SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K/A
Amendment No. 1
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 registrant as specified in its charter)
33-55354-04
------------------------
(Commission File Number)
Nevada 87-0394341
- ------------------------------- ---------------------------------
(State or other jurisdiction of
incorporation) (IRS Employer 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, suite 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:
<TABLE>
<CAPTION>
Number of Percent
Shares of Class
--------- --------
<S> <C> <C>
Beautimate Limited 6,900,000 84.1%
Ongoing Limited 100,000 1.2%
</TABLE>
In addition, each of these shareholders were issued the following Series
B Preferred Shares whose vote on al corporate matters is equivalent to 30% of
the total vote:
<TABLE>
<CAPTION>
Number of Percent
Shares of Class
--------- --------
<S> <C> <C>
Beautimate Limited 100,000 100%
Ongoing Limited 0 0%
</TABLE>
Beautimate Limited is controlled by the following persons, each of whom
may be considered to be beneficial owners of the shares held by Beautimate
Limited: Yiu Yat Hung - 34%; Yiu Yat On - 33%; Yao Yi Le - 13%; Yao Shu Zheng
- 10%; and Yao Yi Ming - 10%.
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 infusion into China Medical of
$4,200,000 in cash. The common Stock issued represents 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. The acquisition agreement also
provided that the shareholders of China Medical would receive an aggregate of
21,000,000 warrants to acquire stock of the Registrant, 7 million of which
would be exercisable for a period of two years at $3.00 per share, 7 million of
which would be exercisable for a period of four years at $4.00 per share and 7
million of which would be exercisable for a period of six years at a price of
$5.00 per share.
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
-2-
<PAGE>
agreement dated March 6, 1996, China Medical contributed $4,200,000 in cash for
a 70% interest in the joint venture, while DHPP contributed its production
plant, (buildings, plant and machinery) valued at $1,800,000 for a 30% 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 $1.9 million 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 realized in cash by June 30, 1997.
Other key provisions of the joint venture agreement include:
o The joint venture duration is 30 years extending from March, 1996 to
March, 2026;
o The profit and loss sharing ration is the same as the respective
percentage of equity interest (70% to China Medical and 30 % to DHPP);
and
o The Board of Directors will consist of seven members, three designated
by DHPP and four designated by China Medical.
ITEM 4. CHANGES IN IN REGISTRANT'S CERTIFYING ACCOUNTANT
(a) Dismissal of Independent Accounting Firm
(i) D. Brian Maceth (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.
-3-
<PAGE>
(iv) During the preceding 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).
-4-
<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 Medial. The Series A Convertible Preferred Shares are
convertible into Common Shares of the Registrant at any time after July 56,
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
DUNHUA HUAKANG PHARMACEUTICAL PLANT
Report of Independent Public Accountants......................*
Statements of Operations for the Years Ended
December 31, 1993, 1994 and 1995............................*
Balance Sheets as of December 31, 1994 and 1994...............*
Statements of Cash Flows for the Years Ended
December 31, 1993, 1994 and 1995............................*
Statements of Changes in Equity for the Years Ended
December 31, 1993, 1994, and 1995...........................*
Notes to Financial Statements.................................*
DUNHUA HUAKANG PHARMACEUTICAL CO. LTD.
Balance Sheet as of June 30, 1996 (unaudited).................F-1
Statement of Operations for the Six Months Ended
June 30, 1996 (unaudited)...................................F-2
Notes to Financial Statements (Unaudited).....................F-3
CHINA MEDICAL DEVELOPMENT CO. LTD.
Report of Independent Public Accountants......................F-4
Statement of Operations for the Period From
September 29, 1995 (date of incorporation) to
June 30, 1996...............................................F-5
Balance Sheet as of June 30, 1996.............................F-6
Statement of Cash Flows for the Period From
September 29, 1995 (date of incorporation) to
June 30, 1996...............................................F-7
-5-
<PAGE>
Statement of Changes in Shareholders' Equity for the
Period From September 29, 1995 (date of incorporation)
to June 30, 1996............................................F-8
Notes to Financial Statements.................................F-9
(b) PRO FORMA FINANCIAL INFORMATION
Introduction to Pro Forma Condensed Combined
Financial Information.......................................F-12
Pro Forma Condensed Combined Balance Sheet
as of June 30, 1996 (Unaudited).............................F-13
Pro Forma Condensed Combined Statements of
Operations for the Year Ended December 31, 1995
and the Months Ended June 30, 1996 (Unaudited)..............F-14
Notes to Pro Forma Condensed Combined
Financial Statements........................................F-15
(c) EXHIBITS
2.1 Acquisition Agreement, as amended
16.1 Letter from D. Brian Macbeth regarding change in certifying
accountants.*
- -------------------------
* Previously filed.
