicly available financial information and other data with
respect to OraLabs, including the Annual Report on Form 10-KSB for the
year ended December 31, 2005, the Quarterly Report on Form 10-QSB for
the three months ended March 31, 2006, the Current Report on Form 8-K
filed April 6, 2006.
o Reviewed non-public information and other data with respect to
OraLabs, including various internal financial management reports.
o Reviewed financial information and other data with respect to PSHL,
including the audited financial report for the two years ended June
30, 2005, management-prepared financial statements for the nine months
ended March 31, 2006, and the Business Memorandum dated April 2006
prepared by Belmont Capital Group.
o Reviewed the Transaction's pro forma impact on OraLabs' securities
outstanding and nonaffiliated shareholders' ownership interest in
OraLabs.
o Considered the historical financial results and present financial
condition of OraLabs and PSHL.
o Reviewed and considered the trading of, and the market for, the common
stock of OraLabs.
o Reviewed and compared the OraLabs nonaffiliated shareholders'
aggregate indicated value on a pre-Transaction basis to the
nonaffiliated shareholders' aggregate indicated value on a
post-Transaction basis.
o Reviewed and analyzed certain financial characteristics of
publicly-traded companies that were deemed to have characteristics
comparable to each of OraLabs and PSHL.
o Reviewed and analyzed certain financial characteristics of target
companies in transactions where such target company was deemed to have
characteristics comparable to those of each of OraLabs and PSHL.
o Reviewed and analyzed PSHL's projected unlevered free cash flows and
prepared a discounted cash flow analysis.
o Reviewed and analyzed the control premiums paid in certain other
transactions.
o Reviewed and discussed with representatives of OraLabs and PSHL
certain financial and operating information furnished by them,
including financial analyses with respect to their respective business
and operations.
The Special Committee of the Board of Directors
OraLabs Holding Corp.
July 19, 2006
Page 3
o Performed such other analyses and examinations as were deemed
appropriate.
In arriving at our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was used by us
without assuming any responsibility for any independent verification of any such
information and have further relied upon the assurances of OraLabs and PSHL
management that they are not aware of any facts or circumstances that would make
any such information inaccurate or misleading. With respect to the financial
information utilized, we assumed that such information has been reasonably
prepared on a basis reflecting the best currently available estimates and
judgments, and that such information provides a reasonable basis upon which we
could make our analysis and form an opinion. We have not made a physical
inspection of the properties and facilities of OraLabs or PSHL and have not made
or obtained any evaluations or appraisals of the assets or liabilities of
OraLabs or PSHL (contingent or otherwise). We have not attempted to confirm
whether OraLabs or PSHL have good title to their respective assets.
We assumed that the Transaction will be consummated in a manner that complies in
all respects with the applicable provisions of the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended, and all other
applicable international, federal and state statutes, rules and regulations. We
assumed that the Transaction will be consummated substantially in accordance
with the terms set forth in the Exchange Agreement, without any further
amendments thereto, and that any amendments, revisions or waivers thereto will
not be detrimental to OraLabs's nonaffiliated stockholders.
Our analysis and opinion are necessarily based upon market, economic and other
conditions, as they exist on, and could be evaluated as of July 19, 2006.
Accordingly, although subsequent developments may affect our opinion, we do not
assume any obligation to update, review or reaffirm our opinion.
Our opinion is for the use and benefit of the Special Committee of the Board of
Directors of OraLabs in connection with its consideration of the Transaction and
is not intended to be and does not constitute a recommendation to any
stockholder of OraLabs whether such stockholder should take any action, if
required, such as voting on any matter, in connection with the contemplated
Transaction. Capitalink does not express any opinion as to the future
performance of OraLabs or PSHL or the prices at which OraLabs's common stock or
PSHL's securities would trade at any time in the future.
Based upon and subject to the foregoing, it is our opinion that, as of the date
of this letter, the Transaction is fair, from a financial point of view, to
OraLab's nonaffiliated stockholders.
In connection with our services, we have previously received a retainer and will
receive the balance of our fee upon the rendering of this opinion. Our fee for
providing the fairness opinion is not contingent on the completion of the
Transaction. Neither Capitalink nor its principals beneficially own any interest
in OraLabs or PSHL. Further, Capitalink has not previously provided any other
services to OraLabs or PSHL, except that Capitalink provided a fairness opinion
to OraLabs in August 2005 in connection with a then-proposed transaction with
NVC Lighting Investment Holdings Limited which was subsequently terminated. In
addition, OraLabs has agreed to indemnify us for certain liabilities that may
arise out of the rendering this opinion.
The Special Committee of the Board of Directors
OraLabs Holding Corp.
July 19, 2006
Page 4
Our opinion is for the use and benefit of the Special Committee of the Board of
Directors and is rendered in connection with its consideration of the
Transaction and may not be used by OraLabs for any other purpose or reproduced,
disseminated, quoted or referred to by OraLabs at any time, in any manner or for
any purpose, without the prior written consent of Capitalink, except that this
opinion may be reproduced in full in, and references to the opinion and to
Capitalink and its relationship with OraLabs may be included in filings made by
OraLabs with the Securities and Exchange Commission, if required by Securities
and Exchange Commission rules, and in any proxy statement or similar disclosure
document disseminated to shareholders if required by the Securities and Exchange
Commission rules.
Very truly yours,
Capitalink, L.C.
ANNEX 3
(2006 Director Stock Plan)
ORALABS HOLDING CORP.
2006 DIRECTOR STOCK PLAN
ADOPTED BY THE BOARD OF DIRECTORS EFFECTIVE AS OF MARCH 1, 2006
1. PURPOSE.
(a) The purpose of the 2006 Director Stock Plan (the "Plan") is to
provide a means by which each director of OraLabs Holding Corp. (the "Company")
may be given bonus compensation in the form of stock of the Company.
(b) The Company, by means of the Plan, seeks to secure and retain the
services of persons capable of serving as directors of the Company and to
provide incentives for such persons to exert maximum efforts for the success of
the Company.
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors of the
Company (the "Board"). The Board shall have the power where consistent with the
general purpose and intent of the Plan to (i) modify the requirements of the
Plan to conform with the law or to meet special circumstances not anticipated or
covered in the Plan, (ii) suspend or discontinue the Plan, (iii) establish
policies and (iv) adopt rules and regulations and prescribe forms for carrying
out the purposes and provisions of the Plan. Unless otherwise provided in the
Plan, the Board shall have the authority to interpret and construe the Plan, and
determine all questions arising under the Plan. Any interpretation, decision or
determination made by the Board shall be final, binding and conclusive. A
majority of the Board shall constitute a quorum, and an act of the majority of
the members present at any meeting at which a quorum is present shall be the act
of the Board.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 8 relating to adjustments
upon changes in stock, the stock that may be granted under the Plan shall not
exceed in the aggregate One Million (1,000,000) shares of the Company's common
stock.
(b) The stock subject to the Plan may be any shares that may be
available for issuance by the Company.
4. ELIGIBILITY.
Shares may be issued to any person serving in the capacity of a
director of the Company and may be authorized by the Board for issuance on any
subsequent date.
5. GRANTS.
The Board may grant awards of shares of common stock from time to time
as it considers to be warranted or otherwise justified for the purpose of
compensating directors for services provided to the Company. The Board may
impose restrictions upon the transferability of the shares as it deems advisable
or may issue shares without any restrictions upon transferability.
6. COVENANTS OF THE COMPANY.
The Company may seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required, if
any, to issue and sell shares of stock as may be permitted under the terms of
this Plan.
7. MISCELLANEOUS.
(a) Nothing in the Plan or in any instrument executed pursuant thereto
shall confer upon any Director any right to continue in the service of the
Company in any capacity or shall affect any right of the Company, its Board or
stockholders to remove any Director pursuant to the Company's Bylaws and the
provisions of the Colorado Business Corporation Act.
(b) In connection with stock issued pursuant to the Plan, it shall be a
condition precedent to the Company's obligation to issue or transfer shares to a
Director that such Director make arrangements satisfactory to the Company to
insure that the amount of any federal, state or local withholding tax required
to be withheld with respect to such sale or transfer, or such removal or lapse,
is made available to the Company for timely payment of such tax. The withholding
tax obligation may be satisfied by payment of the amount in cash or by such
other method permitted by law.
8. ADJUSTMENTS UPON CHANGES IN STOCK.
Subject to any required action by the stockholders of the Company, the
number of shares of common stock that have been authorized for issuance under
the Plan but which have not then been issued shall be proportionately adjusted
for any increase or decrease in the number of issued shares of common stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the common stock, or any other increase or decrease in
the number of issued shares of common stock effected without receipt of
consideration by Company; provided, however, that conversion of any convertible
securities of the Company shall not be deemed to have been "effected without
receipt of consideration." Such adjustment shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive.
9. SHAREHOLDER APPROVAL; AMENDMENT OF THE PLAN.
Shares may be authorized for issuance at any time, but no shares may be
issued under this Plan until approval of the Plan is obtained from the Company's
shareholders. The Board may at any time amend, alter, suspend or discontinue the
Plan. However, to the extent that shareholder approval is necessary for the Plan
to satisfy the requirements of Section 422 of the Code, Rule 16b-3, or any other
applicable law or regulation, including the requirements of the NASD, the NASDAQ
Stock Market or an established stock exchange, such amendment shall not be
effective until shareholder approval is obtained. The Board may in its sole
discretion submit any other amendment to the Plan for shareholder approval.
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10. TERMINATION OR SUSPENSION OF THE PLAN.
The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate on December 31, 2011.
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ANNEX 4
CHINA PRECISION STEEL, INC.
2006 OMNIBUS LONG-TERM INCENTIVE PLAN
China Precision Steel, Inc., a Colorado corporation (the "Company"), sets
forth herein the terms of its 2006 Omnibus Long-Term Incentive Plan (the
"Plan"), as follows:
1. PURPOSE
The Plan is intended to enhance the Company's and its Affiliates' (as
defined herein) ability to attract and retain highly qualified officers,
directors, key employees, and other persons, and to motivate such officers,
directors, key employees, and other persons to serve the Company and its
Affiliates and to expend maximum effort to improve the business results and
earnings of the Company, by providing to such persons an opportunity to acquire
or increase a direct proprietary interest in the operations and future success
of the Company. To this end, the Plan provides for the grant of stock options,
stock appreciation rights, restricted stock, restricted stock units,
unrestricted stock and cash awards. Any of these awards may, but need not, be
made as performance incentives to reward attainment of annual or long-term
performance goals in accordance with the terms hereof. Stock options granted
under the Plan may be non-qualified stock options or incentive stock options, as
provided herein.
2. DEFINITIONS
For purposes of interpreting the Plan and related documents (including
Award Agreements), the following definitions shall apply:
2.1. "Affiliate" means any company or other trade or business that
"controls," is "controlled by" or is "under common control" with the Company
within the meaning of Rule 405 of Regulation C under the Securities Act,
including, without limitation, any Subsidiary.
2.2. "Annual Incentive Award" means an Award made subject to attainment
of performance goals (as described in Section 13) over a performance period of a
duration as specified by the Committee.
2.3. "Award" means a grant of an Option, Stock Appreciation Right,
Restricted Stock, Restricted Stock Unit, Unrestricted Stock, or cash award under
the Plan.
2.4. "Award Agreement" means a written agreement between the Company
and a Grantee, or notice from the Company to a Grantee, that evidences and sets
out the terms and conditions of an Award.
2.5. "Board" means the Board of Directors of the Company.
2.6. "Cause" means, as determined by the Board and unless otherwise
provided in an applicable agreement with the Company or an Affiliate at or
before the Grant Date: (i) engaging in any act, or failing to act, or misconduct
that is injurious to the Company or its Affiliates; (ii) gross negligence or
willful misconduct in connection with the performance of duties; (iii)
conviction of a criminal offense (other than minor traffic offenses); (iv)
fraud, embezzlement or misappropriation of funds or property of the Company or
an Affiliate; (v) material breach of any term of any employment, consulting or
other services, confidentiality, intellectual property or non-competition
agreements, if any, between the Service Provider and the Company or an
Affiliate; (vi) the entry of an order duly issued by any regulatory agency
(including federal, state and local regulatory agencies and self-regulatory
bodies) having jurisdiction over the Company or an Affiliate requiring the
removal from any office held by the Service Provider with the Company or
prohibiting a Service Provider from participating in the business or affairs of
the Company or any Affiliate; or (vii) the revocation or threatened revocation
of any of the Company's or an Affiliate's government licenses, permits or
approvals, which is primarily due to the Service Provider's action or inaction
and such revocation or threatened revocation would be alleviated or mitigated in
any material respect by the termination of the Service Provider's Services.
