SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
General Form for Registration of Securities of
Small Business Issuers
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
Dragon Pharmaceutical Inc.
(Name of Small Business Issuer in its charter)
Florida 65-0142474
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
543 Granville Street, Suite 1200
Vancouver, British Columbia, Canada V6C IX8
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(Address of principal executive offices)
Issuer's telephone number: (604) 669-8817
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Securities to be registered under Section 12(b) of the Act:
None
Securities to be registered under Section 12(g) of the Act:
Common Stock
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With the exception of historical facts stated herein, the following
discussion may contain forward-looking statements regarding events and financial
trends which may affect the Company's future operating results and financial
position. Such statements are subject to risks and uncertainties that could
cause the Company's actual results and financial position to differ materially
from those anticipated in such forward-looking statements. Factors that could
cause actual results to differ materially include, in addition to other factors
identified in this report, the Company's operating losses, need for additional
capital, dependence on the development of a single product, its ability to
develop new products, and uncertainty of dealing in a foreign country, all of
which factors are set forth in more detail in the sections entitled "Certain
Considerations" and "Management's Discussion and Analysis or Plan of Operation"
herein. Readers of this report are cautioned not to put undue reliance on
"forward looking" statements which are, by their nature, uncertain as reliable
indicators of future performance. The Company disclaims any intent or obligation
to publicly update these "forward looking" statements, whether as a result of
new information, future events, or otherwise.
In this statement, all dollar amounts are expressed in United States
dollars unless otherwise stated.
PART I.
Item 1. Description of Business
General
Dragon Pharmaceutical Inc. ("Dragon" or the "Company"), a Florida
corporation, is a development stage pharmaceutical and biotechnological company
that intends to manufacture and market products in China. Although Dragon does
not at this time have the capability to produce drugs, Dragon believes that its
proprietary vector technology will allow it to produce drugs such as
Erythropietin ("EPO") in an efficient and cost effective manner. Dragon's
strategy is to use its biotechnological expertise to produce and market
pharmaceutical products primarily in China through the acquisition of a
manufacturing license and access to a production facility in China to produce
initially (EPO) and other drugs.
Corporate History
Dragon was originally formed on August 22, 1989, as First Geneva
Investments, Inc. First Geneva Investments was formed for the purpose of
evaluating and acquiring businesses. From 1989 to 1998, First Geneva Investments
had no significant activity. On July 28, 1998, pursuant to a share exchange
agreement, First Geneva Investments issued 7,000,000 shares of its Common Stock
and warrants to purchase 1,000,000 shares its Common Stock in exchange for all
of the outstanding shares of Allwin Newtech Ltd., a British Virgin Islands
corporation. Allwin Newtech Ltd. was formed on February 10, 1998 for the purpose
of developing pharmaceutical products in China. As a result of the acquisition,
the former shareholders of Allwin Newtech became 87.5% shareholders of First
Geneva Investments and Allwin Newtech became its wholly-owned subsidiary. On
September 21, 1998, First Geneva Investments changed its named to Dragon
Pharmaceutical Inc.
<PAGE>3
Joint Ventures
Through Allwin Newtech, on April 18, 1998, Dragon entered into a
contract to acquire a 75% interest in San-he Kailong Bio-pharmaceutical Limited,
a corporation organized under the laws of China. The other joint venture partner
is Sinoway Biotech Limited. San-he Kailong Bio-pharmaceutical was formed for the
purpose of developing, manufacturing and marketing pharmaceutical products in
China. For its initial 75% interest, Dragon will contribute approximately
$1,000,000 and its vector technology to San-he Kailong Bio-pharmaceutical
Limited. Dragon has the right to increase its interest to 85% upon the payment
of additional funds. For its initial 25% interest, Sinoway Biotech will
contribute a contract to purchase a license to manufacture EPO and other drugs
in China and a right to purchase 25 acres of land at a pharmaceutical park
located in the Yanjiao Special Economic Zone, China. San-he Kailong
Bio-pharmaceutical Limited has yet to begin operations, and Dragon is currently
evaluating its option under the joint venture agreement.
On July 27,1999, Allwin Newtech entered into a share transfer agreement
with the Nanjing Medical Group Ltd. whereby Allwin Newtech will have the right
to purchase from the Nanjing Medical Group up to a 75% equity interest in
Nanjing Huaxin Biotech Co. Ltd. under the terms of the share transfer agreement.
The total purchase price for the 75% equity interest will be $4.2 million of
which approximately $2.43 million has been paid. On December 31, 1999, $863,000
will be due, with the balance of $4.2 million due on January 31, 2000. Of the
$4.2 million, $1,218,100 has been allocated as working capital for the joint
venture. In the event Allwin Newtech is unable to make the remaining payments,
the 75% interest in Nanjing Huaxin Biotech shall revert back to Nanjing Medical
Group. Dragon is in the process of securing financing for the remaining
payments.
Nanjing Huaxin Biotech is located in Nanjing City, China and owns a
license and production permit for the manufacture of EPO in China. Nanjing
Huaxin Biotech currently manufactures approximately 300,000 doses of EPO
annually; however Dragon believes the Nanjing Huaxin Biotech EPO production has
been hampered by out-of-date technology. As part of its business strategy,
Dragon will supply management to Nanjing Huaxin Biotech and will contribute its
proprietary vector technology consisting of inserting protein DNA into a cell to
product EPO. Dragon believes that its vector technology will lower costs and
increase the production yield of EPO at Nanjing Huaxin Biotech. Nanjing Huaxin
Biotech's board of directors shall consist of five directors of which three
shall be appointed by Allwin Newtech. Nanjing Huaxin Biotech was previously part
of Nanjing Research Institute of Military Medical Science, a corporation
operated by the Chinese military. Allwin Newtech acquired only the part relating
to the production of EPO.
Proposed Product
Erythropeoietin. EPO is a glyoprotein that stimulates and regulates the
rate of formation of red blood cells. In the adult human, EPO is produced by the
kidneys and it acts on precursor cells to stimulate cell proliferation and
differentiation into mature red blood cells. Kidney disease and chemotherapy or
radiation therapy for treating cancer may impair the body's ability to produce
EPO and, in turn, reduce the level of red blood cells to less than one-half that
of healthy humans. The shortage of red blood cells leads to insufficient
delivery of oxygen throughout the body. The result is anemia, which afflicts 90%
of all dialysis patients. Symptoms of anemia include fatigue and weakness.
Anemia can be treated by providing intravenous administration of EPO
protein. This treatment has been available for the past decade, after years of
clinical trials that commenced in the mid-1980s. It is administered through
<PAGE>4
dialysis tubing or by injection approximately three times per week, either
intravenously or subcutaneously. Improvement in a patient's condition is
typically achieved in two to six weeks. EPO is most commonly administered to
people with chronic renal failure, HIV patients being treated with anti-viral
drugs, and cancer patients on chemotherapy. The treatment is less dangerous and
generates fewer adverse side effects than the alternatives, which include blood
transfusions and androgen therapy. However, side effects of EPO may include
hypertension, headaches, shortness of breath, diarrhea, rapid heart rate and
nausea.
Dragon's Vector Technology. Dragon anticipates achieving enhanced
efficiencies in the production of EPO by Nanjing Huaxin Biotech by introducing a
high-yield mammalian cell line. Dragon scientists designed a unique plasmid
vector for expression of target genes in mammalian cells and constructed the
EPO-expression CHO (Chinese Hamster Ovary) cell line using this technology. The
science behind Dragon's technology and "vectoring process" may be summarized as
follows.
CHO cells are used for obtaining the EPO-expression cell lines. CHO
cells have the ability of proliferating indefinitely in culture and are the most
widely-used mammalian cells for producing recombinant proteins. The CHO
cell-based expression system is considered the industry standard and is used by
Dragon for protein production.
In order to construct a CHO cell line, which expresses a particular
protein, the genetic materials encoding the sequences of the desired protein
(cDNA) are inserted into a plasmid vector. The plasmids are encapsulated in
liposomes and then used to transfect the CHO cells. The plasmid vector used for
carrying the genetic information of the desired protein is very crucial. In
addition to delivering the desired cDNA into CHO cells, it is the plasmid vector
that largely determines whether the high yield of the recombinant protein
production by the transfected CHO cells can be achieved or not. The plasmid
vector will allow the amplification of itself together with the cDNA of desired
protectin inside the CHO cells under certain conditions. This will lead to a
higher level production of the desired protein by the transfected CHO cells.
In addition to the protein genetic information that the plasmid vector
transports into the CHO cells, several marker genes are also included within the
plasmids. These genes produce enzymes that can be detected to provide an
indication that the cells are "transfected" (i.e., genetically modified by the
uptake of the genetic material). This will be used to select the transformed
cells from the unmodified cells. Some of the marker genes are used to induce the
amplification of cDNA of the desired protein in the transformed cells. More cDNA
copies would translate into a higher yield of the protein. Through a
time-consuming and complicated selection process, clones of the CHO cells with
stable growth and the highest level of expression of the desired protein are
selected. During this process, various techniques are used to amplify the number
of copies of the cDNA that codes for the desired protein.
These selected clones will be expanded into large volumes and stored in
aliquots as the Master Cell Banks ("MCB") for large-scale protein production.
The CHO cell culture systems for industrial production of recombinant proteins
are variable for a few months of sustained protein production. After that, new
cells from the cell bank will be scaled up for another circle. The protein
produced by the CHO cells will be secreted into the media during the culture and
the media obtained will be used to purify the desired protein.
<PAGE>5
Dragon has developed its own technology to construct the unique plasmid
vector. This plasmid vector is used for constructing a CHO cell line, which
produce EPO at high yields. This is expected by management of Dragon to increase
EPO production and reduce the cost of EPO production.
The yield of Dragon's EPO-expression CHO cell line was tested at the
Beijing Institute of Microbiology and Epidemiology in May of 1999. The CHO cells
were cultured according to the methods provided by Dragon. EPO production was
calculated by measuring the EPO levels in the harvested media using ELISA. The
yield of the EPO cell line was 37 mg/. This result exceeds the estimated 10-20
mg/L achieved by Kirin-Amgen, Inc., another manufacturer of EPO, and the
estimated 2-3 mg/L achieved by Chinese producers. No assurances can be given
that Dragon will achieve the same test results in commercial production.
Nanjing Huaxin Biotech currently produces EPO in China for kidney
dialysis applications and Chinese governmental approval for cancer therapeutic
applications is anticipated of July of 2000.
Originally, management of Dragon contemplated entering the EPO market by
acquiring an EPO license and building a manufacturing facility. This requires
large capital requirements. Dragon is currently evaluating its options and has
entered into an agreement to acquire an interest in Nanjing Huaxin Biotech which
has an existing facility and necessary permits and licenses. Nanjing Huaxin
Biotech, prior to the acquisition and technology transfer by Dragon, has been
producing an estimated 300,000 vials of EPO per year.
Market
China's Pharmaeutical Market
Dragon believes China's pharmaceutical market is large and believes
China's market is showing signs of continued expansion. The market has grown
steadily since 1990, according to a U.S. Department of Commerce article (1998),
"China-Drugs and Pharmaceuticals" detailing how the number of foreign-invested
pharmaceutical ventures had increased from less than a dozen in the late 1980s
to more than 1,800 today. New entrants in the Chinese pharmaceutical market in
the past decade have included J&J, Bristol Myers Squibb, Hoffman La Roche and
Hoechst Marion Roussel.
Growth factors in the Chinese market include:
o Increasing population
o Increasing age of the population
o Increasing wealth
o Increasing awareness of Western medicines
China's EPO Market
Sales of EPO in the Chinese market have been less than elsewhere in the
world because current sales prices of $20 to $40 per vial put it out of reach to
many of the patients who could benefit from it.
There are three sources of EPO in the Chinese marketplace.
<PAGE>6
First, Amgen services the market through offshore production facilities.
However, the price to the consumer is prohibitive because of tariffs and a value
added tax that combined add about 30% to the cost.
Second, there are a number of existing domestic producers similar to
Nanjing Huaxin Biotech. EPO is allowed for sale in China and does not infringe
on patent rights of Kirin-Amgen because no administration protection was filed
before EPO was exported to China; furthermore, EPO is not subject to the
U.S.-China agreement on intellectual property.
Dragon management believes that the market size for EPO would increase
dramatically if prices could be reduced to a more affordable level. A lower
price would allow non-governmental workers to afford EPO and also would increase
the likelihood of EPO being included on the reimbursement list of drugs that are
supplied at no charge to government workers with prescriptions. Dragon plans to
attain the lower costs by producing domestically, thus avoiding import duties,
and by producing with high-yield vector technology, thus avoiding the quality
and inefficient yield problems of existing domestic producers.
The third form of competition is represented by Sinogen (China) Ltd.,
("Sinogen"), a Hong Kong subsidiary of U.S.-based Sinogen International Co. Ltd.
Sinogen reached an agreement in 1998 with the shareholders of the Shandong
Yongming Vivogen Pharmaceutical Co. Ltd. on the establishment of a new joint
venture to research and develop EPO. This EPO was developed by the Nanjing
Institute of Military Medical Sciences and the Hainan Yalong Institute of
Biomedical Sciences. In October 1996, the Ministry of Health granted a new drug
certificate to the drug and approval to start production was received in 1997.
Competition
The world market for EPO is approximately $3 billion in annual sales
and is growing. The market is dominated by three firms: Amgen Inc. of Thousand
Oaks, California; Ortho Pharmaceutical Corp. ("Ortho"), a subsidiary of Johnson
& Johnson, Inc. ("J&J") of New Brunswick, New Jersey; and Kirin Brewery Company,
Limited ("Kirin") of Japan. EPO is marketed by Amgen as Epogen, by J&J as
Procrit/Eprex and by Kirin as Espo. A fourth participant in the international
EPO market is Roche Holding AG of Switzerland, which markets an EPO drug with a
different heritage.
Amgen was granted U.S. rights to market EPO under a licensing agreement
with Kirin-Amgen, Inc. ("Kirin-Amgen"), a joint venture between Kirin and Amgen
that was established in 1984. J&J acquired the rights to EPO for all treatments
except kidney dialysis in the U.S. and for all uses outside the U.S. in 1985.
Kirin manufacturers and markets EPO for China and Japan.
Potential competition to EPO includes any products or technologies that
are successful in attacking anemia. Hoechst Marion Roussel, Inc. is currently
conducting clinical trials on gene-activated erythropoietin for the treatment of
anemia, while Alkermes, Inc. of Cambridge, Massachusetts and J&J are currently
conducting clinical trials with a sustained delivery formulation of Epoetin alfa
for the treatment of anemia. Amgen has sole rights to Novel Erythropoiesis
Stimulating Protein ("NESP"), a second-generation EPO molecule that will post
serious competition to the existing products because it offers the possibility
of less frequent dosing (i.e., once a week rather than three times a week).
Phase I clinical trials have commenced in pre-dialysis patients, and Amgen
expects to begin studies in chemotherapy-induced anemia this year.
<PAGE>7
In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties that could increase their ability to reach customers in the
Chinese market. Such existing and future competition could affect Dragon's
ability to penetrate the Chinese market and generate sales revenues. No
assurances can be given that Dragon will be able to compete successfully against
current and future competitors, and any failure to do so would have a material
adverse effect on Dragon's business.
Intellectual Property, Government Approvals and Regulations
Dragon's vector technology is not protected by any patents or
copyrights. The development and manufacture of EPO requires a license from the
Ministry of Health, China. Amgen has a United States patent to develop EPO.
However, because no corresponding patent was filed in China, Dragon has the
right to develop and market EPO in China.
Customers
At this time, Dragon has no customers. If the share transfer agreement
with the Nanjing Medical Group is consummated, Dragon will have customers
through Nanjing Huaxin Biotech. Dragon intends to expand this customer base
through its relationship with Nanjing Medical Group, one of the largest
pharmaceutical enterprises in China with extensive experience and expertise in
the marketing and distribution of pharmaceutical products in China.
Employees
As of September 30, 1999, the Company had no employees, but has engaged
two consultants to perform administrative services.
CERTAIN CONSIDERATIONS
In addition to the other information presented herein, the following
should be considered carefully in evaluating the Company and its business. This
information contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below and
elsewhere in herein.
Dragon is in immediate need of a significant amount of funds. The
acquisition of Nanjing Huaxin Biotech and costs associated with modernizing the
production facility, ramping-up of production and marketing the EPO will require
an estimated investment of at least $2.0 million before commercial production
and sales growth can be achieved. Further, the Company must raise at least $2.0
million to complete its acquisition of Nanjing Huaxin Biotech.
There are technical risks associated with the Dragon technology.
Although Dragon believes that its vector technology will produce EPO at lower
costs, Dragon's method for producing EPO is commercially unproven. Small-scale
proof-of-product production must be initiated before full-scale production is
started. Although results from recent independent tests have been extremely
encouraging. Dragon's ability to produce EPO at a lower cost is unproven in
commercial production.
<PAGE>8
The Integration of Huaxin/Nanjing Medical Corp. with Dragon is
essential. Dragon's management must integrate Nanjing Huaxin Biotech's
technology into its business.
No assurance that EPO market will develop in China. Dragon may prove
technically capable to producing EPO in the future year, but there is
insufficient evidence that there will be a large enough market to justify a
large volume of EPO vials. Among other marketing issues, vials of EPO must be
lower priced, the Chinese medical community and consumers must be educated about
the EPO, and export market opportunities must be studied. Further, Dragon will
be limited in its ability to market EPO outside of China due to EPO patent
rights held by its competitors.
Lack of Profits and Going Concern Disclosure. For the period from
February 10, 1998 (inception) to December 31, 1998, and for the six months ended
June 30, 1999, Dragon incurred comprehensive net losses of $473,862 and
$321,041, respectively. As a result of these losses and negative cash flows from
operations, the Company's ability to continue as a going concern is uncertain
and is dependent upon the raising additional capital.
In the event the Company is required to raise additional capital through
private placement of its equity securities, such placement of equity securities
will have the effect of diluting existing shareholders of their ownership
interest in the Company. If the Company is unable to raise sufficient funds to
finance these projects, the Company may not be able to complete its projects
which will have an adverse effect on the Company's business objectives.
Dependence on Key Personnel. The Company is dependent on the services of
Dr. Liu for the development of the vector technology. The loss of Dr. Liu would
adversely effect the ability of Dragon to implement its vector technology at
Nanjing Huaxin. The Company does not have key person insurance for Dr. Liu.
No Dividends. The Company has not paid cash dividends on its Common
Shares since its inception and does not anticipate any cash dividends on the
Common Shares in the foreseeable future. For the foreseeable future, the Company
intends to reinvest the earnings of the Company, if any, on the development and
expansion of its business.
Risks Relating to the People's Republic of China. Investment in the
Company may be adversely affected by the political, social and economic
environment in the People's Republic of China ("PRC"). The PRC is controlled by
the Communist Party of China. Under its current leadership, the PRC has been
pursuing economic reform policies, including the encouragement of private
economic activity and greater economic decentralization. There can be no
assurance, however, that the PRC government will continue to pursue such
policies, that such policies will be successful if pursued, or that such
policies will not be significantly altered from time to time. Economic
development may be limited as well by the imposition of austerity measures
intended to reduce inflation, the inadequate development or maintenance of
infrastructure or the unavailability of adequate power and water supplies,
transportation, raw materials and parts, or a deterioration of the general
political, economic or social environment in the PRC, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, economic reforms and growth in the PRC have
been more successful in certain provinces than others, and the continuation or
increase of such disparities could affect the political or social stability of
the PRC.
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Loss of PRC Facilities; Nationalization; Expropriation. If for any
reason the Company were required to move its proposed manufacturing operations
outside of the PRC, the Company's profitability, competitiveness and market
position could be materially jeopardized, and there could be no assurance that
the Company could continue its manufacturing operations. The Company's business
and prospects are dependent upon agreements with various entities controlled by
PRC governmental instrumentalities. Not only would the Company's operations and
prospects be materially and adversely affected by the failure of such entities
to honor these contracts, but it might be difficult to enforce these contracts
in the PRC. There can be no assurance that assets and business operations in the
PRC will not be nationalized, which could result in the total loss of the
Company's investments in that country. Following the formation of the PRC in
1949, the PRC government renounced various debt obligations incurred by
predecessor governments, which obligations remain in default, and they
expropriated assets without compensation. Accordingly, an investment in the
Company involves a risk of total loss.
Government Control Over Economy. The PRC only recently has permitted
greater provincial and local economic autonomy and private economic activities.
The PRC central government has exercised and continues to exercise substantial
control over virtually every sector of the PRC economy. Accordingly, PRC
government actions in the future, including any decision not to continue to
support current economic reform programs and to return to a more centrally
planned economy, or regional or local variations in the implementation of
economic reform policies, could have a significant effect on economic conditions
in the PRC or particular regions thereof. Any such developments could affect
current operations of and property ownership by foreign investors.
PRC Law; Evolving Regulations and Policies. The PRC's legal system is a
civil law system based on written statutes in which decided legal cases have
little value as precedents, unlike the common law system in the United States.
The PRC does not have a well-developed, consolidated body of law governing
foreign investment enterprises. As a result, the administration of laws and
regulations by government agencies may be subject to considerable discretion and
variation. In addition, the legal system of the PRC relating to foreign
investments is both new and continually evolving, and currently there can be no
certainty as to the application of its laws and regulations in particular
instances. Definitive regulations and policies with respect to such matters as
the permissible percentage of foreign investment and permissible rates of equity
returns have not yet been published, statements regarding these evolving
policies have been conflicting, and any such policies, as administered, are
likely to be subject to broad interpretation and discretion and to be modified,
perhaps on a case-by-case basis. As a legal system in the PRC develops with
respect to these new types of enterprises, foreign investors may be adversely
affected by new laws, changes to existing laws (or interpretations thereof) and
the preemption of provincial or local laws by national laws. In circumstances
where adequate laws exist, it may not be possible to obtain timely and equitable
enforcement thereof. The Company's activities in the PRC are by law subject, in
some circumstances, to administrative review and approval by various national
and local agencies of the PRC government. Although the Company believes that the
present level of support from local, provincial and national governmental
entities enjoyed by the Company benefits the Company's operations in connection
with administrative review and the receipt of approvals, there is no assurance
that such approvals, when necessary or advisable in the future, will be
forthcoming. The inability to obtain such approvals could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Bulletin Board Eligibility. The OTC Bulletin Board, upon which Dragon's
common stock is quoted, has required that all companies whose securities are
quoted on the OTC Bulletin Board must become reporting issuers with the SEC
pursuant to a phase-in schedule beginning on August 1, 1999.
<PAGE>10
We are required to become a reporting issuer on or before November 4, 1999, in
order to maintain the quotation of our common stock. In the event we are not
able to become a reporting issuer with the SEC by the deadline, we may be unable
to maintain our quotes on the OTC Bulletin Board. If we are unable to maintain
our quotes on the OTC Bulletin Board, our common stock will be quoted in the
"pink sheets" which will have an adverse affect on the ability of investors to
buy or sell our common stock. Upon becoming a reporting issuer, Dragon will
reapply to the OTC Bulletin Board.
Item 2. Management's Discussion and Analysis or Plan of Operation
General
The following discusses the Company's financial condition and results of
operations based upon the Company's consolidated financial statements which have
been prepared in accordance with generally accepted accounting principles.
The Company was formed on August 22, 1989, under the name First Geneva
Investments Inc. First Geneva Investment's business was to evaluate business for
possible acquisition. On July 28, 1998, entered into a share exchange agreement
with Allwin Newtech. Allwin Newtech was formed in 1998 for the purpose of
developing and market pharmaceutical drugs for the sale in China. Prior to the
acquisition of Allwin Newtech, First Geneva Investments had no operations.
Following information discusses Dragon's results of operations for the
year ended December 31, 1998, and for the six months ended June 30, 1999.
Because Dragon had no operations prior to 1998, the following financial
information will not be indicative of Dragon's operations in the future.
Results of Operations
For the Six Months Ended June 30, 1999.
Revenues. For the six months ended June 30, 1999 Dragon had no revenues.
Dragon had interest income of $9,346. Interest income is related to interest
earned on the cash receive from the private placement of common stock occurring
during the first part of 1999.
Expenses. Total expenses for the six months ended June 30, 1999 was
$189,767. The primary expenses related to management fees of $84,000,
depreciation of fix assets of $31,059, travel of $25,355 and salary and benefits
of $19,312. Management fees relate to the payment of two directors in the
aggregate amount of $96,000 per annum for services, depreciation related to
office equipment, travel to China related to the evaluation of pharmaceutical
companies in China and the acquisition of Nanjing Huaxin Biotech, and payment to
staff.
Net and Comprehensive Loss. Dragon Pharmaceutical had a net loss of
$140,620 and a comprehensive loss of $321,041 for the six months ended June 30,
1999. Calculated in this comprehensive loss was a foreign currency translation
adjustment of $140,620 related to Dragon's operations in China.
<PAGE>11
For the Period from February 10, 1998 (inception) to December 31, 1998.
Revenues. For the period from February 10, 1998 to December 31, 1998,
Dragon had no revenues. During this period, Dragon had interest income of
$9,737. Interest income is related interest earned on cash received from the
private placement of common stock occurring during the last six months of 1998.
Expenses. Total expenses for the period from February 10, 1998 to
December 31, 1998 was $481,454. The primary expenses related to stock option
compensation of $300,000, management fees of $41,943, travel of $41,784 and
legal of $23,241. Stock option compensation of $300,000 related to stock options
granted to officers and directors of the Company, management fees of $41,943
related to the payment to two directors for services, $41,784 related to travel
to China to evaluate pharmaceutical companies in China and legal expenses
related to the reorganization of Allwin Newtech and the raising of capital.
Net and Comprehensive Loss. Dragon Pharmaceutical had a net loss of
$471,717 and a comprehensive loss of $$473,862 for the period February 10, 1998
to December 31, 1998. Calculated in this comprehensive loss was a foreign
currency translation adjustment of $2,145 related to Dragon's operations in
China.
Liquidity and Capital Resources
Dragon Pharmaceutical is a development stage pharmaceutical and
biotechnological company that intends to manufacture and market pharmaceutical
products in China. At this time, the Company has no revenues, and does not
anticipate any substantial revenues until it is able to sell products in China.
Previously, the Company has raised funds through equity financings to fund its
operations and provide working capital. It is anticipated that the Company will
continue to finance its operations and those operations of its subsidiary
through equity and debt financings. As of December 31, 1998 and June 30, 1999,
the Company's working capital (deficit) was $829,493 and ($1,166,536). The
decrease in working capital for the six months ended June 30, 1999, was due to
the loss incurred for the period and payment under the share transfer agreement
with the Nanjing Medical Group.
In September 1998, the Company raised $1 million through the sale of
2,000,000 shares of common stock. The proceeds raised were for working capital.
In April 1999, entered into a $600,000 loan agreement. The $600,000 loan bears
interest at 8% and due in 6 months with the right of the Company to extent the
maturity date by an additional six months at the election of the Company. The
Company exercised this option to extend by six months in September 1999. As an
additional inducement, the Company issued 90,000 shares of common stock to the
lender. On October 14, 1999, the Company entered into a securities purchase
agreement with two investors located in Hong Kong. Under the terms of this
agreement, the investors purchased, in the aggregate, 600,000 shares of Common
Stock of the at $2.50 per share, with the Company raising in the aggregate $1.5
million. Further, as part of the securities purchase agreement, each investor
receive warrants to 300,000 shares of Common Stock at $2.50 per share. Each
warrant allows the holder to purchase one common share of the Company at a price
of $2.50 for a period of one year.
<PAGE>12
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's, or its suppliers' and customers' computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
Because the Company is in its development stage, it does not anticipate
the utilization of software or computer systems which will require any
significant modification or replacement in response to the Year 2000 Issue.
In connection with its interest in the Nanjing Medical Group, the
Company will make sure that it systems will Year 2000 compliant. The Company is
currently analyzing the year 2000 issue with the Nanjing Medical Group.
Item 3. Description of Property
Corporate Offices. The Company are located at 543 Granville Street,
Suite 1200, Vancouver, British Columbia, Canada V6C 1X8. The Company's office is
located at the office of one of the directors of the Company. The Company pays
no rent.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of September 30, 1999, certain
information with respect to the beneficial ownership of the Company's Common
Stock by (i) each stockholder known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock, (ii) each executive officer and
director of the Company, and (iii) each director and executive officer of the
Company as a group.
