<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JUNE 30, 1996
NATURAL WAY TECHNOLOGIES, INC.
-------------------------------------------------------
(EXACT NAME OF REGISTRATION AS SPECIFIED IN ITS CHARTER)
NEVADA 33-55254-04 87-0394341
- ------------------------- ----------------------- -------------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
ROOM 3105, 31/F, UNIVERSAL TRADE CENTRE
3-5A ARBUTHNOT ROAD, CENTRAL, HONG KONG
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (852) 2521-6296
ENERGY SYSTEMS, INC.
1111 CAROLINE, STE. 2905, HOUSTON, TEXAS 77010
--------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
As a result of the acquisition detailed in Item 2, supra control of the
Registrant passed to the former shareholders of China Medical Development Ltd.
The new controlling shareholders are:
Number of Percent of
shares Class
-------- ----------
a) Beautimate Limited 6,900,000
b) Ongoing Limited 100,000
In addition, each of these shareholders were issued the following Series B
Preferred Shares whose vote on all corporate matters is equivalent to thirty
percent of the total vote:
Number of Percent of
Shares Class
--------- ---------
a) Beautimate Limited 100,000 100%
b) Ongoing Limited 0 0
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
As of the close of business on June 30, 1996 the Registrant acquired all of
the issued and outstanding capital stock of China Medical Development Co. Ltd.,
a British Virgin Islands corporation ("China Medical") in exchange for 7,000,000
shares of the Registrant's Common Stock, $0.001 par value, 100,000 shares of
Series B Preferred Stock and $4,200,000 in cash. The Common Stock issued
represent approximately 85.37% of the Registrant's issued and outstanding Common
Stock following the acquisition. The Series B Preferred Stock has voting rights
which will always be equal to 30% of the total vote on any corporate matter.
China Medical was established to participate in a sino-foreign joint
venture with the Dunhua Huakang Pharmaceutical Plant, ("DHPP") a state owned
enterprise engaged in the manufacturing of formulated Chinese medicines for sale
within the Peoples Republic of China ("PRC"). Under the joint venture agreement
dated March 6, 1996, China Medical contributed $4,200,000 in cash for a seventy-
percent interest in the joint venture, while DHPP contributed its production
plant, (buildings, plant and machinery) valued at $1,800,000 for a thirty-
percent interest in the joint venture.
The joint venture will succeed to the business of manufacturing formulated
Chinese medicine which was previously produced by DHPP. As part of the joint
venture agreement, DHPP has delivered a guarantee to China Medical that the
annual net income after tax (as determined under generally accepted accounting
principles) of the joint venture for each of its first four years of operations
will not be less than 25% of the net assets employed by the joint venture. In
the event that the net income of the joint venture is below the guaranteed
amount, DHPP has agreed to reallocate all or a portion of its net income from
the joint venture to China Medical, or make payments to China Medical to cover
any shortfall to China Medical's share of the net income. In addition, DHPP has
agreed to transfer to the joint venture additional operating assets and
liabilities with an estimated value of approximately for a note which bears
interest at an annual rate of 5.5%. The joint venture has the right to transfer
the note back to DHPP if the outstanding accounts receivable as of December 31,
1995 are not realised in cash by June 30, 1997.
2
<PAGE>
Other key provisions of the joint venture agreement include:
/ / the joint venture duration is 30 years extending from March, 1996 to March,
2026;
/ / the profit and loss sharing ratio is the same as the respective percentage
of equity interest (70% to China Medical and 30% DHPP); and
/ / the Board of Directors will consist of seven members, three designated by
DHPP and four designated by China Medical.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
a) Dismissal of Independent Accounting Firm
(i) D. Brian MacBeth (the "principal accountant"), the
independent accountant which audited the financial statements of the
Registrant (formerly, Energy Systems, Inc.) during fiscal years 1994 and
1995, was dismissed in such capacity on July 31, 1996.
(ii) None of the principal accountant's reports on the
financial statements of the registrant for either of the past two
years has contained an adverse opinion or a disclaimer of opinion, or
was qualified or modified as to uncertainty, audit scope, or
accounting principles.
(iii) The decision to change accountants was recommended by
the board of directors.
(iv) During the preceeding two years and the subsequent
interim period preceding his dismissal, the Registrant had no
disagreements with the principal accountant on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement(s), if not resolved to
the satisfaction of the principal accountant, would have caused him to
make reference to the subject matter of the disagreement(s) in
connection with his report.
(v) None of the kinds of events listed in paragraph
(a)(1)(v)(A) through (D) of Regulation S-K, Item 304 occurred during
the two most recent fiscal years or any subsequent interim periods.
(b) Engagement of New Independent Accountants
On July 31, 1996, the Registrant's board of directors formally
engaged Arthur Anderson & Co. as its new principal accountants (the
"new accounting firm") to audit the Registrant's financial statements.
The new accounting firm served as the principal accounting firm
for the Registrant's subsidiary joint venture partner, Dunhua Huakang
Pharmaceutical Plant, with respect to its financial statements for
fiscal years 1994 and 1995. Other than its services in that regard,
the Registrant, during the two most recent fiscal years and the
subsequent interim period prior to the engagement of the new
accounting firm, did not consult with the new accounting firm with
regard to any of the matters listed in Regulation S-K Items
304(a)(2)(i) or (ii).
3
<PAGE>
ITEM 5. OTHER EVENTS.
On July 16, 1996, the Registrant filed Articles of Amendment with the
Secretary of State for the State of Nevada to change its name from Energy
Systems, Inc. to Natural Way Technologies, Inc.
During May, 1996, the Registrant sold 4,200,000 of Series A Convertible
Preferred Shares pursuant to the provisions of Regulation S to finance the
acquisition of China Medical. The Series A Convertible Preferred Shares are
convertible into Common Shares of the Registrant at any time after July 5, 1996
at the lesser of the market price of the stock, or $1.00 per share.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
a) Financial statements of business acquired
b) Proforma financial information - no proforma financial information is
included as the Registrant was a development stage Company until the
acquisition of China Medical and the proforma information is almost
identical to the financial statements of the acquired business.
C) Exhibits
2.1 Acquisition Agreement
16.1 Letter from D. Brian MacBeth regarding change in certifying
accountants.
4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED HEREUNTO DULY AUTHORIZED.
NATURAL WAY TECHNOLOGIES, INC.
Date: July , 1996 BY:
----- -------------------------------------
Yiu Yat Hung
Chairman and Chief Executive Officer
5
<PAGE>
FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
<PAGE>
[LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of China Medical Development Co. Ltd.:
We have audited the accompanying balance sheets of Dunhua Huakang Pharmaceutical
Plant (a state-owned enterprise established in the People's Republic of China;
"the Company") as of December 31, 1994 and 1995 and the related statements of
operations, cash flows and changes in equity for the years ended December 31,
1993, 1994 and 1995, expressed in Chinese Renminbi. These financial statements
are the responsibility of management of the Company. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Substantially all of the Company's operations are conducted in the People's
Republic of China. Accordingly, the Company is subject to special
considerations and significant risks as described in Note 1 to the accompanying
financial statements.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dunhua Huakang Pharmaceutical
Plant as of December 31, 1994 and 1995, and the results of its operations and
its cash flows for the years ended December 31, 1993, 1994 and 1995, in
conformity with generally accepted accounting principles in the United States of
America.
/s/ Arthur Andersen & Co
Hong Kong,
June 25, 1996.
- 1 -
<PAGE>
DUNHUA HUAKANG PHARMACEUTICAL PLANT
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1993 1994 1995
---------- ---------- ----------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
Net sales 36,024 103,614 86,093 10,348
Cost of goods sold (10,712) (27,626) (22,321) (2,683)
---------- ---------- ---------- ----------
Gross profit 25,312 75,988 63,772 7,665
Selling expenses (3,379) (18,306) (14,226) (1,710)
General and administrative
expenses (10,922) (44,609) (22,084) (2,654)
Interest income (expense),
net (1,353) (433) 160 19
Other expense, net - (96) (46) (6)
---------- ---------- ---------- ----------
Income before
income tax 9,658 12,544 27,576 3,314
Provision for income tax - (1,000) (1,000) (120)
---------- ---------- ---------- ----------
Net income 9,658 11,544 26,576 3,194
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The accompanying notes are an integral part of these statements of operations.