-6-
<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.
<TABLE>
<S> <C>
(REGISTRANT) NATURAL WAY TECHNOLOGIES, INC.
BY (SIGNATURE) /s/ Yiu Yat Hung
(NAME AND TITLE) Yiu Yat Hung, Chairman and
Chief Executive Officer
(DATE) November 22, 1996
-7-
<PAGE>
FINANCIAL STATEMENTS
OF
DUNHUA HUAKANG PHARMACEUTICAL CO. LTD.
<PAGE>
DUNHUA HUAKANG PHARMACEUTICAL CO. LTD.
Balance Sheet (Unaudited)
(in United States $'000)
ASSETS
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
-------------
<S> <C>
Current assets:
Cash $ 3,010
Accounts receivable, net 7,961
Prepayments 353
Inventories, net 527
Due from related companies 1,197
--------
Total current assets 13,048
Deferred value added tax recoverable 142
Property, plant and equipment, net 2,193
--------
Total assets $ 15,383
========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
Current liabilities:
Short-term borrowings $ 40
Accounts payable 802
Accrued expenses and other payables 1,674
Taxation payable 1,894
Due to a joint venture partner 2,556
Due to related companies 18
--------
Total current liabilities 6,984
Shareholders' equity:
Paid-in capital 4,800
Dedicated capital 1,109
Retained earnings 2,490
--------
Total shareholders' equity 8,399
--------
Total liabilities and shareholders' equity $ 15,383
========
</TABLE>
See accompanying notes to financial statements
F-1
<PAGE>
DUNHUA HUAKANG PHARMACEUTICAL CO. LTD.
Statement of Operations (Unaudited)
(in United States $'000)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
----------------
<S> <C>
Net sales $ 5,410
Cost of goods sold 1,439
--------
Gross profit 3,971
Selling, general and
administrative expense (2,051)
Interest income (expense) (52)
Other expenses, net (9)
--------
Income before income taxes 1,859
Provision for income tax (60)
--------
Net income $ 1,799
========
</TABLE>
See accompanying notes to financial statements
F-2
<PAGE>
DUNHUA HUAKANG PHARMACEUTICAL CO. LTD.
Notes to Financial Statements (Unaudited)
1. INTERIM FINANCIAL PRESENTATION
The interim financial statements and notes thereto should be read in
conjunction with the financial statements and notes included in the Dunhua
Huakang Pharmaceutical Plant audited financial statements for the year
ended December 31, 1995. In the opinion of management, these interim
financial statements reflect all adjustments of a normal recurring nature
necessary for a fair statement of the results for the interim period
presented.
2. ORGANIZATION
Dunhua Huakang Pharmaceutical Co. Ltd. ("DHPC") was established as a
sino-foreign joint venture in the People's Republic of China on March 6,
1996 pursuant to the terms of a joint venture agreement between Dunhua
Huakang Pharmaceutical Plant ("DHPP") and China Medical Development
Company Limited ("CMDC"). Pursuant to the joint venture agreement, CMDC
is required to contribute to DHPC cash of $4,200,000 as its capital
contribution for 70% equity interest in DHPC, while DHPP is required to
contribute to DHPC its production plant, including buildings and
machinery, with a value of $1,800,000 as its capital contribution for 30%
equity interest in DHPC. As of June 30, 1996, CMDC had contributed
$3,000,000 into DHPC as its capital contribution and the remaining
$1,200,000 will be due for payment on or before March 5, 1997.
F-3
<PAGE>
FINANCIAL STATEMENTS
OF
CHINA MEDICAL DEVELOPMENT CO. LTD.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
China Medical Development Company Limited:
We have audited the accompanying parent company balance sheet of China Medical
Development Company Limited (incorporated in the British Virgin Islands; "the
Company") as of June 30, 1996, and the related statements of operations, cash
flows and changes in shareholder's equity for the period from September 29, 1995
(date of incorporation) to June 30, 1996, expressed in United States Dollars.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of China Medical Development
Company Limited as of June 30, 1996, and the results of its operations and its
cash flows for the period from September 29, 1995 (date of incorporation) to
June 30, 1996, in conformity with generally accepted accounting principles in
the United States of America.
