-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K6zkIlL9ZuHT4IBR1T7Xaw1cUPqfkWkkCom0Rwo+MamhiFy1igfSKTbcupE57Zlu cPzC9Vh4NF/ivCWUpljHFA== 0001282826-05-000037.txt : 20050611 0001282826-05-000037.hdr.sgml : 20050611 20050527132512 ACCESSION NUMBER: 0001282826-05-000037 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20050527 DATE AS OF CHANGE: 20050527 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. CENTRAL INDEX KEY: 0000806592 STANDARD INDUSTRIAL CLASSIFICATION: INVESTORS, NEC [6799] IRS NUMBER: 562416925 FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-125300 FILM NUMBER: 05862837 BUSINESS ADDRESS: STREET 1: 6 YOUPENG ROAD CITY: QUFU, SHANDONG STATE: F4 ZIP: 273100 BUSINESS PHONE: (86) 537-4424999 MAIL ADDRESS: STREET 1: 6 YOUPENG ROAD CITY: QUFU, SHANDONG STATE: F4 ZIP: 273100 FORMER COMPANY: FORMER CONFORMED NAME: NETWORK USA INC DATE OF NAME CHANGE: 20000731 FORMER COMPANY: FORMER CONFORMED NAME: PACIFIC RESOURCES INC DATE OF NAME CHANGE: 19870605 SB-2 1 sunwnreg05.txt AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 27, 2005 Registration No. 333-_________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------- SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. (Name of Small Business Issuer in Its Charter) Nevada 6799 56-2146925 - ----------------------------- --------------- ---------------- (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Number) Identification No.) 6 Youpeng Road Qufu, Shandong, China (86) 537-442999 (Address and Telephone Number of Principal Executive Offices) ------------------------- Ms. Dongdong Lin Chief Executive Officer 6 Youpeng Road Qufu, Shandong, China (86) 537-442999 (Name, Address and Telephone Number of Agent For Service) ------------------------- Copies of all communications to: James M. Schneider, Esq. Schneider Weinberger & Beilly LLP 2200 Corporate Blvd., N.W., Suite 210 Boca Raton, FL 33431 Telephone: (561) 362-9595 Facsimile No. (561) 362-9612 Approximate Date of Proposed Sale to the Public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 of the Securities Act, check the following box: [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE
Proposed Proposed Title of Each Maximum Maximum Class of Securities Amount to be Offering Price Aggregate Amount of to be Registered Registered Per Security(1) Offering Price(1) Registration Fee(1) - -------------------- --------------- ------------------ ------------------ ------------------- Common stock, par value 14,750,006 $ .14 $2,065,000 $244 $.001 per share Common stock, par value 14,000,000 $ 0.15 $2,100,000 248 $.001 per share (2) Common stock, par value 1,500,000 $0.167 $ 250,500 31 $.001 per share (3) Total Registration Fee $523 ====
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457, based upon the average of the bid and asked prices for the common stock on May 23, 2005. (2) Includes 14,000,000 shares of common stock issuable upon the exercise of outstanding Class A Common Stock Purchase Warrants with an exercise price of $0.15 per share. Pursuant to Rule 416, there are also being registered such additional number of shares as may be issuable as a result of the anti-dilution provisions of the warrants. (3) Includes 1,500,000 shares of common stock issuable upon the exercise of outstanding common stock purchase warrants with an exercise price of $0.167 per share. Pursuant to Rule 416, there are also being registered such additional number of shares as may be issuable as a result of the anti-dilution provisions of the warrants. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the securities act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. Subject to Completion May ___, 2005 PROSPECTUS SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. 30,250,006 shares of common stock This prospectus covers the resale of a total of 30,250,006 shares being offered by selling security holders. Of the shares covered by this prospectus, 14,750,006 shares have been issued and 15,500,000 shares are issuable upon exercise of warrants with exercise prices ranging from $0.15 to $0.167 per share. We will not receive any proceeds from sales of shares by the selling security holders. The shares of common stock are being offered for sale by the selling security holders at prices established on the OTC Bulletin Board during the term of this offering. There are no minimum purchase requirements. These prices will fluctuate based on the demand for the shares of common stock. For a description of the plan of distribution of these shares, please see page 49 of this prospectus. Our common stock is quoted on the OTC Bulletin Board under the symbol "SUWN." On May 23, 2005 the last reported sale price for our common stock was $.14 per share. An investment in common stock involves a high degree of risk. See "Risk Factors" beginning on page 4. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is _____, 2005 ABOUT THIS PROSPECTUS You should only rely on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. Our business, financial condition, results of operations and prospectus may have changed since that date. When used in this prospectus, the terms "Sunwin," "we," and "us" refers to Sunwin International Neutraceuticals, Inc. an Nevada corporation, our subsidiary, Sunwin Tech Group, Inc., a Florida corporation, Sunwin Tech's majority owned subsidiary Qufu Natural Green Engineering Company, Limited ("Qufu") and QuFu's three wholly owned subsidiaries, Shengya Veterinery Medicine Co., Ltd (formerly known as Shangong Qufu Veterinary Medicine Plant), Shengyuan Herb Extraction Co., Ltd., and Qufu Chinese Medicine Factory. All per share information contained in this prospectus gives retroactive effect to the one for nine reverse split of our common stock effective March 3, 2003 and the six for one forward stock split of our common stock effective July 27, 2004. PROSPECTUS SUMMARY The Company We manufacture a group of neutraceuticals products in the People's Republic of China (PRC). Our operations are organized into three main product groups which include: * stevioside, a 100% natural sweetener which we extract from the leaves of the Stevia rebaudiana plant. We are one of the leading manufacturers of stevioside in the PRC. We sell this product on a wholesale basis to domestic food manufacturers and larger foreign trade companies which export the product to Japan, Korea and Southeast Asia, * a comprehensive group of veterinary medicines including both Traditional Chinese medicine and Western medicine, feed additives, feeds and disinfectors. These products are sold domestically on both a wholesale and retail basis to livestock and poultry farmers, retail veterinary product outlets and large scale cultivating business. We are one of the top 50 companies in this product category in the PRC, and * traditional Chinese medicine formula extracts which we sell on a wholesale basis to domestic Traditional Chinese medicine manufacturers and large animal pharmaceutical companies. We strive to work closely with consumers to provide a quality, value, and a hybrid mix of agricultural products and services that meet growing demand in the PRC. Our executive offices are located at 6 Youpeng Road, Qufu, Shandong, China, and our telephone number there is (86) 537-442999. The Offering This prospectus covers the resale of a total of 30,250,006 shares of our common stock by selling security holders. Of those shares covered by this prospectus, 14,750,006 shares have been issued and are currently outstanding and the remaining 15,500,000 shares are issuable upon the exercise of outstanding common stock purchase warrants with exercise prices ranging from $0.15 to $0.167 per share. Selling security holders may resell their shares from time-to-time, including through broker-dealers, at prevailing market prices. We will not receive any proceeds from the resale of our shares by the selling security holders. We will pay all of the fees and expenses associated with registration of the shares covered by this prospectus. 