0001099910-01-500093.txt : 20011019
0001099910-01-500093.hdr.sgml : 20011019
ACCESSION NUMBER: 0001099910-01-500093
CONFORMED SUBMISSION TYPE: DEFS14A
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 20011105
FILED AS OF DATE: 20011011
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BIO AQUA SYSTEMS INC
CENTRAL INDEX KEY: 0001089590
STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770]
IRS NUMBER: 650926223
STATE OF INCORPORATION: FL
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: DEFS14A
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-15046
FILM NUMBER: 1756907
BUSINESS ADDRESS:
STREET 1: 1900 GLADES RD
STREET 2: STE 351
CITY: BOCA RATON
STATE: FL
ZIP: 33431
BUSINESS PHONE: 5614168930
MAIL ADDRESS:
STREET 1: RIO AQUA SYSTEMS INC
STREET 2: 1900 GLADES RD STE 351
CITY: BOCA RATON
STATE: FL
ZIP: 33431
DEFS14A
1
bio-aquasystems_defs14a.txt
PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.
14a-12
Bio-Aqua Systems, Inc.
----------------------
(Name of Registrant as Specified In Its Charter)
not applicable
--------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Bio-Aqua Systems, Inc.
General Ekdahl 159
Santiago-Chile
International Telephone (011) 56-2-444-3810 US Telephone 954-766-7879
October 20, 2001
Dear Shareholder:
You are cordially invited to attend the Special Meeting of the
Shareholders of Bio-Aqua Systems, Inc. to be held on Monday, November 5, 2001 at
1:00 p.m. at 350 East Las Olas Blvd., Fort Lauderdale, Florida 33301. The formal
Notice of Special Meeting of Shareholders and Proxy Statement are attached.
The matters to be acted upon by our shareholders are set forth in the
Notice of Special Meeting of Shareholders and include,
* the sale of substantially all the assets of Bio-Aqua by
selling Bio-Aqua's subsidiaries pursuant to the terms of a
stock purchase agreement between Bio-Aqua and Max Rutman,
* to approve the issuance of in excess of 20% of the presently
issued and outstanding common stock of Bio-Aqua through a
share exchange in connection with our acquisition of New
Dragon Asia Food Group,
* to amend our articles of incorporation to increase our
authorized capital stock from 30,000,000 shares to 107,000,000
shares, increasing our authorized class A common stock to
100,000,000 shares,
* to amend our articles of incorporation to change our name to
New Dragon Asia Corp.; and
* any other business which may properly come before the special
meeting or any adjournment or postponement of the special
meeting.
It is important that your shares be represented and voted at the
meeting. Accordingly, after reading the attached proxy statement, please sign,
date and return the enclosed proxy card. Your vote is important regardless of
the number of shares you own. The accompanying proxy is solicited by the board
of directors of Bio-Aqua Systems, Inc. to be voted at the special meeting of
shareholders to be held on November 5, 2001. When such proxy is properly
executed and returned, the shares it represents will be voted at the meeting as
directed. If no specification is indicated, the shares will be voted in
accordance with the recommendation of the board with respect to each matter
submitted to our shareholders for approval. Abstentions and broker non-votes are
counted for purposes of determining a quorum. Any shareholder giving a proxy has
the power to revoke it prior to its exercise by notice of revocation to Bio-Aqua
in writing, by voting in person at the special meeting or by execution of a
subsequent proxy; provided, however, that such action must be taken in
sufficient time to permit the necessary examination and tabulation of the
subsequent proxy or revocation before the vote is taken.
The shares entitled to vote at the special meeting consist of shares of
our common stock, with each class A share entitling the holder to one vote and
each class B share entitling the holder to ten votes. At the close of business
on October 8, 2001, the record date for the Special Meeting, there were
2,748,794 shares of our common stock issued and outstanding, consisting of
1,048,794 class A shares and 1,700,000 class B shares. This proxy statement and
the accompanying form of proxy are first being sent to shareholders on or about
October 22, 2001.
In addition to the use of the mail, solicitations may be made by our
employees, by us, by telephone, email, mailgram, facsimile, telegraph, cable and
personal interview. We will bear all expenses for the solicitation of proxies.
I hope that you will attend the meeting in person, at which time I will
review the proposals contained in the attached proxy statement.
Sincerely,
/s/ Max Rutman
Max Rutman
Chairman and Chief Executive Officer
BIO-AQUA SYSTEMS, INC.
PROXY
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 5, 2001
The Special Meeting of the Shareholders of Bio-Aqua Systems, Inc. will
be held at 1:00 p.m., at 350 East Las Olas Blvd., Fort Lauderdale, Florida 33301
on November 5, 2001. At the Special Meeting, you will be asked to vote on the
following matters:
1. the sale of substantially all the assets of Bio-Aqua by
selling Bio-Aqua's subsidiaries pursuant to the terms of a
stock purchase agreement between Bio-Aqua and Max Rutman,
2. to approve the issuance of in excess of 20% of the presently
issued and outstanding common stock of Bio-Aqua through a
share exchange in connection with our acquisition of New
Dragon Asia Food Group,
3. to amend our articles of incorporation to increase our
authorized capital stock from 30,000,000 shares to 107,000,000
shares, increasing our authorized class A common stock to
100,000,000 shares,
4. to amend our articles of incorporation to change our name to
New Dragon Asia Corp., and
5. any other business which may properly come before the special
meeting or any adjournment or postponement of the special
meeting.
Only shareholders of record, as shown by the transfer books of
Bio-Aqua, at the close of business on October 8, 2001 will be entitled to
notice of and to vote at the meeting. A list of shareholders entitled to vote at
the special meeting will be available for examination by any shareholder for the
proper purpose during normal business hours at our offices for a period of at
least 10 days preceding the special meeting.
The sale of our assets is a corporate action that gives rise to
dissenters' rights under the Florida Business Corporation Act. If the sale is
effected, dissenting shareholders may be entitled to be paid the fair value of
their shares. A summary and discussion of dissenters' rights is included in the
accompanying proxy statement.
The Board of Directors recommends that you vote FOR the sale of assets,
the issuance of shares in excess of 20% of our presently outstanding common
stock, and the amendments to our articles of incorporation.
By Order of the Board of Directors
/s/ Max Rutman
Max Rutman, Chairman and Chief Executive Officer
October 20, 2001
PLEASE FILL IN, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENVELOPE
PROVIDED AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING. IF YOU LATER DESIRE TO REVOKE YOUR PROXY FOR ANY REASON, YOU MAY DO SO
IN THE MANNER DESCRIBED IN THE ATTACHED PROXY STATEMENT.
TABLE OF CONTENTS
Page
----
QUESTIONS AND ANSWERS ABOUT THE SALE OF ASSETS,
SHARE EXCHANGE AND THE SPECIAL MEETING.........................................................
SUMMARY..........................................................................................
The Special Meeting............................................................................
Summary of the Sale of Assets..................................................................
Summary of Share Exchange and Issuance of Common Stock.........................................
Summary of Amendment to Articles of Incorporation..............................................
Market for Common Stock........................................................................
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION......................................
THE SPECIAL MEETING..............................................................................
General........................................................................................
Matters to be Considered.......................................................................
Record Date; Shareholders Entitled to Vote; Voting; Quorum.....................................
Solicitation...................................................................................
Voting and Revocability of Proxies.............................................................
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................
PROPOSAL ONE: SALE OF ASSETS.....................................................................
General........................................................................................
Background and Reasons for Sale of Assets......................................................
Stock Purchase Agreement.......................................................................
Effective Date and Consequences of the Sale of Assets..........................................
Representations, Warranties and Covenants......................................................
Rights of the Company's Dissenting Shareholders................................................
Interest of Certain Entities...................................................................
Board Recommendation...........................................................................
Vote Required..................................................................................
PROPOSAL TWO: APPROVAL OF THE SHARE EXCHANGE AGREEMENT
(STOCK ISSUANCE)...............................................................................
Background and Reasons for Stock Issuance......................................................
Share Exchange Agreement.......................................................................
Effective Date and Consequences of the Acquisition.............................................
Representations, Warranties and Covenants......................................................
Rights of the Company's Dissenting Shareholders................................................
Interest of Certain Entities...................................................................
Board Recommendation...........................................................................
Vote Required..................................................................................
PROPOSAL THREE: APPROVAL OF AMENDMENT TO ARTICLES
(INCREASE AUTHORIZED STOCK)....................................................................
Reasons for the Amendment......................................................................
Approval of Shareholders.......................................................................
Board Recommendation...........................................................................
PROPOSAL FOUR: APPROVAL OF AMENDMENT TO ARTICLES (NAME CHANGE)...................................
Reasons for the Amendment......................................................................
Approval of Shareholders.......................................................................
Board Recommendation...........................................................................
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..........................................................
CERTAIN INFORMATION CONCERNING OUR COMPANY.......................................................
Incorporation by Reference.....................................................................
Market Price and Dividend Data.................................................................
CERTAIN INFORMATION CONCERNING NEW DRAGON ASIA FOOD GROUP........................................
Overview.......................................................................................
Industry Background............................................................................
Products and Services..........................................................................
New Dragon Asia Food Group's Strategy..........................................................
Sales and Marketing............................................................................
Competition....................................................................................
Employees......................................................................................
Facilities.....................................................................................
Legal Proceedings..............................................................................
RISK FACTORS.....................................................................................
Risks Relating to the Sale of Assets...........................................................
Risks Factors Relating to New Dragon Asia Food Group's Business................................
PROFORMA UNAUDITED CONSOLIDATED FINANCIAL INFORMATION............................................
RIGHTS OF DISSENTING SHAREHOLDERS................................................................
OTHER MATTERS....................................................................................
INDEPENDENT PUBLIC ACCOUNTANTS...................................................................
INDEX TO FINANCIAL STATEMENTS OF NEW DRAGON ASIA FOOD GROUP......................................
Report of Independent Public Accountants.......................................................
Balance Sheets.................................................................................
Statements of Operations.......................................................................
Statements of Stockholders' Equity (Deficit)...................................................
Statements of Cash Flows.......................................................................
Notes to Financial Statements..................................................................
UNAUDITED BALANCE SHEETS AND INCOME STATEMENT OF NEW DRAGON ASIA FOOD GROUP (JUNE 25, 2001)......
QUESTIONS AND ANSWERS ABOUT THE SALE OF ASSETS, THE ISSUANCE OF COMMON
STOCK IN CONNECTION WITH THE SHARE EXCHANGE AGREEMENT, AND THE AMENDMENTS
TO OUR ARTICLES OF INCORPORATION
Q: WHY ARE WE HOLDING THE SPECIAL MEETING?
A: Bio-Aqua is holding a special meeting to ask you to vote on four
proposals:
(1) the sale of substantially all of the assets of Bio-Aqua by
selling Bio-Aqua's subsidiaries to Max Rutman, our majority
shareholder and chief executive officer;
(2) the issuance in excess of 20% of the presently issued and
outstanding common stock of Bio-Aqua through a share exchange
in connection with our acquisition of New Dragon Asia Food
Group;
(3) to amend our articles of incorporation increase our
authorized capital stock from 30,000,000 shares to 107,000,000
shares, increasing our authorized class A common stock to
100,000,000 shares;
(4) to amend our articles of incorporation to change our name
to New Dragon Asia Corp.; and
(5) any other business which may properly come before the
special meeting or any adjournment or postponement of the
special meeting.
Copies of the agreements relating to the sale of assets, the share
exchange and articles of amendment are attached to this Proxy Statement and
incorporated by reference as Appendices A, B and C, respectively. You are urged
to read these agreements in their entirety.
Q: WHAT IS THE DETERMINATION AND RECOMMENDATION OF THE BIO-AQUA BOARD
OF DIRECTORS WITH RESPECT TO THE: (1) SALE OF ASSETS, (2) STOCK ISSUANCE IN
CONNECTION WITH THE SHARE EXCHANGE (3) AND THE AMENDMENTS TO THE ARTICLES OF
INCORPORATION?
A: Bio-Aqua's Board of Directors has approved each of the proposals to be
considered at the Special Meeting, and has determined that each of the
transactions are fair to and in the best interests of Bio-Aqua and our
shareholders. Since the proposed sale of assets is to a member of our board of
directors, the proposed sale of our assets to Max Rutman constitutes an
interested party transaction. Accordingly, in accordance with the Florida
Business Corporations Act, Mr. Rutman, as a member of our board of directors,
has abstained from voting on the sale of assets and the remaining disinterested
board members recommend the approval of the sale of assets. In making its
determination and recommendation, the board considered the performance of its
common stock in the marketplace, the status and suspension of Bio-Aqua's current
operations, the nature and geographic location of its principle assets and the
prospects for Bio-Aqua's current business. However, the board strongly
recommends that you consider the merits of the proposed transactions
independently of any recommendation of Bio-Aqua's board of directors.
Q: WHY IS BIO-AQUA PROPOSING THE SALE OF ASSETS
A: Bio-Aqua is proposing the sale of assets for several reasons: (1) the
performance of Bio-Aqua common stock in the marketplace has been disappointing
since the initial public offering in March 2000; (2) the failure and current
suspension of our current operations; (3) lack of working capital; and (4)
economic problems in Chile and Peru have adversely affected our business
prospects. In addition, the sale of assets is a condition to the share exchange
with New Dragon Asia Food Limited. Bio-Aqua currently does not have cash flow or
sources of financing sufficient to continue its operations. Moreover, because of
illiquidity and low stock price, Bio-Aqua's stock has not been sufficiently
attractive to serve as currency to fund investments. As a "small cap" company,
Bio-Aqua has had difficulty raising capital through equity offerings because
1
there has been very little institutional interest in its stock. Having
determined that Bio-Aqua no longer has a ready means by which to fund its
current business plan, Bio-Aqua's board of directors has determined that it is
in Bio-Aqua's best interests to dispose of all of its current operations.
Q: WHY ARE BIO-AQUA AND NEW DRAGON ASIA FOOD GROUP PROPOSING THE SHARE EXCHANGE?
A: In the March of 2001, our board met to evaluate the financial condition of
Bio-Aqua and the prospects for our future as a broker of animal nutrition
products and specialized research and development. Our board of directors
determined that the outlook for Bio-Aqua under its business plan was not good
and that the interests of our shareholders might be better served by
restructuring Bio-Aqua or its business plan. In April 2001, we were introduced
to New Dragon Asia Food Group and after conducting our due diligence and
discussing the fairness of the transaction, we executed a share exchange
agreement with New Dragon Asia Food Group on July 2, 2001. We decided to propose
the acquisition because we believe that the assets of New Dragon Asia Food Group
and the prospects of New Dragon Asia Food Group business will give our
shareholders a greater chance of realizing shareholder value than if we continue
with our current business. New Dragon Asia Food Group, through its subsidiaries,
is principally engaged in the manufacturing, marketing and distribution of
instant noodles and flour in Mainland China. Our board believes that if we can
dispose of our existing assets and acquire New Dragon Asia Food Group, our
shareholders have a better chance of maximizing value. New Dragon Asia Food
Group is proposing the share exchange in order to provide New Dragon Asia Food
Limited (New Dragon Asia Food Group's sole interest holder) with greater
liquidity and to provide New Dragon Asia Food Group with greater access to
capital markets for the continued manufacturing, marketing and development of
its products.
Q: WHAT IS THE CURRENT BUSINESS OF NEW DRAGON ASIA FOOD GROUP?
A: New Dragon Asia Food Group is comprised of four limited liability companies
organized under the laws of the British Virgin Islands. New Dragon Asia Food
Group is principally engaged in the manufacturing, marketing and distribution of
instant noodles and flour in Mainland China. The sole interest holder of New
Dragon Asia Food Group is New Dragon Asia Food Limited, a company organized
under the laws of the British Virgin Islands. New Dragon Asia Food Group's
principal offices are located in Hong Kong.
Q: WHAT WILL HAPPEN IN THE PROPOSED SHARE EXCHANGE?
A: As a condition of and prior to the share exchange, Bio-Aqua will sell all of
its assets in its animal nutrition and research and development operations and
amend its articles of incorporation to increase its authorized capital stock to
107,000,000 shares, increasing the authorized class A common stock to
100,000,000 shares. Bio-Aqua's current operations, which are principally held in
its Chilean and Uruguayan subsidiaries, will be transferred to Max Rutman in
return for his assumption of all of the liabilities of the subsidiaries. In
addition, Mr. Rutman (though his ownership interest in Flagship Import Export
LLC ) and Atik S.A., owners of all 1,700,000 shares of our class B common stock,
have agreed to convert their class B shares to class A common stock.
Q: WHAT WILL NEW DRAGON ASIA FOOD GROUP SHAREHOLDERS RECEIVE IN THE SHARE
EXCHANGE?
A: If the share exchange is consummated, Bio-Aqua will issue an aggregate of
37,890,857 shares of Bio-Aqua common stock in exchange for a wholly owned
interest in New Dragon Asia Food Group and the sole interest holder of New
Dragon Asia Food Group will receive 36,668,571 shares of Bio-Aqua common stock.
In addition, we will be issuing 1,222,286 shares of Bio-Aqua common stock to
several consultants of New Dragon Asia Food Limited for services provided in
connection with the share exchange.
2
Q: ARE THERE ANY CONDITIONS TO CONSUMMATION OF THE SHARE EXCHANGE?
A: Yes, the consummation of the share exchange is subject to the satisfaction or
waiver of several conditions, including the approval by our shareholders of (1)
the sale of substantially all our assets, (2) the issuance of greater than 20%
of our common stock in connection with the share exchange and (3) the amendment
to our articles of incorporation. A discussion of these conditions is set forth
in this proxy statement. If our shareholders do not approve all four of the
proposals described in this proxy statement, Bio-Aqua will not follow through
with the share exchange, sale of assets, or the amendments to the articles of
incorporation. While our board will not consummate the share exchange, sale of
assets, or the articles of amendment unless the shareholders of Bio-Aqua approve
all four proposals, certain other conditions of the share exchange may be waived
by our board and/or the board of directors of New Dragon Asia Food Group.
Similarly, certain conditions to the sale of assets may also be waived by our
board of directors and/or Mr. Rutman.
Q: WHAT ARE THE IMPLICATIONS OF THE PROPOSALS FOR BIO-AQUA'S CURRENT BUSINESSES?
A: If the sale of assets, share exchange and articles of amendment are approved
by our shareholders, Bio-Aqua will sell all or substantially all of its assets
and no longer own or operate its current business. Instead, after the share
exchange, Bio-Aqua will carry on New Dragon Asia Food Group's business, under
the leadership of New Dragon Asia Food Group's current management and Chilean
and Uruguayan subsidiaries will continue to be operated by current employees
under the ownership of Max Rutman and his affiliated entities.
Q: WHAT ARE THE RISKS TO THE PROPOSALS?
A: We are selling all of our assets through a stock purchase agreement with Max
Rutman. Mr. Rutman (or his affiliated entities), the purchaser of the animal
nutrition and research and development operations, is also our majority
shareholder, chairman and chief executive officer. Mr. Rutman is not withdrawing
from the animal nutrition and research and development business. Our decision to
withdraw from our animal nutrition and research and development business may be
premature. Economic factors change quickly. New Dragon Asia Food Group's
business plan may never be realized. It is possible that we will sell our
existing assets to a related party at the bottom of the economic cycle for
animal nutrition and research and development and purchase an Asian food
manufacturer and distributor at the top of the market. If we sell our animal
nutrition and research and development businesses and invest in New Dragon Asia
Food Group, your return may be less than if we continued our current business.
Q: WILL BIO-AQUA'S COMMON STOCK CONTINUE TO BE LISTED ON THE AMERICAN STOCK
EXCHANGE?
A: Currently, our common stock is listed on the American Stock Exchange.
However, on July 17, 2001 we were notified by Amex that our securities were
subject to being delisted from the Amex. We have appealed this determination.
One of the conditions to the consummation of the share exchange, unless waived
by the board of directors of New Dragon Asia Food Group and/or Bio-Aqua, is that
the parties receive assurances from Amex that Bio-Aqua's common stock maintains
its listing, or if Amex requires a new listing application to be submitted, then
Amex shall have approved the application prior to consummation of the share
exchange. If both parties do waive this condition and Bio-Aqua's common stock is
delisted from the American Stock Exchange, then our common stock will likely be
traded on the Electronic Bulletin Board. You are urged to review the section
entitled "Risk Factors" for a discussion of the risks associated with de-listed
stock.
Q: WHEN WILL THE SALE OF ASSETS AND SHARE EXCHANGE OCCUR?
A: We plan to complete the sale of assets, share exchange and amendment to our
articles of incorporation as soon as possible after the special meeting, subject
to the satisfaction or waiver of the conditions to the stock purchase agreement
with Mr. Rutman, and the share exchange agreement with New Dragon Asia Food
Limited. Although we cannot predict exactly when all conditions will be
satisfied or waived, we hope to complete the transactions in October 2001. The
3
share exchange agreement provides for termination if the share exchange is not
consummated by November 5, 2001, unless the both parties agree to a later date.
Q: ARE DISSENTERS' RIGHTS AVAILABLE AND HOW DO I EXERCISE THEM?
A: Yes, Florida law provides that you may dissent from the sale of assets to be
considered at the special meeting. In order to perfect your dissenter's rights,
you must first notify Bio-Aqua prior to the special meeting in writing that you
intend to vote against the sale of assets and you must actually vote against the
sale of assets. If the proposal from which you dissent is approved by our
shareholders and that transaction is consummated, Bio-Aqua will then notify you
that you are entitled to demand payment for your shares and instruct you of the
necessary steps in order to obtain such payment. If you do not comply with the
procedures governing dissenters' rights set forth under Florida law and
explained elsewhere in this proxy statement, you may not be entitled to payment
for your shares. You are urged to review the section of this proxy statement
entitled "Rights of Dissenting Shareholders" for a more complete discussion of
dissenters' rights.
Q: WHAT DO I NEED TO DO NOW?
A: This proxy statement contains important information regarding the sale of
assets, share exchange, and amendment to our articles of incorporation. It also
contains important information about what our management and board of directors,
and the management and board of directors of New Dragon Asia Food Group,
considered in evaluating the sale of assets and share exchange. We urge you to
read this proxy statement carefully, including the appendices, and to consider
how the sale of assets, share exchange and articles of amendment effect you as a
shareholder.
Q: HOW DO I VOTE?
A: Just indicate on your proxy card how you want to vote your shares of Bio-Aqua
stock and sign and mail the proxy card in the enclosed return envelope as soon
as possible so that your shares will be represented at the special meeting.
Q: WHAT VOTE IS REQUIRED TO APPROVE THE SALE OF ASSETS AND ISSUANCE OF COMMON
STOCK BY BIO-AQUA'S SHAREHOLDERS?
A: Each of the proposals to be considered at the special meeting must be
approved by our shareholders in the following manner:
(1) With respect to the sale of assets, the affirmative vote
of a majority of the issued and outstanding shares of our
common stock is required to approve the transaction.
(2) The issuance of common stock in connection with the share
exchange must be approved by the affirmative vote of at least
a majority of the issued and outstanding shares of our class A
common stock and class B common stock voting together as a
single class. Section 712 and 713 of the American Stock
Exchange Company Guide, The American Stock Exchange Listing
Standards, Policies and Requirements requires certain
companies whose securities are traded on the American Stock
Exchange (such as Bio-Aqua) to obtain shareholder approval
prior to issuing common stock (or shares convertible into
common stock) in a transaction other than a public offering at
a price less than the market value of the common stock when
the amount of common stock to be issued (or issuable upon
conversion) is or will be greater than 20% of the common stock
or voting power of the company outstanding prior to issuance.
(3) The amendment to Bio-Aqua's articles of incorporation to
increase the authorized number of shares of capital stock to
107,000,000 and the respective increase in authorized class A
common shares to 100,000,000 requires the affirmative vote of
a majority of the issued and outstanding shares of our common
stock.
4
(4) The amendment to Bio-Aqua's articles of incorporation to
change our name to New Dragon Asia Corp. requires the
affirmative vote of a majority of the issued and outstanding
shares of our common stock.
Max Rutman, through his ownership interest in Flagship Import Export
L.L.C., owns a majority of our outstanding shares of common stock. He intends to
vote all of his shares in favor of the four proposals. The remaining officers
and directors of our company also intend to vote their shares in favor of the
four proposals.
If you return a signed and dated proxy card but do not indicate how the
shares are to be voted, those shares represented by your proxy card will be
voted "FOR" each of the proposals. An "ABSTAIN" vote will not be voted at the
special meeting, but will be counted as present for purposes of both
establishing a quorum and as shares entitled to vote on a matter. Since all of
the proposals being considered must be approved by a majority of all shares
entitled to vote on the matter, an abstention will have the same effect as a
vote against a proposal.
Q: WHAT IF SOME, BUT NOT ALL, OF THE PROPOSALS PRESENTED ARE NOT APPROVED?
A: All proposals must be approved for any of the transactions described in these
proxy materials to be consummated. If any one of the proposals is not approved,
none of the proposed transactions will be consummated.
Q: WHEN AND WHERE IS THE SPECIAL MEETING?
A: The Special Meeting will be held on Monday, November 5, 2001 at 1:00 p.m.
(Florida Time), at 350 East Las Olas Boulevard, Fort Lauderdale, Florida 33301.
Q: WHO CAN VOTE AT THE SPECIAL MEETING?
A: Holders of Bio-Aqua's class A common stock and class B common stock who hold
their shares of record as of the close of business on October 8, 2001 are
entitled to notice of and to vote at the special meeting. On the record date,
there were approximately 200 shareholders of record of Bio-Aqua common stock
(approximately 20 of which are held in "street name") and approximately
2,748,794 shares of Bio-Aqua common stock (including 1,048,794 share of class A
common and 1,700,000 shares of class B common) were issued and outstanding.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER OR NOMINEE, WILL MY
BROKER OR NOMINEE VOTE MY SHARES FOR ME?
A: Your broker or nominee will vote your shares only if you provide instructions
on how you want your shares to be voted. You should follow the directions
provided by your broker or nominee.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY PROXY CARD?
A: Yes. You may change your vote by revoking your proxy at any time before the
polls close at the special meeting. You can do this in one of three ways:
(1) timely delivery of a valid, later-dated proxy;
(2) written notice addressed to Corporate Secretary, Bio-Aqua
Systems, Inc., 350 East Las Olas Boulevard, Suite 1700, Fort
Lauderdale, Florida 33301, before the special meeting that you
have revoked your proxy; or
(3) attendance at the special meeting in person and completing
a ballot.
5
You may not revoke your proxy by simply attending the special meeting
unless you complete a ballot. If you have instructed a broker or nominee to vote
your shares, you must follow directions from your broker or nominee to change
those instructions.
Q: WHAT DO I NEED TO DO NOW?
A: Please vote your shares as soon as possible, so that your shares are
represented at the special meeting. TO VOTE YOUR SHARES, PLEASE COMPLETE, SIGN
AND DATE THE ENCLOSED PROXY CARD AND PROMPTLY RETURN IT IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. If you attend the special meeting, you may vote in person
if you wish by completing a ballot at the special meeting, whether or not you
have already signed, dated and returned your proxy card. Please review this
proxy statement for more complete information regarding the matters proposed for
your consideration at the special meeting.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have any questions regarding the matters discussed in this proxy
statement or if you would like additional copies of this proxy statement or if
you have questions about how to complete and return your proxy card, you should
call Bio-Aqua's corporate counsel at (954) 763-1200, ext. 7879.
6
SUMMARY
The following is a summary of certain information contained elsewhere
in this proxy statement. The following summary is not intended to be complete
and is qualified in its entirety by reference to the more detailed information
contained in this proxy statement and in the attached Appendices. You are urged
to review the entire proxy statement carefully. References in this Summary and
throughout the proxy statement to "we," "us," "Bio-Aqua," or the "Company" refer
to Bio-Aqua Systems, Inc. References to "New Dragon" refer to New Dragon Asia
Food Group. Bio-Aqua has supplied all information contained in this proxy
statement relating to Bio-Aqua and its subsidiaries. New Dragon has supplied all
information in this proxy statement relating to New Dragon Asia Food Group and
its subsidiaries. Neither Bio-Aqua nor New Dragon makes any representation as to
information contained herein supplied by the other company.