2.7. "Change in Control" shall have the meaning set forth in Section
15.2.
2.8. "Code" means the Internal Revenue Code of 1986, as now in effect
or as hereafter amended.
2.9. "Committee" means the Compensation Committee of the Board, or such
other committee as determined by the Board. The Compensation Committee of the
Board may, in its discretion, designate a subcommittee of its members to serve
as the Committee (to the extent the Board has not designated another person,
committee or entity as the Committee) or to cause the Committee to (i) consist
solely of persons who are "Nonemployee Directors" as defined in Rule 16b-3
issued under the Exchange Act, (ii) consist solely of persons who are Outside
Directors, or (iii) satisfy the applicable requirements of any stock exchange on
which the Common Stock may then be listed.
2.10. "Company" means China Precision Steel, Inc., a Colorado
corporation, or any successor corporation.
2.11. "Common Stock" or "Stock" means share of common stock of the
Company, par value $0.001 per share.
2.12. "Covered Employee" means a Grantee who is a "covered employee"
within the meaning of Section 162(m)(3) of the Code as qualified by Section 13.4
herein.
2.13. "Disability" means the Grantee is unable to perform each of the
essential duties of such Grantee's position by reason of a medically
determinable physical or mental impairment which is potentially permanent in
character or which can be expected to last for a continuous period of not less
than 12 months; provided, however, that, with respect to rules regarding
expiration of an Incentive Stock Option following termination of the Grantee's
Service, Disability has the meaning as set forth in Section 22(e)(3) of the
Code.
2.14. "Effective Date" means the date set forth in Section 16.10
herein.
2.15. "Exchange Act" means the Securities Exchange Act of 1934, as now
in effect or as hereafter amended.
2
2.16. "Fair Market Value" of a share of Common Stock as of a particular
date shall mean (i) the closing sale price reported for such 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 (ii) 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 Board in
good faith in its sole discretion (but in any event not less than fair market
value within the meaning of Section 409A).
2.17. "Family Member" means a person who is a spouse, former spouse,
child, stepchild, grandchild, parent, stepparent, grandparent, niece, nephew,
mother-in-law, father-in-law, son-in-law, daughter-in-law, brother, sister,
brother-in-law, or sister-in-law, including adoptive relationships, of the
applicable individual, any person sharing the applicable individual's household
(other than a tenant or employee), a trust in which any one or more of these
persons have more than fifty percent of the beneficial interest, a foundation in
which any one or more of these persons (or the applicable individual) control
the management of assets, and any other entity in which one or more of these
persons (or the applicable individual) own more than fifty percent of the voting
interests.
2.18. "Grant Date" means, as determined by the Committee, the latest to
occur of (i) the date as of which the Committee approves an Award, (ii) the date
on which the recipient of an Award first becomes eligible to receive an Award
under Section 6 hereof, or (iii) such other date as may be specified by the
Committee in the Award Agreement.
2.19. "Grantee" means a person who receives or holds an Award under the
Plan.
2.20. "Incentive Stock Option" means an "incentive stock option" within
the meaning of Section 422 of the Code, or the corresponding provision of any
subsequently enacted tax statute, as amended from time to time.
2.21. "Non-qualified Stock Option" means an Option that is not an
Incentive Stock Option.
2.22. "Option" means an option to purchase one or more shares of Stock
pursuant to the Plan.
2.23. "Option Price" means the exercise price for each share of Stock
subject to an Option.
2.24. "Outside Director" means a member of the Board who is not an
officer or employee of the Company or an Affiliate, determined in accordance
with the requirements of Section 162(m) of the Code.
2.25. "Performance Award" means an Award made subject to the attainment
of performance goals (as described in Section 13) over a performance period of
up to ten (10) years.
2.26. "Plan" means this China Precision Steel, Inc. 2006 Omnibus
Long-Term Incentive Plan.
3
2.27. "Purchase Price" means the purchase price for each share of Stock
pursuant to a grant of Restricted Stock or Unrestricted Stock.
2.28. "Reporting Person" means a person who is required to file reports
under Section 16(a) of the Exchange Act.
2.29. "Restricted Stock" means shares of Stock, awarded to a Grantee
pursuant to Section 10 hereof.
2.30. "Restricted Stock Unit" means a bookkeeping entry representing
the equivalent of shares of Stock, awarded to a Grantee pursuant to Section 10
hereof.
2.31. "SAR Exercise Price" means the per share exercise price of a SAR
granted to a Grantee under Section 9 hereof.
2.32. "Section 409A" shall mean Section 409A of the Code and all formal
guidance and regulations promulgated thereunder.
2.33. "Securities Act" means the Securities Act of 1933, as now in
effect or as hereafter amended.
2.34. "Separation from Service" means a termination of Service by a
Service Provider, as determined by the Committee, which determination shall be
final, binding and conclusive; provided if any Award governed by Section 409A is
to be distributed on a Separation from Service, then the definition of
Separation from Service for such purposes shall comply with the definition
provided in Section 409A.
2.35. "Service" means service as a Service Provider to the Company or
an Affiliate. Unless otherwise stated in the applicable Award Agreement, a
Grantee's change in position or duties shall not result in interrupted or
terminated Service, so long as such Grantee continues to be a Service Provider
to the Company or an Affiliate.
2.36. "Service Provider" means an employee, officer or director of the
Company or an Affiliate, or a consultant or adviser currently providing services
to the Company or an Affiliate.
2.37. "Stock Appreciation Right" or "SAR" means a right granted to a
Grantee under Section 9 hereof.
2.38. "Subsidiary" means any "subsidiary corporation" of the Company
within the meaning of Section 424(f) of the Code.
2.39. "Termination Date" means the date upon which an Option shall
terminate or expire, as set forth in Section 8.3 hereof.
2.40. "Ten Percent Stockholder" means an individual who owns more than
ten percent (10%) of the total combined voting power of all classes of
outstanding stock of the Company, its parent or any of its Subsidiaries. In
determining stock ownership, the attribution rules of Section 424(d) of the Code
shall be applied.
4
2.41. "Unrestricted Stock" means an Award pursuant to Section 11
hereof.
3. ADMINISTRATION OF THE PLAN
3.1. General.
The Committee shall have such powers and authorities related to the
administration of the Plan as are consistent with the Company's certificate of
incorporation and bylaws and applicable law. The Committee shall have full power
and authority to take all actions and to make all determinations required or
provided for under the Plan, any Award or any Award Agreement, and shall have
full power and authority to take all such other actions and make all such other
determinations not inconsistent with the specific terms and provisions of the
Plan that the Committee deems to be necessary or appropriate to the
administration of the Plan. The interpretation and construction by the Committee
of any provision of the Plan, any Award or any Award Agreement shall be final,
binding and conclusive. Without limitation, the Committee shall have full and
final authority, subject to the other terms and conditions of the Plan, to:
(i) designate Grantees;
(ii) determine the type or types of Awards to be made to a
Grantee;
(iii) determine the number of shares of Stock to be subject to
an Award;
(iv) establish the terms and conditions of each Award
(including, but not limited to, the Option Price of any Option, the
nature and duration of any restriction or condition (or provision for
lapse thereof) relating to the vesting, exercise, transfer, or
forfeiture of an Award or the shares of Stock subject thereto, and any
terms or conditions that may be necessary to qualify Options as
Incentive Stock Options);
(v) prescribe the form of each Award Agreement; and
(vi) amend, modify, or supplement the terms of any outstanding
Award including the authority, in order to effectuate the purposes of
the Plan, to modify Awards to foreign nationals or individuals who are
employed outside the United States to recognize differences in local
law, tax policy, or custom.
Notwithstanding the foregoing, no amendment or modification may be made to
an outstanding Option or SAR that (i) causes the Option or SAR to become subject
to Section 409A, (ii) reduces the Option Price or SAR Exercise Price, either by
lowering the Option Price or SAR Exercise Price or by canceling the outstanding
Option or SAR and granting a replacement Option or SAR with a lower Option Price
or SAR Exercise Price or (iii) would be treated as a repricing under the rules
of the exchange upon which the Company's Stock trades, without, with respect to
item (i), the Grantee's written prior approval, and with respect to items (ii)
and (iii), without the approval of the stockholders of the Company, provided,
that, appropriate adjustments may be made to outstanding Options and SARs
pursuant to Section 15.
5
The Company may retain the right in an Award Agreement to cause a
forfeiture of the gain realized by a Grantee on account of actions taken by the
Grantee in violation or breach of or in conflict with any employment agreement,
non-competition agreement, any agreement prohibiting solicitation of employees
or clients of the Company or any Affiliate thereof or any confidentiality
obligation with respect to the Company or any Affiliate thereof or otherwise in
competition with the Company or any Affiliate thereof, to the extent specified
in such Award Agreement applicable to the Grantee. Furthermore, the Company may
annul an Award if the Grantee is terminated for Cause as defined in the
applicable Award Agreement or the Plan, as applicable. The grant of any Award
may be contingent upon the Grantee executing the appropriate Award Agreement.
3.2. Deferral Arrangement.
The Committee may permit or require the deferral of any Award payment into
a deferred compensation arrangement, subject to such rules and procedures as it
may establish and in accordance with Section 409A, which may include provisions
for the payment or crediting of interest or dividend equivalents, including
converting such credits into deferred Stock units.
3.3. No Liability.
No member of the Board or of the Committee shall be liable for any action
or determination made in good faith with respect to the Plan, any Award or Award
Agreement.
3.4. Book Entry.
Notwithstanding any other provision of this Plan to the contrary, the
Company may elect to satisfy any requirement under this Plan for the delivery of
stock certificates through the use of book-entry.
4. STOCK SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 15 hereof, the maximum number
of shares of Stock available for issuance under the Plan shall be 2,165,220. All
such shares of Stock available for issuance under the Plan shall be available
for issuance pursuant to Incentive Stock Options. Stock issued or to be issued
under the Plan shall be authorized but unissued shares; or, to the extent
permitted by applicable law, issued shares that have been reacquired by the
Company. The maximum number of Common Stock that will be awarded to any one
Grantee during any calendar year shall not exceed 216,522.
The Committee may adopt reasonable procedures for making adjustments in
accordance with Section 15. If the Option Price of any Option granted under the
Plan, or if pursuant to Section 16.3 the withholding obligation of any Grantee
with respect to an Option or other Award, is satisfied by tendering shares of
Stock to the Company (by either actual delivery or by attestation) or by
withholding shares of Stock, the number of shares of Stock issued net of the
shares of Stock tendered or withheld shall be deemed delivered for purposes of
determining the maximum number of shares of Stock available for delivery under
the Plan. To the extent that an Award under the Plan is canceled, expired,
forfeited, settled in cash, settled by issuance of fewer shares than the number
underlying the Award, or otherwise terminated without delivery of shares to the
Grantee, the shares retained by or returned to the Company will be available
under the Plan; and shares that are withheld from such an Award or separately
surrendered by the Grantee in payment of any exercise price or taxes relating to
such an Award shall be deemed to constitute shares not delivered to the Grantee
and will be available under the Plan. In addition, in the case of any Award
granted in assumption of or in substitution for an award of a company or
business acquired by the Company or a Subsidiary or Affiliate or with which the
Company or a Subsidiary or Affiliate combines, shares issued or issuable in
connection with such substitute Award shall not be counted against the number of
shares reserved under the Plan.