As of September 30, 1999, there were 10,090,000 shares of Common Stock
outstanding.
<TABLE>
<S> <C> <C>
Percentage
Number of Beneficially
Name and Address Shares(1) Owned
- ---------------------------------- --------------- ---------------
Arbora Portfolio Management
Gartenstrasse 38
Zurich, Switzerland 745,000 7.38%
Zhibin Cai
18 Main Street
Votian
Hubei, China 999,000 9.90%
Yu Fongmei
317 Meilhai Garden, Fontain
Beijing, China 900,000 8.26%
<PAGE>13
Chimei Wu Ho
396 Chungshan Road
China 2,400,000 23.79%
Longbin Liu 400,000(2) 3.85%
Shaun Maskerine 200,000(3) 1.98%
Ken Cai 300,000(2) 2.92%
Greg Hall 200,000(3) 1.98%
Jackson Cheng 309,000(4) 3.03%
Alexander Wick 100,000(3) *
All director and executive officer as a group 1,509,000(5) 13.49%
</TABLE>
(1) Except as otherwise indicated, the Company believes that the beneficial
owners of the Common Stock listed above, based on information furnished by
such owners, have sole investment and voting power with respect to such
shares, subject to community property laws where applicable. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock subject to options or
warrants currently exercisable, or exercisable within 60 days, are deemed
outstanding for purposes of computing the percentage ownership of the
person holding such option or warrants, but are not deemed outstanding for
purposes of computing the percentage ownership of any other person.
(2) Includes 100,000 shares of Common Stock owned with the balance representing
options exercisable within sixty days.
(3) Represents options exercisable within sixty days.
(4) Includes 209,000 shares of Common Stock owned with the balance representing
options exercisable within sixty days.
(5) Includes options to acquire 1,100,000 shares of Common Stock.
Item 5. Directors, Executive Officers, Promoters and Control Persons
The following table sets forth the name and age of the executive
officers and directors of the Company.
<TABLE>
<S> <C> <C> <C>
Name Position Age Period
- ------------------ --------------------------- ------- -------------------------
Longbin Liu President, Chief Executive 37 September 1998 - present
Officer and Director
Shaun Maskerine Director, Secretary 32 July 1998 - present
Ken Z. Cai Director, Chief Financial 35 September 1998 - present
Officer
<PAGE>14
Greg Hall Director 43 September 1998 - present
Jackson Cheng Director 34 September 1998 - present
Alexander Wick Director 61 September 1998 - present
</TABLE>
Executive Officers and Directors
The following is a description of Dragon's executive officers and
directors and their business background for at least the past five years.
Dr. Longbin Liu, M.D. is the President, Chief Executive Officer and
Director of Dragon. He has 15 years of biotechnology experience in North
America, Japan and China, most recently as an Assistant Professor of Medicine in
the Division of Cardiovascular Medicine of the University of Massachusetts
Medical Centre.
Mr. Shaun Maskerine is a Director, Secretary and Treasure of Dragon.
From July 7, 1998, to September 18, 1998, Mr. Maskerine was President of Dragon.
Mr. Maskerine is the President and Director of Aquarius Ventures Inc. and is
also the President and Director of Global Petroleum Inc. Aquarius Ventures Inc.
and Global Petroleum Inc. are both Vancouver Stock Exchange-listed companies.
Dr. Ken Z. Cai is Chief Financial Officer and a Director of Dragon. Dr.
Cai has a Ph.D in Mineral Economics from Queen's University in Kingston,
Ontario, as well as 13 years of experience in mining, public company
administration and financing. He is currently a Director and the President and
Chief Executive Officer of Minco Mining and Metals Corporation, a Toronto Stock
Exchange-listed company. Dr. Cai has extensive experience in conducting business
in China and is the Chairman of the Board of four Sino-foreign joint ventures.
Mr. Greg Hall is a Director of Dragon. Mr. Hall is a stockbroker with
17 years of corporate finance and public offerings experience. He is a former
member/seat holder of the Vancouver Stock Exchange. Mr. Hall was the Co-Founder
of both Pacific International Securities and Georgia Pacific Securities
Corporation. He currently is a Senior Vice President of Yorkton Securities Inc.
in Vancouver.
Mr. Jackson Cheng is a Director of Dragon. He is the President of Ulink
Marketing Inc. of Hong Kong (project finance) and is also CFO of an engineering
consulting firm.
Dr. Alexander Wick is a Director of Dragon. Dr. Wicks holds a doctorate
degree in synthetic organic chemistry from the Swiss Federal Institute of
Technology and has completed post-doctoral studies at Harvard University. He has
thirty years of biotechnology and pharmaceuticals experience and is currently
the President of Sylachim, a chemicals and pharmaceuticals producer.
Committees of the Board
The Board has an Executive Committee consisting of Messrs. Liu, Cai, and
Hall. The primary functions of the Executive Committee is to administer all
daily operating activities of the Company, its subsidiaries, and joint venture
companies.
<PAGE>15
Family Relationships
There are no family relationships between any director or executive
officer.
Item 6. Executive Compensation
Executive Compensation.
None of Dragon's directors, officers, or employees or officers and
employees of its subsidiaries earned in excess of $100,000 for the year ended
December 31, 1998.
The following table sets forth, for each of the compensation of the
Company's president during the last three complete fiscal years. No other
officers received annual compensation in excess of $100,000 during the last
three complete fiscal years.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLE
Long Term Compensation
------------------------------------------------------------
Annual Compensation Awards Payout
----------------------------------------- ------------------------------- --------------
Restricted
Other Annual Stock Securities LTIP All Other
Bonus Compensation Award(s) Underlying Payout Compensation
Year Salary ($) ($) ($) Option s (#) ($) ($)
---------------------------------------------------- ------------------------------- --------------------------
Shaun Maskerine 1998 5,943(1) -0- -0- -0- 200,000 -0- -0-
Longbin Liu 1998 36,000(1) -0- -0- -0- 300,000 -0- -0-
</TABLE>
(1) Pursuant to an oral consulting contract.
During 1998, Dr. Longbin Liu replaced Mr. Maskerine as President. Dr.
Liu's annual salary is $72,000 and includes stock options to purchase 300,000
shares of common stock pursuant to an oral consulting contract. Mr. Maskerine
remains as Secretary and a director of the Company. Mr. Maskerine's annual
salary is $24,000 and includes stock options to purchase 200,000 shares of
common stock pursuant to an oral consulting contract.
Stock Option Plans
Dragon has no Stock Option Plan. The Board of Directors has currently
approved to limit the number of options available to employees, directors and
officers of Dragon at 1,500,000. Unless otherwise provided by the Board, all
options are exercisable for a term of five years. Each option is exercisable
only so long as the optioned remains as a director or employee of Dragon. No
option is transferable by the optioned other than by will or the laws of descent
and distribution. As of March 31, 1999, options to acquire 1,200,000 shares of
common stock were outstanding.
<PAGE>16
OPTION GRANTS IN THE YEAR ENDED DECEMBER 31, 1998
INDIVIDUAL GRANTS
<TABLE>
<S> <C> <C> <C> <C>
Number of
Securities % of Total Option
Underlying Granted to
Options Granted Employees in Exercise or Base
Name 1998 Fiscal Year 1998 Price ($/Share) Expiration Date
- ---------------------- ------------------ ------------------------ ------------------- -------------------
Longbin Liu 300,000 25% $0.50 12/16/03
Shaun Maskerine 200,000 16.6% $0.50 12/16/03
Ken Cai 200,000 16.6% $0.50 12/16/03
Greg Hall 200,000 16.6% $0.50 12/16/03
Jackson Cheng 100,000 8.3% $0.50 12/16/03
Alexander Wick 100,000 8.3% $0.50 12/16/03
- --------------------- ------------------- -------------------------- ------------------- -----------------
</TABLE>
<TABLE>
<S> <C> <C>
FISCAL YEAR-END OPTION VALUE
Number of Securities Value(s) of Unexercised in-the-
Underlying Unexercised Money Options/SARs at Fiscal
Options/SARs at Fiscal Year Year End
End (#) ($)*
Exercisable/Unexercisable Exercisable/Unexercisable
Name Options at December 31, 1998 Options at December 31, 1998
- ---------------------- ------------------------------------------ -----------------------------------
Longbin Liu 150,000 / 150,000 $225,000 / $225,000
Shaun Maskerine 100,000 / 100,000 $150,000 / $150,000
Ken Cai 100,000 / 100,000 $150,000 / $150,000
Greg Hall 100,000 / 100,000 $150,000 / $150,000
Jackson Cheng 50,000 / 50,000 $75,000 / $75,000
Junichi Goto 50,000 / 50,000 $75,000 / $75,000
- --------------------- -------------------------------------------- ----------------------------------
</TABLE>
* The value of unexercised in-the-money stock options is based on a per share
price of $1.50 as quoted on the OTC Bulletin Board on December 31, 1998.
<PAGE>17
Item 7. Certain Relationships and Related Transactions
None.
Item 8. Description of Securities
The Company is authorized to issue 50,000,000 shares of Common Stock,
par value $0.001, of which 10,090,000 were outstanding as of September 30, 1999.
Common Stock
All issued and outstanding shares of Common Stock are fully paid and
non-assessable. Each holder of record of shares of Common Stock is entitled to
one vote for each share so held on all matters requiring a vote of shareholders,
including the election of directors. There are no preferences, conversion
rights, preemptive rights, subscription rights, or restrictions or transfers
attached to the Common Stock. In the event of liquidation, dissolution, or
winding up of the Company, the holders of Common Stock are entitled to
participate in the assets of the Company available for distribution after
satisfaction of and the claims of creditors.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters
The Company's Common Stock began trading on the OTC Bulletin Board under
the symbol "DRUG" on October 9, 1998. The following quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. The high and low prices of the Company's Common
Stock on a quarterly basis since October 9, 1998 are as follows:
Quarter High Low
- -------------------- ----- -----
June 30, 1999 $3.19 $1.88
March 31, 1999 $2.00 $1.00
December 31, 1998 $1.50 $ .94
October 9, 1998 $.75 $ .75
Item 2. Legal Proceedings.
The Company is not involved in any legal proceeding.
Item 3. Changes in and Disagreements with Accountants
Prior to the Reorganization, Dragon's accountant was Barry L. Friedman,
P.C., Las Vegas, Nevada. In connection with the reorganization with Allwin
Newtech, the Company changed its accountants Moore Stephens Ellis Foster,
Vancouver, British Columbia.
<PAGE>18
During the relationship with Barry L. Friedman, P.C. , there was no
disagreements with Dragon regarding any matters with respect to accounting
principles or practices, financial statement disclosure, or audit scope or
procedure, which disagreements, if not resolved to the satisfaction of the
former accountant, would have caused Barry L. Friedman, P.C., to make reference
to the subject matter of the disagreement in connection with its report. The
former accountants' report for Dragon's balance sheets as of March 31, 1998,
December 31, 1997, and December 31, 1996, and the statements of operations,
stockholders' equity and cash flows for the two years ended December 31, 1997,
December 31, 1996 and the period January 1, 1998 to March 31, 1998, is a part of
the financial statements of Dragon included in this registration statement.
Item 4. Recent Sales of Unregistered Securities
On August 17, 1998, Dragon Pharmaceutical (formerly First Geneva
Investments, Inc.) issued 7,000,000 shares of common stock and warrants to
purchase 1,000,000 shares of common stock in exchange for all the outstanding
shares of Allwin Newtech Ltd., a British Virgin Islands corporation, from 20
shareholders of Allwin Newtech. The issuance of the Dragon Pharmaceutical shares
of common stock were exempt pursuant to Regulation S. No commissions were paid.
On September 28, 1998, Dragon Pharmaceutical sold 2,000,000 shares of
common stock at $.50 per share to 11 investors. Dragon Pharmaceuticals relied on
Rule 504 of Regulation D as an exemption from Registration. No commissions were
paid.
On October 14, 1999, the Company sold, in the aggregate, 600,000 shares
of Common Stock of the at $2.50 per share to two investors located in Hong Kong.
Further, as part of the securities purchase agreement, each investor receive
warrants to 300,000 shares of Common Stock at $2.50 per share.. Each warrant
allows the holder to purchase one common share of the Company at a price of
$2.50 for a period of one year. The issuance of the Dragon Pharmaceutical shares
of common stock and warrants were exempt pursuant to Regulation S. No
commissions were paid.
Item 5. Indemnification of Directors and Officers
The Company has adopted Section 607.0850 of the 1999 Florida Statutes,
Business Organization of the State of Florida in its bylaws. Section 607.0850
states:
(1) A corporation shall have power to indemnify any person who was or is a
party to any proceeding (other than an action by, or in the right of, the
corporation), by reason of the fact that he or she is or was a director,
officer, employee, or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise against
liability incurred in connection with such proceeding, including any appeal
thereof, if he or she acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. The termination of any proceeding by
judgment, order, settlement, or conviction or upon a plea of nolo contendere or
its equivalent shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to be
in, or not opposed to, the best interests of the corporation or, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
<PAGE>19
(2) A corporation shall have the power to indemnify any person, who was
or is a party to any proceeding by or in the right of the corporation to procure
a judgment in its favor by reason of the fact that the person is or was a
director, officer, employee, or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
against expenses and amounts paid in settlement not exceeding, in the judgment
of the board of directors, the estimated expense of litigating the proceeding to
conclusion, actually and reasonably incurred in connection with the defense or
settlement of such proceeding, including any appeal thereof. Such
indemnification shall be authorized if such person acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation, except that no indemnification shall be made under
this subsection in respect of any claim, issue, or matter as to which such
person shall have been adjudged to be to be liable unless, and only to the
extent that, the court in which such proceeding was brought, or any other court
of competent jurisdiction, shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indeminity for such expenses which
such court shall deem proper.
PART F/S
The Company's financial statements for the period of December 31, 1997,
December 31, 1996, and the period January 1, 1998, to March 31, 1998, and
February 10, 1998 to December 31, 1998, and for the six months ended June 30,
1998, are attached to this Registration Statement.
PART III
Item 1. Index to Exhibits
Item 2. Description of Exhibits
2.1 Share Exchange Agreement between First Geneva Investments, Inc.
and Allwin Newtech Limited
3.1 Certificate of Incorporation
3.2 Amendment to Articles of Incorporation
3.3 Amendment to Articles of Incorporation
3.4 By-laws of First Geneva Investments, Inc.
10.1 Sino-Foreign Co-operative Company Contract
10.2 Sino-Foreign Joint Venture Contract
16.1 Letter regarding Changes in Certifying Accountant
<PAGE>20
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
DRAGON PHARMACEUTICAL INC.
Dated: November 3, 1999 By: /s/ LONGBIN LIU
_________________________________
Longbin Liu, President
<PAGE>F-1
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Consolidated Financial Statements
(Expressed in US Dollars)
INDEX
<TABLE>
<S> <C>
June 30, 1999
Consolidated Balance Sheet.................................................................F-2
Consolidated Statement of Stockholders' Equity.............................................F-3
Consolidated Statement of Operations and Comprehensive Income..............................F-4
Consolidated Statement of Cash Flows.......................................................F-5
Notes to Consolidated Financial Statements.................................................F-6
December 31, 1999
Report of Independent Accountants.........................................................F-14
Consolidated Balance Sheet................................................................F-15
Consolidated Statement of Stockholders' Equity............................................F-16
Consolidated Statement of Operations......................................................F-17
Consolidated Statement of Cash Flows......................................................F-18
Notes to Consolidated Financial Statements................................................F-19
March 31, 1998, December 31, 1997, and December 31, 1996
Independent Auditors' Report..............................................................F-27
Balance Sheet.............................................................................F-28
Statement of Operations...................................................................F-30
Statement of Changes in Stockholders' Equity..............................................F-31
Statement of Cash Flows...................................................................F-32
Notes to Financial Statements.............................................................F-33
</TABLE>
<PAGE>F-2
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments inc.)
Consolidated Balance Sheet
June 30, 1999
(Expressed in US Dollars)
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current
Cash and cash equivalents $ 180,295
Deposits on licence 201,511
Deposits on bio-technology equipment 200,000
------------------
581,806
Initial payment on the acquisition of Huaxin 1,500,000
Fixed assets 938,469
------------------
$ 3,020,275
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current
Loans payable 600,000
Accounts payable and accrued liabilities
- land lease payable 654,685
- accounts payable - related parties 49,519
- other accounts payable 38,303
------------------
1,342,507
------------------
Commitments
Stockholders' Equity
Share capital
Authorized:
50,000,000 Common shares at par value of $0.001 each Issued and
outstanding:
10,090,000 Common shares 10,090
Additional paid in capital 2,213,542
Accumulated other comprehensive income 74,441
Deficit accumulated during the development stage (620,305)
------------------
1,677,768
------------------
$ 3,020,275
==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-3
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments inc.)
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 1999
(Expressed in US Dollars)
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Deficit
accumulated Accumulated Total
Common stock Additional during the other Stock-
----------------------- paid-in development comprehensive holders'
Shares Amount capital stage income equity
------------- ----------- -------------- -------------- -------------- --------------
Balance, December 31, 1998 10,000,000 $ 10,000 $ 2,201,042 $ (471,717) $ (2,145) $ 1,737,180
Issued of common stock for
loan bonus 90,000 90 - - - 90
Foreign currency translation
Adjustment - - - - 76,586 76,586
Stock option compensation - - 12,500 - 12,500
Net loss for the period - - - (148,588) - (148,588)
------------ ---------- --------------- -------------- -------------- --------------
Balance, June 30, 1999 10,090,000 $ 10,090 $ 2,213,542 $ (620,305) $ 74,441 $ 1,677,768
============ ========== =============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-4
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Consolidated Statement of Operations and Comprehensive Income
Six Months Ended June 30, 1999
(Expressed in US Dollars)
(Unaudited)
<TABLE>
<S> <C>
Interest income $ 9,399
----------------
Expenses
Accounting 3,974
Consulting 4,606
Depreciation of fixed assets 10,269
Entertainment 836
Legal 10,393
Listing, filing and transfer agents 1,529
Loan interest 9,690
Management fees - related parties 48,000
Office and miscellaneous 2,622
Salary and benefits 20,608
Stock option compensation 12,500
Telephone 2,900
Travel 25,684
Foreign exchange loss 4,376
----------------
157,987
----------------
Net loss for the period $ (148,588)
=================
Other comprehensive income
Foreign currency translation adjustments $ 76,586
=================
Comprehensive loss for the period $ (108,002)
=================
Loss per share
Basic and diluted $ (0.01)
=================
Weighted average common
shares outstanding
Basic and diluted 10,034,724
=================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-5
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Consolidated Statement of Cash Flows
Six Months Ended June 30, 1999
(Expressed in US Dollars)
(Unaudited)
<TABLE>
<S> <C>
Cash flows from (used by) operating activities
Net loss for the period $ (148,588)
Adjustments to reconcile net loss to
net cash used in operating activities:
- loan bonus fee 90
- stock option compensation expense 12,500
- depreciation of fixed assets 10,269
Changes in assets and liabilities:
- increase in deposits (208,740)
- decrease in accounts payable (1,126)
-----------------
(335,595)
Cash flows used by investing activities
Initial payment on the acquisition of Huaxin (1,500,000)
Cash flows from financing activities
Loan proceeds 600,000
Foreign exchange gain on cash held in foreign currency 35,535
-----------------
Decrease in cash and cash equivalents (1,200,060)
Cash and cash equivalents, beginning of period 1,380,355
-----------------
Cash and cash equivalents, end of period $ 180,295
==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-6
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Notes to Consolidated Financial Statements
June 30, 1999
- -------------------------------------------------------------------------------
(Unaudited)
1. Nature of Business and Going Concern
The Company was formed on August 22, 1989 as First Geneva Investments Inc.
under the laws of the State of Florida. The Company changed its name to
Dragon Pharmaceuticals Inc. on August 31, 1998. Pursuant to a share
exchange agreement, dated July 29, 1998, the Company acquired 100% of the
issued and outstanding shares of Allwin Newtech Ltd. ("Allwin") by issuing
7,000,000 common shares of the Company. This transaction is accounted for
as a reverse acquisition (see Note 3).
Allwin was incorporated under the laws of British Virgin Islands on
February 10, 1998. Pursuant to a Sino-Foreign Co-operative Company
contract, dated April 18, 1998, Allwin and a Chinese corporation formed a
limited liability company under the Chinese law, named as Sanhe Kailong
Bio-pharmaceutical Co., Ltd. ("Kailong"), located in Hebei Province, China.
Allwin has a 75% interest in Kailong. Kailong is in the business of
research and development, production and sales of pharmaceutical products.
These consolidated financial statements have been prepared with generally
accepted accounting principles applicable to a going concern which
contemplates the realization of assets and the satisfaction of liabilities
and commitments in the normal course of business. The general business
strategy of the Company is to develop and manufacture pharmaceutical
products for sales in the market. The ability of the Company to continue as
a going concern is dependent upon obtaining necessary financing to complete
the development and upon future profitable production. Management's plans
in this regard are to raise equity financing as required. These
consolidated financial statements do not include any adjustments that might
result from this uncertainty.
2. Significant Accounting Policies
(a) Basis of Consolidation
These consolidated financial statements include the accounts of the
Company and its subsidiaries, Allwin and Kailong. All inter-company
transactions and balances have been eliminated.
(b) Principles of Accounting
These financial statements are stated in US Dollars and have been
prepared in accordance with accounting principles generally accepted in
the United States.
<PAGE>F-7
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Notes to Consolidated Financial Statements
June 30, 1999
- -----------------------------------------------------------------------------
(Unaudited)
2. Significant Accounting Policies (continued)
(c) Fixed Assets
Depreciation is based on the estimated useful lives of the assets and
is computed using the straight-line method of depreciation. Fixed
assets were recorded at cost less accumulated depreciation.
Depreciation was provided over the following annual rates:
Land lease 2%
Office equipment 20%
Land improvement 10%
(d) Foreign Currency Transactions
The Company, Allwin and Kailong maintain their accounting records in
their functional currencies (i.e., U.S. dollars, U.S. dollars and
Renminbi Yuan, respectively). They translate foreign currency
transactions into their functional currency in the following manner.
At the transaction date, each asset, liability, revenue and expense is
translated into the functional currency by the use of the exchange
rate in effect at that date. At the period end, monetary assets and
liabilities are translated into the functional currency by using the
exchange rate in effect at that date. The resulting foreign exchange
gains and losses are included in operations.
(e) Foreign Currency Translations
Assets and liabilities of the foreign subsidiary are translated into
U.S. dollars at exchange rates in effect at the balance sheet date.
Revenue and expenses are translated at average exchange rate. Gain and
losses from such translations are included in stockholders' equity.
(f) Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure 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.
<PAGE>F-8
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Notes to Consolidated Financial Statements
June 30, 1999
- -------------------------------------------------------------------------------
(Unaudited)
2. Significant Accounting Policies (continued)
(g) Financial Instruments and Concentration of Risks
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial
instruments include cash and accounts payable and accrued liabilities.
Fair values were assumed to approximate carrying values for these
financial instruments since they are short term in nature and their
carrying amounts approximate fair values or they are receivable or
payable on demand.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents. The Company places its cash and cash equivalents with
high credit quality financial institutions. The Company is operating
in China, which may give rise to currency risks due to fluctuations in
foreign exchange rates. The Company is not exposed to significant
interest or credit risks arising from these financial instruments. The
Company does not require collateral to support financial instruments.
(h) Cash and Cash Equivalents
Cash equivalents usually consist of high liquid investments with
maturities of three months or less. The Company has no cash
equivalents as at June 30, 1999.
(i) Income Taxes
The Company has adopted Statement of Financial Accounting Standards
(SFAS") No. 109, which requires the Company to recognize deferred tax
liabilities and assets for the expected future tax consequences of
events that have been recognized in the Company's financial statements
or tax returns. Under this method, deferred tax liabilities and assets
are determined based on the difference between the financial statement
carrying amounts and tax bases of assets using enacted rates in effect
in the years in which the differences are expected to reverse.
(j) Loss Per Share
Loss per share is computed using the weighted average number of shares
outstanding during the period. The Company adopted SFAS No. 128,
"Earnings per share". Diluted loss per share is equal to the basic
loss per share because common stock equivalents consisting of
2,000,000 warrants and 1,250,000 stock options outstanding at June 30,
1999 are anti-dilutive. However, they might be dilutive in future.
<PAGE>F-9
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Notes to Consolidated Financial Statements
June 30, 1999
- -------------------------------------------------------------------------------
(Unaudited)
2. Significant Accounting Policies (continued)
(k) Research and Development
The Company expenses research and development as incurred. As at June
30, 1999, the Company incurred no such costs.
3. Acquisition of Allwin Newtech Ltd.
Pursuant to a share exchange agreement, dated July 29, 1998, the
Company issued 7,000,000 shares in exchange for all the issued and
outstanding shares of Allwin. The transaction resulted in the former
shareholders of Allwin owning the majority of the issued and
outstanding shares of the Company. Accounting principles applicable to
reverse acquisition have been applied to record this transaction.
Under this basis of accounting, Allwin has been identified as the
acquirer and, accordingly, the consolidated entity is considered to be
a continuation of Allwin with the net liabilities of the Company
deemed to have been assumed by Allwin for a fair market value of
$1,636.
The net liabilities of the Company acquired by Allwin are summarized
as follows:
Current liabilities $1,636
<TABLE>
<S> <C> <C> <C>
4. Fixed Assets
1999
-------------------------------------------------------------
Accumulated Net book
Cost amortization Value
------------------- ---------------------- ------------------
Land lease $944,584 $20,466 $924,118
Office equipment 1,550 310 1,240
Land improvement 15,424 2,313 13,111
------------------- ---------------------- ------------------
961,558 23,089 938,469
=================== ====================== ==================
</TABLE>
The government of China granted a land lease to Kailong for a period
of fifty (50) years, starting June 8, 1998. All capital assets are
located in China.
5. Loans Payable
The loans are bearing interest at 8% per annum and due on April 19, 2000.
<PAGE>F-10
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Notes to Consolidated Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
(Unaudited)
6. Income Taxes
Kailong is subject to income taxes in China on its taxable income as
reported in its statutory accounts at a tax rate in accordance with the
relevant income tax laws applicable to Sino-foreign equity joint venture
enterprises. However, pursuant to the same income tax laws, Kailong is
fully exempt from income tax for two years starting from its first
profit-making year following by a 50% exemption for the next three years.
Allwin is not subject to income taxes.
The Company and Kailong have losses for tax purposes in the year and,
accordingly, no provision for income taxes are required.
7. Non Cash Financing Activities
The Company issued 90,000 common shares as a loan bonus fee for the
$600,000 loan raised.
8. Stock Options and Warrants
a) A summary of the status of the Company's stock options as of June
30, 1999 and the changes during the period then ended is
presented as follows:
<TABLE>
<S> <C> <C>
Weighted Average
Exercise
Shares Price
------------- ------------------
Balance outstanding, December 31, 1998 1,200,000 $ 0.50
Granted 50,000 $ 0.50
------------ -----------
Balance outstanding, June 30, 1999 1,250,000 $ 0.50
--------- -----------
Balance exercisable, June 30, 1999 625,000 $ 0.50
============ ===========
</TABLE>
<PAGE>F-11
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Notes to Consolidated Financial Statements
June 30, 1999
- -------------------------------------------------------------------------------
(Unaudited)
8. Stock Options and Warrants (continued)
b) Stock options outstanding as at June 30, 1999:
Number of Shares Exercise Price Expiry Date
------------------ ---------------- -----------------
1,200,000 $0.50 December 16, 2003
50,000 $0.50 June 15, 2004
c) Share purchase warrants outstanding as at June 30, 1999:
Number of Shares Exercise Price Expiry Date
------------------ ---------------- ---------------
2,000,000 $1.00 June 30, 2000
d) The Company adopted a Stock Option Plan ("the Plan") for the grant of
options to a consultant of the Company to purchase up to 50,000 common
stocks on June 15, 1999. Options granted under the Plan will be
exercisable from the date of the grant for a period of five years.
Half of the options granted (i.e., 25,000 shares) vest immediately at
the date of the grant. The remaining half of the options granted would
vest upon when the Company's share price closes at a price of US $5 or
greater for five (5) consecutive days.