_______________
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
for the convenience of the reader has been made at the noon buying rate in New
York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on June 25, 1996 of US$1.00=
Rmb 8.32. No representation is made that the Renminbi amounts could have been,
or could be, converted into United States dollars at that rate on June 25, 1996
or at any other certain rate.
- 2 -
<PAGE>
DUNHUA HUAKANG PHARMACEUTICAL PLANT
BALANCE SHEETS AS OF DECEMBER 31, 1994 AND 1995
1994 1995
---------- ----------------------
Rmb'000 Rmb'000 US$'000
ASSETS
- ------
Current assets:
Cash 5,345 3,111 374
Accounts receivable, net 44,211 54,308 6,528
Prepayments 4,103 3,537 425
Inventories, net 7,974 7,170 862
Due from related companies 7,727 8,752 1,052
---------- ----------- ----------
Total current assets 69,360 76,878 9,241
Deferred value added tax recoverable 1,686 1,349 162
Property, plant and equipment, net 3,323 18,157 2,182
---------- ----------- ----------
Total assets 74,369 96,384 11,585
---------- ----------- ----------
---------- ----------- ----------
LIABILITIES AND EQUITY
- ----------------------
Current liabilities:
Short-term borrowings 1,690 37 4
Accounts payable 6,875 6,776 815
Accrued expenses and other payables 29,371 24,897 2,992
Taxation payable 12,083 13,642 1,640
Due to related companies 274 380 46
---------- ----------- ----------
Total current liabilities 50,293 45,732 5,497
---------- ----------- ----------
Equity:
Dedicated capital 5,070 7,728 929
Retained earnings 19,006 42,924 5,159
---------- ----------- ----------
Total equity 24,076 50,652 6,088
---------- ----------- ----------
Total liabilities and equity 74,369 96,384 11,585
---------- ----------- ----------
---------- ----------- ----------
The accompanying notes are an integral part of these balance sheets.
__________________
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
for the convenience of the reader has been made at the noon buying rate in New
York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on June 25, 1996 of US$1.00=Rmb
8.32. No representation is made that the Renminbi amounts could have been, or
could be, converted into United States dollars at that rate on June 25, 1996 or
at any other certain rate.
- 3 -
<PAGE>
DUNHUA HUAKANG PHARMACEUTICAL PLANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Cash flows from operating activities:
- -------------------------------------
Net income 9,658 11,544 26,576 3,194
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation of property, plant and equipment 163 154 367 44
Provision for bad debts - 4,037 - -
Provision for stock obsolesence 822 - - -
(Increase) Decrease in operating assets -
Accounts receivable, net (12,628) (27,966) (10,097) (1,213)
Prepayments (1,210) (635) 566 68
Inventories, net (5,200) (389) ( 80497
Due from related companies (1,499) (6,228) (1,025) (123)
Deferred value added tax recoverable - (1,686) 337 41
Increase (Decrease) in operating liabilities -
Accounts payable 2,360 2,720 (99) (12)
Accrued expenses and other payables 4,653 22,569 (4,474) (538)
Taxation payable 1,822 10,003 1,559 187
Due to related companies - 274 106 13
---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities (1,059) 14,397 14,620 1,758
---------- ---------- ---------- ----------
Cash flows from investing activities:
- -------------------------------------
Acquisition of property, plant and equipment (535) (1,200) (15,269) (1,835)
Proceeds from disposals of property, plant and equipment 181 1,295 68 8
---------- ---------- ---------- ----------
Net cash (used in) provided by investing activities (354) 95 (15,201) (1,827)
---------- ---------- ---------- ----------
Cash flows from financing activities:
- -------------------------------------
New short-term bank loans 5,880 381 - -
Repayment of short-term bank loans (3,662) (10,507) (1,653) (199)
---------- ---------- ---------- ----------
Net cash (used in) provided by financing activities 2,218 (10,126) (1,653) (199)
---------- ---------- ---------- ----------
Net (decrease) increase in cash 805 4,366 (2,234) (268)
Cash, as of beginning of year 174 979 5,345 642
---------- ---------- ---------- ----------
Cash, as of end of year 979 5,345 3,111 374
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements of cash flows.
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
for the convenience of the reader has been made at the noon buying rate in New
York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on June 25, 1996 of US$1.00=Rmb
8.32. No representation is made that the Renminbi amounts could have been, or
could be, converted into United States dollars at that rate on June 25, 1996 or
at any other certain rate.
- 4 -
<PAGE>
DUNHUA HUAKANG PHARMACEUTICAL PLANT
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Dedicated Retained
capital earnings
----------- -----------
Rmb'000 Rmb'000
Balance as of December 31, 1992 685 2,189
Net income - 9,658
Transfer to dedicated capital 3,231 (3,231)
----------- -----------
Balance as of December 31, 1993 3,916 8,616
Net income - 11,544
Transfer to dedicated capital 1,154 (1,154)
----------- -----------
Balance as of December 31, 1994 5,070 19,006
Net income - 26,576
Transfer to dedicated capital 2,658 (2,658)
----------- -----------
Balance as of December 31, 1995 7,728 42,924
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements of changes in
equity.
- 5 -
<PAGE>
DUNHUA HUAKANG PHARMACEUTICAL PLANT
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Dunhua Huakang Pharmaceutical Plant ("DHPP" or "the Company") was established in
the People's Republic of China ("the PRC") in 1990 as a state-owned enterprise
[directly under Dunhua Municipal Government]. The principal activity of DHPP
was manufacturing formulated Chinese medicine for sales to customers in the PRC.
DHPP's manufacturing plant was located in Dunhua, Jilin Province, the PRC.
Under a joint venture agreement dated March 6, 1996, DHPP and China Medical
Development Co. Ltd. ("CMDC"; a company incorporated in the British Virgin
Islands) established a sino-foreign joint venture in the PRC - Dunhua Huakang
Pharmaceutical Co. Ltd. ("DHPC"). Pursuant to the aforesaid agreement, CMDC has
contributed to DHPC cash of US$4,200,000 (equivalent to approximately Rmb
34,860,000, determined at an exchange rate of US$1.00 for Rmb 8.30) as its
capital contribution for 70% equity interest in DHPC, while DHPP has contributed
to DHPC its production plant, including buildings, plant and machinery, with a
value of US$ 1,800,000 (equivalent to approximately Rmb 14,940,000 based on an
exchange rate of US$1.00 for Rmb 8.30) as its capital contribution for 30%
equity interest in DHPC.
DHPC will succeed to the business of manufacturing of formulated Chinese
medicine which was previously undertaken by DHPP. In connection with the
establishment of DHPC, DHPP has delivered a guarantee to CMDC that the annual
net income after tax (as determined under generally accepted accounting
principles in the United States of America) of DHPC for each of its first four
years of operations will not be less than 25% of the net assets employed by
DHPC. In the event that the net income of DHPC is below the guaranteed amount,
DHPP has agreed to reallocate all or a portion of its entitlement to the net
income of DHPC to CMDC or make payments to CMDC so as to cover any shortfall
with respect to CMDC's share of the net income. In addition, DHPP has agreed to
transfer into DHPC additional operating assets and liabilities with an estimated
valuation of approximately Rmb 35,712,000 for a note receivable which bears
interest at an annual rate of 5.5%. CMDC has been given a guarantee to transfer
the accounts receivable back to DHPP if the accounts receivable as of December
31, 1995 are not realised in cash by June 30, 1997.
The other key provisions of the joint venture agreement include:
- - the joint venture period is 30 years from March 1996 to March 2026;
- - the profit and loss sharing ratio is the same as the respective percentage
of equity interest; and
- - the Board of Directors consists of seven members, with three designated by
DHPP and four designated by CMDC.