6
5. EFFECTIVE DATE, DURATION AND AMENDMENTS
5.1. Term.
The Plan shall be effective as of the Effective Date and shall terminate
automatically as of the first meeting of stockholders at which directors are to
be elected that occurs after the close of the third calendar year following the
calendar year in which the initial public offering occurs unless the Plan is
approved by the stockholders of the Company prior to such meeting but subsequent
to the Effective Date. In the event that the Plan is approved by the
stockholders during the time prescribed in the preceding sentence, then the Plan
shall terminate automatically on the ten (10) year anniversary of the Effective
Date and may be terminated on any earlier date as provided in Section 5.2.
5.2. Amendment and Termination of the Plan.
The Board may, at any time and from time to time, amend, suspend, or
terminate the Plan as to any Awards which have not been made. An amendment shall
be contingent on approval of the Company's stockholders to the extent stated by
the Board, required by applicable law or required by applicable stock exchange
listing requirements. No Awards shall be made after termination of the Plan. No
amendment, suspension, or termination of the Plan shall, without the consent of
the Grantee, impair rights or obligations under any Award theretofore awarded.
6. AWARD ELIGIBILITY AND LIMITATIONS
6.1. Service Providers and Other Persons.
Subject to this Section 6, Awards may be made to: (i) any Service
Provider, including any Service Provider who is an officer or director of the
Company or of any Affiliate, as the Committee shall determine and designate from
time to time in its discretion, (ii) any Outside Director, and (iii) any other
individual whose participation in the Plan is determined to be in the best
interests of the Company by the Committee.
6.2. Successive Awards.
An eligible person may receive more than one Award, subject to such
restrictions as are provided herein.
7
6.3. Stand-Alone, Additional, Tandem, and Substitute Awards.
Awards may, in the discretion of the Committee, be granted either alone or
in addition to, in tandem with, or in substitution or exchange for, any other
Award or any award granted under another plan of the Company, any Affiliate, or
any business entity to be acquired by the Company or an Affiliate, or any other
right of a Grantee to receive payment from the Company or any Affiliate. Such
additional, tandem, and substitute or exchange Awards may be granted at any
time. If an Award is granted in substitution or exchange for another Award, the
Committee shall have the right to require the surrender of such other Award in
consideration for the grant of the new Award. The Board shall have the right, in
its discretion, to make Awards in substitution or exchange for any other award
under another plan of the Company, any Affiliate, or any business entity to be
acquired by the Company or an Affiliate. In addition, Awards may be granted in
lieu of cash compensation, including in lieu of cash amounts payable under other
plans of the Company or any Affiliate, in which the value of Stock subject to
the Award is equivalent in value to the cash compensation (for example,
Restricted Stock Units or Restricted Stock).
7. AWARD AGREEMENT
Each Award shall be evidenced by an Award Agreement, in such form or forms
as the Committee shall from time to time determine. Without limiting the
foregoing, an Award Agreement may be provided in the form of a notice which
provides that acceptance of the Award constitutes acceptance of all terms of the
Plan and the notice. Award Agreements granted from time to time or at the same
time need not contain similar provisions but shall be consistent with the terms
of the Plan. Each Award Agreement evidencing an Award of Options shall specify
whether such Options are intended to be Non-qualified Stock Options or Incentive
Stock Options, and in the absence of such specification such options shall be
deemed Non-qualified Stock Options.
8. TERMS AND CONDITIONS OF OPTIONS
8.1. Option Price.
The Option Price of each Option shall be fixed by the Committee and stated
in the related Award Agreement. The Option Price of each Incentive Stock Option
shall be at least the Fair Market Value of a share of Stock on the Grant Date;
provided, however, that (i) in the event that a Grantee is a Ten Percent
Stockholder as of the Grant Date, the Option Price of an Option granted to such
Grantee that is intended to be an Incentive Stock Option shall be not less than
110 percent of the Fair Market Value of a share of Stock on the Grant Date, and
(ii) with respect to Awards made in substitution for or in exchange for awards
made by an entity acquired by the Company or an Affiliate, the Option Price does
not need to be at least the Fair Market Value on the Grant Date. In no case
shall the Option Price of any Option be less than the par value of a share of
Stock.
8.2. Vesting.
Subject to Section 8.3 hereof, each Option shall become exercisable
at such times and under such conditions (including without limitation
performance requirements) as shall be determined by the Committee and stated in
the Award Agreement. For purposes of this Section 8.2, fractional numbers of
shares of Stock subject to an Option shall be rounded down to the next nearest
whole number.
8
8.3. Term.
Each Option shall terminate, and all rights to purchase shares of Stock
thereunder shall cease, upon the expiration of ten years from the Grant Date, or
under such circumstances and on such date prior thereto as is set forth in the
Plan or as may be fixed by the Committee and stated in the related Award
Agreement (the "Termination Date"); provided, however, that in the event that
the Grantee is a Ten Percent Stockholder, an Option granted to such Grantee that
is intended to be an Incentive Stock Option at the Grant Date shall not be
exercisable after the expiration of five years from its Grant Date.
8.4. Separation from Service.
Except as otherwise provided in an Award Agreement, if a Grantee's
employment with or service to the Company or Affiliate terminates for any reason
other than Cause, (i) Options granted to such Grantee, to the extent that they
are exercisable at the time of such termination, shall remain exercisable for a
period of not more than 90 days after such termination (one year in the case of
termination by reason of death or Disability), on which date they shall expire,
and (ii) Options granted to such Grantee, to the extent that they were not
exercisable at the time of such termination, shall expire on the date of such
termination. In the event of the termination of a Grantee's employment or
service for Cause, all outstanding Options granted to such Grantee shall expire
on the date of such termination. Notwithstanding the foregoing, no Option shall
be exercisable after the expiration of its term.
8.5. Limitations on Exercise of Option.
Notwithstanding any other provision of the Plan, in no event may any
Option be exercised, in whole or in part, (i) prior to the date the Plan is
approved by the stockholders of the Company as provided herein or (ii) after the
occurrence of an event referred to in Section 15 hereof which results in
termination of the Option.
8.6. Method of Exercise.
An Option that is exercisable may be exercised by the Grantee's delivery
to the Company of written notice of exercise on any business day, at the
Company's principal office, on the form specified by the Company. Such notice
shall specify the number of shares of Stock with respect to which the Option is
being exercised and shall be accompanied by payment in full of the Option Price
of the shares for which the Option is being exercised plus the amount (if any)
of federal and/or other taxes which the Company may, in its judgment, be
required to withhold with respect to an Award. The minimum number of shares of
Stock with respect to which an Option may be exercised, in whole or in part, at
any time shall be the lesser of (i) 100 shares or such lesser number set forth
in the related Award Agreement and (ii) the maximum number of shares available
for purchase under the Option at the time of exercise. Except as otherwise
provided by the Committee, payments hereunder shall be made in cash or cash
equivalents acceptable to the Company. Notwithstanding anything contained herein
to the contrary, the Committee may, solely in its discretion, approve payment in
whole or in part by an alternative method, including (i) by means of any
cashless exercise procedure approved by the Committee, (ii) in the form of
unrestricted shares of Stock already owned by the Grantee (for at least six
months) on the date of surrender to the extent the shares of Stock have a Fair
Market Value on the date of surrender equal to the aggregate Option Price of the
shares as to which such Option shall be exercised, provided that, in the case of
an Incentive Stock Option, the right to make payment in the form of already
owned shares of Stock may be authorized only at the time of grant, or (iii) any
combination of the foregoing.
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8.7. Rights of Holders of Options.
Unless otherwise stated in the related Award Agreement, an individual
holding or exercising an Option shall have none of the rights of a stockholder
(for example, the right to receive cash or dividend payments or distributions
attributable to the subject shares of Stock or to direct the voting of the
subject shares of Stock ) until the shares of Stock covered thereby are fully
paid and issued to him. Except as provided in Section 15 hereof, no adjustment
shall be made for dividends, distributions or other rights for which the record
date is prior to the date of such issuance.
8.8. Delivery of Stock Certificates.
Promptly after the exercise of an Option by a Grantee and the payment in
full of the Option Price, such Grantee shall be entitled to the issuance of a
stock certificate or certificates evidencing his or her ownership of the shares
of Stock subject to the Option.
8.9. Transferability of Options.
Except as provided in Section 8.10, during the lifetime of a Grantee, only
the Grantee (or, in the event of legal incapacity or incompetence, the Grantee's
guardian or legal representative) may exercise an Option. Except as provided in
Section 8.10, no Option shall be assignable or transferable by the Grantee to
whom it is granted, other than by will or the laws of descent and distribution.
8.10. Family Transfers.
If authorized in the applicable Award Agreement, a Grantee may transfer,
not for value, all or part of an Option which is not an Incentive Stock Option
to any Family Member. For the purpose of this Section 8.10, a "not for value"
transfer is a transfer which is (i) a gift, (ii) a transfer under a domestic
relations order in settlement of marital property rights; or (iii) a transfer to
an entity in which more than fifty percent of the voting interests are owned by
Family Members (or the Grantee) in exchange for an interest in that entity.
Following a transfer under this Section 8.10, any such Option shall continue to
be subject to the same terms and conditions as were applicable immediately prior
to transfer. Subsequent transfers of transferred Options are prohibited except
to Family Members of the original Grantee in accordance with this Section 8.10
or by will or the laws of descent and distribution. Notwithstanding the
foregoing, the Committee may also provide that Options may be transferred to
persons other than Family Members. The events of termination of Service of
Section 8.4 hereof shall continue to be applied with respect to the original
Grantee, following which the Option shall be exercisable by the transferee only
to the extent, and for the periods specified, in Section 8.4.
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8.11. Limitations on Incentive Stock Options.
An Option shall constitute an Incentive Stock Option only (i) if the
Grantee of such Option is an employee of the Company or any Subsidiary of the
Company; (ii) to the extent specifically provided in the related Award
Agreement; and (iii) to the extent that the aggregate Fair Market Value
(determined at the time the Option is granted) of the shares of Stock with
respect to which all Incentive Stock Options held by such Grantee become
exercisable for the first time during any calendar year (under the Plan and all
other plans of the Grantee's employer and its Affiliates) does not exceed
$100,000. This limitation shall be applied by taking Options into account in the
order in which they were granted.
9. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS
9.1. Right to Payment.
A SAR shall confer on the Grantee a right to receive, upon exercise
thereof, the excess of (i) the Fair Market Value of one share of Stock on the
date of exercise over (ii) the SAR Exercise Price, as determined by the
Committee. The Award Agreement for an SAR shall specify the SAR Exercise Price,
which shall be fixed on the Grant Date. SARs may be granted alone or in
conjunction with all or part of an Option or at any subsequent time during the
term of such Option or in conjunction with all or part of any other Award. A SAR
granted in tandem with an outstanding Option following the Grant Date of such
Option may have a grant price that is equal to the Option Price.
9.2. Other Terms.
The Committee shall determine at the Grant Date or thereafter, the time
or times at which and the circumstances under which a SAR may be exercised in
whole or in part (including based on achievement of performance goals and/or
future service requirements), the time or times at which SARs shall cease to be
or become exercisable following termination of Service or upon other conditions,
the method of exercise, whether or not a SAR shall be in tandem or in
combination with any other Award, and any other terms and conditions of any SAR.
9.3. Term of SARs. The term of a SAR granted under the Plan shall be
determined by the Committee, in its sole discretion; provided, however, that
such term shall not exceed ten years.
9.4. Payment of SAR Amount. Upon exercise of a SAR, a Grantee shall be
entitled to receive cash payment from the Company in an amount determined by
multiplying:
(i) the difference between the Fair Market Value of a Share on
the date of exercise over the SAR Exercise Price; by
(ii) the number of Shares with respect to which the SAR is
exercised.
10. TERMS AND CONDITIONS OF RESTRICTED STOCK AND RESTRICTED STOCK UNITS
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10.1. Restrictions.
At the time of grant, the Committee may, in its sole discretion, establish
a period of time (a "restricted period") and any additional restrictions
including the satisfaction of corporate or individual performance objectives
applicable to an Award of Restricted Stock or Restricted Stock Units in
accordance with Section 13.1 and 13.2. Each Award of Restricted Stock or
Restricted Stock Units may be subject to a different restricted period and
additional restrictions. Neither Restricted Stock nor Restricted Stock Units may
be sold, transferred, assigned, pledged or otherwise encumbered or disposed of
during the restricted period or prior to the satisfaction of any other
applicable restrictions.