The Company applies Accounting Principles Board ("APB") No. 25
"Accounting for Stock Issued to Employees" and related interpretations
in accounting for stock options. Under APB 25, when the exercise price
of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
Pro-forma information regarding Net Loss and Loss per Share is required
under SFAS 123, and has been determined as if the Company has accounted
for its stock options under the fair value method of SFAS 123. The
weighted average fair value of options granted on June 15, 1999 was
$3.48. The fair value of these options was estimated at the date of
grant using a Black-Scholes option pricing model with following
weighted average assumptions: no dividends, a risk-free interest rate
of 4.75%, volatility factor of the expected market price of the
Company's common stock of 81% and weighted average expected life of the
option of 2 years.
<PAGE>F-12
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Notes to Consolidated Financial Statements
June 30, 1999
- -------------------------------------------------------------------------------
(Unaudited)
8. Stock Options and Warrants (continued)
$12,500 was charged to income in the period on the 25,000 shares that were
immediately vested on the date of grant. No compensation expense was
charged to income on the remaining 25,000 shares subject to certain
conditions being achieved. However, the compensation expense of these
25,000 shares would be recognized based upon the excess of the fair market
value of the stock on the vesting date over its exercise price of $0.50 per
share. Therefore, the Company is likely to incur substantial compensation
expense in future years if these stock options are being exercised. If
compensation expense for stock options plans has been determined based on
the fair value at the grant dates for an awards under the plans, consistent
with the accounting provisions of SFAS 123, the Company's Net Loss and Loss
per Share would have been increased to the pro-forma amounts indicated
below:
As Reported Pro-forma
------------- ---------
Net Loss for the period (148,588) (272,838)
Loss per share-basic and diluted (0.01) (0.03)
9. Related Party Transactions
During the period, the Company incurred the following expenses to the
directors:
Management fee $48,000
10. Commitments
a) The other investor ("Chinese investor") of Kailong, who has a 25%
interest, has entered into a drug licence and related technology
transfer agreement. Under the agreement, the Chinese investor has to
pay RMB 8 Million (approximately US$1 million) in order to obtain the
licence. Pursuant to an agreement signed between Kailong and the
Chinese investor on July 10, 1998, Kailong will pay the RMB 8 Million
licence fee for the Chinese investor and the ownership of drug licence
and related technology will be transferred to Kailong when the drug
licence is obtained. Kailong has paid RMB1.6Million (US$201,511) as
deposit.
Subsequent to June 30, 1999, the transferor of the licence defaulted
on the agreement. The Company is seeking refund of the deposit.
<PAGE>F-13
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Notes to Consolidated Financial Statements
June 30, 1999
- -------------------------------------------------------------------------------
(Unaudited)
10. Commitments (continued)
b) The Company is committed to acquire a 75% interest in a Chinese
company in the pharmaceutical business for US $3,300,000 in cash. As
at June 30, 1999, the Company paid an initial deposit of US
$1,500,000.
The Company has capital expenditure commitment of US $115,000 to
purchase bio- technology equipment.
<PAGE>F-14
MOORE STEPHENS
ELLIS FOSTER LTD.
CHARTERED ACCOUNTANTS
1650 West 1st Avenue
Vancouver, BC Canada V6J 1G1
Telephone: (604) 737-8117 Facsimile: (604) 714-5916
E-Mail: [email protected]
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
DRAGON PHARMACEUTICALS INC. (formerly First Geneva Investments Inc.)
(A development stage enterprise)
We have audited the consolidated balance sheet of Dragon Pharmaceuticals Inc.
and subsidiaries (A development stage enterprise) (formerly First Geneva
Investments Inc.) as at December 31, 1998 and the related consolidated
statements of stockholders' equity, operations and cash flows for the period
from February 10, 1998 (inception) to December 31, 1998. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance 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, these consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as at
December 31, 1998 and the results of their operations and their cash flows for
the period from February 10, 1998 (inception) to December 31, 1998 in conformity
with generally accepted accounting principles in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and the satisfaction of liabilities in
the normal course of business. As discussed in Note 1 to the consolidated
financial statements, the continued operations of the Company as a going concern
is dependent upon its ability to obtain necessary financing to complete the
development of pharmaceutical products. Management's plans concerning these
matters are described in Note 1. These consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Vancouver, Canada MOORE STEPHENS ELLIS FOSTER LTD."
April 12, 1999 Chartered Accountants
- -------------------------------------------------------------------------------
MS
An independently owned and operated member of Moore Stephens North America Inc.
Members in principal cities throughout North America. Moore Stephens North
America Inc. is a member of Moore Stephens International Limited, members in
principal cities throughout the world.
<PAGE>F-15
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments inc.)
Consolidated Balance Sheet
December 31, 1998
(Expressed in US Dollars)
<TABLE>
<S> <C>
1998
--------
ASSETS
Current
Cash and cash equivalents $ 1,380,355
Deposits and prepaid expenses 192,771
------------------
1,573,126
Fixed assets 907,687
------------------
$ 2,480,813
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current
Accounts payable and accrued liabilities
- land lease payable $ 630,120
- management fees payable - related parties 36,000
- accounts payable - related parties 55,316
- other accounts payable 22,197
------------------
743,633
------------------
Commitment
Stockholders' Equity
Share capital
Authorized: 50,000,000 common shares at par value of $0.001 each
Issued and outstanding: 10,000,000 common shares 10,000
Additional paid in capital 2,201,042
Accumulated other comprehensive deficit (2,145)
Deficit accumulated during the development stage (471,717)
------------------
1,737,180
------------------
$ 2,480,813
==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-16
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments inc.)
Consolidated Statement of Stockholders' Equity
Period from February 10, 1998 (inception) to December 31, 1998
(Expressed in US Dollars)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Deficit
accumulated Accumulated Total
Common stock Additional during the other Stock-
------------------------ paid-in development comprehensive holders'
Shares Amount capital stage deficit equity
---------------------------------------------------------------------------------------------
Balance, February 10, 1998 1,000,000 $ 1,000 $ - $ (2,636) $ - $ (1,636)
Capitalization of accumulated
deficit on reverse acquisition - - (2,636) 2,636 - -
Reverse acquisition of Allwin
Newtech Ltd. on July 29, 1998 7,000,000 7,000 940,678 - - 947,678
Issuance of common stock at $0.50
per share net of offering costs
of $35,000 in December, 1998 2,000,000 2,000 963,000 - - 965,000
Stock option compensation - - 300,000 - - 300,000
Foreign currency translation
Adjustment - - - - (2,145) (2,145)
Net loss for the period - - - (471,717) - (471,717)
-------------- --------------- -------------- ------------- ------------- ------------------
Balance, December 31, 1998 10,000,000 $ 10,000 $2,201,042 $ (471,717) $ (2,145) $ 1,737,180
============== =============== ============== ============= ============= ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-17
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Consolidated Statement of Operations
(Expressed in US Dollars)
<TABLE>
<S> <C>
February 10
1998 (inception)
to
December 31
1998
------------------
Interest income $ 9,737
-----------------
Expenses
Accounting 12,000
Depreciation of fixed assets 11,797
Donations 11,682
Entertainment 11,211
Legal 23,241
Listing, filing and transfer agents 2,043
Management fees - related parties 41,943
Office and miscellaneous 9,092
Salary and benefits 13,058
Stock option compensation 300,000
Telephone 1,275
Travel 41,784
Foreign exchange loss 2,328
-----------------
481,454
-----------------
Net loss for the period $ (471,717)
=================
Other comprehensive loss
Foreign currency translation adjustments $ (2,145)
=================
Comprehensive loss for the period $ (473,862)
=================
Loss per share
Basic and diluted $ (0.06)
=================
Weighted average common
shares outstanding
Basic and diluted 8,054,795
=================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-18
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly Cigma Ventures Corp.)
Consolidated Statement of Cash Flows
(Expressed in US Dollars)
<TABLE>
<S> <C>
February 10
1998 (inception)
to
December 31
1998
-----------------
Cash flows from (used by) operating activities
Net loss for the period $ (471,717)
Adjustments to reconcile net loss to
net cash used in operating activities:
- stock option compensation expense 300,000
- depreciation 11,797
Changes in assets and liabilities:
- increase in deposits and prepaid expenses (192,771)
- increase in accounts payable and accrued liabilities 743,633
----------------
390,942
Cash flows used by investing activities
Purchase of fixed assets (891,914)
Cash flows from financing activities
Proceeds from issuance of common stock, net
of share issuance costs 1,913,678
Foreign exchange loss on cash held in foreign currency (32,351)
----------------
Increase in cash and cash equivalents 1,380,355
Cash and cash equivalents, beginning of period -
------------------
Cash and cash equivalents, end of period $ 1,380,355
==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-19
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Notes to Consolidated Financial Statements
December 31, 1998
- -------------------------------------------------------------------------------
(Expressed in US Dollars)
1. Nature of Business and Going Concern
The Company was formed on August 22, 1989 as First Geneva Investments Inc.
under the laws of the State of Florida. The Company changed its name to
Dragon Pharmaceuticals Inc. on August 31, 1998. Pursuant to a share
exchange agreement, dated July 29, 1998, the Company acquired 100% of the
issued and outstanding shares of Allwin Newtech Ltd. ("Allwin") by issuing
7,000,000 common shares of the Company. This transaction is accounted for
as a reverse acquisition (see Note 3).
Allwin was incorporated under the laws of British Virgin Islands on
February 10, 1998. Pursuant to a Sino-Foreign Co-operative Company
contract, dated April 18, 1998, Allwin and a Chinese corporation formed a
limited liability company under the Chinese law, named as Sanhe Kailong
Bio-pharmaceutical Co., Ltd. ("Kailong"), located in Hebei Province, China.
Allwin has a 75% interest in Kailong. Kailong is in the business of
research and development, production and sales of pharmaceutical products.
These consolidated financial statements have been prepared with generally
accepted accounting principles applicable to a going concern which
contemplates the realization of assets and the satisfaction of liabilities
and commitments in the normal course of business. The general business
strategy of the Company is to develop and manufacture pharmaceutical
products for sales in the market. The ability of the Company to continue as
a going concern is dependent upon obtaining necessary financing to complete
the development and upon future profitable production. Management's plans
in this regard are to raise equity financing as required. These
consolidated financial statements do not include any adjustments that might
result from this uncertainty.
2. Significant Accounting Policies
(a) Basis of Consolidation
These consolidated financial statements include the accounts of the
Company and its subsidiaries, Allwin and Kailong. All inter-company
transactions and balances have been eliminated.
(b) Principles of Accounting
These financial statements are stated in US Dollars and have been
prepared in accordance with accounting principles generally accepted
in the United States.
<PAGE>F-20
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Notes to Consolidated Financial Statements
December 31, 1998
- -------------------------------------------------------------------------------
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(c) Fixed Assets
Depreciation is based on the estimated useful lives of the assets and
is computed using the straight-line method of depreciation. Fixed
assets were recorded at cost less accumulated depreciation.
Depreciation was provided over the following annual rates:
Land lease 2%
Office equipment 20%
Land improvement 10%
(d) Foreign Currency Transactions
The Company, Allwin and Kailong maintain their accounting records in
their functional currencies (i.e., U.S. dollars, U.S. dollars and
Renminbi Yuan, respectively). They translate foreign currency
transactions into their functional currency in the following manner.
At the transaction date, each asset, liability, revenue and expense is
translated into the functional currency by the use of the exchange
rate in effect at that date. At the period end, monetary assets and
liabilities are translated into the functional currency by using the
exchange rate in effect at that date. The resulting foreign exchange
gains and losses are included in operations.
(e) Foreign Currency Translations
Assets and liabilities of the foreign subsidiary are translated into
U.S. dollars at exchange rates in effect at the balance sheet date.
Revenue and expenses are translated at average exchange rate. Gain and
losses from such translations are included in stockholders' equity.
(f) Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure 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.
<PAGE>F-21
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Notes to Consolidated Financial Statements
December 31, 1998
- -------------------------------------------------------------------------------
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(g) Financial Instruments and Concentration of Risks
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial
instruments include cash and accounts payable and accrued liabilities.
Fair values were assumed to approximate carrying values for these
financial instruments since they are short term in nature and their
carrying amounts approximate fair values or they are receivable or
payable on demand.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents. The Company places its cash and cash equivalents with
high credit quality financial institutions. The Company is operating
in China, which may give rise to currency risks due to fluctuations in
foreign exchange rates. The Company is not exposed to significant
interest or credit risks arising from these financial instruments. The
Company does not require collateral to support financial instruments.
(h) Cash and Cash Equivalents
Cash equivalents usually consist of high liquid investments with
maturities of three months or less. As at December 31, 1998, the
Company's cash equivalents consist of redeemable term deposits.
(i) Income Taxes
The Company has adopted Statement of Financial Accounting Standards
(SFAS") No. 109, which requires the Company to recognize deferred tax
liabilities and assets for the expected future tax consequences of
events that have been recognized in the Company's financial statements
or tax returns. Under this method, deferred tax liabilities and assets
are determined based on the difference between the financial statement
carrying amounts and tax bases of assets using enacted rates in effect
in the years in which the differences are expected to reverse.
(j) Loss Per Share
Loss per share is computed using the weighted average number of shares
outstanding during the period. The Company adopted SFAS No. 128,
"Earnings per share". Diluted loss per share is equal to the basic
loss per share because common stock equivalents consisting of
2,000,000 warrants and 1,200,000 stock options outstanding at December
31, 1998 are anti-dilutive, however, they may be dilutive in future.
<PAGE>F-22
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Notes to Consolidated Financial Statements
December 31, 1998
- -------------------------------------------------------------------------------
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(k) Research and Development
The Company expenses research and development as incurred. As at
December 31, 1998, the Company incurred no such costs.
3. Acquisition of Allwin Newtech Ltd.
Pursuant to a share exchange agreement, dated July 29, 1998, the Company
issued 7,000,000 shares in exchange for all the issued and outstanding
shares of Allwin. The transaction resulted in the former shareholders of
Allwin owning the majority of the issued and outstanding shares of the
Company. Accounting principles applicable to reverse acquisition have been
applied to record this transaction. Under this basis of accounting, Allwin
has been identified as the acquirer and, accordingly, the consolidated
entity is considered to be a continuation of Allwin with the net
liabilities of the Company deemed to have been assumed by Allwin for a fair
market value of $1,636.
The net liabilities of the Company acquired by Allwin are summarized as
follows:
Current liabilities $1,636
<TABLE>
<S> <C> <C> <C> <C>
4. Fixed Assets
1998
----------
Accumulated Net book
Cost amortization Value
------------------- ---------------------- -------------------
Land lease $903,614 $10,542 $893,072
Office equipment 1,483 148 1,335
Land improvement 14,755 1,475 13,280
=================== ====================== ===================
$919,852 $12,165 $907,687
=================== ====================== ===================
</TABLE>
The government of China granted a land lease to Kailong for a period of
fifty (50) years, starting June 8, 1998. All capital assets are located in
China.
<PAGE>F-23
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Notes to Consolidated Financial Statements
December 31, 1998
- -------------------------------------------------------------------------------
(Expressed in US Dollars)
5. Income Taxes
Kailong is subject to income taxes in China on its taxable income as
reported in its statutory accounts at a tax rate in accordance with the
relevant income tax laws applicable to Sino-foreign equity joint venture
enterprises. However, pursuant to the same income tax laws, Kailong is
fully exempt from income tax for two years starting from its first
profit-making year following by a 50% exemption for the next three years.
Allwin is not subject to income taxes.
The Company and Kailong have losses for tax purposes in the year and,
accordingly, no provision for income taxes are required.
The Company has approximately $171,000 of losses for tax purposes as of
December 31, 1998, which may reduce taxable income and income taxes in
future years. The utilization of these losses to reduce future income taxes
will depend on generating sufficient taxable income prior to their
expiration through the year 2018. In addition, the Internal Revenue Code of
1986 includes provisions which may limit the net operating loss
carryforwards available for uses in any given year if certain events occur,
including significant changes in stock ownership.
Deferred income taxes of the Company reflect the net tax effects of (i)
operating loss carryforwards; and (ii) temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
The Company evaluates its valuation allowance requirements on an annual
basis based on projected future operations. When circumstances change and
this causes a change in management's judgement about the realizability of
deferred tax assets, the impact of the change on the valuation allowance is
generally reflected in current operations.
The tax effect of significant items that give rise to the Company's
deferred tax asset are as follows:
Net operating loss carryforward $ 58,000
Stock option compensation 102,000
Less: valuation allowance (160,000)
-------------------
$ -
===================
<PAGE>F-24
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Notes to Consolidated Financial Statements
December 31, 1998
- -------------------------------------------------------------------------------
(Expressed in US Dollars)
5. Income Taxes (continued)
A reconciliation of the Federal statutory income tax to the Company's
effective income tax rate for the period ended December 31, 1998 is as
follows:
Federal statutory income tax rate 34%
Change in valuation allowance (34%)
--------
Effective income tax rate -
========
6. Stock Options and Warrants
(a) A summary of the status of the Company's stock options as of December
31, 1998 and the changes during the period then ended is presented as
follows:
<TABLE>
<S> <C> <C>
Weighted Average
Exercise
Shares Price
-------------------- -------------------
Balance, February 10, 1998 - $ -
Granted 1,200,000 $ 0.50
--------- -----------
Balance outstanding, December 31, 1998 1,200,000 $ 0.50
--------- -----------
Balance exercisable, December 31, 1998 600,000 $ 0.50
======= ===========
</TABLE>
(b) Stock options outstanding as at December 31, 1998:
Number of Shares Exercise Price Expiry Date
----------------- -------------- -----------------
1,200,000 $0.50 December 16, 2003
(c) On December 16, 1998, The Company adopted a Stock Option Plan ("the
Plan") for the grant of options to directors of the Company to
purchase up to 1,200,000 common stocks. Options granted under the Plan
will be exercisable from the date of the grant for a period of five
years. Half of the options granted (i.e., 600,000 shares) vest
immediately at the date of the grant. The remaining half of the
options granted would vest upon when the Company achieving the ability
to produce commercially acceptable and revenue generating products.
<PAGE>F-25
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Notes to Consolidated Financial Statements
December 31, 1998
- -------------------------------------------------------------------------------
(Expressed in US Dollars)
6. Stock Options and Warrants (continued)
(d) The Company applies Accounting Principles Board ("APB") No. 25
"Accounting for Stock Issued to Employees" and related interpretations
in accounting for stock options. Under APB 25, when the exercise price
of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
Pro-forma information regarding Net Loss and Loss per Share is
required under SFAS 123, and has been determined as if the Company has
accounted for its stock options under the fair value method of SFAS
123. The weighted average fair value of options granted in 1998 was
$1.13. The fair value of these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted average assumptions: no dividends, a risk-free interest rate
of 5.5%, volatility factor of the expected market price of the
Company's common stock of 56% and a weighted average expected life of
the option of 5 years.
$300,000 was charged to income in 1998 on the 600,000 shares that were
immediately vested on the date of grant. No compensation expense was
charged to income on the remaining 600,000 shares subject to certain
conditions being achieved. However, the compensation expense of these
600,000 shares would be recognized based upon the excess of the fair
market value of the stock on the vesting date over its exercise price
of $0.50 per share. Therefore, the Company is likely to incur
substantial compensation expense in future years if these stock
options are being excercised. If compensation expense for stock option
plans has been determined based on the fair value at the grant dates
for an awards under the plans, consistent with the accounting
provisions of SFAS 123, the Company's Net Loss and Loss per Share
would have been increased to the pro-forma amounts indicated below:
<TABLE>
<S> <C> <C>
As Reported Pro-forma
---------------- -------------
Net loss for the year $471,717 $1,527,717
Loss per share - basic and diluted $(0.06) $(0.19)
</TABLE>
(e) Share purchase warrants outstanding as at December 31, 1998:
Number of Shares Exercise Price Expiry Date
- ------------------ ---------------- ---------------
2,000,000 $1.00 June 30, 2000
<PAGE>F-26
DRAGON PHARMACEUTICALS INC.
(A development stage enterprise)
(Formerly First Geneva Investments Inc.)
Notes to Consolidated Financial Statements
December 31, 1998
- -------------------------------------------------------------------------------
(Expressed in US Dollars)
7. Related Party Transactions
During the period, the Company incurred the following expenses to the
directors:
Management fee $41,943
Management fees will be paid to two directors of the Company at $72,000 and
$24,000 per annum, respectively, under agreements with the Company.
8. Commitment
The other investor ("Chinese investor") of Kailong, who has a 25% interest,
has entered into a drug licence and related technology transfer agreement.
Under the agreement, the Chinese investor has to pay RMB 8 Million
(approximately US$960,000) in order to obtain the licence. Pursuant to an
agreement signed between Kailong and the Chinese investor on July 10, 1998,
Kailong will pay the RMB 8 Million licence fee for the Chinese investor and
the ownership of drug licence and related technology will be transferred to
Kailong when the drug licence is obtained. As at December 31, 1998, Kailong
has paid RMB1.6Million (US$192,771) as deposit.
9. Non-Cash Investing and Financing Activities
As described in Note 3, as a non-cash investing activity, the Company
issued 7,000,000 shares in exchange for all the issued and outstanding
shares of Allwin.
<PAGE>F-27
BARRY L. FRIEDMAN, P.C.
Certified Public Accountant
1582 Tulita Drive OFFICE (702) 361-8414
Las Vegas, Nevada 89123 FAX NO. (702) 896-0278
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors April 24, 1998
First Geneva Investments, Inc.
Miami, Florida
I have audited the accompanying Balance Sheets of First Geneva
Investments, Inc., (A Development Stage Company), as of March 31, 1998, December
31, 1997, and December 31, 1996, and the related statements of operations,
stockholders' equity and cash flows for the two years ended December 31, 1997,
December 31, 1996, and the period January 1, 1998, to March 31, 1998. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted auditing
standards. 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of First Geneva
Investments, Inc., (A Development Stage Company) as of March 31, 1998, December
31, 1997, and December 31, 1996, and the results of its operations and cash
flows for the two years ended December 31, 1997, and December 31, 1996, and the
period January 1, 1998, to March 31, 1998, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has no established source of revenue. This
raises substantial doubt about its ability to continue as a going concern.
Management's plan in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ BARRY L. FREIDMAN
----------------------------
Barry L. Friedman
Certified Public Accountant
<PAGE>F-28
FIRST GENEVA INVESTMENTS, INC.
(A Development Stage Company)
BALANCE SHEET
ASSETS
<TABLE>
<S> <C> <C> <C>
March 31, December 31, December 31,
1998 1997 1996
CURRENT ASSETS: $ 0 $ 0 $ 0
============== =============== ==============
TOTAL CURRENT ASSETS $ 0 $ 0 $ 0
============== =============== ==============
OTHER ASSETS: $ 0 $ 0 $ 0
============== =============== ==============
TOTAL OTHER ASSETS $ 0 $ 0 $ 0
============== =============== ==============
TOTAL ASSETS $ 0 $ 0 $ 0
============== =============== ==============
</TABLE>
See accompanying notes to financial statements & audit report.
<PAGE>F-29
FIRST GENEVA INVESTMENTS, INC.
(A Development Stage Company)
BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C>
March 31, December 31, December 31,
1998 1997 1996
------------- ----------------- ----------------
CURRENT LIABILITIES:
Accounts Payable $ 1,636 $ 0 $ 0
============= ================== =================
TOTAL CURRENT LIABILITIES $ 1,636 $ 0 $ 0
============= ================== =================
STOCKHOLDERS' EQUITY: (Note 1)
Common stock, $1.00 par value
authorized 500 Shares issued and
outstanding at December 31, 1996-500
shares $ 500
Common stock, $ .001 par value
authorized 50,000,000 shares issued
and outstanding at December 31, 1997-
1,000,000 shares $ 1,000
March 31, 1998-1,000,000 shares $ 1,000
Additional paid in Capital 0 0 500
Accumulated loss (2,636) (1,000) (1,000)
TOTAL STOCKHOLDERS' EQUITY $ (1,636) $ 0 $ 0
============= ================== ===============
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 0 $ 0 $ 0
============== ================== =================
</TABLE>
See accompanying notes to financial statements & audit report
<PAGE>F-30
FIRST GENEVA INVESTMENTS, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
<TABLE>
<S> <C> <C> <C> <C>
Aug. 22, 1989
Jan. 1, 1998 to Year Ended Year Ended (inception)
Mar. 31, 1998 Dec. 31, 1997 Dec. 31, 1996 Mar. 31, 1998
--------------- -------------- -------------- --------------
INCOME:
Revenue $ 0 $ 0 $ 0 $ 0
================= ================= ================ ===============
EXPENSES:
General, Selling and
Administrative $ 1,636 $ 0 $ 0 $ 2,636
============== ================= ================= ==============
Total Expenses $ 1,636 $ 0 $ 0 $ 2,636
============== ================= ================= ==============
Net Loss $ (1,636) $ 0 $ 0 $ (2,636)
============== ================= ================= ==============
Net Loss per weighted
share (Note 2) $ (.0016) $ .0000 $ .0000 $ (.0026)
============== ================ ================= ==============
Weighted average
number of common
shares outstanding 1,000,000 1,000,000 1,000,000 1,000,000
============== ================ ================ ==============
</TABLE>
See accompanying notes to financial statements & audit report.
<PAGE>F-31
FIRST GENEVA INVESTMENTS, INC.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C>
Additional
Common Stock paid-in Accumulated
Shares Amount Capital Deficit
------------ ------------ ------------- --------------
Balance,
December 31, 1995 500 $ 500 $ 500
Net loss year ended
December 31, 1996 0
----------- ------------ ------------- --------------
Balance,
December 31, 1996 500 $ 500 $ 500 $ (1,000)
June 23, 1997
changed par value
from $1.00 to $ .001 (499) 499
June 23, 1997
forward stock split 2,000:1 999,500 999 (999)
Net loss year ended
December 31, 1997 0
--------- ------------ ------------- --------------
Balance,
December 31, 1997 1,000,000 $ 1,000 $ 0 $ (1,000)
Net loss January 1, 1998 to
March 31, 1998 (1,636)
--------- ------------ ------------- --------------
Balance,
March 31, 1998 1,000,000 $ 1,000 $ 0 $ (2,636)
========= =========== ============= ==============
</TABLE>
See accompanying notes to financial statements & audit report.
<PAGE>F-32
FIRST GENEVA INVESTMENTS, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
<TABLE>
<S> <C> <C> <C> <C>
Aug. 22, 1989
Jan. 1, 1998 to Year Ended Year Ended (inception)
Mar. 31, 1998 Dec. 31, 1997 Dec. 31, 1996 Mar. 31, 1998
----------------- ----------------- -------------- -----------------
Cash Flows from
Operating Activities:
Net Loss $ (1,636) $ 0 $ 0 $ (2,636)
Adjustment to reconcile
net loss to net cash
provided by operating
activities 0 0 0 0
Changes in assets and
liabilities:
Increase in current
liabilities: 1,636 0 0 1,636
--------------- ---------------- -------------- ------------
Net cash used in
operating activities $ 0 $ 0 $ 0 $ (1,000)
Cash Flows from
investing activities 0 0 0 0
Cash Flows from
Financing Activities:
Issuance of common
stock for services 0 0 0 1,000
--------------- ---------------- -------------- ------------
Net increase (decrease)
in cash $ 0 $ 0 $ 0 $ 0
Cash,
Beginning of period 0 0 0 0
--------------- ---------------- -------------- ------------
Cash, End of period $ 0 $ 0 $ 0 $ 0
=============== ================ =============== =============
</TABLE>
See accompanying notes to financial statements & audit report.
<PAGE>F-33
FIRST GENEVA INVESTMENTS, INC.
(A Development Stage Company) March 31, 1998,
December 31, 1997, and December 31, 1996
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - History and Organization of the Company
The Company was organized August 22, 1989, under the laws of the State
of Florida as First Geneva Investments, Inc. The Company currently has no
operations and, in accordance with SFAS #7, is considered a development company.
On September 25, 1989, the Company issued all of its authorized common
stock, 500 shares of its $1.00 par value common stock for services of $1,000.
On June 23, 1997, the State of Florida approved the Company's restated
Articles of Incorporation, which increased its capitalization from 500 common
shares to 50,000,000 common shares. The par value was changed from $1.00 to $
.001.