- 6 -
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)
RISK CONSIDERATIONS
As substantially all of the operations of DHPP are conducted in the PRC, DHPP
is subject to special considerations and significant risks not typically
associated with investments in equity securities of North American and Western
European companies. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. These
are described further in the following paragraphs:
a. POLITICAL ENVIRONMENT
DHPP's results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, inflationary measures, currency conversion
and remittance abroad, and rates and methods of taxation, among other
things. While the PRC's government is expected to continue its economic
reform policies, many of the reforms are new or experimental and may be
refined or changed. It is also possible that a change in the PRC's
leadership could lead to changes in economic policy.
b. ECONOMIC ENVIRONMENT
The economy of the PRC differs significantly from the economy in the North
American and Western European countries in many respects, including its
structure, levels of development and capital reinvestment, growth rate,
government involvement, resource allocation, self-sufficiency, rate of
inflation and balance of payments position. The adoption of economic
reform policies since 1978 has resulted in a gradual reduction in the role
of state economic plans in the allocation of resources, pricing and
management of such assets, and increased emphasis on the utilization of
market forces, and rapid growth in the PRC's economy. However, such growth
has been uneven among various regions of the country and among various
sectors of the economy.
In recent years, the PRC's economy has experienced periods of rapid
economic expansion and high rates of inflation, which have led to the
adoption by the central government from time to time of various corrective
measures designed to regulate growth and control inflation. High inflation
may cause the government to take other actions which could inhibit economic
activity in the PRC and may thereby delay planned expansion. Such action
could adversely affect DHPP's results of operations and expansion plans.
c. LEGAL ENVIRONMENT
The PRC's legal system is based on written statutes under which prior court
decisions may be cited as authority but do not have binding precedential
effect. The PRC's legal system is relatively new, and the government is
still in the process of developing a comprehensive system of laws, a
process that has been ongoing since 1979. Considerable progress has been
made in the promulgation of laws and regulations dealing with economic
matters such as corporate organization and governance, foreign investment,
commerce, taxation and trade. Such legislation has significantly enhanced
the protection afforded to foreign investors. However, experience with
respect to the implementation, interpretation and enforcement of such laws
is limited.
- 7 -
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)
d. FOREIGN CURRENCY EXCHANGE
DHPP expects that substantially all of its revenue will be denominated in
Renminbi ("Rmb"). A portion of such revenues will need to be converted
into other currencies to meet foreign currency obligations. At present,
the conversion of Renminbi into other currencies and the remittance of
foreign currencies abroad to meet foreign currencies obligations on trade
debts, loans and profit repatriation do not require approvals of the PRC
government. All other conversion of Renminbi and the remittance of foreign
currencies abroad, in particular those relating to capital transactions,
require approvals of the PRC government. No assurance can be given that
DHPP will continue to be able to convert sufficient amounts of foreign
currencies in the PRC's foreign exchange markets in the future to meet its
foreign currency obligations.
2. BASIS OF PRESENTATION
The accompanying financial statements were prepared in accordance with generally
accepted accounting principles in the Unites States of America ("US GAAP").
This basis of accounting differs from that used in the statutory accounts of
DHPP, which were prepared in accordance with the accounting principles and the
relevant financial regulations applicable to state-owned enterprises in the PRC,
as established by the Ministry of Finance of the PRC.
The principal adjustments made to conform to US GAAP included the following:
- - Adjustment to recognize sales and cost of sales upon delivery of goods and
passage of title to customers;
- - Recording additional allowance for doubtful accounts receivable;
- - Recording of provision for obsolete, slow-moving and defective inventories;
and
- - Reclassification of certain items designated as "dedicated capital
appropriated from/transferred to net income" as charges or credits to
income.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. SALES
Sales represent the invoiced value of goods, net of sales tax or value-
added tax, supplied to customers. Sales are recognized upon delivery of
goods and passage of title to customers.
- 8 -
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b. TAXATION
Income tax is provided under the provisions of Statement of Financial
Accounting Standards No. 109, which requires recognition of deferred tax
assets and liabilities for expected future tax consequences of events that
have been included in the financial statements or tax returns.
DHPP's sales is subject to value added tax ("VAT") at a rate of 17% which
can be offset by VAT paid by DHPP on its purchases.
c. INVENTORIES
Inventories are stated at the lower of cost, on a weighted average basis,
and market value. Costs of work-in-progress and finished goods are
composed of direct materials, direct labor and an attributable portion of
manufacturing overheads.
d. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation for
financial reporting purposes is provided using the straight-line method
over the asset's estimated useful life after taking into account the
estimated residual value. The estimated useful lives are as follows:
Land and buildings 15 years
Machinery and equipment 10 years
Motor vehicles 5 years
Furniture, fixtures and office equipment 5 years
Construction-in-progress represents buildings under construction, and
machinery and equipment pending installation. No depreciation is provided
in respect of construction-in-progress until the construction and
installation work is completed.
e. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from
those estimates.
- 9 -
<PAGE>
4. TAXATION
The Company, being a state-owned enterprise in the PRC, is subject to PRC income
tax at a rate of 55% for the year ended December 31, 1993, and at a rate of 33%
(30% state unified income tax and 3% local income tax) for the years ended
December 31, 1994 and 1995. However, DHPP was granted tax concessions by the
Dunhua Municipal Government and was exempted from income tax for the year ended
December 31, 1993 and was required to pay pre-determined income tax of Rmb
1,000,000 for each of the years ended December 31, 1994 and 1995. The
reconciliations of the statutory income tax rate in the PRC to the effective
income tax rate as stated in the statements of operations are as follows :
Year ended December 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
Statutory tax rate 55.0% 33.0% 33.0%
Tax concessions (55.0%) (25.0%) (29.4%)
---------- ---------- ----------
Effective tax rate 0% 8.0% 3.6%
---------- ---------- ----------
---------- ---------- ----------
Taxation payable comprised :
December 31,
----------------------------------
1994 1995
---------- ----------------------
Rmb'000 Rmb'000 US$'000
Income tax - - -
Value added tax 8,755 11,940 1,435
Others 3,328 1,702 205
---------- ---------- ----------
12,083 13,642 1,640
---------- ---------- ----------
---------- ---------- ----------
5. ACCOUNTS RECEIVABLE
Accounts receivable comprised:
December 31,
----------------------------------
1994 1995
---------- ----------------------
Rmb'000 Rmb'000 US$'000
Trade receivables 48,248 58,345 7,013
Less: Allowance for doubtful accounts (4,037) (4,037) (485)
---------- ---------- ----------
Accounts receivable, net 44,211 54,308 6,528
---------- ---------- ----------
---------- ---------- ----------
- 10 -
<PAGE>
6. INVENTORIES
Inventories comprised:
December 31,
----------------------------------
1994 1995
---------- ----------------------
Rmb'000 Rmb'000 US$'000
Raw materials 5,020 3,117 375
Work-in-progress 2,122 1,898 228
Finished goods 1,654 2,977 358
---------- ---------- ----------
8,796 7,992 961
Less: Provision for obsolete, slow-moving
and defective inventories (822) (822) (99)
---------- ---------- ----------
Inventories, net 7,974 7,170 862
---------- ---------- ----------
---------- ---------- ----------
7. DEFERRED VALUE ADDED TAX RECOVERABLE
Deferred value added tax ("VAT") recoverable arose from a change in the PRC tax
system and regulations effected January 1, 1994, and was determined at 14% of
the balance of DHPP's inventories as of January 1, 1994. In 1994, approximately
Rmb 220,000 of the deferred VAT recoverable was utilized to offset output VAT
payable by DHPP. Pursuant to a directive issued by the PRC State Tax Bureau,
the amount of deferred VAT recoverable outstanding at January 1, 1995 can be
used to offset output VAT payable over a period of five years. The amount
utilized in 1995 was approximately Rmb 337,000.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised:
December 31,
----------------------------------
1994 1995
---------- ----------------------
Rmb'000 Rmb'000 US$'000
Land and buildings 2,216 2,271 273
Machinery and equipment 539 724 87
Motor vehicles 257 569 68
Furniture, fixtures and office equipment 261 230 27
Construction-in-progress:
Buildings 335 11,112 1,336
Machinery and equipment 172 3,926 472
---------- ---------- ----------
3,780 18,832 2,263
Less: Accumulated depreciation (457) (675) (81)
---------- ---------- ----------
3,323 18,157 2,182
---------- ---------- ----------
---------- ---------- ----------
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<PAGE>
8. PROPERTY, PLANT AND EQUIPMENT (Continued)
Upon its establishment, DHPP was granted a right to use the parcel of land of
approximately Rmb 425,000 presently occupies for the long-term.
