SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

 

Check the appropriate box:

 

 

ZHONGCHAI MACHINERY, INC.

Payment of Filing Fee (Check the appropriate box):

 

ZHONGCHAI MACHINERY, INC.

224 Tianmushan Road

Zhongrong Chengshi Huayuan 5-1-602

Zhangzhou, P.R. China 310007

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

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IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDERS SPECIAL MEETING TO BE HELD ON JUNE ----,JULY 26, 2011 — THE PROXY STATEMENT IS AVAILABLE AT HTTP://WWW.ZHONGCHAIMACHINERY.COM.

 

 

General

Record Date and Voting Securities

Voting and Revocation of Proxies

The presence, in person or by proxy, of a majority of the votes entitled to be cast at the meeting will constitute a quorum at the meeting. A proxy submitted by a stockholder may indicate that all or a portion of the shares represented by his or her proxy are not being voted (“stockholder withholding”) with respect to a particular matter. Similarly, a broker may not be permitted to vote stock (“broker non-vote”) held in street name on a particular matter in the absence of instructions from the beneficial owner of the stock. The shares subject to a proxy which are not being voted on a particular matter because of either stockholder withholding or broker non-vote will not be considered shares present and entitled to vote on the matter. These shares, however, may be considered present and entitled to vote on other matters and will count for purposes of determining the presence of a quorum, unless the proxy indicates that the shares are not being voted on any matter at the meeting, in which case the shares will not be counted for purposes of determining the presence of a quorum.

Solicitation of Proxies

Although your vote is important, and we encourage each and every stockholder to vote in this matter, it is management’s understanding that there is one stockholder that holds 63.13% of all the outstanding shares of common stock entitled to vote on the reverse stock split proposal, whose vote will be determinative on the matter.  Additionally, management persons, through Mr. Peter Wang, the president of the Company, has the right to vote 14.92% of all the outstanding shares of common stock entitled to vote on the reverse stock split, and it is anticipated that these shares will be voted to approve the reverse stock split proposal.

Adjournment or Postponement

Annual Report

Availability of Proxy Materials

 

 

PROPOSAL NO. 1:  AUTHORIZATION OF REVERSE STOCK SPLIT

SUMMARY OF TERMS OF REVERSE STOCK SPLIT

o   Within 10 days after the effective date of the Reverse Stock Split, the Company will mail to all the record and beneficial stockholders the required state law notice under the provisions relating to dissenters rights, and mail other information to the record holders with respect to the method by which they may present their stock certificates to, Olde Monmouth Stock Transfer Company, Inc.,  the Company’s transfer agent (“Transfer Agent”) for payment.

It should be noted that during the twelve months prior to March 16, 2011, the closing market price of a share of Common Stock fluctuated between a low of $0.12 in May 2010 and a high of $0.72 in December 2010 and again in January 2011.  In the same period there were 17 days on which the Common Stock traded at reported closing prices of more than $0.56, and two of those 17 days reported actual trades at $0.72.  The reported closing price of $0.72 per share was the highest achieved during the last three years.  From January 7, 2011, the day after the last reported closing high of $0.72, to March 16, 2011, the reported closing price range was from a low of $0.29 to a high of $0.55.  Additionally, on June ___,July 5, 2011, the reported closing price of a share of Common Stock was $0.____.$0.25.

The benefits considered by the Board of Directors to the Cashed-Out Stockholders includes the following:

Disadvantages

DISCUSSION OF TERMS OF REVERSE STOCK SPLIT

 

The Independent Directors and the Board of Directors have determined that the cost of being an SEC reporting company currently outweighs the benefits and, thus, it is no longer in the best interests of the Company or the stockholders, including the unaffiliated stockholders, for the Company to remain an SEC reporting company.  Accordingly, the Company is pursuing a course of action that will authorize a reverse stock split of the Common Stock, with the result of reducing the number of stockholders of the Company. Once that number is reduced below 300 holders, the Company will seek deregistration from the Exchange Act.  By no longer being a reporting company under the Exchange Act, it is expected that there will be cost savings by the elimination of the many different expenses and administrative burdens related to being an SEC reporting company.

 

The Board of Directors believes that the public marketplace has little interest in public companies with very small market capitalizations and a limited amount of shares available for public trading.  Our Common Stock is a “penny stock” and experiences a limited trading volume with no trading on many days. As such, institutional investors are not willing to consider investing in the Common Stock. In the current conditions, the Board of Directors believes it is unlikely that the Common Stock will achieve sufficient trading volume so as to create a significantly active and liquid market.  These factors also adversely impact the ability of the Company to find funding for its operations through its equity or equity based securities and limit the Company’s ability to attract employees and consultants with the prospect of stock based compensation. It is difficult for the Company, as a smaller company facing the challenges of limited financial and managerial resources, to recruit executives from large public companies who are not accustomed to the circumstances of a small public company.

 

While many of the factors that were considered in the decision have existed for several years, the decision was undertaken at this time, as opposed to another time, because of the ongoing escalation in regulatory burdens and associated compliance costs for public reporting companies, as discussed in more detail below.  These factors, when coupled with the fact that the Company was not obtaining offsetting benefits from being a public reporting company, in the opinion of the Independent Directors and the Board of Directors, supported the decision to pursue the Reverse Stock Split.

 

The Reverse Stock Split is designed to acquire, for cash, the equity interests in the Company of those stockholders who, as of the effective date of the Reverse Stock Split, own less than 120 shares of Common Stock.  The general purposes of the transaction are as follows:

 

 

The Board of Directors believes that, by deregistering the Common Stock and suspending the Company's SEC periodic reporting obligations, the Company will experience annual cost savings of approximately $308,000, based on the fiscal year ended June 30, 2010.  The annual cost savings estimate are based on the expenses incurred during the last year, which are scheduled in detail below:

 

 

The estimated annual cost savings based on the above actual costs reflect, among other things:

 

 

The annual cost savings amount set forth above is only an estimate.  The actual savings the Company will realize from going private may be higher or lower than such estimate.  The estimate of the annual savings to be realized if the Reverse Stock Split is consummated are based upon (i) the actual costs to the Company of the services and disbursements in each of the categories listed above that were reflected in the Company's recent financial statements and indicated above, (ii) anticipated costs of compliance in the future, and (iii) the allocation to each category of management's estimates of the portion of the expenses and disbursements in such category believed to be solely or primarily attributable to the Company's SEC public reporting company status.  In some instances, management's cost savings expectations were based on information provided by third parties or upon verifiable assumptions.  The Company has been informed by its current independent auditors, informally, that there will be a reduction in auditing fees if the Company ceases to be a public reporting company, because the firm may engage a non-PCAOB registered firm and prepare more limited financial statements and financial statements that will not have to comply with XRBL classifications or be fully audited.  Moreover, there will not be the requirement of controls and procedure audits by an independent auditor.  Also, legal counsel, informally, indicated that the costs associated with compliance under the Exchange Act's reporting requirements will be eliminated if the Company no longer files reports with the SEC and is otherwise not required to comply with the disclosure requirements that apply to public reporting companies.

 

 

Finally, the Company expects the actual cost savings of being a non-reporting private company to be much greater than simply eliminating the historical out-of-pocket costs.  As a result of recent corporate governance scandals over the last decade, the legislative and litigation environment resulting from those scandals, the costs of being a public reporting company in general, and the costs of remaining a public reporting company in particular, are expected to continue to increase.  Moreover, legislation, such as SOX and the Dodd-Frank Act, will likely continue to have the effect of increasing the compliance burdens and potential liabilities of being a public reporting company.  This and other proposed legislation and regulation will likely continue to increase audit fees and other costs of compliance such as securities counsel fees, increase outside director fees and officer and director insurance expense, increase the potential liability faced by the Company's officers and directors, and Edgarization expense, particularly in respect of XBRL that is being implemented during 2011.

 

 

 

 

The Company has generally been unable to realize the foregoing benefits due to one or a combination of the following: (i) the limited liquidity due to the few number of shares that are tradable and the low trading volumes and the low market price of its Common Stock, and/or (ii) the relatively small size of the Company.  In addition, in many circumstances, the Company has had to seek more favorable alternatives to accomplish its objectives, such as using traditional debt financing from banks and continuing joint ventures with its business partners and concessions from government sources, rather than by the use of the Common Stock.

 

 

Given the foregoing competitive disadvantages, the Independent Directors and the Board of Directors believe that the benefits associated with maintaining the Company's status as a public reporting company and maintaining the Company's smaller stockholder accounts are substantially outweighed by the associated costs, both financial and operational.  The Independent Directors and the Board of Directors believe that it is in the best interests of the Company to eliminate the administrative burden and costs associated with maintaining the Company's status as a public reporting company and its smaller stockholder accounts.

 

The Independent Directors and the Board of Directors has determined that the Reverse Stock Split is the most expeditious and economical way of liquidating the holdings of smaller stockholders and changing the Company's status from that of a public reporting company to that of a more closely-held, non-reporting company.  The Independent Directors and the Board of Directors further determined that the reverse stock split ratio should be 1-for-120.