On June 23, 1997, the Company forward split its common stock 2,000:1,
thus increasing the number of outstanding common stock shares from 500 shares to
1,000,000 shares.
NOTE 2 - Accounting Policies and Procedures
The Company has not determined its accounting policies and procedures,
except as follows:
1. The Company uses the accrual method of accounting.
2. Earnings or loss per share is calculated using the weighted average
number of shares of common stock outstanding.
3. The Company has not yet adopted any policy regarding payment of
dividends. No dividends. No dividends have been paid since inception.
NOTE 3 - Warrants and Options
There are no warrants or options outstanding to issue any additional
shares of common stock of the Company.
<PAGE>F-34
FIRST GENEVA INVESTMENTS, INC.
(A Development Stage Company) March 31, 1998,
December 31, 1997, and December 31, 1996
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - Going Concern
The Company's financial statements are prepared using the generally
accepted accounting principles applicable to a going concern, which contemplates
the realization of assets and liquidation of liabilities in the normal course of
business. However, the Company has no current source of revenue. Without
realization of additional capital, it would be unlikely for the Company to
continue as a going concern. It is management's plan to seek additional capital
through a merger with an existing operating company.
NOTE 5 - Related Party Transactions
The Company neither owns or leases any real or personal property. Office
services are provided without charge by an officer. Such costs are immaterial to
the financial statements and accordingly, have not been reflected therein. The
officers and directors of the Company are involved in other business activities
and may, in the future, become involved in other business opportunities. If a
specific business opportunity becomes available, such persons may face a
conflict in selecting between the Company and their other business interests.
The Company has not formulated a policy for the resolution of such conflicts.
SHARE EXCHANGE AGREEMENT
DATED AS AT JULY 28, 1998
AMONG:
FIRST GENEVA INVESTMENTS, INC.
AND:
ALLWIN NEWTECH LTD.
AND:
THE SHAREHOLDERS OF ALLWIN NEWTECH LTD.
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Section Title Page
1. PURCHASE AND SALE........................................................................................2
2. VENDORS'REPRESENTATIONS AND WARRANTIES...................................................................2
3. VENDORS'ACKNOWLEDGEMENTS.................................................................................7
4. PURCHASER'S REPRESENTATIONS AND WARRANTIES...............................................................9
5. CONDITIONS PRECEDENT....................................................................................14
6. COVENANTS OF THE PURCHASER AND THE VENDORS..............................................................16
7. CLOSING.................................................................................................18
8. PROPRIETARY INFORMATION.................................................................................18
9. INDEMNIFICATION.........................................................................................19
10. GENERAL.................................................................................................20
</TABLE>
Schedules
The following are Schedules to this Agreement, and are incorporated herein by
reference:
SCHEDULE "A" List of Shareholders of Allwin
SCHEDULE "B" Memorandum and Articles of Association of Allwin
SCHEDULE "C" List of Allwin's Material Contracts
SCHEDULE "D" Allwin's Financial Statements
SCHEDULE "E" List of Powers of Attorney
SCHEDULE "F" First Geneva's Financial Statements
SCHEDULE "G" List of 10% Holders of First Geneva
<PAGE>
THIS SHARE EXCHANGE AGREEMENT made and dated as of the 29th day of July, 1998,
AMONG:
FIRST GENEVA INVESTMENTS, INC., a company incorporated
pursuant to the laws of the State of Florida and having an
office at 5600 French Plum Lane, Tamarac, Florida, U.S.A.
33321
(the "Purchaser" or "First Geneva")
AND:
ALLWIN NEWTECH LIMITED, a company incorporated pursuant to
the laws of the British Virgin Islands having its registered
office at Arawak Chambers, P.O. Box 173, Road Town, Tortola,
British Virgin Islands
(the "Company" or "Allwin")
AND:
THE SHAREHOLDERS OF THE COMPANY SET OUT IN SCHEDULE "A"
ATTACHED HERETO
(collectively, the "Vendors")
WITNESSES THAT WHEREAS:
A. The Vendors are the legal and beneficial owners of all of the issued
and outstanding shares in the capital of the Company (collectively, the
"Allwin Shares") and all of the issued and outstanding warrants to
purchase common shares in the capital of the Company (collectively, the
"Allwin Warrants");
B. The Purchaser has agreed to acquire from the Vendors, and the Vendors
have agreed to transfer to the Purchaser, the Allwin Shares and Allwin
Warrants in accordance with the terms and conditions of this Agreement;
NOW THEREFORE in consideration of the recitals, the following
agreements and the payment of $1.00 made by each party to the other,
the receipt and sufficiency of which is acknowledged by each party, the
parties agree on the following terms:
<PAGE>
1. PURCHASE AND SALE
1.1 On the Closing Date (as defined in section 7.1 of this Agreement),
subject to the terms and conditions hereof, the Purchaser will purchase
from the Vendors and the Vendors will assign, sell and transfer to the
Purchaser the Allwin Shares and the Allwin Warrants for and in
consideration of the aggregate sum of US$3,500,000 (the "Purchase
Price").
1.2 The Purchaser will, on the Closing Date, satisfy the Purchase Price by
issuing to the Vendors, pro rata in accordance with their respective
security holdings in the Company as set out in Schedule "A", 7,000,000
common shares of the Purchaser (the "First Geneva Shares") and common
share purchase warrants (the "First Geneva Warrants") entitling the
holders thereof to purchase an aggregate of 2,000,000 common shares of
the Purchaser, on substantially the same terms as the Allwin Warrants.
1.3 In no event shall the Purchaser be required to purchase less than
90% of the Allwin Shares and Allwin Warrants.
2. VENDORS' REPRESENTATIONS AND WARRANTIES
2.1 In order to induce the Purchaser to enter into and consummate this
Agreement, Allwin represents and warrants to the Purchaser, and
acknowledges that the Purchaser is relying on such representations and
warranties in entering into this Agreement and completing the
transactions contemplated hereby, that:
(a) the Company was duly incorporated under the laws of the British Virgin
Islands and is validly subsisting and in good standing thereunder;
(b) the Memorandum and Articles of Association of the Company are as set
forth in Schedule "B" attached hereto;
(c) the authorized capital of the Company consists of 50,000,000 common
shares without par value, of which 7,000,000 common shares are, or at
the Time of Closing will be, duly and validly issued and outstanding,
as fully paid, to the parties set out in Schedule "A" attached hereto.
(d) except as provided for in the agreement set out in Schedule "C", the
Company does not currently own, directly or indirectly, any shares or
interests in any other company or firm;
(e) the Vendors are the legal and beneficial owners of the Allwin Shares
and have the right to transfer legal and beneficial title and
ownership of the Allwin Shares to the Purchaser, free of all liens,
claims, charges, restrictions on transfer, voting agreements, voting
trusts, escrow conditions and encumbrances whatsoever;
(f) the Vendors have due and sufficient right and authority to enter into
this Agreement on the terms and conditions herein set out and all
necessary action has been taken by or on the part of the Vendors to
authorize the execution, delivery and performance of this Agreement
and all other documents contemplated hereby;
<PAGE>
(g) this Agreement constitutes a valid and legally binding contract,
enforceable against the Vendors in accordance with its terms, subject
to equitable remedies and the rights of creditors generally;
(h) the Allwin Shares are not subject to or affected by any actual, or, to
the best of Allwin's knowledge after having made due inquiry, pending
or threatened investigation or proceeding by or before, any securities
regulatory authority, court, administrative agency or other tribunal;
(i) to the best of Allwin's knowledge, the Allwin Shares were originally
issued in full compliance with all applicable securities laws;
(j) Allwin does not have any information or knowledge of any material
facts pertaining to the Company which, if known to the Purchaser,
might reasonably be expected to deter the Purchaser from completing
the transactions contemplated hereby;
(k) other than the Allwin Shares, no person, firm or corporation has any
right, agreement or option, whether oral or in writing, or a right
capable of becoming a right, agreement or option:
(i) for the purchase of the Allwin Shares,
(ii) for the purchase, subscription or issuance of any of the unissued
shares in the capital of the Company, or
(iii)to require Allwin to purchase, redeem or otherwise acquire the
Allwin Shares,
except as set out in Schedule "A" attached hereto;
(l) the Company has the corporate capacity and power to carry on the
business presently carried on by it;
(m) the Company owns, holds, possesses or lawfully uses in the operation
of its business all material permits, approvals, waivers, licences or
similar authorizations ("Authorizations") of any governmental entity
having jurisdiction which are necessary for it to conduct its business
as presently conducted in compliance with all applicable laws. All
such Authorizations are valid, subsisting and in good standing, the
Company is not in material default or breach thereof and, to the best
of Allwin's knowledge, no proceeding is pending or threatened to
revoke or limit any Authorization. All Authorizations are renewable by
their terms or in the ordinary course of business without the need to
comply with any special rules or procedures, agree to any materially
different terms or conditions or pay any amounts other than routine
filing fees. None of the Vendors nor any affiliate thereof owns or has
any proprietary, financial or other interest (direct or indirect) in
any such Authorization;
<PAGE>
(n) the Company is not in material breach of, and the business of the
Company is and has been conducted in material compliance with, all
applicable statutes, ordinances, bylaws, regulations, decrees or court
orders to which it is subject;
(o) the unaudited balance sheet of the Company as at July 28, 1998 and the
unaudited statement of profit and loss for the period from January 1,
1998 to July 28, 1998 (the "Company's Financial Statements"), which
are attached hereto as Schedule "D", are true and correct in every
material respect and present fairly the assets, liabilities and the
financial position of the Company as at July 28, 1998 in accordance
with United States' generally accepted accounting principles, on a
basis consistently applied;
(p) the Company has not guaranteed, or agreed to guarantee, any material
debt, liability or other obligation of any person, firm or
corporation;
(q) the Company is not indebted to the Vendors or to any affiliate of the
Company, or associate of the Vendors, other than as set forth in the
Company's Financial Statements;
(r) neither the Vendors nor any directors, officers, shareholders or
consultants of the Company are now indebted or under obligation to the
Company on any account whatsoever;
(s) no dividends or other distribution of any kind on any shares in the
capital of the Company and no distribution of assets in any form or
manner have been made, declared or authorized nor will any be
declared, paid or authorized until after the Closing Date;
(t) there are no material actions, suits, judgements, investigations or
proceedings outstanding or pending, or, to the best of the Company's'
knowledge, threatened against or affecting the Company at law or in
equity or before or by any federal, provincial, state, municipal,
county or regional government or governmental authority, domestic or
foreign, including any department, commission, bureau, board,
administrative agency or regulatory body of any of the foregoing
(individually, a "Governmental Authority");
(u) no authorization, approval, order, license, permit, consent,
certificate or registration of any Governmental Authority, court or
arbitrator, or any other party, and no registration, declaration or
filing by the Company or the Vendors with any Governmental Authority,
court or arbitrator, or any other party, is required in order for the
Company and the Vendors to execute and deliver this Agreement and all
other documents and instruments to be delivered by the Company and the
Vendors pursuant hereto;
(v) no material action, suit, judgement, investigation, inquiry,
assessment, reassessment, litigation, determination or administrative
or other proceeding or arbitration before or of any court, arbitrator
or Governmental Authority or dispute with any Governmental Authority
is in process or, to the best of the Company's knowledge, threatened,
against or relating to the business of the Company and, to the best of
the Company's' knowledge, no state of facts exists which could
constitute the basis therefor;
<PAGE>
(w) there are no violations or, to the best of the Company's knowledge,
potential violations, of any material patents, trademarks, trade
names, copyrights or trade secrets or other proprietary rights of any
person which has been or may be caused by the conduct of the Company's
business in the manner in which it has heretofore been conducted;
(x) to the best of the Company's knowledge, the business of the Company
complies in all material respects with all applicable laws,
judgements, decrees, orders, injunctions, rules, statutes and
regulations of all courts, arbitrators or Governmental Authority,
including all environmental, health and safety statutes and
regulations;
(y) the business of the Company is not subject to any judicial or
administrative proceeding alleging the violation of any applicable
environmental, health or safety law, judgement, decree, order,
injunction, rule, statute or regulation;
(z) to the best of the Company's knowledge, the conduct of the business of
the Company does not infringe the rights or interests in the patents,
trade-marks, trade names, trade secrets, industrial designs,
copyrights, or any other industrial or intellectual property whether
domestic or foreign, of any other person;
(aa) all material contracts entered into by the Company (including without
limitation employment agreements, change of control agreements,
collective agreements, finders' fee agreements, agreements to pay
bonuses, agreements in respect of gifts or donations, agreements
regarding dividends or distributions or containing restrictions on
dividends or distributions, agreements with respect to borrowings,
agreements with respect to loans or advances, agreements with respect
to investments, guarantees or other financial support for the
obligations of others, management or consulting agreements, leases of
real property, leases of personal property, non-competition or
non-solicitation agreements, confidentiality agreements, and licensing
or royalty agreements relating to intellectual property) are listed in
Schedule "D" attached hereto and are in good standing and have not
been assigned or encumbered, and neither the Company nor any other
party thereto is in default thereunder in any material respect;
(bb) the Company has no employees and has not yet commenced business
operations;
(cc) neither this Agreement nor the performance of the transactions
contemplated hereby will conflict with or result in a violation of the
Memorandum or Articles of Association of the Company, any resolutions
of its directors or shareholders or of any agreement to which any of
the Vendors or the Company is a party or any law, rule or regulation,
judgement or order to which any of them are subject and will not give
any person any right to terminate or cancel any material agreement or
any right enjoyed by the Company or result in the creation or
imposition of any material lien, encumbrance or restriction of any
nature whatsoever in favour of a third party upon or against the
Allwin Shares or the assets of the Company;
<PAGE>
(dd) neither the Company nor the Vendors have retained, employed or
introduced any broker, finder or other person who would be entitled to
a brokerage commission or finder's fee arising out of the transactions
contemplated hereby;
(ee) there are no material liabilities of the Company of any kind
whatsoever, contingent or otherwise, existing on the date hereof in
respect of which the Company has knowledge and which the Company or
the Purchaser may be liable on or after the completion of the
transactions contemplated hereby;
(ff) all material transactions of the Company have been properly recorded
in the books and records of the Company, and the minute books of the
Company contain, or at the Time of Closing will contain, records of
all material contracts and meetings and proceedings of shareholders
and directors thereof;
(gg) the directors and officers of the Company are as follows:
Name Office
-------------- ----------------------
Lonydin Liu President and Director
Ken Cai Director
Jackson Cheng Director
(hh) the Company owns or possesses all assets, rights and property
necessary to the conduct of its business after the Closing
substantially in the same manner as it was conducted prior to the
Closing, and none of the Vendors has any claim in respect thereof.
2.2 The representations and warranties of the Company contained in this
Agreement or any certificates or documents delivered pursuant to the
provisions hereof or in connection with the transactions contemplated
hereby will be true at and as of the Time of Closing as though such
representations and warranties were made at and as of such time.
Notwithstanding any investigations or inquiries made by the Purchaser prior
to the Closing or the waiver of any condition by the Purchaser, the
representations and warranties of the Company will survive the Closing Date
and, notwithstanding the Closing, will continue in full force and effect
for one year from the Closing, except those relating to tax matters which
will survive until the expiration of any statutory limitation period and
those relating to fraud or intentional misrepresentation which will survive
indefinitely.
3. VENDORS' ACKNOWLEDGEMENTS
3.1 In order to induce the Purchaser to enter into and consummate this
Agreement, the Vendors acknowledge, knowing that the Purchaser is
relying on such acknowledgements in entering into this Agreement and
completing the transactions contemplated hereby, that:
<PAGE>
(a) the Vendors are resident in the jurisdictions set out under their
respective names in Schedule "A" to this Agreement;
(b) the First Geneva Shares, First Geneva Warrants and common shares
issuable upon exercise of the First Geneva Warrants (collective, the
"First Geneva Securities") are subject to restrictions on resale and
may not be resold by the Vendors until all applicable hold periods
have elapsed, except in compliance with all applicable securities laws
and stock exchange requirements;
(c) no prospectus will be filed by the Purchaser with any securities
regulatory authority in connection with the distribution of the First
Geneva Securities and, as a result:
(i) the Vendors are restricted from using most of the civil remedies
available under applicable securities laws;
(ii) the Vendors may not receive information that would otherwise be
required to be provided to them under applicable securities laws;
and
(iii)the Purchaser is relieved from certain obligations that would
otherwise apply under applicable securities laws;
(d) First Geneva has no current intention of becoming a reporting issuer
under applicable securities laws in any province of Canada and,
accordingly, any Vendor resident in those jurisdictions will be
required to hold the First Geneva Securities for an indefinite period
of time;
(e) this Agreement is made with the Vendors in reliance upon the Vendors'
representations to the Purchaser, which by the Vendors' execution of
this Agreement, the Vendors hereby confirm that the First Geneva
Shares to be purchased by Vendors will be acquired for investment
purposes for the Vendors' own accounts and not with a view to the
resale or distribution of any part thereof in violation of the
applicable United States federal and state securities laws;
(f) the Vendors represent that they are experienced in evaluating and
investing in securities of companies in the development stage and
acknowledge that they are able to fend for themselves, can bear the
economic risk of the investment, and have such knowledge and
experience in financial and business matters that they are capable of
evaluating the merits and risks of the investment in the First Geneva
Shares and First Geneva Warrants;
(g) the Vendors represent that they have not been organized solely for the
purpose of acquiring the First Geneva Shares and First Geneva
Warrants;
(h) each of the Vendors represents that:
(i) if a resident of the United States, it is an "accredited
investor" as that term is defined in SEC Rule 501(a) of
Regulation D; or
<PAGE>
(ii) if not a resident of the United States, (1) that is not a U.S.
Person as defined in Rule 902(o) of Regulation S, that it is not
acquiring the First Geneva Shares and First Geneva Warrants for
the account or benefit of any U.S. person, and that the exchange
is occurring in an "Offshore Transaction" as defined in Rule
902(i) of Regulation S; (2) that it agrees to resell the First
Geneva Securities only in accordance with the provisions of
Regulation S; and (3) that it understands that Purchaser has the
right to refuse to register any transfer of the First Geneva
Securities not made in accordance with the provisions of
Regulation S;
(i) the Vendors understand that the First Geneva Securities have not
been registered under the Securities Act of 1933 ("Securities
Act") on the grounds that the transactions contemplated by this
Agreement and the issuance of the securities hereunder is exempt
from registration under the Securities Act pursuant to Regulation
D and S promulgated thereunder, and that the Purchaser's reliance
on such exemption is predicated on the Vendors' representations
set forth herein;
(j) the Vendors understand that the First Geneva Securities issued,
or to be issued, hereunder may not be sold, transferred, or
otherwise disposed of without registration under the Securities
Act or an exemption therefrom, and that in the absence of an
effective registration statement covering the First Geneva
Security, or an available exemption from registration under the
Securities Act, the First Geneva Securities must be held
indefinitely. In particular, the Vendors are aware that the First
Geneva Securities may not be sold pursuant to Securities Act Rule
144 unless all of the conditions of that Rule are met;
(k) the Vendors understand, to the extent applicable, that each
certificate or other document evidencing the First Geneva
Securities shall be endorsed with a legend disclosing that the
common stock and warrants have not been registered under the
Securities Act and may not be sold, transferred, assigned,
pledged or hypothecated absent registration under the Securities
Act or an exemption therefrom;
(l) the Vendors understand that the First Geneva Securities shall not
be transferable unless the transfer is registered with the
Securities and Exchange Commission or unless, in the opinion of
First Geneva's counsel, that there is an exemption available from
registration. The Vendors will cause any successor or proposed
transferee of their First Geneva Securities to agree to take and
hold such shares or common stock and warrants subject to such
restrictions. The Vendors acknowledge the restrictions upon their
right to transfer the First Geneva Securities.
(m) The Vendors understand that each certificate representing the
First Geneva Securities shall (unless otherwise permitted or
unless the securities evidenced by such certificate shall have
been registered under the Securities Act) be stamped or otherwise
imprinted with a legend in the following form (in addition to any
legend required under applicable state securities laws):
<PAGE>
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY
NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND
ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED."
4. PURCHASER'S REPRESENTATIONS AND WARRANTIES
4.1 In order to induce the Vendors to enter into and consummate this Agreement,
the Purchaser represents and warrants to the Vendors, and acknowledges that
the Vendors are relying on such representations and warranties in entering
into this Agreement and completing the transactions contemplated hereby,
that:
(a) the Purchaser is duly incorporated pursuant to the laws of the State
of Florida and is in good standing with respect to the filing of
annual reports thereunder;
(b) the authorized capital of the Purchaser consists of 50,000,000 common
shares with a par value of US$0.001, of which 1,000,000 common shares
are issued and outstanding as fully paid and non-assessable;
(c) the Purchaser will issue the First Geneva Shares and First Geneva
Warrants against payment for same pursuant to section 1.2 of this
Agreement, free of all liens, claims, charges, restrictions on
transfer, voting agreements, voting trusts, escrow conditions and
encumbrances whatsoever, other than statutory hold periods or other
restrictions imposed by applicable securities laws or securities
regulatory bodies;
(d) the Purchaser has due and sufficient right and authority to enter into
this Agreement on the terms and conditions herein set out and all
necessary corporate action has been taken by or on the part of the
Purchaser to authorize the execution and delivery of this Agreement
and all other documents contemplated hereby;
(e) this Agreement constitutes a valid and legally binding contract,
enforceable against the Purchaser in accordance with its terms,
subject to equitable remedies and the rights of creditors generally;
(f) other than the First Geneva Securities, no person, firm or corporation
has any right, agreement or option, whether oral or in writing, or a
right capable of becoming a right, agreement or option:
(i) for the purchase of the First Geneva Securities,
(ii) for the purchase, subscription or issuance of any of the unissued
shares in the capital of the Purchaser, or
<PAGE>
(iii)to require the Purchaser to purchase, redeem or otherwise
acquire the First Geneva Securities,
(g) the audited financial statements of the Purchaser as at March 31,
1998, which are attached hereto as Schedule "G", are true and correct
in every material respect and present fairly the assets, liabilities
and the financial position of the Purchaser as at March 31, 1998 and
the sales, earnings and the results of its operations for the periods
then ended in accordance with United States' generally accepted
accounting principles, on a basis consistently applied;
(h) copies of all documents filed with the United States Securities and
Exchange Commission (the "Public Record") since March 31, 1998 have,
or will have, prior to the Closing, been provided to the Vendors'
counsel;
(i) except as set out in the Public Record, since March 31, 1998:
(i) there has not been any material adverse change in the financial
position or condition of the Purchaser or any damage, loss or
other change in circumstances materially affecting the business
of the Purchaser or its right or capacity to carry on business,
(ii) the Purchaser has not waived or surrendered any right of material
value,
(iii)the Purchaser has not discharged or satisfied or paid any
material lien or encumbrance or obligation or liability other
than current liabilities in the ordinary course of business, and
(iv) the business of the Purchaser has been carried on in the ordinary
course;
(j) there are no material liabilities, contingent or otherwise, of the
Purchaser, of which the Purchaser has knowledge, not disclosed in the
financial statements of the Purchaser as at March 31, 1998 or the
Public Record, except those non-material liabilities incurred in the
ordinary course of business of the Purchaser since March 31, 1998 and
the Purchaser has not guaranteed, or agreed to guarantee, any material
debt, liability or other obligation of any person, firm or
corporation;
(k) no dividends or other distribution on any shares in the capital of the
Purchaser has been made, declared or authorized since its
incorporation nor will any be declared, paid or authorized after the
date hereof and up to the Closing Date;
(l) except as set out in the Public Record, no payments of any kind have
been made or authorized by or on behalf of the Purchaser to or on
behalf of officers, directors, shareholders or employees of the
Purchaser or under any management agreements with the Purchaser, other
than in the ordinary course of business;
(m) the Purchaser has not entered into any material contracts (including
without limitation employment agreements, change of control
agreements, collective agreements, finders' fee agreements, agreements
to pay bonuses, agreements in respect of gifts or donations,
<PAGE>
agreements regarding dividends or distributions or containing
restrictions on dividends or distributions, agreements with respect to
borrowings, agreements with respect to loans or advances, agreements
with respect to investments, guarantees or other financial support for
the obligations of others, management or consulting agreements, leases
of real property, leases of personal property, non-competition or
non-solicitation agreements, confidentiality agreements, and licensing
or royalty agreements relating to intellectual property);
(n) except as set out in the Public Record, there are no material actions,
suits, judgements, investigations or proceedings outstanding or
pending or, to the best of the Purchaser's knowledge, threatened
against or affecting the Purchaser at law or in equity or before or by
any federal, provincial, state, municipal or other governmental
department, commission, board, bureau, agency, court or tribunal;
(o) there are no pensions, profit sharing, group insurance or similar
plans or other deferred compensation plans affecting the Purchaser;
(p) except as set out in the Public Record, no shareholders, directors,
officers, employees or consultants of the Purchaser are now indebted
or under obligation to the Purchaser on any account whatsoever;
(q) except as set out in the Public Record, the Purchaser is not indebted
to any of its shareholders, directors, officers, employees or
consultants, other than in the ordinary course of business;
(r) the performance of this Agreement will not be in violation of the
Articles or By-laws of the Purchaser or of any agreement to which the
Purchaser is a party and will not give any person any right to
terminate or cancel any agreement or any right enjoyed by the
Purchaser and will not result in the creation or imposition of any
lien, encumbrance or restriction of any nature whatsoever in favour of
a third party upon or against the assets of the Purchaser;
(s) the Purchaser has not retained, employed or introduced any broker,
finder or other person who would be entitled to a brokerage commission
or finder's fee arising out of the transactions contemplated hereby;
(t) there are no liabilities of the Purchaser of any kind whatsoever,
contingent or otherwise, existing on the date hereof in respect of
which the Purchaser may be liable on or after the completion of the
transactions contemplated hereby other than:
(i) liabilities disclosed or referred to in this Agreement, and
(ii) liabilities incurred in the ordinary course of business, none of
which are materially adverse to the business, operations, affairs
or financial condition of the Purchaser.