9. SHORT-TERM BORROWINGS
Short-term borrowings comprised :
December 31,
----------------------------------
1994 1995
---------- ----------------------
Rmb'000 Rmb'000 US$'000
Bank loans 1,643 - -
Other loans 47 37 4
---------- ---------- ----------
1,690 37 4
---------- ---------- ----------
---------- ---------- ----------
Supplementary information with respect to the short-term bank loans for the
years ended December 31, 1994 and 1995:
December 31,
----------------------------------
1994 1995
---------- ----------------------
Rmb'000 Rmb'000 US$'000
Maximum amount outstanding: 5,285 1,659 199
Average amount outstanding 3,464 822 99
Weighted average interest rate per
annum 10.98% 10.98% 10.98%
10. ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables represented commission payable to sales
agents at certain percentages of gross sales and accruals of expenditures. The
accrued expenses and other payables comprised:
December 31,
----------------------------------
1994 1995
---------- ----------------------
Rmb'000 Rmb'000 US$'000
Accruals for operating expenses
- - Selling expenses 11,913 10,717 1,288
- - Advertising and promotional expenses 9,946 3,231 388
- - Employee bonus 2,535 2,366 284
- - Employee salary 658 901 108
Provision for staff welfare fund 1,842 2,401 289
Accruals for construction cost of buildings - 5,281 635
Others 2,477 - -
---------- ---------- ----------
29,371 24,897 2,992
---------- ---------- ----------
---------- ---------- ----------
- 12 -
<PAGE>
11. DISTRIBUTION OF INCOME
Income of DHPP as determined under generally accepted accounting principles in
the PRC is distributable to investors after transfer to contributory dedicated
capital as required under PRC government regulations and discretionary dedicated
capital as determined by DHPP's board of directors. Contributory dedicated
capital is a form of legal reserve fund. Discretionary dedicated capital
includes an
enterprise expansion fund, new product development fund, salary fund and staff
welfare fund. Contributory and discretionary dedicated capital are not
distributable in the form of dividends. In the financial statements prepared
under US GAAP, amounts designated for payments of employee salary and welfare
have been charged to income and the related provisions are reflected as accrued
liabilities in the balance sheets.
12. RETIREMENT PLAN
As stipulated by PRC regulations, DHPP maintains a defined contribution
retirement plan for all of its employees commencing from 1994. All retired
employees are entitled to an annual pension equal to their basic annual salary
upon retirement. DHPP contributes to a state sponsored retirement plan
approximately 21.5% of the basic salary of its employees, and has no further
obligations for the actual pension payments or post-retirement benefits beyond
the annual contributions. The state sponsored retirement plan is responsible
for the entire pension obligations payable to retired employees. DHPP's
contributions for 1993, 1994 and 1995 was Nil (as the plan was not commenced),
Rmb 150,000 and Rmb 150,000 respectively.
13. COMMITMENTS
As of December 31, 1995, DHPP had outstanding commitments for construction of a
manufacturing plant and purchases of machinery and equipment (not provided for
in the financial statements) of approximately Rmb 5,317,000.
OPERATING RISKS
a. LIMITED PRODUCT TYPES
Substantially all of DHPP's sales were derived from one product in 1993 and
1994 and two products in 1995.
b. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
DHPP's concentration of credit risk with respect to trade receivables is
limited due to the large number of customers comprising DHPP's customer
base. There were no customers which represented a significant
concentration of sales for 1993, 1994 and 1995, or trade receivables as of
December 31, 1994 and 1995. Ongoing credit evaluations of each customer's
financial condition are performed and, generally, no collateral is
required. DHPP maintains reserves for potential credit losses and such
losses, in the aggregate, have not exceeded management's expectations.
- 13 -
<PAGE>
14. OPERATING RISK (Continued)
c. CONCENTRATION OF SUPPLIERS
Details of the suppliers accounting for more than 10% of DHPP's purchases
are as follows:
Percentage of purchases for years ended
December 31,
--------------------------------------
1993 1994 1995
----------- ---------- ----------
(Peiking Herbal China Limited) - - 15%
----------- ---------- ----------
----------- ---------- ----------
15. RELATED PARTY TRANSACTIONS
DHPP entered into the following transactions with related parties :
Year ended December 31,
---------------------------------------
1993 1994 1995
------- ------- -------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
Sales to related companies - 1,496 2,202 265
Interest income earned from
related companies - 431 - -
Management fees paid to
related companies 493 926 - -
------- ------- -------- -------
------- ------- -------- -------
All outstanding balances with related companies are unsecured, non-interest
bearing and without pre-determined repayment terms.
16. OTHER SUPPLEMENTARY INFORMATION
Year ended December 31,
--------------------------------------------
1993 1994 1995
--------- --------- ----------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
Interest expenses 1,353 870 6 1
Advertising and promotional
expenses 7,384 33,105 17,541 2,108
Bad debt provisions - 4,037 - -
Provision for obsolete, slow-
moving and defective
inventories 822 - - -
Interest income - 437 166 20
--------- --------- --------- ---------
--------- --------- --------- ---------
- 14 -
<PAGE>
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma statement of operations for the year ended December 31,
1995 has been prepared to give effect to the establishment of Dunhua Huakang
Pharmaceutical Co. Ltd. ("DHPC") and the commencement of its operations had
occurred on January 1, 1995. It is based upon the statement of operations of
Dunhua Huakang Pharmaceutical Plant ("DHPP"), the predecessor of DHPC, for the
year ended December 31, 1995, after giving effect to pro forma adjustments
described in the notes thereto.
The unaudited pro forma statement of operations does not purport to represent
what the results of operations of DHPC would actually have been if the events
described above had in fact occurred on January 1, 1995, or to project the
results of operations of DHPC for any future period.
- 15 -
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
Historical - Pro forma Pro forma-
DHPP adjustments DHPC
------------ ------------ ------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
Sales 86,093 86,093 10,348
Cost of goods sold (22,321) (22,321) (2,683)
------------ ------------ --------- -------
Gross profit 63,772 63,772 7,665
Selling expenses (14,226) (14,226) (1,710)
General and administrative
expenses (22,084) (22,084) (2,654)
Interest income (expense), net 160 (a) (1,964) (1,804) (217)
Other expense, net (46) (46) (6)
------------ ------------ --------- -------
Income before income
tax 27,576 25,612 3,078
Provision for income tax (1,000) (b) (7,452) (8,452) (1,016)
------------ ------------ --------- -------
Net income 26,576 17,160 2,062
------------ ------------ --------- -------
------------ ------------ --------- -------
The accompanying notes are an integral part of this unaudited pro forma
statement of operations.
________________
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
for the convenience of the reader has been made at the noon buying rate in New
York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on June 25,1996 of US$1.00=Rmb
8.32. No representation is made that the Renminbi amounts could have been, or
could be, converted into United States dollars at that rate on June 25, 1996 or
at any other certain rate.
- 16 -
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
The descriptions of pro forma adjustments to the financial information of DHPP
for the year ended December 31, 1995 are:
a. To record interest expenses at a rate of 5.5% per annum on the notes
payable to DHPP resulting from the transfer by DHPP to DHPC of operating
assets and liabilities with an estimates valuation of approximately Rmb
35,712,000, assuming that the notes payable would be outstanding for the
entire year.
b. To record PRC income tax at a rate of 33% (30% state unified income tax and
3% local income tax) on the income before tax. DHPC is granted tax
concession, underwhich it is exempted from PRC income tax for two years
starting from the first year of profitable operations and then is subject
to a 50% reduction in PRC income tax for three years. The potential
benefit of tax exemption has not been reflected in the unaudited proforma
statement of operations.