THE SPECIAL MEETING
DATE, TIME AND PLACE
The special meeting will be held on Monday, November 5, 2001 at 1:00
p.m. (Florida time) at 350 East Las Olas Blvd., Fort Lauderdale, Florida 33301
RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE
Only holders of issued and outstanding shares of Bio-Aqua's common
stock on October 8, 2001, (the "Record Date") are entitled to notice of and
to vote at the special meeting or at any adjournment or postponement thereof. As
of the Record Date, there were approximately 2,748,794 shares of Bio-Aqua common
stock outstanding, held of record by approximately 200 shareholders. 1,048,794
shares of class A common stock were outstanding and 1,700,000 shares of class B
common stock were outstanding. Our class B common stock is held by Max Rutman,
our majority shareholder and chief executive officer through his interest in
Flagship Import Export LLC (1,530,010 shares) and Atik S.A. (169,990 shares).
Class B shares have super voting rights. Mr. Rutman intends to vote all of his
shares in favor of the four proposals. The presence, in person or by proxy, at
the special meeting of the holders of a majority of the outstanding shares of
Bio-Aqua's common stock is necessary to constitute a quorum at the special
meeting.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, you will be asked to:
1. approve the sale of substantially all the assets of Bio-Aqua
pursuant to the terms of a stock purchase agreement between
Bio-Aqua and Max Rutman,
2. approve the issuance of in excess of 20% of the presently
issued and outstanding common stock of Bio-Aqua in connection
with our acquisition of New Dragon Asia Food Group pursuant to
a share exchange agreement,
3. to amend our articles of incorporation to increase our
authorized capital stock from 30,000,000 shares to 107,000,000
shares, increasing our authorized class A common stock to
100,000,000 shares,
4. to amend our articles of incorporation to change our name
to New Dragon Asia Corp., and
5. any other business which may properly come before the
special meeting or any adjournment or postponement of the
special meeting.
7
SHAREHOLDER APPROVAL OF THE SALE OF ASSETS AND THE SHARE EXCHANGE
Approval of the sale of assets, share exchange agreement, and amendment
to our articles of incorporation requires the affirmative vote of at least a
majority of all issued and outstanding shares of Bio-Aqua common stock. It is
expected that all 1,550,010 shares of common stock owned by our officers and
directors, which is approximately 56% of the total number of beneficially owned
shares of Bio-Aqua's common stock and 80% of the voting shares of Bio-Aqua, will
be voted in favor of the amendment to the articles of incorporation and the
share exchange at the special meeting. Max Rutman, to whom all or substantially
all of the assets of Bio-Aqua are being sold, is also the beneficial owner of
approximately 54% of the common stock of Bio-Aqua and 80% of the voting interest
in Bio-Aqua.
BIO-AQUA
General. Bio-Aqua Systems, Inc., a Florida corporation, was
incorporated in March 1999 as a holding company to acquire Tepual, S.A., a
Chilean corporation. Until business operations were suspended, Tepual, S.A. was
in the business of research and development and sales of vaccine products and
production and control systems related to animal nutrition and health. Bio-Aqua
also sold, brokered and provided technical advice in the production of meals for
feed used by the aqualculture, poultry and cattle farming industries. In
addition, Bio-Aqua acquired 75% of Krisel, S.A. in 2000, a krill fishing company
operating in Uruguay. Bio-Aqua's historical and current operations will
sometimes be referred to as "Tepual operations" throughout this proxy. However,
due to lack of working capital we have suspended all of our operations. On
August 7, 2001, Bio-Aqua announced it would seek to divest itself of its current
operations and acquire a new operating company with the goal of enhancing
shareholder value.
Recent Events. To facilitate the payment of certain obligations of
Bio-Aqua, including legal, accounting, American Stock Exchange fees and general
corporate expenses, Max Rutman entered into a series of agreements dated May 9,
2001 with OTC Limited. Under these agreements Mr. Rutman received a loan of
$152,991. Mr. Rutman pledged 1,529,910 shares of his Bio-Aqua class B stock
under a pledge agreement to secure the loan. Under the terms of a secured
promissory note, Mr. Rutman must repay the principal sum of the loan plus annual
interest of 8% accrued from May 9, 2001 at the earliest of either (a) September
30, 2001 or (b) one business day after the closing of the share exchange. As of
the mailing date of this proxy statement, OTC Limited has not exercised its
option. In addition, in consideration for the loan, Mr. Rutman granted an option
to purchase 1,529,910 of his class B common shares of Bio-Aqua to OTC Limited.
OTC Limited may exercise the option and purchase the shares during the option
period. The per share exercise price of the option is $.10. During the term of
the above agreements, Mr. Rutman will maintain all and any voting rights
pertaining to the class B shares.
SUMMARY OF THE SALE OF ASSETS
Bio-Aqua is a holding company that owns and operates a 99.9% interest
in Tepual, S.A. (a Chilean company) and a 75% interest in Krisel, S.A. (a
Chilean company) (collectively "Tepual"). The stock purchase agreement governing
the terms and conditions of the sale of assets provides for the sale of all of
Bio-Aqua's stock interest in Tepual to Max Rutman in consideration for Mr.
Rutman assuming all of the liabilities of Tepual.
SUMMARY OF THE SHARE EXCHANGE
NEW DRAGON ASIA FOOD GROUP
New Dragon Asia Food Group is a group comprised of several subsidiaries
and joint ventures, principally engaged in the manufacturing, marketing and
distribution of instant noodles and flour in Mainland China. New Dragon
maintains its principal offices.
New Dragon was wholly owned by New Dragon Asia Food Limited, a British
Virgin Islands company. No public market exists for New Dragon's equity
interests.
8
New Dragon is headquartered in Hong Kong. Its address is Wing On
Centre, 111 Connaught Road Central, 13th Floor, Sheung Wan, Hong Kong and its
telephone number is 011 (825) 2815-9892.
RECOMMENDATION OF BIO-AQUA'S BOARD OF DIRECTORS; REASONS FOR THE SHARE EXCHANGE
On or about July 2, 2001, Bio-Aqua's board of directors, determined
that the share exchange agreement and the transactions contemplated by the share
exchange agreement, including the sale of assets and the amendment to the
articles of incorporation, were advisable, fair to and in the best interests of
Bio-Aqua and its shareholders. In reaching its conclusion, the board considered
several factors, including: (1) The Tepual operations have been suspended and
Bio-Aqua currently does not have cash flow or borrowing power sufficient to
recommence its Tepual operations. In addition, because of illiquidity and its
stock low price, Bio-Aqua's stock has not been sufficiently attractive to serve
as currency to fund investments. As a "small cap" company, Bio-Aqua has had
difficulty raising capital through equity offerings because there has been very
little institutional interest in its stock; and (2) Bio-Aqua believes that New
Dragon's operations and business prospects offer its shareholders a greater
chance of maximizing shareholder value than if Bio-Aqua continued with its
Tepual operations. Having determined that Bio-Aqua no longer has a ready means
by which to fund its operations, Bio-Aqua's board of directors has determined
that it is in Bio-Aqua's best interests to dispose of all of its Tepual
operations.
NEW DRAGON'S REASONS FOR THE SHARE EXCHANGE
On July 2, 2001, New Dragon Asia Food Limited unanimously approved the
share exchange agreement and the transactions contemplated in the share exchange
agreement, determining they were advisable and in the best interests of New
Dragon and its shareholders. In reaching its conclusion, New Dragon's board of
directors and shareholders considered the liquidity provided to its shareholders
that the share exchange may afford, as well as the increased ability that New
Dragon will have to raise additional capital if and when that becomes necessary.
TERMS OF THE SHARE EXCHANGE
General. Pursuant to the terms of the share exchange agreement, the
shareholders of New Dragon Asia Food Limited will exchange its wholly owned
interest in New Dragon for an aggregate of 37,890,857 shares of Bio-Aqua class A
common stock. Upon the closing of the share exchange, New Dragon will then be a
wholly-owned subsidiary of Bio-Aqua.
Upon the consummation of the transactions contemplated by the share
exchange agreement, in exchange for its interest in New Dragon, New Dragon Asia
Food Limited and its consultants will receive an aggregate of 37,890,857 shares
of Bio-Aqua common stock.
The share exchange will become effective upon Bio-Aqua shareholder
approval. Assuming all conditions to the share exchange are satisfied or waived,
it is anticipated that the share exchange will be completed within one week of
the special meeting. At the effective time of the share exchange.
Conditions to Closing. In addition to other conditions to consummation
of the share exchange customary to agreements of this type, the share exchange
agreement provides that the obligations of the parties to effect the share
exchange are subject to the satisfaction, among others, of the following
conditions, any of which may be waived by the parties:
- Amex shall not have provided any notice that the proposed share
exchange will prevent the continued listing of Bio-Aqua's common
stock on the American Stock Exchange;
- All outstanding Bio-Aqua class B common shares shall be
converted to class A common shares;
9
- Bio-Aqua shall not have more than 2,748,794 shares outstanding
(excluding shares of common stock underlying common stock purchase
warrants) immediately prior to the effective time of the share
exchange;
- Bio-Aqua shall have completed the sale of assets or otherwise
disposed of all of its assets;
- Bio-Aqua shall have disposed of or transferred its liabilities;
- Bio-Aqua shall have entered into a registration rights agreement
with the New Dragon interest holders; and
- Bio-Aqua shall have received shareholder approval to amend its
articles of incorporation to change its name and increase its
authorized common stock.
Termination of the share exchange agreement. The share exchange
agreement may be terminated by either party if:
- the shareholders of either company do not approve the requisite
transactions contemplated by the share exchange agreement;
- the share exchange has not been consummated by November 5, 2001,
or a later date mutually agreed upon;
- there has been a material misrepresentation, breach of warranty
or breach of a covenant by the other party; or
- there has been a material adverse change in the financial
condition of the other party.
MANAGEMENT OF BIO-AQUA AFTER THE SHARE EXCHANGE
Bio-Aqua has agreed that, as of the effective time of the share
exchange, the directors and all officers of Bio-Aqua will resign, except for Max
Rutman, who will remain a director. Mr. Rutman, as the sole remaining director
of Bio-Aqua, will appoint Song Xue Jun, Zhang Shu Hua, Lai Wing Leung, and Leung
Man Fai to serve as members of the board of directors until the next annual
meeting of the shareholders. Immediately thereafter, Mr. Rutman will resign and
the newly-comprised board of directors will elect those individuals serving as
officers of New Dragon immediately preceding the effective time of the share
exchange as officers of Bio-Aqua. Biographical information concerning the new
directors is set forth in "Approval of the Share Exchange Agreement -- The
Management of Bio-Aqua and the Surviving Company After the Share Exchange."
INTERESTS OF CERTAIN PERSONS IN THE SHARE EXCHANGE
Certain individuals who will serve as directors and executive officers
of Bio-Aqua following the effective time of the share exchange currently own no
shares of Bio-Aqua's common stock. Mr. Rutman has pledged 1,529,910 shares in
return for a loan in the amount of $152,991, which amount has been used to pay
certain obligations of Bio-Aqua. Mr. Rutman will retain voting control over the
shares during the term of the pledge agreement. Assuming there is no adjustment
in the exchange ratio, following the share exchange the current and future
directors and executive officers will be deemed to have such beneficial
ownership of common stock as follows:
10
Shares Owned Prior Shares Owned After
to Effective Date Effective Date
Name Number Percentage Number Percentage
---- ------ ---------- ------ ----------
Max Rutman 1,530,010(1)(2) 54% 1,530,010(1)(2) 4%
Nestor Lagos 10,000(3) * 10,000(3) *
Pedro Sayes 5,000(4) * 5,000(4) *
Oscar Cornejo 5,000(5) * 5,000(5) *
Song Xue Jun -0- -0- -0- -0-
Zhang Shu Hua -0- -0- -0- -0-
Lai Wing Leung -0- -0- -0- -0-
Leung Man Fai -0- -0- -0- -0-
(1) Represent class B common shares, which have super voting rights. The
majority of these shares have been pledged as security for a loan.
(2) Excludes 25,000 shares of common stock underlying options to purchase
common stock exercisable at $1.65 per share.
(3) Excludes 15,000 shares of common stock underlying options to purchase
common stock exercisable at $1.50 per share.
(4) Excludes 10,000 shares of common stock underlying options to purchase
common stock exercisable at $1.50 per share.
(5) Excludes 10,000 shares of common stock underlying options to purchase
common stock exercisable at $1.50 per share.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that the share exchange will qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"). It is not expected that the share exchange
will result in any federal income tax consequences to shareholders of Bio-Aqua
other than any shareholders exercising dissenter's rights under the FBCA. See
"Approval of the Share Exchange Agreement -- Certain Federal Income Tax
Effects."
REGULATORY APPROVAL
Bio-Aqua and New Dragon each believe that no regulatory approvals are
or will be required in connection with the share exchange.
MARKET FOR COMMON STOCK
Bio-Aqua's common stock and common stock purchase warrants are
currently traded on the American Stock Exchange under the symbol "SEA" and
"SEA/WS", respectively. Bio-Aqua has also issued options to purchase an
aggregate of 300,000 share of common stock, exercisable at prices ranging from
$1.50 to $1.65. The options are not publicly traded.
No established trading market exists for New Dragon's securities.
The closing sale price per share of Bio-Aqua's common stock, as
reported on the American Stock Exchange on July 1, 2001, the last full trading
day before the execution of the share exchange agreement by Bio-Aqua, was $.21.
The closing price per share on October 8, 2001 was $.90.
11
The following table sets forth high and low bid quotations for our
common stock for the periods indicated. These quotations, as reported by
Interactive Data, reflect prices between dealers, do not include retail
mark-ups, mark-downs, commissions and may not necessarily represent actual
transactions.
Period High Low
------ ---- ---
May 1, 2000 - June 30, 2000 $4.18 $2.50
July 1, 2000 - September 30, 2000 3.25 1.06
October 1, 2000 - December 31, 2000 1.37 .18
January 1, 2000 - March 31, 2001 .47 .18
April 1, 2001 - June 30, 2001 .30 .21
July 1, 2001 - September 30, 2001 1.24 .21
12
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION
Certain information contained in this proxy statement which does not
relate to historical financial information may be deemed to constitute forward
looking statements. The words or phrases "will likely result," "are expected
to," "will continue," "is anticipated," "estimate," "project," "believe" or
similar expressions identify "forward looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (as amended). This proxy
statement contains certain forward-looking statements with respect to the
financial condition, results of operations, plans, objectives, future
performance and business of each of Bio-Aqua and New Dragon, and the effect of
the share exchange. Because such statements are subject to risks and
uncertainties, actual results may differ materially from historical results and
those presently anticipated or projected. Bio-Aqua's shareholders are cautioned
not to place undue reliance on such statements, which speak only as of the date
hereof. Among the factors that could cause actual results in the future to
differ materially from any opinions or statements expressed with respect to
future periods are those described in the section of this proxy statement
entitled "Risk Factors." Neither Bio-Aqua nor New Dragon undertakes any
obligation to release publicly any revisions to such forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
THE SPECIAL MEETING
GENERAL
This proxy statement is being furnished to shareholders of Bio-Aqua in
connection with the solicitation of proxies by the board of directors of
Bio-Aqua for use at the special meeting to be held on November 5, 2001 at 1:00
p.m. (Florida time) at 350 East Las Olas Blvd., Fort Lauderdale, Florida 33301,
and at any adjournment or postponement thereof. The approximate date on which
these proxy materials were first sent or given to shareholders of Bio-Aqua was
October 22, 2001.
MATTERS TO BE CONSIDERED
The matters to be considered at the special meeting are the following:
1. the sale of substantially all the assets of Bio-Aqua pursuant
to the terms of a stock purchase agreement between Bio-Aqua
and Max Rutman,
2. to approve the issuance of in excess of 20% of the presently
issued and outstanding common stock of Bio-Aqua in connection
with our acquisition of New Dragon Asia Food Group,
3. to amend our articles of incorporation to increase our
authorized capital stock from 30,000,000 shares to 107,000,000
shares, increasing our authorized class A common stock to
100,000,000 shares,
4. to amend our articles of incorporation to change our name
to New Dragon Asia Corp., and
5. any other business which may properly come before the special
meeting or any adjournment or postponement of the special
meeting.
RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE; VOTING; QUORUM
Bio-Aqua has fixed October 8, 2001, as the record date for the
determination of the holders of Bio-Aqua's common stock entitled to notice of
and to vote at the special meeting. Only holders of Bio-Aqua's common stock on
the Record Date will be entitled to notice of and to vote at the special meeting
and at any adjournment or postponement thereof. As of the Record Date, there
were approximately 2,748,794 shares of Bio-Aqua's common stock outstanding, held
by approximately 200 shareholders of record (approximately 20 of which are held
in "street name"). Each holder of record of class A common stock is entitled to
1
cast one vote per share of stock on all matters properly submitted for the vote
of Bio-Aqua's shareholders, exercisable in person or by properly executed proxy,
at the special meeting. Each holder of record of class B common stock (Max
Rutman through his interest in Flagship Import Export LLC and Atik S.A.) is
entitled to cast five votes per share of stock. Max Rutman owns a majority of
our outstanding shares of common stock. He intends to vote all of his shares in
favor of the four proposals. The remaining officers and directors of our company
also intend to vote their shares in favor of the four proposals.
The presence, in person or by proxy, of holders of a majority of the
shares of Bio-Aqua common stock outstanding as of the Record Date constitutes a
quorum for the transaction of business at the special meeting. In the event
there are not sufficient votes for a quorum or to approve any proposals at the
time of the special meeting, the special meeting may be adjourned in order to
permit further solicitation of proxies. Abstentions will count towards quorum
requirements.
The sale of assets (Proposal One); share exchange and issuance of
common stock (Proposal Two); and amendment to the articles of incorporation
(Proposal Three and Four) must be approved by the affirmative vote of at least a
majority of all of the issued and outstanding shares of Bio-Aqua common stock.
As to the sale of assets, share exchange and amendment to the articles, a
shareholder may: (i) vote "FOR" the proposal, (ii) vote "AGAINST" the proposal,
or (iii) "ABSTAIN" with respect to each proposal. Since all proposals must be
approved by an affirmative vote of a majority of all of the outstanding shares
of Bio-Aqua, a vote of "Abstain" has the same effect as a vote against the
proposals.
SOLICITATION
Any person signing and returning the enclosed Proxy may revoke it at
any time before it is voted by giving written notice of such revocation to
Bio-Aqua, or by voting in person at the Meeting. Pursuant to the share exchange
agreement, the expense of soliciting proxies, including the cost of preparing,
assembling and mailing the proxy materials to shareholders, will be assumed by
New Dragon. It is anticipated that solicitations of proxies for the special
meeting will be made only by use of the mails; however, Bio-Aqua may use the
services of a proxy solicitation firm. Directors, officers and employees may
also be used to solicit proxies personally or by telephone, without additional
salary or compensation to them. Brokerage houses, custodians, nominees and
fiduciaries will be requested to forward the proxy materials to the beneficial
owners of Bio-Aqua's shares held of record by such persons, and Bio-Aqua will
reimburse such persons for their reasonable out-of-pocket expenses incurred by
them in that connection.
All shares represented by valid proxies will be voted in accordance
therewith at the special meeting.
VOTING AND REVOCABILITY OF PROXIES
Shares of Bio-Aqua common stock represented by all properly executed
proxies received at Bio-Aqua's transfer agent prior to the date of the special
meeting, will be voted as specified in the proxy. Unless contrary instructions
are indicated on the proxy, the shares of common stock represented by such proxy
will be voted "FOR" approval of the sale of assets, "FOR" approval of the share
exchange agreement, and "FOR" the amendment to the articles of incorporation.
The giving of the enclosed proxy does not preclude the right to vote in
person should the shareholder giving the proxy so desire. A proxy may be revoked
at any time prior to its exercise by (1) providing notice in writing to
Bio-Aqua's corporate secretary that the proxy is revoked; (2) presenting to
Bio-Aqua a later-dated proxy; or (3) by attending the special meeting and voting
in person.
2
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Number of Shares
Name of of Common Stock Ownership Voting
Beneficial Owner Beneficially Owned Percentage Percentage
---------------- ------------------ ---------- ----------
Max Rutman 1,530,010(1) 54% 80%
Atik S.A. 169,990(2) 6% 9%
Nestor Lagos 10,000(3) * *
Pedro Sayes 5,000(4) * *
Oscar Cornejo 5,000(5) * *
All executive officers and
Directors as a group (4 persons) 1,550,010 55% 80%
--------------------
(1) Includes 1,530,010 shares of class B common stock that have 5 votes per
share. The majority of Mr. Rutman's shares are held by Flagship Import
Export L.L.C., a limited liability company wholly owned by Max Rutman.
Mr. Rutman has pledged 1,529,910 shares in return for a loan of
$152,991. Mr. Rutman will retain voting control over the shares
pursuant to a pledge agreement. Excludes 25,000 shares of common stock
underlying options exercisable at $1.65 per share.
(2) Includes 169,990 shares of class B common stock that have 5 votes per
share.
(3) Excludes 15,000 shares of common stock underlying options exercisable
at $1.50 per share.
(4) Excludes 10,000 shares of common stock underlying options exercisable
at $1.50 per share.
(5) Excludes 10,000 shares of common stock underlying options exercisable
at $1.50 per share.
3
PROPOSAL ONE:
SALE OF ASSETS
The following discussion summarizes certain aspects of the proposal to
sell all or substantially all of Bio-Aqua's assets to Max Rutman or an entity
beneficially owned by Mr. Rutman. The following is not a complete statement of
the terms of the sale of assets and is qualified in its entirety by the stock
purchase agreement, a copy of which is attached as Appendix A.
GENERAL
The stock purchase agreement (attached as Appendix A to the proxy
materials) provides for the sale of all of the issued and outstanding stock of
Tepual to Max Rutman. In consideration for the interest in Tepual, Mr. Rutman
will assume all debts and liabilities of Tepual. Mr. Rutman is the principal
shareholder, chairman and chief executive officer of Bio-Aqua.
BACKGROUND AND REASONS FOR SALE OF ASSETS
Bio-Aqua is proposing the sale of assets for several reasons. The
disposition of all of Bio-Aqua's assets is a condition to the consummation of
the share exchange, as described in this proxy statement. Currently, Tepual has
suspended operations and Bio-Aqua does not have cash flow or borrowing capacity
sufficient to continue its Tepual operations, nor satisfy current obligations.
Moreover, because of illiquidity and significant fluctuation in its stock price,
Bio-Aqua's stock has not been sufficiently attractive to serve as currency to
generate capital. As an American Stock Exchange company, Bio-Aqua has been
unable to raise capital through equity offerings because it has had no
institutional interest in its stock. Having determined that it no longer has a
ready means by which to fund operations and recognizing Tepual's financial
condition, the board of directors has determined that it is in Bio-Aqua's best
interests to dispose of Tepual.
STOCK PURCHASE AGREEMENT
You are urged to review the stock purchase agreement, a copy of which
is incorporated in and attached to this proxy statement as Appendix A, for a
complete statement of the terms of the sale of assets. The following summary is
qualified in its entirety by the stock purchase agreement.
EFFECTIVE DATE AND CONSEQUENCES OF THE SALE OF ASSETS
The effective time of the sale of assets will immediately precede the
closing of the share exchange. It is anticipated that the closing of the sale of
assets will occur within one week of the date of the special meeting. Upon the
consummation of the sale of assets, Bio-Aqua will no longer own Tepual.
REPRESENTATIONS, WARRANTIES AND COVENANTS
The stock purchase agreement contains certain covenants of Mr. Rutman
relating to the continued operation of Tepual, its assets and liabilities.
RIGHTS OF BIO-AQUA'S DISSENTING SHAREHOLDERS
The proposed sale of assets is a corporate action which gives rise to
dissenters' rights under the FBCA. A summary and discussion of dissenters'
rights available to Bio-Aqua shareholders is set forth in this proxy statement
under the heading "Rights of Dissenting Shareholders."
INTERESTS OF CERTAIN ENTITIES
In considering the sale of assets, you should be aware that Max Rutman,
through his interests in Flagship Import Export LLC, currently owns
approximately 54% of the Bio-Aqua outstanding common stock and 80% of Bio-Aqua's
voting interest. Although Mr. Rutman has pledged the majority of these shares as
4
collateral for a $152,991 loan, he maintains voting control of these shares.
Therefore, Mr. Rutman, as a shareholder of Bio-Aqua, has interests in the sale
of assets in addition to, and different from, the interests of Bio-Aqua's
shareholders generally. Prior to the effective date of the sale of assets,
Bio-Aqua shall have received a written opinion acceptable to Bio-Aqua in its
sole discretion, stating that the consideration to be received by Bio-Aqua
pursuant to the stock purchase agreement is fair to Bio-Aqua and its
shareholders from a financial point of view.
BOARD RECOMMENDATION
The proposed sale of assets could constitute a conflict of interest
transaction because Bio-Aqua's assets are being sold to Mr. Rutman, its largest
shareholder. Accordingly, pursuant to the FBCA, Section 607.0901 (Affiliated
Transactions), Bio-Aqua's disinterested directors recommend that you approve the
sale of assets. However, shareholders must consider the merits of the sale of
assets independent of any recommendation of the board.
VOTE REQUIRED
Approval of the sale of assets requires the affirmative vote of at
least a majority of all of the issued and outstanding shares of Bio-Aqua common
stock. Because the sale of assets must be approved by an affirmative vote of a
majority of all of the outstanding shares of Bio-Aqua, a vote of "Abstain" has
the same effect as a vote against the sale of assets.
PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE VOTED FOR THE SALE OF ASSETS
PROPOSAL UNLESS A VOTE AGAINST THE PROPOSAL OR ABSTENTION IS SPECIFICALLY
INDICATED.
IN THE EVENT THAT THE SHARE EXCHANGE AGREEMENT IS NOT APPROVED BY THE
SHAREHOLDERS AT THE SPECIAL MEETING OR THE SHARE EXCHANGE IS OTHERWISE ABANDONED
PRIOR TO THE CONSUMMATION OF THE SALE OF ASSETS, THE SALE OF ASSETS WILL ALSO BE
ABANDONED. SIMILARLY, THE SHARE EXCHANGE AGREEMENT WILL BE TERMINATED IF THE
SALE OF ASSETS IS NOT APPROVED BY THE REQUISITE SHAREHOLDER VOTE AT THE SPECIAL
MEETING.
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PROPOSAL TWO:
APPROVAL OF THE SHARE EXCHANGE AGREEMENT (STOCK ISSUANCE)
The following information describes the material aspects of the share
exchange. This description does not purport to be complete and is qualified in
its entirety by reference to the appendices attached hereto, including the share
exchange agreement, which is attached to this proxy statement as Appendix B and
is incorporated herein by reference. You are urged to read Appendix B in its
entirety.
BACKGROUND OF THE SHARE EXCHANGE
On April 29, 2001, Bio-Aqua entered into a non-binding letter of intent
to acquire 100% of the issued and outstanding stock of New Dragon. Negotiations
subsequent to the letter of intent led to definitive agreements concerning the
share exchange. Prior to negotiating the letter of intent, neither Bio-Aqua nor
any of its subsidiaries or affiliates were involved in any negotiations,
transactions, share exchanges, acquisitions, or consolidations with New Dragon
or any of its affiliates.
New Dragon Asia Food Group, through several subsidiaries and joint
ventures, is principally engaged in the manufacturing, marketing and
distribution of instant noodles and flour in Mainland China. New Dragon Asia
Food Group maintains its principal offices at.
On the effective date of the share exchange agreement, Bio-Aqua will
receive 100% of the issued and outstanding shares of New Dragon common stock in
exchange for 37,890,857 shares of Bio-Aqua class A common stock.
BIO-AQUA'S REASONS FOR THE SHARE EXCHANGE
In March 2001, Bio-Aqua's board of directors met to consider and
evaluate the economic conditions for the company. Due to lack of working capital
and economic conditions throughout Chile and Peru, Bio-Aqua has suspended all
current operations. In April 2001, the board began to evaluate restructuring
alternatives. The board of directors evaluated several opportunities. In early
April 2001, Bio-Aqua was introduced to New Dragon. Shortly after this
introduction, the parties entered into a non-binding letter of intent to
facilitate a share exchange between the companies, and on July 2, 2001, the
parties executed the share exchange agreement. Bio-Aqua proposed the share
exchange because it believes that the business prospects of New Dragon will
afford Bio-Aqua's shareholders a better opportunity to increase shareholder
value than if Bio-Aqua continued its current business. The board of directors
believes that if Bio-Aqua sells its existing assets and invests, by way of the
share exchange in New Dragon, Bio-Aqua's shareholders are more likely to realize
increased value.