/s/ Arthur Andersen & Co.
Arthur Andersen & Co.
Hong Kong,
November 13, 1996.
-1-
F-4
<PAGE>
CHINA MEDICAL DEVELOPMENT COMPANY LIMITED
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM SEPTEMBER 29, 1995 (DATE OF INCORPORATION)
TO JUNE 30, 1996
(Expressed in United States dollars)
<TABLE>
<S> <C>
Interest income, net $ 35,463
---------
Income before income tax 35,463
Provision for income tax -
---------
Net income $ 35,463
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
F-5
<PAGE>
CHINA MEDICAL DEVELOPMENT COMPANY LIMITED
balance sheet as OF JUNE 30, 1996
(Expressed in Uinted States dollars)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 19,660
Due from a related company 56,905
Loan to a related company 1,200,000
----------
Total current assets 1,276,565
Investment in a subsidiary 3,000,000
----------
Total assets $4,276,565
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Due to a director $ 31,102
----------
Shareholder's equity:
Common stock 10,000
Additional paid-in capital 4,200,000
Retained earnings 35,463
----------
Total equity 4,245,463
----------
Total liabilities and shareholder's equity $4,276,565
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
F-6
<PAGE>
CHINA MEDICAL DEVELOPMENT COMPANY LIMITED
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM SEPTEMBER 29, 1995 (DATE OF INCORPORATION)
TO JUNE 30, 1996
(Expressed in Uinted States dollars)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 35,463
-----------
Net cash provided from operating activities 35,463
-----------
Cash flows from investing activities:
Acquisition of a subsidiary (3,000,000)
Advance to a related company (56,905)
Loan to a related company (1,200,000)
-----------
Net cash used in investing activities (4,256,905)
-----------
Cash flows from financing activities:
Loan from a director 31,102
Proceeds from issuance of common stock 10,000
Additional shareholder contributions 4,200,000
-----------
Net cash provided by financing activities 4,241,102
-----------
Net increase in cash 19,660
Cash, as of beginning of period -
-----------
Cash, as of end of period $ 19,660
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
F-7
<PAGE>
CHINA MEDICAL DEVELOPMENT COMPANY LIMITED
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE PERIOD FROM SEPTEMBER 29, 1995 (DATE OF INCORPORATION)
TO JUNE 30, 1996
(Expressed in United States dollars)
<TABLE>
<CAPTION>
Common stock
------------------ Additional
Number of Paid In Retained
Shares Amount Capital Earnings
--------- ------ ---------- --------
<S> <C> <C> <C> <C>
Balance as of September 25, 1995
(date of incorporation) - $ - $ - $ -
Issuance of common stock 10,000 10,000 - -
Additional shareholder
contributions - - 4,200,000 -
Net income - - - 35,463
------ ------- ---------- -------
Balance as of June 30, 1996 10,000 $10,000 $4,200,000 $35,463
====== ======= ========== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
F-8
<PAGE>
CHINA MEDICAL DEVELOPMENT COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
(Amounts expressed in United States dollars)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
China Medical Development Company Limited (the "Company") was incorporated in
the British Virgin Islands on September 29, 1995.
On February 14, 1996, the Company allotted and issued 7,000 shares of common
stock, par value $1 each, to Beautimate Group Limited ("BGL"; a company
incorporated in the British Virgin Islands) and 3,000 shares of common stock,
par value $1 each, to Ongoing Limited ("OL"; a company incorporated in the
British Virgin Islands), for $10,000. BGL is owned and controlled by Yiu Yat
Hung (director of the Company), Yiu Yat On (director of the Company), Yao Yile
and Yao Suzhen, and OL is owned and controlled by Guan Wu (director of the
Company).
Joint venture
On March 6, 1996, the Company entered into a joint venture agreement with
Dunhua Huakang Pharmaceutical Plant ("DHPP") to establish a sino-foreign joint
venture in the People's Republic of China ("the PRC") - Dunhua Huakang
Pharmaceutical Co. Ltd. ("DHPC"). Pursuant to this joint venture agreement,
the Company is required to contribute to DHPC cash of $4,200,000 as its capital
contribution for 70% equity interest in DHPC, while DHPP is required to
contribute to DHPC its production plant, including buildings and machinery,
with a value of $1,800,000 as its capital contribution for 30% equity interest
in DHPC. As of June 30, 1996, the Company had contributed $3,000,000 into DHPC
as its capital contribution, and the remaining $1,200,000 will be due for
payment on or before March 5, 1997.