- 17 -
<PAGE>
Exhibit 2.1
ACQUISITION AGREEMENT
<PAGE>
AGREEMENT, dated as of day of 1996, by and between ENERGY
SYSTEMS, INC., a Nevada corporation (hereinafter called "ESI"), and the
shareholders of CHINA MEDICAL DEVELOPMENT CO., LTD. (hereinafter called
"Shareholders").
RECITALS
WHEREAS, the Shareholders own or control in their respective capacities the
right to sell, transfer and exchange all of the shares of the capital stock of
CHINA MEDICAL DEVELOPMENT CO., LTD., a British Virgin Islands Corporation and
its 70% shareholding in Dun Hua Hua Kang Pharmaceutical Co., Ltd. (hereinafter
collectively called the "China Medical Group").
WHEREAS, ESI wishes to acquire all of the issued and outstanding capital
stock of the China Medical Group in exchange for 7,000,000 shares of Common
Stock, par value $0.001 per share and 21,000,000 shares of warrants of ESI
(hereinafter referred to as the "ESI Common Stock and Warrants"), representing
approximately 85.37% of the issued and outstanding shares of ESI following the
exchange, and 100,000 shares of the to be issued Class B Preferred Stock with
superior voting right always equivalent to 30% of total vote (hereinafter called
"Class B Preferred Stock") on all corporate matters of ESI and cash of
US$4,200,000 (Say United States Dollars Four Million and Two Hundred Thousand
Only).
WHEREAS, the Shareholders wish to exchange their shares in the China
Medical Group for shares of the ESI Common Stock and Class B Preferred Stock and
cash amount of US$4,200,000. (hereinafter called "Consideration")
NOW, THEREFORE, in consideration of the premises herein contained and the
mutual covenants hereinafter set forth, the parties hereto covenant and agree as
follows:
1. EXCHANGE OF SECURITIES Subject to the terms and conditions
hereinafter set forth, at the time of the closing referred to in Section 6
hereof (hereinafter called the
-1-
<PAGE>
"Closing Date"), ESI will issue and deliver, or cause to be issued and delivered
to the Shareholders, 7,000,000 shares of ESI Common Stock, 100,000 shares of
Class B Preferred Stock and US$4,200,000 in exchange for which the Shareholders
will deliver, or cause to be delivered to ESI, all of the issued and outstanding
capital stock of the China Medical Group. Each of the 7,000,000 shares of ESI
Common Stock shall also be accompanied by 3 classes of warrants making up a
total of 21,000,000 warrants, 7,000,000 shares of Class A warrants exercisable
at a price of $3.00 for one share of Common Stock at anytime up to and including
the second anniversary date of this agreement; 7,000,000 shares of Class B
warrants exercisable at a price of $4.00 for one share of Common Stock at
anytime up to and including the fourth anniversary date of this agreement and
7,000,000 shares of Class C warrants exercisable at a price of $5.00 for one
share of Common Stock up to and including the sixth anniversary date of this
agreement. Immediately after the exchange, the Shareholders will own 85.37% of
the resulting outstanding Common Stock of ESI, or 7,000,000 shares of ESI out of
total issued and outstanding Common Stock of 8,200,000 shares. In addition, ESI
will issue the Shareholders 100,000 shares of Class B Preferred Stock. The
Class B Preferred Stock will have a superior voting right always equivalent to
30% of total vote on all corporate matters of ESI. The aforereferenced warrants
shall also be issued for the existing 1,200,000 shares of common stock
outstanding.
2. REPRESENTATIONS AND WARRANTIES BY THE SHAREHOLDERS The Shareholders
represent and warrant to ESI, all of which representations and warranties shall
be true at the time of closing, and shall survive the Closing Date for a period
of two years therefrom, except as to the representations and warranties set
forth in subsection (g) hereof which shall survive for a period of three years
from the Closing Date, and those set forth in subsection (i) which shall survive
for a period of twelve months from the Closing Date, or from the date when the
accounts receivable may become due and payable, whichever shall be later, that:
a. The China Medical Group and its subsidiaries are corporations duly
organized and validly existing and in good standing under the laws of the
jurisdiction of their incorporation and have the corporate powers to own their
property and carry on their businesses as and where it is now being conducted.
Certified copies of the Memorandum & Articles of Association and the By-laws for
the China Medical Group and each of its
-2-
<PAGE>
subsidiaries are attached hereto as Exhibit 1, and such documents are true and
correct copies of the Memorandum & Articles of Association and By-laws of each
company and include all amendments thereto to the date hereof.
b. The authorized share capital of China Medical Group is $3,000,000 made
up of one class and one series of shares divided into 3,000,000 shares of $1.00
par value each, of which 10,000 shares are presently issued and outstanding.
c. The Shareholders have the full power to exchange their shares of the
capital stock of the China Medical Group upon the terms provided for in this
Agreement, and all such shares have been duly and validly issued, and are free
and clear of any lien or other encumbrance.
d. The consolidated financial statements prepared by Arthur Andersen,
Certified Public Accountants, at and for the year ended December 31, 1995,
attached hereto as Exhibit 2, constitute true and correct statements as of such
date of the financial condition of the China Medical Group and of its assets,
liabilities and income, prepared in accordance with generally accepted
accounting principles of the United States consistently applied, and from
December 31, 1995, and until the date of closing, no dividends or distributions
of capital, surplus, or profits has been, or will be paid or declared by any
member of the China Medical Group in redemption of its outstanding shares or
otherwise than in the ordinary course of business, and additional debt or equity
securities have not been issued by any member of the China Medical Group, nor
have any agreements or commitments been entered into for the issuance of any
such securities.
e. Since December 31, 1995, no member of the China Medical Group has
engaged in any transaction other than transactions in the normal course of the
operations of their business, except as specifically authorized by ESI in
writing.
f. No member of the China Medical Group is involved in any pending or
threatened litigation which would materially adversely affect its financial
condition as shown
-3-
<PAGE>
by the balance sheets of December 31, 1995 (Exhibit 3 hereto), which has not
been provided for on such balance sheets or referred to in such balance sheets
or disclosed to ESI in writing.
g. Each member of the China Medical Group has and will have at the
Closing Date, good and marketable title to all of its property and assets shown
on Exhibit 2 hereto, free and clear of any and all liens, encumbrances or
restrictions, except as shown on Exhibit 2 hereto, and except for taxes and
assessments due and payable after the Closing Date and easements or minor
restrictions with respect to its real property which do not materially affect
the present value or use of such real property.
h. The inventories of the China Medical Group as reflected in Exhibit 2,
and as specifically set forth in separate schedules dated as of December 31,
1995, and attached hereto as Exhibit 3 are valued at the lower of cost or net
realizable value.
i. The accounts receivable of the China Medical Group reflected in
Exhibit 2, and as specifically set forth in separate schedules attached hereto
at Exhibit 4, which shall become due and payable on or before the Closing Date
shall be valid and collectible pursuant to their terms, and can reasonably be
anticipated to be paid within twelve months after the Closing Date or after the
date when the accounts receivable may become due and payable.
j. In connection with their acquisition of shares of ESI, each
Shareholder represents and warrants to ESI the following :
(i) The Shareholder has such knowledge and experience in financial
and business matters that the Shareholder is capable of
evaluating the merits and risks of an investment in ESI.
(ii) The ESI Common Stock is being acquired for the account of the
Shareholder for investment and not with a view to, or for resale
in connection with, any distribution of the ESI Common Stock
within the meaning of the Securities Act of 1933, as amended (the
"Securities Act").