NEW DRAGON'S REASONS FOR THE SHARE EXCHANGE
The decision by New Dragon's sole interest holder to enter into the
share exchange agreement is based upon its conclusion that the share exchange
affords New Dragon greater access to capital markets for the continued
development of its services and greater liquidity for New Dragon Asia Food
Limited.
THE SHARE EXCHANGE AGREEMENT
General Terms
-------------
The share exchange agreement provides that, upon the satisfaction or
waiver of certain conditions, New Dragon Asia Food Limited, the equity holder of
New Dragon, will exchange its interest in New Dragon for an aggregate of
37,890,857 shares of Bio-Aqua class A common stock (of which 1,222,286 shares
will be issued to several consultants of New Dragon Asia Food Limited). The
shares received by New Dragon equity holders shall be restricted securities as
defined under the Securities Act. Following the share exchange, New Dragon will
be a wholly-owned subsidiary of Bio-Aqua. The share exchange will become
effective upon Bio-Aqua shareholder approval. It is anticipated that if all
conditions of the share exchange have been satisfied or waived, the share
exchange will be completed within one week of the special
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meeting. The delay in fulfilling any condition of the share exchange could delay
the completion of the share exchange or result in the termination of the share
exchange agreement.
Effects of the Share Exchange
-----------------------------
Upon consummation of the share exchange, New Dragon will become a
wholly-owned subsidiary of Bio-Aqua. At the effective time of the share
exchange, all outstanding equity interest in New Dragon common stock will be
exchanged for 37,890,857shares of Bio-Aqua class A common stock (subject to
adjustment in certain events).
Following the share exchange and assuming Bio-Aqua's sale of assets,
New Dragon will be a wholly-owned subsidiary of Bio-Aqua.
As of the Record Date, New Dragon Asia Food Limited, a British Virgin
Islands limited liability company, was the sole interest holder of New Dragon.
Assuming the wholly owned interest in New Dragon is exchanged for 37,890,857
shares of Bio-Aqua common stock and assuming no change prior to the effective
time of the share exchange, the aggregate number of shares of Bio-Aqua common
stock issuable to New Dragon Asia Food Limited and its consultants would be
37,890,857, or approximately 93% of the Bio-Aqua common stock outstanding
immediately after the effective time of the share exchange. New Dragon Asia Food
Limited would own 36,668,571, shares of Bio-Aqua common stock. There are no
outstanding options, warrants or other convertible instruments to purchase
interests in New Dragon. As a result, New Dragon Asia Food Limited will have
significant control over Bio-Aqua.
Fractional Shares
-----------------
No fractional shares of Bio-Aqua common stock shall be issued in
exchange for interests in New Dragon.
Effective Time
--------------
If the share exchange agreement is adopted by the requisite vote of the
shareholders of Bio-Aqua and all of the other conditions described under "The
Share Exchange Agreement -- Certain Conditions to Consummation" are satisfied or
waived by one or both of the parties, as appropriate (and to the extent
permitted by the share exchange agreement), then, unless the share exchange
agreement is previously terminated, the share exchange will be consummated and
become effective at the time Bio-Aqua shareholders approve the transaction.
The share exchange agreement provides that Bio-Aqua and New Dragon will
cause the effective time to occur as promptly as practicable after the adoption
by the shareholders of Bio-Aqua and of New Dragon and the satisfaction or waiver
of the other conditions described below, but in no event later than ten (10)
business days after all such conditions have been satisfied or waived, or on
such other date as may be mutually agreed upon by the parties. There can be no
assurance that all conditions to the share exchange will be satisfied. The share
exchange agreement may be terminated prior to the effective date of the share
exchange by either Bio-Aqua or New Dragon in certain circumstances, whether
before or after adoption of the share exchange agreement by the shareholders of
Bio-Aqua. See "The Share Exchange Agreement -- Termination."
Representations and Warranties
------------------------------
Subject to certain specified exceptions, the share exchange agreement
contains various representations and warranties of both Bio-Aqua and New Dragon
relating to, among other things:
(1) the due organization, power and standing of Bio-Aqua and New Dragon,
and similar corporation matters;
(2) the authorization, execution, delivery and performance by, and
enforceability of the share exchange agreement against, Bio-Aqua and
New Dragon;
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(3) the absence of any provision of each party's articles or bylaws or any
agreements, governmental authorizations, laws, regulations or orders in
conflict with such party's authorization, execution, delivery or
performance of the share exchange agreement;
(4) the absence of any public body, court or authority's authorization,
consent or approval required for the consummation of the share exchange
by Bio-Aqua and New Dragon;
(5) the capital structure and the authorization and validity of the
outstanding shares of capital stock of Bio-Aqua and New Dragon;
(6) the absence of certain changes or events with respect to Bio-Aqua and
New Dragon;
(7) the absence of certain undisclosed liabilities of Bio-Aqua and New
Dragon
(8) the absence of pending or threatened actions against such party with
respect to the share exchange;
(9) the absence of claims for brokerage commissions, finders' fees,
investment advisory fees or similar compensation based upon
arrangements made by or on behalf of Bio-Aqua or New Dragon with
respect to the share exchange;
(10) real property used or occupied by Bio-Aqua and New Dragon;
(11) title (including leasehold title) of Bio-Aqua and New Dragon to, and
the absence of liens against, certain properties and assets;
(12) the filing of tax returns, the absence of tax audits, the payment of
taxes and related tax matters by Bio-Aqua and New Dragon;
(13) certain material contracts to which Bio-Aqua or New Dragon is a party
and the absence of defaults and breaches with respect thereto;
(14) the rights in certain intellectual property of Bio-Aqua and New Dragon;
(15) employee relations and certain other matters related to employees of
Bio-Aqua and New Dragon;
(16) certain employee benefit plans and matters arising under the Employee
Retirement Income Security Act of 1974, as amended;
(17) insurance policies of Bio-Aqua and New Dragon and certain matters
related thereto;
(18) certain transactions with affiliates of Bio-Aqua and New Dragon;
(19) compliance with applicable laws and possession of necessary permits
by Bio-Aqua and New Dragon; and
(20) material disclosure by Bio-Aqua and New Dragon.
In addition, Bio-Aqua has also made certain additional representations
and warranties to New Dragon relating to, among other things, the following
matters (which representations and warranties are subject, in certain cases, to
specified exceptions):
- the filing of reports and other documents with the SEC, the
material compliance of such documents with SEC rules and
regulations and the accuracy of the information contained therein;
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- the material compliance of this proxy statement with certain laws
and the accuracy of the information contained therein; and
- the authorization and validity of the shares of common stock to
be issued pursuant to the share exchange agreement.
Certain Covenants
-----------------
The Share exchange agreement also contains various other covenants,
including the following:
(1) The parties shall use all reasonable efforts to make all
legally-required filings and take all other actions necessary, proper or
advisable to consummate the share exchange;
(2) Between the date of the share exchange agreement and the date this
proxy statement was filed with the SEC, the parties were required to afford each
other reasonable access to certain books, records and papers;
(3) Prior to the closing of the share exchange and in the event the
share exchange is never consummated, the parties are prohibiting from disclosing
or using any confidential information received from the other party;
(4) Bio-Aqua is required to hold a special meeting of its shareholders
to seek approval of the transactions contemplated by the share exchange
agreement; each party is required to cooperate in the preparation of this proxy
statement;
(5) Neither Bio-Aqua nor New Dragon shall knowingly take any action
which would disqualify the share exchange as a tax-free reorganization under the
Internal Revenue Code;
(6) The parties shall cooperate regarding the substance of press
releases and public announcements relating to the share exchange agreement;
(7) The parties shall use reasonable efforts to maintain listing of
Bio-Aqua's common stock on the American Stock Exchange;
(8) Subject to the fiduciary duties and legal obligations of the
respective boards of directors of Bio-Aqua and New Dragon, the parties shall
each recommend approval of the share exchange agreement, and, in the case of
Bio-Aqua, the sale of substantially all of its assets and the amendment to
Bio-Aqua's articles of incorporation, and use all reasonable efforts to obtain
approvals thereof from their respective shareholders;
(9) The parties shall give prompt notice to each other with respect to
certain events and determinations and discovery of certain information;
(10) At the effective time of the share exchange, Bio-Aqua shall
deliver the voluntary resignations of its directors and executive officers,
except that Max Rutman shall remain on the board of directors;
(11) The parties agreed that, following the effective time of the share
exchange, they will not alter the rights of any current or former director of
Bio-Aqua who has a right to indemnification from Bio-Aqua pursuant to its
articles of incorporation or bylaws.
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Limitations on Solicitation of Transactions
-------------------------------------------
Pursuant to the share exchange agreement, Bio-Aqua and New Dragon have
each agreed that neither party nor any party's officers, directors or agents
shall, directly or indirectly, encourage, solicit or initiate discussions or
negotiations with, or engage in negotiations or discussions with, or provide
non-public information to, any corporation, partnership, person or other entity
or groups concerning any share exchange, sale of capital stock, sale of
substantial assets or other business combination; provided that either party may
engage in such discussion in response to an unsolicited proposal from an
unrelated party if such party's board of directors determines, in good faith,
after consultation with counsel, that the failure to engage in such discussions
may constitute a breach of the fiduciary or legal obligations of such board of
directors. Bio-Aqua and New Dragon have each agreed to promptly advise the other
party if it receives a proposal or inquiry with respect to the matters described
above.
Certain Conditions to Consummation of the Share Exchange
--------------------------------------------------------
The effective time of the share exchange shall occur only upon the
satisfaction of numerous conditions by either Bio-Aqua, New Dragon or both. The
share exchange agreement provides that neither party is obligated to consummate
the share exchange unless the following conditions are satisfied or mutually
waived:
(1) Amex shall not have provided any notice that the proposed share
exchange will prevent the continued listing of Bio-Aqua's common stock on the
American Stock Exchange;
(2) All outstanding Bio-Aqua class B common shares shall be converted
to class A common shares;
(3) Bio-Aqua shall not have more than 2,748,794 shares outstanding
(excluding shares of common stock underlying common stock purchase warrants and
options) immediately prior to the effective time of the share exchange;
(4) Bio-Aqua shall have completed the sale of assets or otherwise
disposed of all of its assets;
(5) Bio-Aqua shall have disposed of or transferred its liabilities;
(6) Bio-Aqua shall have entered into a registration rights agreement
with the New Dragon interest holders; and
(7) Bio-Aqua shall have received shareholder approval to amend its
articles of incorporation to change its name and increase its authorized common
stock.
(8) Each party shall have obtained all necessary third party consents
and approvals;
(9) No action or proceeding shall be pending or threatened which would
seek to prohibit the transactions contemplated by the share exchange agreement;
and
(10) The offering of shares of Bio-Aqua common stock to the New Dragon
interest holders shall be exempt under the Securities Act.
Conditions to Bio-Aqua's Obligations
------------------------------------
In addition to the conditions set forth above, the obligation of
Bio-Aqua to effect the share exchange is subject to the satisfaction of certain
conditions at or prior to the effective time of the share exchange (unless
waived by Bio-Aqua), including without limitation:
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(1) The interest holders of New Dragon shall have individually approved
the share exchange.
(2) The representations and warranties of New Dragon contained in the
share exchange agreement shall be true and correct on the closing date.
(3) New Dragon shall have performed and complied with all the covenants
and agreements contained in all material respects and satisfied in all material
respects all the conditions required by the share exchange agreement to be
performed or complied with by New Dragon at or prior to the effective time of
the share exchange.
Conditions to New Dragon's Obligations
--------------------------------------
The obligation of New Dragon to effect the share exchange is subject to
the satisfaction of certain conditions at or prior to the effective time of the
share exchange (unless waived by New Dragon), including without limitation:
(1) The shareholders of Bio-Aqua shall have approved the share
exchange, as well as the sale of assets and the articles of amendment, by the
requisite votes.
(2) The class B common stock holders shall convert their shares to
class A common stock.
(3) The representations and warranties of Bio-Aqua contained in the
share exchange agreement shall be true and correct on the closing date.
(4) Bio-Aqua shall have performed and complied with all the covenants
and agreements contained in all material respects and satisfied in all material
respects all the conditions required by the share exchange agreement to be
performed or complied with by Bio-Aqua at or prior to the effective time of the
share exchange.
(5) Bio-Aqua shall have disposed of all or substantially all of its
assets and liabilities.
(6) Bio-Aqua shall not have more than 2,748,794 shares of its common
stock outstanding on a fully-diluted basis, excluding 850,000 shares of common
stock underlying outstanding common stock purchase warrants and 300,000 shares
of common stock underlying options.
Termination of Share Exchange Agreement
---------------------------------------
The share exchange agreement may be terminated at any time prior to the
effective time of the share exchange:
(1) by mutual consent of Bio-Aqua or New Dragon;
(2) by either Bio-Aqua or New Dragon if:
(a) the shareholders of either company do not give the requisite
approvals to the transactions contemplated by the share exchange
agreement;
(b) the shareholders of Bio-Aqua do not approve the share exchange,
sale of assets, or amendment to the articles of incorporation;
(c) the share exchange has not been consummated on or before
November 5, 2001, or such later date as the parties may mutually agree;
(d) there has been a material misrepresentation, breach of warrant
or breach of covenant by the other party; and
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(e) there shall have been a material adverse change in the
financial condition of the other party, or if an event shall have
occurred which, as far as reasonably can be foreseen, would result in
any such change.
Expenses
--------
Whether or not the share exchange is consummated, all costs and
expenses, including legal, accounting and investment banking fees and expenses,
incurred in connection with the share exchange agreement will be paid by New
Dragon. In addition, New Dragon shall be responsible for the costs and expenses
relating to the printing and mailing of this proxy statement.
MANAGEMENT OF BIO-AQUA AFTER THE SHARE EXCHANGE
Pursuant to the share exchange agreement, the officers and all
directors of Bio-Aqua, except Mr. Rutman, will, as of the effective time of the
share exchange, resign. Mr. Rutman, as the remaining director of Bio-Aqua, will
appoint to the board of directors Song Xue Jun, Zhang Shu Hua, Lai Wing Leung,
and Leung Man Fai, each of whom is currently a director of New Dragon and who
will serve as a director of Bio-Aqua until the next annual meeting of Bio-Aqua's
shareholders. Biographical information concerning the new directors is set forth
below:
Name Age Position
---- --- --------
Song Xue Jun 53 Chairman and President
Zhang Shu Hua 39 Executive Director
Lai Wing Leung 45 Chief Financial Officer and Director
Leung Man Fai 44 Director
Mr. Song Xue Jun is the founder of the group and has over 19 years experience in
food business. He is primarily responsible for business development and overall
company management. He is a member of National Food Industry Entrepreneurs'
Council and a committee member of China National Food Industry Association.
Ms. Zhang Shu Hua has served as deputy general manager for accounting and
administration since September 2000. She graduated from Shandong Central Radio
and TV University with a higher diploma in Business Management. She is an
associate member of The Chinese Institute of Certified Public Accountants. She
served as the assistant director of the Yantai Dongfang Certified Public
Accountants Co. Ltd. From 1988 to 2000.
Mr. Lai Wing Leung has served as chief financial officer since September 2000.
He received his bachelors degree in Banking and Insurance from the University of
North Wales, Bangor, in the United Kingdom, a masters degree in Business
Administration from the University of East Asia in Macau and a masters degree in
Accounting from the University of New South Wales in Australia. He is a fellow
member of the Australian Society of Certified Practicing Accountants and an
associate member of Hong Kong Society of Accountants. From 1990 to 1998, Mr. Lai
served as finance director of Albationics (Far East) Co., Ltd. And was the
finance director of Ying Wing Holdings Ltd. From 1998 to 1999.
Mr. Leung Man Fai graduated from Manchester Polytechnic in the U.K. with a
bachelor degree in accounting and finance and a masters degree from the
University of New South Wales in Australia in professional accounting. He is an
associate member of the Hong Kong Society of Accountants and the Australian
Society of Certified Practicing Accountants. Since 1995, he has been an
executive director of the Lerado Group (Holding) Company Ltd.
INTERESTS OF CERTAIN PERSONS IN THE SHARE EXCHANGE
The following table sets forth certain information regarding the
beneficial ownership of Bio-Aqua's common stock as of the Record Date, and as
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adjusted to give effect to the share exchange as if such transaction had
occurred on such date, by those individuals who will serve as directors and by
the directors and executive management of Bio-Aqua (as a group) following the
share exchange. See "Management of Bio-Aqua After the Share Exchange." The
number of shares reflected under shares to be issued include the shares issuable
upon exercise of the warrants issued in the share exchange. Shares of common
stock subject to options and warrants currently exercisable or exercisable
within 60 days from the date hereof are deemed outstanding for computing the
percentage of the person holding such options or warrants, but are not deemed
outstanding for computing the percentage ownership of any other person:
Shares Owned Prior Shares Owned After
to Effective Date Effective Date
Name Number Percentage Number Percentage
---- ------ ---------- ------ ----------
Max Rutman 1,530,010(1)(2) 54% 1,530,010(1)(2) 4%
Nestor Lagos 10,000(3) * 10,000(3) *
Pedro Sayes 5,000(4) * 5,000(4) *
Oscar Cornejo 5,000(5) * 5,000(5) *
Song Xue Jun -0- -0- -0- -0-
Zhang Shu Hua -0- -0- -0- -0-
Lai Wing Leung -0- -0- -0- -0-
Leung Man Fai -0- -0- -0- -0-
(1) Represent class B common shares, which have super voting rights.
1,529,910 of these shares have been pledged as security for a loan of
$152,991. Mr. Rutman will retain voting control over the shares
pursuant to the pledge agreement and intends to vote his shares in
favor of the proposals.
(2) Excludes 25,000 shares of common stock underlying options to purchase
common stock exercisable at $1.65 per share.
(3) Excludes 15,000 shares of common stock underlying options to purchase
common stock exercisable at $1.50 per share.
(4) Excludes 10,000 shares of common stock underlying options to purchase
common stock exercisable at $1.50 per share.
(5) Excludes 10,000 shares of common stock underlying options to purchase
common stock exercisable at $1.50 per share.
REGULATORY APPROVAL
Bio-Aqua and New Dragon each believe that no regulatory approvals are
or will be required in connection with the share exchange.
ACCOUNTING TREATMENT
The share exchange will be accounted for as a stock for stock exchange.
Accordingly, there will be no change in the recorded amount of New Dragon's
assets and liabilities. The monetary assets of Bio-Aqua that are acquired as a
result of the share exchange will be recorded at their fair market value and no
goodwill will be recorded.
APPROVAL OF SHAREHOLDERS
The share exchange must be approved by the affirmative vote of at least
a majority of all of the issued and outstanding shares of our stock, both
classes of common stock counted together and voting as a single class. Because
the share exchange must be approved by an affirmative vote of a majority of all
of the outstanding shares of Bio-Aqua, a vote of "Abstain" has the same effect
as a vote against the share exchange.
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BOARD RECOMMENDATION
The board of directors of Bio-Aqua has determined that the terms and
conditions of the share exchange are fair from a financial point of view to
Bio-Aqua's shareholders. The board of directors has approved the share exchange
agreement. Under FBCA Section 607.0901, because the share exchange could
constitute a conflict of interest transaction, Max Rutman did not participate in
the board's analysis of the transaction. The remaining disinterested members of
the board recommend that the shareholders approve the share exchange. The share
exchange could constitute a conflict of interest transaction because the sale of
assets is a condition of the share exchange. The sale of assets is an interested
party transaction for Max Rutman because Mr. Rutman is the potential asset
purchaser and an officer, director and principal shareholder of Bio-Aqua.
PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE VOTED FOR THE SHARE EXCHANGE
UNLESS A VOTE AGAINST THE SHARE EXCHANGE OR ABSTENTION IS SPECIFICALLY
INDICATED.
IN THE EVENT THAT THE SHARE EXCHANGE AGREEMENT IS NOT APPROVED BY THE
SHAREHOLDERS AT THE SPECIAL MEETING, THE SALE OF ASSETS WILL BE ABANDONED.
SIMILARLY, THE SHARE EXCHANGE AGREEMENT MAY BE TERMINATED IF THE SALE OF ASSETS
OR ARTICLES OF AMENDMENT IS NOT APPROVED AT THE SPECIAL MEETING.
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PROPOSAL THREE:
APPROVAL OF AMENDMENT TO THE ARTICLES OF
INCORPORATION TO INCREASE AUTHORIZED
COMMON STOCK
On July 2, 2001, the board of directors approved a proposal to amend
Bio-Aqua's articles of incorporation to increase the number of authorized shares
of common stock from 30,000,000 shares to 107,000,000 shares, including
increasing the number of authorized shares of class A common stock from
20,000,000 shares to 100,000,000 shares. The board further decreed that the
proposal be submitted to the stockholders with the recommendation that the
amendment be approved. If Proposal 3 is approved by Bio-Aqua's stockholders, the
newly authorized shares of common stock will have voting and other rights
identical to the currently authorized shares of class A common stock. The text
of the proposed amendment is set forth in Appendix C attached to this proxy
statement.
Of the 30,000,000 currently authorized shares of common stock,
20,000,000 shares were designated class A and 2,000,000 shares were designated
class B. As of the date of this proxy statement, 2,748,794 common stock shares,
consisting of 1,048,794 class A and 1,700,000 class B, were issued and
outstanding. Bio-Aqua has also reserved 300,000 shares of class A common stock
for issuance under its stock option plan. Bio-Aqua has issued options to
purchase an aggregate of 300,000 shares of class A common stock. Bio-Aqua has
also reserved 850,000 shares of its class A common stock for shares of common
stock underlying common stock purchase warrants. In addition, if the share
exchange disclosed in this proxy statement effectuated, an additional 37,890,857
shares of class A common stock will be issued.
If this proposal is approved by the stockholders, Bio-Aqua proposes to
utilize the additional shares of authorized common stock, from time to time, as
the need may arise, in connection with future opportunities for expanding
Bio-Aqua's business through investments or acquisitions, equity financing,
management incentive and employee benefit plans, and for other purposes. As of
this date Bio-Aqua does not have any specific plans (excluding the transactions
described in this proxy statement) for the issuance of additional shares of
common stock that would result from the approval of this proposal.
Authorized but unissued shares of the common stock may be issued at
such times, for such purposes and for such consideration as the board of
directors may determine to be appropriate without further authority from
Bio-Aqua's stockholders, except as otherwise required by applicable corporate
law or stock exchange policies.
REASONS FOR THE AMENDMENT
The amendment is a condition to the share exchange.
APPROVAL OF SHAREHOLDERS
The amendment to the articles of incorporation must be approved by the
affirmative vote of at least a majority of all of the issued and outstanding
shares of our stock, both classes of common stock counted together and voting as
a single class. Because the articles of amendment must be approved by an
affirmative vote of a majority of all of the outstanding shares of Bio-Aqua, a
vote of "Abstain" has the same effect as a vote against the amendment to the
articles.
BOARD RECOMMENDATION
The Board of Directors recommends a vote "For" the adoption of the
amendment to Bio-Aqua's Articles of Incorporation increasing Bio-Aqua's
authorized shares of common stock.
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PROPOSAL FOUR:
APPROVAL OF AMENDMENT TO THE ARTICLES OF
INCORPORATION TO CHANGE BIO-AQUA'S NAME
On July 2, 2001, the board of directors approved a proposal to amend
Bio-Aqua's articles of incorporation to change Bio-Aqua's name to New Dragon
Asia Corp. The board further decreed that the proposal be submitted to the
stockholders with the recommendation that the amendment be approved. If Proposal
4 is approved by Bio-Aqua's stockholders, New Dragon Asia Corp. will be the
company's new name. The text of the proposed amendment is set forth in Appendix
C attached to this proxy statement.
REASONS FOR THE AMENDMENT
Our board of directors has proposed the articles of amendment to change
our corporate name because it is a condition to the share exchange. In addition,
New Dragon Asia Corp. more accurately represents the business of New Dragon.
APPROVAL OF SHAREHOLDERS
The amendment to the articles of incorporation must be approved by the
affirmative vote of at least a majority of all of the issued and outstanding
shares of our stock, both classes of common stock counted together and voting as
a single class. Because the articles of amendment must be approved by an
affirmative vote of a majority of all of the outstanding shares of Bio-Aqua, a
vote of "Abstain" has the same effect as a vote against the amendment to the
articles.
BOARD RECOMMENDATION
The Board of Directors recommends a vote "For" the adoption of the
amendment to Bio-Aqua's articles of incorporation changing Bio-Aqua's name to
New Dragon Asia Corp.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Bio-Aqua and New Dragon expect that the share exchange and sale of
assets will be treated as a tax-free reorganization within the meaning of the
Code, and that no income, gain or loss will be recognized by Bio-Aqua or its
shareholders as a result of the consummation of either transaction other than
shareholders exercising dissenters' rights under the Florida Business
Corporation Act (FBCA) with respect to the sale of assets. Such dissenting
shareholders of Bio-Aqua may be subject to state and federal taxation as
described below.
Under currently existing provisions of the Code, the Treasury
Regulations promulgated thereunder, applicable judicial decisions and
administrative rulings, all of which are subject to change, the federal income
tax consequences described below are expected to arise in connection with the
exercise of dissenters' rights. Due to the complexity of the Code, the following
discussion is limited to the material federal income tax aspects of the proposed
sale of assets for a Bio-Aqua shareholder who properly exercises his or her
dissenters' rights under the FBCA, who is a citizen or resident of the United
States and who, on the date of disposition of such holder's shares of common
stock, holds such shares as a capital asset. The general tax principles
discussed below are subject to retroactive changes that may result from
subsequent amendments to the Code. The following discussion does not address the
material federal income tax aspects of the sale of assets for any dissenting
shareholder who is not a citizen or resident of the United States. The following
discussion does not address potential foreign, state, local and other tax
consequences, nor does it address taxpayers subject to special treatment under
the federal income tax laws, such as life insurance companies, tax-exempt
organizations, S corporations, trusts, and taxpayers subject to the alternative
minimum tax. In addition, the following discussion may not apply to dissenting
shareholders who acquired their shares upon the exercise of employee stock
options or otherwise as compensation. Bio-Aqua has not requested the IRS to rule
or issue an opinion on the federal income tax consequences of the share exchange
or the sale of assets.
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ALL SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE
FEDERAL, FOREIGN, STATE, AND LOCAL TAX CONSEQUENCES OF THE DISPOSITION OF THEIR
SHARES IN THE SHARE EXCHANGE.
For federal income tax purposes, the exchange of Bio-Aqua common stock
for cash pursuant to the proposed sale of assets will be treated as a
distribution in redemption of common stock from each holder of Bio-Aqua's common
stock who properly exercises dissenter's rights, subject to the provisions of
Section 302 of the Code. Under the rules of Section 302, the determination of
whether the exchange of common stock for cash pursuant to the exercise of
dissenters' rights has the effect of a distribution of a dividend will be made,
on a shareholder by shareholder basis, by comparing the proportionate,
percentage interest of a shareholder after the share exchange with the
proportionate, percentage interest of such shareholder before such transaction.
In making this comparison, there must be taken into account (a) any other shares
of common stock actually owned by such shareholder, and (b) any such shares
considered to be owned by such shareholder by reason of the constructive
ownership rules set forth in Section 318 of the Code. These constructive
ownership rules apply in certain specified circumstances to attribute ownership
of shares of a corporation from the shareholder actually owning the shares,
whether an individual, trust, partnership or corporation, to certain members of
such individual's family or to certain other individuals, trusts, partnerships
or corporations. Under these rules, a shareholder is also considered to own any
shares with respect to which the shareholder holds stock options.