2 Common Stock: Outstanding Prior to this Offering....43,367, 276 shares as of May 17, 2005 Common Stock Reserved: ..............15,500,000 shares issuable upon exercise of outstanding warrants with exercise prices ranging from $0.15 to $0.167 per share, the resale of which is covered by this prospectus. Selected Financial Data The following summary of our financial information for the years ended April 30, 2004 and 2003 has been derived from, and should be read in conjunction with, our audited financial statements included elsewhere in this prospectus. Information for the nine months ended January 31, 2005 and 2004 has been derived from, and should be read in conjunction with, our unaudited financial statements included elsewhere in this prospectus. Income Statement: Nine Months Ended January 31, Years Ended April 30, ----------------------------- --------------------- 2005 2004 2004 2003 ---- ---- ---- ---- (unaudited) Net revenues $ 9,163,681 $ 7,720,279 $10,887,670 $8,104,074 Gross profit 2,887,343 2,490,940 3,137,849 2,636,188 Total operating expenses 1,956,366 1,158,497 2,164,105 1,318,300 Income from operations 930,977 1,332,443 973,744 1,317,300 Other income (expense) (30,727) (54,713) (10,879) (100,483) Income before minority interest 511,104 856,079 610,152 802,016 Minority interest in income of subsidiary (158,017) (171,216) (144,842) (165,673) Net income $ 353,087 $ 684,863 $ 465,310 $ 636,343 Net income per share - basic and diluted $0.01 $0.04 $0.03 $0.04 Weighted common shares outstanding 34,198,798 17,000,004 17,040,051 17,000,004
Balance Sheet: January 31, 2005 April 30, 2004 ---------------- -------------- (unaudited) Cash $ 670,506 $ 543,078 Working capital $ 3,717,943 $ 3,494,320 Current assets $ 7,443,623 $ 8,137,646 Total assets $ 10,191,584 $ 10,221,637 Current liabilities $ 3,725,680 $ 4,643,326 Total liabilities $ 3,855,970 $ 4,773,616 Total stockholders' equity $ 4,522,531 $ 3,792,955 3 RISK FACTORS An investment in the securities offered hereby is speculative in nature and involves a high degree of risk. The following factors are believed by management to be all of the material risks that should be carefully considered by investors before purchasing our shares. RISKS RELATED TO OUR BUSINESS The management of our company is located in the PRC and we are materially dependent upon advisory services of a U.S. company. None of the current members of our management have any experience in U.S. public companies and these individuals are not fluent in English, except our recently appointed president. We have engaged China Direct Investments, Inc. to provide us with various advisory and consulting services, including U.S. business methods and compliance with SEC disclosure requirements. We selected China Direct Investments, Inc. to provide these services to us in part because its staff includes Chinese-speaking individuals with experience in the operation and regulatory framework applicable to U.S. public companies. Until such time as we are able to expand our board of directors to include English-speaking individuals who have experience with the operation and regulatory framework applicable to U.S. public companies, we are materially dependent upon our relationship with China Direct Investments, Inc. Our contract with that company expires in June 2005. If for any reason China Direct Investments, Inc. should fail to provide the contracted services at the anticipated levels or fails to extend its services and we have not added members to our board of directors with the requisite experience, the abilities of our board of directors to do business as a U.S. public company could be materially and adversely affected. In such instances, we may be unable to prepare and file reports as required by the Securities Exchange Act of 1934 on a timely basis which could lead to our common stock being removed from the OTCBB. Certain agreements to which we are a party and which are material to our operations lack various legal protections which are customarily contained in similar contracts prepared in the United States. We are a Chinese company and all of our business and operations are conducted in China. We are a party to certain material contracts, including the planting agreements with the farmers who supply the stevia rebaudiana used in our products and the lease for our principal offices and manufacturing facility. While these contracts contain the basic business terms of the agreements between the parties, these contracts do not contain certain provisions which are customarily contained in similar contracts prepared in the U.S., such as representations and warranties of the parties, confidentiality and non-compete clauses, provisions outlining events of defaults, and termination and jurisdictional clauses. Because our material contracts omit these types of clauses, notwithstanding the differences in Chinese and U.S. laws we may not have the same legal protections as we would if the contracts contained these additional provisions. We anticipate that contracts we enter into in the future will likewise omit these types of legal protections. While we have not been subject to any adverse consequences as a result of the omission of these types of clauses, and we consider the contracts to which we are a party to contain all the material terms of our business arrangements with the other party, we cannot assure you that future events will not occur which could have been avoided if the contracts were prepared in conformity with U.S. standards, or what the impact, if any, of this hypothetical future events could have on our company. 