 

 

As soon as practicable after the completion of the Reverse Stock Split (assuming it is consummated and assuming it results in the Company having less than 300 stockholders of record), the Company intends to apply for termination of the registration of its Common Stock under the Exchange Act.  Upon termination of the Company's reporting obligations under the Exchange Act, although the Common Stock may continue to trade on one of several trading platforms that do not require compliance with the reporting requirements of the Exchange Act, such as the Pink Sheets, the Company does not believe there will be any significant trading in the Common Stock. Rather, the Company believes that the deregistration of the Common Stock under the Exchange Act will likely cause the trading market for shares of the Common Stock to be eliminated or, at a minimum, substantially reduced.

 

 

 

 

 

 

 

 

 

 

 

 

The Reverse Stock Split (assuming it is consummated) will affect the registration of the Common Stock under the Exchange Act, as the Company intends to apply for termination of such registration as soon as practicable after the Reverse Stock Split.  The completion of the Reverse Stock Split and the deregistration of the Common Stock under the Exchange Act will render the Common Stock ineligible for listing or quotation on any stock exchange and other automated quotation systems such as the OTC Bulletin Board.  After the Reverse Stock Split, the Common Stock may trade on one of various trading mediums, such as the Pink Sheets; however, the Company does not intend to take any action to facilitate trading on that or any other trading medium.  As a result, Continuing Stockholders should expect the public market for their shares of Common Stock to be eliminated or, at a minimum, substantially reduced.

 

The Company has no current plans to issue additional Common Stock after the Reverse Stock Split.  However, the Company reserves the right to do so at any time, and from time to time, at such prices and on such terms as the Board of Directors determines to be in the best interests of the Company.  Continuing Stockholders will not have any preemptive or other preferential rights to purchase any capital stock that the Company may issue in the future, unless such rights are otherwise specifically granted to the Continuing Stockholders.

 

The Company also has no current plans to repurchase shares of Common Stock pursuant to an odd-lot repurchase program, private negotiated sale, or other transaction.  However, the Company reserves the right to do so at any time, and from time to time.  Whether or not the Company seeks to purchase shares in the future will depend on a number of factors, including the Company's financial condition, operating results, and available capital at the time.

 

The Company may take action to effect a forward stock split or issue a stock dividend in the future to align the value of the Company with the number of outstanding shares of Common Stock.  It has no immediate plans to change the capital structure of the Company after the Reverse Stock Split, but it reserves the right to do so at any time, and from time to time.

 

The par value of the Common Stock will remain $0.001 per share following the consummation of the Reverse Stock Split.

 

 

In making the determination to proceed with the Reverse Stock Split, the Independent Directors and the Board of Directors considered the potential feasibility of the kinds of transactions below as other alternative means to accomplish the stated purposes of the Reverse Stock Split, as described in this Proxy Statement.  For more detailed discussion of the deliberations of the Board of Directors with respect to the potential feasibility of the transactions below, see " Fairness of the Transaction - Deliberations of the Board of Directors."

 

 

 

 

 

 

 

Investment bankers were not approached to explore this alternative because during the past couple of years, while the Company was seeking to attract equity investment into the Company for business development and growth, the overall interest of investors to consider an investment in the Company was limited, and the very few opportunities that were presented for investment had terms that were very expensive for the Company. Therefore, the Independent Directors and Board of Directors concluded that the specialized industry in which the Company operates would not attract many, if any, offers, at attractive valuations.  The potential up front fees and the expenses of engaging investment bankers, the success fees that would be imposed and the overall expense of a transaction to buy out a public company were all considered in light of the other alternatives set forth above.

 

The Independent Directors and the Board of Directors also considered the regulatory climate of the Peoples Republic of China in respect of mergers and acquisitions. The ability to effect the sale of a Chinese operating company, or its business and assets, would be subject to various reviews by PRC regulatory authorities over the transaction, even though the transaction might be effected through a parent or intermediary holding company located outside of the PRC. Any such PRC regulatory transaction review is anticipated to take several months, and only after the final terms are negotiated and contracts are signed. Any cash transfers in connection with the transaction, whether into or out of the PRC, involving the PRC operating company would be subject to the currency control regulations.  For example, a leveraged buy out supported by the operations of the PRC operating company would be subject to review by the State Authority for Foreign Exchange of final documentation and a lengthy review period.  Therefore, there can be no assurance to purchasers that a transaction would ever be consummated, which has the effect of chilling merger and acquisition transactions in or with PRC operating companies at this time.

 

 

After considering these various factors, the Independent Directors and Board of Directors concluded that pursuing a transaction to sell the company in one of the various forms that such a transaction might take was not assured of attracting many, if any, offers, offers may not be at attractive valuations, and if any offers were pursued, they undoubtedly would be time consuming, would be subject to PRC regulatory review and rejection, and would be expensive for the Company to conclude.

 

 

 

 

It is expected that the maximum number of shares that will be eliminated in the Reverse Stock Split will be 100,000. If this is the case, after the Reverse Stock Split, (i) Ruihua International Ltd, will increase its ownership from 63.13% to 63.35%, (ii) Mr. Peter Wang will increase his beneficial ownership from 7.09% to 7.11%, (iii) Sinoquest Management Limited will increase its ownership from 14.92% to 14.97%, and (iv) the beneficial ownership of Mr. Rong Shi will remain at 0.72%. These percentages may change depending on the number of shares that are purchased pursuant to the Reverse Stock Split and any exercise of dissenters’ rights.

 

Our officers, directors and 10% and greater stockholders will experience certain advantages, in that they will be relieved of certain SEC reporting requirements and “short-swing trading” provisions making them liable to recovery of “short-swing profits” under Section 16 of the Exchange Act, and persons acquiring more than 5% of the Common Stock will no longer be required to report their beneficial ownership under the Exchange Act.  Furthermore, information regarding their compensation and stock ownership will no longer be publicly available.  In addition, by deregistering the Common Stock under the Exchange Act, the Company will no longer be subject to the SOX provisions, including personal attestation by the officers about the controls and procedures, potential criminal liability regarding the disclosure by the Company and restrictions on lending, although the Company has no intention of making any loans to its officer and directors.

 

 

Because of the above ownership of Common Stock and the fact of being Continuing Stockholders and the change in the regulatory requirements, our officers, directors and 10% and greater stockholders may have interests in the Reverse Stock Split that are different from the interests of the Cashed-Out Stockholders and the non-affiliated Continuing Stockholders.  It is possible that the Messrs Shi, Chen and Wang, who comprise the Independent Directors and the Board of Directors, and as such are acting as the representatives of the Cashed-Out Stockholders and the non-affiliated Continuing Stockholders, may be influenced by the benefits of these differences.   Therefore, stockholders which consider that these persons may not be acting in their best interests or consider that they have been unduly affected by the Reverse Stock Split should consider their legal remedies, which may include seeking injunctive relief to stop the transaction and seek judicial review and/or assert their appraisal rights.

 

Notwithstanding the conflicts of interest noted above, the terms transaction was initially approved by the Independent Directors.  Because the shareholding interest of Mr. Shi is only on a beneficial basis and less than 1.0% and Mr. Chen has no shareholding interest, the Board of Directors believed that these two individuals could represent the interests of the Cashed-Out Stockholders and the Continuing Stockholders in a fair and impartial manner.

 

 

 

 

 

In the opinion of the Board of Directors, the Independent Directors were better suited to represent the interests of the Company's unaffiliated stockholders with respect to the procedural fairness of the Reverse Stock Split.  The Independent Directors have knowledge and experience as to the Company's business and have been intimately involved in the Board of Directors' discussions regarding the Company's going private transaction and, more specifically, the Reverse Stock Split.  In addition, the Independent Directors have not and will not receive any additional compensation for their service with respect to the Reverse Stock Split.  Although one of the Independent Directors is a beneficial stockholder through the possession of a vested stock option and, therefore, is in a different position from that of the unaffiliated stockholders who will be cashed out, the Company does not believe that this apparent conflict prevented that Independent Director from representing the interests of the Company's unaffiliated stockholders as described above along with the other Independent Director.  The reason for this conclusion was because Mr. Shi, the Independent Director in question, holds shares representing beneficially less than 1% of the issued and outstanding shares of the Company which is not a significantly large number of shares to unduly influence his decision, Mr. Shi is considered an independent director under SEC Exchange Act Rule 10A-3, within the meaning of Rule 5605(a)(2) of the NASDAQ Stock Market, and Mr. Shi is fully aware of his director legal duties and responsibilities to all the stockholders, regardless of whether they are affiliated or not affiliated and whether they are going to be Cashed-Out Stockholders or Continuing Stockholders.