Under applicable IRS guidelines, such a redemption involving a holder
of a minority interest in Bio-Aqua whose relative stock interest in Bio-Aqua is
minimal, who exercises no control over the affairs of Bio-Aqua and who
experiences a reduction in the shareholder's proportionate interest in Bio-Aqua,
both directly and by application of the foregoing constructive ownership rules,
generally will not be deemed to have resulted in a distribution of a dividend
under the rules set forth in Section 302(b)(1) of the Code. Accordingly, the
federal income tax consequences to Bio-Aqua's shareholders who exercise
dissenters' rights will generally be as follows:
(a) Assuming that the shares of common stock exchanged by a
dissenting shareholder for cash in connection with the sale of assets
are capital assets in the hands of the dissenting shareholder at the
effective date of the share exchange (and the exchange does not result
in a distribution of a dividend under Section 302 of the Code), such
dissenting shareholder may recognize a capital gain or loss by reason
of the consummation of the share exchange.
(b) The capital gain or loss, if any, will be long-term with
respect to shares of common stock held for more than twelve (12) months
as of the effective date of the share exchange, and short-term with
respect to such shares held for twelve (12) months or less.
(c) The amount of capital gain or loss to be recognized by each
dissenting shareholder will be measured by the difference between the
amount of cash received by such dissenting shareholder in connection
with the exercise of dissenters' rights and such dissenting
shareholder's adjusted tax basis in the common stock at the effective
date of the share exchange.
(d) An individual's long-term capital gain is subject to federal
income tax at a maximum rate of 20 percent, while any capital loss can
be offset only against other capital gains plus $3,000 of other income
in any tax year ($1,500 in the case of a married individual filing a
separate return). Capital losses in excess of these limits can be
carried forward to future years.
(e) A corporation's long-term capital gain is subject to federal
income tax at a maximum rate of 35%, while any capital loss can be
offset only against other capital gains in any tax year, subject to the
carryback and carryforward rules of the Code.
Cash payments made pursuant to the sale of assets will be reported to
the extent required by the Code to dissenting shareholders and the IRS. Such
amounts will ordinarily not be subject to withholding of U.S. federal income
tax. However, backup withholding of such tax at a rate of 31% may apply to
17
certain dissenting shareholders by reason of the events specified in Section
3406 of the Code and the Treasury Regulations promulgated thereunder, which
include failure of a dissenting shareholder to supply Bio-Aqua or its agent with
such dissenting shareholder's taxpayer identification number. Accordingly,
Bio-Aqua dissenting shareholders (or other payees) will be asked to provide the
dissenting shareholder's taxpayer identification number (social security number
in the case of an individual, or employer identification number in the case of
other dissenting shareholders of Bio-Aqua) on a Form W-9 and to certify that
such number is correct. Withholding may also apply to Bio-Aqua dissenting
shareholders who are otherwise exempt from such withholding, such as a foreign
person, if such person fails to properly document its status as an exempt
recipient. Each dissenting shareholder of Bio-Aqua, and, if applicable, each
other payee, should complete and sign a Form W-9 to provide the information and
certification necessary to avoid backup withholding, unless an applicable
exemption exists and is proved in a manner satisfactory to Bio-Aqua.
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE ARE FOR GENERAL INFORMATION
ONLY. YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR TO DETERMINE THE PARTICULAR
TAX CONSEQUENCES TO YOU AS A RESULT OF THE PROPOSED TRANSACTIONS (INCLUDING THE
APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS).
CERTAIN INFORMATION CONCERNING BIO-AQUA
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with the SEC, which means that we can disclose important information to you
about Bio-Aqua by referring you to documents that we have previously filed with
the SEC. The information incorporated by reference is considered to be a part of
this proxy statement. Any later information that we file with the SEC will
automatically update and supersede the information contained in this proxy
statement. If you desire a copy of any document incorporated by reference but
not delivered to you as part of this proxy statement, upon written or oral
request to Bio-Aqua Systems, Inc., 350 East Las Olas Boulevard, Suite 1700, Fort
Lauderdale, Florida 33301, attention: Brian A. Pearlman, Corporate Counsel,
telephone (954) 763-1200, a copy of such document(s) will be sent to you by
first class mail or equally prompt means within one business day of receipt of
such request. Additionally, the SEC maintains a Web site that contains all
documents we have previously filed with the SEC. The address of the site is
www.sec.gov.
We incorporate by reference the documents listed below and any further
filings made with the SEC under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934:
- Annual Report on Form 10-K for the year ended December 31, 2000;
and
- Quarterly Reports on Form 10-Q for the quarters ending March 31,
2001 and June 30, 2001.
18
MARKET PRICE DATA
Bio-Aqua's class A common stock is quoted on the American Stock
Exchange under the symbol SEA. Bio-Aqua's common stock purchase warrants are
quoted on the American Stock Exchange under the symbol SEA/WS. From Bio-Aqua's
initial public offering on March 29, 2000 through May 1, 2000, Bio-Aqua's
securities traded as a unit. The unit included two shares of class A common
stock and two common stock purchase warrants. The American Stock Exchange has
notified Bio-Aqua that it intends to delist Bio-Aqua's securities from trading
due to several factors, including, but not limited to, the company's low trading
price of its common stock and suspension of business operations. Bio-Aqua has
appealed the American Stock Exchange determination.
On July 1, 2001, the day prior to the execution of the share exchange
agreement, Bio-Aqua's common stock was trading at $.21 per share. On October 8,
2001, the closing trading price of Bio-Aqua's common stock was $.90. Prices
below are for Bio-Aqua's class A common stock:
BID PERIOD HIGH LOW
---------- ---- ---
Quarter Ended June 30, 2000................................. $4.18 $2.50
Quarter Ended September 30, 2000............................ $3.25 $1.06
Quarter Ended December 31, 2000............................. $1.37 $0.18
Quarter Ended March 31, 2001................................ $0.47 $0.18
Quarter Ended June 30, 2001................................. $0.30 $0.21
Quarter Ended September 30, 2001............................ $1.24 $0.21
There are approximately 200 holders of Bio-Aqua's common stock, of
which approximately 20 hold their shares in "street name."
DIVIDENDS
Bio-Aqua has paid no cash dividends on its common stock and has no
present intention of paying cash dividends in the foreseeable future. Payment of
cash dividends in the future will depend, among other things, upon Bio-Aqua's
future earnings, requirements for capital improvements and financial condition.
CERTAIN INFORMATION CONCERNING NEW DRAGON ASIA FOOD GROUP
OVERVIEW
The business was established in 1952 under the name "Long Feng Foods,"
as a grain and oil processing enterprise in the Shandong Province of the
People's Republic of China and developed as one of the Province's leading flour
millers. In 1992, Long Feng established a manufacturing operation for instant
noodles as the Chinese market for "convenience foods" was entering a prolonged
growth phase. Through rapid increases in capacity and maintenance of consistent
quality, Long Feng has established itself as one of China's leading
manufacturers of instant noodles with 9 manufacturing plants, nationwide
distribution and over 10% market share.
In 1998, the Hong Kong based New World Group (the fifth largest public
company in Hong Kong), together with Maxim Group (Hong Kong's largest fast food
company with operations in food retail, restaurant and airline catering) formed
a Sino Foreign Joint Venture under the name "New Dragon Asia Food Limited" to
acquire a controlling interest in 6 of Long Feng's largest manufacturing
subsidiaries. The objective of this venture was to combine Long Feng's China
manufacturing capabilities and distribution with New World Group's financial
strength and Maxim Group's management expertise to capitalize on the rapid
growth potential available for the Chinese fast food industry, both within China
and internationally.
New Dragon Asia Food Limited has elected to combine four of its largest
and most profitable joint ventures - collectively "New Dragon Asia Food Group".
These joint ventures are located in Dalian, Yantai and Sanhe and are listed as
follows:
19
o New Dragon Asia Flour (Yantai) Company Limited
o New Dragon Asia Food (Yantai) Company Limited
o New Dragon Asia Food (Dalian) Company Limited
o New Dragon Asia Food (Sanhe) Company Limited
Bio Aqua will acquire 100% of each of the British Virgin Islands
holding companies which own the above listed operations.
INDUSTRY BACKGROUND
"Fast food" in the form of instant noodles was introduced to China in
the early 1980's following the commencement of the market economy in 1979. With
rapidly rising income and living standards and meteoric growth of the urban
middle class, demand for quality foodstuffs and convenience food has grown
significantly.
The rapidly increasing market for instant noodles, a staple "fast food"
in Asia, China has attracted foreign producers from Japan, Korea and Taiwan.
While this has generated increased competition for high end manufacturers, more
popular, national brand names such as Long Feng are well entrenched and
increasing both sales and market share as less efficient local brands are
absorbed or eliminated. In a national survey undertaken in 1999, average annual
per capita consumption of instant noodles in China was 7 packets compared with
80 in Korea and 59 in Taiwan. Growth potential in the China market, as consumers
become increasingly affluent, is considerable and should underwrite future
performance of well established local manufacturers.
SERVICES
New Dragon Asia Food Group produces and distributes a wide range of
both instant noodles and milled flour products, with a traditional focus on high
quality but competitively priced items for sale in both traditional rural and
rapidly growing urban areas primarily in north and central China. New Dragon
Asia Food Group distributes its products through a network of 200 distributors
and 20 direct sales offices in over 27 provinces in China. Rural distribution
operations are facilitated by a large fleet of trucks owned by New Dragon Asia
Food Group which carry products bound for both wholesale and retail customers in
outlying areas.
STRATEGY
New Dragon Asia Food Group has targeted a strategy of acquiring
additional plants and regional brand names to accelerate its growth in market
share. As the effects of China's entry into the World Trade Organization become
apparent, and more foreign manufacturers target the China market, New Dragon
plans to establish a cooperative linkage with a major multinational to maximize
the impact of its unique brand name and distribution advantages.
SALES AND MARKETING
Headquartered in Shandong Province, management of New Dragon also
operates sales and corporate offices in Hong Kong and a sales office in the
United States. Management draws on the unique combination of China food
manufacturing experience, together with the marketing and branding skills of the
Maxim Group and capital and corporate resources of New World Group.
COMPETITION
New Dragon Asia Food Group was ranked #3 in terms of production of
instant noodles in China in 2000, with a market share of approximately 10%. The
largest manufacturer, Master Kang, with 45% market share is the dominant
producer with the next largest, Provident, only slightly larger than New Dragon,
at 11%. Both Master Kang and Provident are owned by Taiwanese, produce a higher
20
price product with a much higher cost basis and lack the manufacturing and
distribution economies of scale enjoyed by New Dragon.
EMPLOYEES
New Dragon employs a work force exceeding 2,000.
FACILITIES
New Dragon Asia Food Group's 4 manufacturing plants occupy over 1.1
million sq. ft. of facilities with over 40 noodle production lines and a 250,000
tonne pa flour milling facility with 3 production lines, located in Yantai.
Manufacturing operations are vertically integrated, with the flour production
utilized in the noodle manufacturing process. All of New Dragon's manufacturing
facilities have been awarded ISO9002 quality certification.
LEGAL PROCEEDINGS
To New Dragon's knowledge, it is not involved in any material legal
actions and there is no threatened litigation against New Dragon.
21
RISK FACTORS
You are urged to read and carefully consider the following risk factors
in deciding whether to approve the share exchange.
RISKS RELATING TO THE SHARE EXCHANGE
Bio-Aqua may not realize the anticipated benefits of the share exchange and is
------------------------------------------------------------------------------
selling its operating assets to a related party.
------------------------------------------------
As a condition of the share exchange, Bio-Aqua is selling all of its
assets which includes its Tepual operations. Max Rutman, the purchaser, is also
Bio-Aqua's majority shareholder, chairman and chief executive officer. Mr.
Rutman is not withdrawing from Tepual operations. Bio-Aqua's decision to
withdraw from the animal nutrition industry and related research and development
projects may be premature. Economic conditions change quickly, and New Dragon's
business plan may never be realized. It is possible that Bio-Aqua has decided to
sell its assets to a related party at the bottom of the economic cycle for the
Tepual operations while investing an Asian food manufacturing and distribution
company at the top of the market.
Nevertheless, Bio-Aqua's board of directors believes that selling
Bio-Aqua's current business operations and implementing New Dragon's business
will permit the combined companies to achieve a greater level of success than is
possible with Bio-Aqua's current business. Accordingly, there can be no
assurance that, following the share exchange, Bio-Aqua will ever be successful.
The share exchange will dilute your percentage ownership of Bio-Aqua's common
-----------------------------------------------------------------------------
stock.
------
The share exchange will dilute the percentage ownership held by
Bio-Aqua's shareholders when compared to their ownership prior to the share
exchange. Based upon the estimated capitalization of both Bio-Aqua and New
Dragon, at the effective time of the share exchange Bio-Aqua's shareholders will
hold approximately 7% of Bio-Aqua's outstanding capital stock following the
share exchange.
The aggregate number of shares of Bio-Aqua's common stock issued to New Dragon
------------------------------------------------------------------------------
Asia Food Limited and its consultants in the share exchange is fixed and will
-----------------------------------------------------------------------------
not be adjusted in the event of any change in the stock price.
--------------------------------------------------------------
Under the share exchange agreement, the wholly owned interest in New
Dragon will be exchanged for 37,890,857 shares of Bio-Aqua's common stock. The
number of shares issued to New Dragon Asia Food Limited and its consultants in
the share exchange is fixed and will not be adjusted for any fluctuation in the
market price of Bio-Aqua's common stock.
Even following the share exchange Bio-Aqua may be exposed to liabilities
------------------------------------------------------------------------
resulting from its current business operations.
-----------------------------------------------
As a condition to the proposed share exchange with New Dragon, Bio-Aqua
must dispose of all of its assets. Even though Bio-Aqua will have disposed of
all Tepual operations, there can be no assurance third party creditors will not
seek claims against the reorganized company and Mr. Rutman has agreed to assume
all debts and liabilities of the Tepual operations.
Bio-Aqua's common stock could be delisted from the American Stock Exchange.
---------------------------------------------------------------------------
As a result of our current financial status, proposal to dispose of all
of our assets, the share exchange with New Dragon and the change in our business
operations, we may be delisted from the American Stock Exchange. We may be
delisted from the American Stock Exchange regardless of whether or not the
transactions proposed in this proxy are consummated. If we are required to
reapply for Amex listing, there is no assurance that we will be able to meet all
of Amex's initial listing requirements. Although continued listing on Amex is a
condition to our and New Dragon's obligations to consummate the share exchange,
22
both parties may agree to waive this condition and complete the share exchange
anyway.
In that event our common stock is delisted from the American Stock
Exchange and we and New Dragon nevertheless agree to proceed with the share
exchange, trading, if any, in our common stock would be conducted in the
National Association of Securities Dealers' Electronic Bulletin Board.
Consequently, the liquidity of our common stock would likely be significantly
impaired, not only in the number of shares which could be bought and sold, but
also through delays in the timing of the transactions, reduction in coverage by
securities analysts and the news media, and lower prices for our common stock
that might otherwise prevail. In addition, our common stock would likely become
subject to the SEC's rules relating to "penny stocks." These rules require
broker-dealers to make special suitability determinations for purchasers other
than established customers and certain institutional investors and to receive
the purchasers' prior written consent for a purchase transaction prior to sale.
These "penny stock rules" may therefore adversely affect the ability of
broker-dealers to sell our common stock and may adversely affect your ability to
sell shares of our common stock in the secondary market.
RISK FACTORS RELATING TO NEW DRAGON'S BUSINESS
New Dragon's business is conducted in Mainland China and is subject to special
------------------------------------------------------------------------------
considerations and risks not typically associated with companies operating in
-----------------------------------------------------------------------------
North America and Latin America.
--------------------------------
Operations conducted in China are subject to risks associated with the
political, economic and legal environment of a Communist government. New
Dragon's results may be adversely by political and social conditions in China.
23
BIO AQUA SYSTEMS, INC.
PRO FORMA BALANCE SHEETS
( Unaudited )
IN THOUSANDS '000
25-Jun-01
Sale of Book value of Effect of
-------- ------------- ---------
Bio Aqua Bio Aqua prior Book value of exchange of Post merger
-------- -------------- ------------- ----------- -----------
Bio Aqua Subsidiaries reverse merger New Dragon shares balances
-------- ------------ -------------- ---------- ------ --------
ASSETS
Current Assets
Cash and cash equivalents 14 (14) - 1,416 1,416
Accounts receivable, net 360 (360) - 4,219 4,219
Other receivables 163 (163) - 342 342
Inventories 50 (50) - 2,802 2,802
Income taxes receivable 75 (75) - - -
Other current assets - - 800 800
Total Current Assets 662 (662) - 9,579 - 9,579
Property, machinery and
equipment, net 549 (549) - 22,526 22,526
Other assets 1,987 (1,987) - - -
$ 3,198 $ (3,198) $ - $ 32,105 $ - $ 32,105
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable 1,512 (1,512) - 2,387 2,387
Lines-of-credit 2,012 (2,012) - 1,591 1,591
Current portion of long term debt 276 (276) - -
Income tax payable - - 2,331 2,331
Accrued expenses and other liab. 374 (374) - 2,519 2,519
Total Current Liabilities 4,174 (4,174) - 8,828 - 8,828
Long-Term Liabilities:
Due to MI, Long Feng Group (3,863) (3,863)
Due to immediate parent company 19,282 19,282
Due to a joint venture partner - -
Total Long-Term Liabilities - - - 15,419 - 15,419
Minority Interest 5 (5) - 2,015 2,015
Stockholders' Equity:
ORIGINAL CAPITAL STRUCTURE
Class A common stock, $.0001 par value;
20,000,000 shares authorized, 936,294
shares issued and outstanding at June 30, 2001. - -
Class B common stock, $.0001 par value;
2,000,000 shares authorized, 1,700,000
shares issued and outstanding at
June 30, 2001. -
Preferred stock, $.0001 par value;
5,000,000 shares authorized; no shares issued
and outstanding
AMENDED CAPITAL STRUCTURE
Class A common stock, $.0001 par value;
107,000,000 shares authorized, 38,939,651
shares issued and outstanding at EXCHANGE DATE 4 4
Additional paid-in capital 4,035 (4,035) -
Retained earnings (accumulated deficit) (1,828) 1,828 - 5,843 (4) 5,839
Accumulated other comprehensive loss (3,188) 3,188 -
Total Stockholders' Equity (981) 981 - 5,843 - 5,843
$ 3,198 $ (3,198) $ - $ 32,105 $ - $ 32,105
24
RIGHTS OF DISSENTING SHAREHOLDERS
Set forth below is a summary of dissenters' rights available to
Bio-Aqua's shareholders relating to the sale of assets to be considered at the
special meeting. This summary is not intended to be a complete statement of
applicable Florida law and is qualified in its entirety by reference to Chapter
607 of the FBCA, set forth in its entirety as Appendix D.
Right to Dissent. Shareholders of Bio-Aqua are entitled to dissent from
the sale of assets (Proposal 1) discussed in this proxy statement and obtain
payment of the fair value of their shares if and when the sale of assets is
effectuated. A shareholder entitled to dissent and to obtain payment for the
shareholder's shares under Chapter 607 of the FBCA may not challenge the
corporate action (i.e. the sale of assets) creating the right to dissent unless
the action is unlawful or fraudulent with respect to the shareholder or the
corporation.
Under Section 607.1302 of the FBCA, a record shareholder may assert
dissenters' rights as to fewer than all the shares registered in the record
shareholder's name.
Procedure for Exercise of Dissenters' Rights. The notice accompanying
the proxy statement states that shareholders are entitled to assert dissenters'
rights under Chapter 607 of the FBCA. A Bio-Aqua shareholder who wishes to
assert dissenters' rights must (a) cause Bio-Aqua to receive, before the vote is
taken on the sale of assets, written notice of the shareholder's intention to
demand payment for the shareholder's shares if the sale of assets is
effectuated; and (b) not vote the shares in favor of the sale of assets.
A SHAREHOLDER WHO DOES NOT SATISFY THE FOREGOING REQUIREMENTS WILL NOT BE
ENTITLED TO DEMAND PAYMENT FOR HIS OR HER SHARES UNDER CHAPTER 607 OF THE FBCA.
If the sale of assets is authorized, Bio-Aqua must give a written
notice to dissenters who are entitled to demand payment for their shares. The
notice required to be given by Bio-Aqua must be given no later than 10 days
after the effective date of the sale of assets.
A shareholder who is given a dissenters' notice to assert dissenters'
rights and who wishes to exercise dissenters' rights must, in accordance with
the terms of the dissenters' notice, within 20 days cause Bio-Aqua to receive a
payment demand and simultaneously deposits his share certificates with Bio-Aqua.
Any shareholder that fails to file such election to dissent within the 20 day
period will be bound by the terms of the sale of assets. Upon filing a notice of
election to dissent, a shareholder shall only be entitled to payment as provided
under Chapter 607 of the FBCA and shall not be entitled to vote or to exercise
any other rights of a shareholder. A notice of election may be withdrawn in
writing by a shareholder at any time before an offer is made by Bio-Aqua to pay
for his shares. After Bio-Aqua makes an offer to purchase, no notice of election
may be withdrawn unless Bio-Aqua consents thereto.
A SHAREHOLDER WHO DOES NOT DEMAND PAYMENT AS REQUIRED BY THE DATE OR DATES SET
IN THE DISSENTERS' NOTICE IS NOT ENTITLED TO PAYMENT FOR HIS OR HER SHARES.
Within 10 days after the expiration of the period in which shareholders
may file their notices of election to dissent, or within 10 days after the sale
of assets is effected, whichever is later (but in no case later than 90 days
from the shareholders' authorization date), Bio-Aqua shall make a written offer
to each dissenting shareholder who has made demand as provided in Chapter 607 of
the FBCA to pay an amount the corporation estimates to be the fair value for the
shares. If the corporation has not been consummated before the expiration of the
90 day period after the shareholders' authorization date, the offer may be made
conditional upon consummation of the sale of assets. The notice and offer shall
be accompanied by:
(1) A balance sheet of Bio-Aqua and of the latest available date;
and
25
(2) A profit and loss statement of Bio-Aqua for the 12 month period
ended on the date of the balance sheet.
Upon payment of the agreed value for the shares, the dissenting
shareholder shall cease to have any interest in the shares of Bio-Aqua. If
Bio-Aqua fails to make an offer within the period specified above or if Bio-Aqua
makes an offer that any dissenting shareholder fails to accept, then Bio-Aqua,
within 30 days after receipt of written demand from any dissenting shareholder,
will file an action in any court of competent jurisdiction in Broward County,
Florida, requesting that the fair value of such shares be determined.
A DISSENTER MAY LOSE THE RIGHT TO DEMAND PAYMENT UNDER THIS PARAGRAPH UNLESS THE
DISSENTER CAUSES BIO-AQUA TO RECEIVE THE NOTICE REQUIRED WITHIN 30 DAYS AFTER
BIO-AQUA MADE OR OFFERED PAYMENT FOR THE SHARES OF THE DISSENTER.
Judicial Appraisal of Shares. If a demand for payment made by a
dissatisfied dissenter as set forth above is unresolved, Bio-Aqua may, within 60
days after receiving the payment demand, commence a proceeding and petition a
court to determine the fair value of the shares. Bio-Aqua must commence the
proceeding described above in any court of competent jurisdiction in Broward
County, Florida. Bio-Aqua must make all dissenters whose demands remain
unresolved parties to the proceeding as in an action against their shares, and
all parties must be served with a copy of the petition. The jurisdiction of the
court in which the proceeding is commenced is plenary and exclusive. One or more
persons may be appointed by the court as appraisers to receive evidence and
recommend a decision on the question of fair value. The proceeding will be
entitled to the same discovery rights as parties in other civil proceedings.
Each dissenter made a party to the proceeding will be entitled to judgment for
the amount, if any, by which the court finds the fair value of the dissenter's
shares exceeds the amount paid by Bio-Aqua, or the fair value of a dissenters'
shares for which Bio-Aqua elected to withhold payment.
The court in an appraisal proceeding will determine the costs and
expenses of the proceeding, including the reasonable compensation and expenses
of appraisers appointed by the court. The court will assess the costs against
Bio-Aqua, but all or any part of such costs and expenses may be apportioned and
assessed as the court deems equitable against any or all of the dissenting
shareholders who are parties to the proceeding, to whom Bio-Aqua has made an
offer to pay for the shares, if the court finds that the action of such
shareholders in failing to accept such offer was arbitrary, vexatious, or not in
good faith. Such expenses shall include reasonable compensation for, and
reasonable expenses of, the appraisers, but shall exclude the fees and expenses
of counsel for, and experts employed by, any party. If the fair value of the
shares, as determined, materially exceeds the amount which Bio-Aqua offered to
pay therefor or if no offer was made the court in its discretion may award to
any shareholder who is a party to the proceeding such sum as the court
determines to be reasonable compensation to any attorney or expert employed by
the shareholder in the proceeding.
OTHER MATTERS
Management and the board of directors of Bio-Aqua know of no matters to
be brought before the special meeting other than as set forth in this proxy
statement. However, if any other matters properly are presented to the
shareholders for action at the meeting and any adjournments or postponements
thereof, it is the intention of the proxy holder named in the enclosed proxy to
vote in his discretion on all matters on which the shares represented by such
proxy are entitled to vote.
26
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of Spear, Safer, Harmon & Company, our independent
public accountants, are not expected to be present at the meeting.
Representatives of Spear, Safer, Harmon & Company will, however, have the
opportunity to make a statement to be read at the meeting if they desire to do
so and will be available to respond to appropriate questions submitted to them.
By Order of the Board of Directors
Bio-Aqua Systems, Inc.
/s/ Max Rutman
---------------------------
Max Rutman
Chief Executive Officer
27
BIO-AQUA SYSTEMS, INC.
SPECIAL MEETING OF SHAREHOLDERS
[MEETING DATE]
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF BIO-AQUA SYSTEMS,
INC.
The undersigned hereby appoints Max Rutman proxy with power of
substitution and hereby authorizes him to represent and to vote, as designated
below, all of the shares of common stock of Bio-Aqua Systems, Inc. held of
record by the undersigned on October 8, 2001 at the Special Meeting of
Shareholders to be held at 350 East Las Olas Boulevard, Fort Lauderdale, Florida
33301 on November 5, 2001, at 1:00 p.m., local time, and at all adjournments
thereof, with all powers the undersigned would possess if personally present. In
his or her discretion, the Proxy is authorized to vote upon such other business
as may properly come before the meeting.
1. Proposal for the sale of substantially all the assets of Bio-Aqua
Systems, Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Proposal to approve the possible issuance of in excess of 20% of the
presently issued and outstanding common stock in connection with the
acquisition of New Dragon Asia Food Group
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Proposal to amend the articles of incorporation of Bio-Aqua Systems,
Inc. to increase the authorized capital stock to 107,000,000 shares and
the authorized class A common stock to 100,000,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Proposal to amend the articles of incorporation of Bio-Aqua Systems,
Inc. to change Bio-Aqua's name to New Dragon Asia Corp.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED "FOR" PROPOSALS 1, 2 AND 3.
28
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF Special
Meeting AND PROXY STATEMENT FURNISHED IN CONNECTION THEREWITH.
DATED: ---------------------------------
----------------- (Signature)
---------------------------------
(Signature if jointly held)
---------------------------------
(Printed name(s))
Please sign exactly as name appears herein. When shares are held by Joint
Tenants, both should sign, and for signing as attorney, as executor, as
administrator, trustee or guardian, please give full title as such. If held by a
corporation, please sign in the full corporate name by the president or other
authorized officer. If held by a partnership, please sign in the partnership
name by an authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY
IN THE ENCLOSED ENVELOPE. THANK YOU.
29
NEW DRAGON ASIA FOOD GROUP
COMBINED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 25, 1999 AND 2000
TOGETHER WITH AUDITORS' REPORT
F-1
Arthur Andersen
Arthur Andersen & Co
21st Floor Edinburgh Tower
The Landmark
15 Queen's Road Center
Hong Kong
To the Stockholders of
NEW DRAGON ASIA FOOD LIMITED
(Incorporated in the British Virgin Islands with limited liability)
We have audited the accompanying combined balance sheets of the companies
(collectively referred to as "the New Dragon Asia Food Group" or "the Group")
listed in Note 1 to the accompanying financial statements as of December 25,
1999 and 2000, and the related combined statements of operations and
comprehensive income, cash flows and changes in stockholders' equity for the
years ended December 25, 1999 and 2000. These financial statements are the
responsibility of the Group's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with International Standards on Auditing
issued by International Federations of Accountants. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statements presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements give a true and fair view of
the financial position of the Group as of December 25, 1999 and 2000, and of its
results of operations and comprehensive income and its cash flows for the years
ended December 25, 1999 and 2000 in accordance with generally accepted
accounting principles in the United States of America.