-4-
<PAGE>
(iii) The Shareholder acknowledges and agrees that the shares of
ESI Common Stock are not registered under the Securities
Act, or the laws of any other jurisdiction. Under U.S. law,
the ESI Common Stock cannot be sold or transferred by the
Shareholder unless they are subsequently registered under
applicable law or an exemption from registration is
available. ESI is not required to register or assist in the
registration of the ESI Common Stock or to make any
exemption from registration available. The Shareholder
further acknowledges and agrees that the share certificates
evidencing the ESI Common Stock will bear a legend
substantially in the following terms :
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE
"REGISTERED SECURITIES" WITHIN THE MEANING OF THE SECURITIES
ACT OF 1933. AS AMENDED, AND RULE 144 PROMULGATED
THEREUNDER, THE SECURITIES MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 AS AMENDED, OR AN OPINION OF
COUNSEL SATISFACTORY TO THE ISSUER THAT THE SALE OR TRANSFER
IS EXEMPT FROM REGISTRATION UNDER SAID ACT.
3. REPRESENTATIONS AND WARRANTIES OF ESI. ESI represents and warrants to
the Shareholders, all of which representations and warranties shall be true at
the Closing Date, and which shall survive the Closing Date for a period of three
years therefrom, that :
a. ESI is a corporation duly organized and validly existing and in good
standing under the laws of the State of Nevada and has the corporate power to
own its properties and carry on its business as now being conducted and has
authorized capital stock consisting of 50,000,000 shares of Common Stock, par
value $0.001 per share, of which 1,200,000 shares are presently issued and
outstanding, and no other debt or equity securities of ESI are issued or
outstanding as of the dated hereof and there does not now exist nor will there
exist at the
-5-
<PAGE>
Closing Date any agreement or commitment to issue any such securities.
Additionally, ESI and its board of directors and shareholders shall take such
action prior to the Closing Date as shall be necessary to effect registration of
preferred stocks or other similar actions such that, as of the Closing Date,
there shall be 1,200,000 issued and outstanding shares of Common Stock of $0.001
par value and, as of such date, there shall be no other debt or equity
securities of ESI outstanding and no agreement or commitment by ESI to issue any
such securities. True and correct copies of the Articles of Incorporation and
Bylaws of ESI, as amended through the date hereof, are attached hereto as
Exhibit 5 and no amendment shall occur through the Closing Date.
b. ESI has the corporate power to execute and perform this Agreement and
to deliver the shares required to be delivered to the Shareholders hereunder.
c. The execution and delivery of this Agreement and the issuance of the
stock required hereunder, have been duly authorized by all necessary corporate
action, and neither the execution nor delivery of this Agreement, nor the
issuance of the shares nor the performance, observance, or compliance with the
terms and provisions of this Agreement, will violate any provision of law, any
order of any court or other governmental agency, the Certificate of
Incorporation or Bylaws of ESI or any indenture, agreement or other instrument
to which ESI is a party, or by which ESI is bound or by which any of its
property is bound.
d. The shares of ESI Common Stock deliverable hereunder will, on delivery
in accordance with terms hereof, be duly authorized, validly issued, and fully
paid and nonassessable and will be free and clear of any lien, claim or other
encumbrance.
e. The financial statements prepared by Brian Macbeth, Certified Public
Accountants, at and or the year ended December 31, 1995 (The "ESI Financial
Statements"), attached hereto as Exhibit 6, constitute true and correct
statements as of such date of the financial condition of ESI and of its assets,
liabilities and income, prepared in accordance with generally accepted
accounting principles of the United States consistently applied, and from
December 31, 1995, and until the Closing Date, no dividends or distributions of
capital,
-6-
<PAGE>
surplus, or profits shall be paid or declared by ESI in redemption of its
outstanding shares or otherwise.
f. Since December 31, 1995, ESI has not engaged in any transaction other
than transactions in the normal course of the operations of its business, except
as specifically authorized by the Shareholders in writing.
g. ESI is not involved in any pending or threatened litigation which
would materially adversely affect its financial condition as shown by the
balance sheet of December 31, 1995 (Exhibit 6 hereto), which has not been
provided for on such balance sheet or referred to in such balance sheet or
described on Exhibit 7 attached hereto.
h. No representations, warranties or covenants of ESI in this Agreement
or any certificate or other document furnished or to be furnished by ESI
pursuant to this Agreement contains or will contain a material misstatement of
fact, or omit or will omit a material fact necessary to make the statements
contained herein or therein not misleading. None of the officers or directors
of ESI has knowledge of any act or matter, which may have a material adverse
effect upon ESI or the securities of ESI.
i. As of the date hereof, the shares of outstanding common stock of ESI
are, and as of the Closing Date, such shares shall be, registered under Section
13 or 151 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Copies of all report (the "Reports") filed by ESI pursuant to Section 13
or 15 of the Exchange Act since January 1, 1994, have been delivered to the
Shareholders. The Reports were prepared in accordance with the requirements of
the Exchange Act and the rules and regulations thereunder. The Report (i) do
not contain any untrue statement of a material fact, and (ii) do not omit to
state material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
j. Except as previously described to the Shareholders in writing, ESI has
no material liabilities of any nature except :
-7-
<PAGE>
(i) Liabilities reflected or reserved against in the ESI
Financial Statements attached hereto ; and
(ii) Liabilities incurred by ESI subsequent to the date of the
latest statement of financial condition submitted as part of
the ESI Financial Statements in the ordinary course of
business and consistent with past practice and disclosed in
writing to the Shareholders. As used in this Section,
"material" means amounts of $5,000 or more.
k. In connection with its acquisition of the China Medical Group, ESI
hereby represents and warrants to the Shareholders the following :
(i) ESI has such knowledge and experience in financial and
business matters that ESI is capable of evaluating the
merits and risks of an investment in the China Medical
Group.
(ii) The shares of the China Medical Group are being acquired for
the account of ESI for investment and not with a view to, or
for, resale in connection with, any distribution of such
shares within the meaning of the Securities Act.
(iii) ESI acknowledges and agrees that the shares of the China
Medical Group are not registered under the Securities Act,
or the laws of any other jurisdiction. The shares of the
China Medical Group cannot be sold or transferred by ESI
unless they are subsequently registered under applicable law
or an exemption from registration is available. The
Shareholders are not required to register or assist in the
registration of the shares of the China Medical Group or to
make any exemption from registration available. ESI further
acknowledges and agrees that the share certificates
evidencing the shares of the China Medical Group will bear a
legend substantially similar to the legend set forth in
Section 2(j)(iii) above.
-8-
<PAGE>
(iv) The Shareholders shall have received the representation and
guarantee made personally by all members of Board of
Directors of ESI that ESI has no loss and no liabilities of
any kind prior to or at the Closing Date.
l. Except as previously disclosed to the Shareholders in writing, there
has not been with respect to ESI since December 31, 1995, nor shall there be
with respect to ESI through the Closing Date :
(i) Any event, condition or state of facts, which individually
or in the aggregate, has resulted in any known adverse
material change in condition (financial or otherwise), in
the assets, liabilities, prospects or business of ESI taken
as a whole ;
(ii) Any declaration, setting aside or payment, directly or
indirectly, or a distribution of assets, in the nature of
dividends or a partial liquidation, pro rata or otherwise ;
(iii) Any damages, destruction, loss or other casualty, whether or
not covered by insurance, or any strike, work stoppage,
slowdown, or other labour trouble materially adversely
affecting the business or properties of ESI considered as a
whole.
(iv) Any material change in the method of recordkeeping employed
by ESI.
(v) Any issuance or sale of any capital stock, bond, debentures,
notes or other securities ;
(vi) Any discharge or satisfaction of any lien or encumbrance or
the payment of any obligation or liability, accrued,
absolute or contingent, by such entity in excess of $5,000
in the aggregate other than liabilities shown in the latest
ESI Financial Statements and liabilities arising out
-9-
<PAGE>
of obligations incurred since December 31, 1995, in the
ordinary course of business and disclosed in writing to
the Shareholders prior to the execution of this Agreement;
(vii) Any amendment or termination or receipt of notice of any
proposed amendment or termination of any material contract,
franchise, agreement, plan, lease, license or permit to
which ESI is party or by which it may be bound which
materially affects or will affect the business of ESI as
presently conducted;
(viii) Any mortgage, pledge or subjection of any lien, charge,
option or other encumbrance upon any of the property or
assets, tangible or intangible, of ESI.