10.2. Restricted Stock Certificates.
The Company shall issue stock, in the name of each Grantee to whom
Restricted Stock has been granted, stock certificates or other evidence of
ownership representing the total number of shares of Restricted Stock granted to
the Grantee, as soon as reasonably practicable after the Grant Date. The
Committee may provide in an Award Agreement that either (i) the Secretary of the
Company shall hold such certificates for the Grantee's benefit until such time
as the Restricted Stock is forfeited to the Company or the restrictions lapse,
or (ii) such certificates shall be delivered to the Grantee, provided, however,
that such certificates shall bear a legend or legends that comply with the
applicable securities laws and regulations and makes appropriate reference to
the restrictions imposed under the Plan and the Award Agreement.
10.3. Rights of Holders of Restricted Stock.
Unless the Committee otherwise provides in an Award Agreement, holders of
Restricted Stock shall have the right to vote such Stock and the right to
receive any dividends declared or paid with respect to such Stock. The Committee
may provide that any dividends paid on Restricted Stock must be reinvested in
shares of Stock, which may or may not be subject to the same restrictions
applicable to such Restricted Stock. All distributions, if any, received by a
Grantee with respect to Restricted Stock as a result of any stock split, stock
dividend, combination of shares, or other similar transaction shall be subject
to the restrictions applicable to the original Award.
10.4. Rights of Holders of Restricted Stock Units.
10.4.1 Settlement of Restricted Stock Units.
Restricted Stock Units may be settled in cash or Stock, as determined
by the Committee and set forth in the Award Agreement. The Award Agreement shall
also set forth whether the Restricted Stock Units shall be settled (i) within
the time period specified in Section 16.9.1 for short term deferrals or (ii)
otherwise within the requirements of Section 409A, in which case the Award
Agreement shall specify upon which events such Restricted Stock Units shall be
settled.
10.4.2 Voting and Dividend Rights.
Holders of Restricted Stock Units shall have no rights as stockholders of
the Company. The Committee may provide in an Award Agreement that the holder of
such Restricted Stock Units shall be entitled to receive, upon the Company's
payment of a cash dividend on its outstanding Stock, a cash payment for each
Restricted Stock Unit held equal to the per-share dividend paid on the Stock,
which may be deemed reinvested in additional Restricted Stock Units at a price
per unit equal to the Fair Market Value of a share of Stock on the date that
such dividend is paid to shareholders.
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10.4.3 Creditor's Rights.
A holder of Restricted Stock Units shall have no rights other than those
of a general creditor of the Company. Restricted Stock Units represent an
unfunded and unsecured obligation of the Company, subject to the terms and
conditions of the applicable Award Agreement.
10.5. Termination of Service.
Unless the Committee otherwise provides in an Award Agreement or in
writing after the Award Agreement is issued, upon the termination of a Grantee's
Service, any Restricted Stock or Restricted Stock Units held by such Grantee
that have not vested, or with respect to which all applicable restrictions and
conditions have not lapsed, shall immediately be deemed forfeited, and the
Grantee shall have no further rights with respect to such Award.
10.6. Purchase of Restricted Stock.
The Grantee shall be required, to the extent required by applicable law,
to purchase the Restricted Stock from the Company at a Purchase Price equal to
the greater of (i) the aggregate par value of the shares of Stock represented by
such Restricted Stock or (ii) the Purchase Price, if any, specified in the
related Award Agreement. If specified in the Award Agreement, the Purchase Price
may be deemed paid by Services already rendered. The Purchase Price shall be
payable in a form described in Section 12 or, in the discretion of the
Committee, in consideration for past Services rendered.
10.7. Delivery of Stock.
Upon the expiration or termination of any restricted period and the
satisfaction of any other conditions prescribed by the Committee, the
restrictions applicable to shares of Restricted Stock or Restricted Stock Units
settled in Stock shall lapse, and, unless otherwise provided in the Award
Agreement, a stock certificate for such shares shall be delivered, free of all
such restrictions, to the Grantee or the Grantee's beneficiary or estate, as the
case may be.
11. TERMS AND CONDITIONS OF UNRESTRICTED STOCK AWARDS
The Committee may, in its sole discretion, grant (or sell at par value or
such other higher purchase price determined by the Committee) an Award of
Unrestricted Stock to any Grantee pursuant to which such Grantee may receive
shares of Stock free of any restrictions ("Unrestricted Stock") under the Plan.
Awards of Unrestricted Stock may be granted or sold as described in the
preceding sentence in respect of past Services rendered and other valid
consideration, or in lieu of, or in addition to, any cash compensation due to
such Grantee. Unless otherwise provided by the Committee, Awards of Unrestricted
Stock shall be paid within the time period specified in Section 16.9.1 for
short-term deferrals.
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12. FORM OF PAYMENT FOR OPTIONS AND RESTRICTED STOCK
12.1. General Rule.
Payment of the Option Price for the shares purchased pursuant to the
exercise of an Option or the Purchase Price for Restricted Stock shall be made
in cash or in cash equivalents acceptable to the Company, except as provided in
this Section 12.
12.2. Surrender of Stock.
To the extent the Award Agreement so provides, payment of the Option Price
for shares purchased pursuant to the exercise of an Option or the Purchase Price
for Restricted Stock may be made all or in part through the tender to the
Company of shares of Stock, which shares, if acquired from the Company and if so
required by the Company, shall have been held for at least six months at the
time of tender and which shall be valued, for purposes of determining the extent
to which the Option Price or Purchase Price has been paid thereby, at their Fair
Market Value on the date of exercise or surrender.
12.3. Cashless Exercise.
With respect to an Option only (and not with respect to Restricted Stock),
to the extent permitted by law and to the extent the Award Agreement so
provides, payment of the Option Price may be made all or in part by delivery (on
a form acceptable to the Committee) of an irrevocable direction to a licensed
securities broker acceptable to the Company to sell shares of Stock and to
deliver all or part of the sales proceeds to the Company in payment of the
Option Price and any withholding taxes described in Section 16.3.
12.4. Other Forms of Payment.
To the extent the Award Agreement so provides, payment of the Option
Price or the Purchase Price may be made in any other form that is consistent
with applicable laws, regulations and rules.
13. TERMS AND CONDITIONS OF PERFORMANCE AND ANNUAL INCENTIVE AWARDS
13.1. Performance Conditions.
The right of a Grantee to exercise or receive a grant or settlement
of any Award, and the timing thereof, may be subject to such performance
conditions as may be specified by the Committee. The Committee may use such
business criteria and other measures of performance as it may deem appropriate
in establishing any performance conditions, and may exercise its discretion to
reduce the amounts payable under any Award subject to performance conditions,
except as limited under Sections 13.2 hereof in the case of a Performance Award
or Annual Incentive Award intended to qualify under Code Section 162(m).
13.2. Performance or Annual Incentive Awards Granted to Designated
Covered Employees.
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If and to the extent that the Committee determines that a
Performance or Annual Incentive Award to be granted to a Grantee who is
designated by the Committee as likely to be a Covered Employee should qualify as
"performance-based compensation" for purposes of Code Section 162(m), the grant,
exercise and/or settlement of such Performance or Annual Incentive Award shall
be contingent upon achievement of pre-established performance goals and other
terms set forth in this Section 13.2.
13.2.1 Performance Goals Generally.
The performance goals for such Performance or Annual Incentive Awards
shall consist of one or more business criteria and a targeted level or levels of
performance with respect to each of such criteria, as specified by the Committee
consistent with this Section 13.2. Performance goals shall be objective and
shall otherwise meet the requirements of Code Section 162(m) and regulations
thereunder including the requirement that the level or levels of performance
targeted by the Committee result in the achievement of performance goals being
"substantially uncertain." The Committee may determine that such Performance or
Annual Incentive Awards shall be granted, exercised and/or settled upon
achievement of any one performance goal or that two or more of the performance
goals must be achieved as a condition to grant, exercise and/or settlement of
such Performance or Annual Incentive Awards. Performance goals may differ for
Performance or Annual Incentive Awards granted to any one Grantee or to
different Grantees.
13.2.2 Business Criteria.
One or more of the following business criteria for the Company, on a
consolidated basis, and/or specified subsidiaries or business units of the
Company (except with respect to the total stockholder return and earnings per
share criteria), shall be used exclusively by the Committee in establishing
performance goals for such Performance or Annual Incentive Awards: (i) total
stockholder return; (ii) such total stockholder 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; (iii) net income; (iv) pretax
earnings; (v) earnings before interest expense, taxes, depreciation and
amortization; (vi) pretax operating earnings after interest expense and before
bonuses, service fees, and extraordinary or special items; (vii) operating
margin; (viii) earnings per share; (ix) return on equity; (x) return on capital;
(xi) return on investment; (xii) operating earnings; (xiii) working capital;
(xiv) ratio of debt to stockholders' equity and (xv) revenue.
13.2.3 Timing for Establishing Performance Goals.
Performance goals shall be established not later than 90 days after the
beginning of any performance period applicable to such Performance or Annual
Incentive Awards, or at such other date as may be required or permitted for
"performance-based compensation" under Code Section 162(m).
13.2.4 Settlement of Performance or Annual Incentive Awards;
Other Terms.
Settlement of such Performance or Annual Incentive Awards shall be in
cash, Stock, other Awards or other property, in the discretion of the Committee.
The Committee may, in its discretion, reduce the amount of a settlement
otherwise to be made in connection with such Performance or Annual Incentive
Awards. The Committee shall specify the circumstances in which such Performance
or Annual Incentive Awards shall be paid or forfeited in the event of
termination of Service by the Grantee prior to the end of a performance period
or settlement of Performance Awards.
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13.3. Written Determinations.
All determinations by the Committee as to the establishment of
performance goals, the amount of any Performance Award pool or potential
individual Performance Awards and as to the achievement of performance goals
relating to Performance Awards, and the amount of any Annual Incentive Award
pool or potential individual Annual Incentive Awards and the amount of final
Annual Incentive Awards, shall be made in writing in the case of any Award
intended to qualify under Code Section 162(m). To the extent permitted by Code
Section 162(m), the Committee may delegate any responsibility relating to such
Performance Awards or Annual Incentive Awards.
13.4. Status of Section 13.2 Awards Under Code Section 162(m).
It is the intent of the Company that Performance Awards and Annual
Incentive Awards under Section 13.2 hereof granted to persons who are designated
by the Committee as likely to be Covered Employees within the meaning of Code
Section 162(m) and regulations thereunder shall, if so designated by the
Committee, constitute "qualified performance-based compensation" within the
meaning of Code Section 162(m) and regulations thereunder. Accordingly, the
terms of Section 13.2, including the definitions of Covered Employee and other
terms used therein, shall be interpreted in a manner consistent with Code
Section 162(m) and regulations thereunder. The foregoing notwithstanding,
because the Committee cannot determine with certainty whether a given Grantee
will be a Covered Employee with respect to a fiscal year that has not yet been
completed, the term Covered Employee as used herein shall mean only a person
designated by the Committee, at the time of grant of Performance Awards or an
Annual Incentive Award, as likely to be a Covered Employee with respect to that
fiscal year. If any provision of the Plan or any agreement relating to such
Performance Awards or Annual Incentive Awards does not comply or is inconsistent
with the requirements of Code Section 162(m) or regulations thereunder, such
provision shall be construed or deemed amended to the extent necessary to
conform to such requirements.