DHPC has succeeded to the business of manufacturing formulated Chinese medicine
which was previously undertaken by DHPP. In connection with the establishment
of DHPC, DHPP has delivered to the Company a guarantee 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 the Company or make payments to the Company so as to cover any
shortfall with respect to the Company's share of the net income. In addition,
DHPP has transferred into DHPC additional operating assets and liabilities with
an estimated valuation of approximately $4,288,000 for a note receivable which
bears interest at an annual rate of 5.5%. DHPP has also given a guarantee to
the Company to transfer DHPP's accounts receivable as of December 31, 1995 back
to DHPP if such accounts receivable are not realized in cash by June 30, 1997.
-6-
F-9
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
The other key provisions of the joint venture agreement include:
o the joint venture period is 30 years from March 1996 to March
2026;
o the profit and loss sharing ratio is the same as the respective
percentage of equity interest; and
o the Board of Directors consists of seven members, with four designated
by the Company and three designated by DHPP.
Change in shareholders
On June 30, 1996, BGL and OL, the then shareholders of the Company, entered
into an agreement with Natural Way Technologies, Inc. ("NWYT"; previously named
Energy Systems, Inc.; a Nevada, U.S.A. corporation) underwhich NWYT acquired a
100% interest in the Company by issuing to BGL and OL an aggregate of 7,000,000
shares of common stock, par value of $0.001, 100,000 shares of Series B
convertible and redeemable preferred stock and 21,000,000 shares of warrants.
Among the warrants, 7,000,000 of Class A warrants are exercisable at a price of
$3.00 for one share of common stock at any time up to June 30, 1998; 7,000,000
of Class B warrants are exercisable at a price of $4.00 for one share of common
stock at any time up to June 30, 2000; and 7,000,000 of Class C warrants are
exercisable at a price of $5.00 for one share of common stock at any time up to
June 30, 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Subsidiary
A subsidiary is a company in which the Company holds, directly or
indirectly, more than 50% of its issued voting share capital. Investment
in a subsidiary is stated at cost which approximate equity.
b. Income taxes
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. Deferred
income taxes are provided using the liability method. Under the liability
method, deferred income taxes are recognised for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities.
-7-
F-10
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
c. Foreign currency translation
The translation of the financial statements of the foreign subsidiary into
United States dollars is performed for balance sheet accounts using closing
exchange rates in effect at the balance sheet date and for revenue and
expense accounts using an average exchange rate during each reporting
period.
3. INCOME TAX
The Company is incorporated in the British Virgin Islands under the
International Business Companies Act and, accordingly, is exempted from the
payment of income tax in the British Virgin Islands.
4. COMMON STOCK
During the period, the Company issued 10,000 shares of common stock at par
value of $1 per share for $10,000.
5. RELATED PARTY TRANSACTIONS
The Company entered into the following transactions with related parties:
a. The loan to Shen Po Holdings Limited, a related company which is owned and
controlled by Yiu Yat Hung (a director of the Company), of approximately
$1,200,000 is unsecured, bears interest at 15% per annum and is repayable
on or before November 15, 1996. The recoverablility of this loan is also
guaranteed by Mr. Yiu Yat Hung. During the period, the Company earned from
this related company interest income of approximately $23,000.
b. The amount due from a related company and the amount due to a director are
unsecured, non-interest bearing and without pre-determined repayment terms.
<PAGE>
PRO FORMA
CONDENSED COMBINED
FINANCIAL INFORMATION
<PAGE>
NATURAL WAY TECHNOLOGIES, INC.
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
reflects the June 30, 1996 acquisition of 100% of the stock of China Medical
Development Company Limited ("CMDC") in exchange for the issuance of 7,000,000
shares of common stock, 100,000 shares of Series B preferred stock, 7,000,000
Class A Warrants, 7,000,000 Class B Warrants and 7,000,000 Class C Warrants.
CMDC is a British Virgin Island corporation formed on September 29, 1995. On
March 6, 1996, CMDC entered into a joint venture agreement with Dunhua Huakang
Pharmaceutical Plant ("DHPP") to establish a sino-foreign joint venture in the
People's Republic of China (the "PRC") - Dunhua Huakang Pharmaceutical Co. Ltd.