<PAGE>
(u) the Purchaser is currently listed on the NASD OTC Bulletin Board under
the trading symbol FGAI;
(v) the Purchaser is not subject to any cease trade or any other similar
order of any securities regulatory authority, and, to the knowledge of
the Purchaser, no investigation or other similar proceeding is
currently in progress or pending before any securities regulatory
authority;
(w) the Purchaser is current in the filing of all public disclosure
documents required to be filed by the Purchaser under applicable
securities and other legislation and all such filings are complete and
correct and do not contain any misrepresentations and the Purchaser is
not in default of any material requirement of the securities laws of
any jurisdiction;
(x) as of the date hereof, to the best of its knowledge, Schedule "H"
lists all of the holders of 10% or more of the total number of
outstanding shares in the capital of the Purchaser;
(y) to the best of the Purchaser's knowledge, all currently issued and
outstanding common shares of the Purchaser were originally issued in
full compliance with all applicable securities laws;
(z) the Purchaser does not have any information or knowledge of any
material facts pertaining to it which, if known to the Vendors, might
reasonably be expected to deter the Vendors from completing the
transactions contemplated hereby;
(aa) no authorization, approval, order, license, permit, consent,
certificate or registration of any Governmental Authority, court or
arbitrator, or any other party, and no registration, declaration or
filing by the Purchaser with any Governmental Authority, court or
arbitrator, or any other party, is required in order for the Purchaser
to execute and deliver this Agreement and all other documents and
instruments to be delivered by it pursuant hereto;
(bb) no action, suit, judgement, investigation, inquiry, assessment,
reassessment, litigation, determination or administrative or other
proceeding or arbitration before or of any court, arbitrator or
Governmental Authority or dispute with any Governmental Authority is
in process or, to the best of the Purchaser's knowledge, threatened,
against or relating to the business of the Purchaser or any of its
assets or properties and, to the best of the Purchaser's knowledge, no
state of facts exists which could constitute the basis therefor;
(cc) to the best of the Purchaser's knowledge, the business of the
Purchaser complies in all material respects with all applicable laws,
judgements, decrees, orders, injunctions, rules, statutes and
regulations of all courts, arbitrators or Governmental Authority,
including all environmental, health and safety statutes and
regulations;
<PAGE>
(dd) the Purchaser does not have any contracts, agreements, pension plans,
benefit plans, profit sharing plans, bonus plans, undertakings or
arrangements, whether oral, written, or implied, with employees,
lessees, licensees, managers, accountants, suppliers, agents,
distributors, officers, lawyers, or others which cannot be terminated
on not more than one month's notice and for an amount not in excess of
$1,000;
(ee) the Purchaser has complied with all laws, rules, regulations and
orders applicable to it relating to employment, including those
relating to wages, hours, collective bargaining, occupational health
and safety, workers' hazardous materials, employment standards, pay
equity and workers' compensation;
(ff) all requisite tax returns and reports of the Purchaser have been
prepared and filed and are all substantially true, correct and
complete, the Purchaser has been assessed for applicable income tax
for all years up to and including the fiscal year of the Purchaser
ended December 31, 1998, all taxes and other government charges have
been paid to date or, if not yet due, have been accrued and are
reflected in the Purchaser's Financial Statements, and, to the best of
the Purchaser's knowledge, there are no contingent tax liabilities;
(gg) the Purchaser has made adequate provision for all tax payable for the
current period for which returns or records are not yet required to be
filed, and the Purchaser has not made any agreements or other
arrangements providing for, or received any waivers allowing, an
extension of time within which any tax return or record must be filed
or any tax, tax deficiency or other charge to any government agency
must be paid;
(hh) there are no actions, audits, assessments, reassessments, suits,
proceedings, investigations or claims now pending or, to the best of
the Purchaser's knowledge, threatened against the Purchaser in respect
of taxes or governmental charges asserted by any Governmental
Authority, nor has the Purchaser been notified that any tax returns
previously filed will be subject to reassessment;
(ii) all material transactions of the Purchaser have been properly recorded
in the books and records of the Purchaser, and the minute books of the
Purchaser contain records of all material contracts and meetings and
proceedings of shareholders and directors thereof;
(jj) the Purchaser owns, holds, possesses or lawfully uses in the operation
of its business all Authorizations of any governmental entity having
jurisdiction which are necessary for it to conduct its business as
presently conducted in compliance with all applicable laws. All such
Authorizations are valid, subsisting and in good standing, the
Purchaser is not in material default or breach thereof and, to the
best of the Purchaser's knowledge, no proceeding is pending or
threatened to revoke or limit any Authorization. All Authorizations
are renewable by their terms or in the ordinary course of business
without the need to comply with any special rules or procedures, agree
to any materially different terms or conditions or pay any amounts
other than routine filing fees. Neither the Purchaser nor any
affiliate thereof owns or has any proprietary, financial or other
<PAGE>
interest (direct or indirect) in any such Authorization; and
(kk) the Purchaser has not granted a power of attorney to any person.
4.2 The representations and warranties of the Purchaser contained in this
Agreement or any certificates or documents delivered pursuant to the
provisions hereof or in connection with the transactions contemplated
hereby will be true at and as of the Time of Closing as though such
representations and warranties were made at and as of such time.
Notwithstanding any investigations or inquiries made by the Purchaser prior
to the Closing or the waiver of any condition by the Purchaser, the
representations and warranties of the Purchaser will survive the Closing
Date and, notwithstanding the Closing, will continue in full force and
effect for one year from the Closing, except those relating to tax matters
which will survive until the expiration of any statutory limitation period
and those relating to fraud or intentional misrepresentation which will
survive indefinitely. 5. CONDITIONS PRECEDENT
5.1 All obligations of the Vendors and the Purchaser under this Agreement are
subject to:
(a) the receipt of all necessary consents, approvals, orders and
authorizations from any regulatory or Governmental Authority or stock
exchange having jurisdiction over the transactions contemplated
hereby; and
(b) there being no injunction or restraining order issued preventing, and
no pending or threatened claim, action, litigation or proceeding,
judicial or administrative, or investigation against, the Vendors, the
Purchaser or the Company by any regulatory or Governmental Authority
or stock exchange for the purpose of enjoining or preventing the
consummation of the transactions contemplated hereby or otherwise
claiming that this Agreement or the consummation of this Agreement is
improper or would give rise to proceedings under any statute or rule
of law, which would have a material adverse impact on the business of
the Company or the Purchaser, as the case may be.
5.2 All obligations of the Vendors under this Agreement are further subject to
the fulfilment, at or before the Time of Closing, of each of the following
conditions:
(a) the Vendors carrying out a due diligence review of the business of the
Purchaser to their satisfaction;
(b) the representations and warranties of the Purchaser being true and
correct in all material respects as of the Closing Date;
(c) the Purchaser having complied in all material respects with all
covenants to be performed by it hereunder;
(d) the Purchaser delivering to the Vendors at the Time of Closing:
<PAGE>
(i) a certified copy of the resolution of the directors of the
Purchaser approving this Agreement and the transactions
contemplated hereby;
(ii) a certified copy of the resolution of the directors of the
Purchaser authorizing the issuance of the First Geneva
Securities;
(iii)certificates representing the First Geneva Shares and First
Geneva Warrants registered in the names of the Vendors in
accordance with section 1.2 of this Agreement;
(iv) a certificate of the Purchaser certifying, as of the Date of
Closing, that:
(A) the representations and warranties of the Purchaser set out
in this Agreement were true and correct as of the date of
this Agreement and are true and correct in all material
respects as of the Date of Closing as if made by the
Purchaser on the Closing Date,
(B) the Purchaser has complied in all mater ial respects with
all covenants to be performed by it hereunder;
(v) an opinion dated as of the Closing Date from counsel for the
Purchaser addressed to the Vendors in a form acceptable to the
Company, acting reasonably.
5.3 The conditions set out in section 5.2 of this Agreement are for the
exclusive benefit of the Vendors and the Vendors may waive the conditions
in whole or in part by delivering to the Purchaser at or before the Time of
Closing a written waiver to that effect stated to be made pursuant to this
subsection and executed by each of the Vendors.
5.4 All obligations of the Purchaser under this Agreement are further subject
to the fulfilment, at or before the Time of Closing, of each of the
following conditions:
(a) the Purchaser carrying out a due diligence review of the business of
the Company to its satisfaction;
(b) the representations and warranties of the Company and the Vendors
being true and correct in all material respects as of the Closing
Date;
(c) the Company and the Vendors having complied in all material respects
with all covenants to be performed by them hereunder;
(d) the Vendors delivering to the Purchaser at the Time of Closing:
(i) a certified copy of the resolution of the directors of the
Company consenting to the transfer of the Allwin Shares from the
Vendors to the Purchaser and authorizing the issuance of a new
share certificate in the name of the Purchaser,
<PAGE>
(ii) certificates representing the Allwin Shares registered in the
names of the Vendors, duly endorsed for transfer to the Purchaser
or transfer documents transferring the Allwin Shares to the
Purchaser,
(iii)a certificate representing the Allwin Shares registered in the
name of the Purchaser,
(iv) a certificate of the Vendors certifying, as of the Date of
Closing, that:
(A) the representations and warranties of the Company and the
Vendors set out in this Agreement were true and correct as
of the date of this Agreement and are true and correct in
all material respects as of the Date of Closing as if made
by the Company or the Vendors, as the case may be, on the
Closing Date,
(B) the Company and the Vendors have complied in all material
respects with all covenants to be performed by them
hereunder;
(v) an opinion dated as of the Closing Date from counsel for the
Vendors addressed to the Purchaser in a form acceptable to the
Purchaser, acting reasonably; and
(vi) such other certificates, instruments and other documents as the
Purchaser may reasonably request.
5.5 The conditions set out in section 5.4 of this Agreement are for the
exclusive benefit of the Purchaser and the Purchaser may waive the
conditions in whole or in part by delivering to the Vendors, at or before
the Time of Closing, a written waiver to that effect stated to be made
pursuant to this subsection and executed by the Purchaser.
6. COVENANTS OF THE PURCHASER AND THE VENDORS
6.1 The Purchaser covenants with the Vendors that up to and including the
Closing or the termination of this Agreement:
(a) it will provide the Vendors with full and complete access to its
books, records, financial statements, and other documents, articles of
incorporation, by-laws, minutes of its board of directors and its
committees, investment agreements, material contracts, as well as such
other documents and materials as the Vendors or their legal counsel
may deem reasonable and necessary to conduct an adequate due diligence
investigation of the Purchaser, its operations and financial condition
prior to the Closing;
(b) it will use all reasonable efforts to obtain all consents, approvals
or waivers that may be necessary or desirable in connection with the
transactions contemplated hereby, and execute and deliver all such
further documents and assurances and take such steps or measures as
may be reasonably appropriate to enable it to be able to satisfy its
obligations hereunder and put itself in a position where the
<PAGE>
transactions contemplated hereby can be closed on or about August 15,
1998; and
(c) up to and including the Closing, the Purchaser will not, without the
written consent of the Vendors:
(i) declare or pay any dividend, or make any distribution of its
assets to its shareholders, or purchase or retire any of its
shares,
(ii) allot, issue, grant or enter into any agreement for the allotment
or issuance of any shares or securities, other rights to acquire
shares or securities, securities convertible into, exchangeable
for, or which otherwise carry the right to acquire, directly or
indirectly, any shares or securities in its capital, except as
contemplated by this Agreement or referred to herein;
(iii)sell all or any part of its assets, or agree to do or perform
any act or enter into any transaction or negotiation which could
reasonably be expected to interfere with or be contemplated by
this Agreement, or which would render inaccurate any of the
representations and warranties set out in section 4 of this
Agreement, or
(iv) merge, amalgamate or consolidate into or with any entity, or
enter into any other corporate reorganization.
6.2 The Company covenants with the Purchaser that up to and including the
Closing or the termination of this Agreement:
(a) it will provide the Purchaser with full and complete access to the
Company's books, records, financial statements, and other documents,
articles of incorporation, by-laws, minutes of its board of directors
and its committees, investment agreements, material contracts, as well
as such other documents and materials as the Purchaser or its legal
counsel may deem reasonable and necessary to conduct an adequate due
diligence investigation of the Company, its operations and financial
condition prior to the Closing;
(b) it will use all reasonable efforts to obtain all consents, approvals
or waivers that may be necessary or desirable in connection with the
transactions contemplated hereby, and execute and deliver all such
further documents and assurances and take such steps or measures as
may be reasonably appropriate to enable them to be able to satisfy
their obligations hereunder and put themselves in a position where the
transactions contemplated hereby can be closed by on or about August
15, 1998; and
(c) it will carry on its businesses in the usual and ordinary course in
compliance with all applicable laws and will not, without the prior
written consent of the Purchaser:
<PAGE>
(i) declare or pay any dividend, or make any distribution of its
assets to its shareholders, or purchase or retire any of its
shares;
(ii) allot, issue, grant or enter into any agreement for the allotment
or issuance of any shares or securities, other rights to acquire
shares or securities, or securities convertible into exchangeable
for, or which otherwise carry the right to acquire, directly or
indirectly, any shares or securities in its capital;
(iii)sell or otherwise dispose of all or any part of its assets or
agree to do or perform any act or enter into any transaction or
negotiation which could reasonably be expected to interfere with
this Agreement, or which would render inaccurate any of the
representations and warranties set out in section 2 of this
Agreement;
(iv) merge, amalgamate or consolidate into or with any entity, or
enter into any other corporate reorganization;
(v) increase its indebtedness for borrowed money other than trade
obligations entered into in the ordinary course of business; or
(vi) enter into any arrangements or transactions with any director,
former director, officer, shareholder or employee of the Company,
or any other person that is not dealing at "arm's length" with
the Company (as such term is defined in the Income Tax Act
(Canada);
7. CLOSING
7.1 The purchase and sale of the Allwin Shares and Allwin Warrants and the
issuance of the First Geneva Shares and First Geneva Warrants contemplated
by this Agreement will be closed on the third business day following the
satisfaction or waiver, as applicable, of the conditions precedent set out
in section 5 of this Agreement, or on such other date as may be agreed upon
in writing by the President of the Company and the President of the
Purchaser, which date is referred to herein as the "Date of Closing" and
"Closing Date" and which time is referred to herein as the "Closing" and
"Time of Closing".
8. PROPRIETARY INFORMATION
8.1 Each of the parties hereto covenants with the others that prior to the
Closing Time and, if the transactions contemplated hereby are not
completed, at all times after the Closing Time, it will keep confidential
all information obtained by it relating to the others, except such
information which prior to the date hereof was already in the possession of
that party, as demonstrated by written records, is generally available to
the public, other than as a result of a disclosure by that party, or is
made available to that party on a non-confidential basis from a source
other than the other parties to this Agreement or their representatives
(the "Confidential Information"). The parties further agree that the
Confidential Information will be disclosed only to those of its employees
and representatives of its advisors who need to know such information for
the purposes of evaluating and implementing the transactions contemplated
hereby.
<PAGE>
8.2 Notwithstanding the foregoing provisions of this section, the obligation to
maintain the confidentiality of the Confidential Information will not apply
to the extent that disclosure of such information is required under
applicable securities laws and regulations, stock exchange by-laws or
rules, or judicial order, provided, however, that to the extent reasonably
practicable, the party disclosing the Confidential Information consults
with the others respecting such disclosure.
8.3 If the transactions contemplated hereby are not consummated for any reason,
each of the parties hereto will return forthwith, without retaining any
copies thereof, all information and documents obtained from the others.
9. INDEMNIFICATION
9.1 The Vendors severally (and not jointly) and agree to indemnify and save
harmless the Purchaser of and from any loss, cost, damage or expense
whatsoever arising out of or resulting from, under or pursuant to:
(a) all debts, liabilities, contingent or otherwise, contracts or
engagements of the Company whatsoever, including, without limitation,
liabilities for federal, provincial, sales, excise, income, corporate
or other taxes of the Company or any re-assessment therefor, interest
thereon or penalties with respect thereto existing at the Closing and
not disclosed on or included in the Company's Financial Statements;
(b) the inaccuracy of any representation or warranty or the breach of any
covenant made by the Company or the Vendors herein or in any
instrument or certificate delivered by the Company or the Vendors
pursuant hereto except as contemplated by this Agreement; and
(c) all claims, actions, suits, proceedings, demands, costs and expenses
in respect of or incidental to any of the foregoing.
9.2 The Purchaser hereby indemnifies and saves harmless the Vendors of and from
any loss, cost, damage or expense whatsoever arising out of or resulting
from, under or pursuant to:
(a) the inaccuracy of any representation or warranty or the breach of any
covenant made by the Purchaser contained herein or any instrument or
certificate delivered by the Purchaser pursuant hereto except as
contemplated by this Agreement; and
(b) all claims, actions, suits, proceedings, demands, costs and expenses
in respect of or incidental to any of the foregoing.
9.3 No claim for indemnification will arise until notice thereof is given to
the party (the "Indemnitor") from whom indemnity is sought. Such notice
shall be sent within a reasonable time following the determination by a
party (the "Claimant") that a claim for indemnity exists. In the event that
any legal proceedings shall be instituted or any claim or demand is
asserted by any third party in respect of which the Indemnitor may have an
obligation to indemnify the Claimant, the Claimant shall give or cause to
<PAGE>
be given to the Indemnitor written notice thereof and such party shall have
the right, at its option and expense, to be present at the defence of such
proceedings, claim or demand, but not to control the defence, negotiation
or settlement thereof, which control shall at all times rest with the
Claimant, unless the Indemnitor irrevocably acknowledges full and complete
responsibility for indemnification of Claimant, in which case the
Indemnitor may assume such control through counsel of its choice, provided
however, that no settlement shall be entered into without the Claimant's
written consent (which shall not be unreasonably withheld). The parties
hereto agree to cooperate fully with each other in connection with the
defence, negotiation or settlement of any such third party legal
proceeding, claim or demand.
9.4 Notwithstanding anything in this Agreement to the contrary, the indemnity
provided for in this section shall apply to any loss, liability, damage,
deficiency or expense, whether or not the actual amount thereof shall have
been ascertained prior to the final day upon which a claim for indemnity
with respect thereto may be made hereunder, so long as written notice
thereof shall have been given to the Indemnitor prior to said date, setting
forth specifically and in reasonable detail, so far as is known, the matter
as to which indemnification is being sought, the quantum of the claim (if
ascertainable) and the provision of this Agreement under which the
Indemnitor is liable, but nothing herein shall be construed to require
payment of any claim for indemnity until the actual amount payable shall
have been finally ascertained.
10. GENERAL
10.1 Unless otherwise specified, all monetary amounts set out in this Agreement
are in reference to lawful currency of the United States of America.
10.2 Time is of the essence of this Agreement.
10.3 Each of the parties hereto shall bear all expenses incurred by it in
connection with this Agreement including, without limitation, the charges
of their respective counsel, accountants and financial advisors.
10.4 The Purchaser and the Vendors acknowledge that Catalyst Corporate Finance
Lawyers acts as British Columbia counsel to Allwin in respect of this
transaction.
10.5 This Agreement constitutes the entire agreement between the parties and
supersedes all prior agreements and understandings, oral or written, by and
between any of the parties with respect to the subject matter hereof. There
are no pre-contractual representations and warranties except as set out in
this Agreement and any certificates or documents delivered pursuant to the
provisions hereof.
10.6 This Agreement will be governed by, construed and enforced in accordance
with the laws of the Province of British Columbia and the parties submit
and attorn to the non-exclusive jurisdiction of the courts of the Province
of British Columbia.
<PAGE>
10.7 This Agreement and each of its terms and provisions will enure to the
benefit of and be binding upon the parties to this Agreement and their
respective heirs, executors, administrators, personal representatives,
successors and permitted assigns.
10.8 If any one or more of the provisions contained in this Agreement should be
invalid, illegal or unenforceable in any respect in any jurisdiction, the
validity, legality and enforceability of such provision or provisions will
not in any way be affected or impaired thereby in any other jurisdiction
and the validity, legality and enforceability of the remaining provisions
contained herein will not in any way be affected or impaired thereby,
unless in either case as a result of such determination this Agreement
would fail in its essential purpose.
10.9 This Agreement is not transferable or assignable without the prior written
consent of the other parties.
10.10 Any notice under this Agreement must be
(a) in writing,
(b) delivered, telecopied or mailed by prepaid post, and
(c) addressed to the party to which notice is to be given at the address
for such party indicated herein or at another address designated by
such party in writing.
Notice which is delivered or telecopied will be deemed to have been given
at the time of transmission or delivery. If notice is by mail it will be
deemed to have been given five business days following the date of mailing.
If there is an interruption in normal mail service at or prior to the time
a notice is mailed, the notice must be delivered or telecopied.
10.11The parties will do all such things and provide all such reasonable
assurances as may be required to consummate the transactions contemplated
hereby, and each party to this Agreement will execute and deliver such
further documents or instruments required by the other party as may be
reasonably necessary or desirable for the purposes of giving effect to or
perfecting the transactions contemplated hereby and obtaining any required
regulatory approvals, whether before or after the Closing.
<PAGE>
10.12This Agreement may be executed in as many counterparts as may be necessary
or by facsimile and each such facsimile or counterpart so executed shall be
deemed to be an original and such counterparts together shall constitute
one and the same instrument and notwithstanding the date of execution shall
be deemed to bear the date as set out on the first page of this Agreement.
IN WITNESS WHEREOF the parties have hereunto duly executed this Agreement as of
the day and year first above written.
FIRST GENEVA INVESTMENTS, INC. ALLWIN NEWTECH LTD.
Per: /s/ Per: /s/
--------------------- ---------------------
Authorized Signatory Authorized Signatory
/s/ YU FONGMI /s/ ZHIBIN CAI
- --------------------------- ---------------------
Yu Fongmi Zhibin Cai
THE SUNSHINE TRUST
/s/ LONGBIN LIU
- -------------------------- Per: /s/
Longbin Liu ---------------------
Authorized Signatory
/s/ KEN Z. CAI /s/ DENG CHUAN MEI
- -------------------------- ------------------------
Ken Z. Cai Deng Chaun Mei
<PAGE>
AFFIDA BANK ARBORA PORTFOLIO MANAGEMENT
Per: Per: /s/
---------------------- ---------------------
Authorized Signatory Authorized Signatory
NEW DRAGON (NO. 3) INVESTMENTS LIMITED BUNNATON
Per: ----------------------
Authorized Signatory Per: /s/
---------------------
Authorized Signatory
DRAGON GOLD CORPORATION
Per: /s/
---------------------
/s/ DOUG CASEY Authorized Signatory
-------------
Doug Casey
MED-RAY GROUP INC. CRESVALE FAR EAST LTD.
Per: /s/ Per: /s/
--------------------- ---------------------
Authorized Signatory Authorized Signatory
MORNING SUN HOLDINGS LTD.
Per: /s/
---------------------
/s/ REBERTO CHU Authorized Signatory
------------
Reberto Chu
CERTIFICATE OF INCORPORATION
OF
FIRST GENEVA INVESTMENTS, INC.
WE, THE UNDERSIGNED, hereby associate ourselves together for the purpose
of becoming a corporation under the laws of the State of Florida, by and under
the provisions of the Statutes of the said State of Florida.
ARTICLE I
This name of this corporation shall be:
First Geneva Investments, Inc.
ARTICLE II
The corporation may engage in any activity or business permitted under
the laws of the United States and of the State of Florida.
ARTICLE III
The maximum number of shares of capital stock that this corporation is
authorized to have outstanding at any time is FIVE HUNDRED (500) shares of
common stock, having a par value of ONE ($1.00) DOLLAR PER SHARE.
ARTICLE IV
The amount of capital with which this corporation will begin business
shall be the sum of not less than FIVE HUNDRED ($500.00) DOLLARS.
ARTICLE V
This corporation shall exist perpetually unless sooner dissolved
according to law.
ARTICLE VI
The initial street of the principal office of the corporation shall be:
200 East Cypress Creek Road, Ste. 204
Ft. Lauderdale, FL 33334
<PAGE>
ARTICLE VII
The number of Directors of this corporation shall be at least one (1)
and no more than five (5).
ARTICLE VIII
The names and street addresses of the members of the first Board of
Directors of this Corporation are as follows:
James R. Beckett
ARTICLE IX
The names and street addresses of the persons signing these Articles of
Incorporation as subscribed is as follows:
James R. Beckett 800 E. Cypress Creek Rd., #204
Ft. Lauderdale, FL 33334
ARTICLE X
The corporate existence of this corporation shall begin on the date the
Articles of Incorporation are filed of record.
IN WITNESS WHEREOF, the undersigned, James R. Beckett, AND
James R. Beckett, both being natural persons, competent to contract, have
hereunto set their hands and seal this 18th day of August, 1987.
/s/ JAMES R. BECKETT (SEAL)
STATE OF FLORIDA )
) SS
COUNTY OF BOWARD )
BEFORE ME, the undersigned Notary Public of the State of Florida
personally appeared James R. Beckett and ___________________ to me well known
and known to me to be the individuals described in and who executed the
foregoing Articles of Incorporation, and they acknowledge before me that they
executed the same freely and voluntarily for the purpose therein expressed.
<PAGE>
WITNESS my hand and official seal this 18th day of Aug. 1987.
/s/
Notary Public, State of Florida
(NOTARY SEAL)
AMENDMENT TO
ARTICLES OF INCORPORATION
OF
FIRST GENEVA INVESTMENTS, INC.
THE UNDERSIGNED, being the sole director of FIRST GENEVA INVESTMENTS, INC.
does hereby amend the Articles of Incorporation of FIRST GENEVA INVESTMENTS,
INC., as follows:
SHARES
The capital stock of this corporation shall consist of 50,000,000 shares of
common stock, $.001 par value.
I hereby certify that the following was adopted by a majority unanimous
vote of the shareholders and directors of the corporation on June 18, 1997, and
that the number of votes cast was sufficient for approval.
IN WITNESS WHEREOF, I have hereunto subscribed to and executed this Amendment
to Articles of Incorporation this on June 19, 1997.
/s/ NANCY SCHWARTZ
-------------------------------------------
Nancy Schwartz, President and Sole Director
Subscribed and Sworn on this 19th day of June, 1997 Before me:
/s [NOTARIAL SEAL]
My Commission Expires
AMENDMENT TO
ARTICLES OF INCORPORATION
OF
FIRST GENEVA INVESTMENTS, INC.
THE UNDERSIGNED, being the sole director of FIRST GENEVA INVESTMENTS, INC.
does hereby amend the Articles of Incorporation of FIRST GENEVA INVESTMENTS,
INC., as follows:
SHARES
The capital stock of this corporation shall consist of 50,000,000 shares of
common stock, $.001 par value.
I hereby certify that the following was adopted by a majority unanimous
vote of the shareholders and directors of the corporation on June 18, 1997, and
that the number of votes cast was sufficient for approval.
IN WITNESS WHEREOF, I have hereunto subscribed to and executed this Amendment
to Articles of Incorporation this on June 19, 1997.
/s/ NANCY SCHWARTZ
-------------------------------------------
Nancy Schwartz, President and Sole Director
Subscribed and Sworn on this 19th day of June, 1997 Before me:
/s [NOTARIAL SEAL]
My Commission Expires
AMENDMENT TO
ARTICLES OF INCORPORATION
OF
FIRST GENEVA INVESTMENTS
THE UNDERSIGNED, being the sole director of FIRST GENEVA INVESTMENTS, INC.,
does hereby amend the Articles of Incorporation of FIRST GENEVA INVESTMENTS,
INC. as follows:
ARTICLE I
The name of this corporation shall be DRAGON PHARMACEUTICAL, INC..
I hereby certify that the above amendment was adopted on August 31, 1998 by
shareholders owning a majority of the outstanding shares of common stock, and by
the sole director of the corporation on August 31, 1998.
IN WITNESS WHEREOF, I have hereunto subscribed to and executed this
Amendment to Articles of Incorporation on August 31, 1998.
/s/ SHAUN MASKERINE
-------------------------------------------
Shaun Maskerine, President and Sole Director
BY-LAWS
OF
FIRST GENEVA INVESTMENTS, INC.
ARTICLE 1. MEETINGS OF SHAREHOLDERS
Section 1. Annual Meeting. The annual meeting of the shareholders of
this corporation shall be held on the 30th day of June of each year or at such
other time and place designated by the Board of Directors of the corporation.
Business transacted at the annual meeting shall include the election of
directors of the corporation. If the designated day shall fall on a Sunday or
legal holiday, then the meeting shall be held on the first business day
thereafter.
Section 2. Special Meetings. Special meetings of the shareholders shall
be held when directed by the President or the Board of Directors, or when
requested in writing by the holders of not less than 10% of all the shares
entitled to vote at the meeting. A meeting requested by shareholders shall be
called for a date not less than 3 nor more than 30 days after the request is
made, unless the shareholders requesting the meeting designate a later date. The
call for the meeting shall be issued by the Secretary, unless the President,
Board of Directors, or shareholders requesting the meeting shall designated
another person to do so.
Section 3. Place. Meetings of shareholders shall be held at the
principal place of business of the corporation or at such other place as may be
designated by the Board of Directors.
Section 4. Notice. Written notice stating the place, day and hour of the
meeting and in the case of a special meeting, the purpose or purposes for which
the meeting is called, shall be delivered not less than 3 nor more than 30 days
before the meeting, either personally or by first class mail, or by the
direction of the President, the Secretary or the officer or persons calling the
meeting to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail addressed to the shareholder at his address as it appears on the
stock transfer books of the corporation, with postage thereon prepaid.
Section 5. Notice of Adjourned Meeting. When a meeting is adjourned to
another time or place, it shall not be necessary to give any notice of the
adjourned meeting if the time and place to which the meeting is adjourned are
announced at the meeting at which the adjournment is taken, and at the adjourned
meeting any business may be transacted that might have been transacted on the
original date of the meeting. If, however, after the adjournment the Board of
Directors fixes a new record date for the adjourned meeting, a notice of the
adjourned meeting shall be given as provided in this Article to each shareholder
of record on a new record date entitled to vote at such meeting.
<PAGE>
Section 6. Shareholder Quorum and Voting. A majority of the shares
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. If a quorum is present, the affirmative vote of a
majority of the shares represented at the meeting and entitled to vote on the
subject matter shall be the act of the shareholders unless otherwise provided by
law.
Section 7. Voting of Shares. Each outstanding share shall be entitled
to one vote on each matter submitted to a vote at a meeting of shareholders.