4 We are materially reliant on revenues from our operations in the PRC. There are significant risks associated with doing business in the PRC which may cause you to lose your entire investment in our company. Currently, all of our revenues are derived from sale of herbs or traditional Chinese medicine formula extracts, stevioside and veterinary products to customers in the Peoples Republic of China (PRC). While our goal is to both expand our operations to countries outside the PRC, in the foreseeable future our growth and success will remain tied to our existing operations in the PRC. Therefore, a downturn or stagnation in the economic environment of the PRC could have a material adverse effect on our financial condition which could result in a significant loss of revenues and liquidity in future periods. We cannot assure you that the current Chinese policies of economic reform will continue. Because of this uncertainty, there are significant economic risks associated with doing business in China. Although the majority of productive assets in China are owned by the Chinese government, in the past several years the government has implemented economic reform measures that emphasize decentralization and encourage private economic activity. In keeping with these economic reform policies, the PRC has been openly promoting business development in order to bring more business into the PRC. Because these economic reform measures may be inconsistent or ineffectual, there are no assurances that: * the Chinese government will continue its pursuit of economic reform policies; * the economic policies, even if pursued, will be successful; * economic policies will not be significantly altered from time to time; and * business operations in China will not become subject to the risk of nationalization. Even if the Chinese government continues its policies of economic reform, we may be unable to take advantage of these opportunities in a fashion that will provide financial benefit to our company. Our inability to sustain our operations in China at current levels could result in a significant reduction in our revenues which would result in escalating losses and liquidity concerns China's economy has experienced significant growth in the past decade, but such growth has been uneven across geographic and economic sectors and has recently been slowing. There can be no assurance that such growth will not continue to decrease or that any slow down will not have a negative effect on our business. The Chinese economy is also experiencing deflation which may continue in the future. We cannot assure you that we will be able to capitalize on these economic reforms, assuming the reforms continue. Given our material reliance on our operations in the PRC, any failure on our part to continue to take advance of the growth in the Chinese economy will have a materially adverse effect on our results of operations and liquidity in future periods. We are subject to risks associated with the conversion of Chinese RMB into U.S. dollars. We generate revenue and incur expenses and liabilities in both Chinese renminbi (RMB) and U.S. dollars. Since 1994, the official exchange rate for the conversion of Chinese RMB to U.S. dollars has generally been stable and the Chinese RMB has appreciated slightly against the U.S. dollar. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. Our results of operations and financial condition may be affected by changes in the value of Chinese RMB and other currencies in which are earnings and obligations are denominated. 5 We may not have sufficient protection of certain of our intellectual property. We utilize certain technologies in the purification of raw material which are used in our products which are proprietary in nature. To protect our proprietary rights, we rely generally on confidentiality agreements with employees and third parties, and agreements with consultants, vendors and customers, although we have not signed such agreements in every case. Despite such protections, a third party could, without authorization, utilize our propriety technologies without our consent. The unauthorized use of this proprietary information by third parties could adversely affect our business and operations as well as any competitive advantage we may have in our market segment. We can give no assurance that our agreements with employees, consultants and others who participate in the production of our products will not be breached, or that we will have adequate remedies for any breach, or that our proprietary technologies will not otherwise become known or independently developed by competitors. We have not voluntarily implemented various corporate governance measures, in the absence of which, stockholders may have reduced protections against interested director transactions, conflicts of interest and other matters. We are not subject to any law, rule or regulation requiring that we adopt any of the corporate governance measures that are required by the rules of national securities exchanges or Nasdaq such as independent directors and audit committees. It is possible that if we were to adopt some or all of the corporate governance measures, stockholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions We may be exposed to potential risks relating to our internal controls over financial reporting and our ability to have those controls attested to by our independent auditors. As directed by Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"), the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the company's internal controls over financial reporting in their annual reports, including Form 10-KSB. In addition, the independent registered public accounting firm auditing a company's financial statements must also attest to and report on management's assessment of the effectiveness of the company's internal controls over financial reporting as well as the operating effectiveness of the company's internal controls. We were not subject to these requirements for the fiscal year ended April 30, 2004. We are evaluating our internal control systems in order to allow our management to report on, and our independent auditors attest to, our internal controls, as a required part of our annual report on Form 10-KSB beginning with our report for the fiscal year ended April 30, 2006. 6 While we expect to expend significant resources in developing the necessary documentation and testing procedures required by SOX 404, there is a risk that we will not comply with all of the requirements imposed thereby. At present, there is no precedent available with which to measure compliance adequacy. Accordingly, there can be no positive assurance that we will receive a positive attestation from our independent auditors. In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner or we are unable to receive a positive attestation from our independent auditors with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements and our ability to obtain equity or debt financing could suffer. RISKS RELATED TO THIS OFFERING We will need to raise additional capital to expand our operations in future periods. If we cannot raise sufficient capital, our ability to implement our business strategies and continue to expand will be at risk. We want to build an additional manufacturing line and upgrade our manufacturing facilities and technologies, in order to expand our stevioside production. Based upon our preliminary estimates this will require capital and other expenditures of approximately USD $2 million to $3 million. We do not presently have sufficient working capital to fund the additional line and upgrade our manufacturing facilities and technologies, and we will need to raise additional working capital to complete this project. We do not presently have any external sources of capital and will in all likelihood raise the capital in a debt or equity offering. If we raise the necessary capital through the issuance of debt, this will result in increased interest expense. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our company held by existing stockholders will be reduced and those stockholders may experience significant dilution. In addition, new securities may contain certain rights, preferences or privileges that are senior to those of our common stock. There can be no assurance that acceptable financing to fund this project can be obtained on suitable terms, if at all. Our ability to continue to implement our growth strategy could suffer if we are unable to raise the additional funds on acceptable terms which will have the effect of adversely affecting our ongoing operations and limiting our ability to increase our revenues in the future. Provisions of our articles of incorporation and bylaws may delay or prevent a take-over which may not be in the best interests of our stockholders. Provisions of our articles of incorporation and bylaws may be deemed to have anti-takeover effects, which include when and by whom special meetings of our stockholders may be called, and may delay, defer or prevent a takeover attempt. In addition, certain provisions of the Nevada Revised Statutes also may be deemed to have certain anti-takeover effects which include that control of shares acquired in excess of certain specified thresholds will not possess any voting rights unless these voting rights are approved by a majority of a corporation's disinterested stockholders. In addition, our articles of incorporation authorize the issuance of up to 1,000,000 shares of preferred stock with such rights and preferences as may be determined from time to time by our Board of Directors, of which no shares are currently outstanding. Our Board of Directors may, without stockholder approval, issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our common stock. Because our stock currently trades below $5.00 per share, and is quoted on the OTC Bulletin Board, our stock is considered a "penny stock" which can adversely affect its liquidity. 7 As the trading price of our common stock is less than $5.00 per share, our common stock is considered a "penny stock," and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction. SEC regulations also require additional disclosure in connection with any trades involving a "penny stock," including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few broker or dealers are likely to undertake these compliance activities. In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market. This prospectus permits selling security holders to resell their shares. If they do so, the market price for our shares may fall and purchasers of our shares may be unable to resell them. This prospectus includes 30,250,006 shares being offered by existing stockholders, including 15,500,000 shares issuable upon the exercise of outstanding common stock purchase warrants exercisable at prices ranging from $0.15 to $0.167 per share. To the extent that these shares are sold into the market for our shares, there may be an oversupply of shares and an undersupply of purchasers. If this occurs the market price for our shares may decline significantly and investors may be unable to sell their shares at a profit, or at all. We cannot predict whether we will successfully effectuate our current business plan. Each prospective purchaser is encouraged to carefully analyze the risks and merits of an investment in the Shares and should take into consideration when making such analysis, among others, the Risk Factors discussed above. USE OF PROCEEDS We will not receive any proceeds upon the sale of shares by the selling security holders. Any proceeds that we receive from the exercise of the outstanding common stock purchase warrants will be used by us for general working capital. The actual allocation of proceeds realized from the exercise of the warrants will depend upon the amount and timing of such exercises, our operating revenues and cash position at such time and our working capital requirements. There can be no assurances that any of the outstanding warrants will be exercised. Pending utilization of the proceeds we may receive from the exercise of the warrants, the will be deposited in interest bearing accounts or invested in money market instruments, government obligations, certificates of deposits or similar short-term investment grade interest bearing investments. 8 MARKET FOR COMMON STOCK AND DIVIDEND POLICY Our common stock has been quoted on the OTCBB since November 13, 2002, originally under the symbol "NUSA" which was changed to "SUWN" on July 28, 2004 following the name change of our company. The following table sets forth the high and low closing sale prices for our common stock as reported on the OTCBB for the following periods. These prices do not include retail mark-ups, markdowns or commissions, and may not necessarily represent actual transactions. High Low Fiscal 2003 November 13, 2002 through January 31, 2003 $ 0.72 $ 0.03 February 1, 2003 through April 30, 2003 $0.833 $ 0.022 Fiscal 2004 May 1, 2003 through July 31, 2003 $0.50 $0.1083 August 1, 2003 through October 31, 2003 $0.25 $0.1083 November 1, 2003 through January 31, 2004 $0.2083 $0.1417 February 1, 2004 through April 30, 2004 $0.2083 $ 0.10 Fiscal 2005 May 1, 2004 through July 31, 2004 $0.74 $0.17 August 1, 2004 through October 31, 2004 $0.74 $0.25 November 1, 2004 through January 31, 2005 $0.27 $0.12 On May 23 2005, the last reported sale prices of the common stock on OTCBB was $.14 per share. As of May 17, 2005 there were approximately 763 stockholders of record of the common stock. Dividends We have never paid cash dividends on our common stock. We intend to keep future earnings, if any, to finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in the foreseeable future. Our future payment of dividends will depend on our earnings, capital requirements, expansion plans, financial condition and other relevant factors. Our retained earnings deficit currently limits our ability to pay dividends. Under Nevada law, we are prohibited from paying dividends if the distribution would result in our company not be able to pay its debts as they become due in the usual course of business or if our total assets would be less than the sum of our total liabilities plus the amount that would be needed, we were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution. SEC "Penny Stock" Rules The Securities and Exchange Commission has adopted regulations which generally define a "penny stock" to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Depending on market fluctuations, our common stock could be considered to be a "penny stock". A penny stock is subject to rules that impose additional sales practice requirements on broker/dealers who sell these securities to persons other than established customers and accredited investors. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of these securities. In addition he must receive the purchaser's written consent to the transaction prior to the purchase. He must also provide certain written disclosures to the purchaser. Consequently, the "penny stock" rules may restrict the ability of broker/dealers to sell our securities, and may negatively affect the ability of holders of shares of our common stock to resell them. 9 FORWARD-LOOKING STATEMENTS This prospectus, including the Management's Discussion and Analysis or Plan of Operation, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities and Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements are subject to risks and uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. You should not unduly rely on these statements. Our forward-looking statements in this prospectus are not protected by the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities and Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "project," "contemplate," "would," "should," "could," or "may." With respect to any forward-looking statement that includes a statement of its underlying assumptions or bases, we believe such assumptions or bases to be reasonable and have formed them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material depending on the circumstances. When, in any forward-looking statement, we express an expectation or belief as to future results, that expectation or belief is expressed in good faith and is believed to have a reasonable basis, but there can be no assurance that the stated expectation or belief will result or be achieved or accomplished. All subsequent written and oral forward-looking statements attributable to us, or anyone acting on our behalf, are expressly qualified in their entirety by the cautionary statements. We do not undertake any obligations to publicly release any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect unanticipated events that may occur. Factors that may cause our actual results to differ materially from those described in forward-looking statements include the risks discussed elsewhere in this prospectus under the caption "Risk Factors". 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following analysis of our consolidated financial condition and results of operations for the years ended April 30, 2004 and 2003 and the nine months ended January 31, 2005 and 2004 (unaudited), should be read in conjunction with the consolidated financial statements, including footnotes, and other information presented elsewhere in this prospectus. Overview Effective February 1, 2004 Sunwin Tech entered into a stock purchase agreement with Shandong Shengwang Pharmaceutical Corporation, Limited, a corporation that, at that time, was a 90% shareholder of Qufu. Under this agreement, Sunwin Tech acquired 80% of the capital stock of Qufu in exchange for 100% of its capital stock which had a fair market value of $95,000. In April 2004 we acquired 100% of Sunwin Tech in exchange for approximately 17,000,000 shares of our common stock which resulted in a change of control of our company. The transaction has been accounted for as a reverse acquisition under the purchase method for business combinations. The combination of the two companies is recorded as a recapitalization of Qufu and we are treated as the continuing entity. Though our subsidiaries we manufacturer and sell neutraceutical products which can be classified into three main product groups including stevioside, a 100% natural sweetener, veterinary medicines and animal feed additives, and traditional Chinese medicine formula extracts. All of our business and operations are located in the PRC. The majority of our revenues are derived from our stevioside product, and our principal customers for this product are located in China and Japan where it is approved for use both as a food additive as well as a nutritional supplement. This product group represents approximately 48.7% of our total revenues. China has grown into the world's largest exporting company of stevioside, with volume exceeding 80% of the world's supply. We believe that we are one of the top three companies in China manufacturing stevioside. Our ability, however, to expand our revenues from the sale of stevioside is limited as the product is not approved for use as a food additive in most Western countries, including the United States, Canada and the European Union. We also manufacture and sell a comprehensive group of veterinary medicines including seven series of more than 200 products. These veterinary medicines include both traditional Chinese medicine and Western medicine, feed additives, feeds and disinfectors. We are a leading advocator of preparing animal medicine from Chinese herbs, especially antivius and feed additives. We are concentrating our efforts in this product category on developing and producing medicines which are relevant to the needs of the animal stock industry in the PRC, and developing special veterinary medicines made from pure traditional Chinese medicines or combining traditional Chinese medicine with Western medicine. This product group represents approximately 24.6% of our total revenues. Our last product group includes the manufacture and sale of traditional Chinese medicines formula extracts that are used in products made for use by both humans and animals. This product group represents approximately 26.7% of out total revenues. 11 Our ability to significantly increase our revenues in any of these groups faces a number of challenges. In addition to the existing laws which limit the sale of stevioside to Western countries, the other two product groups operate in highly competitive environments. We estimate that there are more than 50,000 companies in China selling animal medicines and more than 200 companies in China that produce Chinese traditional medicines and extracts and refined chemical products. Our sale of products in these two product groups are concentrated on domestic customers therefore our ability to expand our revenues in these product groups is limited to a certain extent by economic conditions in the PRC. In addition, because we are dependent upon raw materials which are farmed, our ability to produce our products and compete in our markets is also subject to risks including weather and similar events which may reduce the amount of raw materials we are able to purchase from farmers as well as increased competition or market pressure which may result in reduced prices for our products. Even though we are a U.S. company, because all of our operations are located in the PRC, we face certain risks associated with doing business in that country. These risks include risks associated with the ongoing transition from state business ownership to privatization, operating in a cash-based economy, dealing with inconsistent government policies, unexpected changes in regulatory requirements, export restrictions, tariffs and other trade barriers, challenges in staffing and managing operations in a communist country, differences in technology standards, employment laws and business practices, longer payment cycles and problems in collecting accounts receivable, changes in currency exchange rates and currency exchange controls. We are unable to control the vast majority of these risks associated both with our operations and the country in which they are located and these risks could result in significant declines in our revenues and adversely effect our ability to continue as a going concern. Foreign Exchange Considerations Because revenues from our operations in the PRC accounted for 100% of our consolidated net revenues for the fiscal year ended April 30, 2004 and for the nine months ended January 31, 2005, how we report net revenues from our PRC-based operations is of particular importance to understanding our financial statements. Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in determining net income or loss. For foreign operations with the local currency as the functional currency, assets and liabilities are translated from the local currencies into U.S. dollars at the exchange rate prevailing at the respective balance sheet date. Revenues and expenses are translated at weighted average exchange rates for the period to approximate translation at the exchange rates prevailing at the dates those elements are recognized in the financial statements. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive loss. 12 The functional currency of our Chinese subsidiaries is the Chinese RMB, the local currency. The financial statements of the subsidiaries are translated to U.S. dollars using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not material during the periods presented. The cumulative translation adjustment and effect of exchange rate changes on cash at January 31, 2005 was not material. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A summary of significant accounting policies is included in Note 1 to the audited consolidated financial statements included Form 10-KSB as filed with the Securities and Exchange Commission for the year ended April 30, 2004. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about the company's operating results and financial condition. We record property and equipment at cost. Depreciation and amortization are provided using the straight-line method over the estimated economic lives of the assets, which are from five to ten years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. We account for stock options issued to employees in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation cost is measured on the date of grant as the excess of the current market price of the underlying stock over the exercise price. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant. We adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for Stock-Based Compensation - -Transition and Disclosure", which permits entities to provide pro forma net income (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants as if the fair-valued based method defined in SFAS No. 123 had been applied. We account for stock options and stock issued to non-employees for goods or services in accordance with the fair value method of SFAS 123. We follow the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin 104 for revenue recognition. In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. Our revenues from the sale of products are recorded when the goods are shipped, title passes, and collectibility is reasonably assured. Results Of Operations Nine months ended January 31, 2005 as compared to nine months ended January 31, 2004 For the nine months ended January 31, 2005, our revenues were $9,163,681 as compared to $7,720,279 for the nine months ended January 31, 2004, an increase of $1,443,402 or approximately 18.7%. We attribute this increase in net revenues to an increase in revenues from the manufacture and sale of our Chinese medicine offset by a decrease in the sale of our animal medicine products and decrease in the sale of our natural sweetener, stevioside. We anticipate that our net revenues will continue to increase in fiscal 2005 from amounts reported in fiscal 2004. 13 For the nine months ended January 31, 2005, cost of sales amounted to $6,276,338 or 68.5% of net revenues as compared to cost of sales of $5,229,339 or 67.7% of net revenues for the nine months ended January 31, 2004, a percentage increase of 1.2%. This increase resulted from an increase in the dollar amount of revenue. Additionally, we experienced an increase in raw material costs and overhead costs such as utilities during the nine months ended January 31, 2005 as compared to the nine months ended January 31, 2004. Gross profit for the nine months ended January 31, 2005 was $2,887,343 or 31.5% of revenues, as compared to $2,490,940, or 32.3% of revenues for the nine months ended January 31, 2004. For the nine months ended January 31, 2005, total operating expenses were $1,956,366 as compared to $1,158,497 for the nine months ended January 31, 2004, an increase of $797,869 or 68.9%. Included in this increase was: * For the nine months ended January 31, 2005, we recorded non-cash compensation expense of $220,000 and non-cash professional fees of $30,000 as compared to $0 for the nine months ended January 31, 2004, an increase of $250,000 or 100%. This amount represented the value of shares of our common stock we issued as compensation for consulting services and professional services being rendered to us. While we anticipate that we will enter into similar agreements during fiscal 2005, we cannot predict the amount of expense which will be attributable to such agreements; * For the nine months ended January 31, 2005, selling expenses amounted to $987,267 as compared to $712,830 for the nine months ended January 31, 2004, an increase of $274,437 or 38.5%. This increase is attributable to increased shipping costs, local tax costs and commissions associated with our increased revenues. We expect out selling expenses to increase as our revenues increase and expect to spend increased funds on adverting and promotion of our products. * For the nine months ended January 31, 2005, general and administrative expenses were $749,099 as compared to $445,667 for the nine months ended January 31, 2004, an increase of $303,432, or 68%. The increase is primarily attributable to an increase of approximately $45,000 in repairs and maintenance and retooling expense associated with the upgrade of our manufacturing facilities in order to meet new government manufacturing standards in our industry. We expect this expense to decrease in the future since these upgrades will be completed by February 2005. Additionally, we experienced an increase in professional fees of $55,000 related to our corporate SEC filings and an overall increase in general and administrative expenses such as salaries and rent associated with an increase in operations. For the nine months ended January 31, 2005, other income amounted to $24,881 as compared to other expenses of $(221) for the nine months ended January 31, 2004. Other income for the nine months ended January 31, 2005 was associated with income recognized from the collection of value-added taxes on certain of our products which we receive a tax credit. 