("DHPC"). Pursuant to this joint venture agreement, CMDC was required to
contribute to DHPC cash of $4,200,000 as its capital contribution for a 70%
equity interest in DHPC, while DHPP was required to contribute to DHPC its
production plant, including buildings and machinery, with a value of $1,800,000
as its capital contribution for a 30% equity interest in DHPC. As of June 30,
1996, CMDC had contributed $3,000,000 into DHPC as its capital contribution and
the remaining $1,200,000 will be due for payment on or before March 5, 1997.
The pro forma balance sheet data at June 30, 1996 assumes the formation of DHPC
and the acquisition of CMDC occurred at June 30, 1996. The pro forma
statements of operations for the six months ended June 30, 1996 and the year
ended December 31, 1995 assumes the formation of DHPC and acquisition of CMDC
occurred on December 31, 1994.
The historical financial information of DHPP, DHPC and CMDC as of and for the
six months ended June 30, 1996 and the year ended December 31, 1995 have been
derived from the respective companies' financial statements included elsewhere
herein and such information with respect to the Company has been derived from
reports filed by the Company on Form 10-KSB and Form 10-QSB for such periods.
The pro forma financial information should be read in conjunction with the
acompanying notes thereto and with the financial statements of the Company,
DHPP, DHPC and CMDC.
The pro forma condensed combined financial information does not purport to be
indicative of the financial position or operating results which would be
achieved had the formation of DHPC and the acquisition of CMDC been consummated
as of the dates indicated and should not be construed as representative of
future financial position or operating results. In management's opinion, all
adjustments necessary to reflect the effects of the transactions described have
been made.
F-12
<PAGE>
NATURAL WAY TECHNOLOGIES, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
June 30, 1996
(Amounts in United States $'000)
(Unaudited)
<TABLE>
<CAPTION>
Natural Pro Forma Pro Forma
Way CMDC DHPC Adjustments Combined
------- ------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash $ - $ 19 $ 3,010 $ - $ 3,029
Accounts receivable - - 7,961 - 7,961
Prepayments - - 353 - 353
Inventories - - 527 - 527
Due from related company - 57 1,197 (40)<F3> 1,214
Loan to a related company - 1,200 - - 1,200
Deposit 1,400 - - - 1,400
Deferred value added tax - - 142 - 142
Investment in subsidiary 4,207 3,000 - (7,207)<F2> -
Property, plant and
equipment - - 2,193 - 2,193
------ ------ ------- ------- -------
Total assets $5,607 $4,276 $15,383 $(7,247) $18,019
====== ====== ======= ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8 $ - $ 802 $ - $ 810
Short-term borrowings - - 40 - 40
Accrued expenses - - 1,674 - 1,674
Taxes payable - - 1,894 - 1,894
Due to joint venture
partner - - 2,556 (2,556)<F1><F3> -
Due to related companies - - 18 - 18
Due to a director - 31 - - 31
Minority interest - - - 2,519<F1> 2,519
Shareholders' equity:
Common stock 8 10 - (10)<F2> 8
Preferred stock - - - - -
Additional paid-in capital 5,601 4,200 4,800 (7,200)<F2> 7,401
Dedicated capital - - 1,109 - 1,109
Subscription monies
receivable - - - - -
Retained earnings
(deficit) (10) 35 2,490 - 2,515
------ ------ ------- ------- -------
Total stockholders'
equity 5,599 4,245 8,399 (7,210) 11,033
------ ------ ------- ------- -------
Total liabilities and
stockholders' equity $5,607 $4,276 $15,383 $(7,247) $18,019
====== ====== ======= ======= =======
<FN>
<F1>
To record minority interest in net assets acquired of DHPC.
<F2>
To eliminate investments in subsidiaries.
<F3>
To eliminate intercompany payables.