Section 8. Proxies. A shareholder may vote either in person or by proxy
executed in writing by the shareholder or his duly authorized attorney-in-fact.
No proxy shall be valid after the duration of 11 months from the date thereof
unless otherwise provided in the proxy.
Section 9. Action by Shareholders Without a Meeting. Any action required
by law or authorized by these by-laws or the Articles of Incorporation of this
corporation or taken or to be taken at any annual or special meeting of
shareholders, or any action which may be taken at any annual or special meeting
of shareholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
ARTICLE II. DIRECTORS
Section 1. Function. All 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, the Board of Directors.
Section 2. Qualification. Directors need not be residents of this
state or shareholders of this corporation.
Section 3. Compensation. The Board of Directors shall have authority
to fix the compensation of directors.
Section 4. Presumption of Assent. A director of the corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless he
votes against such action or abstains from voting in respect thereto because of
an asserted conflict of interest.
Section 5. Number. This corporation shall have a minimum of 1 director
but no more than 7.
Section 6. Election and Term. Each person named in the Articles of
Incorporation as a member of the initial Board of Directors shall hold office
until the first annual meeting of shareholders, and until his successor
shareholders, and until his successor shall hold office until
<PAGE>
the first annual meeting of shareholders, and until his successor shall have
been elected and qualified or until his earlier resignation, removal from office
or death. At the first annual meeting of shareholders and at each annual meeting
thereafter the shareholders shall elect directors to hold office until the next
succeeding annual meeting. Each director shall hold office for a term for which
he is elected and until his successor shall have been elected and qualified or
until his earlier resignation, removal from office or death.
Section 7. Vacancies. Any vacancy occurring in the Board of Directors,
including any vacancy created by reason of an increase in the number of
Directors, may be filled by the affirmative vote of a majority of the remaining
directors though less than a quorum of the Board of Directors. A director
elected to fill a vacancy shall hold office only until the next election of
directors by the shareholders.
Section 8. Removal of Directors. At a meeting of shareholders called
expressly for that purpose, any director or the entire Board of Directors may be
removed, with or without cause, by a vote of the holders of a majority of the
shares then entitled to vote at an election of directors.
Section 9. Quorum and Voting. A majority of the number of directors
fixed by these by-laws shall constitute a quorum for the transaction of
business. The act of a majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors.
Section 10. Executive and Other Committees. The Board of Directors, by
resolution adopted by a majority of the full Board of Directors, may designate
from among its members an executive committee and one or more other committees
each of which, to the extent provided in such resolution shall have and may
exercise all the authority of the Board of Directors, except as is provided by
law.
Section 11. Place of Meeting. Regular and special meetings of the
Board of Directors shall be held at the principal place of business of the
corporation or as otherwise determined by the Directors.
Section 12. Time, Notice and Call of Meetings. Regular meetings of the
Board of Directors shall be held without notice on the first Monday of the
calendar month two (2) months following the end of the corporation's fiscal, or
if the said first Monday is a legal holiday, then on the next business day.
Written notice of the time and place of special meetings of the Board of
Directors shall be given to each director by either personal deliver, telegram
or cablegram at least three (3) days before the meeting or by notice mailed to
the director at least 3 days before the meeting.
Notice of a meeting of the Board of Directors need not be given to any
director who signs a waiver of notice either before or after the meeting.
Attendance of a director at a meeting shall constitute a waiver of notice of
such meeting and waiver of any and all objections to the place of
<PAGE>
the meeting, the time of the meeting, or the manner in which it has been called
or convened, except when a director states, at the beginning of the meeting, any
objection to the transaction of business because the meeting is not lawfully
called or convened.
Neither the business to be transacted at, nor the purpose, of any
regular or special meeting of the Board of Directors need be specified in the
notice of waiver of notice of such meeting. A majority of the directors present,
whether or not a quorum exists, may adjourn any meeting of the Board of
Directors to another time and place. Notice of any such adjourned meeting shall
be given to the directors who were not present at the time of the adjournment,
and unless the time and place of adjourned meeting are announced at the time of
the adjournment, to the other directors. Meetings of the Board of Directors may
be called by the chairman of the board, by the president of the corporation or
by any two directors.
Members of the Board of Directors may participate in a meeting of such
board by means of a conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other at
the same time. Participation by such means shall constitute presence in person
at a meeting.
Section 13. Action Without a Meeting. Any action, required to be taken
at a meeting of the Board of Directors, or any action which may be taken at a
meeting of the Board of Directors or a committee thereof, may be taken without a
meeting if a consent in writing, setting forth the action so to be taken, is
signed by such number of the directors, or such number of the members of the
committee, as the case may be, as would constitute the requisite majority
thereof for the taking of such actions, is filed in the minutes of the
proceedings of the board or of the committee. Such actions shall then be deemed
taken with the same force and effect as though taken at a meeting of such board
or committee whereat all members were present and voting throughout and those
who signed such action shall have voted in the affirmative and all others shall
have voted in the negative. For informational purposes, a copy of such signed
actions shall be mailed to all members of the board or committee who did not
sign said action, provided however, that the failure to mail said notices shall
in no way prejudice the actions of the board or committee.
ARTICLE III. OFFICERS
Section 1. Officers. The officers of this corporation shall consist of a
president, a secretary and a treasurer, each of whom shall be elected by the
Board of Directors. Such other officers and assistant officers and agents as may
be deemed necessary may be elected or appointed by the Board of Directors from
time to time. Any two or more offices may be held by the same person.
Section 2. Duties. The officers of this corporation shall have the
following duties:
The President shall be the chief executive officer of the corporation,
shall have general and active management of the business and affairs of the
corporation subject to the directions of
<PAGE>
the Board of Directors, and shall preside at all meetings of the shareholders
and Board of Directors.
The Secretary shall have custody of, and maintain, all of the corporate
records except the financial records; shall record the minutes of all meetings
of the shareholders and Board of directors, send all notices of all meetings and
perform such other duties as may be prescribed by the Board of Directors or the
President.
The Treasurer shall have custody of all corporate funds and financial
records, shall keep full and accurate accounts of receipts and disbursements and
render accounts thereof at the annual meetings of shareholders and whenever else
required by the Board of Directors or the President, and shall perform such
other duties as may be prescribed by the Board of Directors or the President.
Section 3. Removal of Officers. An officer or agent elected or appointed
by the Board of Directors may be removed by the board whenever in its judgment
the best interests of the corporation will be served thereby. Any vacancy in any
office may be filed by the Board of Directors.
ARTICLE IV. STOCK CERTIFICATES
Section 1. Issuance. Every holder of shares in this corporation shall be
entitled to have a certificate representing all shares to which he is entitled.
No certificate shall be issued for any share until such share is fully paid.
Section 2. Form. Certificates representing shares in this corporation
shall be signed by the President or Vice President and the Secretary or an
Assistant Secretary and may be sealed with the seal of this corporation or a
facsimile thereof.
Section 3. Transfer of Stock. The corporation shall register a stock
certificate presented to it for transfer if the certificate is properly endorsed
by the holder of record or by his duly authorized attorney.
Section 4. Lost, Stolen or Destroyed Certificates. If the shareholder
shall claim to have lost or destroyed a certificate of shares issued by the
corporation, a new certificate shall be issued upon the making of an affidavit
of that fact by the person claiming the certificate of stock to be lost, stolen
or destroyed, and, at the discretion of the Board of Directors, upon the deposit
of a bond or other indemnity in such amount and with such sureties, if any, as
the board may reasonably require.
<PAGE>
ARTICLE V. BOOKS AND RECORDS
Section 1. Books and Records. This corporation shall keep correct and
complete books and records of account and shall keep minutes of the proceedings
of its shareholders, Board of Directors and committee of directors.
This corporation shall keep at its registered office, or principal place
of business a record of its shareholders, giving the names and addresses of all
shareholders and the number of shares held by each.
Any books, records and minutes may be in written form or in any other
form capable of being converted into written form within a reasonable time.
Section 2. Shareholders' Inspection Rights. Any person who shall have
been a holder of record of shares of voting trust certificates therefor at least
six months immediately preceding his demand or shall be the holder of record of,
or the holder of record of voting trust certificates for, at least five percent
of the outstanding shares of the corporation, upon written demand stating the
purpose thereof, shall have the right to examine, in person or by agent or
attorney, at any reasonable time or times, for any proper purpose its relevant
books and records of accounts, minutes and records of shareholders and to make
extracts therefrom.
Section 3. Financial Information. Not later than four months after the
close of each fiscal year, this corporation shall prepare a balance sheet
showing in reasonable detail the financial condition of the corporation as of
the close of its fiscal year, and a profit and loss statement showing the
results of the operations of the corporation during the fiscal year.
Upon the written request of any shareholder or holder of voting trust
certificates for shares of the corporation, the corporation shall mail to each
shareholder or holder of voting trust certificates a copy of the most recent
such balance sheet and profit and loss statement. The balance sheets and profit
and loss statements shall be filed in the registered office of the corporation
in this state, shall be kept for at least five years, and shall be subject to
inspection during business hours by any shareholder or holder of voting trust
certificates, in person or by agent.
ARTICLE VI. DIVIDENDS
The Board of Directors of this corporation may, from time to time,
declare and the corporation may pay dividends on its shares in cash, property or
its own shares, except when the corporation is insolvent or when the payment
thereof would render the corporation insolvent subject to the provisions of the
Florida Statutes.
ARTICLE VII. CORPORATE SEAL
The Board of Directors shall provide a corporate seal which shall be in
circular form.
<PAGE>
ARTICLE VIII. AMENDMENT
These by-laws may be altered, amended or repealed, and new by-laws may
be adopted by the majority vote of the directors of the corporation.
SINO-FOREIGN CO-OPERATIVE COMPANY CONTRACT
CHAPTER 1 - GENERAL PRINCIPLES AND DEFINITIONS
Sanhe City Yanjiao Sinoway Biotech Ltd. (hereinafter referred as
"Sinoway") and Allwin Newtech Ltd. of British Virgin Islands (hereinafter
referred as "Allwin") agree, on the basis of mutual benefit and equity, through
friendly negotiations, to establish a joint venture within Sanhe Yanjiao
Economic and Technological Development Zone of Hebei Province, China in
accordance with the Sino- Foreign Co-operative Enterprise Law of China.
Therefore, the parties agree as follows.
The following words and phrases shall be construed in accordance with the
meaning defined hereunder:
"Approval Authority" means the Ministry of Foreign Trade and Economic
Cooperation of China, Hebei provincial bureau of foreign trade and economic
cooperation, or Sanhe municipal office of foreign trade and economic
cooperation.
"Commencement Date" means the date that the board of directors decides that
Sanhe Kailong Bio- Pharmaceutical Limited (the "JVC") shall start to operate.
"Contract Date" means the date that all parties to this Contract sign the
Contract.
"Employees" means all employees of the JVC except senior management staff of the
JVC.
"Establishment Date" means the date on which the business license has been
issued by the Sanhe City Industry and Commerce Bureau after the parties have
applied for registration of the JVC in accordance with Article 7 of the
Implementation Rules of the Cooperative Enterprise Law of the People's Republic
of China and Registration Rules for Cooperative Enterprises in the People's
Republic of China. On the Establishment Date, the JVC shall be established in
accordance with Article 2 of this Contract.
"Senior Management Staff" means the General Manager and the Deputy General
Manager, and other employees recognized or designated as such by the board of
directors.
"Government" means the central government of People's Republic of China, the
provincial government and all their departments as well as their authorized
agencies.
"Chinese Law" means all the laws, regulations, rules, and stipulations
promulgated by the "Government" of the People's Republic of China and other all
relevant supplementary regulations.
<PAGE>
CHAPTER II - PARTIES
Article Parties to this Contract are:
Sanhe City Yanjiao Sinoway Biotech Ltd., incorporated and validly existing
under the laws of China, having its registered office at Yanjiao Economic and
Technological Development Zone, Sanhe City, Hebei, China 065201 and having Mr.
Huimin Liu as its legal representative, position: Chairman, nationality: Chinese
Citizen
("Sinoway")
AND:
Allwin Newtech Ltd., incorporated and validly existing under the laws of
British Virgin Islands, having its registered office at the Arawak Chambers, P.
O. Box 173, Road Town, Tortola, British Virgin Islands, and having Mr. Longbin
Liu as its legal representative, position: President, nationality: Canadian
Citizen
("Allwin")
CHAPTER III - ESTABLISHMENT OF THE JVC
Article 2 The parties agree to establish a Sino-foreign co-operative company
under the name of Sanhe Kailong Bio-Pharmaceutical Limited (the "JVC") within
China with limited liability under the Sino-Foreign Co-operative Enterprise Law
of China and other relevant laws and regulations.
Article 3 The Chines name of the JVC is [Chinese characters] (Sanhe Kailong
Shengwu Yaoye Youxiangongsi). The English name of the JVC is Sanhe Kailong
Bio-Pharmaceutical Co., Ltd., and the registered office of the JVC is: Yanjiao
Economic and Technological Development Zone, Sanhe City, Hebei, China 065201.
Article 4 All activities of the JVC shall abide by and protected by Chinese Law.
Article 5 The JVC shall be organized as a limited liability company under
Chinese Law. The JVC shall be qualified as an independent legal person under
Chinese Law. Each party shall enjoy rights, share profits, and bear liabilities,
risks, and losses according to Sino-Foreign Co-operative Enterprise Law of China
and its detailed rules of implementation as well as the Articles of Association
specified in this Contract. The Articles of Association shall be submitted to
the Government for approval and shall be effective from the date of approval.
CHAPTER IV - OBJECTS AND SCOPE OF BUSINESS
Article 6 The purposes of the co-operation between Sinoway and Allwin are to
utilize biological engineering technology, to research and manufacture new
medicines so as to cure patients and to enhance health standards, level, and to
have social and economic effects, based on the principle of mutual benefits.
<PAGE>
This investment falls under the encouraged category of the Industrial
Guide for Foreign Investment promulgated by the State Council of China:
(XIII) pharmaceutical industry
11. new medicine manufactured by using bio-engineering technology
Article 7 The business scope of the JVC shall be: production, research,
development of series of biological and chemical medicines and drugs, and sale
of the products of the JVC.
Article 8 The JVC is estimated to produce annually five million pieces of
recombinant human erythropoietin (rhEPO). The production scale of "Condensed
Blood No. 8 Element, Insulin, and Artificial Blood" will be determined at a
later time. With the development of the JVC and market demand, new products will
be developed and production scale will be expanded.
CHAPTER V - REGISTERED CAPITAL, TOTAL INVESTMENT AND FINANCING
Article 9 The total investment in the JVC shall be one hundred million ((Y)
100,000,000) RMB, equivalent to US $12,048,200 (the exchange rate between the US
dollar and RMB shall be at 1:8.3).
Article 10 The registered capital of the JVC shall be US $5,000,000, equivalent
to RMB (Y) 41,500,000. The registered capital shall be fully subscribed and
paid. Each party's subscription in the registered capital is as follows:
Sinoway shall subscribe RMB (Y) 10,375,000, equivalent to US $1,250,000,
making up 25% of the registered capital of the JVC, and
Allwin shall subscribe RMB (Y) 31,125,000, equivalent to US $3,750,000,
making up 75% of the registered capital of the JVC.
The conversion rate between US dollar and RMB yuan used in articles 9
and 10 shall be adjusted in accordance with the change of the market. The
conversion of the subscription amount of each party shall be calculated by using
the medium conversion rate between the buying rate and the selling rate of US
dollars in China's foreign exchange market one day before the business license
of the JVC was issued.
Article 11 Allwin shall be responsible for financing the difference between the
total investment and registered capital and for making loans to the JVC. The
terms of the loans shall be specified by Allwin and the JVC separately in
another contract.
Article 12 The parties shall make their contributions in the following modes.
Sinoway:
a) Land-use right accounting for RMB (Y) 10,075,000; and
b) Cash of RMB (Y) 300,000.
<PAGE>
Allwin:
a) Cash of US $1,750,000, equivalent to RMB (Y) 14,525,000; and
b) Equipment accounting for US $2,000,000, equivalent to RMB (Y)
16,600,000.
Notwithstanding the number of shares held by a party from time to time,
a party's undivided percentage ownership of the JVC will be determined by its
participating interest which will be in accordance with the following:
a) if each party subscribes and contributes according to Article 12
of this Contract, the parties shall have the following
Participating Interests and shall be deemed to own the following
contributions:
Participant Participating Interest Contribution (RMB)
- --------------- ------------------------ ---------------------------
Sinoway 25% (Y) 10,375,000
Allwin 75% US $3,750,000 equivalent to
(Y) 31,125,000
b) if a party fails to make its full initial contribution as set out
above, then that party shall have its Participating Interest
reduced to a percentage equal to the product of the following
formula:
cumulative contributions by failing party
---------------------------------------------------- x 100%
cumulative contributions by both parties
In accordance with relevant provision of Chinese law, the minimum
percentage of equity holding in the registered capital of the JVC
shall be agreed as follows:
i) If Sinoway chooses not to contribute its registered capital,
its minimum percentage of equity holding in the registered
capital of the JVC shall be 15%;
ii) If Allwin chooses not to contribute its registered capital,
its minimum percentage of equity holding in the registered
capital of the JVC shall be 25%.
c) if both parties agree to increase the registered capital of the JVC
specified in Article 10 of this Contract, each party shall increase
its share of the registered capital of the JVC in accordance with its
initial share of the registered capital of the JVC. If a party is
unable to contribute the increased portion of the registered capital
of the JVC, then the contributing party shall have the following
options: increase its registered capital contribution and treat such
increased portion as a loan to the JVC with priority repayment
privilege from the interests earned by the JVC, or regain its
increased portion of the registered capital from the registered
capital of the JVC.
The failing party shall have its portion of the registered capital
reduced to a percentage equal to the product of the following formula:
<PAGE>
cumulative contributions in the registered capital by failing party
------------------------------------------------------------------------ x 100%
cumulative contributions in the registered capital by both parties
The failing party's share in the registered capital of the JVC may be
diluted to a minimum of 15% for Sinoway and 25% for Allwin. Such party's minimum
share is carried interest and shall not be subject to further dilution. The
holder of carried interest shall have the right to receive profits based on is
carried interest in the registered capital of the JVC and the right to undertake
financial examination of the JVC. The holder of the carried interest shall not
have the right or obligation to make any further contribution to the registered
capital of the JVC.
Article 13 The payment schedule for contributions to the registered capital by
the parties shall be as follows:
a) Within three months from the Establishment Date, Sinoway shall
complete the transfer of land-use right to the JVC, and pay cash of
RMB (Y) 300,000 to the registered capital of the JVC; Allwin shall pay
15% of its equity share in the amount of US $562,500, equivalent to
RMB (Y) 4,668,750 to the registered capital of the JVC.
b) Within one year from the Establishment Date, Allwin shall pay 45% of
its remaining amount in the registered capital, i.e., US $1,275,000,
equivalent to RMB (Y) 10,582,500.
c) Within two years from the Establishment Date, Allwin shall pay the
remaining amount of its share in the registered capital of the JVC and
be responsible for financing the difference between the total
investment and registered capital.
Article 14 Transfer of part or whole of the equity contribution by one party to
a third party shall be made by consent from all parties to the JVC, and shall be
filed with the Approval Authority for approval. When one party transfers part or
whole of its equity contribution in the JVC, the other party shall have the
first right of refusal to buy. However, the following transfer shall not
constitute the kind of transfer contemplated under this Contract, i.e., the
non-transferring party does not have the first right of refusal;
a) transfer due to the requirements of going public of one party;
b) transfer to the parent company or the subsidiary company of the JVC;
and
c) transfer agreed to by both parties.
Unless otherwise stipulated in this Contract, obligations and debts
specified in this Contract shall not be transferred to a third party without the
consent of both parties to the JVC.
If the JVC needs to borrow money, and the lender requires security for
its loan, any party to the JVC may pledge part or whole of its equity shares in
the JVC as security for the loan. But such pledge shall be subject to consent by
both parties.
<PAGE>
CHAPTER VI - OBLIGATIONS AND RESPONSIBILITIES
Article 15 The parties shall respectively have the following obligations and
responsibilities:
Sinoway shall have the following responsibilities and obligations:
a) to assist the JVC to apply to the relevant Chinese government
departments for approval, registration, and other filing;
b) to introduce the results of scientific research by the People's
Liberation Army Academy of Military Medical Sciences concerning
biological medicines;
c) to train production technicians and quality inspection staff;
d) to provide information and materials on product technology and product
design;
e) to be responsible to obtain the certificate of the advanced technology
enterprise for the JVC;
f) to share the responsibility and risk on the basis of equity share
ratio in the JVC;
g) to deal with other matters as entrusted by the JVC from time to time;
and
h) to co-ordinate the relationship between the JVC and the relevant
Chinese governments.
Allwin shall have the following responsibilities and obligations:
a) to assist the JVC in purchasing and selecting proper and advanced
equipment and machinery in good working order, which cannot be
manufactured in China and are needed by the JVC in its research,
production or quality control, by co-ordinating with foreign
companies;
b) to assist the JVC to train the senior management personnel and the
principal technical staff, quality inspection staff, and sales staff
at the JVC;
c) to assist the sales staff of the JVC to develop international market
for the products;
d) to deal with other matters as entrusted by the JVC from time to time;
e) to share the responsibility and risk on the basis of equity share
ratio in the JVC; and
f) to be responsible to other matters as entrusted by the JVC.
CHAPTER VII - TRANSFER OF TECHNOLOGY
Article 16 Sinoway shall transfer its ownership right in the technology to the
JVC, including possession right, use right, profit-receiving right, and
disposition right. The JVC shall be the rightful owner of all these rights.
<PAGE>
Article 17 The parties agree that the JVC shall entrust Sinoway to sign a
technology transfer agreement with People's Liberation Army Academy of Military
Medical Science and other scientific research institutes on behalf of the JVC in
order to obtain advanced technology for the purpose of achieving the production
goals and scale contemplated in Chapter IV of this Contract, including product
design, manufacturing procedure, examination methods, production formula,
quality standards, and personnel training, etc.
Article 18 With respect to the technology transfer, Sinoway provides the
following warranties and guarantees:
a) all technology concerning design, manufacturing, industrial process,
vesting, and inspection of the biological products provided by Sinoway
are complete, accurate and reliable;
b) Sinoway shall transfer all the technology specified in this Contract
and in the technology transfer agreement to the JVC, and guarantees
that the technology provided by Sinoway is advanced, the model and
quality of the equipment are excellent and suitable to the industrial
operation and actual utilization;
c) Sinoway shall provide a detailed list of all the technology and the
technical services specified in the technology transfer agreement as
its schedule, and fully guarantees the implementation of the
technology transfer agreement and its schedule;
d) equipment blueprints and drawings, technological conditions, and other
detailed materials are part of the technology to be transferred,
Sinoway guarantees to provide them in a timely manner;
e) during the period when the technology transfer agreement is still
valid, Sinoway shall provide the JVC with any product improvements,
and all information and technical materials concerning the
improvements in a timely manner, and shall not charge any fees for
such provision of improvements, its information and technical
materials;
f) Sinoway guarantees that all technicians and workers will master the
transferred technology as specified in the technology transfer
agreement within the period of validity of the technology transfer
agreement; and
g) after the establishment of the JVC, the JVC shall have an exclusive
ownership right over the four products of EPO, Condensed Blood No. 8
Element, Insulin, and Artificial Blood, as well as any other products
the JVC has done research on, developed, produced and sold; Sinoway
guarantees that it will not compete with the JVC in research,
development, production, and sale of the four products of EPO,
Condensed Blood No. 8 Element, Insulin, and Artificial Blood.
Article 19 If Sinoway fails to provide the technology and equipment specified in
this Contract and the technology transfer agreement, or its found deceptive or
to conceal anything from the JVC, Sinoway shall be responsible to compensate for
all direct economic losses suffered by the JVC.
<PAGE>
CHAPTER VIII - CONTRIBUTION OF CAPITAL
Article 20 According to the provisions in this Contract, Sinoway shall transfer
the technology to JVC in time; Allwin shall contribute the difference between
the registered capital and the total investment to the account of JVC in
accordance with progress of the JVC preparation and construction and relevant
regulations.
Article 21 If any party failed to fulfill the obligation specified in Article 20
of this Contract, and resulting in losses to the other party or the JVC, the
failing party shall be responsible for all the losses resulting from its
default.
CHAPTER IX - SALES OF THE PRODUCT
Article 22 The parties agree that the sales policies of the products produced by
the JVC shall be decided by its board of directors according to the best
interest of the JVC. The best interest of the JVC shall be the best interest of
the JVC as an entity rather than the best interest of any one party.
Article 23 The products of the JVC shall be distributed both in China and
international market. 70% of the products are estimated to be sold in the
Chinese market, and 30% of the products are estimated to be sold in
international market. The products of the JVC for sale in China may be sold
through the medicine and health departments of China, the wholesale or
consignment sale of commercial departments, or direct sale by the JVC.
Article 24 The trademark for the products of the JVC shall be provided by
Sinoway or registered by the JVC.
CHAPTER X - BOARD OF DIRECTORS
Article 25 The date when the JVC obtains its business license shall be the date
for the establishment of the board of directors.
Article 26 The board of directors shall consist of five members, two appointed
by Sinoway and three appointed by Allwin. The chairman of the board of directors
shall be appointed by Allwin. The chairman and directors shall have a term of
four years and can be reappointed or reelected. Either party may replace its
director appointed by it with a notice to the other party.
Article 27 The board of directors is the highest decision-making organ and shall
make all important decisions. The following matters shall be decided by
unanimity in the board of directors:
a) amendment or revision of the Articles of Association;
b) dissolution of the JVC;
c) increase, decrease or transfer of the registered capital of the JVC;
d) mortgage of property of the JVC; and
e) merger, dissolution, reorganization or acquisition involving the JVC
and other economic organizations.
Except for the above-mentioned matters, all other matters shall be
decided by a simple majority in the board of directors.
<PAGE>
Article 28 The chairman of the board shall be the legal representative of the
JVC. If the chairman cannot perform his/her duties due to some causes, the
chairman may appoint any director to act on his/her behalf temporarily.
The following persons are not qualified to be appointed as the director
of the senior of the JVC:
a) criminally convicted in China or other countries;
b) administratively punished under the public security regulations of
China; or
c) mainly responsible for causing bankruptcy in another economic
organisation due to mismanagement.
Persons with any one of the following circumstances shall not be
appointed as the director or senior officer of the JVC:
a) without civil capacity or with restricted civil capacity;
b) convicted for corruption, bribery, conversion of property,
embezzlement or disturbing the socio-economic order and sentenced, and
the time is shorter than five years from the completion of the
sentence fulfillment; or convicted and deprived of political rights,
and the time is shorter than five years from the completion of the
sentence fulfilment;
c) acting as the director, head, or manager of a bankrupt or insolvent
company or enterprise and is personally responsible for the bankruptcy
of the company or enterprise, and the time is shorter than three years
from the completion of the bankruptcy and liquidation;
d) acting as the legal representative of a company or enterprise whose
business license has been revoked due to illegal activities, and is
personally responsible for such illegal activities, and the time is
shorter than three years from the revocation of the business license;
e) has not paid personal debts of large amount which is overdue; or f)
acting as civil servants in a government department.
The responsibility and obligation of directors and senior officers are
as follows:
a) observe the regulation of the JVC, honestly perform their duties,
vindicate the interest of the JVC;
b) not pursue personal ends by utilizing their status and position in the
JVC;
c) shall not accept bribery and other illegal income by using their
position and power in the JVC;
d) not possess or convert property of the JVC;
e) not embezzle the funds of the JVC or lend the funds to others;
f) not deposit the funds of the JVC in his or her or any other person's
personal account;
g) not place the funds of the JVC as a security guarantee for either
party of the JVC or any other person;
h) not operate for self or for others any business similar with the
business of the JVC or conduct any activities detrimental to the
interest of the JVC. The income gained through such business operation
or activity shall belong to the JVC;
i) not sign any contract or make any deal with the JVC unless with
consent from the board of directors or in accordance with the Articles
of Association of the JVC;
j) not disclose any confidential information of the JVC unless with
consent from the board of directors or in accordance with the Articles
of Association of the JVC; or
<PAGE>
k) compensate the losses to the JVC caused by violation of law,
administrative regulations or the Articles of Association of the JVC
in his/her performance of duties to the JVC.