(ix) Any sale, assignment, transfer or agreement to sell, assign
or transfer any of the assets of ESI or the making of any
commitment or the incurring of any material liability, or
the cancellation or compromise or agreement to cancel or
compromise any of the debts or claims of such entity;
(x) Any sale, assignment or transfer or agreement to sell,
assign or transfer any trademark or trade name, or
application therefore, or computer software or hardware or
other proprietary information; or
(xi) Any other material transaction or event other than in the
ordinary course of business.
m. Except as previously disclosed to the Shareholders in writing by ESI,
ESI is not party to any of the following :
(i) Collective bargaining agreements involving ESI and all other
agreements with employees of ESI as a group ;
-10-
<PAGE>
(ii) Bonus, deferred compensation, pension, profit sharing, stock
option, stock purchase, incentive or retirement plans or
other employee benefit arrangement ;
(iii) Employment agreements, contracts, or commitments, not
terminable at will without penalty, with or between ESI and
a director, officer or employee of ESI ;
(iv) Agreements of guarantee or indemnification from ESI to any
person or entity ;
(v) Agreements, contracts or commitments containing any covenant
limiting the right of ESI to engage in any line of business
or complete with any person or entity ;
(vi) Agreements, contracts, or commitments to which ESI is a
party or by which it is bound evidencing or providing for
loans to others ;
(vii) Agreements, contracts, or commitments of ESI relating to
material future payments ;
(viii) Agreements, contracts or commitments relating to a merger,
recapitalization, reorganization or the acquisition of
assets or capital stock of any business enterprise ;
(ix) Government or government agency or authority approvals,
consents, orders, registrations, authorizations, licenses
and permits, and applications with respect thereto, which
are material to the business and operations of ESI as
currently conducted ; or
-11-
<PAGE>
(x) Agreements, contracts or commitments which may require consent by
any other person or entity in connection with the consummation of
the transactions contemplated hereby either to prevent a breach
or to continue the effectiveness hereof.
During the period commencing with the date hereof and ending with
the Closing Date, ESI will not enter into any such agreement,
contract or commitment, or be subject of any such approval,
consent, order, registration, authorization, license, permit or
application without the prior written consent of the
Shareholders.
n. Subject to the terms and conditions hereof, the Board of Directors of
ESI has duly approved this Agreement and its execution and the carrying out of
the transactions contemplated herein.
o. Prior to the Closing Date, ESI shall not negotiate or directly or
indirectly solicit or propose to enter into any negotiations which have as their
purpose the sale of the ESI Common Stock or all or any material portion of the
assets of, or a tender offer, merger or other acquisition proposal involving ESI
or its assets, with any person other than the Shareholders.
p. ESI hereby agrees, except as otherwise consented to or approved by the
Shareholders in writing, that prior to the Closing Date, ESI will (I) operate
its business substantially as now operated and only in the ordinary course, and,
to the extent of an consistent with such operation, it will use its best efforts
to preserve its relationships with persons having business dealings with it,
(ii) maintain all of its properties in customary repair, order and condition,
reasonable wear and tear excepted, (iii) maintain its books, accounts and
records in the usual, regular and ordinary manner and in accordance with
generally accepted accounting principles of the United States applied on
consistent basis, (iv) timely file all federal, state and local tax returns and
reports, including, without limitation, income, franchise, excise, ad valorem,
and other taxes with respect to its business and properties and to pay all taxes
or assessments, except for taxes being contested in good faith
-12-
<PAGE>
by appropriate proceedings, as they become due, (v) maintain insurance upon its
properties in accordance with its current practice, (vi) comply in all material
respect with all laws, regulations, rules and ordinances applicable it and to
the conduct of their respective business, and (vii) comply with any contracts,
agreements, commitments, mortgages and similar instruments to which it is party.
4. CONDITIONS TO THE OBLIGATIONS OF ESI The obligations of ESI
hereunder are subject to the following conditions :
a. ESI shall not have discovered any material error or misstatement in
any of the representations and warranties made by the Shareholders as parties
hereto and all of the terms and conditions of this Agreement to be performed and
complied with by the Shareholders on or prior to the Closing Date shall have
been performed and complied with by the Closing Date.
b. ESI shall have received the opinion of Messrs. Vanderkam & Sanders,
legal counsel for the China Medical Group, to the effect that (i) each member of
the China Medical Group is duly organized and validly existing under the laws of
the jurisdiction of its incorporation and have the power and authority to own
their properties and to carry on their respective business wherever the same may
be located and operated as of the Closing Date, and (ii) this Agreement has been
duly executed, and when delivered by the Shareholders is enforceable in
accordance with its terms, subject to general principles of equity, and the
valid exercise of police power. In rendering any such opinion, Vanderkam &
Sanders may rely on opinions of counsel licensed to practice law in applicable
jurisdictions where Vanderkam & Sanders is not so licensed.
5. CONDITIONS TO THE OBLIGATIONS OF THE SHAREHOLDERS. The obligations
of the Shareholders hereunder are subject to the following conditions :
a. All representations and warranties of ESI made herein shall be true
and correct as of the date made and as of the Closing Date, and all the terms
and conditions of this
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Agreement to be performed and complied with by ESI on or prior to the Closing
Date shall have been performed and complied by the Closing Date.
b. There shall have been no substantial adverse change in the conditions,
whether financial, business or otherwise of ESI from December 31, 1995 to the
Closing Date, and between December 31, 1995 and the Closing Date, the business
and assets of ESI shall have not been materially adversely affected as the
result of any fire explosion, earthquake, flood, accident, strike, lockout,
taking over of any assets by any governmental authorities, riot, activities of
armed forces, or acts of God or of public enemies.
c. The Shareholders shall have received the opinion of Messrs. Vanderkam
& Sanders, counsel for ESI, to the effect that (i) ESI is a corporation duly
organized and validly existing under the laws of the State of Nevada, and that
it has the power to own and operate its properties wherever the same may be
located as of the Closing Date ; (ii) the Agreement has been duly executed and
delivered by ESI and is enforceable against ESI in accordance with its terms ;
(iii) the shares to be delivered to the Shareholders pursuant to the terms of
this Agreement have been validly issued, are fully paid and nonassessable, and
(iv) the exchange of the shares herein contemplated does not require the
registration of the ESI Common Shares pursuant to any Federal law dealing with
the issuance, sale, transfer, and/or exchange of corporate securities.
6. CLOSING DATE. The closing shall take place at 10:00 a.m. Mountain
Standard Time, on or before , 1996, at such time and
place as the parties hereto shall mutually agree.
7. ACTIONS AT CLOSING. At closing, ESI and the Shareholders will each
deliver, or cause to be delivered to the other, the securities to be exchanged
in accordance with Section 1 of this Agreement, and each party shall pay any and
all taxes required to be paid in connection with the issuance and delivery of
the securities being assigned by such party. All share certificates shall be in
the name of the party to which the same are deliverable except the Shareholders
shares which shall be duly endorsed or accompanied by a stock power executed in
blank with the signature guaranteed.
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In addition, the following shall occur at Closing :
a. ESI will deliver to the Shareholders :
(i) Duly certified copies of all corporate resolutions and other
corporate proceedings taken by ESI to authorize the execution,
delivery and performance of the Agreement. (ii) The opinion if
Messrs. Vanderkam & Sanders, counsel for ESI, as provided for in
Section 5(c) hereof. (iii) A Certificate executed by a principal
officer of ESI and each member of its Board of Directors and the
holders of a majority of its Common Stock attesting that all of the
representations and warranties of ESI are true and correct as of the
Closing Date, and that all of the conditions to the obligations of the
Shareholders to be performed by ESI have been performed as of the
Closing Date. (iv) A Certificate of Incumbency and Signatures of the
officers of ESI dated as of the date of this Agreement and as of the
Closing Date. (v) The written resignations of all directors and
officers, auditors, consultants, consults and employees of ESI, which
resignations shall contain an acknowledgement from each of them that
they have no claims against ESI for loss of office or otherwise. (vi)
All registration certificates, statutory books, minutes books and
corporate seal of ESI all accounts, books and all documents and papers
in connection with the affairs of ESI and all documents of title
relating to ESI assets.
b. The Shareholders will deliver to ESI :
(i) The opinion of Vanderkam & Sanders, counsel for the China Medical
Group, as provided for in Section 4(b) hereof. (ii) Certificates of
corporate good standing from the jurisdiction of incorporation as of a
recent date for each member of the China Medical Group. (iii) A
certificate of the Shareholders signed by each Shareholder that each
of the representations and warranties of the Shareholders is true and
correct as of the Closing Date and that all of the conditions to the
obligations of ESI to be performed by the Shareholders have been
performed as of the Closing Date.