Arthur Andersen & Co
Arthur Andersen & Co
Certified Public Accountants
Hong Kong
Hong Kong
August 15, 2001
F-2
NEW DRAGON ASIA FOOD GROUP
--------------------------
COMBINED BALANCE SHEETS
-----------------------
AS OF DECEMBER 25, 1999 AND 2000
--------------------------------
Note 1999 2000
---- ---- ----
RMB'000 RMB'000 US$000
ASSETS
------
CURRENT ASSETS
Cash and bank deposits 13,757 6,408 1,015
Accounts receivable, net 4 11,993 22,663 2,737
Other receivables 5 3,980 1,613 219
Inventories 6 2,203 4,362 527
7 4,892 49,528 5,982
--------- --------- ---------
Total current assets 76,825 86,774 10,480
Property, machinery and equipment, net 8 194,588 164,915 22,333
Prepaid rental expense 9 4,022 3,659 466
--------- --------- ---------
Total assets 275,435 274,548 33,279
========= ========== =========
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES
-------------------
Short-term borrowings 10 21,010 29,700 3,587
Accounts payable 30,481 40,685 4,938
Accrued liabilities 11 11,744 1,649 199
Other payables 12 1,142 1,905 230
Value added tax payable 8,583 14,762 1,783
--------- ---------- ---------
Total current liabilities 62,960 88,901 10,737
Due to an immediate parent company 17.b 76,304 139,103 16,800
Due to a joint venture partner 17.b 127,935 9,921 1,198
--------- ---------- ---------
Total liabilities 267,199 237,925 28,735
--------- ---------- ---------
STOCKHOLDERS EQUITY
Common stock 14
Retained earnings 8,236 37,623 4,544
--------- ---------- ---------
Total stockholders' equity 8,236 37,623 4,544
--------- ---------- ---------
Total liabilities and stockholders' equity 275,435 275,548 33,279
========= ========== =========
The accompanying notes are an integral part of these combine financial
statement.
F-3
NEW DRAGON ASIA FOOD GROUP
--------------------------
COMBINED STATEMENTS OF OPERATIONS
---------------------------------
AND COMPREHENSIVE INCOME
------------------------
FOR THE YEARS ENDED DECEMBER 25 AND 2000
----------------------------------------
Note 1999 2000
---- ---- ----
RMB'000 RMB'000 US$000
Net sales 220,374 261,082 31,532
Costs of goods sold (178,696) (210,531) (25,426)
--------- ---------- ---------
Gross profit 41,678 50,551 6,106
Selling and distribution (12,088) (12,583) (1,520)
General and administrative expenses (23,599) (8,057) (973)
--------- ---------- ---------
Income from operations 5,991 29,911 13,613
Subsidy from Mainland China local
government 3,995 -- --
Interest income 475 1,336 161
Interest expense (2,225) (1,860) (225)
--------- ---------- ---------
Income before income tax 8,236 29,387 3,549
Provision for taxation 13 -- -- --
Net income and comprehensive income 8,236 29,387 3,549
========= ========== =========
The accompanying notes are an integral part of these combine financial
statement.
F-4
NEW DRAGON ASIA FOOD GROUP
--------------------------
COMBINED STATEMENTS OF CASH FLOWS
---------------------------------
FOR THE YEARS ENDED DECEMBER 25 AND 2000
----------------------------------------
1999 2000
---- ----
RMB'000 RMB'000 US$000
Cash flows from operating activities:
-------------------------------------
Net income 8,236 29,387 3,549
Adjustments to reconcile net income to
net cash provided by operating activities -
Amortization of land use rights 783 763 92
Loss on disposal of machinery
and equipment 7,502 5,008 605
Depreciation of property,
machinery and equipment 8,282 8,767 1,029
Impairment of machinery and
equipment 6,716 -- --
(Increase) Decrease in operating assets -
Accounts receivable, net (11,993) (10,670) (1,289)
Deposits and prepayments (3,980) 2,167 262
Other receivables (2,203) (2,159) (260)
Inventories (44,892) (4,636) (560)
Prepaid rental expense (4,022) 163 20
Increase (Decrease) in operating liabilities -
Accounts payable 30,481 10,404 1,257
Accrued liabilities 1,744 (95) (12)
Other payables 11,442 763 92
Value added tax payable 8,583 6,179 746
--------- --------- --------
6,379 46,041 5,561
--------- --------- --------
Cash flows from investing activities:
-------------------------------------
Acquisition of property, machinery and
equipment (217,871) (4,865) (588)
--------- --------- --------
Cash flows from financing activities:
-------------------------------------
New short-term borrowings 44,110 26,500 3,200
Repayment of short-term borrowings (23,100) (17,810) (2,151)
Increase in amount due to an immediate
parent company 76,304 62,799 7,584
Increase (Decrease) in amount due to a joint
venture partner 127,925 (118,014) (14,253)
--------- --------- --------
225,249 (46,525) (5,620)
--------- --------- --------
Net increase (decrease) in cash and bank
deposits 13,757 (5,349) (647)
Cash and bank deposits, beginning of year -- 13,757 1,662
--------- --------- --------
Cash and bank deposits, end of year 13,757 8,408 1,015
========= ========= ========
Cash paid for interest expense is as follows:
Interest expense 2,225 1,860 225
========= ========= ========
F-5
NEW DRAGON ASIA FOOD GROUP
--------------------------
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 25, 1999 AND 2000
----------------------------------------------
Issued common stock
-------------------
Number of shares Amount Retained earnings
RMB'000 RMB'000
Balance as of December 26, 1998 4 -- --
Net income -- -- 8,236
Balance as of December 25, 1999 4 -- 8,236
Net income -- -- 29,387
---------------- --------------- ---------------
Balance as of December 25, 2000 4 -- 37,623
================ =============== ===============
F-6
NEW DRAGON ASIA FOOD GROUP
--------------------------
NOTES TO THE COMBINED FINANCIAL STATEMENTS
------------------------------------------
(Amounts expressed in Renminbi unless otherwise stated)
1. ORGANIZATION AND NATURE OF OPERATIONS
-------------------------------------
New Dragon Asia Food Group ("the Group") is principally engaged in the
manufacturing, marketing and distribution of instant noodles and flour in
Mainland China.
The Group is subject to, among others, the following operating risks:
Country risk
As all of the Group's operations are conducted in Mainland China, the Group is
subject to special considerations and significant risks not typically associated
with companies operating in North America and Western Europe. These include
risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. The Group's results may be adversely
affected by changes in the political and social conditions in Mainland China,
and by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
In addition, all of the Group's revenue is denominated in Renminbi ("RMB") which
must be converted into other currencies before remittance out of Mainland China.
Both the conversion of RMB into foreign currencies and the remittance of foreign
currencies abroad require approvals of the Mainland Chinese government.
Operating risk
The Group conducts its manufacturing and sales operations through joint ventures
established between the Group and the Mainland Chinese parties. Any
deterioration of these strategic relationships may have an adverse effect on the
operations of the Group.
Concentration of credit risk
The Group performs ongoing credit evaluations of each customer's financial
condition. It maintains reserves for potential credit losses and such losses in
the aggregate have not exceeded management's projections.
F-7
1. ORGANIZATION AND NATURE OF OPERATIONS (cont'd)
-------------------------------------
Details of the companies comprising the Group are as follows:
Percentage
of equity
interest
attributable
Place and date of to the Principal
Name incorporation Paid up capital Group activities
---- ------------- --------------- ----- ----------
Mix Creation Limited ("MC") (a) British Virgin Islands US$1 100% Investment
November 7, 1997 holding
New Dragon Asia Flour (Yantal) Mainland China RMB28,000,000 90% (b) Manufacturing,
Company Limited ("NDAFLY") August 13, 1999 marketing and
distribution
of flour
Rich Delta Limited ("RD") (a) British Virgin Islands US$1 100% Investment
October 28, 1998 holding
New Dragon Asia Flour (Yantal) Mainland China RMB17,462,000 90% (c) Manufacturing,
Company Limited ("NDAFLY") December 24, 1998 marketing and
distribution
of instant
noodles
Noble Point Limited ("NP") (a) British Virgin Islands US$1 100% Investment
October 29, 1998 holding
New Dragon Asia Food (Dalian) Mainland China RMB17,430,000 90% (c) Manufacturing,
Company Limited ("NDAFD") December 25, 1998 marketing and
distribution
of instant
noodles
Keen General Limited British Virgin Islands US$1 100% Investment
("KG") (a) July 20, 1998 holding
Sanhe New Dragon Asia Food Mainland China RMB51,191,432 80% (c) Manufacturing,
Company Limited ("SNDAF") December 25, 1998 marketing and
distribution
of instant
noodles
Notes--
a. MC, RD, NP and KG are wholly owned by New Dragon Asia Food Limited
("NDAFL"), a company incorporated in the British Virgin Islands. NDAFL
is 51% owned by New Dragon International Investment Limited and 49%
owned by Long Feng Food (Overseas) Company Limited, both are
incorporated in the British Virgin Islands, through a number of
intermediate holding companies.
b. NDAFLY is a contractual joint venture established in Mainland China to
be operated for 50 years until August 13, 2049. In September 2000, MC
contributed 90% of the registered capital to NDAFLY. Under the joint
venture agreement dated June 1, 1999 and the supplemental agreement
dated June 26, 1999, the Chinese joint venture partner is entitled to
receive a pre-determined annual fee and is not responsible for any
profit or loss to NDAFLY effective from June 26, 1999. In view of the
profit sharing arrangement, NDAFLY is regarded as 100% owned by the
Group.
F-8
1. ORGANIZATION AND NATURE OF OPERATIONS (cont'd)
-------------------------------------
c. NDAFY, NDAFD and SNDAF are contractual joint ventures established in
Mainland China to be operated for 50 years until December 24, 2048. In
March 1999, RD and NP contributed 90% of the registered capital to
NDAFY and NDAFD, respectively, while KG contributed 80% of the
registered capital to SNDAF. Under the joint venture agreements dated
November 28, 1998 and the supplemental agreements dated December 26,
1998, the Mainland Chinese joint venture partner is entitled to receive
a pre-determined annual fee and is not responsible for any profit or
loss of NDAFY, NDAFD and SNDAF effective from December 26, 1998. In
view of the profit sharing arrangements, NDAFY, NDAFD and SNDAF are
regarded as 100% owned by the Group.
2. BASIS OF PRESENTATION
---------------------
The combined financial statements include the consolidated financial statements
of MC and its subsidiary (NDAFLY), RD and its subsidiary (NDAFY), NP and its
subsidiary (NDAFD), KG and its subsidiary (SNDAF), as they are enterprises
controlled by NDAFL. All significant intra-group balances and transactions have
been eliminated on combination.
The financial statements were prepared in accordance with generally accepted
accounting principles in the United States of America ("U.S. GAAP"). The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of revenues and
expenses during the report period. Actual results could differ from those
estimates. This basis of accounting differs from that used in the statutory
financial statements of the major operating subsidiaries of the Group, which
were prepared in accordance with the relevant accounting principles and
financial reporting regulations applicable to joint venture enterprises as
established by the Ministry of Finance in Mainland China. Certain accounting
principles stipulated under U.S. GAAP are not applicable in Mainland China.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
a. Contractual joint ventures
--------------------------
A contractual joint venture is an entity established between the Group
and another joint venture partner, with the rights and obligations of
each party governed by a contract. If the Group owns more than 50% of
the joint venture and is able to govern and control its financial and
operating policies and its board of directors, such joint venture is
considered as a de facto subsidiary and is accounted for as a
subsidiary.
b. Inventories
-----------
Inventories are stated at the lower of cost, on a weighted average
basis, and net realizable value. Costs of work-in-process and finished
goods are composed of direct materials, direct labor and an
attributable portion of manufacturing overhead. Net realizable value
F-9
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
------------------------------------------
is the estimated selling price in the ordinary course of business less
the estimated cost of completion and the estimated costs necessary to
make the sale.
When inventories are sold, their carrying amount is charged to expense
in the year in which the revenue is recognized. Writedowns for declines
in net realizable value or for losses of inventories are recognized as
an expense in the year the impairment or loss occurs.
c. Property, machinery and equipment, construction-in-progress
-----------------------------------------------------------
Property, machinery and equipment are stated at cost less accumulated
depreciation. Gains or losses on disposal are reflected in current
operations. Major expenditures for betterments and renewals are
capitalized. All ordinary repair and maintenance costs are expensed as
incurred. Depreciation for financial reporting purposes is provided
using the straight-line method over the estimated useful lives of the
assets after taking into account the estimated residual value. The
estimated useful lives are as follows: land use rights - 40 to 50
years, buildings - 40 years, machinery and equipment - 12 years,
furniture and office equipment - 5 years, and motor vehicles - 5 years.
Construction-in-progress represents land costs as well as factory and
office buildings under construction. The Group capitalizes interest
during the construction phase of qualifying assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 34:
"Capitalization of Interest Cost".
The Group accounts for property, machinery and equipment and
construction-in-progress in accordance with SFAS No. 121: "Accounting
for the Impairment of Long-lived Assets to be Disposed of" which
requires impairment loss to be recognized on the long-lived assets when
the sum of expected future cash flows (undiscounted and without
interest charges) resulted from the use of the asset and its eventual
disposition is less than the carrying amount of the assets. Otherwise,
an impairment loss is not recognized. Measurement of the impairment
loss for long-lived assets is based on the fair value of the assets.
For the years ended December 25, 1999 and 2000, the Group recorded an
impairment loss of approximately RMB6,716,000 (equivalent to
approximately US$812,000) and Nil, respectively, related to certain
machinery and equipment of SNDAF.
d. Sales recognition
-----------------
The Group recognizes sales in accordance with SEC Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements".
Sales represent the invoiced value of goods, net of value-added tax
("VAT"), supplied to customers. Sales are recognized upon delivery of
goods and passage of title to customers.
F-10
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
------------------------------------------
Deposits or advanced payments from customers prior to delivery of goods
and passage of title of goods are recorded as deposits from customers.
All of the Group's sales made in Mainland China are subject to Mainland
Chinese value-added tax at rates ranging from 13% to 17% ("output
VAT"). Such output VAT is payable after offsetting VAT paid by the
Group on purchases ("input VAT").
e. Income taxes
------------
The Group accounts for income tax under the provisions of SFAS No. 109:
"Accounting for Income Taxes", which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Deferred income tax is provided using the liability method and
is recognized for all significant temporary differences between the tax
and financial statements bases of assets and liabilities.
f. Operating leases
----------------
Operating leases represent those leases under which substantially all
the risks and rewards of ownership of the leased assets remain with the
lessors. Rental payments under operating leases are charged to expenses
on a straight-line basis over the period of the relevant leases.
g. Foreign currency translation
----------------------------
The functional currency of the Group is Renminbi ("RMB"). Transactions
denominated in foreign currencies are translated into RMB at the
unified exchange rates quoted by the People's Bank of China prevailing
at the dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies are translated into RMB using the
applicable unified exchange rates prevailing at the balance sheet
dates. The resulting exchange differences are included in the
determination of income. No gain or loss from foreign currency
transactions was recorded in the combined financial statements for the
years ended December 25, 1999 and 2000.
Translation of amounts from Renminbi ("RMB") into United States dollars
("US$") is for the convenience of readers and 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 December 25, 2000 of US$1.00 = RMB8.28. No representation is
made that the Renminbi amounts could have been, or could be, converted
into United States dollars at that rate or at any other rate.
h. Comprehensive income
--------------------
The Group has adopted Statement of Financial Accounting Standards No.
130: "Reporting Comprehensive Income" which requires the Group to
report all changes in equity during a period, except for those
resulting from investment by owners and
F-11
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
------------------------------------------
distribution to owners, in financial statements for the period in which
they are recognized. The Group has disclosed comprehensive income,
which encompasses net income, in the statements of operations and
comprehensive income.
i. Financial instruments
---------------------
The Group accounts for financial instruments under the provisions of
SFAS No. 133: "Accounting for Derivative Instruments and Hedging
Activities", which requires that all derivative financial instruments
be recognized in the financial statements and maintained at fair value
regardless of the purpose or intent for holding them. Changes in fair
value of derivative financial instruments are either recognized
periodically in income or stockholders' equity (as a component of
comprehensive income), depending on whether the derivative is being
used to hedge changes in fair value or cash flows. The adoption of SFAS
133 did not have a material impact on the Group's financial position or
its results of operations because the Group does not currently hold any
derivative financial instruments and does not engage in hedging
activities.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and bank deposits and short-term bank loans
The carrying amounts approximate fair values because of the short
maturity of those instruments.
j. Cash equivalents
----------------
Highly liquid investments with maturity of three months or less at the
time of acquisition are considered cash equivalents.
4. ACCOUNTS RECEIVABLE
-------------------
Accounts receivable consisted of:
1999 2000
---- ----
RMB'000 RMB'000 US$000
Trade receivables 13,596 24,266 2,931
Less: Allowance for doubtful receivables (1,603) (1,603) (194)
------- ------- -----
Accounts receivable, net 11,993 22,663 2,737
======= ======= =====
F-12
5. DEPOSITS AND PREPAYMENTS
------------------------
1999 2000
---- ----
RMB'000 RMB'000 US$000
Deposits for purchase of
- raw materials 2,110 555 67
- machinery and equipment 733 56 7
Prepayments for construction work 980 1,039 125
Prepaid rental expense, current portion (Note 9) 157 163 20
------- ----- ---
3,980 1,813 219
======= ===== ===
6. OTHER RECEIVABLES
-----------------
1999 2000
---- ----
RMB'000 RMB'000 US$000
Advances to
- staff 732 675 82
- unrelated parties 1,471 3,687 445
----- ----- ---
2,203 4,362 527
===== ===== ===
Advances to staff and unrelated parties are unsecured, non-interest bearing and
without pre-determined repayment terms.
7. INVENTORIES
-----------
Inventories consisted of:
1999 2000
---- ----
RMB'000 RMB'000 US$000
Raw materials 29,519 27,389 3,308
Finished goods 15,373 22,139 2,674
------ ------ -----
44,892 49,528 5,982
====== ====== =====
8. PROPERTY, MACHINERY AND EQUIPMENT
---------------------------------
Property, machinery and equipment consisted of:
1999 2000
---- ----
RMB'000 RMB'000 US$000
Land use rights 33,444 33,444 4,039
Buildings 70,787 72,003 8,696
Machinery and equipment 87,357 89,726 10,836
Furniture and office equipment 1,299 1,142 138
Motor vehicles 3,999 3,699 447
Construction-in-progress 6,177 1,359 164
------- -------- -------
203,063 201,373 24,320
Less: Accumulated depreciation (8,475) (16,458) (1,987)
------- -------- -------
Property, machinery and equipment, net 194,588 184,915 22,333
======= ======== =======
F-13
8. PROPERTY, MACHINERY AND EQUIPMENT (cont'd)
---------------------------------
Land and buildings are located in Mainland, China, where private ownership of
land is not allowed. Rather, entities acquire the right to use land for a
designated term. As of December 25,2000, the Group had rights to use three
parcels of land for periods ranging from 40 to 50 years up to 2025 to 2047.
9. PREPAID RENTAL EXPENSE
----------------------
Prepaid rental expense represented prepayment to a joint venture partner for the
use of one parcel of land for 26 years up to April 2025.
10. SHORT-TERM BORROWINGS
---------------------
1999 2000
---- ----
RMB'000 RMB'000 US$000
Bank loans 18,810 28,310 3,419
Other borrowings from unrelated parties 2,200 1,390 168
------- ------ -----
21,010 29,700 3,587
======= ====== =====
Other borrowings are unsecured, non-interest bearing and without pre-determined
repayment terms.
Bank loans are secured by corporate guarantees provided by a Mainland Chinese
joint venture partner, and bear interest at prevailing lending rates in Mainland
China ranging from 5.36% to 6.66% and 5.12% to 6.44% per annum for the years
ended December 25, 1999 and 2000, respectively.
11. ACCRUED LIABILITIES
-------------------
1999 2000
---- ----
RMB'000 RMB'000 US$000
Accruals for
- staff welfare 900 927 112
- staff salaries and bonuses 295 380 46
- operating expenses 436 116 14
- property tax 113 226 27
----- ----- ---
1,744 1,649 199
===== ===== ===
12. OTHER PAYABLES
--------------
1999 2000
---- ----
RMB'000 RMB'000 US$000
Payable for construction-in-progress 866 703 85
Deposits from customers - 504 61
Others 276 698 84
----- ----- ---
1,142 1,905 230
===== ===== ===
F-14
13. TAXATION
--------
The companies within the Group are subject to income taxes on an entity basis on
income arising in or derived from the tax jurisdiction in which they operate.
The group companies incorporated under the International Business Companies Act
of the British Virgin Islands are exempted from payment of the British Virgin
Islands income taxes.
For the years ended December 25, 1999 and 2000, substantially all of the Group's
income was generated in Mainland China by NDAFLY, NDAFY, NDAFD and SNDAF ("the
joint ventures"), which are subject to Mainland China income taxes at rates
ranging from 27% to 33% (24% to 30% state income tax and 3% local income tax).
They are exempted from state income tax and local income tax for two years
starting from December 26, 1998, and then subject to a 50% reduction in state
income tax and full exemption in local income tax for the following three years.
If the tax holiday for the joint ventures established in Mainland China did not
exist, the Group's income tax expense would have been increased by
approximately; RMB2,205,000 and RMB8,328,000 (equivalent to approximately
US$266,000 and US$1,006,000) for the years ended December 25, 1999 and 2000,
respectively.
14. COMMON STOCK
------------
Common stock represents the combined issued and paid up capital of MC, RD, NP
and KG.
15. COMMITMENTS
-----------
Under the supplementary joint venture agreements, the Group has committed to pay
pre-determined annual fees to the Chinese joint venture partners for the period
from December 26, 1998 to 2049. As of December 25, 2000, total commitments under
these arrangements are analyzed as follows:
1999 2000
---- ----
RMB'000 RMB'000 US$000
Payables during the year ended
- Within one year 950 950 115
- Over one year but not exceeding two years 950 950 115
- Over two years but not exceeding three years 950 950 115
- Over three years but not exceeding four years 950 950 115
- Over four years but not exceeding five years 950 950 115
- Over five years 43,700 42,750 5,163
------ ------ -----
48,450 47,500 5,738
====== ====== =====
16. BANK FACILITIES
---------------
As of December 25, 2000, the Group had banking facilities of approximately
RMB28,310,000 (equivalent to approximately US$3,419,000) for short-term bank
loans. All of the Group's banking facilities were utilized as of December 25,
2000. These banking facilities were secured by corporate guarantee provided by a
Mainland Chinese joint venture partner.
F-15
17. RELATED PARTY TRANSACTIONS
--------------------------
Parties are considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant influence over
the other party in making financial and operating decisions. Parties are also
considered to be related if they are subject to common control or common
significant influence.
a. Particulars of significant transactions between the Group and related
companies are summarized below:
1999 2000
---- ----
RMB'000 RMB'000 US$000
i. Sale of finished goods to
- a joint venture partner
Shandong Long Feng Group Co. 4 9 1
- related parties
New Dragon Asia Food
(Yueyang) Company Limited** 1,440 240 29
New Dragon Asia Food
(Luoyang) Company Limited** 2,495 472 57
New Dragon Asia Food
(Chengdu) Company Limited** 2,272 65 8
Long Feng Soybean Food Co., Ltd.* 2
----- --- --
6,213 786 95
===== === ==
ii. Purchase of raw materials from
- a joint venture partner
Shandong Long Feng Group Co. - 2,183 264
- a related party
Shandong Long Feng Pengla Flour Co., Ltd.* - 31 4
--- ------- ----
- 2,214 268
=== ======= ====
iii. Pre-determined annual fee charged
by joint venture partners
Shandong Long Feng Group Co. 650 650 79
Shandong Long Feng Flour Co., Ltd. 150 300 36
---- ---- ---
800 950 115
==== ==== ===
iv. Acquisition of assets and
liabilities from
- a joint venture partner
Shandong Long Feng Flour Co., Ltd. 48,508 - -
- related parties
Yantai Meilong Food and Oil Co., Ltd.* 31,072 - -
Dalian Meilong Food Co., Ltd.* 21,856 - -
Long Feng Co., Ltd.* 69,755 - -
------- ---- ----
171,191 - -
======= ==== ====
v. Interest income earned from short-
term advances to a joint venture
partner Shandong Long Feng Group Co. - 465 56
======= ==== ====
F-16
17. RELATED PARTY TRANSACTIONS (cont'd)
--------------------------
vi. Rental expense charged by a joint
venture partner Shandong Long Feng Flour Co., Ltd. 65 157 19
==== === ==
b. Summary of related party balances is as follows:
i. The amount due to an immediate parent company consisted of:
1999 2000
----
RMB'000 RMB'000 US$000
New Dragon Asia Food Limited 76,304 139,103 16,800
======= ======= ======
The amount due to an immediate parent company is unsecured and
non-interest bearing. The immediate parent company has agreed not
to demand repayment from the Group until January 1, 2002.
ii. The amount due to a joint venture partner consisted of:
1999 2000 2000
---- ---- ----
RMB'000 RMB'000 US$000
Shandong Long Feng Group Co. 127,935 9,921 1,198
======== ===== =====
The amount due to a joint venture partner is unsecured and
non-interest bearing. The joint venture partner has agreed not to
demand repayment from the Group until January 1, 2002.
c. The Group did not properly report certain of its taxes obligations in
Mainland China during the years ended December 25, 1999 and 2000. As a
consequence, the Group may be subject to additional surcharges or
penalties as a result of the unpaid taxes in accordance with tax laws
in Mainland China, of which the amount cannot be reasonably estimated
and is not recorded in the financial statements as of December 25, 1999
and 2000. In addition, the holding companies of the Group, namely New
Dragon International Investment Limited and Long Feng Food (Overseas)
Company Limited, have agreed to indemnify the Group against any
liabilities which may arise as a result of the above surcharges or
penalties which are not recorded in the financial statements of the
Group.
d. The bank facilities of the Group are secured by corporate guarantee
provided by Shandong Long Feng Group Co., a joint venture partner.
Notes -
* Mr. Song Xue Jun, director of each of the Group companies, has
beneficial interests in these companies.
** These companies are wholly owned subsidiaries of NDAFL, the immediate
parent company.
In the opinion of the directors of each of the Group companies, the above
related party transactions were carried out in the usual course of business.