 

The cost savings to the Company of being able to rely on the Independent Directors as opposed to an independent third-party representative to ensure the procedural fairness of the Reverse Stock Split to the unaffiliated stockholders is significant.  The transactional costs of the Reverse Stock Split are already expected to exceed the Company's fund outlay for the going private transaction and, given that the Company intends to use cash on hand (as opposed to alternative financing arrangements/plans) for such fund outlays, it would be in the best interest of the Company and its stockholders to control such transactional costs.  In the opinion of the Board of Directors, including the Independent Directors, the foregoing factors serve as procedural safeguards ensuring that the Reverse Stock Split is procedurally fair to the Company's unaffiliated stockholders.

 

 

 

 The Board of Directors, including the Independent Directors, believes that it has a fiduciary responsibility to all Company stockholders, both Cashed-Out Stockholders and Continuing Stockholders.  It further believes that paying excessive consideration to the Cashed-Out Stockholders in connection with the Reverse Stock Split would not be fair to the Continuing Stockholders and, conversely, that paying inadequate consideration would not be fair to the Cashed-Out Stockholders.  In upholding its fiduciary responsibility to all Company stockholders, the Board of Directors reviewed and considered the terms, alternatives, and effects of the Reverse Stock Split as to each of the Cashed-Out Stockholders, the Continuing Stockholders, and the Company.

 

The Independent Directors and the Board of Directors also noted that this Proxy Statement, along with our other filings of the Company with the SEC, provide a great deal of information for unaffiliated stockholders to evaluate the Reverse Stock Split, and that no special provision for the review of our corporate files was necessary.  The Independent Directors and the Board of Directors noted as well that, subject to certain conditions, Nevada law already provides stockholders with the right to review the Company’s books and records.

 

 The Independent Directors and the Board of Directors also noted that, although the Reverse Stock Split will increase the percentage of our outstanding Common Stock held by our directors and executive officers by an immaterial amount and will increase the percentage of our outstanding Common Stock held directly or indirectly by our controlling stockholder, these changes will not affect the control of the Company.

 

 

 

 

After weighing the substantive benefits and disadvantages, the Independent Directors, and afterwards, the Board of Directors, considered, on balance the Reverse Stock Split was fair to the unaffiliated stockholders.

 

 

 

 

 

 

 

Notwithstanding the foregoing, the Company is aware that currently there is limited liquidity for the Common Stock.  However, there is sufficient liquidity to allow current stockholders owning less than 120 shares of Common Stock to acquire additional shares of Common Stock so that they own at least 120 shares of Common Stock immediately before the Reverse Stock Split.  To illustrate, as of March 16, 2011, the average daily trading volume for the Common Stock over the preceding three months was 5,161 shares.  Given this average daily trading volume, there is some liquidity for a stockholder to acquire additional  shares of Common Stock, especially in light of the relatively low reverse split ratio.  Therefore, a stockholder which might be cashed out, because of a holding of 100 shares, would only have to buy 20 shares to become a Continuing Stockholder.  Since there are approximately 375 record holders with 100 shares, given the average trading volume, approximately 250 of these persons could buy shares to become Continuing Stockholders.

 

 

 

 

 

 

 

 

There may be a significant decline in the value of the Common Stock.  Given the factors described under the two immediately preceding paragraphs, Continuing Stockholders may experience a significant decrease in the value of their shares of Common Stock.

 

 

 

 

 

 

 

 

Certain aspects of the decision process by the Independent Directors and Board of Directors may be considered to reduce or nullify the fact that the Independent Directors and Board of Directors consider that the transaction has been carried out in a fair manner.  These include the following:

 

 

It was decided by the Independent Directors to limit the scope of the engagement of The Mentor Group. It was determined that the valuation methods to be used would be the discounted cash flow method and the market approach.

 

Liquidation value also was not considered to likely be demonstrative of the amount to be paid for the Cashed-Out Stockholders because the Company believed that the greater value lay in the business as a continuing enterprise.  Liquidation value of the Company would be low because the location of the Company operations being in the PRC, through a PRC corporate entity, would present some additional issues that would reduce any valuation. The valuation of the property and equipment of the Company (representing approximately 15% of the assets as of June 30, 2010) would be difficult because valuing land in China depends on the continuation of the land use rights that are governed by a lease or other agreement with the appropriate owning government authority. Therefore, land such as that on which the Company plants are located is not generally considered a free market asset, and consequently valuation of land may not be possible or would have to be extremely low, and any valuation would have to be subject to a reduction for the time value of money due to the regulatory approval process for a transfer even where permitted and the term of the lease.  The goodwill of the Company (representing approximately 17% of the assets as of June 30, 2010) would be eliminated in such a valuation method.  The fact that the Company has a lot of competition within the PRC and has a limited number of customers would likely result in little interest in a purchase of the Company as a whole, so at best, a liquidation valuation would be dependant on a break up approach, not a business sale approach.  Inventory (representing approximately 14% of the assets as of June 30, 2010) and accounts receivable (representing approximately 19% of the assets as of June 30, 2010) would have to be deeply discounted for a liquidation valuation determination. Any payment from the operating subsidiary to the United States parent from the sale of assets would be subject to the PRC withholding tax on any repatriation payments to the United States parent company, currently 10%, and any realized amounts from the sale of assets would have to take into account any PRC income and capital gains tax and any United States corporate dividend receipt tax.  These tax obligations would greatly reduce any valuation represented by a share of the United States parent Company in a liquidation analysis.  Therefore, the Independent Directors determined that liquidation value of the Company, either as a business or on a break-up basis, would most likely result in a low per share amount and would not represent a meaningful value of the Company for purposes of the Reverse Stock Split.  Additionally, because it is the intent of the Board of Directors and management to continue the business, using a liquidation valuation methodology was deemed unreflective of the value of the Company.

 

 

A valuation on the basis of going concern was also rejected as an appropriate method to value the business as a continuing enterprise.  Going concern value represents the asset value of a company as long as it remains in business.  To calculate the going concern value of a company, however, the analysis includes the intangible assets of the business such as goodwill, brand recognition and intellectual properties with the other assets.  On this basis, the assets of the Company were $12,091,651, or $0.44 per share, as of December 31, 2010, which the Independent Directors and Board of Directors determined was likely to be less than a valuation by the discounted cash flow or market approach methods, and in fact was less than the two ranges suggested by The Mentor Group.

After considering the experience of The Mentor Group, refining the scope of their valuation analysis, and negotiating the fees, the Independent Directors caused the Company to enter into an agreement for the preparation of a valuation analysis of the Company, to assist in their evaluation of the Reverse Stock Split and the amount of consideration to be paid to the Cashed-Out Stockholders and to provide a fairness opinion.

 

The Independent Directors, the Board of Directors and the Company, including their affiliates, did not have any actual or contemplated material relationship with The Mentor Group during the past two years and did not give to The Mentor Group any compensation other than in connection with their fairness opinion dated March 17, 2011.

 

The Independent Directors received an oral business valuation analysis report on March 17, 2011, and a fairness opinion dated March 17, 2011 from The Mentor Group related to the fair value of the Company’s shares of Common Stock, the fairness of the consideration to be paid to the unaffiliated stockholders.  The Mentor Group considered a number of factors in its analysis and used several methodologies in reaching its conclusions.

 

The full text of The Mentor Group fairness opinion is attached as an exhibit to this Proxy Statement as Appendix 3, which document sets forth, among other things, the assumptions made, the procedures followed, matters considered, and the limitations of the review undertaken by The Mentor Group, which are described below.  You are urged to read The Mentor Group fairness opinion carefully and in its entirety.

 

Discounted Cash Flow Method

 

 

 

 

 

 

In addition to the estimated cost of equity, The Mentor Group considered that the capital structure of the entity would be 50% equity and 50% debt, based upon the assumed capital structure of similar companies. Therefore, the weighted average cost of the capital is based on the cost of the equity. In our analysis, we estimated the implied weighted average cost of capital for the Company is 16.4%. For the valuation of the equity using the discounted cash flow method and Monte Carlo simulation, The Mentor Group utilized the weighted average cost of capital that ranged from 15.4% to 17.4%.

Market Approach – Public Guideline Company Method

This approach determines the value of a business enterprise by comparing the Company to comparable companies that are publicly traded. The first step in this approach is to select and analyze a sample of comparable companies. These publicly-traded companies are all larger than the Company. We focused our analysis on the following companies:

 

 

We identified three multiples that we utilized in our analysis. These multiples were:

 

MVIC = Market Value of Invested Capital (Market value of invested capital is equal to the stock price multiplied by the total shares outstanding plus interest bearing debt less cash.)

The Mentor Group used a Monte Carlo simulation model that utilized a range of the above referenced multiples.  Monte Carlo simulation is a method whereby the distribution of possible outcomes is generated by letting the computer re-calculate the market value of an asset 10,000 times, each time using a different set of the specific variables within the selected range. The output of using Mote Carlo simulation is a chart of all the possible market values. This is considered by some valuation experts as being much more helpful than simply using scenario analysis that takes into consideration a best case, worst case and most likely case because the chart of market values can be used to compute a value range at a very high confidence level.