14. REQUIREMENTS OF LAW
14.1. General.
The Company shall not be required to sell or issue any shares of Stock
under any Award if the sale or issuance of such shares would constitute a
violation by the Grantee, any other individual exercising an Option, or the
Company of any provision of any law or regulation of any governmental authority,
including without limitation any federal or state securities laws or
regulations. If at any time the Company shall determine, in its discretion, that
the listing, registration or qualification of any shares subject to an Award
upon any securities exchange or under any governmental regulatory body is
necessary or desirable as a condition of, or in connection with, the issuance or
purchase of shares hereunder, no shares of Stock may be issued or sold to the
Grantee or any other individual exercising an Option pursuant to such Award
16
unless such listing, registration, qualification, consent or approval shall have
been effected or obtained free of any conditions not acceptable to the Company,
and any delay caused thereby shall in no way affect the date of termination of
the Award. Specifically, in connection with the Securities Act, upon the
exercise of any Option or the delivery of any shares of Stock underlying an
Award, unless a registration statement under such Act is in effect with respect
to the shares of Stock covered by such Award, the Company shall not be required
to sell or issue such shares unless the Committee has received evidence
satisfactory to it that the Grantee or any other individual exercising an Option
may acquire such shares pursuant to an exemption from registration under the
Securities Act. Any determination in this connection by the Committee shall be
final, binding, and conclusive. The Company may, but shall in no event be
obligated to, register any securities covered hereby pursuant to the Securities
Act. The Company shall not be obligated to take any affirmative action in order
to cause the exercise of an Option or the issuance of shares of Stock pursuant
to the Plan to comply with any law or regulation of any governmental authority.
As to any jurisdiction that expressly imposes the requirement that an Option
shall not be exercisable until the shares of Stock covered by such Option are
registered or are exempt from registration, the exercise of such Option (under
circumstances in which the laws of such jurisdiction apply) shall be deemed
conditioned upon the effectiveness of such registration or the availability of
such an exemption.
14.2. Rule 16b-3.
During any time when the Company has a class of equity security registered
under Section 12 of the Exchange Act, it is the intent of the Company that
Awards and the exercise of Options granted hereunder will qualify for the
exemption provided by Rule 16b-3 under the Exchange Act. To the extent that any
provision of the Plan or action by the Board or Committee does not comply with
the requirements of Rule 16b-3, it shall be deemed inoperative to the extent
permitted by law and deemed advisable by the Board, and shall not affect the
validity of the Plan. In the event that Rule 16b-3 is revised or replaced, the
Board may exercise its discretion to modify this Plan in any respect necessary
to satisfy the requirements of, or to take advantage of any features of, the
revised exemption or its replacement.
15. EFFECT OF CHANGES IN CAPITALIZATION
15.1. Changes in Stock.
If the number of outstanding shares of Stock is increased or decreased or
the shares of Stock are changed into or exchanged for a different number or kind
of shares or other securities of the Company on account of any recapitalization,
reclassification, stock split, reverse split, combination of shares, exchange of
shares, stock dividend or other distribution payable in capital stock, or other
increase or decrease in such shares effected without receipt of consideration by
the Company occurring after the Effective Date, the number and kinds of shares
for which grants of Options and other Awards may be made under the Plan shall be
adjusted proportionately and accordingly by the Company; provided that any such
adjustment shall comply with Section 409A. In addition, the number and kind of
shares for which Awards are outstanding shall be adjusted proportionately and
accordingly so that the proportionate interest of the Grantee immediately
following such event shall, to the extent practicable, be the same as
immediately before such event. Any such adjustment in outstanding Options or
17
SARs shall not change the aggregate Option Price or SAR Exercise Price payable
with respect to shares that are subject to the unexercised portion of an
outstanding Option or SAR, as applicable, but shall include a corresponding
proportionate adjustment in the Option Price or SAR Exercise Price per share.
The conversion of any convertible securities of the Company shall not be treated
as an increase in shares effected without receipt of consideration.
Notwithstanding the foregoing, in the event of any distribution to the Company's
stockholders of securities of any other entity or other assets (including an
extraordinary cash dividend but excluding a non-extraordinary dividend payable
in cash or in stock of the Company) without receipt of consideration by the
Company, the Company may, in its sole discretion and in such manner as the
Company deems appropriate, adjust (i) the number and kind of shares subject to
outstanding Awards and/or (ii) the exercise price of outstanding Options and
Stock Appreciation Rights to reflect such distribution.
15.2. Definition of Change in Control.
Unless an Award Agreement provides for a different meaning, a "Change in
Control" shall mean the occurrence of any of the following:
(i) Any `person' (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) becomes the `beneficial owner' (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing more than fifty percent
(50%) of the total voting power represented by the Company's
then-outstanding voting securities, provided, however, that a
Change in Control shall not be deemed to occur if an employee
benefit plan (or a trust forming a part thereof) maintained by
the Company, directly or indirectly, becomes the beneficial owner
of more than fifty percent (50%) of the then-outstanding voting
securities of the Company after such acquisition;
(ii) A majority of the members of the Board is replaced during any
12-month period commencing on the ( Effective Date, by directors
whose appointment or election is not endorsed by a majority of
the members of the Board prior to the date of the appointment.
(iii) The consummation of a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation
which would result in (a) the voting securities of the Company
outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or being converted into voting
securities of the surviving entity) at least fifty percent (50%)
of the total voting power represented by the voting securities of
the Company or such surviving entity outstanding immediately
after such merger or consolidation; or (b) the directors of the
Company immediately prior thereto continuing to represent at
least fifty percent (50%) of the directors of the Company or such
surviving entity immediately after such merger or consolidation;
or
(iv) The consummation of the sale or disposition by the Company of all
or substantially all of the Company's assets.
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Notwithstanding the foregoing, the Company will not be deemed to have
undergone a Change in Control unless the Company is deemed to have undergone a
change in control pursuant to the definition in Section 409A.
15.3. Effect of Change in Control; Corporate Transactions
The Committee shall determine the effect of a Change in Control upon
Awards, and such effect may be set forth in the appropriate Award Agreement.
Unless an Award Agreement explicitly provides otherwise, if the Company is to be
consolidated with or acquired by another entity in a merger, sale of all or
substantially all of the Company's assets other than a transaction to merely
change the state of incorporation (a "Corporate Transaction"), the Committee or
the board of directors of any entity assuming the obligations of the Company
hereunder (the "Successor Board"), shall, as to outstanding Options and/or SARs,
either (i) make appropriate provision for the continuation of such Options
and/or SARs by substituting on an equitable basis for the Shares then subject to
such Options and/or SARs either the consideration payable with respect to the
outstanding shares of Common Stock in connection with the Corporate Transaction
or securities of any successor or acquiring entity; or (ii) upon written notice
to the Grantees, provide that all Options and/or SARs must be exercised (either
to the extent then exercisable or, at the discretion of the Committee or, upon a
change of control of the Company, all Options and/or SARs being made fully
exercisable for purposes of this Section 15.3), within a specified number of
days of the date of such notice, at the end of which period the Options and/or
SARs shall terminate; or (iii) terminate all Options and/or SARs in exchange for
a cash payment equal to the excess of the Fair Market Value of the Shares
subject to such Options and/or SARs (either to the extent then exercisable or,
at the discretion of the Committee, all Options and/or SARs being made fully
exercisable for purposes of this Section 15.3) over the exercise price thereof.
Unless an Award Agreement explicitly provides otherwise, with respect to
outstanding grants of Restricted Stock, Restricted Stock Units and/or
Unrestricted Stock, the Committee or the Successor Board, shall either (i) make
appropriate provisions for the continuation of such grants of Restricted Stock,
Restricted Stock Units and/or Unrestricted Stock by substituting on an equitable
basis for the Shares then subject to such Restricted Stock, Restricted Stock
Units and/or Unrestricted Stock either the consideration payable with respect to
the outstanding Shares of Common Stock in connection with the Corporate
Transaction or securities of any successor or acquiring entity; or (ii) upon
written notice to the Participants, provide that all grants of Restricted Stock,
Restricted Stock Units and/or Unrestricted Stock must be accepted (to the extent
then subject to acceptance) within a specified number of days of the date of
such notice, at the end of which period the offer of the Restricted Stock,
Restricted Stock Units and/or Unrestricted Stock shall terminate; or (iii)
terminate all grants of Restricted Stock, Restricted Stock Units and/or
Unrestricted Stock in exchange for a cash payment equal to the excess of the
Fair Market Value of the Shares subject to such Restricted Stock, Restricted
Stock Units and/or Unrestricted Stock over the purchase price thereof, if any.
In addition, in the event of a Corporate Transaction, the Administrator may
waive any or all Company repurchase rights with respect to outstanding
Restricted Stock and/or Restricted Stock Units.
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15.4. Reorganization Which Does Not Constitute a Change in Control.
If the Company undergoes any reorganization, merger, or consolidation of
the Company with one or more other entities which does not constitute a Change
in Control, any Option or SAR theretofore granted pursuant to the Plan shall
pertain to and apply to the securities to which a holder of the number of shares
of Stock subject to such Option or SAR would have been entitled immediately
following such reorganization, merger, or consolidation, with a corresponding
proportionate adjustment of the Option Price or SAR Exercise Price per share so
that the aggregate Option Price or SAR Exercise Price thereafter shall be the
same as the aggregate Option Price or SAR Exercise Price of the shares remaining
subject to the Option or SAR immediately prior to such reorganization, merger,
or consolidation. Subject to any contrary language in an Award Agreement, any
restrictions applicable to such Award shall apply as well to any replacement
shares received by the Grantee as a result of the reorganization, merger or
consolidation.
15.5. Adjustments.
Adjustments under this Section 15 related to shares of Stock or securities
of the Company shall be made by the Committee, whose determination in that
respect shall be final, binding and conclusive. No fractional shares or other
securities shall be issued pursuant to any such adjustment, and any fractions
resulting from any such adjustment shall be eliminated in each case by rounding
downward to the nearest whole share.
15.6. No Limitations on Company.
The making of Awards pursuant to the Plan shall not affect or limit in any
way the right or power of the Company to make adjustments, reclassifications,
reorganizations, or changes of its capital or business structure or to merge,
consolidate, dissolve, or liquidate, or to sell or transfer all or any part of
its business or assets.
16. GENERAL PROVISIONS
16.1. Disclaimer of Rights.
No provision in the Plan or in any Award Agreement shall be construed to
confer upon any individual the right to remain in the employ or service of the
Company or any Affiliate, or to interfere in any way with any contractual or
other right or authority of the Company either to increase or decrease the
compensation or other payments to any individual at any time, or to terminate
any employment or other relationship between any individual and the Company. In
addition, notwithstanding anything contained in the Plan to the contrary, unless
otherwise stated in the applicable Award Agreement, no Award granted under the
Plan shall be affected by any change of duties or position of the Grantee, so
long as such Grantee continues to be a Service Provider, if applicable. The
obligation of the Company to pay any benefits pursuant to this Plan shall be
interpreted as a contractual obligation to pay only those amounts described
herein, in the manner and under the conditions prescribed herein. The Plan shall
in no way be interpreted to require the Company to transfer any amounts to a
third party trustee or otherwise hold any amounts in trust or escrow for payment
to any Grantee or beneficiary under the terms of the Plan.
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16.2. Nonexclusivity of the Plan.
Neither the adoption of the Plan nor the submission of the Plan to the
stockholders of the Company for approval shall be construed as creating any
limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable either
generally to a class or classes of individuals or specifically to a particular
individual or particular individuals), including, without limitation, the
granting of stock options as the Board in its discretion determines desirable.
16.3. Withholding Taxes.
The Company or an Affiliate, as the case may be, shall have the right to
deduct from payments of any kind otherwise due to a Grantee any federal, state,
or local taxes of any kind required by law to be withheld (i) with respect to
the vesting of or other lapse of restrictions applicable to an Award, (ii) upon
the issuance of any shares of Stock upon the exercise of an Option, or (iii)
pursuant to an Award. At the time of such vesting, lapse, or exercise, the
Grantee shall pay to the Company or the Affiliate, as the case may be, any
amount that the Company or the Affiliate may reasonably determine to be
necessary to satisfy such withholding obligation. Subject to the prior approval
of the Company or the Affiliate, which may be withheld by the Company or the
Affiliate, as the case may be, in its sole discretion, the Grantee may elect to
satisfy such obligations, in whole or in part, (i) by causing the Company or the
Affiliate to withhold shares of Stock otherwise issuable to the Grantee or (ii)
by delivering to the Company or the Affiliate shares of Stock already owned by
the Grantee. The shares of Stock so delivered or withheld shall have an
aggregate Fair Market Value equal to such withholding obligations. The Fair
Market Value of the shares of Stock used to satisfy such withholding obligation
shall be determined by the Company or the Affiliate as of the date that the
amount of tax to be withheld is to be determined. A Grantee who has made an
election pursuant to this Section 16.3 may satisfy his or her withholding
obligation only with shares of Stock that are not subject to any repurchase,
forfeiture, unfulfilled vesting, or other similar requirements.