</FN>
</TABLE>
See accompanying notes
F-13
<PAGE>
NATURAL WAY TECHNOLOGIES, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 1996
(Amounts in United States $'000)
(Unaudited)
<TABLE>
<CAPTION>
Natural Pro Forma Pro Forma
Way CMDC DHPC Adjustments Combined
------- ------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ - $ 5,410 $ - $ 5,410
Cost of goods sold - - 1,439 - 1,439
----- ----- ------- ---------
Gross profit - - 3,971 - 3,971
Selling, general and
administrative expense - - (2,051) - (2,051)
Interest income (expense) - 35 (52) - (17)
Other expenses, net - - (9) - (9)
----- ----- ------- -------- -------
Income before income
taxes - 35 1,859 - 1,894
Provision for income tax - - (60) - (60)
----- ----- ------- -------- -------
Income before minority
interest - 35 1,799 - 1,834
Minority interest - - - (540) (540)
----- ----- ------- -------- -------
Net income $ - $ 35 $ 1,799 $ (540) $1,294
===== ===== ======= ======== =======
</TABLE>
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1995
(Amounts in United States $'000)
(Unaudited)
<TABLE>
<CAPTION>
Natural Pro Forma Pro Forma
Way CMDC DHPC Adjustments Combined
------- ------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ - $10,348 $ - $10,348
Cost of goods sold - - 2,683 - 2,683
----- ----- ------- --------- -------
Gross profit - - 7,665 - 7,665
Selling, general and
administrative expense (8) - (4,364) - (4,372)
Interest income (expense) - - 19 - 19
Other expenses, net - - (6) - (6)
----- ----- ------- --------- -------
Income before income
taxes (8) - 3,314 - 3,306
Provision for income tax - - (120) - (120)
----- ----- ------- --------- -------
Income before minority
interest (8) - 3,194 - 3,186
Minority interest - - - (958) (958)
----- ----- ------- --------- -------
Net income $ (8) $ - $ 3,194 $ (958) $ 2,228
===== ===== ======= ========= =======
</TABLE>
See accompanying notes
F-14
<PAGE>
NATURAL WAY TECHNOLOGIES, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
PRO FORMA ADJUSTMENTS:
(1) To record minority interest in net assets acquired of DHPC.
(2) To eliminate investments in subsidiaries.
(3) To eliminate intercompany payables.
F-15
ACQUISITION AGREEMENT
AGREEMENT, dated as of the 3rd day of June 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
(hereinafter called "China") 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 China 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 (hereinafter called "Class B
Preferred Stock") with superior voting right always equivalent to 30% of total
vote on all corporate matters of ESI, and the infusion into China of 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 China for
shares of the ESI Common Stock and Class B Preferred Stock and the infusion
into China of cash in the 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
-1-
<PAGE>
hereof (hereinafter called the "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 the infusion into
China of 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 China. 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. China 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 China and each of
its subsidiaries are attached hereto as Exhibit 1, and such documents are true
-2-
<PAGE>
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 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 China 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 financial statements prepared by Arthur Andersen, Certified Public
Accountants, at and for the year ended December 31, 1995 and the period ended
June 30, 1996, attached hereto as Exhibit 2, constitute true and correct
statements as of such date of the financial condition of China and its
subsidiary 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 disclosed to ESI or
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 by the balance sheets of December 31, 1995 or June 30, 1996
(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.
-3-
<PAGE>
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 each member 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 June 30, 1996 for China and attached hereto as Exhibit 3
are valued at the lower of cost or net realizable value.
i. The accounts receivable of each member 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 Closing Date any agreement or commitment to issue any such
securities. Additionally, ESI and its board of directors and shareholders
-5-
<PAGE>
shall take such action prior to the Closing Date as shall be necessary to
effect the authorization of preferred stock or other similar actions. 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
-6-
<PAGE>
capital, 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 15 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 China 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 China are not
registered under the Securities Act, or the laws of any other
jurisdiction. The shares of China 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 China or to make any exemption
from registration available. ESI further acknowledges and
agrees that the share certificates evidencing the shares of
China 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 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;
-9-
<PAGE>
(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
(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.
-11-
<PAGE>
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 by
appropriate proceedings, as they become due, (v) maintain insurance upon its
-12-
<PAGE>
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 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.
-13-
<PAGE>
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 June 30, 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.
-14-
<PAGE>
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. , 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.
-15-
<PAGE>
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 China, without first obtaining the written consent of ESI.
Reciprocal requirements shall 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:
-16-
<PAGE>
(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.
-17-
<PAGE>
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.
-18-
<PAGE>
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,
<TABLE>
<S> <C>
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
</TABLE>
-19-
<PAGE>
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.
<TABLE>
<S> <C>
"ESI"
Attest: ENERGY SYSTEMS, INC.
By: By:
------------------------ ----------------------------
Secretary President
</TABLE>
"Shareholders"
- ----------------------------
Beautimate Limited
Suite 5301
Central Plaza
18 Harbour Road
Wanchai
Hong Kong
- ----------------------------
Ongoing Limited
Suite 5301
Central Plaza
18 Harbour Road
Wanchai
Hong Kong
-20-