Article 29 The board of directors shall hold at least one meeting each year. The
meeting shall be chaired by chairman of the board. The chairman may call a
provisional meeting at the request of two- fifths directors. The minutes of the
meeting shall be maintained. The place of the meeting shall be decided by the
chairman of the board, either in China or abroad. The quorum of a meting of the
board shall be fixed at three with two from Allwin and one from Sinoway. All
directors' resolution shall be in writing. The directors' resolution shall be
binding. If a director for any reason is unable to attend a meeting of the board
of directors, he/she may entrust a proxy in writing to attend the meeting on
his/her behalf.
Except for the special resolutions of the board of directors set out in
Article 27 of this Contract, written resolutions passed by a simple majority of
all the directors shall have the same legal effect as resolutions passed by the
board of directors at formal meetings of the board. Written resolutions may
include several documents with the same contents with each document signed by
one or more directors. A director may fax or use other communication means to
confirm that the director himself/herself has signed the original document and
shall deliver the executed original documents to the registered address of the
JVC within 14 days from the date of execution.
CHAPTER XI - ORGANISATION OF THE JVC
Article 30 The JVC shall establish a management structure that is responsible
for the daily operations of the JVC. The management structure shall consist of
one general manager and one deputy general manager, who will be appointed by the
board of directors; one chief engineer, one chief accountant and one auditor,
who will be nominated by the general manager and confirmed by the board of
directors. Their terms of office shall be four years.
Article 31 The responsibilities of the general manager is to carry out the
resolutions of the board of directors, and to organise daily operations of the
JVC. The deputy general manager shall assist the general manager in the
discharge of his/her duties and be responsible to the general manager. The chief
engineer, chief accountant, and auditor are entrusted by the general manager and
the deputy general manager to be responsible for technology, accounting, and
auditing of the JVC respectively. The general manager shall have the right to
make decisions on all important matters in the daily operations of the JVC.
While the general manager is absent, the deputy general manager may act on
behalf of the general manager.
The JVC may appoint a number of department managers. These department
managers shall be responsible for the operation of their respective departments,
complete assignments from the general manager and the deputy general manager,
and accountable to the general manager and deputy general manager.
Article 32 The board of directors may by its resolutions remove or replace the
general manager, the deputy general manager or other Senior Management engaging
in unethical activities, or serious negligence on their duties. The JVC shall
sign an employment contract with each senior officer in accordance with the
Labour Law of China.
<PAGE>
CHAPTER XII - PURCHASE OF THE EQUIPMENT
Article 33 All the raw material, fuel, necessary accessories, transportation and
office equipment shall be firstly purchased in China if the terms of purchase
are the same with a foreign purchase.
Article 34 When Allwin is entrusted by the JVC to purchase equipment in the
international market, the price and quality of the equipment shall be approved
by Sinoway, if necessary, Sinoway may send its representatives to participate in
the purchasing activities.
CHAPTER XIII - PREPARATORY WORK AND CONSTRUCTION
Article 35 During the preparation and construction period, the JVC shall set up
a preparatory committee consisting of five persons under the board of directors,
two members from Sinoway and three from Allwin. The preparatory committee is
mainly responsible for the project approval and all preparatory work. The JVC
shall bear all the expenses of the preparatory committee. Sinoway shall have the
first right of refusal as a contractor to these construction projects on the
basis of good quality, competitive market price and reasonable construction
time.
Article 36 The specific tasks of the preparatory committee are to examine the
engineering design, to sign the relevant construction contracts, the purchase
and inspect equipment and materials, to schedule construction speed, to
establish a budget, to maintain a budgetary control on the project, to adopt
management measures, and to maintain and file all the documents, drawings, files
and materials.
Article 37 The parties shall establish a technical group under the leadership of
the preparatory committee to deal with the examination, supervision, acceptance,
and checking concerning the project design, construction quality, import of
materials and technology.
Article 38 The structure, expenses, and wages for member staff of the
preparatory committee shall be included in the project budget with the approval
of the board of directors.
Article 39 After the completion of the project construction, the preparatory
committee shall undertake a final acceptance and inspection procedure. After the
final acceptance and inspection, the preparatory committee shall be dissolved by
the board of directors.
CHAPTER XIV - LABOUR MANAGEMENT
Article 40 Terms on the employment, dismissal, salary, labor insurance, welfare,
and disciplines and award shall be decided by the board of directors in
accordance with the Labour Law of China, the Labour Management Measures
Concerning Sino-Foreign Joint Ventures of the People's Republic of China, the
Implementation Rules for the Labour Management Measures Concerning Sino-Foreign
Joint Ventures. All these terms of employment shall be spelled out in the
employment contracts between the JVC and the labor union of the JVC or the
individual employees. The contract shall be filed with the Government labor
administration department.
Article 41 The hiring, salary, social insurance, benefits, travel allowance and
so on for the Senior Management recommended by both parties shall be decided by
the board of directors.
<PAGE>
CHAPTER XV - TAXATION, ACCOUNTING & AUDITING
Article 42 The JVC shall pay taxes in accordance with the Income Tax Law of the
People's Republic of China Concerning Foreign Investment Enterprises and Foreign
Enterprises, the Implementation Rules for the Income Tax Law of the People's
Republic of China Concerning Foreign investment Enterprises and Foreign
Enterprises, and other relevant laws and regulations. The JVC shall be entitled
to the benefits of the following preferential policies implemented in the
Yanjiao Economic and Technological Development Zone (the "Development Zone"):
a) A foreign investment enterprise, from the year beginning to make
profit, shall be exempted from income tax in the first and second
years within two years and allowed a fifty percent reduction in
the third to fifth years. After payment of the income tax by the
foreign investment enterprise, the Development Zone Treasury
Board shall return the fifty percent of the income tax paid;
b) All foreign investment enterprises shall be exempted from the
local income tax of 3%. In addition, productive foreign
investment enterprises, from the year beginning to operate, shall
be exempted from the housing tax and vehicle and ship license
plate tax for five years;
c) 40% of the paid income tax for the reinvestment part shall be
returned if a foreign investor re-invests to his/her own
enterprise or other enterprises in the Development Zone with his
share of profit, and the business term is more than five years.
The paid income tax for the reinvestment shall be returned if a
foreign investor reinvests to the production exporting
enterprises or to the advanced technology enterprises with his
share of profit;
d) For foreign investment enterprises with high technology that
satisfies the state' technological area and confirmed conditions,
provided that their high technological production has been
approved by the provincial or higher level of technology
department and examined by tax authority, 25% of the value-added
tax actually paid by the year end shall be returned; and
e) Foreign investment enterprises in the Development Zone shall be
exempted from fixed assets investment orientation adjustment ax
and land use tax.
Article 43 All the employees in the JVC shall pay the individual income tax and
individual income adjustment tax in accordance with the Individual Income Tax
Law of the People's Republic of China, the Implementation Regulations of the
Individual Income Tax Law of the People's Republic of China, and other relevant
regulations.
Article 44 The fiscal year of the JVC shall be from January 1 of each year to
December 31. All accounting receipts, entries, statements, and accounts shall be
in both Chinese and English.
Article 45 The JVC may either retain the accountant registered in China or
branch office of a foreign accountant firm to undertake financial auditing and
examination. The auditor submit its report to the board of directors and the
general manager.
<PAGE>
If a party considers that it is necessary to retain a foreign auditor to
undertake the annual auditing, the other party shall give its consent. All the
expenses incurred from such auditing shall be borne by the proposing party.
Article 46 Within the first three months of a business year, the general manager
shall organize the making of a balance sheet, a financial report, and a profit
allocating plan for the previous year, and submit them to the board of directors
for examination and approval.
The JVC shall balance its foreign exchange by the following means:
a) at the time of application for the establishment of the JVC,
Sinoway shall submit an application to the foreign exchange
control authority for quota on foreign exchange based on that the
JVC has adopted advanced technology;
b) the JVC shall apply for a membership in the Beijing or Tianjin or
Hebei provincial foreign exchange swap centre so that the JVC may
exchange its surplus RMB for hard currency;
c) the JVC shall apply to be designated as "Advanced Technology
Enterprise" so that the JVC can apply for preferential foreign
exchange allowance from the foreign exchange control authority;
d) the JVC shall export its products to the international market by
an exclusive export agency agreement with Allwin and use its
earnings from export to satisfy its needs for foreign exchange;
and
e) issues relating to balance of foreign exchange shall be dealt
with in accordance with the Provisional Regulations on Foreign
Exchange Control of the People's Republic of China.
CHAPTER XVI - TERM AND DURATION
Article 47 The JVC shall have a term of thirty (30) years from the Establishment
Date of the JVC. The date on which the JVC receives its business license shall
be the establishment date of the JVC.
Article 48 Upon the motion of one party, the board of directors may decide by
unanimous vote to extend the term of the JVC, the JVC shall apply to the
Approval Authority for approval within six months of the expiry of the term of
the JVC.
CHAPTER XVII - DISSOLUTION AND LIQUIDATION
Article 49 Upon the expiration of the JVC or the early termination of this
Contract, the JVC shall be liquidated in accordance with legal procedures. The
asset after liquidation shall be distributed to the parties on the basis of the
equity share ratio in the registered capital of the JVC.
When the Contract expires, Allwin shall have the right to apply for the
extension of the Contract. Sinoway shall not refuse such application without due
reason. The parties may negotiate a new contract based on this Contract. If this
Contract is terminated early due to any reason before the expiry date, the
<PAGE>
distribution of the assets of the JVC shall be carried out on the basis of their
beneficial interest the parties have in the JVC at the time of such early
termination.
The JVC shall be dissolved or liquidated under the following
circumstances:
a) the JVC has operated for a fully thirty (30) years and the board of
directors does not extend the term of the JVC;
b) the objectives of the JVC cannot be realized or are very difficult to
be realized, for example, the major natural disasters or radical
change in Chinese Law and policy;
c) the JVC cannot continue to operate due to force majeure events and has
suffered huge loss;
d) if the JVC has a cumulative loss of 40% of the registered capital and
the loss has resulted in that the JVC cannot operate normally, Sinoway
and Allwin shall consult on whether the JVC should continue. Sinoway
and Allwin agree that the JVC shall be terminated;
e) the loss of the JVC accounts for 80% of the registered capital of the
JVC and one party requests the liquidation of the JVC;
f) one party or both parties voluntarily or involuntarily declare
bankruptcy, insolvency, dissolution, or liquidation;
g) one party fails to perform the contractual obligations contained in
this Contract or fails to perform its contractual obligations up to
the standards required under this Contract; and such non-performance
has caused significant loss to the other party;
h) the Chinese government authority has struck the JVC off the record or
orders it to stop operations due to illegal activities; or
i) both parties agree to dissolve the JVC.
The board of directors shall establish a liquidation committee in
accordance with the share ratio of each party based on the provisions of this
contract. The mandate of the liquidation committee shall be clearing all the
assets and debts of the JVC, making a financial report and balance sheet,
preparing a liquidation plan, and reporting to the board of directors for
approval and implementation. The board of directors shall adopt the liquidation
principles and procedures. The board of directors shall decide the composition
of the liquidation committee. During the liquidation period, the liquidation
committee shall represent the JVC in any litigation involving the JVC.
The JVC shall be responsible for its debts with all its assets. The
remaining assets after the payment of all debts shall be distributed to the
parties on the basis of their respective share ratio in the JVC.
The liquidation committee shall have the right to sell the JVC as a
"Going Concern" upon the approval of the Chinese Government. The board of
directors in consultation with the liquidation
<PAGE>
committee shall decide the price of the sale. The parties shall share the
proceeds of the sale in accordance with their respective share ratio in the JVC.
The liquidation committee shall try its best to sell the non-cash assets
at best price. Any party may acquire, at the market price or at the price set by
an independent appraiser, if within thirty (30) days a written agreement cannot
be reached, part or all the non-cash assets in accordance the purchase contract
and submit to the Approval Authority for approval. Such proceeds may be used to
set off the share capital the JVC owes to such a party.
Provisions set out in this Chapter shall be valid after this Contract is
expired or the JVC is early terminated.
CHAPTER XVIII - INSURANCE
Article 50 The JVC shall purchase various insurance policies from insurance
companies within China. The types, values and terms of insurance shall be
subject to the agreement between the JVC and the insurance companies and decided
at meetings of the board of directors of the JVC.
CHAPTER XIX - VALIDITY, AMENDMENT, MODIFICATION AND TERMINATION
Article 51 This Contract is binding, legal, and enforceable in accordance with
Chinese Law and regulations. Either party is prohibited from breaching the terms
or the spirits of this Contract.
The Establishment Date of the JVC shall be the date the business license
is issued to the JVC by the Chinese Government. This Contract shall become
effective upon the approval of the Chinese Government.
The parties may amend this Contract by written agreement and the
amendment shall become effective only upon the approval of the original Approval
Authority.
Article 52 If the JVC is unable to continue its performance of this Contract due
to force majeure, or the JVC consecutively losses in its business operation so
that the JVC is unable to continue its operation, the JVC can be early
terminated and the Contract rescinded upon the unanimous consent of the board of
directors, and the approval of the original Approval Authority.
Article 53 If one party fails to perform its obligations under this Contract or
the Articles of Association, or commits serious breach of the provisions of this
Contract or the Articles of Association, so as to force the JVC unable to
achieve the objectives of the JVC under this Contract, the other party may deem
this as a unilateral termination of this Contract by the defaulting party.
If one party fails to perform its obligations under this Contract, or
commits serious breach of the provisions of this Contract so as to cause the JVC
unable to achieve the objectives of the JVC under this Contract, the other party
may deem this as the termination of this Contract and shall have the right to
claim and obtain compensation for loss from the defaulting party. The
non-defaulting party may also request the Approval Authority to terminate this
Contract.
<PAGE>
CHAPTER XX - LIABILITIES FOR BREACH OF CONTRACT
Article 54 Any party who fails to contribute the full amount of capital within
the time limits set out in Chapter 5 of this Contract shall pay the contract
breach damages to the non-defaulting party in accordance with the provisions of
this Article calculated from the first month the payment is overdue or the party
is at default.
The following constitutes a default event:
a) any party fails to perform its obligations under this Contract, and
such non-performance remains for 30 days from the date the defaulting
party receives notice of default in writing from the other party, or
such non-performance has not stopped within 30 days;
b) any party requests liquidation or ordered to be liquidated;
c) any party or most of its assets are taken over by a liquidation
organization or its management;
d) any party declares bankrupt or is insolvent or applies for bankruptcy.
Under any of the above-reference circumstances, the non-defaulting party
shall have the right to adopt any remedial means under this Contract or law,
which may include legal actions in the court or other institutions with legal
authority in order to stop the default and breach. The defaulting party shall
not oppose to any legal measures or means adopted by the non-defaulting party.
Unless otherwise provided in this Contract, any party who fails to pay
to the JVC any money within the time limits shall pay interest to the JVC. The
interest shall be calculated by adding 2% per month to the prime lending
interest rate published by the People's Bank of China.
Article 55 The defaulting party shall be liable for its negligence that has
caused that this Contract and its schedules could not be performed or fully
performed. If both parties are in default, the parties shall respectively be
liable for its own defaults based on the actual facts.
If any party causes any loss to the other party due to its breach of
this Contract, the defaulting party shall pay damages to the other party in the
amount equal to its losses.
The contract breach damages are RMB (Y) 100,000 for the first month of
default, and shall be RMB (Y) 50,000 each month thereafter.
The non-defaulting party has the following rights:
a) to receive and retain RMB(Y)100,000 from the defaulting party and give
notice to the defaulting party;
b) to apply to the original Approval Authority for the termination of the
Contract in accordance with this Contract;
c) to claim and sue for damages from the defaulting party caused by the
default of the defaulting party; and
d) to agree to continue the operation of the JVC, however, such agreement
shall not exonerate the defaulting party from paying damages to the
non-defaulting party and the JVC.
<PAGE>
The non-defaulting party shall have the following means to enforce its
rights:
a) cessation of infringements;
b) removal of obstacles;
c) return of property;
d) compensation for lasses;
e) payment of contract breach damages; and
f) any other means allowed by law.
The limitation period for the claim for compensation shall not be more
than five years from the time that the non-defaulting party knows or should have
known that its rights have been infringed upon.
CHAPTER XXI - FORCE MAJEURE
Article 56 If any party or the JVC is unable to complete any obligation under
this Contract, including any plan or budget, due to a force majeure event, such
a party shall not be deemed to have breached this Contract. If the force majeure
event delays any party or the JVC from performing its obligations under this
Contract, the obligations under this Contract and other rested obligations shall
also be postponed. The length of such postponement shall include the time for
reparation of damages and restoration of the business operation.
The above-mentioned force majeure refers to the following events: laws,
regulations, orders or directives issued by any "Government" or State in legal
or other forms, enemy sabotage, navigational hazard, fire, torrential rainstorm,
typhoon, earthquake, epidemic, contagious disease, accident, hostilities, war
(formally declared or without declaration), blockade, unforeseeable embargo or
other activity from the hostile party, strike or other labor disputes, riot
insurrection, and all other force majeure events not caused by the error or
negligence of the informing party, and cannot be controlled by the informing
party.
The informing party shall immediately notify the other party of the
causes and date of the force majeure event, and provide evidence. Thereafter,
the parties shall adopt all means to eliminate or lessen the effect of the force
majeure event. If the force majeure that causes serious consequences for the
business operation cannot be eliminated within one year, the parties shall
consult and decide whether or not this Contract should be continued. Once the
force majeure event disappears, the informing party shall notify the other party
immediately.
CHAPTER XXII - APPLICABLE LAW
Article 57 The law applicable to the making, validity, interpretation,
performance, and settlement of dispute of this Contract is Chinese Law.
According to prevailing international customs and Chinese Laws, unless
otherwise stipulated by law, the laws of the People's Republic of China
effective after the execution of this Contract shall not have the retrospective
effect to this Contract.
If within the term of this Contract, due to the implementation of new
laws and policies, amendment or abolishment of the existing preferential laws
and policies, resulting in the prevention or restriction of the rights in this
Contract or increase of the obligations for Allwin or the JVC, the JVC shall at
its cost adopt necessary measures to restore the original status of Allwin or
the JVC. The means of remedy is as follows: applying with relevant authorities
<PAGE>
for an exceptional treatment, so as to eliminate the direct or indirect negative
effects resulting from compliance with the new laws and policies.
If relevant Chinese Law conflicts with international treaty or
convention that China has signed, except the provisions that China expressed her
reservations, the international treaty or convention shall be applicable.
If there is neither an applicable Chinese Law nor international treaty
or convention which can be referred to on some matters involving the JVC,
international customs shall be applicable.
CHAPTER XXIII - SETTLEMENT OF DISPUTE
Article 58 The parties shall settle, through friendly discussions first, all
their disputes arising from or under this Contract. If the parties fail to
resolve their disputes by friendly discussions, the parties shall submit their
case to the Singapore International Arbitration Centre for arbitration in
accordance with its arbitration rules. The arbitration award is final and has
binding effect to both parties. The party that loses shall bear the legal fee.
Article 59 Except those parts of this Contract the parties have disputed, the
remaining provisions of this Contract are still valid and effective and the
parties shall continue to perform their duties under this Contract.
The parties shall periodically hold discussions on the progress for the
implementation of the Contract, and shall try their best to settle any dispute
arising from the performance of this Contract through friendly negotiation.
Any dispute shall be settled in Singapore in accordance with its
arbitration rules and the arbitration rules of the UNCITRAL for final
arbitration:
a) the parties fail to settle their disputes through friendly negotiation
within ninety (90) days after the date a written notice is given;
b) both parties fail to require a mediation within thirty (30) days; or
c) the parties cannot reach an agreement on the selection of a mediation.
The languages used in the arbitration shall be Chinese and English. All
the materials, affidavits, statement of claim, statement of defense, arbitration
award and supporting reasons shall all be in both Chinese and English.
The arbitrator shall fully consider the provisions set out in this
Contract and shall be capable to ascertain the intent of each party at the time
of making this Contract.
The arbitration award is final. Both parties shall not appeal.
CHAPTER XXIV - LANGUAGES AND TEXTS
Article 60 This Contract shall be written in both Chinese and English. Both
versions are equally authentic and have same legal effect.
<PAGE>
CHAPTER XXV - GENERAL PROVISIONS
Article 61 If this Contract conflicts with the Articles of Association of the
JVC or any other documents, this Contract shall prevail.
If anything occurs or expires on a non-business day due to time limits,
the following day shall be deemed as the date of the occurrence or expiration.
Time is of the essence of this Contract and shall be strictly observed.
Any breach shall result in unfavorable consequence.
The parties shall faithfully perform their obligations in this Contract
with good faith. The parties shall use their best efforts to achieve the goals
of the JVC.
The parties shall try their best to obtain the preferential policies
from the Government for the JVC and each party from time to time.
Article 62 If the notice relates to the rights and obligations of the parties,
the original notice must also be sent by mail after being sent by telex,
telegram, or facsimile.
All the notices or correspondence shall be in writing and:
a) be delivered by courier or telex or facsimile to the registered
address of the receiving party. Under such circumstance, such notice
or correspondence shall be deemed to have been delivered to such
address on the day of delivery or the day following (if the delivery
is not done in a business day); and
b) telex and facsimile shall be sent to the registered address of the
receiving party. If received before 3 p.m. local time, such notice or
correspondence shall be deemed received on the same day. Otherwise the
notice or correspondence shall be deemed received on the following
business day. If the following day is not a business day, such notice
or correspondence shall be deemed received the next business day. If
one party changes it business address, the party shall notify the
other party in the manner described above and such change shall take
effect immediately.
Article 63 This Contract is signed by the representatives respectively
authorized by each party in Beijing on April 18, 1998.
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this Contract
the day and year first written above.
The Corporate Seal of Sanhe City Yanjiao )
Sinoway Biotech Ltd. was hereunto affixed )
in the presence of )
)
/s/ ) c/s
Authorized Signatory )
)
)
Chairman )
Occupation )
The Corporate Seal of Allwin Newtech Ltd. )
was hereunto affixed in the presence of )
)
/s/ )
Authorized Signatory ) c/s
)
)
President )
Occupation )
)
Sino-Foreign Joint Venture Contract
Part I General Rules and Definitions
The Nanjing Medical Group Company Limited (hereafter abbreviated to Party A) and
Allwin Newtech Ltd. of the British Virgin Islands (hereafter abbreviated to
Party B), in accordance with "the Law of the People's Republic of China
Governing Sino-Foreign Joint Ventures in Operations of Enterprises" and other
relevant regulations of China and the principle of equality and mutual benefits,
have agreed through cordial negotiations to jointly invest, set up and operate a
Sino-Foreign joint-venture enterprise in Nanjing City, Jiangsu Province, the
People's Republic of China Therefore the parties agree as follows.
The phrases and terminology below shall be interpreted in accordance with the
definitions as follows:
"Approving Authority": The Nanjing City Committee for External Economic Trade;
"Commencing Operating Date": refers to the date that the Board of Directors has
decided for the Joint-Venture Company to commence operation;
"The Date of Contract": refers to the date of signing the Contract by all
Parties;
"Employees": refers to all employees other than the high-ranking management
personnel of the Company;
"The Incorporation Date of the Joint-Venture Company": refers to the date of
issuance of the business licence by the Nanjing City Industrial and Commercial
Administration Board after the Joint-Venture Parties have submitted application
and made registration in accordance with Clause 11 of the "Enforced Detailed
Rules Pertaining to the Law of the People's Republic of China Governing
Sino-Foreign Joint Ventures in Operations of Enterprises" and the Administration
Rules on Registration of Sino-Foreign Joint Ventures. On the day of the
Joint-Venture company is incorporated, it shall be organised in accordance with
Clause 2 of the Contract.
"High-ranking Management Personnel": refers to the Joint-Venture Company's
Chairman, Vice Chairman and other high-ranking management personnel recognised
by the Board of Directors;
"Government": the overall reference to the central and provincial district
governments that include all departments and authorised organisations of every
level of the governments;
"The Laws of China": refers to the collective reference to the relevant laws,
regulations, ordinances, enforced detailed rules and other supplementary
regulations published by the "Government" of the People's Republic of China.
Part II Joint-Venture Parties
1. The Parties to the Contract are:
Party A: The Nanjing Medical Group Company Limited
Place of Registration: 486 Zhongshan East Road, Baixia District, Nanjing City
Registered Address: 486 Zhongshan East Road, Baixia District, Nanjing City
Legal Representative: Name: Ni, Zhongxaing, Position: General Manager,
Nationality: Chinese
<PAGE>
Party B: Allwin Newtech Ltd.
Place of Incorporation: British Virgin Islands
Registered Address: Arawak Chambers, P. O. Box 173, Road Town
Tortola, British Virgin Islands
Legal Representative: Name: Liu, Longbin, Position: President, Nationality:
Canadian
Part III Incorporation of the Joint-Venture Company
2. In accordance with "the Law of the People's Republic of China Governing
Sino-Foreign Joint Ventures in Operations of Enterprises" and other relevant
regulations, Party A and Party B agree to set up in China the Nanjing Huaxin
Biotech Co. Limited (hereafter abbreviated as Joint-Venture Company).
3. The name and registered address of the Joint-Venture Company:
Name in Chinese: Nanjing Huaxin Biotech Co. Limited
Registered Address: 293 Zhongshan East Road, Xuenwu District, Nanjing City
Postal Code: 210005
4. The Joint-Venture Company shall abide by the "Laws of China" in respect of
all its activities and shall be protected by the "Laws of China".
5. The Joint-Venture Company is a limited company in terms of structure. Under
the "Laws of China" the Joint-Venture Company shall be a Sino-Foreign
joint-venture enterprise with the entity as an independent legal person. In
accordance with the proportion of their capital contributions in the register of
capital, the Joint-Venture Parties shall share their rights and profits and
undertake responsibilities, risks and losses. In accordance with the "Law of the
People's Republic of China Governing Sino-Foreign Joint Ventures in Operations
of Enterprises" and the published detailed rules under this law, all Parties
shall draw up the Contract and the Articles of Association for submission to the
"Approving Authority" for their approval and these shall become binding on all
Parties on the approval date.
Part IV The Objective, Scope and Capacity of the Production and Operation
6. The purpose of the co-operation between Party A and Party B are to utilize
biological engineering technology, to research and to manufacture new medicines
as to cure patients and to enhance health standards, level, and to have social
and economic effects, based on the principle of mutual benefits.
This investment falls under the encouraged category of the Industrial Guide for
Foreign Investment promulgated by the State Council of China:
(13) pharmaceutical industry
(11) new medicine manufactured by using bio-engineering technology
7. The business scope of the Joint-Venture Company shall be: production,
research, development of a series of biological and chemical medicines and
drugs, and the same of the products of the Joint-Venture Company.
<PAGE>
Part V The Total Investment and the Registered Capital
8. The total investment in the Joint-Venture Company is 14 million US dollars
(about the equivalent of 116.2 million yuan in Renminbi)
9. The Joint-Venture Company's registered capital is 5.6 million US dollars
(about the equivalent of 46.48 yuan in Renminbi) in which
Party A shall contribute 1.4 million US dollars or 25% of the
registered capital; and Party B shall contribute 4.2 million US dollars
or 75% of the registered capital.
The exchange rate used to calculate the contribution amount of each party shall
be based on the exchange rates published by China's National Foreign Exchange on
the day such a contribution is made.
The mode and time of contribution by each Party are:
(1) Party A shall contribute its capital to the Joint-Venture Company in
accordance with twenty-five per cent (25%) of the shares held in Nanjing
Huaxin Biotech Co. Limited.
Party A shall, in accordance with its proportional share of 25% in the
registered capital, contribute the equivalent of 1.4 million US dollars
calculated in Renminbi of 116.2 million yuan and shall pay up the whole sum
before 31 August 1999.