16.4. Captions.
The use of captions in this Plan or any Award Agreement is for the
convenience of reference only and shall not affect the meaning of any provision
of the Plan or any Award Agreement.
16.5. Other Provisions.
Each Award Agreement may contain such other terms and conditions not
inconsistent with the Plan as may be determined by the Committee, in its sole
discretion.
16.6. Number and Gender.
With respect to words used in this Plan, the singular form shall include
the plural form, the masculine gender shall include the feminine gender, etc.,
as the context requires.
16.7. Severability.
If any provision of the Plan or any Award Agreement shall be determined to
be illegal or unenforceable by any court of law in any jurisdiction, the
remaining provisions hereof and thereof shall be severable and enforceable in
accordance with their terms, and all provisions shall remain enforceable in any
other jurisdiction.
21
ANNEX 5
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ABOVE SPACE FOR OFFICE USE ONLY
Articles of Amendment
Filed pursuant to ss.7-90-301, et seq. and ss.7-110-106 of the Colorado Revised
Statutes (C.R.S.)
ID number: 19971100991
---------------------
1. Entity name: ORALABS HOLDING CORP.
--------------------------------------------------
(If changing the name of the corporation, indicate
name BEFORE the name change)
2. New Entity name:
(if applicable) CHINA PRECISION STEEL, INC.
--------------------------------------------------
3. Use of Restricted Words (if
any of these terms are
contained in an entity name, |_| "bank" or "trust" or any derivative
true name of an entity, thereof
trade name or trademark |_| "credit union" |_| "savings and loan"
stated in this document, mark the |_| "insurance", "casualty", "mutual", or
applicable box): "surety"
4. Other amendments, if any, are attached.
5. If the amendment provides for an exchange, reclassification or cancellation
of issued shares, the attachment states the provisions for implementing the
amendment.
6. If the corporation's period of duration
as amended is less than perpetual, state
the date on which the period of duration expires:
------------------------------
(mm/dd/yyyy)
OR
If the corporation's period of duration as amended is perpetual, mark this
box: |X|
7. (Optional) Delayed effective date: ------------------------------
(mm/dd/yyyy)
Notice:
Causing this document to be delivered to the secretary of state for filing shall
constitute the affirmation or acknowledgement of each individual causing such
delivery, under penalties of perjury, that the document is the individual's act
and deed, or that the individual in good faith believes the document is the act
and deed of the person on whose behalf the individual is causing the document to
be delivered for filing, taken in conformity with the requirements of part 3 of
article 90 of title 7, C.R.S., the constituent documents, and the organic
statutes, and that the individual in good faith believes the facts stated in the
document are true and the document complies with the requirements of that Part,
the constituent documents, and the organic statutes.
Page 1 of 2
This perjury notice applies to each individual who causes this document to be
delivered to the secretary of state, whether or not such individual is named in
the document as one who has caused it to be delivered.
8. Name(s) and address(es) of the
individual(s) causing the document
to be delivered for filing:
---------------------------------------------------
(Last) (First) (Middle) (Suffix)
---------------------------------------------------
(Street name and number or Post Office information)
----------------- --------- -----------------
(City) (State) (Postal/Zip Code)
--------------------------- ---------------------
(Province - if applicable) (Country if not US)
(The document need not state the true name and address of more than one
individual. However, if you wish to state the name and address of any
additional individuals causing the document to be delivered for filing,
mark this box |_| and include an attachment stating the name and address of
such individuals.)
Disclaimer:
This form, and any related instructions, are not intended to provide legal,
business or tax advice, and are offered as a public service without
representation or warranty. While this form is believed to satisfy minimum
legal requirements as of its revision date, compliance with applicable law,
as the same may be amended from time to time, remains the responsibility of
the user of this form. Questions should be addressed to the user's attorney.
Page 2 of 2
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
CHINA PRECISION STEEL, INC.
KNOW ALL MEN BY THESE PRESENTS: That the undersigned incorporator, being at
least eighteen (18) years or more, and desiring to form a corporation under the
Colorado Business Corporation Code, does hereby make, execute, acknowledge, and
deliver to the Secretary of State of the State of Colorado these Articles of
Incorporation:
ARTICLE I - NAME AND PRINCIPAL OFFICE
The name of the corporation shall be China Precision Steel, Inc., and the
address of the corporation's initial principal office shall be
____________________________________________________.
ARTICLE II - PERIOD OF DURATION
The corporation shall exist in perpetuity from and after the date of filing
these Articles of Incorporation with the Secretary of State of the State of
Colorado, unless sooner dissolved according to law.
ARTICLE III - PURPOSES
The purposes for which the corporation is organized are to engage in, and
to transact all lawful business for which corporations may be incorporated
pursuant to the Colorado Business Corporation Act.
ARTICLE IV - POWERS
The corporation shall have all powers and rights permitted under the
Colorado Business Corporation Act, including without limitation, those
necessary, suitable, proper, or convenient to effectuate the purposes for which
the corporation is organized.
ARTICLE V - CAPITAL STOCK
The aggregate number of shares of capital stock which the corporation shall
have the authority to issue is sixty-two million (62,000,000) shares of a class
of $0.001 par value common stock, and eight million (8,000,000) shares of a
class of $0.001 par value preferred stock, which may be issued in one or more
series. Shares of capital stock may be issued for consideration consisting of
any tangible or intangible property or benefit to the corporation and, when
issued, shall be fully paid and non-assessable. With respect to the class of
preferred shares and any series thereof, the designations, powers, preferences,
rights, qualifications, limitations and restrictions thereof, and variations in
the relative rights and preferences as between different series, shall be
established by the Board of Directors in accordance with the Colorado Business
Corporation Act. Except for such voting powers, if any, as may be expressly
stated by the Board of Directors when establishing the rights and other
attributes of preferred stock, the holders of such preferred stock shall have no
voting power whatsoever except as required by law. The preferences and relative
participating, optional or other special rights, qualifications, limitations, or
restrictions of the common stock of the corporation are as follows:
1. Distributions. Distributions in cash, property, or shares of the
corporation may be paid upon the common stock, as and when declared by the Board
of Directors, out of funds of the corporation to the extent and in the manner
permitted by law.
2. Payment on Liquidation. Upon any liquidation, dissolution, or winding-up
of the corporation, and after payment or the setting aside of amounts sufficient
to provide for payment in full of all debts and liabilities of and other claims
against the corporation, the remaining net assets of the corporation shall be
distributed pro rata to the holders of the common stock, except as preferential
payments of assets may be first paid to holders of preferred shares in
accordance with preferences afforded any preferred shares which may subsequently
be issued. The Board of Directors may, from time to time, distribute to the
shareholders in partial liquidation, a portion of its assets, in cash or
property, in the manner permitted by law.
3. Voting Rights. Each holder of common stock shall be entitled to one
vote, or fraction of a vote, for each share, or corresponding fraction of a
share, of common stock held by each such shareholder. The shares of this class
of common stock shall have unlimited voting rights and shall constitute the sole
voting group of the corporation except to the extent any additional voting group
or groups may hereafter be established.
4. Transfer of Shares. The corporation shall have the right by appropriate
action to impose restrictions upon the transfer of any shares of its stock or
any interest therein, from time to time issued, provided that such restrictions
as may from time to time be imposed, or notice of the substance thereof, shall
be set forth on the face or back of the certificate representing such shares of
stock.
2
ARTICLE VI - NO CUMULATIVE VOTING
Cumulative voting shall not be permitted in the election of directors of
the corporation or otherwise.
ARTICLE VII - QUORUM OF VOTING GROUPS
At all meetings of shareholders, a majority of the shares of a voting group
entitled to vote at such meeting, represented in person or by proxy, shall
constitute a quorum of that voting group.
ARTICLE VIII - DIRECTORS
The corporate powers shall be exercised by or under the authority of, and
the business and affairs of the corporation shall be managed under the direction
of, a Board of Directors.
ARTICLE IX - LIMITATION OF LIABILITY OF DIRECTORS
To the fullest extent permitted by the Colorado Business Corporation Act as
the same exists or may be hereafter amended, a director of the corporation shall
not be liable to the corporation or its shareholders for monetary damages for
breach of fiduciary duty as a director. Any repeal or modification of this
Article by the shareholders of the corporation shall be prospective only and
shall not adversely affect any right or protection of a director of the
corporation existing at the time of such repeal or modification.
ARTICLE X - RIGHTS OF DIRECTORS AND OFFICERS
TO CONTRACT WITH CORPORATION
1. As used in this section, "conflicting interest transaction" means any of
the following:
a. A loan or other transaction involving assistance by the corporation
to a director of the corporation or to an entity in which a director of the
corporation is a director or officer or has a financial interest;
b. A guaranty by the corporation of an obligation of a director of the
corporation or of an obligation of an entity in which a director of the
corporation is a director or officer or has a financial interest; or
c. A contract or transaction between the corporation and a director of
the corporation or between the corporation and an entity in which a director of
the corporation is a director or officer or has a financial interest.
3
2. No conflicting interest transaction shall be either void or voidable, be
enjoined, be set aside, or give rise to an award of damages or other sanctions
in a proceeding by a shareholder or by or in the right of the corporation,
solely because of such conflicting interest in the transaction, or solely
because such directors or officers are present at or participate in a meeting of
the board of directors or a committee thereof which authorizes, approves, or
ratifies such a conflicting interest transaction, or solely because his or her
votes are counted for such purpose if:
a. The material facts of such relationship or interest and as to the
conflicting interest transaction are disclosed or known to the board of
directors or committee and such board or committee in good faith authorizes,
approves, or ratifies the conflicting interests transaction by the affirmative
vote of a majority of disinterested directors even though the disinterested
directors are less than a quorum; or
b. The material facts of such relationship or interest and as to the
conflicting interest transaction are disclosed or known to the shareholders
entitled to vote thereon and the conflicting interest transaction is
specifically authorized, approved, or ratified in good faith by vote of the
shareholders; or
c. The conflicting interest transaction is fair as to the corporation
as of the time it is authorized, approved or ratified by the board of directors,
a committee thereof, or the shareholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the board of directors or a committee thereof which
authorizes, approves, or ratifies such conflicting interest transaction.
ARTICLE XI - INDEMNIFICATION
The corporation shall indemnify, to the maximum extent permitted by law,
any person who is or was a director, officer, agent, fiduciary or employee of
the corporation 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 corporation's
request. The corporation shall further have the authority to the maximum extent
permitted by law to purchase and maintain insurance providing such
indemnification.
4
ARTICLE XII - BYLAWS
A majority of the Board of Directors of the corporation shall have the
power to adopt such initial bylaws as may be deemed necessary or convenient for
the proper government and management of the business and affairs of the
corporation, and a majority of the Board of Directors shall have the power to
amend, alter, or repeal the same at any regular meeting or at any special
meeting called for that purpose.
ARTICLE XIII - NEGATION OF EQUITABLE INTERESTS
Unless a person is recognized as a shareholder through procedures
established by the corporation pursuant to Colorado Revised Statutes 7-107-204
or any similar law, the corporation shall be entitled to treat the registered
holder of any shares of the corporation as the owner thereof for all purposes
permitted by the Colorado Business Corporation Act, including without limitation
all rights deriving from such shares, and the corporation shall not be bound to
recognize any equitable or other claim to, or interest in, such shares or rights
deriving from such shares on the part of any other person including without
limitation, a purchaser, assignee or transferee of such shares, unless and until
such other person becomes the registered holder of such shares or is recognized
as such, whether or not the corporation shall have either actual or constructive
notice of the claimed interest of such other person. By way of example and not
of limitation, until such other person has become the registered holder of such
shares or is recognized pursuant to Colorado Revised Statutes 7-107-204 or any
similar applicable law, he shall not be entitled: (i) to receive notice of the
meetings of the shareholders; (ii) to vote at such meetings; (iii) to examine a
list of the shareholders; (iv) to be paid dividends or other distributions
payable to shareholders; or (v) to own, enjoy and exercise any other rights
deriving from such shares against the corporation. Nothing contained herein will
be construed to deprive any beneficial shareholder, as defined in Colorado
Revised Statutes 7-113-101(1), of any right he may have pursuant to Article 113
of the Colorado Business Corporation Act or any subsequent law.