F-17
18. SEGMENT INFORMATION
-------------------
The Group classifies its products into two core business segments, namely
instant noodles and flour. In view of the fact that the Group operates in
Mainland China, no geographical segment information is presented.
a. Net sales:
1999 2000
---- ----
RMB'000 RMB'000 US$000
Instant noodles 148,180 111,075 13,415
Flour 72,194 150,007 18,117
------- ------- ------
220,374 261,082 31,532
======= ======= ======
b. Income (loss) from operations:
1999 2000
---- ----
RMB'000 RMB'000 US$000
Instant noodles (13) 21,953 2,652
Flour 6,004 9,958 1,203
----- ------ -----
5,991 31,911 3,855
===== ====== =====
c. Interest income:
1999 2000
---- ----
RMB'000 RMB'000 US$000
Instant noodles 239 285 34
Flour 236 1,051 127
--- ----- ---
475 1,336 161
=== ===== ===
d. Interest expense:
1999 2000
---- ----
RMB'000 RMB'000 US$000
Instant noodles 1,184 628 76
Flour 1,041 1,232 149
----- ----- ---
2,225 1,860 225
===== ===== ===
e. Identifiable assets, capital expenditures, depreciation and
amortization:
1999 2000
---- ----
RMB'000 RMB'000 US$000
Identifiable assets
-------------------
Instant noodles 166,955 159,872 19,308
Flour 108,480 117,676 14,212
------- ------- ------
275,435 277,548 33,520
======= ======= ======
F-18
18. SEGMENT INFORMATION (cont'd)
-------------------
Capital expenditures
--------------------
Instant noodles 161,498 4,093 494
Flour 56,373 772 94
------- ----- -----
217,871 4,865 588
======= ===== =====
Depreciation and amortization
-----------------------------
Instant noodles 7,459 6,307 762
Flour 1,606 3,223 389
------- ----- -----
9,065 9,530 1,151
======= ===== =====
f. Major customers:
Details of individual customer accounting for more than 5% of the
Group's sales are as follows -
1999 2000
----- ----
Inner Mongolia Chifeng Co. 7% 6%
== ==
g. Major suppliers:
Details of individual supplier accounting for more than 5% of the
Group's purchases are as follows -
1999 2000
----- ----
Longkau Provincial Grain Reserve Administration Centre 11% 10%
Henno Xinxiung (North Station) State Reserve Centre - 6%
Penglai Flour Factory 8% 4%
Yangxing Grain Reserve Co. 6% 3%
Huimin Flour Factory 6% -
--- ---
1999 2000
---- ----
RMB'000 RMB'000 US$000
Instant noodles 1,184 628 76
Flour 1,041 1,232 149
----- ----- ---
2,225 1,860 225
===== ===== ===
19. RETIREMENT PLAN
---------------
As stipulated by the regulations of the Mainland Chinese government, the Group
companies operate in Mainland China have defined contribution retirement plans
for their employees. The Mainland Chinese government is responsible for the
pension liability to these retired employees. Commencing December 26, 1998, the
Group is required to make specified contributions to the state-sponsored
retirement plan at 23% of the basic salary cost of their staffs. Each of the
F-19
19. RETIREMENT PLAN (cont'd)
---------------
employees in these Group companies is required to contribute 5% of his/her
basic salary, with the maximum amount of contribution by each of the employees
to be at the rate of 8%. For the years ended December 25, 1999 and 2000,
contributions made by the Group were approximately RMB836,000 and RMB864,000
(equivalent to approximately US$101,000 and US$104,000), respectively.
20. OTHER ADDITIONAL INFORMATION
----------------------------
Net income is determined after charging and crediting the following:
1999 2000
---- ----
RMB'000 RMB'000 US$000
Charging -
Depreciation of owned property, machinery
and equipment 8,282 8,767 1,059
Amortization of land use rights 783 763 92
Impairment of machinery and equipment 6,716 - -
Write-off of bad and doubtful other receivables - 2,000 242
Write-off of pre-operating expenses 4,983 - -
Write-off of bad and doubtful accounts
receivable 1,603 - -
Write-off of obsolete and slow-moving
inventories 4,405 - -
Interest expense for short-term bank loans 2,225 1,860 225
===== ======= ======
Crediting -
Interest income from
- bank deposits 475 871 105
- short-term advances to a joint venture
partner - 465 56
----- ------- ------
475 1,336 161
===== ======= ======
F-20
New Dragon Asia Food Group and its subsidiaries
Unaudited Consolidated Balance Sheet (June 25, 2001)
Exchange rate: USD 1 = RMB 8.2941
New Dragon Asia New Dragon Asia New Dragon Asia New Dragon Asia
Food Limited Food Limited Food Limited Food Limited
----------------------------------------------------------------------
25-Jun-01 25-Jun-01 25-Mar-01 25-Mar-01
('000) ('000) ('000) ('000)
Rmb USD Rmb USD
Assets
------
Cash 11,744 1,416 10,761 1,297
Trade receivable 34,990 4,219 30,966 3,733
Intra companies -- -- -- --
Other receivable 2,837 342 3,793 457
Net Inventories 23,241 2,802 23,608 2,846
Prepayments and other current assets 6,639 800 1,585 191
--------------------------------------------------------------------
Total current assets 79,451 9,579 70,173 8,526
--------------------------------------------------------------------
Investment in subsidiaries -- -- -- --
Investment in subsidiaries (Intermediate) -- -- -- --
Due from subsidiaries -- -- -- --
Due from subsidiaries (Intermediate) -- -- -- --
Fixed assets, at NBV 186,831 22,526 189,019 22,790
Prepaid rental expenses -- -- -- --
--------------------------------------------------------------------
Total non-current assets 186,831 22,526 189,019 22,790
--------------------------------------------------------------------
Total Assets 266,282 32,105 259,732 31,315
====================================================================
Liabilities, Minority Interest & Stockholders' Equity
-----------------------------------------------------
Accounts payable 19,797 2,387 18,381 2,216
Short term borrowings 13,200 1,591 28,643 3,453
Accrued liabilities 14,175 1,709 1,662 200
Provision for taxation 19,334 2,331 17,154 2,068
Other payable and accruals 6,710 809 3,160 381
--------------------------------------------------------------------
Total liabilities 73,216 8,828 69,000 8,319
--------------------------------------------------------------------
Non-current liabilities
Due to MI, Long Feng Group (32,038) (3,863) (30,958) (3,773)
Due to Immediate parent company -- -- -- --
Due to Immediate parent company, (Intermediate) -- -- -- --
Due to Immediate parent company, (Ultimate) 159,929 19,282 159,929 19,282
--------------------------------------------------------------------
127,891 15,419 128,971 15,510
--------------------------------------------------------------------
Share Capital 0 0 0 0
Minority Interest 16,712 2,015 16,712 2,015
Retained Earnings 48,468 5,843 45,050 5,432
--------------------------------------------------------------------
Stockholders' Equity 65,175 7,858 61,761 7,446
--------------------------------------------------------------------
Total Liabilities & Stockholders' Equity 266,282 32,105 259,732 31,275
====================================================================
Sales 110,344 13,304 68,883 8,305
F-21
New Dragon Asia Food Group and its subsidiaries
Unaudited Consolidated Income Statement (June 25, 2001)
Exchange rate: USD 1 = RMB 8.2941
New Dragon Asia New Dragon Asia New Dragon Asia New Dragon Asia
Food Limited Food Limited Food Limited Food Limited
-----------------------------------------------------------------------------
25-Jun-01 25-Jun-01 25-Mar-01 25-Mar-01
('000) ('000) ('000) ('000)
Rmb USD Rmb USD
Cost of goods sold (89,789) (10,826) (54,940) (6,624)
----------------------------------------------------------------------
Gross Profits 20,554 2,478 13,942 1,681
Selling and distribution expenses (4,031) (486) (2,694) (325)
General and administrative expenses (3,818) (460) (2,472) (298)
----------------------------------------------------------------------
Income from operations 12,705 1,532 8,777 1,058
Interest income 556 67 280 34
Interest expense (1,566) (189) (1,089) (131)
----------------------------------------------------------------------
Income before taxation 11,694 1,410 7,968 961
Taxation (853) (103) (540) (65)
----------------------------------------------------------------------
Income for the year 10,842 1,307 7,428 896
F-22
APPENDIX A
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
FLAGSHIP IMPORT EXPORT L.L.C. AND BIO-AQUA SYSTEMS, INC.
____________, 2001
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("Agreement"), is made as of __________,
2001 between Flagship Import Export L.L.C., a Nevada limited liability company
or its assignees ("Purchaser") and Bio-Aqua Systems, Inc., a Florida corporation
("Seller").
WHEREAS, Seller is a holding company which owns interests in the
subsidiary entities as listed on Exhibit A hereto (the "Subsidiaries"). The
Subsidiaries include Tepual S.A., Krisel S.A. and Profeed, Inc;
WHEREAS, the Subsidiaries are in the business of research and
development; krill fishing; sales of vaccine products; and selling, brokering
and providing technical advice in the production of meals for feed used by the
aqualculture, poultry and cattle farming industries (collectively, the
"Business");
WHEREAS, Seller does not believe the Business is viable and desires to
dispose of the Business without incurring any additional costs or expenses;
WHEREAS, the Subsidiaries have accumulated substantial debt and
liabilities and materially all Business operations of the Subsidiaries have been
suspended;
WHEREAS, Purchaser desires to acquire and Seller desires to sell all of
the issued and outstanding stock of the Subsidiaries (the "Stock") in exchange
for the consideration and upon the terms described herein;
WHEREAS, Purchaser and Seller desire to make certain representations,
warranties, covenants and agreements in connection with the Purchase;
NOW THEREFORE, in consideration of the mutual promises, covenants,
provisions and representations contained herein, the parties hereto agree as
follows:
ARTICLE I
THE PURCHASE
1.1 SALE AND DELIVERY OF STOCK. Subject to all the terms and conditions
of this Agreement, Seller shall sell, transfer, convey, assign and deliver to
Purchaser the Stock in consideration of the Purchase Price (as defined in
paragraph 1.3 hereof) at the Closing (as defined in paragraph 1.2 hereof).
Purchaser shall purchase, acquire and accept from the Seller certificates for
the Stock duly endorsed by Seller, or accompanied by duly executed stock powers.
1.2 EFFECTIVE DATE AND CLOSING. The effective date (the "Effective
Date") of this transaction shall be immediately preceding the closing of the
share exchange agreement dated July 2, 2001 (the "Share Exchange") by and
between New Dragon Asia Food Group ("New Dragon") and the Seller. The closing of
the transaction contemplated herein (the "Closing") shall occur at a mutually
agreeable time and place, on the earliest practicable date following the day on
which all of the obligations and conditions precedent herein are complied with
but in no event later than the date of the Share Exchange. It is expected that
the Closing shall be on or about October 15, 2001 or as soon thereafter as
reasonably practicable.
1.3 PURCHASE PRICE. Subject to all of the terms and conditions set
forth in the Agreement and in reliance on the representations, warranties and
covenants hereinafter set forth, Purchaser shall acquire the Stock in the
Subsidiaries in consideration for Purchasers agreement to avoid any additional
costs or expenses to Seller (hereinafter referred to as the "Purchase Price").
ARTICLE II
REPRESENTATIONS OF SELLER
As an inducement to Purchaser to enter into this Agreement, Seller
represents and warrants to Purchaser as of the Closing the following:
2.1 ORGANIZATION. Each of Seller and the Subsidiaries is a company duly
organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation, has all necessary corporate powers to own
properties and to carry on its business as now owned and operated by it, and is
duly qualified to do business and is in good standing in each of the states
where its business requires qualification. To the best of Seller's knowledge and
belief, each of the Subsidiaries is a corporation duly organized, validly
existing, and in good standing under the laws of the jurisdiction of its
incorporation, has all necessary corporate powers to own properties and to carry
on its business as now owned and operated by it, and is duly qualified to do
business and is in good standing in each of the states where its business
requires qualification. Other than the Subsidiaries, Seller has no material
equity or other material ownership interest in any corporation, limited
liability company, partnership, association or other business entity.
2.2 AUTHORITY. The execution of this Agreement and the consummation of
the transactions contemplated herein have been authorized by the directors and
shareholders of Seller and the officers and directors of its Subsidiaries and
Seller has the full power and authority to execute, deliver and perform this
Agreement and this Agreement is a legal, valid and binding obligation of the
Seller, and is enforceable in accordance with its terms and conditions, except
as enforceability may be limited by bankruptcy, insolvency, fraudulent
conveyance, moratorium or other laws generally effecting the rights of creditors
and general principles of equity.
2.3 TITLE TO THE STOCK. Seller owns the percentage of the issued and
outstanding shares of each of the Subsidiaries as disclosed on Exhibit A, which
shares are duly and validly issued, fully paid and non-assessable. Seller has
good and marketable title to the Stock, free and clear of all debts, liens and
encumbrances and, by virtue of the grant, conveyance, sale, transfer, and
assignment of the Stock hereunder, Purchaser shall receive good and marketable
title to the Stock, free and clear of all debts, liens and encumbrances. As of
the Closing, there shall be no outstanding options, contracts, warrants,
appreciation rights, redemption rights or subscription rights of any nature
relating to the issuance, sale or acquisition of the Stock or the Subsidiaries,
regardless of series, class or designation.
2.4 ABILITY TO CARRY OUT OBLIGATIONS. The execution and delivery of
this Agreement by Seller and the performance by Seller of its obligations
hereunder will not cause, constitute, or conflict with or result in (a) any
breach or violation of any of the provisions of or constitute a default under
any license, indenture, mortgage, charter, instrument, certificate of
incorporation, bylaw, or other agreement or instrument to which Seller is a
party, or by which it may be bound, nor will any consents or authorizations of
any party other than those hereto be required, (b) an event that would permit
any party to any agreement or instrument to terminate it or to accelerate the
maturity of any indebtedness or other obligation of Seller, or (c) an event that
would result in the creation or imposition of any lien, charge, or encumbrance
on any asset of Seller.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
As an inducement to Seller to enter into this Agreement, the Purchaser
represents and warrants to the Seller as of the date hereof and as of the
Closing the following:
2
3.1 AUTHORITY. The Purchaser has authorized the execution of this
Agreement and the transactions contemplated herein, and Purchaser has full power
and authority to execute, deliver and perform this Agreement and this Agreement
is the legal, valid and binding obligation of Purchaser, and is enforceable in
accordance with its terms and conditions, except as enforceability may be
limited by bankruptcy, insolvency, fraudulent conveyance, moratorium or other
laws generally effecting the rights of creditors and general principles of
equity.
3.2 ABILITY TO CARRY OUT OBLIGATIONS. The execution and delivery of
this Agreement by Purchaser and the performance by Purchaser of its obligations
hereunder will not cause, constitute, or conflict with or result in (a) any
breach or violation of any of the provisions of or constitute a default under
any license, indenture, mortgage, charter, instrument, certificate of
incorporation, bylaw, or other agreement or instrument to which Purchaser is a
party, or by which it may be bound, nor will any consents or authorizations of
any party other than those hereto be required, (b) an event that would permit
any party to any agreement or instrument to terminate it or to accelerate the
maturity of any indebtedness or other obligation of Purchaser, or (c) an event
that would result in the creation or imposition of any lien, charge, or
encumbrance on any asset of Purchaser.
3.3 FAMILIARITY WITH SELLER. The Purchaser acknowledges that he is
familiar with the financial and business condition of the Subsidiaries.
Purchaser is acquiring the Subsidiaries and the Business "as is" and
acknowledges that the Seller has not provided any representations or warranties,
except for representations provided under Article II, herein.
ARTICLE IV
COVENANTS
4.1 RELEASE OF GUARANTIES. Purchaser shall have released Seller of all
obligations, contingent or otherwise, relating to or in any way connected to or
with the Stock or Subsidiaries, including any and all bank guaranties or other
guaranties of the Seller made by the Purchaser or Max Rutman.
4.2 SELLER'S COOPERATION AFTER THE CLOSING; FURTHER ACTION. At any
time, and from time to time after the Closing, the Seller shall execute and
deliver to the Purchaser such other instruments and take such other actions as
the Purchaser may reasonably request more effectively to vest title of the Stock
in the Purchaser and, to the full extent permitted by law, to put the Purchaser
in actual possession and operating control of the Subsidiaries, the Stock and
the Business. Each of the parties hereto shall use all reasonable efforts to
take, or cause to be taken, all appropriate action, do or cause to be done, all
things necessary, proper or advisable under applicable laws, and execute and
deliver such documents and other papers, as may be required to carry out the
provisions of this Agreement and to consummate and make effective the
transactions contemplated hereby.
ARTICLE V
CONDITIONS PRECEDENT TO SELLER'S PERFORMANCE
The Seller's obligations hereunder shall be subject to the
satisfaction, at or before the Closing, of all the conditions set forth in this
Article V. The Seller may waive any or all of these conditions in whole or in
part without prior notice; so long as such waiver is in writing; and provided,
however, that no such waiver of a condition shall constitute a waiver by the
Seller of any other condition of or any of the Seller's rights or remedies at
law or in equity, if Purchaser shall be in default of any of its
representations, warranties, or covenants under this Agreement.
5.1 PERFORMANCE. Purchaser shall have performed, satisfied, and
complied with all covenants, agreements and conditions required by this
Agreement to be performed or complied with by it, on or before the Closing Date,
and the Representations and Warranties contained in Article III shall be true
and correct as of the Closing.
5.2 ABSENCE OF LITIGATION. No action, suit or proceeding before any
court or any governmental body or authority, pertaining to the transaction
contemplated by this Agreement or to its consummation, shall have been
instituted against any party hereto on or before the Closing Date.
3
5.3 APPROVAL AND CONSUMMATION OF SHARE EXCHANGE. The Share Exchange
shall have been adopted by the affirmative vote of a majority of all the votes
entitled to be cast of the Seller, or as otherwise required and in accordance
with the Articles of Incorporation of the Seller and the Florida Business
Corporation Law.
5.4 RELEASE OF SELLER. Purchaser shall have released Seller for all
claims of the Subsidiaries and shall have executed a release substantially in a
form approved by the Seller.
ARTICLE VI
CONDITIONS PRECEDENT TO PURCHASER'S PERFORMANCE
The Purchaser's obligations hereunder shall be subject to the
satisfaction, at or before the Closing, of all the conditions set forth in this
Article VI. The Purchaser may waive any or all of these conditions in whole or
in part without prior notice; so long as such waiver is in writing; and
provided, however, that no such waiver of a condition shall constitute a waiver
by the Purchaser of any other condition of or any of the Purchaser's rights or
remedies at law or in equity, if Seller shall be in default of any of its
representations, warranties, or covenants under this Agreement.
6.1 PERFORMANCE. Seller shall have performed, satisfied, and complied
with all covenants, agreements and conditions required by this Agreement to be
performed or complied with by it, on or before the closing Date, and the
Representations and Warranties contained in Article II shall be true and correct
as of the Closing.
6.2 ABSENCE OF LITIGATION. No action, suit or proceeding before any
court or any governmental body or authority, pertaining to the transaction
contemplated by this Agreement or to its consummation, shall have been
instituted against any party hereto on or before the Closing Date.
6.3 APPROVAL AND CONSUMMATION OF SHARE EXCHANGE AND THIS AGREEMENT. The
Share Exchange and the Agreement shall have been adopted by the affirmative vote
of a majority of all the votes entitled to be cast of Seller, or as otherwise
required and in accordance with the Articles of Incorporation of the Seller and
the Florida Business Corporation Law.
ARTICLE VII
MISCELLANEOUS
7.1 CAPTIONS AND HEADINGS. The Articles and paragraph/section headings
throughout this Agreement are for convenience and reference only, and shall in
no way be deemed to define, limit or add to the meaning of any provisions of
this Agreement.
7.2 WAIVER. Except as otherwise expressly provided herein, no waiver of
any covenant, condition, or provision of this Agreement shall be deemed to have
been made unless expressly in writing and signed by the party against whom such
waiver is charged; and (i) the failure of any party to insist in any one or more
cases upon the performance of any of the provisions, covenants, or conditions of
this Agreement to exercise any option herein contained shall not be construed as
a waiver or relinquishment for the future of any such provisions, covenants, or
conditions, (ii) the acceptance of performance of anything required by this
Agreement to be performed with knowledge of the breach or failure of a covenant,
condition, or provision hereof shall not be deemed a waiver of such breach or
failure, and (iii) no waiver by any party of one breach by another party shall
be construed as a waiver with respect to any other subsequent breach.
7.3 ENTIRE AGREEMENT. This Agreement contains the entire Agreement and
understandings between the parties hereto, and supersedes all prior agreements
and understandings with respect to the subject matter hereof.
7.4 CHOICE OF LAW, JURISDICTION AND VENUE. This Agreement and the
rights and obligations of the parties hereunder shall be governed by and
construed in accordance with the laws of the State of Florida without regard to
4
conflict of laws principles. Any action at law or in equity directly or
indirectly in connection with, related to or in any way connected to this
Agreement or any provisions hereof, shall be litigated exclusively in the state
or federal courts located in the City of Fort Lauderdale and County of Broward,
Florida. The parties hereto irrevocably waive any rights such party may
otherwise have to transfer or change the venue of any litigation brought or
arising in connection with this Agreement.
7.5 COUNTERPARTS. This Agreement may be executed simultaneously in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
7.6 NOTICES. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed to have been duly
given on the date of receipt if served personally on the party to whom notice is
to be given, by telecopy or telegram, or mailing if mailed to the party to whom
notice is to be given, by first class mail, registered or certified, postage
prepaid, and properly addressed as follows:
PURCHASER: FLAGSHIP IMPORT EXPORT L.L.C.
General Ekdhal 159
Santiago - Chile
SELLER: BIO-AQUA SYSTEMS, INC.
350 East Las Olas, Suite 1700
Fort Lauderdale, FL 33301
7.7 BINDING EFFECT. This Agreement shall inure to and be binding upon
the heirs, executors, personal representatives, successors and assigns of each
of the parties to this Agreement.
7.8 MUTUAL COOPERATION. The parties hereto shall cooperate with each
other to achieve the purpose of this Agreement, and shall execute such other and
further documents and take such other and further actions as may be necessary or
convenient to effect the transaction described herein.
7.9 ANNOUNCEMENTS. Purchaser and Seller will consult and cooperate with
each other as to the timing and content of any announcements of the transactions
contemplated hereby to the general public or to employees, customers or
suppliers. Except to the extent that the parties consent in writing otherwise,
no party to this Agreement shall make, or cause to be made, any press release or
public announcement in respect of this Agreement or the transactions
contemplated hereby or otherwise communicate with any news media. Nevertheless,
the parties agree that the Seller and the Purchaser or any affiliate thereof may
make such disclosure (on Form 8-K, by press release or otherwise) regarding the
terms of this Agreement and the transactions contemplated hereby as it deems
necessary to comply with the applicable securities laws or the rules and
regulations of the American Stock Exchange, including a press release following
the execution of this Agreement.
7.10 EXPENSES. Except as specifically provided in this Agreement, all
direct costs and expenses including legal, and any other out-of-pocket expense
incurred by Seller, in connection with this transaction, shall be paid by New
Dragon. All costs and expenses including legal, accounting and any other
out-of-pocket expenses incurred by the Purchaser, in connection with this
transaction, shall be paid by the Purchaser.
7.11 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of the parties set forth in Articles II and III shall not survive
the Closing. The covenants, agreements set forth in Articles IV and VI shall
survive the Closing.
7.12 ASSIGNMENT. This Agreement may not be assigned by operation of law
or otherwise by the Seller or the Purchaser; provided, however, that Purchaser
5
may assign its rights and obligations to any affiliate of Purchaser, provided
however that such assignment shall not release the Purchaser of its obligations
hereunder and Purchaser shall guarantee the obligation of any assignee.
7.13 TERMINATION. This Agreement may be terminated prior to the
Effective Date; (a) by mutual consent of the Seller and the Purchaser if the
Board of Directors of Seller and Purchaser each so determines; or (b) by Seller
if the Share Exchange is not consummated.
AGREED TO AND ACCEPTED as of the date first above written.
PURCHASER: FLAGSHIP IMPORT EXPORT L.L.C.
By:
---------------------------------------
Max Rutman
Its: Sole Shareholder
SELLER: BIO-AQUA SYSTEMS, INC.
By:
---------------------------------------
Name: ______________________________
Title: _____________________________
6
EXHIBIT A
Subsidiary Ownership Interest
---------- ------------------
Tepual S.A. 99%
Profeed, Inc. 100%
Krisel S.A. 75%
APPENDIX B
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT, dated as of July 2, 2001 is by and among
Bio-Aqua Systems, Inc., a Florida corporation (the "Company"); Max Rutman and
Flagship Import Export LLC, a ______ limited liability company (the
"Shareholders"); and New Dragon Asia Food Limited, a company organized under the
laws of the British Virgin Islands ("New Dragon").
W I T N E S S E T H:
WHEREAS, New Dragon owns 100% of the shares of the equity interests of
four companies organized under the laws of the British Virgin Islands (each a
"Subsidiary" and, collectively the "Subsidiaries") each of which in turn hold an
interest in a separate sino-foreign joint venture as described on Schedule I
attached hereto, which equity interests constitute all of the issued and
outstanding equity interests of the Subsidiaries ( the "Equity Interests");
WHEREAS, concurrently with the execution of this Agreement the Company
desires to acquire from New Dragon, and New Dragon desires to sell to the
Company, all of the Equity Interests in exchange (the "Exchange") for the
issuance by the Company of an aggregate of 37,890,857 shares (the "Company
Shares") of the Company's Class A common stock, par value $.0001 per share (the
"Company Common Stock"), on the terms and conditions set forth below;
WHEREAS, the Shareholders will benefit from the transactions
contemplated herein,
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and agreements set forth herein, the parties hereto
agree as follows:
ARTICLE I
EXCHANGE
1.1 Exchange. Subject to the terms and conditions of this Agreement, on
the Closing Date (as hereinafter defined):
(a) The Company shall issue and deliver an aggregate of 37,890,857
Company Shares to New Dragon and its designee(s), which Shares shall constitute
93% of the voting power of the Company's issued and outstanding capital stock on
a fully diluted basis after giving effect to the Exchange.
(b) As the consideration, New Dragon shall transfer to the Company
the Equity Interests in the Subsidiaries along with appropriate transfer
documents in favor of the Company.
1.2 Time and Place of Closing. The closing of the transactions
contemplated hereby (the "Closing") shall take place at the offices of Loeb and
Loeb LLP, 10100 Santa Monica Boulevard, Suite 2200, Los Angeles, California
90067 on September 15, 2001 (the "Closing Date") or at such other place as the
Company and New Dragon may agree.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS
The Company and the Shareholders jointly and severally represent and
warrant to New Dragon that now and/or as of the Closing:
2.1 Due Organization and Qualification; Subsidiaries; Due
Authorization.
(a) The Company and each subsidiary of the Company is a corporation
duly incorporated, validly existing and in good standing under the laws of its
jurisdiction of formation, with full corporate power and authority to own, lease
and operate its respective business and properties and to carry on its
respective business in the places and in the manner as presently conducted or
proposed to be conducted. The Company and each subsidiary of the Company is in
good standing as a foreign corporation in each jurisdiction in which the
properties owned, leased or operated, or the business conducted, by it requires
such qualification except for any such failure, which when taken together with
all other failures, is not likely to have a material adverse effect on the
business of the Company taken as a whole.
(b) Except as set forth in Schedule 2.1(b) attached hereto, the
Company does not own, directly or indirectly, any capital stock, equity or
interest in any corporation, firm, partnership, joint venture or other entity.
(c) The Company has all requisite corporate power and authority to
execute and deliver this Agreement, and to consummate the transactions
contemplated hereby and thereby. The Company has taken all corporate action
necessary for the execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby, and this Agreement constitutes the
valid and binding obligation of the Company, enforceable against the Company in
accordance with its respective terms, except as may be affected by bankruptcy,
insolvency, moratoria or other similar laws affecting the enforcement of
creditors' rights generally and subject to the qualification that the
availability of equitable remedies is subject to the discretion of the court
before which any proceeding therefore may be brought.
2.2 No Conflicts or Defaults. The execution and delivery of this
Agreement by the Company and the consummation of the transactions contemplated
hereby do not and shall not (a) contravene the Articles of Incorporation or
Bylaws of the Company or (b) with or without the giving of notice or the passage
of time (i) violate, conflict with, or result in a breach of, or a default or
loss of rights under, any material covenant, agreement, mortgage, indenture,
lease, instrument, permit or license to which the Company is a party or by which
the Company is bound, or any judgment, order or decree, or any law, rule or
regulation to which the Company is subject, (ii) result in the creation of, or
give any party the right to create, any lien, charge, encumbrance or any other
right or adverse interest ("Liens") upon any of the assets of the Company, (iii)
terminate or give any party the right to terminate, amend, abandon or refuse to
perform, any material agreement, arrangement or commitment to which the Company
is a party or by which the Company's assets are bound, or (iv) accelerate or
modify, or give any party the right to accelerate or modify, the time within
which, or the terms under which, the Company is to perform any duties or
2
obligations or receive any rights or benefits under any material agreement,
arrangement or commitment to which it is a party.
2.3 Capitalization. Except as set forth on Schedule 2.3, the authorized
capital stock of the Company immediately prior to giving effect to the
transactions contemplated hereby consists of 20,000,000 shares of Class A Common
Stock par value $.0001 per share, of which 940,000 shares are issued and
outstanding; 1,700,000 shares of Class B Common Stock par value $.0001 per
share, of which 1,700,000 shares are issued and outstanding; and 5,000,000
shares of Preferred Stock, none of which are outstanding. All of the outstanding
shares of capital stock are, and the Company Shares when issued in accordance
with the terms hereof will be, duly authorized, validly issued, fully paid and
non-assessable, and have not been or, with respect to the Company Shares, will
not be, issued in violation of any preemptive right of stockholders. The Company
Shares are not subject to any preemptive or subscription right, any voting trust
agreement or other contract, agreement, arrangement, option, warrant, call,
commitment or other right of any character obligating or entitling the Company
to issue, sell, redeem or repurchase any of its securities, and there is no
outstanding security of any kind convertible into or exchangeable for Common
Stock. The Company has not granted registration rights to any person.