14 For the nine months ended January 31, 2005, interest expense was $55,608 as compared to $54,492 for the nine months ended January 31, 2004. Our income before minority interest decreased by $344,975 or 40% to $511,104 for the nine months ended January 31, 2005 as compared to $856,079 for the nine months ended January 31, 2004 primarily as a result of an approximate 0.8% decrease in our gross profit margins for the nine months ended January 31, 2005 from 2004 period, together with the increase in total operating expense described above. For the nine months ended January 31, 2005, we reported a minority interest in income of subsidiary (Qufu) of $158,017 as compared to $171,216 for the nine months ended January 31, 2004. The minority interest in income of subsidiary is attributable to Qufu, which we allocate to our minority stockholders, had the effect of reducing our net income. As a result of these factors, we reported net income of $353,087 or $.01 per share for the nine months ended January 31, 2005 as compared to net income of $684,863 or $.04 per share for the nine months ended January 31, 2004. Fiscal 2004 as compared to fiscal 2003 For the year ended April 30, 2004, our revenues were $10,887,670 as compared to $8,104,074 fore the year ended April 30, 2003, an increase of $2,783,596 or approximately 34.3%. We attribute this increase in net revenues to an increase in revenues from the manufacture and sale of stevioside which are rebounding from a decline in fiscal 2003 due primarily to the overall economic decline in China as a result of the SARS outbreak. We anticipate that our net revenues will continue to increase in fiscal 2005 from amounts reported in fiscal 2004. For the year ended April 30, 2004, cost of sales amounted to $7,749,821 or 71.2% of net revenues as compared to cost of sales of $5,467,886 or 67.5% of net revenues for the year ended April 30, 2003, 2003, an increase of 3.7%. This increase resulted from an increase in the dollar amount of revenue. Additionally, we experienced an increase in raw material costs and overhead costs such as utilities during fiscal 2004. Gross profit for the year ended April 30, 2004 was $3,137,849 or 28.8% of revenues, as compared to $2,636,188, or 32.5% of revenues for the year ended April 30, 2003. For the year ended April 30, 2004, total operating expenses were $2,164,105 as compared to $1,318,888 for the year ended April 30, 2003, an increase of $845,217, or approximately 64.1%. Included in this increase was: * For the year ended April 30, 2004, we recorded non-cash compensation expense of $112,500 as compared to $0 for the year ended April 30, 2003, an increase of $112,500 or 100%. This amount represented the value of shares of our common stock we issued as compensation for consulting services being rendered to us. In addition to this expense recognized in fiscal 2004 related to these consulting agreements, we have deferred consulting expenses of an additional $100,000 which will be recognized over the term of the agreements. While we anticipate that we will enter into similar agreements during fiscal 2005, we cannot predict the amount of expense which will be attributable to such agreements; 15 * For the year ended April 30, 2004, selling expenses amounted to $1,007,466 as compared to $857,655 for the year ended April 30, 2003, an increase of $149,811, or approximately 17.5%. This increase is attributable to increased shipping costs and local tax costs associated with our increased revenues. Additionally, in fiscal 2004, we increased our advertising and promotions spending. We expect out selling expenses to increase as our revenues increase and expect to spend increased funds on adverting and promotion of our products. * For the year ended April 30, 2004, general and administrative expenses were $1,044,139 as compared to $461,233 for the year ended April 30, 2003, an increase of $582,906, or approximately 126%. The increase is primarily attributable to an increase of approximately $342,000 in repairs and maintenance and retooling expense associated with the upgrade of our manufacturing facilities in order to meet new government manufacturing standards in our industry. We expect this expense to decrease in the future since these upgrades will be completed by October 2004. Additionally, we experienced an overall increase in general and administrative expenses associated with an increase in operations. For fiscal 2004, other income (expenses) decreased by $89,604 or approximately 89% as compared to fiscal 2003. Included in this decrease was an increase of $44,364, or approximately 1113%, in other income associated with income recognized from the collection of value-added taxes on certain of our products which we receive a tax credit offset by a decrease of $45,240, or approximately 43%, in interest expense. In fiscal 2003, we incurred certain costs associated with our loans which we did not incur in fiscal 2004. Our income before minority interest decreased $191,864, or approximately 24%, for fiscal 2004 from fiscal 2003 primarily as a result of an approximate 3.7% decrease in our gross profit margins in fiscal 2004 from fiscal 2003, together with the increase in total operating expense described above. For fiscal 2004, we reported a minority interest in income of subsidiary (Qufu) of $144,842, a decrease of $20,831, or approximately 12.6%, from fiscal 2003. The minority interest in income of subsidiary, which represents 24% of our income before minority interest attributable to Qufu which is allocated to its minority stockholders, had the effect of reducing our income before income taxes. Liquidity And Capital Resources At January 31, 2005 we had working capital of $2,981,318 and cash and cash equivalents of $670,506. At January 31, 2005, our cash position by geographic area is as follows: United States $ - China 670,506 ------- Total $ 670,506 ======= 16 We raised cash proceeds of $120,000 from the sale our common stock. Net cash provided by operating activities for the nine months ended January 31, 2005 was $1,612,599 as compared to $1,218,341 for the nine months ended January 31, 2004. For the nine months ended January 31, 2005, cash provided by operations consisted of cash received from net income of $353,087 and the add-back of non-cash items such as stock-based compensation of $250,000, depreciation and amortization expense of $168,895, and minority interest of $158,017 as well as changes in assets and liabilities of $691,682. For the nine months ended January 31, 2004, cash provided by operations consisted of cash received from net income of $684,863 and the add-back of non-cash items such as depreciation and amortization expense of $179,386 and minority interest of $171,215 as well as changes in assets and liabilities of $182,877. Net cash used in investing activities for the nine months ended January 31, 2005 was $844,942 as compared to net cash used in investing activities of $883,553 for the nine months ended January 31, 2004, a decrease of $38,611 related to capital expenditures for the acquisition of manufacturing equipment. Net cash used in financing activities for the nine months ended January 31, 2005 was $640,229 as compared to net cash used in financing activities for the nine months ended January 31, 2004 of $301,329. For the nine months ended January 31, 2005, we received cash from the sale of common stock of $120,000 offset by the repayment of loans of $760,229. For the nine months ended January 31, 2004, we used proceeds to pay loans payable of $301,329. We currently have no material commitments for capital expenditures. As described elsewhere herein, while we have sufficient funds to conduct our business and operations as they are currently undertaken, we want to build an additional manufacturing line and upgrade our facilities and technologies in order to expand our stevioside production. We have already spent $500,000 on constructing a new building to house the additional manufacturing line. Based upon our preliminary estimates additional capital and other expenditures will be required in the amount of approximately USD $2 million to $3 million. We do not presently have sufficient working capital to fund this project and we will need to raise additional working capital to complete this project. We do not presently have any external sources of capital and will in all likelihood raise the capital in a debt or equity offering. There can be no assurance that acceptable financing to fund this project can be obtained on suitable terms, if at all. Our ability to continue to implement our growth strategy could suffer if we are unable to raise the additional funds on acceptable terms which will have the effect of adversely affecting our ongoing operations and limiting our ability to increase our revenues in the future. 