ARTICLE XIV - REGISTERED OFFICE
The street address of the corporation's initial registered office is
____________________________________________. The name of the corporation's
initial registered agent at that office is _________________________, and the
consent of the registered agent is designated by the signature of the initial
registered agent on these Articles of Incorporation.
ARTICLE XV - INCORPORATOR
The name and address of the incorporator is
_______________________________________________________.
5
IN WITNESS WHEREOF, the above-named incorporator has hereunder signed his
name on this ____ day of December 2006.
_________________________
________________________, Incorporator
IN WITNESS WHEREOF, the undersigned consents to the appointment as the
initial registered agent of the corporation this ____ day of December 2006.
_________________________
_________________________, Registered Agent
6
ARTICLE IX.
AMENDMENTS TO AND EFFECT OF BY-LAWS
Section 9.1. Force and Effect of By-Laws. These By-Laws are subject to the
provisions of the Delaware Code and the Corporation's Certificate of
Incorporation, as it may be amended from time to time. If any provision in these
By-Laws is inconsistent with a provision in the Delaware Code or the Certificate
of Incorporation, the provision of the Delaware Code or the Certificate of
Incorporation shall govern.
Section 9.2. Amendments to By-Laws. These By-Laws may be amended or repealed and
new By-Laws may be adopted by the stockholders and/or the Board. Any By-Laws
adopted, amended or repealed by the Board may be amended or repealed by the
stockholders.
11
ANNEX 6
TAX INDEMNITY AGREEMENT
This Tax Indemnity Agreement ("Agreement") is dated for reference
purposes only __________________, 2006, and is by and between OraLabs, Inc., a
Colorado corporation ("OraLabs"), China Specialty Steel, Inc., formerly known as
OraLabs Holding Corp. a Colorado corporation ("Holding") and Partner Success
Holdings Limited, a British Virgin Islands international business company
("PSHL").
WHEREAS, Holding and PSHL entered into a Stock Exchange Agreement (the
"Exchange Agreement") dated as of May 31, 2006, as amended by First Amendment to
Stock Exchange Agreement ("First Amendment") under which, among other things,
PSHL became on even date herewith (the "Closing Date") a wholly-owned subsidiary
of Holding in consideration for the issuance to the principals of PSHL and their
designees of controlling ownership of Holding; and
WHEREAS, under the Exchange Agreement, such acquisition of the
ownership of PSHL was followed immediately on the Closing Date by the redemption
by Holding of all of the stock of Holding owned individually by Gary H.
Schlatter ("Schlatter") in exchange for the conveyance to Schlatter of all of
the stock of OraLabs owned by Holding (the "Redemption Transaction"); and
WHEREAS, the parties agree that the Redemption Transaction is a taxable
transaction under the Internal Revenue Code of 1986, as amended, (the "Code"),
calculated upon the excess, if any, of the value of OraLabs ("OraLabs Value") on
the Closing Date over Holding's basis in the OraLabs' common stock owned by
Holding immediately prior to the distribution of those shares of common stock to
Schlatter (the "Basis"), and that income taxes assessed by a State may also be
payable with respect to the Redemption Transaction; and
WHEREAS, on the Closing Date, OraLabs estimated that the Basis is
$________________ and the OraLabs Value is $_________________, (as determined
from a fairness opinion from Capitalink, L.C.); and
WHEREAS, on the Closing Date, the Spinoff Tax Liability (defined below)
was estimated to be $________, and to pay the same, OraLabs purchased shares of
common stock from Holding for the total purchase price of $________________,
[and paid to Holding an additional sum of $____________ (the "Cash Payment")]
(collectively, the "Estimated Tax") plus a Gross-Up Amount (as defined in
Section 5B below) on the Cash Payment, to provide the public company with the
funds to pay the Estimated Tax and taxes thereon; and
WHEREAS, Holding and PSHL have required an indemnity from OraLabs to
the extent that the amount of Spinoff Tax Liability owing with respect to the
Redemption Transaction is Finally Determined to be more than the Estimated Tax,
and OraLabs is willing to provide an indemnity in accordance with the provisions
of this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and for
other good and valuable consideration, the receipt and sufficiency of which is
acknowledged by the parties, the parties agree as follows:
1. For the purposes of this Agreement, the capitalized terms set forth
below have the meanings set forth in this Section:
1.1 "Final Determination" or "Finally Determined" means with respect
to any liability for Taxes for any period, (a) a final, unappealable decision by
a court of competent jurisdiction, (b) the expiration of applicable statutes of
limitations on assessment of Taxes or filing of claims for refund, (c) the
execution of a closing agreement under section 7121 of the Code or the
acceptance by the IRS of an offer in compromise pursuant to section 7122 of the
Code (or similar agreements with tax authorities entered into under applicable
state or local tax law), but excluding any agreement or compromise that reserves
(whether by its terms or by operation of law) the right of the taxpayer to file
a claim for refund and/or the right of the Taxing Authority to assert a further
deficiency, or (d) any other final, irrevocable and unappealable determination
of Taxes for such period.
1.2 "IRS" means the United States Internal Revenue Service or any
successor thereto.
1.3 "Income Tax" or "Income Taxes" means Taxes based upon or
measured by net income.
1.4 "Income Tax Return" means a Tax Return relating to the payment
or receipt of any refund of any Income Tax.
1.5 "Neutral Auditors" means a firm of nationally or regionally
recognized independent accountants who shall not have had a material
relationship with OraLabs, Holding or PSHL.
1.6 "Preclosing Taxable Period" means a Taxable Year that ends on or
before the Closing Date.
1.7 "Spinoff Tax Liability" means the excess of the OraLabs Value
over the Basis multiplied by 34% plus the state income tax rate, if applicable.
1.8 "Tax" or "Taxes" means any taxes imposed by any federal, state
or local government or agency thereof within the United States.
1.9 "Tax Practices" means the most recently applied policies,
procedures and practices employed by Holding in the preparation and filing of,
and positions taken on, any Tax Returns of Holding for any Preclosing Taxable
Period.
1.10 "Tax Return" means all returns and other filings relating to,
or required to be filed by any taxpayer in connection with, the payment or
receipt of any refund of any Income Tax.
1.11 "Taxable Year" means a taxable year (which may be shorter than
a full calendar or fiscal year) or similar period with respect to which any Tax
may be imposed.
1.12 "Taxing Authority" means the IRS or any other governmental
authority responsible for the administration of any Tax.
2. Holding has the responsibility to file the Income Tax Return(s) that
will report the Redemption Transaction for the Taxable Year during which the
Closing Date occurs. Holding will prepare the Tax Return(s) with respect thereto
in a manner consistent with past Tax Practices except as otherwise required by
changes in applicable law or material underlying facts. Holding will report the
Redemption Transaction in the Income Tax Return(s) for said Taxable Year and
agrees that the basis in its OraLabs stock and the value of OraLabs will be
reported as the Basis and OraLabs Value stated above. However, the Basis
calculation (but not the OraLabs Value) may be adjusted as required by changes
2
in applicable law or material underlying facts, or by a determination by Holding
after Holding's compliance with Section 4 below of a different amount of Basis.
The parties agree that OraLabs has no indemnity obligation with respect to the
amount of Income Tax owed with respect to the Redemption Transaction except to
the extent that the amount of Spinoff Tax Liability exceeds the Estimated Tax.
Prior to Holding's filing any Income Tax Return that reports the Redemption
Transaction, Holding will comply with the provisions of Section 4 of this
Agreement, and if the amount of Basis reported in said Income Tax Return is
lower than the Basis used to compute the Estimated Tax, OraLabs will pay to
Holding, within 30 days after filing the Income Tax Return, the additional
amount of Estimated Tax calculated upon the lower Basis, plus the applicable
Gross-Up Amount defined in Section 5B. If the amount of Basis reported in said
Income Tax Return is higher than used to calculate the Estimated Tax at Closing,
then to the extent of any Cash Payment (and Gross-Up Amount thereon) made at
Closing, Holding will refund to OraLabs an amount equal to the sum of the
overpayment portion of the Cash Payment made at Closing, plus the applicable
Gross-Up Amount on the refunded amount.
3. In the event that Holding does not comply with its obligations under
this Agreement, then notwithstanding any provision of this Agreement to the
contrary, OraLabs will be relieved of all of its indemnity obligations under
this Agreement.
4. OraLabs will cooperate and assist Holding in the preparation and
filing of all Tax Returns required to be filed for Holding after the date hereof
that relate to a Preclosing Taxable Period. At least 45 days prior to the filing
of any Tax Return (including amendments thereto) for Holding for a Preclosing
Taxable Period, Holding will provide OraLabs with a copy of those portions of
the proposed Tax Return that relate to the Redemption Transaction and/or any Tax
claimed to be payable in connection therewith, and OraLabs will have the right
to review all related work papers prior to the filing of any such Tax Return.
Holding will consult with OraLabs regarding its comments with respect to such
portions of the Tax Returns, will in good faith consult with OraLabs in an
effort to resolve any differences with respect to the preparation and accuracy
of such portions of the Tax Returns and their consistency with past Tax
Practices, and will consider OraLabs' recommendations for alternative positions
with respect to items reflected on such portions of the Tax Returns.
5. A. Subject to the provisions of this Agreement, OraLabs agrees to
indemnify and hold harmless Holding and PSHL, and their respective officers,
agents and directors, from and against any obligation of Holding to pay an
amount of federal and state (if applicable) Income Tax attributable to the
Redemption Transaction in an amount equal to the excess of the Spinoff Tax
Liability over the Estimated Tax. However, the parties agree that the amount of
Spinoff Tax Liability will be determined without regard to the actual Income Tax
that may be payable by Holding for any Taxable Year. Provided that Holding and
PSHL comply with their obligations under this Agreement, OraLabs will pay to
Holding the amount indemnified hereunder that is due with the filing of the Tax
Return that reports the Redemption Transaction, or that results from a Final
Determination that an indemnified amount is due with respect to the Redemption
Transaction. If an amount representing state Income Tax is payable by OraLabs to
Holding under this paragraph, the amount of federal Income Tax payable by
Holding will give effect to any reduction of federal taxes due to the payment of
state taxes.
B. The parties agree that any payment made to Holding under Section
5A above will be a taxable transaction to Holding. OraLabs agrees that when it
pays the amount ("Tax Amount") of indemnified Spinoff Tax Liability required to
be paid under Section 5A, it will simultaneously pay to Holding an amount (a
"Gross-Up Amount") that will enable Holding to net the amount of the Tax Amount
after paying United States federal and any state income tax due (giving effect
to any reduction of federal taxes due to the payment of state taxes) with
respect to OraLabs' payment to Holding of the Tax Amount. The Gross-Up Amount
shall be calculated by using a 34% federal income tax rate plus the state income
tax rate, if applicable and shall be determined without regard to the actual
Income Tax that may be payable with respect to such Tax Amount. The parties
agree that the payment made by OraLabs to Holding under the preceding sentence
will be deemed to be in full satisfaction of any Income Tax that may be payable
by Holding that arises from OraLabs' payment of the Tax Amount, and shall be a
full and final settlement between the parties.