2.4 Financial Statements. Schedule 2.4 contains copies of the
consolidated balance sheet of the Company at December 31, 2000 and the related
statements of operations, stockholders' equity and cash flows for the fiscal
year then ended, including the notes thereto, as audited by Spear, Safer, Harmon
& Co., certified public accountants and the unaudited balance sheet of the
Company at March 31, 2001, and the related consolidated statements of
operations, stockholders' equity and cash flows for the three month period then
ended prepared by the Company's management (collectively, the "Company Financial
Statements"). The Company Financial Statements have been prepared in accordance
with U.S. generally accepted accounting principles applied on a basis consistent
throughout all periods presented, subject to, in the case of the interim
statements, audit adjustments, which are not expected to be material. Such
statements present fairly the financial position of the Company as of the dates
and for the periods indicated. The books of account and other financial records
of the Company have been maintained in accordance with good business practices.
2.5 Further Financial Matters. The Company does not have any
liabilities or obligations, whether secured or unsecured, accrued, determined,
absolute or contingent, asserted or unasserted or otherwise, which are required
to be reflected or reserved in a balance sheet or the notes thereto under
generally accepted accounting principles, but which are not reflected in the
Company Financial Statements.
2.6 Taxes. The Company and each subsidiary of the Company has filed all
United States federal, state, county, local and foreign national, provincial and
local returns and reports which were required to be filed on or prior to the
date hereof in respect of all income, withholding, franchise, payroll, excise,
property, sales, use, value added or other taxes or levies, imposts, duties,
license and registration fees, charges, assessments or withholdings of any
nature whatsoever (together, "Taxes"), and has paid all Taxes (and any related
penalties, fines and interest) which have become due pursuant to such returns or
reports or pursuant to any assessment which has become payable, or, to the
extent its liability for any Taxes (and any related penalties, fines and
3
interest) has not been fully discharged, the same have been properly reflected
as a liability on the books and records of the Company or such subsidiary and
adequate reserves therefore have been established. All such returns and reports
filed on or prior to the date hereof have been properly prepared and are true,
correct (and to the extent such returns reflect judgments made by the Company,
as the case may be, such judgments were reasonable under the circumstances) and
complete in all material respects. No tax return or tax return liability of the
Company or such subsidiary has been audited or, presently under audit. The
Company has not given or been requested to give waivers of any statute of
limitations relating to the payment of any Taxes (or any related penalties,
fines and interest). There are no claims pending or, to the knowledge of the
Company, threatened, against the Company or such subsidiary for past due Taxes.
All payments for withholding taxes, unemployment insurance and other amounts
required to be paid for periods prior to the date hereof to any governmental
authority in respect of employment obligations of the Company or such
subsidiary, including, without limitation, amounts payable pursuant to the
Federal Insurance Contributions Act, have been paid or shall be paid prior to
the Closing and have been duly provided for on the books and records of the
Company and in the Company Financial Statements.
2.7 Indebtedness; Contracts; No Defaults.
(a) Schedule 2.7 sets forth a true, complete and correct list of
all material instruments, agreements, indentures, mortgages, guarantees, notes,
commitments, accommodations, letters of credit or other arrangements or
understandings, whether written or oral, to which the Company or any subsidiary
of the Company is a party (collectively, the "Company Agreements").
(b) Except as disclosed in Schedule 2.7, neither the Company or any
subsidiary of the Company nor, to the Company's knowledge, any other person or
entity is in breach in any material respect of, or in default in any material
respect under, any material contract, agreement, arrangement, commitment or plan
to which the Company or any subsidiary of the Company is a party, and no event
or action has occurred, is pending or is threatened, which, after the giving of
notice, passage of time or otherwise, would constitute or result in such a
material breach or material default by the Company or any subsidiary of the
Company or, to the knowledge of the Company, any other person or entity. Neither
the Company nor any subsidiary of the Company has received any notice of default
under any contract, agreement, arrangement, commitment or plan to which it is a
party, which default has not been cured to the satisfaction of, or duly waived
by, the party claiming such default on or before the date hereof.
2.8 Personal Property. The Company has good and marketable title to all
of its tangible personal property and assets, including, without limitation, all
of the assets reflected in the Company Financial Statements that have not been
disposed of in the ordinary course of business and such property is free and
clear of all Liens or mortgages.
2.9 Real Property. Schedule 2.9 sets forth a true and complete list of
all real property owned by, or leased or subleased by or to, the Company or any
subsidiary of the Company.
2.10 Compliance with Law. Neither the Company nor any subsidiary of the
Company is conducting its business or affairs in violation of any applicable
foreign, federal, state or local law, ordinance, rule, regulation, court or
4
administrative order, decree or process, or any requirement of insurance
carriers. The Company has not received any notice of violation or claimed
violation of any such law, ordinance, rule, regulation, order, decree, process
or requirement.
2.11 No Adverse Changes. There have not been (a) any material adverse
change in the business, prospects, the financial or other condition, or the
respective assets or liabilities of the Company or any subsidiary of the Company
as reflected in the Company Financial Statements, (b) any material loss
sustained by the Company or any subsidiary of the Company, including, but not
limited to any loss on account of theft, fire, flood, explosion, accident or
other calamity, whether or not insured, which has materially and adversely
interfered, or may materially and adversely interfere, with the operation of the
Company's or such subsidiary's business, or (c) any event, condition or state of
facts, including, without limitation, the enactment, adoption or promulgation of
any law, rule or regulation, the occurrence of which materially and adversely
does or would affect the results of operations or the business or financial
condition of the Company or any subsidiary of the Company. Notwithstanding the
foregoing, the Company's business operations are currently inactive.
2.12 Litigation. Except as set forth on Schedule 2.12, there is no
claim, dispute, action, suit, proceeding or investigation pending or, to the
knowledge of the Company, threatened, against or affecting the business of the
Company or any subsidiary of the Company, or challenging the validity or
propriety of the transactions contemplated by this Agreement, at law or in
equity or admiralty or before any federal, state, local, foreign or other
governmental authority, board, agency, commission or instrumentality, nor to the
knowledge of the Company, has any such claim, dispute, action, suit, proceeding
or investigation been pending or threatened, during the 12-month period
preceding the date hereof; (b) there is no outstanding judgment, order, writ,
ruling, injunction, stipulation or decree of any court, arbitrator or federal,
state, local, foreign or other governmental authority, board, agency, commission
or instrumentality, against or materially affecting the business of the Company
or any subsidiary of the Company; and (c) the Company has not received any
written or verbal inquiry from any federal, state, local, foreign or other
governmental authority, board, agency, commission or instrumentality concerning
the possible violation of any law, rule or regulation or any matter disclosed in
respect of its business.
2.13 Insurance. Except as set forth on Schedule 2.13 attached hereto,
the Company does not currently maintain any form of insurance.
2.14 Articles of Incorporation and By-laws; Minute Books. The copies of
the Articles of Incorporation and Bylaws (or similar governing documents) of the
Company and all amendments to each are true, correct and complete. The minute
books of the Company and each subsidiary of the Company contain true and
complete records of all meetings and consents in lieu of meetings of their
respective Board of Directors (and any committees thereof), or similar governing
bodies, since the time of their respective organization.
2.15 Employee Benefit Plans. The Company does not maintain, nor has the
Company maintained in the past, any employee benefit plans ("as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), or any plans, programs, policies, practices, arrangements or
contracts (whether group or individual) providing for payments, benefits or
5
reimbursements to employees of the Company, former employees, their
beneficiaries and dependents under which such employees, former employees, their
beneficiaries and dependents are covered through an employment relationship with
the Company, any entity required to be aggregated in a controlled group or
affiliated service group with the Company for purposes of ERISA or the Internal
Revenue Code of 1986 (the "Code") (including, without limitation, under Section
414(b), (c), (m) or (o) of the Code or Section 4001 of ERISA, at any relevant
time ("Benefit Plans").
2.16 Patents; Trademarks and Intellectual Property Rights. The Company
does not own or possesses any patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information, Internet web site(s) or
proprietary rights of any nature.
2.17 Affiliate Transactions. Except as disclosed in Schedule 2.17,
neither the Company nor any officer, director or employee of the Company (or any
of the relatives or Affiliates of any of the aforementioned Persons) is a party
to any agreement, contract, commitment or transaction with the Company or
affecting the business of the Company, or has any interest in any property,
whether real, personal or mixed, or tangible or intangible, used in or necessary
to the Company which will subject the Sellers to any liability or obligation
from and after the Closing Date.
2.18 Trading. The Company's Common Stock is currently listed for
trading on the American Stock Exchange ("AMEX"), and the Company has received no
notice that its Common Stock is subject to being delisted therefrom. However,
the Company is deficient in the following listing requirements: (a) failure to
file the Form 10-Q for the quarter ended March 31, 2001, and (b) failure to meet
the minimum bid requirement.
2.19 Compliance. The Company and the Shareholders have complied in all
material respects with all applicable foreign, federal and state laws, rules and
regulations, including, without limitation, the requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and the Securities Act of
1933, as amended, (the "Securities Act") and is current in its filings, except
that the Company has not yet filed its Form 10-Q for the quarter ended March 31,
2001, which Form shall be filed no later than July 15, 2001.
2.20 Filings. None of the filings made by the Company under the
Securities Act or the Exchange act make any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements made,
in light of the circumstances under which they were made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF NEW DRAGON
New Dragon represents and warrants to the Company that now and/or as of
the Closing:
3.1 Due Organization and Qualification; Subsidiaries; Due
Authorization.
(a) Each Subsidiary is an entity duly organized, validly existing
and in good standing under the laws of the British Virgin Islands, with full
power and authority to own, lease and operate its business and properties and to
6
carry on its business in the places and in the manner as presently conducted or
proposed to be conducted.
(b) The Subsidiaries do not own, directly or indirectly, any
capital stock, equity or interest in any corporation, firm, partnership, joint
venture or other entity, except as set forth on Schedule 3.1. Except as set
forth on Schedule 3.1, each entity listed on Schedule 3.1 is wholly owned by the
applicable Subsidiary. All the outstanding shares of capital stock of each
Subsidiary listed on Schedule 3.1 are owned free and clear of all liens. There
is no contract, agreement, arrangement, option, warrant, call, commitment or
other right of any character obligating or entitling any such Subsidiary to
issue, sell, redeem or repurchase any of its securities, and there is no
outstanding security of any kind convertible into or exchangeable for securities
of any such entity.
(c) New Dragon has requisite power and authority to execute and
deliver this Agreement, and to consummate the transactions contemplated hereby
and thereby. New Dragon has taken all action necessary for the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby, and this Agreement constitutes the valid and binding obligation of New
Dragon, enforceable against New Dragon in accordance with its terms, except as
may be affected by bankruptcy, insolvency, moratoria or other similar laws
affecting the enforcement of creditors' rights generally and subject to the
qualification that the availability of equitable remedies is subject to the
discretion of the court before which any proceeding therefore may be brought.
3.2 No Conflicts or Defaults. The execution and delivery of this
Agreement by New Dragon and the consummation of the transactions contemplated
hereby do not and shall not (a) contravene the organizational documents of New
Dragon or any Subsidiary, or (b) with or without the giving of notice or the
passage of time, (i) violate, conflict with, or result in a breach of, or a
default or loss of rights under, any material covenant, agreement, mortgage,
indenture, lease, instrument, permit or license to which New Dragon or such
Subsidiary is a party or by which New Dragon or such Subsidiary or any of their
respective assets are bound, or any judgment, order or decree, or any law, rule
or regulation to which New Dragon, such Subsidiary or any of their respective
assets are subject, (ii) result in the creation of, or give any party the right
to create, any Lien upon any of the assets of any Subsidiary, or (iii) terminate
or give any party the right to terminate, amend, abandon or refuse to perform,
any material agreement, arrangement or commitment to which any Subsidiary is a
party or by which any Subsidiary or any of its assets are bound, or (iv)
accelerate or modify, or give any party the right to accelerate or modify, the
time within which, or the terms under which any Subsidiary is to perform any
duties or obligations or receive any rights or benefits under any material
agreement, arrangement or commitment to which it is a party.
3.3 Capitalization. Set forth on Schedule 3.3 is a list of all Equity
Interests in the Subsidiaries, setting forth the names, addresses and number of
shares owned. All of the Equity Interests in such Subsidiaries are, and when
transferred in accordance with the terms hereof, will be, duly authorized,
validly issued, fully paid and nonassessable, and have not been or will not be
transferred in violation of any rights of third parties. The shares are not
subject to any preemptive or subscription right, any voting trust agreement or
other contract, agreement, arrangement, option, warrant, call, commitment or
other right of any character obligating or entitling any Subsidiary to issue,
7
sell, redeem or repurchase any of its securities, and there is no outstanding
security of any kind convertible into or exchangeable for shares.
3.4 Financial Statements. Schedule 3.4 contains copies of the draft
audited combined balance sheet of New Dragon relating solely to the Subsidiaries
as at December 25, 2000, and the related combined Statement of Operations,
Stockholders' Equity and Cash Flows for the period then ended, including the
notes thereto, (the "New Dragon Financial Statements"). The New Dragon Financial
Statements, together with the notes thereto, have been prepared in accordance
with generally accepted accounting principles all subject to audit adjustments,
which are not expected to be material. The New Dragon Financial Statements
present fairly the consolidated financial position of the Subsidiaries as of the
date and for the period indicated. The books of account and other financial
records of New Dragon as they pertain to the Subsidiaries have been maintained
in accordance with good business practices. On or prior to the Closing, New
Dragon will deliver to the Company audited New Dragon Financial Statements which
will substantially conform to the draft financial statements.
3.5 Further Financial Matters. Except as set forth on Schedule 3.5, the
Subsidiaries have no material liabilities or obligations, whether secured or
unsecured, accrued, determined, absolute or contingent, asserted or unasserted
or otherwise, which are required to be reflected or reserved in a balance sheet
or the notes thereto under generally accepted accounting principles, but which
are not reflected in the New Dragon Financial Statements.
3.6 Taxes. Except as indicated on Schedule 3.6, the Subsidiaries have
complied with all relevant legal requirements relating to registration or
notification for taxation purposes. All tax returns and reports filed on or
prior to the date hereof have been properly prepared and are true, correct (and
to the extent such returns reflect judgments made by the Subsidiaries, such
judgments were reasonable under the circumstances) and complete in all material
respects. Except as indicated on Schedule 3.6, no extension for the filing of
any such return or report is currently in effect. Except as indicated on
Schedule 3.6, no tax return or tax return liability of the Subsidiaries has been
audited or, presently under audit. All taxes which have been asserted to be
payable as a result of any audits have been paid or have been provided for in
the New Dragon Financial Statements. Except as indicated on Schedule 3.6, the
Subsidiaries have not given or been requested to give waivers of any statute of
limitations relating to the payment of any Taxes (or any related penalties,
fines and interest). Except as indicated on Schedule 3.6, all payments for
withholding taxes, unemployment insurance and other amounts required to be paid
for periods prior to the date hereof to any governmental authority in respect of
employment obligations of the Subsidiaries have been paid or shall be paid prior
to the Closing and have been duly provided for on the books and records of the
Subsidiaries and in the New Dragon Financial Statements.
3.7 Indebtedness; Contracts; No Defaults.
(a) Schedule 3.7 sets forth a true, complete and correct list of
all material instruments, agreements, indentures, mortgages, guarantees, notes,
commitments, accommodations, letters of credit or other arrangements or
understandings, whether written or oral, to which the Subsidiaries are a party
(collectively, the "New Dragon Operating Agreements"). An agreement shall not be
considered material for the purposes of this Section 3.7(a) if it provides for
8
expenditures or receipts of less than US $100,000 and has been entered into by
any Subsidiary in the ordinary course of business. The New Dragon Operating
Agreements constitute all of the contracts, agreements, understandings and
arrangements required for the operation of the business of the Subsidiaries or
which have a material effect thereon. Copies of all such material written New
Dragon Operating Agreements have previously been delivered or otherwise made
available to the Company and such copies are true, complete and correct as of
the date hereof.
(b) Except as disclosed on Schedule 3.7, each Subsidiary, or to New
Dragon's knowledge, any other person or entity, is not in breach in any material
respect of, or in default in any material respect under, any material contract,
agreement, arrangement, commitment or plan to which any Subsidiary is a party,
and no event or action has occurred, is pending or is threatened, which, after
the giving of notice, passage of time or otherwise, would constitute or result
in such a material breach or material default by such Subsidiary to the
knowledge of any other person or entity. No Subsidiary has received any notice
of default under any contract, agreement, arrangement, commitment or plan to
which it is a party, which default has not been cured to the satisfaction of, or
duly waived by, the party claiming such default on or before the date hereof.
3.8 Personal Property. Except as set forth on Schedule
3.8, the Subsidiaries have good and marketable title to all of its
tangible personal property and assets, including, without limitation, all of the
assets reflected in the New Dragon Financial Statements that have not been
disposed of in the ordinary course of business since December 25, 2000, free and
clear of all Liens or mortgages, except for any Lien for current taxes not yet
due and payable and such restrictions, if any, on the disposition of securities
as may be imposed by federal or applicable state securities laws.
3.9 Real Property.
(a) Schedule 3.9 sets forth a true and complete list of all real
property owned by, or leased or subleased by or to, the Subsidiaries.
(b) Except as set forth on Schedule 3.9, each lease to which the
Subsidiary is a party is valid, binding and in full force and effect with
respect to such Subsidiary and, to the knowledge of New Dragon, all other
parties thereto; no notice of default or termination under any such lease is
outstanding.
3.10 Compliance with Law. Except as set forth on Schedule 3.10, each
Subsidiary is conducting its respective business or affairs in material
compliance with applicable law, ordinance, rule, regulation, court or
administrative order, decree or process, or any requirement of insurance
carriers. No Subsidiary has received any notice of violation or claimed
violation of any such law, ordinance, rule, regulation, order, decree, process
or requirement.
3.11 Permits and Licenses. Except as set forth on Schedule 3.11, each
Subsidiary has all certificates of occupancy, rights, permits, certificates,
licenses, franchises, approvals and other authorizations as are reasonably
necessary to conduct its respective business and to own, lease, use, operate and
occupy its assets, at the places and in the manner now conducted and operated,
9
except those the absence of which would not materially adversely affect its
respective business. Except as set forth on Schedule 3.11, as of the date
hereof, the Subsidiaries have not received any written or oral notice or claim
pertaining to the failure to obtain any material permit, certificate, license,
approval or other authorization required by any agency or other regulatory body,
the failure of which to obtain would materially and adversely affect its
business.
3.12 No Adverse Changes. Except as set forth on Schedule 3.12, since
December 25, 2000, there has not been (a) any material adverse change in the
business, prospects, the financial or other condition, or the respective assets
or liabilities of the Subsidiaries as reflected in the New Dragon Financial
Statements, (b) any material loss sustained by any Subsidiary, including, but
not limited to any loss on account of theft, fire, flood, explosion, accident or
other calamity, whether or not insured, which has materially and adversely
interfered, or may materially and adversely interfere, with the operation of the
Subsidiaries' business, or (c) to the best knowledge of New Dragon, any event,
condition or state of facts, including, without limitation, the enactment,
adoption or promulgation of any law, rule or regulation, the occurrence of which
materially and adversely does or would affect the results of operations or the
business or financial condition of the Subsidiaries.
3.13 Litigation. (a) Except as set forth on Schedule 3.13, there is no
claim, dispute, action, suit, proceeding or investigation pending or, to the
knowledge of New Dragon threatened, against or affecting the business of any
Subsidiary, or challenging the validity or propriety of the transactions
contemplated by this Agreement, at law or in equity or admiralty or before any
authority, board, agency, commission or instrumentality, nor to the knowledge of
New Dragon, has any such claim, dispute, action, suit, proceeding or
investigation been pending or threatened, during the 12-month period preceding
the date hereof; (b) there is no outstanding judgment, order, writ, ruling,
injunction, stipulation or decree of any court, arbitrator or federal, state,
local, foreign or other governmental authority, board, agency, commission or
instrumentality, against or materially affecting the business of any Subsidiary;
and (c) no Subsidiary has received any written or verbal inquiry from any
federal, state, local, foreign or other governmental authority, board, agency,
commission or instrumentality concerning the possible violation of any law, rule
or regulation or any matter disclosed in respect of its business.
3.14 Insurance. The Subsidiaries maintain insurance against all risks
customarily insured against by companies in its industry. All such policies are
in full force and effect, and no Subsidiary has received any notice from any
insurance company suspending, revoking, modifying or canceling (or threatening
such action) any insurance policy issued to such Subsidiary.
3.15 Articles of Association; Minute Books. The copies of the Articles
of Association of the Subsidiaries, and all amendments to each are true, correct
and complete. The minute books of the Subsidiaries contain true and complete
records of all meetings and consents in lieu of meetings of their Board of
Directors (and any committees thereof), or similar governing bodies, since the
time of their respective organization. The stock records of the Subsidiaries are
true, correct and complete.
3.16 Employee Benefit Plans. Except as set forth on Schedule 3.17, the
Subsidiaries do not have in existence any share incentive, share option scheme
or profit sharing bonus or other such incentive scheme for any of its directors
10
or employees. Except as set forth in Item 3.17 or required under the applicable
laws, there are no arrangements, schemes, customs or practices (whether legally
enforceable or not) in operation for the payment of or contributions towards any
provident fund, pensions, allowances, lump sums or other like benefits on
retirement or on death or during periods of sickness or disablement for the
benefit of any director or former director or employee or former employee or for
the benefit of the dependents of any such persons nor has any proposal been
announced to establish any such agreement or agreements.
3.17 Patents; Trademarks and Intellectual Property Rights. Each
Subsidiary owns or possesses sufficient legal rights to all patents, trademarks,
service marks, trade names, copyrights, trade secrets, licenses, information,
internet web site(s) proprietary rights and processes necessary for its business
as now conducted without any conflict with or infringement of the rights of
others. Except as set forth on Schedule 3.18, there are no outstanding options,
licenses or agreements of any kind relating to the foregoing, and no Subsidiary
is bound by, or a party to, any options, licenses or agreements of any kind with
respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information, proprietary rights and processes of any
other person or entity.
3.18 Brokers. Except as set forth on Schedule 3.18, all negotiations
relative to this Agreement and the transactions contemplated hereby have been
carried without the intervention of any Person in such a manner as to give rise
to any valid claim by any Person against any Seller for a finder's fee,
brokerage commission or similar payment.
3.19 Purchase for Investment.
(a) New Dragon is acquiring the Company Shares for investment for
New Dragon's own account and not as a nominee or agent, and not with a view to
the resale or distribution of any part thereof, and New Dragon has no present
intention of selling, granting any participation in, or otherwise distributing
the same. New Dragon further represents that it does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participation to such person or to any third person, with respect to any of the
Company Shares.
(b) New Dragon understands that the Company Shares are not
registered under the Securities Act on the ground that the sale and the issuance
of securities hereunder is exempt from registration under the Securities Act
pursuant to Section 4(2) thereof, and that the Company's reliance on such
exemption is predicated on New Dragon's representations set forth herein. New
Dragon is an "accredited investor" as that term is defined in Rule 501(a) of
Regulation D under the Securities Act.
3.20 Investment Experience. New Dragon acknowledges that New Dragon can
bear the economic risk of its investment, and has such knowledge and experience
in financial and business matters that it is capable of evaluating the merits
and risks of the investment in the Company Shares.
3.21 Information. New Dragon has carefully reviewed such information as
New Dragon deemed necessary to evaluate an investment in the Company Shares. To
the full satisfaction of New Dragon, it has been furnished all materials that it
11
has requested relating to the Company and the issuance of the Company Shares
hereunder, and New Dragon has been afforded the opportunity to ask questions of
representatives of the Company to obtain any information necessary to verify the
accuracy of any representations or information made or given to New Dragon.
Notwithstanding the foregoing, nothing herein shall derogate from or otherwise
modify the representations and warranties of the Company set forth in this
Agreement, on which each of New Dragon has relied in making an exchange of the
Equity Interests of the Company Shares.
3.22 Restricted Securities. New Dragon understands that the Company
Shares may not be sold, transferred, or otherwise disposed of without
registration under the Act or an exemption there from, and that in the absence
of an effective registration statement covering the Company Shares or any
available exemption from registration under the Securities Act, the Company
Shares must be held indefinitely. New Dragon is aware that the Company Shares
may not be sold pursuant to Rule 144 promulgated under the Securities Act unless
all of the conditions of that Rule are met. Among the conditions for use of Rule
144 may be the availability of current information to the public about the
Company.
ARTICLE IV
INDEMNIFICATION
4.1 Indemnity of the Company and the Shareholders. The Company and the
Shareholders agree to jointly and severally defend, indemnify and hold harmless
New Dragon from and against, and to reimburse New Dragon with respect to, all
liabilities, losses, costs and expenses, including, without limitation,
reasonable attorneys' fees and disbursements, asserted against or incurred by
New Dragon by reason of, arising out of, or in connection with any material
breach of any representation or warranty contained in this Agreement made by the
Company or the Shareholders or in any document or certificate delivered by the
Company or the Shareholders pursuant to the provisions of this Agreement or in
connection with the transactions contemplated thereby.
4.2 Indemnity of the Company. New Dragon agrees to defend, indemnify
and hold harmless the Company from and against, and to reimburse the Company
with respect to, all liabilities, losses, costs and expenses, including, without
limitation, reasonable attorneys' fees and disbursements, asserted against or
incurred by the Company by reason of, arising out of, or in connection with any
material breach of any representation or warranty contained in this Agreement
and made by New Dragon or in any document or certificate delivered by New Dragon
pursuant to the provisions of this Agreement or in connection with the
transactions contemplated thereby.
4.3 Indemnification Procedure. A party (an "Indemnified Party") seeking
indemnification shall give prompt notice to the other party (the "Indemnifying
Party") of any claim for indemnification arising under this Article 4. The
Indemnifying Party shall have the right to assume and to control the defense of
any such claim with counsel reasonably acceptable to such Indemnified Party, at
the Indemnifying Party's own cost and expense, including the cost and expense of
reasonable attorneys' fees and disbursements in connection with such defense, in
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which event the Indemnifying Party shall not be obligated to pay the fees and
disbursements of separate counsel for such in such action. In the event,
however, that such Indemnified Party's legal counsel shall determine that
defenses may be available to such Indemnified Party that are different from or
in addition to those available to the Indemnifying Party, in that there could
reasonably be expected to be a conflict of interest if such Indemnifying Party
and the Indemnified Party have common counsel in any such proceeding, or if the
Indemnified Party has not assumed the defense of the action or proceedings, then
such Indemnifying Party may employ separate counsel to represent or defend such
Indemnified Party, and the Indemnifying Party shall pay the reasonable fees and
disbursements of counsel for such Indemnified Party. No settlement of any such
claim or payment in connection with any such settlement shall be made without
the prior consent of the Indemnifying Party which consent shall not be
unreasonably withheld.
ARTICLE V
DELIVERIES
5.1 Items to be delivered to New Dragon prior to or at Closing by the
Company.
(a) articles of incorporation and amendments thereto, bylaws and
amendments thereto, certificate of good standing in the Company's state of
incorporation;
(b) all applicable schedules hereto;
(c) all minutes and resolutions of board of director and
shareholder meetings in possession of the Company;
(d) shareholder list;
(e) all financial statements and tax returns in possession of the
Company;
(f) resolution from the Company's current directors appointing
designees of New Dragon to the Company's Board of Directors;
(g) letters of resignation from the Company's current officers and
directors to be effective upon Closing and after the appointments described in
this section;
(h) certificates representing 37,890,857 Company Shares issued in
the denominations as set forth opposite the respective names as designated by
New Dragon on or before the Closing, duly authorized, validly issued, fully paid
for and non-assessable;
(i) copies of board, and if applicable, shareholder resolutions
approving this transaction and authorizing the issuances of the shares hereto;
(j) any other document reasonably requested by New Dragon that it
deems necessary for the consummation of this transaction.