Schedule for Payment of Registered Capital
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Unit: 10,000 Renminbi/dollars
Particulars
Country Date Amount Purpose Total Amount % of Registered
- -------- ------- --------- -------------- ------------- ----------------
Renminbi US$ Renminbi US$ Capital
---------- --------- --------- --------- ----------------
Foreign 99.10.31 2021.25 243.52 buying 51.25% of 2021.25 243.52 43.49%
the rights in shares
- -------------------------------------------------------------------------------------------------------------------
99.12.31 453.75 54.67 buying 75% of 2737.5 329.82 58.90%
the rights in shares
- -------------------------------------------------------------------------------------------------------------------
99.12.31 262.5 31.63 payment of capital
in cash
- -------------------------------------------------------------------------------------------------------------------
2000.1.31 748.5 90.18 payment of capital 3486.00 420 75.00%
in cash
- -------------------------------------------------------------------------------------------------------------------
China 1999.8 1162 140 payment of capital 25.00%
by rights in shares
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Before 31 October 1999 both parties' paid-up capital has reached 31.83
million yuan or68.49% of the registered capital of 5.6 million US dollars
(equivalent to 46.48 million Renminbi yuan @ 1:8.3). From six months after the
business licence was pre-issued until 31 January 2000, Party B's registered
capital was paid up.
(2) Using two modes of contributing its capital to the Joint-Venture Company,
Party B shall pay cash to purchase seventy-five per cent (75%) of the
rights in shares being held by Party A in Nanjing Huaxin Biotech Co.
Limited and shall pay cash for the capital. These include the capital
contribution for the rights in shares: the equivalent of 24.75 million
Renminbi yuan in US dollars (about 2.9819 million US dollars) and the
capital contribution in cash: the equivalent of 10.11 million Renminbi yuan
in US dollars (about 1.2181 million US dollars), making a total of the
equivalent of 34.86 million Renminbi yuan in US dollars (about 4.20 million
dollars).
(i) Before 31 October 1999 the payment for the transfer of rights in
shares shall amount to the equivalent of 20.2125 million Renminbi in
US dollars (of which 12 million Renminbi yuan being paid in cash for
capital contribution).
(ii) Before 31 December 1999 there shall be paid the equivalent of 7.1625
million Renminbi yuan, including the sum in US dollars which are
equivalent to 4.5375 million Renminbi yuan for the completion of the
purchase of 75% of the rights in shares, leaving a sum in US dollars
equivalent to 2.625 million Renminbi yuan to be paid in cash for the
contribution of capital.
<PAGE>
(iii)In accordance with its proportional share of 75% of the registered
capital, Party B shall contribute a capital of 4.2 million US dollars,
any shortfall to be made good with a sight draft in US dollars within
half a year of the business licence of being issued. That is to say:
before 31 January 2000 Party B shall contribute a capital in US
dollars equivalent to 7.485 million Renminbi yuan. By then Party B
shall have completed the investment in the registered capital in US
dollars equivalent to 34.86 million Renminbi yuan.
Party B shall use the amount it has actually paid for the rights in the shares
transferred as a proportion of the rights in shares of the Joint-Venture Company
to exercise its rights as an investor in the Joint-Venture Company and to enjoy
its share of income.
10. Where either Party A or Party B transfers wholly or partially its share of
capital to a party other than the either Party, consent shall be obtained from
the other Party and application submitted to the authority for approval. Where
one Party transfers all or part of its rights in the shares, the other Party
shall have the preferential purchase right. However, the following transfers do
not fall into the transfers being stipulated in the Contract and the other Party
shall have no preferential purchase right in the transfers preferential purchase
right:
(1) a transfer that arises from the requirement of a Joint-Venture Party's
shares being listed in the stock market;
(2) a transfer by a Joint-Venture Party to its subsidiary or parent
company;
(3) a transfer agreed upon by all Parties.
Unless otherwise being specially stipulated, all obligations or liabilities
specified in the Contract shall not be assigned without the consent of both
Joint-Venture Parties.
Where as a result of the Joint-Venture Company borrowing from others and the
lender requires property as a collateral, either of the Joint-Venture Parties
may use all or part of its investment as such a collateral but in doing so a
unanimous consent shall be obtained from both Parties.
Part VI Responsibilities of the Joint-Venture Parties
11. The Joint-Venture Parties shall be responsible to complete the following
matters:
Both Parties' joint responsibilities
(1) Both Parties shall contribute the capital in accordance with what is
stipulated in Part V in terms of the amounts of capital, the modes of
payment and the date of payment.
(2) Both Parties shall designate the personnel concerned to take part in
the management, research and development, production, sale and
operation of the Joint-Venture Company.
Party A's responsibilities
In accordance with the Joint-Venture Company's requirements and its provision of
technological specifications, Party A shall provide the following services to
the Joint-Venture Company:
(1) To assist securing the Chinese government's approval for the
Joint-Venture Company;
(2) To assist the Joint-Venture Company in obtaining the necessary
facilities or land-use right through rental or purchase.
(3) To assist, in respect the items below under feasible circumstances,
the Joint-Venture Company to select and purchase in China property and
equipment, facilities, fuel, raw materials, etc., the expenditure to
be borne by the Joint-Venture Company.
<PAGE>
Party B's Responsibilities
In accordance with the Joint-Venture Company's requirements and its provision of
technological specifications, Party B shall provide the following services to
the Joint-Venture Company:
(1) On establishing the Joint-Venture Company's facilities, to assist the
Joint-Venture Company by providing technological and management
support;
(2) To assist the Joint-Venture Company, whether in or outside China, to
select and purchase in China building and equipment, facilities, fuel,
raw materials, etc.;
(3) To assist the Joint-Venture Company to train the Joint-Venture
Company's personnel, such training including the application of
business management and production technology in order to achieve the
objectives of the Contract;
(4) To assist the Joint-Venture Company to obtain the necessary property
and equipment;
(5) To assist the Joint-Venture Company in taking necessary measures to
keep the Joint-Venture Company's foreign exchange in balance;
(6) In order to materialise the objectives in the Contract, to perform
other reasonable obligations that it has accepted.
If reasonable expenses are incurred in the course of carrying out the
responsibilities above, both Party A and Party B may have these reimbursed by
the Joint-Venture Company after the other Party's consent is obtained.
Part VII Sale of Products
12. Both Parties agree that the sale policy of the Joint-Venture Company's
products shall be determined by the Company's Board of Directors in the best
interests of the Joint-Venture Company. The best interests of the Joint-Venture
Company shall be its best interests as an entity and not the best interests of
one single party.
13. When the Joint-Venture Company sells its products in China and overseas, the
Chinese Drugs and Health Department and commercial departments may become the
wholesalers or agents in respect of sales in China or the Company may make
direct sales, and Party B shall provide the necessary guidance and assistance.
When its products are sold in international markets, Party A shall provide the
necessary guidance and assistance.
14. The Joint-Venture Company's products shall use the trademark of
"Ninghongxin".
Part VIII Board of Directors
15. The date when the business licence is obtained by the Joint-Venture Company
shall be the date when the Board of Directors of the Joint-Venture Company is
formed.
16. The Board of Directors shall consist of five directors of whom Party A may
appoint two members and Party B three members. The Chairman shall be appointed
by Party B and Vice Chairman by Party A. The Chairman and the directors shall
serve a term of four years and may, if further being appointed, continue in
office. Either Party shall have the right to change its appointed directors but
shall have to inform the other Party of the Joint-Venture Company.
17. The Board of Directors shall be the highest authority structure of the
Joint-Venture Company and shall decide on all important matters. The following
matters shall be only be resolved after being passed unanimously by all
attending directors at a directors' meeting:
(1) amendments to the Joint-Venture Company's Articles of Association;
(2) liquidation of the Joint-Venture Company;
<PAGE>
(3) increases or decreases in or transfers of the Joint-Venture Company's
registered capital;
(4) mortgage of the Joint-Venture Company's assets;
(5) the Joint-Venture Company's merging with other economic bodies,
division or changes in the organisational form.
Other matters than those mentioned above shall be passed and determined with a
simple majority at the directors' meetings.
18. The Chairman is the legal representative of the Joint-Venture Company. Where
the Chairman is unable to perform duties, another director may be temporarily
authorised as the representative.
The duties and obligations of the directors and high-ranking management
personnel shall be:
(1) To abide by the Company's Articles of Association and to faithfully
carry out duties and to protect the interests of the Company;
(2) Not to use the positions and authority in the Company to make personal
gains;
(3) Not to make use of the authority to accept bribes or other
illegitimate incomes;
(4) Not to encroach upon the Company's assets;
(5) Not to use the Company's funds or lend the Company's funds to others;
(6) Not to use the Company's assets to open deposit accounts in own name
or in other people's names;
(7) Not to use the Company's assets as a security for the debts of the
Company's Joint-Venture Parties or other people;
(8) Not to operate similar business of the Company for self or for others
or engage in activities detrimental to the Company's benefits. All
incomes arising from the business or activities above shall become the
Company's.
(9) Unless permitted by the Company's Articles or agreed by the Board of
Directors, not to enter into any Contract or transact with the
Company;
(10) Unless being in accordance with the laws or consented by the Board of
Directors, not to leak out the secrets of the Company;
(11) Where the directors and high-ranking management personnel violate
laws, administration regulations or the Company's Articles in the
course of carrying out the Company's duties and cause the Company to
suffer losses, to bear the responsibility for making compensations.
19. The Board of Directors shall hold meetings at least once a year. This shall
be called and held by the Chairman. Subject to a motion carried by two-fifths of
the directors, the Chairman may call an extraordinary meeting. The minutes of
meetings shall be filed and kept. In principle the meetings shall be held at the
place where the Joint-Venture Company is but may be decided by the Board of
Directors to be held elsewhere. The quorum for a director's meeting shall be
three-fifths of all the directors including two directors appointed by Party A
and one director appointed by Party B. The resolutions of the Board of Directors
shall come in the written form. The resolutions of the Board of Directors shall
have binding forces. Those directors who are unable to attend a directors'
meeting may sign proxies to appoint other directors to carry out their duties.
A directors' meeting may be called by mail. With the exception of the special
resolutions specified in Clause 17 above, after written notices of the agendas
of the meeting are served on all the directors and subject to the collective
opinions of the directors, written resolutions signed by more than half of the
directors and resolutions passed in a directors' meeting held formally shall
carry the same force. The written resolutions may contain several documents of
the same contents with each document being signed by one or more directors. The
directors may confirm the original copies of the documents formally signed by
them by using faxes or other written forms and return the signed original copies
of the documents within fourteen days of signing to the Joint-Venture Company's
registered address.
<PAGE>
Part IX Operation Management Hierarchy
20. The Joint-Venture Company shall set up an operation management hierarchy to
take charge of the Company's day-to-day production and operation work. The
operating and managing hierarchy consists of the Chairman and the Vice Chairman
who are selected and appointed by the Board of Directors. Other high-ranking
management staff members for a four-year term shall be recommended by the
Chairman and submitted to the Board of Directors for approve.
21. The Chairman's duties shall be to implement the resolved matters at
directors' meetings and to organise and lead the Joint-Venture Company in its
daily tasks of production, operation and management. The Vice Chairman shall
assist the Chairman and be responsible to the Chairman. During the absence of
the Chairman, the Vice Chairman shall help carry out the duties.
The operating and management hierarchy may consist of several departmental
managers to be separately responsible for departmental tasks.
22. The Chairman, the Vice Chairman and other high-ranking employees who engage
in corruption or seriously fail in their duties shall be immediately replaced
after the Board of Directors hold a meeting and determine so. In accordance with
China's relevant laws, the Joint-Venture Company shall sign employment contracts
with every high-ranking employee.
Part X Purchase of Materials
23. Raw materials, fuel, assemblages, transportation equipment and office
supplies, etc. that are needed by the Joint-Venture Company shall, where
everything being equal under the circumstances, be preferably purchased in
China.
24. Where the Joint-Venture Company asks Party B to buy equipment from the
overseas markets, the prices and quality shall be agreed upon by Party A. Where
it is deemed necessary, Party A may send its own people to take part in the
process.
Part XI Labour Management
25. The Joint-Venture Company's matters on employees' recruitment, engagement,
dismissal, wages, work insurance, benefits and award/punishment shall be in
compliance with "the Labour Law of the People's Republic of China", "the
Regulations on Labour Management in Sino-Foreign Operated Enterprises in the
People's Republic of China" and " the Methods of Implementing the Regulations on
Labour Management in Sino-Foreign Operated Enterprises, studied and formulated
by the Board of Directors and determined in labour contracts to be drawn up
between the Joint-Venture Company and the Joint-Venture Company's labour union
or individual employees. After being drawn up, the labour contracts shall be
submitted to the Labour Management Department of the "Government" .
26. The directors' meetings shall discuss and determine the engagement,
salaries, social insurance, benefits, travel expenses, etc. in respect of
high-ranking management personnel being recommended by Party A and Party B.
Part XII Taxes, Finances and Audits
27. The Joint-Venture Company shall, in accordance with "the Income Tax Law on
Foreign Business Investment Enterprises and Overseas Enterprises in the People's
Republic of China",
"the Detailed Rules on the Income Tax of Foreign Business Investment Enterprises
and Overseas Enterprises in the People's Republic of China" and the relevant
laws and regulations, pay the various taxes. The Joint-Venture Company shall
have the right to enjoy preferential treatment policy laid down by the
governments country and the Nanjing City.
<PAGE>
28. The Joint-Venture Company shall pay individuals' income tax and income
regulatory tax in accordance with "the Income Tax Law on Individuals in the
People's Republic of China", "the Implemented Regulations Pertaining to the
Income Tax Law on Individuals in the People's Republic of China" and other
relevant rules.
29. The accounting year of the Joint-Venture Company shall commence from 1
January and end 31 December every year. All accounting evidence, bills and
invoices, financial statements and books of account shall be written in both
Chinese and English.
30. With regard to the financial audit of the Joint-Venture Company, accountants
registered in China or foreign accountants in a branch office in China shall be
engaged to check, audit and report the results to the Board of Directors and the
Chairman.
If one Party thinks there is a need to engage another country's auditor to check
the annual financial affairs, the other Party shall have to give its consent and
all necessary expenses shall be borne by the Party suggesting it.
31. Within the first three months of every accounting year, the Chairman shall
prepare the previous year's balance sheet, profit and loss account and the
profit appropriation account and submit these to the Board of Directors for
adoption in their meeting.
The Joint-Venture Company shall use the following ways to balance the foreign
exchange it requires:
(1) On applying for the incorporation of the Joint-Venture Company, Party
A shall apply to China's foreign exchange management authority for a
foreign exchange quota for the following matters: advanced technology
and equipment required to be used by the Joint-Venture Company,
scientific research materials that cannot be satisfied internally and
raw materials needed in production.
(2) The Joint-Venture Company shall apply to the Foreign Exchange
Regulatory Centre in Nanjing or Jiangsu Province to become a member in
order that the Joint-Venture Company may use any excess Renminbi to
exchange for hard currency in accordance with the rules on national
foreign exchange management.
(3) The Joint-Venture Company shall apply to become "the cutting edge
enterprise" in order that it may receive a preferential treatment from
China's foreign exchange management authority in terms of maintaining
a balance in foreign exchange.
(4) Through the Contract it signs with Party B for it to be the sole agent
for the external export sales of the Joint-Venture Company's products,
the Joint-Venture Company shall use the foreign exchange it receives
to satisfy the requirement for balancing its foreign exchange.
(5) Other problems pertaining to balancing the foreign exchange shall be
dealt with in accordance with the regulations on management of foreign
exchange in the People's Republic of China.
Part XIII Term of the Joint Venture
32. The Joint-Venture Company's operating term shall be for thirty years. The
issuance date of the Joint-Venture Company's business licence shall be the
incorporation date of the joint-Venture Company.
33. On the proposal being made by one Party and passed unanimously by the Board
of Directors at the meeting, an application may be made six months prior to the
expiry of the joint-venture term to the Nanjing City Committee for External
Economic Trade (or its appointed approving authority) for an extension of the
joint-venture term.
<PAGE>
Part XIV Disposal of Assets, Liquidation and Settlement on Expiry of
Joint-Venture Term
34. Where the joint-venture term expires or is prematurely terminated, the
Joint-Venture Company shall settle its accounts in accordance with the laws. The
assets remaining after such a settlement shall be divided between Party A and
Party B in the ratio of their registration.
After the term of the Joint Venture has expired, both Parties may negotiate and
mutually agree to extend the Joint-venture term. If the Contract is prematurely
terminated for any reason, the Joint-Venture Company's assets shall be divided
in accordance with the ratio of the Joint-Venture Parties' shareholdings at the
time.
<PAGE>
The Joint-Venture Company shall be liquidated or dissolved in the following
circumstances:
(1) The Joint-Venture Company has already operated for thirty years and
the Board of Directors has decided not to extend its term.
(2) the Joint-Venture Company's objectives cannot be or are difficult to
be achieved as in instances of major natural disasters.
(3) As a result of Force Majeure, the Joint-Venture Company has been
unable to continue its operation and has suffered major losses.
(4) If the Joint-Venture Company's accumulated losses have reached 40% of
its registered capital and these losses have made it unable to
function normally, the Joint-Venture Parties may, after negotiations,
jointly agree to terminate the operation of the Joint-Venture Company.
(5) the Joint-Venture Company's losses have reached 80% of the registered
capital and one of the Joint-Venture Parties has requested for the
Joint-Venture Company to be dissolved.
(6) Where one of the Joint-Venture Parties has not performed its
responsibilities as stipulated in this Contract or where the
responsibilities performed have not reached standard specified in the
Contract and where these non-performances of responsibilities have
caused major damages to other parties, the Party suffering the damages
shall demand to have the Joint-Venture Company liquidated or
dissolved.
(7) The Joint-Venture Company has violated laws in its operation and the
licensing authority has struck it off.
(8) All Parties have agreed to liquidate the Joint-Venture Company.
The Board of Directors shall, in accordance with the stipulations in this
Contract, set up a liquidation committee based on the ratio of each Party's
shareholdings. The duties of the liquidation committee shall be to carry out a
total settlement of the Joint-Venture Company's assets and liabilities, to
prepare a balance sheet, to lay down a settlement plan and to submit it to the
Board of Directors for approval of implementation. The settlement procedures and
principles shall be determined by the Board of Directors. The Board of Directors
shall determine the composition of the members in the liquidation party. During
the liquidation period, the liquidation committee shall represent the
Joint-Venture Company in commencing and defending lawsuits.
The Joint-Venture Company shall use all of its assets to meet its obligations of
liabilities. The assets that remain after paying for the debts shall be
distributed in accordance of the ratio of the Joint-Venture Parties'
shareholdings.
After being approved by the Chinese "Government", the liquidation committee
shall have the right to sell the Joint-Venture Company. The Board of Directors
shall, after negotiating with the liquidation committee, determine the sale
price. The Joint-Venture Parties shall divide the sale proceeds in accordance
with the ratio of their respective shareholdings in the Joint-Venture Company.
<PAGE>
The liquidation committee shall try its best to sell the Company's non-cash
assets at their best possible prices. Either Joint-Venture Party may, by
agreement and subject to the approval of the authority concerned, buy the whole
or part of these assets at market prices. (If there has been no written
agreement within 30 days, then the purchase price shall be determined by an
independent appraiser). The sum of money may be used to offset what the company
owes the Joint-Venture Company in respect of the unpaid sum for the shares.
These clauses shall continue to remain in effect beyond the Contract's legal
term of operation or during the period when the Joint Venture's operation is
prematurely terminated.
Part XV Insurance
35. The Joint-Venture Company's various types of insurance coverage shall be
taken out with insurance companies in China. The types of coverage, the insured
sums and term of the insurance shall be determined by the Joint-Venture Company
and the insurance companies and shall be discussed and decided on in meetings by
the Board of Directors.
Part XVI The Effective Date, Amendments, Changes and Annulment of the Contract
36. The legal effect of the Contract shall, by virtue of China's laws and
regulations, be lawful, binding and enforceable. Either Party shall not breach
the terms and the spirit of the Contract.
The incorporation date of the Joint-Venture Company shall be the date of the
business licence issued by the Chinese "Government". This Contract shall come
into force on the date when it receives approval from the Chinese "Government".
Any amendment to the Contract and its attached documents shall become effective
only after both Party A and Party B have signed a written agreement and after
receiving the approval of the original authority.
37. As a result of Force Majeure that makes it impossible for the Contract to be
performed and as a result of the Joint-Venture Company being unable to carry on
the operation because losses for a number of years, it may be possible to
prematurely terminate the term of the Joint Venture and to annul the Contract
after being approved by the Board of Directors in unanimity and by the original
authority.
38. As a result of one Party not performing in accordance with the Contract, the
Articles of Association in terms of responsibilities and obligations or having
seriously breached the terms of the Contract or the Articles of Association,
hence making the Joint-Venture Company unable to achieve the operation
objectives specified by the Contract, the breaching Party shall be deemed to
have unilaterally terminated the Contract.
If one Party has not discharged its responsibilities and obligations stipulated
in the Contract or has seriously breached the Contract until the Joint-Venture
Company is unable to operate or achieve its objectives stipulated in the
Contract, the Party suffering the damages shall treat the Contract as having
been terminated and shall have the right to seek compensations from the
breaching Party. The abiding Party may also ask the authority concerned to
terminate the Contract.
<PAGE>
Part XVII Liabilities for Breach of Contract
39. In accordance with clause 9 of the Contract that specifies the date of
payment for the capital, if Party B fails to pay by the deadline, then that
portion of late payment shall be subject to an amount for breach of Contract to
be calculated at 4/10,000 per day and to be made payable to Party A.
If the sum payable to Party A for the transfer of its right in shares and the US
dollars sight draft in respect of the cash payment for the capital contribution,
which is the equivalent of 7.1625 million Renminbi yuan have not been paid up
Party B on 31 December 1999, this shall be treated as a penalty for breach of
the Contract and Party B's holding of the shares in the Joint-Venture Company
shall entirely go back to Party A without any compensation. In this connection
with regard to its shareholdings in Huaxin Company (the Joint-Venture Company
after reorganisation) that it has obtained after making the initial payment to
Party A for the latter's transfer of the shareholdings, Party B agrees to allow
such shares to be held as a security for the unpaid sum owing to Party A for the
shares transferred. The formalisation procedures shall be dealt with by Party A
and Party B in accordance the laws and regulations concerned.
Party XVIII Force Majeure
40. Where either Party or the Joint-Venture Company, being impacted by the Force
Majeure, has not completed the obligations stipulated in this Contract,
including any obligations of plans and projections, the Party shall not be held
to be in breach of the Contract. If the Force Majeure has caused a delay in the
performance of any obligations in the Contract by either Party or the
Joint-Venture Company, then the performance of the obligations in the Contract
and the deadlines on the obligations concerning the Contract may be extended.
The extended time shall include the time restoration work delayed by the Force
Majeure and the time required for putting the operation back on track.
The Force Majeure mentioned in the previous clause shall include the following
situations: any law, regulation, order or directive in the form of laws or other
forms that issued by the "Government" or the country, destructive activities
carried out by public enemies, risks at sea, fires, rain storms, typhoons,
earthquakes, epidemics, incidents, hostile actions, wars (both declared and
undeclared), blockades, unforeseen embargoes or other enemies' actions, strikes
and other labour disputes, riots, insurrections and other mistakes or failures
to perform duties that are not caused but are uncontrollable by the Party
claiming circumstances of Force Majeure.
The Party claiming Force Majeure shall immediately notify all other Parties,
explaining the cause of Force Majeure and its starting date and providing
evidence thereof. Thereafter, each Party shall take whatever possible and
necessary measures to eliminate or reduce the impact of the Force Majeure. If
the Force Majeure cannot be eliminated within a year and has caused serious
impacts, then all Parties shall conduct amicable discussions on whether the
Contract should continue. As soon as the Force Majeure has disappeared, the
Party claiming the Force Majeure shall immediately inform the other Party.
Part XIX The Governing Laws
41. The drawing up, effect, interpretation, performance and settlement of
disputes pertaining to the Contract shall be governed by the laws of the
People's Republic of China.
The laws of the People's Republic of China that are legislated after this
Contract has come into force shall, unless otherwise specified, not be
retroactive on the performance of the Contract.
Where "the Laws of China" conflict with the international treaties or
conventions that China has endorsed, then the governing laws shall be the
international treaties or conventions concerned. However, any reservations
<PAGE>
announced by the Chinese "Government" in endorsing these treaties or conventions
shall be excepted.
If certain matters concerning the Joint-Venture Company have not been regulated
by "the Chinese Laws" and there are no corresponding international treaties or
conventions endorsed by China, then the Contract shall be governed by
international customs.
Part XX Settlement of Disputes
42. All disputes arising from the performance of the Contract or concerning the
Contract shall be resolved through amicable negotiations. If no solution arises
from negotiations, the disputes shall be submitted to China International
Economic Trade Arbitration Committee in Beijing for an arbitration to be
conducted in accordance with its arbitration rules. The arbitration shall be
final and binding on all Parties. The arbitration fee shall be borne by the
losing Party.
43. In the course of arbitration, with the exception of those sections being
disputed by the Parties, the Contract shall remain in force.
Both Parties shall discuss the developments of the Contract on fixed dates and
shall try their best to resolve through friendly negotiations that arise from
the implementation of the Contract.
In the circumstances below, any dispute shall have the final arbitration to be
conducted by China International Economic Trade Arbitration Committee in Beijing
in accordance with its arbitration rules:
(1) Both Parties have not been able to resolve the dispute through
friendly negotiations within ninety (90) days of the written notice
being issued in respect of the dispute.
(2) Both Parties have not requested a mediation within thirty (30) days
(3) Both Parties have failed to have a unanimous opinion on the mediator
named.
The arbitration languages used shall be Chinese and English. The materials,
statement of hearing, statement of claim, statement of defence, decision and the
supporting reasons of the arbitration shall be in Chinese and English.
In the course of the arbitration, the arbitrator shall refer to and fully
consider the clauses in the Contract and these clauses in the Contract to
determine the intentions of each Party on the signing of the Contract.
The arbitrator's decision shall be final and shall be binding on both Parties
without any further appeal.
Part XXI The Written Languages
44. The Contract shall be written in both Chinese and English. Both written
languages shall carry the same force.
Part XXII General
45. If the Contract is in conflict with the Company's Articles of Association or
any other documents, the Contract shall prevail.
If any time limitation causes any matter to come into force or to become invalid
on a non-working day, then the next first working day shall become the day when
the matter comes into force or becomes invalid.
<PAGE>
The time clauses in the Contract carry important meanings and shall be strictly
adhered to or any adverse consequences shall be borne.
All Parties to the Contract shall endeavour to perform every obligation to
achieve the laid-down objectives of the Company through earnest co-operation,
honesty, trustworthiness, full discharge of duties and great efforts.
All Parties to the Contract shall from time to time try their best to ensure the
Joint-Venture Company and the Parties enjoy favourable policy of the
"Government".
46. The methods of notification used by both Party A and Party B are by telegram
or telex. If it involves the Parties' rights and obligations, then notification
shall be in writing by mail. The registered addresses of all Parities listed in
the Contract shall be the addresses of the Parties for receiving the mail.
Any notification and correspondences shall be in the written form and shall:
(1) be delivered to all Parties' registered address by express courier
service or by telex or by fax. In such cases, these notices and other
correspondence shall be deemed to have been delivered to the addresses
listed below on the day of delivery or the next working day (if
delivered on a non-working day).
(2) The telex and fax shall be transmitted to all Parties' registered
addresses. If these are received before 3.00 p.m. local time, then it
shall be deemed to have been received on that day. If these are
received after 3.00 p.m. local time, then it shall be deemed to have
been received on the next working day. If the next day is a
non-working day, then it shall be deemed to have been received on the
following working day. If one Party changes its working address, it
shall use the foregoing methods to notify the other Party and this
shall take effect immediately.
The Contract is drawn up on 27 July 1999 and is signed in Nanjing, China by the
authorised representatives of both Party A and Party B.
Party A: The Nanjing Medical Group Company Limited (with company stamp)
Representative:
Position: General Manager
Party B: Allwin Newtech Ltd.
Representatuve:
Position: President
27 July 1999
Barry L. Friedman, P.C.
1582 Tulita Drive
Las Vegas, NV 89123
November 2, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Ladies and Gentlemen:
I have read and agree with the information contained in the section
entitled "Change in Accountants" included in Dragon Pharmaceutical Inc.'s
Registration Statement on Form 10-SB to be filed with the Securities and
Exchange Commission on or about October 29, 1999, insofar as such comments
relate to us.
Yours truly,
/s/ BARRY L. FRIEDMAN
------------------
Barry L. Friedman, P.C.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-SB FOR DRAGON PHARMACEUTICAL INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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