3
6. Holding and OraLabs will endeavor in good faith to resolve any
dispute under this Agreement, including without limitation any dispute about a
reporting position in connection with the Redemption Transaction. If any such
dispute is not so resolved, then either party may deliver to the other a written
notice detailing such party's objections. If the parties are unable to resolve
the dispute within 15 days after such notice is given, then either party shall
have the right to refer the dispute for resolution to Neutral Auditors selected
by the parties within 10 days after the expiration of such 15-day period. If the
parties do not agree upon the Neutral Auditors within that time, then either
party has the right to request that the American Arbitration Association appoint
the Neutral Auditors, and any costs in connection therewith will be shared
equally by the parties. Each party agrees to execute, if requested by the
Neutral Auditors, a reasonable engagement letter. All fees and expenses relating
to the work, if any, to be performed by the Neutral Auditors shall be borne
equally by the parties. The Neutral Auditors shall act as an arbitrator to
determine, based solely on presentations by OraLabs and Holding, and not by
independent review, only those issues that remain in dispute between the
parties. The Neutral Auditors' determination shall be made within 30 days of
such firm's selection, shall be set forth in a written statement delivered to
the parties, and shall be final, binding and conclusive.
7. A. In the event that Holding is notified of any audit, examination
or other controversy (any such proceeding will be referred to as a "Proceeding")
before a Taxing Authority with respect to the amount of Income Tax due from the
Redemption Transaction, Holding will within 15 business days thereafter give
written notice to OraLabs of the Proceeding. The notification required by this
Section must include, insofar as relevant to the Redemption Transaction, copies
of any correspondence between the Taxing Authority and Holding and, as
applicable, written summaries of any oral communications, as well as a detailed
statement of the reasons why Holding believes that the Proceeding may result in
an indemnification obligation under this Agreement. To the extent known by
Holding, the notice will also include a calculation of the estimated amount of
Spinoff Tax Liability in excess of the Estimated Tax that may be payable.
B. Holding and OraLabs will comply with the provisions of Section 4
with respect to any Proceeding described in the previous paragraph. Holding will
deliver to OraLabs copies of any correspondence between the Taxing Authority and
Holding and, as applicable, written summaries of any subsequent oral
communications, that occur throughout the course of the Proceeding, , insofar as
relevant to the Redemption Transaction. OraLabs will have ultimate control over
whether to settle a Proceeding, the amount of any settlement, and whether to
challenge the Proceeding until a Final Determination, but only to the extent
that the Proceeding relates to the Redemption Transaction. Holding will execute
a power of attorney to facilitate OraLabs' direct communications with the Taxing
Authority. In no event will Holding or PSHL take any action with any Taxing
Authority that Holding or PSHL could reasonably foresee would have a material
and adverse effect upon any indemnification obligation of OraLabs under this
Agreement.
C. OraLabs will reimburse Holding for its reasonable costs and fees
incurred in connection with the conduct and resolution of a Proceeding, but if
the Proceeding involves any Tax matter other than the Redemption Transaction,
the obligation of OraLabs under this sentence will only apply to the reasonable
costs and fees incurred by Holding that relate to the Redemption Transaction.
Promptly upon resolution of the Proceeding, the parties will in good faith seek
to agree upon how the costs and fees incurred by Holding will be allocated on
the one hand to OraLabs and on the other hand to Holding. If the parties do not
agree upon the allocation, then either party may deliver to the other a written
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notice detailing such party's objections. Thereafter, the resolution procedure
in Section 6 above will be undertaken to resolve the disagreement. The Neutral
Auditors will act as an arbitrator to determine, based solely on presentations
by OraLabs and Holding, and not by independent review, the allocation of the
costs and fees, and the Neutral Auditors shall (i) assess to OraLabs the costs
and fees that are found to be solely attributable to the Reimbursement
Transaction, (ii) assess to Holding the costs and fees that are found to be
solely attributable to matters other than the Redemption Transaction, and (iii)
allocate the costs and fees incurred in the Proceeding in general, not
specifically allocable to a specific Tax matter that is addressed in the
Proceeding, as determined to be appropriate.
8. Holding shall retain all Tax Returns relating to the Redemption
Transaction and any Proceeding involving the Redemption Transaction, and all
books, records, schedules, work papers and other documents relating thereto,
until the expiration of the later of (i) all applicable statutes of limitations
(including any waivers or extensions thereof), and (ii) any retention period
required by law or pursuant to any record retention agreement. OraLabs has the
right to review and copy any of such books and records of the Proceeding
relating to the Redemption Transaction from time to time upon reasonable advance
notice to Holding. Holding shall notify OraLabs in writing of any waivers,
extensions or expirations of applicable statutes of limitations, and shall
provide at least 30 days prior written notice of any intended destruction of the
documents referred to in the preceding sentence. Holding shall not dispose of
any of the foregoing materials without first obtaining the written approval of
OraLabs, which may not be unreasonably withheld.
9. Except as required by law or with a prior written consent of the
other parties, all Tax Returns, documents, schedules, work papers and similar
items and all information contained therein, which Tax Returns and other
materials are within the scope of this Agreement, shall be kept confidential by
the parties and their representatives, shall not be disclosed to any other
person or entity and shall be used only for the purposes provided in this
Agreement.
10. This Agreement contains the entire agreement among the parties with
respect to the indemnification by OraLabs of Taxes arising from the Redemption
Transaction. In the event of a conflict between any provision of this Agreement
and any provision of the Exchange Agreement, First Amendment, or Indemnification
Agreement attached to the First Amendment, the provision of this Agreement
controls. Notices under this Agreement shall be given only in the same manner
described in the Indemnification Agreement attached to the First Amendment, to
the addresses specified therein or to such other address as any party may
designate by proper written notice to the other.
11. The Parties agree that this Agreement shall be construed in
accordance with the laws of the State of Colorado and that exclusive
jurisdiction and venue for any controversy, claim or suit arising out of or
connected with this Agreement shall be in the courts located in Denver,
Colorado. This Agreement may be executed in counterparts, each such counterpart
being deemed to be an original instrument, and all of such counterparts shall
together constitute one and the same instrument. Facsimile signatures will be
accepted as originals.
12. This Agreement may be amended only by written agreement executed
and delivered by all of the parties. This Agreement is solely for the benefit of
the parties to this Agreement and shall not be deemed to confer upon third
parties any remedy, claim, liability, reimbursement, claim of action or other
right. Except as otherwise stated in this Agreement, each party agrees to pay
its own costs and expenses (including without limitation attorneys fees)
resulting from the fulfillment of its respective obligations hereunder. Any
ambiguities in this Agreement shall be resolved without regard to which party
drafted this Agreement.
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13. The parties acknowledge that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with its specific terms or were otherwise breached. The parties shall
be entitled to an injunction or injunctions to prevent breaches of this
Agreement and to enforce specifically the terms and provisions hereof in any
court having jurisdiction. Any such remedy shall be in addition to any other
remedy available at law or in equity.
[Remainder of page intentionally left blank. Signatures on following page.]
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ORALABS HOLDING CORP.
18685 E. PLAZA DRIVE
PARKER, COLORADO 80134
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF ORALABS
HOLDING CORP.
The undersigned stockholder of OraLabs Holding Corp., a Colorado
corporation, (the "Company" or "OraLabs"), hereby appoints Michael I. Friess and
Gary H. Schlatter, and each of them, as proxies, each with the power to appoint
his substitute, and hereby authorizes each of them to represent, and to vote as
designated in this Proxy, all of the shares of common stock of the Company held
of record by the undersigned on October 27, 2006, at the Annual Meeting of
Stockholders of the Company to be held at the Company's offices at 18685 E.
Plaza Drive, Parker, Colorado 80134, at 10:00 a.m., Mountain Time on December
27, 2006, and at all adjournments or postponements thereof upon the following
matters, as set forth in the Notice of Annual Meeting of Shareholders and Proxy
Statement, each dated November 27, 2006, copies of which have been received by
the undersigned, hereby revoking any Proxy heretofore given.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION, THIS PROXY WILL BE VOTED
FOR THE APPROVAL OF THE PROPOSALS DESCRIBED IN THE PROXY STATEMENT AND AS LISTED
BELOW IN THIS PROXY.
THE EFFECTIVENESS OF EACH OF THE PROPOSALS LISTED BELOW IS CONDITIONED UPON
THE EFFECTIVENESS OF ALL OF THE PROPOSALS. IN OTHER WORDS, IF ANY ONE OF THE
FOLLOWING PROPOSALS IS NOT APPROVED BY THE SHAREHOLDERS, NONE OF THE PROPOSALS
WILL BE IMPLEMENTED.
The Board of Directors of the Company recommends a vote "FOR" all of the
matters that are being considered at the meeting.
1. PROPOSAL ONE: APPROVAL OF THE TRANSACTIONS BY WHICH ORALABS (UNDER ITS
NEW NAME, CHINA PRECISION STEEL, INC.) WILL ISSUE 94% OF ITS OUTSTANDING SHARES
TO THE PSHL SHAREHOLDERS OR THEIR DESIGNEES IN EXCHANGE FOR ALL OF THE OWNERSHIP
INTERESTS IN PARTNER SUCCESS HOLDINGS LIMITED.
/ / FOR / / AGAINST / / ABSTAIN
2. PROPOSAL TWO: REDEMPTION OF ALL OF THE SHARES OF ORALABS HOLDING CORP.
OWNED INDIVIDUALLY BY GARY H. SCHLATTER IN EXCHANGE FOR THE ISSUANCE TO HIM OF
THE ENTIRE OWNERSHIP OF THE OPERATING SUBSIDIARY, ORALABS, INC., HELD BY ORALABS
HOLDING CORP.
/ / FOR / / AGAINST / / ABSTAIN
3. PROPOSAL THREE: APPROVAL OF THE 2006 DIRECTOR STOCK PLAN AND THE
ISSUANCE TO ROBERT C. GUST OF 100,000 SHARES AND MICHAEL I. FRIESS OF 200,000
SHARES UNDER THAT PLAN.
/ / FOR / / AGAINST / / ABSTAIN
4. PROPOSAL FOUR: APPROVAL OF THE SALE TO ORALABS, INC., THE WHOLLY-OWNED
SUBSIDIARY OF ORALABS, OF UP TO 100,000 SHARES OF ORALABS COMMON STOCK TO
SATISFY AN INDEMNITY OBLIGATION OF ORALABS, INC. IN CONNECTION WITH THE CLOSING
OF THE TRANSACTIONS DESCRIBED IN THIS PROXY STATEMENT.
/ / FOR / / AGAINST / / ABSTAIN
5. PROPOSAL FIVE: TO AUTHORIZE ORALABS (UNDER ITS NEW NAME, CHINA PRECISION
STEEL, INC.) TO ISSUE 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 A POTENTIAL EQUITY FINANCING.
6. PROPOSAL SIX: APPROVAL OF AMENDMENT TO ORALABS' ARTICLES OF
INCORPORATION TO CHANGE THE COMPANY NAME AND INCREASE THE NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK.
/ / FOR / / AGAINST / / ABSTAIN
7. PROPOSAL SEVEN: APPROVAL OF AMENDMENT TO ORALABS' ARTICLES OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF PREFERRED STOCK.
/ / FOR / / AGAINST / / ABSTAIN
8. PROPOSAL EIGHT: ELECTION OF DIRECTORS.
ELECTION OF DIRECTORS |_| |_| |_|
(Instructions: To withhold FOR ALL FOR ALL WITHHOLD
authority to vote for an individual EXCEPT AUTHORITY
nominee, strike a line through the FOR ALL
nominee's name in the list below and
mark center box to right.)
NOMINEES: Wo Hing Li, Hai Sheng Chen, Che Kin Lui, David Peter Wong, Tung
Kuen Tsui
9. PROPOSAL NINE: APPROVAL OF THE CHINA PRECISION STEEL, INC. 2006 OMNIBUS
LONG-TERM INCENTIVE PLAN.
/ / FOR / / AGAINST / / ABSTAIN
10. PROPOSAL TEN: ELECTION OF INDEPENDENT AUDITORS. Ratify the selection of
Murell, Hall McIntosh & Co., PLLP as the independent auditors for the fiscal
year ended December 31, 2006.
/ / FOR / / AGAINST / / ABSTAIN
In their discretion, the proxy holders are authorized to vote upon such
other matters as may properly come before the Annual Meeting of Shareholders and
at any adjournments thereof. The Board of Directors at present know of no other
business to be presented by or on behalf of the Company or the Board of
Directors at the Annual Meeting of Shareholders.
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Signature Signature if Held Jointly
----------------------------------- -----------------------------------
Name (Please print) Name (Please print)
Date: _____________________________ Date: _____________________________
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