5.2 Items to be delivered to the Company prior to or at Closing by New
Dragon.
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(a) articles of association and amendments thereto and amendments
thereto with respect to each Subsidiary;
(b) all applicable schedules hereto;
(c) all minutes and resolutions of board of director and
shareholder meetings of each Subsidiary in possession of New Dragon;
(d) shareholder list;
(e) all financial statements and tax returns in possession of the
Subsidiaries;
(f) resolution from New Dragon's current directors appointing
designees of New Dragon to the Company's Board of Directors;
(g) copies of board, and if applicable, shareholder resolutions
approving this transaction and authorizing the issuances of the shares hereto;
and
(h) any other document reasonably requested by the Company that it
deems necessary for the consummation of this transaction.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions Precedent to Closing. The obligations of the parties
under this Agreement shall be and are subject to fulfillment, prior to or at the
Closing, of each of the following conditions:
(a) That each of the representations and warranties of the parties
contained herein shall be true and correct at the time of the Closing Date as if
such representations and warranties were made at such time.
(b) That the parties shall have performed or complied with all
agreements, terms and conditions required by this Agreement to be performed or
complied with by them prior to or at the time of the Closing.
(c) No material adverse change shall have occurred in the
financial, business or trading conditions of the Company and the Subsidiaries,
taken as a whole, as the case may be, from the date hereof up to and including
the Closing Date.
6.2 Conditions to Obligations New Dragon. The obligations of New Dragon
shall be subject to fulfillment prior to or at the Closing of each of the
following conditions:
(a) The Shareholders shall have paid all of the costs and expenses
of the Company associated with the transactions contemplated by this Agreement;
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(b) As of the Closing, the Company shall have transferred all of
its assets and assigned all of its liabilities whatsoever, contingent or
otherwise, to the effect that immediately prior to the Exchange, the Company
will have no assets or liabilities. All such transfers and assignments shall be
in form and substance reasonably satisfactory to New Dragon and its counsel.
(c) The Company shall have entered into a registration rights
agreement with all the Sellers in the form attached as Exhibit 6.2(c) (the
"Registration Rights Agreement").
(d) The Company shall have delivered evidence reasonably
satisfactory to New Dragon regarding the approval of the shareholders of the
Company for this Agreement, the transfer of the Company's assets referred to in
Section 6.2(b) (the "Transferred Assets") and the change of the Company's name
as may be designated by New Dragon after the date hereof (the "Name Change").
(e) The Company and New Dragon shall have received notification
from AMEX that the Company's Common Stock shall be continued to be listed for
trading on AMEX.
(f) The Company and the Shareholders shall have entered into a
Pledge Agreement respecting the Company's and the Shareholders' obligations
pursuant to Section 4.1 hereof, in form and substance reasonably satisfactory to
New Dragon.
(g) The Company shall have increased the authorized shares of Class
A Common Stock to 100,000,000 (the "Share Increase").
(h) All of the shareholders holding shares of Class B Common Stock
shall have converted such shares to shares of Class A Common Stock on a
one-for-one basis so that, immediately prior to the Closing, the Company shall
have no more than 2,852,000 shares of Common Stock outstanding on a fully
diluted basis.
ARTICLE VII
COVENANTS
7.1 Shareholders Vote. As soon as practicable after the date hereof,
the Company shall (a) cause the preparation and filing with the Securities and
Exchange Commission a proxy statement with respect to this Agreement, the
transfer of the Transferred Assets, the Share Increase and the Name Change and
(b) call a special meeting of the Shareholders (the "Special Meeting") to
approve such matters.
7.2 AMEX Application. New Dragon shall provide such information as may
be reasonably requested by AMEX relating to the continued listing of the
Company's Common Stock on AMEX.
7.3 Shareholders Vote. Each of the Shareholders agrees to vote all
shares beneficially owned by such Shareholder at the Special Meeting in favor of
the matters referred to in Section 7.1.
15
ARTICLE VIII
NO PUBLIC DISCLOSURE
8.1 No Public Disclosure. Without the prior written consent of the
others, none of the Company or New Dragon will, and will each cause their
respective representatives not to, make any release to the press or other public
disclosure with respect to either the fact that discussions or negotiations have
taken place concerning the transactions contemplated by this Agreement, the
existence or contents of this Agreement or any prior correspondence relating to
this transactions contemplated by this Agreement, except for such public
disclosure as may be necessary, in the written opinion of outside counsel
(reasonably satisfactory to the other parties) for the party proposing to make
the disclosure not to be in violation of or default under any applicable law,
regulation or governmental order. If either party proposes to make any
disclosure based upon such an opinion, that party will deliver a copy of such
opinion to the other party, together with the text of the proposed disclosure,
as far in advance of its disclosure as is practicable, and will in good faith
consult with and consider the suggestions of the other party concerning the
nature and scope of the information it proposes to disclose.
ARTICLE IX
CONFIDENTIAL INFORMATION
9.1 Confidential Information. In connection with the negotiation of
this Agreement and the consummation of the transactions contemplated hereby,
each party hereto will have access to data and confidential information relating
to the other party. Each party hereto shall treat such data and information as
confidential, preserve the confidentiality thereof and not duplicate or use such
data or information, except in connection with the transactions contemplated
hereby, and in the event of the termination of this Agreement for any reason
whatsoever, each party hereto shall return to the other all documents, work
papers and other material (including all copies thereof) obtained in connection
with the transactions contemplated hereby and will use reasonable efforts,
including instructing its employees who have had access to such information, to
keep confidential and not to use any such data or information; provided,
however, that such obligations shall not apply to any data and information (i)
which at the time of disclosure, is available publicly, (ii) which, after
disclosure, becomes available publicly through no fault of the receiving party,
(iii) which the receiving party knew or to which the receiving party had access
prior to disclosure by the disclosing party, (iv) which is required by law,
regulation or exchange rule, or in connection with legal process, to be
disclosed, (v) which is disclosed by a receiving party to its attorneys or
accountants, who shall respect the above restrictions, or (vi) which is obtained
in connection with any Tax matters and is disclosed in connection with the
filing of Tax returns or claims for refund or in conducting an audit or other
proceeding.
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ARTICLE X
TERMINATION
10.1 Termination. This Agreement may be terminated at any time before
or, at Closing, by:
(a) The mutual agreement of the constituent parties;
(b) Any party if:
(i) Any provision of this Agreement applicable to a party shall
be materially untrue or fail to be accomplished;
(ii) Any legal proceeding shall have been instituted or shall be
imminently threatening to delay, restrain or prevent the consummation of this
Agreement; or
(iii) If by November 5, 2001, the conditions precedents to
Closing are not satisfied. ARTICLE XI
MISCELLANEOUS
11.1 Survival of Representations, Warranties and Agreements. All
representations and warranties and statements made by a party to in this
Agreement or in any document or certificate delivered pursuant hereto shall
survive the Closing Date for so long as the applicable statute of limitations
shall remain open. Each of the parties hereto is executing and carrying out the
provisions of this agreement in reliance upon the representations, warranties
and covenants and agreements contained in this agreement or at the closing of
the transactions herein provided for and not upon any investigation which it
might have made or any representations, warranty, agreement, promise or
information, written or oral, made by the other party or any other person other
than as specifically set forth herein.
11.2 Access to Books and Records. During the course of this transaction
through Closing, each party agrees to make available for inspection all
corporate books, records and assets, and otherwise afford to each other and
their respective representatives, reasonable access to all documentation and
other information concerning the business, financial and legal conditions of
each other for the purpose of conducting a due diligence investigation thereof.
Such due diligence investigation shall be for the purpose of satisfying each
party as to the business, financial and legal condition of each other for the
purpose of determining the desirability of consummating the proposed
transaction. The Parties further agree to keep confidential and not use for
their own benefit, except in accordance with this Agreement any information or
documentation obtained in connection with any such investigation.
11.3 Further Assurances. If, at any time after the Closing, the parties
shall consider or be advised that any further deeds, assignments or assurances
in law or that any other things are necessary, desirable or proper to complete
the merger in accordance with the terms of this agreement or to vest, perfect or
17
confirm, of record or otherwise, the title to any property or rights of the
parties hereto, the Parties agree that their proper officers and directors shall
execute and deliver all such proper deeds, assignments and assurances in law and
do all things necessary, desirable or proper to vest, perfect or confirm title
to such property or rights and otherwise to carry out the purpose of this
Agreement, and that the proper officers and directors the parties are fully
authorized to take any and all such action.
11.4 Notice. All communications, notices, requests, consents or demands
given or required under this Agreement shall be in writing and shall be deemed
to have been duly given when delivered to, or received by prepaid registered or
certified mail or recognized overnight courier addressed to, or upon receipt of
a facsimile sent to, the party for whom intended, as follows, or to such other
address or facsimile number as may be furnished by such party by notice in the
manner provided herein:
If to the Company:
BioAqua Systems Inc.
1900 Glades Road, Suite 351
Boca Raton, FL 33431
Attention: President
Tel: 954-766-789_
Fax: _______________
If to the Shareholders:
c/o Robert Heiss
99 University Place, 8th Floor
New York, NY 10003
Tel: _______________
Fax: _______________
If to New Dragon:
Suite 1304, 13th Floor
Wing On Centre
Connaught Road Central
Hong Kong
Tel: 852-2815-9892
Fax: 852-2815-9839
Attention: Willie Lai
Email: willie@longfeng.com.hk
Or such other as New Dragon may notify to the other parties to
the Agreement by not less than five (5) Business Day's notice.
11.5 Entire Agreement. This Agreement, the Schedules and any
instruments and agreements to be executed pursuant to this Agreement, sets forth
the entire understanding of the parties hereto with respect to its subject
matter, merges and supersedes all prior and contemporaneous understandings with
18
respect to its subject matter and may not be waived or modified, in whole or in
part, except by a writing signed by each of the parties hereto. No waiver of any
provision of this Agreement in any instance shall be deemed to be a waiver of
the same or any other provision in any other instance. Failure of any party to
enforce any provision of this Agreement shall not be construed as a waiver of
its rights under such provision.
11.6 Successors and Assigns. This Agreement shall be binding upon,
enforceable against and inure to the benefit of, the parties hereto and their
respective heirs, administrators, executors, personal representatives,
successors and assigns, and nothing herein is intended to confer any right,
remedy or benefit upon any other person. This Agreement may not be assigned by
any party hereto except with the prior written consent of the other parties,
which consent shall not be unreasonably withheld.
11.7 Governing Law. This Agreement shall in all respects be governed by
and construed in accordance with the laws of the State of California are
applicable to agreements made and fully to be performed in such state, without
giving effect to conflicts of law principles.
11.8 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.9 Construction. Headings contained in this Agreement are for
convenience only and shall not be used in the interpretation of this Agreement.
References herein to Articles, Sections and Exhibits are to the articles,
sections and exhibits, respectively, of this Agreement. The Disclosure Schedules
are hereby incorporated herein by reference and made a part of this Agreement.
As used herein, the singular includes the plural, and the masculine, feminine
and neuter gender each includes the others where the context so indicates.
11.10 Severability. If any provision of this Agreement is held to be
invalid or unenforceable by a court of competent jurisdiction, this Agreement
shall be interpreted and enforceable as if such provision were severed or
limited, but only to the extent necessary to render such provision and this
Agreement enforceable.
11.11 Costs and Expenses. Except as set forth in Section 6.2(a), each
party hereto shall pay its own costs and expenses hereunder, provided that if
the transactions contemplated herein are not completed because (i) of the
failure of the Company or the Shareholders to satisfy any condition precedent in
favor of the Sellers, then the Company and the Shareholders shall forthwith
indemnify and reimburse the Sellers for their costs and expenses, or (ii) of the
failure of the Sellers to satisfy any condition precedent in favor of the
Company, then the Sellers shall forthwith indemnify and reimburse the Company
for its costs and expenses.
11.12 Equitable Relief. The parties hereto agree that money damages
would not be a sufficient remedy for any breach or threatened breach of any
provision herein and that, in addition to all other remedies which any party may
have, each party will be entitled to specific performance and injunctive or
other equitable relief as a remedy therefor.
19
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the date first set forth above.
BIO AQUA SYSTEMS INC.
By:
------------------------------------------------
Max Rutman
New Dragon ASIA FOOD LIMITED
By:
------------------------------------------------
Shareholders:
-------------------------------
Max Rutman
FLAGSHIP IMPORT EXPORT LLC
By:
----------------------------
20
DISCLOSURE SCHEDULE
21
APPENDIX C
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
BIO-AQUA SYSTEMS, INC.
Pursuant to Section 607.1006 of the Business Corporation Act of the
State of Florida, the undersigned President of BIO-AQUA SYSYEMS, INC. (the
"Corporation"), a corporation organized and existing under and by virtue of the
Business Corporation Act of the State of Florida, bearing document number
P____________, does hereby certify:
First: That in accordance with the Written Consent of the Board of
Directors dated _____, 2001and approval by a majority of the Corporation's
shareholders pursuant to a special meeting of the shareholders held on ______,
2001, in accordance with Section 607.0820 and Section 607.0705 of the Florida
Business Corporation Act, all the directors and a majority of the shareholders
of said Corporation approved the amendment to the Corporation's Articles of
Incorporation as follows:
Article I of the Corporation's Articles of Incorporation shall be
deleted in its entirety and substituted by the following:
ARTICLE I
CORPORATE NAME
--------------
The Corporation's name shall be: NEW DRAGON ASIA CORP.
Article IV of the Corporation's Articles of Incorporation shall be
deleted in its entirety and substituted by the following:
ARTICLE IV
CAPITAL STOCK
-------------
The maximum number of shares that this Corporation shall be authorized
to issue and have outstanding at any one time shall be (i) one hundred seven
million (107,000,000) shares of common stock, par value $.0001 per share, of
which 100,000,000 shares have been designated as Class A Common Stock and
2,000,000 shares have been designated as Class B Common Stock, and (ii) five
million (5,000,000) shares of Preferred Stock having a par value of $.0001 per
share.
Brian A. Pearlman, Esq. - Fla. Bar No. 0157023
Atlas Pearlman, P.A.
350 East Las Olas Boulevard, Suite 1700
Fort Lauderdale, FL 33301
(954) 763-1200
1
The Class A Common Stock shall be designated as follows:
1. Designation and Number of Shares. The Class A Common Stock shall be
designated as "Class A Common Stock" with a par value of $.0001 each, and the
number of shares constituting the Class A Common Stock shall be 100,000,000
shares.
2. Voting Rights. Holders of Class A Common Stock shall be entitled to
one (1) vote for each share of Class A Common Stock held.
3. Dividends. Holders of Class A Common Stock shall be entitled to
dividends as shall be designated by the Company's Board of Directors from time
to time.
The Class B Common Stock shall be designated as follows:
1. Designation and Number of Shares. The Class B Common Stock shall be
designated "Class B Common Stock" with a par value of $.0001 each, and the
number of shares constituting the Class B Common Stock shall be 2,000,000
shares.
2. Voting Rights. Holders of Class B Common Stock shall be entitled to
five (5) votes for each share of Class B Common Stock held.
3. Dividends. Holders of Class B Common Stock shall be entitled to
dividends as shall be designated by the Company's Board of Directors from time
to time.
4. Conversion. Holders of Class B Common Stock may convert any shares
of Class B Common Stock held by any of them into shares of Class A Common Stock,
provided that upon conversion, the voting rights of such converted shares shall
be on a one vote for one share basis; and provided that such Class A Common
Stock are unencumbered or are not subject to any escrow agreement or otherwise.
5. Sale or Transfer of Class B Common Stock. Holders of Class B Common
Stock may sell or transfer any or all of their shares of Class B Common Stock to
any party, who will have the same rights, privileges, and restrictions, if
applicable, of any other holder of Class B Common Stock.
Classes and series of the Common Stock and Preferred Stock may be
created and issued from time to time, with such designations, preferences,
conversion rights, cumulative, relative, participating, optional or other
rights, including voting rights, qualifications, limitations or restrictions
thereof as shall be stated and expressed in the resolution or resolutions
providing for the creation and issuance of such classes of Common Stock as
adopted by the Board of Directors.
The foregoing amendment was adopted by the Board of Directors and a
majority of the shareholders of the Corporation pursuant to the Florida Business
Corporation Act; therefore, the number of votes cast by the shareholders of the
Corporation for the amendment to the Corporation's Articles of Incorporation was
sufficient for approval.
2
IN WITNESS WHEREOF, the undersigned being the President of this
Corporation has executed these Articles of Amendment to Articles of
Incorporation as of __________, 2001.
/s/ Max Rutman
---------------------------
Max Rutman, President
3
APPENDIX D
Dissenters' Rights Under Florida Business Corporation Act
607.1301 Dissenters' rights; definitions.--The following definitions apply to
ss. 607.1302 and 607.1320:
(1) "Corporation" means the issuer of the shares held by a dissenting
shareholder before the corporate action or the surviving or acquiring
corporation by merger or share exchange of that issuer.
(2) "Fair value," with respect to a dissenter's shares, means the value of the
shares as of the close of business on the day prior to the shareholders'
authorization date, excluding any appreciation or depreciation in anticipation
of the corporate action unless exclusion would be inequitable.
(3) "Shareholders' authorization date" means the date on which the shareholders'
vote authorizing the proposed action was taken, the date on which the
corporation received written consents without a meeting from the requisite
number of shareholders in order to authorize the action, or, in the case of a
merger pursuant to s. 607.1104, the day prior to the date on which a copy of the
plan of merger was mailed to each shareholder of record of the subsidiary
corporation.
607.1302 Right of shareholders to dissent.--
(1) Any shareholder of a corporation has the right to dissent from, and obtain
payment of the fair value of his or her shares in the event of, any of the
following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party:
1. If the shareholder is entitled to vote on the merger, or
2. If the corporation is a subsidiary that is merged with its parent under s.
607.1104, and the shareholders would have been entitled to vote on action taken,
except for the applicability of s. 607.1104;
(b) Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation, other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange
pursuant to s. 607.1202, including a sale in dissolution but not including a
sale pursuant to court order or a sale for cash pursuant to a plan by which all
or substantially all of the net proceeds of the sale will be distributed to the
shareholders within 1 year after the date of sale;
(c) As provided in s. 607.0902(11), the approval of a control-share acquisition;
(d) Consummation of a plan of share exchange to which the corporation is a party
as the corporation the shares of which will be acquired, if the shareholder is
entitled to vote on the plan;
(e) Any amendment of the articles of incorporation if the shareholder is
entitled to vote on the amendment and if such amendment would adversely affect
such shareholder by:
1. Altering or abolishing any preemptive rights attached to any of his or her
shares;
2. Altering or abolishing the voting rights pertaining to any of his or her
shares, except as such rights may be affected by the voting rights of new shares
then being authorized of any existing or new class or series of shares;
3. Effecting an exchange, cancellation, or reclassification of any of his or her
shares, when such exchange, cancellation, or reclassification would alter or
abolish the shareholder's voting rights or alter his or her percentage of equity
in the corporation, or effecting a reduction or cancellation of accrued
dividends or other arrearages in respect to such shares;
4. Reducing the stated redemption price of any of the shareholder's redeemable
shares, altering or abolishing any provision relating to any sinking fund for
the redemption or purchase of any of his or her shares, or making any of his or
her shares subject to redemption when they are not otherwise redeemable;
5. Making noncumulative, in whole or in part, dividends of any of the
shareholder's preferred shares which had theretofore been cumulative;
6. Reducing the stated dividend preference of any of the shareholder's preferred
shares; or
7. Reducing any stated preferential amount payable on any of the shareholder's
preferred shares upon voluntary or involuntary liquidation; or
(f) Any corporate action taken, to the extent the articles of incorporation
provide that a voting or nonvoting shareholder is entitled to dissent and obtain
payment for his or her shares.
(2) A shareholder dissenting from any amendment specified in paragraph (1)(e)
has the right to dissent only as to those of his or her shares which are
adversely affected by the amendment.
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(3) A shareholder may dissent as to less than all the shares registered in his
or her name. In that event, the shareholder's rights shall be determined as if
the shares as to which he or she has dissented and his or her other shares were
registered in the names of different shareholders.
(4) Unless the articles of incorporation otherwise provide, this section does
not apply with respect to a plan of merger or share exchange or a proposed sale
or exchange of property, to the holders of shares of any class or series which,
on the record date fixed to determine the shareholders entitled to vote at the
meeting of shareholders at which such action is to be acted upon or to consent
to any such action without a meeting, were either registered on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc., or held of record by not fewer than 2,000 shareholders.
(5) A shareholder entitled to dissent and obtain payment for his or her shares
under this section may not challenge the corporate action creating his or her
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
607.1320 Procedure for exercise of dissenters' rights.-
(1) (a) If a proposed corporate action creating dissenters' rights under s.
607.1302 is submitted to a vote at a shareholders' meeting, the meeting notice
shall state that shareholders are or may be entitled to assert dissenters'
rights and be accompanied by a copy of ss. 607.1301, 607.1302, and 607.1320. A
shareholder who wishes to assert dissenters' rights shall:
1. Deliver to the corporation before the vote is taken written notice of the
shareholder's intent to demand payment for his or her shares if the proposed
action is effectuated, and
2. Not vote his or her shares in favor of the proposed action. A proxy or vote
against the proposed action does not constitute such a notice of intent to
demand payment.
(b) If proposed corporate action creating dissenters' rights under s. 607.1302
is effectuated by written consent without a meeting, the corporation shall
deliver a copy of ss. 607.1301, 607.1302, and 607.1320 to each shareholder
simultaneously with any request for the shareholder's written consent or, if
such a request is not made, within 10 days after the date the corporation
received written consents without a meeting from the requisite number of
shareholders necessary to authorize the action.
(2) Within 10 days after the shareholders' authorization date, the corporation
shall give written notice of such authorization or consent or adoption of the
plan of merger, as the case may be, to each shareholder who filed a notice of
intent to demand payment for his or her shares pursuant to paragraph (1)(a) or,
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in the case of action authorized by written consent, to each shareholder,
excepting any who voted for, or consented in writing to, the proposed action.
(3) Within 20 days after the giving of notice to him or her, any shareholder who
elects to dissent shall file with the corporation a notice of such election,
stating the shareholder's name and address, the number, classes, and series of
shares as to which he or she dissents, and a demand for payment of the fair
value of his or her shares. Any shareholder failing to file such election to
dissent within the period set forth shall be bound by the terms of the proposed
corporate action. Any shareholder filing an election to dissent shall deposit
his or her certificates for certificated shares with the corporation
simultaneously with the filing of the election to dissent. The corporation may
restrict the transfer of uncertificated shares from the date the shareholder's
election to dissent is filed with the corporation.
(4) Upon filing a notice of election to dissent, the shareholder shall
thereafter be entitled only to payment as provided in this section and shall not
be entitled to vote or to exercise any other rights of a shareholder. A notice
of election may be withdrawn in writing by the shareholder at any time before an
offer is made by the corporation, as provided in subsection (5), to pay for his
or her shares. After such offer, no such notice of election may be withdrawn
unless the corporation consents thereto. However, the right of such shareholder
to be paid the fair value of his or her shares shall cease, and the shareholder
shall be reinstated to have all his or her rights as a shareholder as of the
filing of his or her notice of election, including any intervening preemptive
rights and the right to payment of any intervening dividend or other
distribution or, if any such rights have expired or any such dividend or
distribution other than in cash has been completed, in lieu thereof, at the
election of the corporation, the fair value thereof in cash as determined by the
board as of the time of such expiration or completion, but without prejudice
otherwise to any corporate proceedings that may have been taken in the interim,
if:
(a) Such demand is withdrawn as provided in this section;
(b) The proposed corporate action is abandoned or rescinded or the shareholders
revoke the authority to effect such action;
(c) No demand or petition for the determination of fair value by a court has
been made or filed within the time provided in this section; or
(d) A court of competent jurisdiction determines that such shareholder is not
entitled to the relief provided by this section.
(5) Within 10 days after the expiration of the period in which shareholders may
file their notices of election to dissent, or within 10 days after such
corporate action is effected, whichever is later (but in no case later than 90
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days from the shareholders' authorization date), the corporation shall make a
written offer to each dissenting shareholder who has made demand as provided in
this section to pay an amount the corporation estimates to be the fair value for
such shares. If the corporate action has not been consummated before the
expiration of the 90-day period after the shareholders' authorization date, the
offer may be made conditional upon the consummation of such action. Such notice
and offer shall be accompanied by:
(a) A balance sheet of the corporation, the shares of which the dissenting
shareholder holds, as of the latest available date and not more than 12 months
prior to the making of such offer; and
(b) A profit and loss statement of such corporation for the 12-month period
ended on the date of such balance sheet or, if the corporation was not in
existence throughout such 12-month period, for the portion thereof during which
it was in existence.
(6) If within 30 days after the making of such offer any shareholder accepts the
same, payment for his or her shares shall be made within 90 days after the
making of such offer or the consummation of the proposed action, whichever is
later. Upon payment of the agreed value, the dissenting shareholder shall cease
to have any interest in such shares.
(7) If the corporation fails to make such offer within the period specified
therefor in subsection (5) or if it makes the offer and any dissenting
shareholder or shareholders fail to accept the same within the period of 30 days
thereafter, then the corporation, within 30 days after receipt of written demand
from any dissenting shareholder given within 60 days after the date on which
such corporate action was effected, shall, or at its election at any time within
such period of 60 days may, file an action in any court of competent
jurisdiction in the county in this state where the registered office of the
corporation is located requesting that the fair value of such shares be
determined. The court shall also determine whether each dissenting shareholder,
as to whom the corporation requests the court to make such determination, is
entitled to receive payment for his or her shares. If the corporation fails to
institute the proceeding as herein provided, any dissenting shareholder may do
so in the name of the corporation. All dissenting shareholders (whether or not
residents of this state), other than shareholders who have agreed with the
corporation as to the value of their shares, shall be made parties to the
proceeding as an action against their shares. The corporation shall serve a copy
of the initial pleading in such proceeding upon each dissenting shareholder who
is a resident of this state in the manner provided by law for the service of a
summons and complaint and upon each nonresident dissenting shareholder either by
registered or certified mail and publication or in such other manner as is
permitted by law. The jurisdiction of the court is plenary and exclusive. All
shareholders who are proper parties to the proceeding are entitled to judgment
against the corporation for the amount of the fair value of their shares. The
court may, if it so elects, appoint one or more persons as appraisers to receive
evidence and recommend a decision on the question of fair value. The appraisers
shall have such power and authority as is specified in the order of their
appointment or an amendment thereof. The corporation shall pay each dissenting
shareholder the amount found to be due him or her within 10 days after final
determination of the proceedings. Upon payment of the judgment, the dissenting
shareholder shall cease to have any interest in such shares.
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(8) The judgment may, at the discretion of the court, include a fair rate of
interest, to be determined by the court.
(9) The costs and expenses of any such proceeding shall be determined by the
court and shall be assessed against the corporation, but all or any part of such
costs and expenses may be apportioned and assessed as the court deems equitable
against any or all of the dissenting shareholders who are parties to the
proceeding, to whom the corporation has made an offer to pay for the shares, if
the court finds that the action of such shareholders in failing to accept such
offer was arbitrary, vexatious, or not in good faith. Such expenses shall
include reasonable compensation for, and reasonable expenses of, the appraisers,
but shall exclude the fees and expenses of counsel for, and experts employed by,
any party. If the fair value of the shares, as determined, materially exceeds
the amount which the corporation offered to pay therefor or if no offer was
made, the court in its discretion may award to any shareholder who is a party to
the proceeding such sum as the court determines to be reasonable compensation to
any attorney or expert employed by the shareholder in the proceeding.
(10) Shares acquired by a corporation pursuant to payment of the agreed value
thereof or pursuant to payment of the judgment entered therefor, as provided in
this section, may be held and disposed of by such corporation as authorized but
unissued shares of the corporation, except that, in the case of a merger, they
may be held and disposed of as the plan of merger otherwise provides. The shares
of the surviving corporation into which the shares of such dissenting
shareholders would have been converted had they assented to the merger shall
have the status of authorized but unissued shares of the surviving corporation.
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