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8. DISSOLUTION OF BOARD OF DIRECTORS. Upon completion of the
acquisition, the existing board of directors of ESI shall be dissolved and new
board shall be constituted by the China Medical Group.
9. CONDUCT AND BUSINESS BOARD OF DIRECTORS, ETC. Between the date
hereof and the Closing Date, the members of the China Medical Group shall
conduct their business in the same manner in which it has heretofore been
conducted, and the Shareholders will not permit any member of the China Medical
Group to (i) enter into any contract, agreement or commitment other than in the
ordinary course of business, or (ii) declare or make any distribution of any
kind to the Shareholders of the China Medical Group, without first obtaining the
written consent of ESI. Reciprocal requirements also apply to ESI.
10. ACCESS TO PROPERTIES, BOOKS AND RECORDS
a. The Shareholders hereby grant to ESI and its duly authorized
representatives, during normal business hours between the date hereof and the
Closing Date, the right of full and complete access to the properties of the
China Medical Group and full opportunity to examine their books and records.
b. ESI hereby grants to the Shareholders and their duly authorized
representatives, during normal business hours between the date hereof and the
Closing Date, the right of full and complete access to the properties of ESI and
full opportunity to examine ESI's books and records.
11. CONFIDENTIAL MATTERS
a. ESI acknowledges and agrees that during, and as a result of any
discussions, furnishing of documents, ESI's own investigation, and otherwise,
ESI shall have access to certain confidential information (as defined herein
below). ESI hereby agrees for itself and for each of its officers, directors,
employees, agents, representatives and affiliates :
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(i) to keep secret and confidential, and not to use directly or indirectly for
its own benefit or the benefit of others or to the detriment of any of the
Shareholders or of the China Medical Group, each and every item of the
Confidential Information, and to use the Confidential Information solely for the
purpose of evaluating the transactions described herein ; (ii) to restrict
access to the Confidential Information to those of its officers, directors,
employees, agents, representatives, consultants, financial advisors and
potential investors who, in the performance of its or their duties, reasonably
require access to the Confidential Information ; (iii) to the best of its/their
ability ensure that its officers, directors, employees, agents, representatives,
consultants, financial advisors, potential investors and potential lenders who
obtain access to Confidential Information maintain the secrecy and
confidentiality thereof and do not use directly or indirectly any such
Confidential Information for its or their own benefit or the benefit of others
or disclose any of the Confidential Information to any person or entity not
entitled to the same pursuant to the terms hereof or any written consent of the
Shareholders and China Medical Group; and (iv) to use the Confidential
Information for no other purposes than those specifically authorized hereunder.
b. For purpose of this Agreement, "Confidential Information" shall
include, but not be limited to, (i) all subsequent and prior or derivative
drafts hereof, and all information contained or described in the Exhibits and
Schedules attached hereto; (ii) the identity of the Shareholders and the members
of the China Medical Group; (iii) the nature, structure and terms of the
transactions described herein and contemplated hereby and any arrangements
related thereto; (iv) all information pertaining or relating to, or arising out
of or in connection with, any of the foregoing, regardless of the source of such
information, projections, financial margins, or any other information relating
to the transactions described herein and the Shareholders or the China Medical
Group, including, but not limited to customer lists, trade secrets, computer
programs, products being developed, marketed, and distributed by the
Shareholders or China Medical Group, engineering, technical and scientific date,
tapes, designs, skills, procedures, formulations, methods, drawings, facilities,
information and know-how, and other confidential information regarding the
Shareholders or the China Medical Group.
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c. ESI further agrees that it shall deliver to the Shareholders and its
counsel for their prior approval all proposed press releases, reports on Form 8-
K to be filed with the Securities and Exchange Commission and other statements,
disclosures or reports regarding the transactions or matters described herein,
contemplated hereby, or related hereto.
d. The provisions of this Section and the agreements by ESI as set forth
in this Section shall apply whether or not the Shareholders actually acquire
ESI, and accordingly, shall continue to apply after any termination, of the
discussions regarding said acquisition for whatever reason and shall have no
termination or expiration date.
e. ESI agrees that disclosure of any of the Confidential Information
would cause immediate and irreparable harm to the Shareholders and the China
Medical Group for which damages would not constitute adequate compensation and
that in the event that ESI has violated or is about to violate any provision of
this Agreement, any of the Shareholders or the China Medical Group may bring an
action for and obtain injunctive relief in any court having jurisdiction over
ESI or its assets without providing a bond or other security. Such Shareholders
and/or the China Medical Group may recover their attorneys fees and other costs
of successfully enforcing this Agreement or their rights hereunder or in
recovering damages for the breach hereof.
12. BROKERAGE FEE. Each party hereto represents that no brokers have been
employed in this transaction for which the other party could or will become
liable.
13. COSTS AND EXPENSES. Each party hereto shall pay its own costs and
expenses incident to the preparation of this Agreement and to the consummation
of the transactions contemplated herein.
14. MISCELLANEOUS
a. This Agreement shall be controlled, construed and enforced in
accordance with the laws of the State of Nevada.
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b. This Agreement shall not be assignable by either party without the
prior written consent of the other.
c. All paragraph headings herein are inserted for convenience only. This
Agreement may be executed in several identical counterparts, each of which shall
be deemed an original, and which when taken together shall constitute one and
the same instrument.
d. The Agreement sets forth the entire understanding between the parties,
there being no terms, conditions, representations or warranties other than those
contained herein, and no amendments hereto shall be valid unless in writing and
signed by all parties hereto.
e. This Agreement shall be binding upon and shall inure to the benefit of
the heirs, executors, administrators, successors and assigns of the Shareholders
and upon the successors and assigns of ESI.
f. All notices, requests, instructions, or other documents to be given
hereunder shall be in writing and sent by registered mail :
If to the Shareholder,
then : To the names and addresses set out
on the signature page under the
heading "Shareholders".
With copies to : Vanderkam & Sanders
Attn : Hank Vanderkam
1111 Caroline, Suite 2905
Houston, Texas 77010
If to ESI, then : Energy Systems, Inc.
1111 Caroline, Suite 2905
Houston, Texas 77010
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With copies to : Vanderkam & Sanders
Attn : Hank Vanderkam
1111 Caroline, Suite 2905
Houston, Texas 77010
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement and ESI
has caused its corporate seal to be affixed hereto as of the date and year first
above written.
"ESI"
Attest:: ENERGY SYSTEMS, INC.
By : /s/ illegible By : /s/ illegible
----------------- --------------
Secretary President
"Shareholders"
/s/ illegible /s/ illegible
- ------------------ -----------------
BEAUTIMATE LIMITED
Suite 5301
Central Plaza
18 Harbour Road
Wanchai
Hong Kong
/s/ illegible
- -----------------
ONGOING LIMITED
Suite 5301
Central Plaza
18 Harbour Road
Wanchai
Hong Kong
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EXHIBIT 16.1
LETTER FROM D. BRIAN MACBETH
REGARDING CHANGE IN CERTIFYING ACCOUNTANTS
<PAGE>
[LETTERHEAD]
July 17, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: NATURAL WAY TECHNOLOGIES, INC. (FORMALLY ENERGY SYSTEMS, INC.)
Gentlemen:
I have read Item 4(a) in the Form 8-K of Natural Way Technologies, Inc.
(formally Energy Systems, Inc.) dated July 19, 1996 as filed with the Securities
and Exchange Commission. I am in agreement with all statements contained
therein.
Very truly yours,
/s/ D. Brian MacBeth DBM 7/17/96
---------------------------------
D. Brian MacBeth