 

In applying Monte Carlo simulation, The Mentor Group utilized a range for the following variables: (i) revenue growth, (ii) cost of goods sold, (iii) operating expenses (iv) cost of capital and (v) valuation multiples.  By using a range for these specific variables, The Mentor Group was able to compute 10,000 valuation iterations based on the different combinations for the variables within the selected range. Each of the 10,000 valuation iterations was then plotted on a chart. Once the 10,000 valuation iterations were completed, The Mentor Group was able to perform statistical analysis on the concluded market values.

 

Based on that statistical analysis, there was a 90% confident interval range from $0.46 to $0.67 using the income approach. The mode of the 10,000 valuation iterations was $0.54. The median of the 10,000 valuation iterations was $0.56. The mean of the 10,000 valuation iterations was $0.56.

 

Using the market approach, the range for the valuation multiples considered is as follows:

 

 

The 90% confident interval ranged from $0.50 to $0.63 using the market approach. The mode of the 10,000 valuation iterations was $0.55. The median of the 10,000 valuation iterations was $0.56. The mean of the 10,000 valuation iterations was $0.56.

 

Based on the foregoing, and in reliance thereon, it is The Mentor Group’s opinion that the Reverse Stock Split is fair to the stockholders of the Cashed-Out Shares from a financial point of view.

 

The Mentor Group was paid $30,000 for the fairness opinion and provided reimbursement of expenses, not to exceed $600, under the terms of an engagement agreement dated March 14, 2011.

 

 

 

 

On March 20, 2010, the President of the Company, Peter Wang had a meeting in the city of New York with Company’s investment banker, CapLink Financial Group, LLC (“CapLink”), represented by Mr. Tony Tsai, during which meeting CapLink suggested that going private by some means to terminate its reporting obligations under the United States securities laws may result much better situation for Company to raise equity capital in the future and offer more flexibility to the capitalization of the Company.  There were a number of reasons for this conclusion. One set of reasons was that as a result of various suggested scandals surrounding certain Chinese operating companies that were United States public reporting companies, that the PCAOB had listed a large number of accounting firms with PRC offices which were auditing public reporting companies as not being in compliance with PCAOB requirements, and that issues had been raised about the quality of independent audit activities by some accounting firms of Chinese operating companies, the climate for investment into Chinese operating companies had depressed the value of many Chinese operating companies that were public reporting in the United States and the interest in investing in these companies.  Even though the aforementioned problems of some companies had nothing to do with the Company or the majority of Chinese operating companies that were United States reporting companies, it was suggested by CapLink that if the Company was a non-reporting company when it approached investors, it would be able to raise the merits of an investment into the Company without the hindrance of being compared to those companies that were publicly traded but were experiencing the effects of the scandals.

 

CapLink explained that investors in a public reporting company in the United States were largely uninterested in investing in companies with low trading volume and, if interested, would offer very low valuations based on what was not a representative trading valuation.  CapLink indicated that as a private firm, the investment approach would be that of a private equity investment which would typically value an equity investment on the basis of the performance of the company and growth prospects of the company and the industry within which it operated.  Generally speaking, it was pointed out that the price earnings for a public company, such as the Company, were then about 3 to 4 times while in the private equity market it would be expected to be about 10 to 12 times.

 

 Additionally, CapLink believed that there were a number of long-term, non-United States private equity investors who would be interested in investing in growing Chinese operating companies; however, they believed that significant foreign investors were often reluctant to invest in companies where they would have to be subject to United States personal disclosure laws such as Schedule 13d reporting and reporting share transactions under Section 16 of the Securities Exchange Act of 1934, that as long-term investors they wanted to conserve the costs of being public, and that as strategic investors, they believed a company should focus on operations and growth rather than quarterly earnings to satisfy stockholder relations demand.  Another benefit would be that by not having to disclose in SEC reports the terms of specific investment would increase the Company’s bargaining position with investors in trying to achieve the greatest investment with the least cost to the Company.  It was CapLink’s opinion that becoming a non-reporting company could be an option for the Company in attracting long-term equity investment.

 

On May 25, 2010, Mr. Peter Wang had a telephone conversation with, Mr. Shi, one of the independent directors of the Company, in which they discussed whether the Company should go private as raised by CapLink.  As part of the discussion, Mr. Wang and Mr. Shi focused on the capital needs of the Company going forward, the sources of capital available to the Company, whether or not there was continuing advantage to being a public reporting company in the United States, the stock trading activity of the Common Stock and the costs of being a public reporting company.  After a discussion, it was agree that the Company should consider pursuing a plan to withdraw from the reporting obligations of the Company under the United States federal securities laws.  It was also determined that Mr. Wang should continue to investigate the benefits and process of going private.

 

In June 2010, Mr. Wang had a conversation with Mr. Patrick Ko, a representative of FT Financial Global Capital, Inc. (an investment banking firm), during which they discussed whether the Company should go private.  Mr. Wang raised the points that had been discussed between Mr. Shi and himself on May 25, 2010.  During the conversation,  Mr. Ko indicated that in his personal estimation, the Company might be better able to raise capital for its operations as a non-reporting company in the United States. The same reasons as expressed by CapLink mentioned above, including the less than encouraging environment for capital raising by Chinese operating companies, the low trading price and volume of the Company Common Stock, and the difference in valuations between public and private companies, were reiterated by Mr. Ko. Moreover, not being a public reporting company would also permit management to focus on its operations without the distractions of the demands of public reporting and responding to the demands of public stockholders.

 

On September 20, 2010, Mr. Peter Wang called an internal meeting of the Company managers, including the financial director of the Company, Vivian Chen, and held a discussion about the cost and other resources associated with keeping Company as a public reporting company. After discussion, management concluded that the Company should go private because the Company working capital was declining, and there is no meaningful way to raise substantial funds as a public company.  Moreover, upon a review of the costs of continuing to be a public reporting company, it was seen that the annual expense was over $308,000 per year, based on the fiscal year ended June 30, 2010, and that amount was likely to increase going forward, especially considering the effects of the Dodd-Frank legislation and the changes in Edgarization requirements.

 

During the period between late September 2010 and the end of December 2010, the Company’s in-ability to raise equity capital was made more clear to management.  Although management considered equity forms of financing, because the market prices of the Common Stock were low and there was little trading volume to support the price or an offering of Common Stock of the Company, such forms of financing offered were at unfavorable valuations and therefore were not practical or in the Company’s best interests. Moreover, the climate in the United States capital markets for investing in Chinese operating companies continued to be over-shadowed by the reporting and accounting issues that had persisted since early in 2010. Because of the offered equity funding was unacceptable, instead, management actively sought to borrow money from one or more commercial banks for its operations.  The public price of the Common Stock, being so low, did not facilitate finding such debt financing either, because the low price and low volume suggested a lower valuation of the Company and its assets.

 

 

On January 20, 2011, Mr. Peter Wang, as the chairman of the Board of Directors, called a meeting of the directors.  The principal issue was to discuss the capital needs of the Company and to consider whether or not it was practical for the future of the Company to continue to be a public reporting company and continue to seek to have the common stock traded in a public market.  The Board of Directors considered the informal, oral advice that management had heard from CapLink and FT Global Financial Capital, Inc., the experience of management in trying to raise capital during the later part of 2010 and the costs of being public.  The board of directors concluded, after discussion, that they should establish a committee of the Board of Directors comprised of Mr. Shi and Mr. Chen, the two independent of directors, who would consider whether or not the Company should terminate the reporting obligations of the Company under the United States securities laws and in essence become a non-reporting, private company, which committee would make a recommendation to the Board of Directors.

 

During later January and February 2011, management, at the direction of the Independent Directors consulted by telephone with legal counsel to learn the various means by which a company could cease being obligated to prepare and publish public reports under the United States securities laws and the process and time frame needed to take such action.  Management and legal counsel investigated the ability of the Company to pursue several different alternatives and assessed the merits of each.  Management informally reported by telephone conference the results of these conversations and investigations to the Independent Directors.

 

On March 8, 2011, management also discussed with legal counsel the need for and benefits of a fairness opinion as part of the deliberative process of the Independent Directors and the Proxy Statement that would be provided to stockholders.  After that discussion, management reported to the Independent Directors the conclusions of the conversation with legal counsel.  On March 8, 2011, the Independent Directors held a meeting in which they determined that they would seek a fairness opinion as to the consideration to be paid to the unaffiliated stockholders that would be cashed-out in the Reverse Stock Split and obtain an analysis of the value of the Common Stock based on different valuation methodologies. Management approached CapLink to see if they would undertake the engagement, but CapLink declined indicating that because of their past association with the Company as a financial advisor, it was not appropriate for them to undertake the assignment. CapLink introduced the Company to The Mentor Group, a specialist in valuations, appraisals and mergers and acquisitions.  The Mentor Group was an experienced firm in business valuations, and had many departments relating to financial services and valuations.  According to their very comprehensive web site they listed providing valuation and solvency reports for over thirty five companies, and they provided a wide range of valuations of common stock, inventory, intangible assets, options, transfer pricing, among other kinds of valuation.  They are considered an expert in valuation analysis.  On March 9, 2011, the Independent Directors approached The Mentor Group to see if they would undertake an assignment to render a fairness opinion in connection with the Reverse Stock Split, and indicated the methods of valuation that would be best reflective of the Company’s value.  On March 9, 2011, management obtained a proposal from The Mentor Group to perform the analytic work for valuation of the Company in connection with the Reverse Stock Split and to provide a fairness option.  Management reported to the Independent Directors, and after discussion the Independent Directors authorized management to negotiate and conclude an agreement to engage The Mentor Group.  The Mentor Group was engaged pursuant to the terms of understanding dated March 14, 2011, under an agreement dated March 15, 2011.  The fee to be paid was set at $30,000, plus expenses, not to exceed $600.

 

 

On March 10 and 11, 2011, management provided certain materials, including various projections concerning the future business of the Company which are included as Appendix D, to The Mentor Group.  During the period of March 12 to 15, 2011, The Mentor Group had further discussions with management of the Company from time to time to obtain information concerning the business of the Company.  On March 15, 2011, The Mentor Group had a discussion with management of the Company about the range of value for a share of Common Stock of the Company that their analysis had produced.  The range, based on their analysis was $0.45 to $0.67 using a discounted cash flow method and $0.49 to $0.63 using a market value method.  The management said that if The Mentor Group was comfortable and finished with their analysis and did not need additional information, then it would be appropriate to present to the Independent Directors the analysis and final form of fairness opinion. The Mentor Group indicated that they were ready to make a presentation to the Independent Directors.   A telephonic meeting of the Independent Directors was set up with The Mentor Group, management of the Company and legal counsel for the Company to hear an oral presentation of the analysis for the value range for a share of Common Stock and receive the fairness opinion.  The meeting was held March 17, 2011.

 

On March 17, 2011, at 10:00AM, the Independent Directors had a meeting at which The Mentor Group reviewed its analysis orally and the written draft of the fairness opinion. Mr. Brad Cashion acted for The Mentor Group. Also attending the meeting was Mr. Peter Wang, representing management of the Company, Mr. Andrew Hudders, counsel to the Company, and Mr. Tsai of Caplink acted as translator.

 

Mr. Cashion reviewed the nature of the assignment for the fairness opinion and explained his position in the firm.  He repeated the fundamental aspects of the transaction being a reverse stock split, with a cash out of fractional shares.

 

Mr. Cashion then explained the steps of the valuation analysis, indicating that he started with a review of the historical operations of the business available in the public reports of the Company and an analysis of the market performance of the Common Stock. He also indicated that he had been provided with projections by management, which were also considered in his analysis. He then summarized for the Independent Directors the other information that he examined, including basic information about the nature of the Reverse Stock Split terms, discussions with management about the operations, financial conditions and future prospects for the Company, publicly available information about companies that could be considered comparable to the Company. Mr. Cashion then explained how he reviewed the foregoing data to examine the historical gross profit margin and EBITDA for each year of the projections provided by management.  Mr. Cashion explained the techniques he used to perform his analysis, including the Monte Carlo Simulation and how such technique was able to provide an analysis of a range of variables to test the sensitivity of the final valuation.  Mr. Cashion explained how, using the different data and ranges, he was able to create a range of values for the common stock of the Company.

 

 

Mr. Cashion then explained the discounted cash flow analysis, indicating how this is a determination of the equity value of a share of Common Stock under the income approach. He indicated that this approach resulted in a valuation range of $0.46 to $0.67 per share.  The mean and median of this valuation approach showed a value of $.56, per share.

 

Mr. Cashion then discussed the market approach.  He reviewed the guideline companies, numbering seven companies, and pointed out the determined market multiples of the selected companies.  He then discussed how he analyzed the market multiples to determine the median, mean and harmonic mean and the comparison to the Company using the last and next 12 months data about the Company.  Again, Mr. Cashion described how he was able to create a table of the relevant multiples for the Company, and then using the Monte Carlo analysis, generate a range of valuations, which showed a per share range of $0.49 to $0.63.  The median  for this valuation, also, was $0.56 per share.

 

Mr. Cashion concluded that based on these analyses, that if the Independent Directors determined to pay $.56 per shares for the Cashed-Out Stockholders, then the amount would be fair to the stockholders from a financial perspective.

 

After the presentation by Mr. Cashion, the Independent Directors discussed the data presented and the determined that the consideration to be paid to the for the Cashed-Out Shares should be $0.56.  They also reviewed the substantive factors in favor and against the Reverse Stock Split, the procedural steps to undertake the proposed transaction, and the potential conflicts of interest that the management and others may have in the transaction.  They concluded that, overall, the Reverse Stock Split was fair to the Company’s unaffiliated stockholders, both in terms of its form, substance and the cash consideration being offered, and that the reverse stock split is in the best interests of the Company and is substantively and procedurally fair to the Company’s unaffiliated stockholders, regardless of whether they are classified as cashed-out or continuing stockholders.  Based on the foregoing, they recommended to the Board of Directors to approve the Reverse Stock Split and the amount of $0.56 to be paid for the cashed out shares.

 

On March 17, 2011, at 10:45AM, the Board of Directors met, to consider the recommendation of the Independent Directors with regard to the Reverse Stock Split.  The Board of Directors considered the recommendation, and reviewed the draft fairness opinion of The Mentor Group as well as the various substantive factors for and against the proposed transaction.  The Board of Directors also reviewed the procedural aspects of the transaction.  The Board of Directors also considered the conflicts of interest that the management and others may have in the transaction.  After deliberation, the Board of Directors concluded that that the Reverse Stock Split was fair to the Company’s unaffiliated stockholders, both in terms of its form, substance and the cash consideration being offered, and that the reverse stock split is in the best interests of the Company and is substantively and procedurally fair to the Company’s unaffiliated stockholders, regardless of whether they are classified as cashed-out or continuing stockholders.  Based on the foregoing, the Board of Directors approved the Reverse Stock Split and the amount of $0.56 to be paid for the cashed out shares.  The Board of Directors then commissioned management to seek stockholder approval, which could include seeking the consent of Ruihua International Ltd, as the holder of approximately 63% of the issued and outstanding Common Stock.

 

 

After the meeting of the Board of Directors, at the request of the board, management notified The Mentor Group to provide the final version of their fairness opinion.  Mr. Cashion then provided the signed and dated fairness opinion on March 17, 2011, the only changes to the draft presented to the Independent Directors being the addition of the date, removal of the making of “draft” and the addition of the signature.

 

On March 18, 2011, Ruihua International Ltd., after review of certain information provided to it offered its written consent to approve the Reverse Stock Split.  On the basis of this offered consent, the Company prepared an Information Statement, which was filed with the SEC on March 22, 2011.  On the basis of certain comments from the Staff of the SEC, it was determined on May 5, 2011 not to continue with the stockholder approval by means of a written stockholder consent and proceed with a special meeting of the Stockholders.  The Board of Directors took action by written consent on May 6, 2011 to call a special meeting and authorize the management to prepare this Proxy Statement and organize a special meeting.

 

 

 

 

The following summary of historical consolidated financial data was derived from the Company's audited consolidated financial statements as of and for the fiscal years ended June 30, 2009 and 2010, and the unaudited consolidated financial statements as of and for the fiscal quarters ended December 31, 2009 and 2010, presented in the Financial Reports.  This financial information is only a summary and should be read in conjunction with the consolidated financial statements of the Company and other financial information, including notes thereto, contained in the Company's Financial Reports.

 

 

 

 

 

Summarized Audited Consolidated Statements of Cash Flows for the years ended June 30, 2009 and 2010:

 

 

 

 

 

 

 

 

 

 

The Company has appointed the Transfer Agent to act as exchange agent to carry out the exchange of certificates for cash or new certificates, as applicable.  On the effective date of the Reverse Stock Split, all stock certificates evidencing ownership of Common Stock held by Cashed-Out Stockholders shall be deemed canceled without further action by such Cashed-Out Stockholders.  Such certificates will no longer represent an ownership interest in the Company but will represent only the right to receive cash equal to $0.56 per share in exchange for such shares.  Certificates representing shares of Common Stock held by Cashed-Out Stockholders subsequently presented for transfer will not be transferred on the Company's books and records.

 

The Transfer Agent will furnish stockholders with the necessary materials and instructions to effect such surrender promptly following the effective date of the Reverse Stock Split.  The letter of transmittal will direct how certificates are to be surrendered for cash or new certificates, as applicable.  Stockholders must complete and sign the letter of transmittal and return it with their stock certificate(s) to the Transfer Agent in accordance with the instructions set forth on the transmittal letter before they can receive cash payment for those shares or new certificates, as applicable.  Do not send your stock certificates to us, and do not send them to the Transfer Agent until you have received a transmittal letter and followed the instructions therein.  In connection with the Reverse Stock Split, the Common Stock will be identified by a new CUSIP number.  This new CUSIP number will appear on all stock certificates representing shares of Common Stock issued after the effective date of Reverse Stock Split.

 

No service charges will be payable by stockholders in connection with the exchange of certificates or the payment of cash in lieu of issuing fractional shares.  All expenses of the Reverse Stock Split will be borne by the Company.

 

Vote Required and Recommendation

 

The affirmative vote of the holders of a majority of the outstanding shares of the voting stock is required to approve the proposal to change the name of the Company. It is management’s understanding that there is one stockholder which holds 63.13% of all the outstanding shares of common stock entitled to vote on the reverse stock split proposal, the vote of which will be determinative on the matter and that this stockholder has indicated that it is in favor of the Reverse Stock Split.  Additionally, management persons, through Mr. Peter Wang, the president of the Company, has the right to vote 14.92% of all the outstanding shares of common stock entitled to vote on the Reverse Stock Split, and this person has indicated that these shares will be voted to approve the reverse stock split proposal.  Therefore, it is virtually assured that the Reverse Stock Split will be approved.

 

 

Upon the recommendation and approval of the Independent Directors, the Board of Directors unanimously recommends a vote FOR the approval of the Reverse Stock Split, and that the Board of Directors reasonably believes and unanimously determined that the Reverse Stock Split is fair to, and in the best interests of, the Company and the stockholders.

 

ADDITIONAL INFORMATION REGARDING THE REVERSE STOCK SPLIT

 

 

 

In reviewing this discussion of federal income tax consequences, please be advised of the following:

 

 

 

 

 

 

 

 

 

 

Pursuant to Chapter 92A (Section 300 through 500 inclusive) of the Nevada Revised Statutes ("CHAPTER 92A"), any stockholder of the Company is entitled to dissent to the Reverse Stock Split, and obtain payment of the fair value of the shares. In the context of the Reverse Stock Split, Chapter 92A provides that stockholders may elect to have the Company purchase pre-Reverse Stock Split shares that would become fractional shares as a result of the Reverse Stock Split for a cash price that is equal to the "fair value" of such shares, as determined in a judicial proceeding in accordance with the provisions of Chapter 92A. The fair value of the shares of any stockholder means the value of such shares immediately before the effectuation of the Reverse Stock Split, excluding any appreciation or depreciation in anticipation of the Reverse Stock Split, unless exclusion of any appreciation or depreciation would be inequitable, using customary and current valuation concepts, without discounting for lack of marketability or minority interests.

 

 

Stockholders who have not validly tendered their shares of Common Stock will be entitled to exercise dissenters' rights. Stockholders who perfect their dissenters' rights by complying with the procedures set forth in Chapter 92A will have the fair value of their shares determined by the Nevada state court and will be entitled to receive a cash payment equal to such fair value. Any such judicial determination of the fair value of shares could be based upon any valuation method or combination of methods the court deems appropriate. The value so determined could be more or less than the $0.56 per share to be paid in connection with the Reverse Stock Split. In addition, stockholders who invoke dissenters' rights may be entitled to receive payment of interest at a statutory rate from the effective time of the transaction on the amount determined to be the fair value of their shares.

 

Within 10 days after the effectuation of the Reverse Stock Split, the Company will send a written notice (a "Dissenters' Rights Notice") to all the record stockholders of the Company entitled to dissenters' rights. The Dissenters' Rights Notice will be accompanied by (i) a form for demanding payment from the Company that includes the date of the first announcement to the news media or to the stockholders of the terms of the proposed action and requires that the person asserting dissenter's rights certify whether or not they acquired beneficial ownership of the shares before that date; (ii) a copy of the provisions of Chapter 92A; and (iii) a brief description of the procedures that a stockholder must follow to exercise dissenter's rights.

 

In order to maintain eligibility to exercise dissenters' rights under Chapter 92A, you must take the following actions at the date specified in the Dissenters’ Rights Notice, which will be not less than 30 days after or more than 60 days after the date that the Dissenters' Rights Notice was delivered: (i) deliver a written demand for payment on the form provided in the Dissenters' Rights Notice; (ii) certify whether you acquired beneficial ownership of the shares before the date set forth in the Dissenters' Rights Notice; and (iii) deliver the certificates representing the dissenting shares to the Company.

 

Within 30 days after receipt of a demand for payment, the Company must pay each dissenter who complied with the provisions of Chapter 92A the amount the Company estimates to be the fair value of such shares, plus interest from the effective date of the Reverse Stock Split. The payment will be accompanied by the following: (i) financial statements for the Company for the year ended June 30, 2010 and the most recent interim financial statements; (ii) a statement of the Company's estimate of the fair value of the shares; and (iii) an explanation of how the interest was calculated. If the Company does not deliver payment within 30 days of receipt of the demand for payment, the dissenting stockholder may enforce the dissenter's rights by commencing an action in Clark County, Nevada or if the dissenting stockholder resides or has its registered office in Nevada, in the county where the dissenter resides or has its registered office.

 

If a dissenting stockholder disagrees with the amount of the Company's payment, the dissenting stockholder may, within 30 days of such payment, (i) notify the Company in writing of the dissenting stockholder's own estimate of the fair value of the dissenting shares and the amount of interest due, and demand payment of such estimate, less any payments made by the Company, or (ii) reject the offer by the Company if the dissenting stockholder believes that the amount offered by the Company is less than the fair value of the dissenting shares or that the interest due is incorrectly calculated. If a dissenting stockholder submits a written demand as set forth above and the Company accepts the offer to purchase the shares at the offer price, then the stockholder will be sent a check for the full purchase price of the shares within 40 days of acceptance.

 

 

If a demand for payment remains unsettled, the Company must commence a proceeding in the Clark County, Nevada district court within 60 days after receiving the demand. Each dissenter who is made a party to the proceeding shall be entitled to a judgment in the amount, if any, by which the court finds the fair value of the dissenting shares, plus interest, exceeds the amount paid by the Company. If a proceeding is commenced to determine the fair value of the common stock, the costs of such proceeding, including the reasonable compensation and expenses of any appraisers appointed by the court, shall be assessed against the Company, unless the court finds the dissenters acted arbitrarily, vexatiously or not in good faith in demanding payment. The court may also assess the fees and expenses of the counsel and experts for the respective parties, in amounts the court finds equitable against the Company if the court finds that (i) the Company did not comply with Chapter 92A or (ii) against either the Company or a dissenting stockholder, if the court finds that such party acted arbitrarily, vexatiously or not in good faith with respect to the rights provided by Chapter 92A.

 

A person having a beneficial interest in shares that are held of record in the name of another person, such as a broker, fiduciary, depository or other nominee, must act to cause the record holder to follow the requisite steps properly and in a timely manner to perfect dissenters' rights of appraisal. If the shares are owned of record by a person other than the beneficial owner, including a broker, fiduciary (such as a trustee, guardian or custodian), depositary or other nominee, the written demand for dissenters' rights of appraisal must be executed by or for the record owner. If shares are owned of record by more than one person, as in joint tenancy or tenancy in common, the demand must be executed by or for all joint owners. An authorized agent, including an agent for two or more joint owners, may execute a demand for appraisal for a stockholder of record, provided that the agent identifies the record owner and expressly discloses, when the demand is made, that the agent is acting as agent for the record owner. If a stockholder owns shares through a broker who in turn holds the shares through a central securities depository nominee such as CEDE & Co., a demand for appraisal of such shares must be made by or on behalf of the depository nominee and must identify the depository nominee as the record holder of such shares.

 

A record holder, such as a broker, fiduciary, depository or other nominee, who holds shares as a nominee for others, will be able to exercise dissenters' rights of appraisal with respect to the shares held for all or less than all of the beneficial owners of those shares as to which such person is the record owner. In such case, the written demand must set forth the number of shares covered by the demand. Where the number of shares is not expressly stated, the demand will be presumed to cover all shares outstanding in the name of such record owner.

 

The foregoing summary of the rights of dissenting stockholders under Chapter 92A does not purport to be a complete statement of the procedures to be followed by stockholders desiring to exercise any dissenters' rights of appraisal rights available under Chapter 92A. The preservation and exercise of dissenters' rights of appraisal require strict adherence to the applicable provisions of Chapter 92A, and the foregoing summary is qualified in its entirety by reference to Appendix 1 to this Proxy Statement.

 

 

The Company has not made any provision to obtain counsel or appraisal services for unaffiliated stockholders.

 

FOR A COMPLETE ANALYSIS OF THE APPRAISAL PROCESS, YOU ARE ENCOURAGED TO SEEK YOU OWN LEGAL COUNSEL.

 

 

 

 

Our common stock is quoted on the OTC Bulletin Board, or OTCBB, under the symbol “EQPI.OB”. There is a very limited trading market for our stock. The following table sets forth for the periods indicated the high and low prices per share traded for our common stock as reported on the OTCBB.  The high and low prices per share traded for our common stock as reported on the OTCBB on March 14, 2011, the last day there were any trades prior to the approval of the transaction, were, $0.45 and $0.45, respectively, on which day there was 6,000 shares traded. On March 16, 2011 there were 27,613,019 shares of Common Stock outstanding held by approximately 413 holders of record.  The quotations shown below represent prices among dealers of the Common Stock and do not include retail mark-ups, mark-downs, or commissions, and do not necessarily represent actual transactions.

 

 

 

 

 

 

 

 

 

The Company intends to fund the foregoing costs of the Reverse Stock Split using cash on hand.  The Company does not have any alternative financing arrangements or alternative financing plans; however, the Company believes that the likelihood that the Company will have sufficient cash on hand to pay the consideration to the Cashed-Out stockholders and the costs of the Reverse Stock Split.

 

 

DIRECTORS AND EXECUTIVE OFFICERS

 

The following table sets forth certain information about each of the members of the Board of Directors and each executive officer:

 

 

 

 

 

 

All directors are elected to annual terms by the holders of common stock.  All directors hold office until the next annual meeting of stockholders and the election and qualification of their successors.  Officers are elected annually by the board of directors and serve at the discretion of the Board.

 

There are no family relationships (whether by blood, marriage or adoption) among the Zhongchai directors or executive officers.

 

 

PRINCIPAL STOCKHOLDERS

 

 

 

WHERE YOU CAN FIND MORE INFORMATION

HOUSEHOLDING

SHAREHOLDER PROPOSALS AND NOMINATIONS

OTHER BUSINESS

EXHIBIT A TO PROXY STATEMENT

 

NEVADA REVISED STATUTES

 

RIGHTS OF DISSENTING OWNERS

 

NRS 92A.300 DEFINITIONS. As used in NRS 92A.300 to 92A.500, inclusive, unless the context otherwise requires, the words and terms defined in NRS 92A.305 to 92A.335, inclusive, have the meanings ascribed to them in those sections.

 

NRS 92A.305 "BENEFICIAL STOCKHOLDER" DEFINED. "Beneficial stockholder" means a person who is a beneficial owner of shares held in a voting trust or by a nominee as the stockholder of record.

 

NRS 92A.310 "CORPORATE ACTION" DEFINED. "Corporate action" means the action of a domestic corporation.

 

NRS 92A.315 "DISSENTER" DEFINED. "Dissenter" means a stockholder who is entitled to dissent from a domestic corporation's action under NRS 92A.380 and who exercises that right when and in the manner required by NRS 92A.400 to 92A.480, inclusive.

 

NRS 92A.320 "FAIR VALUE" DEFINED. "Fair value," with respect to a dissenter's shares, means the value of the shares determined:

 

 

 

 

NRS 92A.325 "STOCKHOLDER" DEFINED. "Stockholder" means a stockholder of record or a beneficial stockholder of a domestic corporation.

 

NRS 92A.330 "STOCKHOLDER OF RECORD" DEFINED. "Stockholder of record" means the person in whose name shares are registered in the records of a domestic corporation or the beneficial owner of shares to the extent of the rights granted by a nominee's certificate on file with the domestic corporation.

 

NRS 92A.335 "SUBJECT CORPORATION" DEFINED. "Subject corporation" means the domestic corporation which is the issuer of the shares held by a dissenter before the corporate action creating the dissenter's rights becomes effective or the surviving or acquiring entity of that issuer after the corporate action becomes effective.

 

 

NRS 92A.340 COMPUTATION OF INTEREST. Interest payable pursuant to NRS 92A.300 to 92A.500, inclusive, must be computed from the effective date of the action until the date of payment, at the rate of interest most recently established pursuant to NRS 99.040.

 

NRS 92A.350 RIGHTS OF DISSENTING PARTNER OF DOMESTIC LIMITED PARTNERSHIP. A partnership agreement of a domestic limited partnership or, unless otherwise provided in the partnership agreement, an agreement of merger or exchange, may provide that contractual rights with respect to the partnership interest of a dissenting general or limited partner of a domestic limited partnership are available for any class or group of partnership interests in connection with any merger or exchange in which the domestic limited partnership is a constituent entity.

 

NRS 92A.360 RIGHTS OF DISSENTING MEMBER OF DOMESTIC LIMITED-LIABILITY COMPANY. The articles of organization or operating agreement of a domestic limited-liability company or, unless otherwise provided in the articles of organization or operating agreement, an agreement of merger or exchange, may provide that contractual rights with respect to the interest of a dissenting member are available in connection with any merger or exchange in which the domestic limited-liability company is a constituent entity.

 

NRS 92A.370 RIGHTS OF DISSENTING MEMBER OF DOMESTIC NONPROFIT CORPORATION.

 

1.           Except as otherwise provided in subsection 2, and unless otherwise provided in the articles or bylaws, any member of any constituent domestic nonprofit corporation who voted against the merger may, without prior notice, but within 30 days after the effective date of the merger, resign from membership and is thereby excused from all contractual obligations to the constituent or surviving corporations which did not occur before his resignation and is thereby entitled to those rights, if any, which would have existed if there had been no merger and the membership had been terminated or the member had been expelled.

 

2.           Unless otherwise provided in its articles of incorporation or bylaws, no member of a domestic nonprofit corporation, including, but not limited to, a cooperative corporation, which supplies services described in chapter 704 of NRS to its members only, and no person who is a member of a domestic nonprofit corporation as a condition of or by reason of the ownership of an interest in real property, may resign and dissent pursuant to subsection 1.

 

 

NRS 92A.380 RIGHT OF STOCKHOLDER TO DISSENT FROM CERTAIN CORPORATE ACTIONS AND TO OBTAIN PAYMENT FOR SHARES.

 

1.           Except as otherwise provided in NRS 92A.370 and 92A.390, any stockholder is entitled to dissent from, and obtain payment of the fair value of his shares in the event of any of the following corporate actions:

 

 

 

 

 

 

 

 

 

2.           A stockholder who is entitled to dissent and obtain payment pursuant to NRS 92A.300 to 92A.500, inclusive, may not challenge the corporate action creating his entitlement unless the action is unlawful or fraudulent with respect to him or the domestic corporation.

 

3.           From and after the effective date of any corporate action described in subsection 1, no stockholder who has exercised the right to dissent pursuant to NRS 92A.300 to 92A.500, inclusive, is entitled to vote his or her shares for any purpose or to receive payment of dividends or any other distributions on shares.  This subsection does to apply to dividends or other distributions payable to stockholders on a date before the effective date of any corporate action from which the stockholder has dissented

 

NRS 92A.390 LIMITATIONS ON RIGHT OF DISSENT: STOCKHOLDERS OF CERTAIN CLASSES OR SERIES; ACTION OF STOCKHOLDERS NOT REQUIRED FOR PLAN OF MERGER.

 

1.           There is no right of dissent with respect to a plan of merger, conversion or exchange in favor of stockholders of any class or series which is:

 

 

 

 

2.           The applicability of subsection 1 must be determined as of:

 

 

 

3.           Subsection 1 is not applicable and dissenter’s rights are available pursuant to NRS 92A.380 for the holders of any class or series of shares who are required by the terms of the corporate action requiring dissenter’s rights to accept for such shares anything other than cash or shares of any class or any series of shares of any corporation, or any other proprietary interest of any other entity, that satisfies the standards set fourth in subsection 1 at the time the corporate action becomes effective.

 

4.           There is no right of dissent for any holders of stock of the surviving domestic corporation if the plan of merger does not require action of the stockholders of the surviving domestic corporation under NRS 92A.130.

 

5.           There is no right of dissent for any holders of stock of the parent domestic corporation if the plan of merger does not require action of the stockholders of the parent domestic corporation under NRS 92A.180.

 

NRS 92A.400 LIMITATIONS ON RIGHT OF DISSENT: ASSERTION AS TO PORTIONS ONLY TO SHARES REGISTERED TO STOCKHOLDER; ASSERTION BY BENEFICIAL STOCKHOLDER.

 

1.           A stockholder of record may assert dissenter's rights as to fewer than all of the shares registered in his or her name only if the stockholder of record dissents with respect to all shares of the class or series beneficially owned by any one person and notifies the subject corporation in writing of the name and address of each person on whose behalf the stockholder of record asserts dissenter's rights. The rights of a partial dissenter under this subsection are determined as if the shares as to which the partial dissenter dissents and his or her other shares were registered in the names of different stockholders.

 

 

2.           A beneficial stockholder may assert dissenter's rights as to shares held on his or her behalf only if the beneficial stockholder:

 

 

 

NRS 92A.410 NOTIFICATION OF STOCKHOLDERS REGARDING RIGHT OF DISSENT.

 

1.           If a proposed corporate action creating dissenters' rights is submitted to a vote at a stockholders' meeting, the notice of the meeting must state that stockholders are, are not or may be entitled to assert dissenters' rights under NRS 92A.300 to 92A.500, inclusive. If the domestic corporation concludes that dissenter’s rights are or may be available, a copy of NRS 92A.300 to 92A.500, inclusive, must accompany the meeting notice sent to those record stockholders entitled to exercise dissenter’s rights.

 

2.           If the corporate action creating dissenters' rights is taken by written consent of the stockholders or without a vote of the stockholders, the domestic corporation shall notify in writing all stockholders entitled to assert dissenters' rights that the action was taken and send them the dissenter's notice described in NRS 92A.430.

 

NRS 92A.420 PREREQUISITES TO DEMAND FOR PAYMENT FOR SHARES.

 

1.           If a proposed corporate action creating dissenters' rights is submitted to a vote at a stockholders' meeting, a stockholder who wishes to assert dissenter's rights:

 

 

 

2.           If a proposed corporate action creating dissenters' rights is taken by written consent of the stockholders, a stockholder who wishes to assert dissenters' rights with respect to any class or series of shares must not consent to or approve the proposed corporate action with respect to such class or series.

 

3.           A stockholder who does not satisfy the requirements of subsection 1 or 2 and NRS 92A.400 is not entitled to payment for his or her shares under this chapter.

 

NRS 92A.430 DISSENTER'S NOTICE: DELIVERY TO STOCKHOLDERS ENTITLED TO ASSERT RIGHTS; CONTENTS.

 

1.           The subject corporation shall deliver a written dissenter's notice to all stockholders entitled to assert dissenters' rights.

 

 

2.           The dissenter's notice must be sent no later than 10 days after the effective date of the corporate action specified in NRS 92A.380, and must:

 

 

 

 

 

 

NRS 92A.440 DEMAND FOR PAYMENT AND DEPOSIT OF CERTIFICATES; RETENTION OF RIGHTS OF STOCKHOLDER.

 

1.           A stockholder who receives a dissenter’s notice pursuant to NRS 92A.430 and who wishes to exercise dissenter’s rights must:

 

 

 

 

2.           If a stockholder fails to make the certification required by paragraph (b) of subsection 1, the subject corporation may elect to treat the stockholder’s shares as after-acquired shares under NRS 92A.470.

 

 

4.           A stockholder who has complied with subsection 1 may nevertheless decline to exercise dissenter’s rights and withdraw from the appraisal process by so notifying the subject corporation in writing by the date set forth in the dissenter’s notice pursuant to NRS 92A.430. A stockholder who fails to so withdraw from the appraisal process may not thereafter withdraw without the subject corporation’s written consent.

 

 

5.           The stockholder who does not demand payment or deposit his or her certificates where required, each by the date set forth in the dissenter’s notice, is not entitled to payment for his or her shares under this chapter.

 

NRS 92A.450 UNCERTIFICATED SHARES: AUTHORITY TO RESTRICT TRANSFER AFTER DEMAND FOR PAYMENT; RETENTION OF RIGHTS OF STOCKHOLDER.

 

1.           The subject corporation may restrict the transfer of shares not represented by a certificate from the date the demand for their payment is received.

 

NRS 92A.460  PAYMENT FOR SHARES: GENERAL REQUIREMENTS.

 

1.           Except as otherwise provided in NRS 92A.470, within 30 days after receipt of a demand for payment, the subject corporation shall pay in cash to each dissenter who complied with NRS 92A.440 the amount the subject corporation estimates to be the fair value of the dissenter’s shares, plus accrued interest. The obligation of the subject corporation under this subsection may be enforced by the district court:

 

 

 

 

2.           The payment must be accompanied by:

 

 

 

 

 

NRS 92A.470 PAYMENT FOR SHARES: SHARES ACQUIRED ON OR AFTER DATE OF DISSENTER'S NOTICE.

 

1.           A subject corporation may elect to withhold payment from a dissenter unless the dissenter was the beneficial owner of the shares before the date set forth in the dissenter's notice as the first date of any announcement to the news media or to the stockholders of the terms of the proposed action.

 

2.           To the extent the subject corporation elects to withhold payment, within 30 days after receipt of a demand for payment, the subject corporation shall notify the dissenters described in subsection 1:

 

 

 

 

 

 

3.           Within 10 days after receiving the stockholder’s acceptance pursuant to subsection 2, the subject corporation shall pay in cash the amount offered under paragraph (b) of subsection 2 to each stockholder who agreed to accept the subject corporation’s offer in full satisfaction of the stockholder’s demand.

 

4.           Within 40 days after sending the notice described in subsection 2, the subject corporation shall pay in cash the amount offered under paragraph (b) of subsection 2 to each stockholder described in paragraph (e) of subsection 2.

 

NRS 92A.480 DISSENTER'S ESTIMATE OF FAIR VALUE: NOTIFICATION OF SUBJECT CORPORATION; DEMAND FOR PAYMENT OF ESTIMATE.

 

1.           A dissenter paid pursuant to NRS 92A.460 who is dissatisfied with the amount of the payment may notify the subject corporation in writing of the dissenter’s own estimate of the fair value of his or her shares and the amount of interest due, and demand payment of such estimate, less any payment pursuant to NRS 92A.460. A dissenter offered payment pursuant to NRS 92A.470 who is dissatisfied with the offer may reject the offer pursuant to NRS 92A.470 and demand payment of the fair value of his or her shares and interest due.

 

2.           A dissenter waives the right to demand payment pursuant to this section unless the dissenter notifies the subject corporation of his or her demand to be paid the dissenter’s stated estimate of fair value plus interest under subsection 1 in writing within 30 days after receiving the subject corporation’s payment or offer of payment under NRS 92A.460 or 92A.470 and is entitled only to the payment made or offered.

 

 

NRS 92A.490 LEGAL PROCEEDING TO DETERMINE FAIR VALUE: DUTIES OF SUBJECT CORPORATION; POWERS OF COURT; RIGHTS OF DISSENTER.

 

1.           If a demand for payment remains unsettled, the subject corporation shall commence a proceeding within 60 days after receiving the demand and petition the court to determine the fair value of the shares and accrued interest. If the subject corporation does not commence the proceeding within the 60-day period, it shall pay each dissenter whose demand remains unsettled the amount demanded.

 

2.           A subject corporation shall commence the proceeding in the district court of the county where its principal office is located in this Sate. If the principal office of the subject corporation is not located in the State, it shall commence the proceeding in the county where the principal office of the domestic corporation merged with or whose shares were acquired is not located in this State, the subject corporation shall commence the proceeding in the district court in the count in which the corporation’s registered office is located.

 

3.           The subject corporation shall make all dissenters, whether or not residents of Nevada, whose demands remain unsettled, parties to the proceeding as in an action against their shares. All parties must be served with a copy of the petition. Nonresidents may be served by registered or certified mail or by publication as provided by law.

 

4.           The jurisdiction of the court in which the proceeding is commenced under subsection 2 is plenary and exclusive. The court may appoint one or more persons as appraisers to receive evidence and recommend a decision on the question of fair value. The appraisers have the powers described in the order appointing them, or any amendment thereto. The dissenters are entitled to the same discovery rights as parties in other civil proceedings.

 

5.           Each dissenter who is made a party to the proceeding is entitled to a judgment:

 

 

 

NRS 92A.500 LEGAL PROCEEDING TO DETERMINE FAIR VALUE: ASSESSMENT OF COSTS AND FEES.

 

1.           The court in a proceeding to determine fair value shall determine all of the costs of the proceeding, including the reasonable compensation and expenses of any appraisers appointed by the court. The court shall assess the costs against the subject corporation, except that the court may assess costs against all or some of the dissenters, in amounts the court finds equitable, to the extent the court finds the dissenters acted arbitrarily, vexatiously or not in good faith in demanding payment.

 

 

2.           The court may also assess the fees and expenses of the counsel and experts for the respective parties, in amounts the court finds equitable:

 

 

 

3.           If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated, and that the fees for those services should not be assessed against the subject corporation, the court may award to those counsel reasonable fees to be paid out of the amounts awarded to the dissenters who were benefited.

 

4.           In a proceeding commenced pursuant to NRS 92A.460, the court may assess the costs against the subject corporation, except that the court may assess costs against all or some of the dissenters who are parties to the proceeding, in amounts the court finds equitable, to the extent the court finds that such parties did not act in good faith in instituting the proceeding.

 

5.           To the extent the subject corporation fails to make a required payment pursuant to NRS 92A.460, 92A.470 or 92A.480, the dissenter may bring a cause of action directly for the amount owed, and, to the extent the dissenter prevails, is entitled to recover all expenses of the suit.

 

6.           This section does not preclude any party in a proceeding commenced pursuant to NRS 92A.60 or NRS 92A.490 from applying the provisions of N.R.C.P. 68 or NRS 17.115.

 

 

ROSS MILLER

Secretary of State

204 North Carson Street, Suite 1

Carson City, Nevada  89701-4520

(775) 684-7708

Website:  www.nvsos.com

(Pursuant to NRS 78.385 and 78.390 – After Issuance of Stock)

 

 

This form must be accompanied by appropriate fees.