17 BUSINESS We sell stevioside, a natural sweetener, veterinary products and herbs used in traditional Chinese medicine in the People's Republic of China (PRC or China). All of our operations are located in the PRC. As an industry leader in agricultural processing, we have built an integrated firm with the sourcing and production capabilities to meet the needs of our customers. The Sunwin family works closely with consumers to provide a quality, value, and a hybrid mix of agricultural products and services that meet growing demand. Our operations are organized into three main product groups: * Stevioside - a natural sweetener, * Veterinary medicines; and * Traditional Chinese medicine formula extracts. Stevioside - a natural sweetener We manufacture and sell stevioside, a 100% natural sweetener which is extracted from the leaves of the Stevia rebaudiana plant, a green herb plant of the Aster/Chrysanthemum family. For the nine months ended January 31, 2005 revenues from this product group represented approximately 48.7% of our total net revenues. We are one of the leading manufacturers of stevioside in the PRC. We have been engaged in the continuous production of stevioside since 1998. Our present capacity is approximately 200 tons annually, which will be increased to approximately 300 tons annually in July 2005 following the completion of ongoing expansion of our manufacturing facilities, which will then account for approximately one sixth of the total capacity of the top 10 stevioside manufacturers in the PRC. We are a perennial member of China Stevia Association. The association seeks to contribute its efforts, and the strength of its members to harmonize the relationships among other participants of this industry, to promote the technology innovation, to supervise the quality control, to set self-discipline market prices, to assist the association to set long-term goals, industrial policy and technical standard. The leaves of the Stevia rebaudiana plant have been used for centuries to sweeten bitter beverages and to make tea in the plant's native Paraguay. In 1931 French chemists extracted the compounds which give stevia its sweet taste. These extracts, called steviosides, were found to be 250 to 300 times sweeter than sucrose (ordinary table sugar). Stevioside, the major sweetener present in the leaf and stem tissue of the stevia rebaudiana plant, was first seriously considered as a sugar substitute in the early 1970's by a Japanese consortium formed for the purpose of commercializing stevioside and stevia extracts. 18 Stevia is grown commercially in Brazil, Paraguay, Uruguay, Central America, Israel, Thailand and China. The Stevia rebaudiana plant was first introduced to China in 1977 and wide planting of stevia started in the mid-1980's. There are two major species of stevia grown in China; one is cultured by Chinese researchers and the other was introduced from Japan. China has grown into the world's largest exporting country of stevioside, with a volume exceeding 80% of the overall amount of stevioside used in the world. Most stevioside is exported by Chinese manufacturers, primarily to Japan and South Korea. Japan consumes more stevia than any other country and it is estimated that stevia accounts for 40% of the sweetener market in Japan. We believe that the worldwide demand for healthy sugar is rising, and we estimated that the demand for stevioside in recent years is increasing at a rate of 15% to 20% every year. In 2002, worldwide demand for stevioside exceeded 1,200 tons and China supplied more than 1,000 tons, accounting for 80% of worldwide consumption of stevioside. In 2003, as a result of the overall economic decline in China due mainlyto the SARS outbreak, our production and sales of stevioside decreased to 176 tons, however, during 2004 the production recovered to the approximate sales levels of 2002. In 2004, our stevioside production reached 150 tons, accounting for approximately 8.3% of the global production. The use of stevioside Generally, no large scale mechanized production has been established and stevia sweeteners are not yet found in mainstream food products in most countries of the world. Progress towards large scale commercialization has been slow, largely due to difficulties in producing the crop, the poor quality of stevia extracts and the absence of regulatory approvals essential for stevia sweeteners in the North American and European markets. While stevioside has been sanctioned by the Ministry of Health of China to be used as a food additive, and is listed in the Sanitation Standard of Food Additives (GB2760), the number of countries in the world which permit the use of stevioside as a food additive is limited. At present Japan, Korea, China, Taiwan, Indonesia, Israel, German Brazil and Paraguay permit the use of stevioside as a sweetener and food additive. In these countries stevioside may be used in a wide variety of products including soft drinks, Japanese-style processed vegetable products, tabletop sweeteners, confectioneries, fruit products and processed seafood products. The number of countries, however, which do not permit the use of stevioside as a food additive include most Western nations. While stevioside may be used as a dietary supplement in the U.S. since the mid-1980's the United States Food and Drug Administration (FDA) has labeled stevia as an "unsafe food additive." The FDA's position is that available toxicological information on stevia is inadequate to demonstrate its safety as a food additive or to affirm its status as generally recognized as safe. When sold as a dietary supplement, dietary ingredients, including stevia, are not subject to the food additive regulations of the FDA. Canada and Australia also permit the use of stevioside as a dietary supplement but not as +a food additive. In 1999, the Canadian Food Inspection Agency, the equivalent of the FDA, issued a notice of detention to companies in Canada who attempt to move, sell or dispose of stevia products. Stevia is also not approved for use in the European Union, Singapore or Hong Kong. 19 The Joint FAO/WHO Expert Committee on Food Additives is an international scientific committee that is administered by the Food and Agriculture Organization of the United Nations (FAO) and the World Health Organization (WHO). Since 1956 the committee has evaluated the use of food additives as well as other food hazards and is recognized as an international authority in the risk assessment of food hazards. In 1998 the committee conducted an evaluation of the safety of stevioside. As a result of incompleteness in search findings, the committee has not yet reached a conclusion as to the safety of stevioside as a food additive. In addition, the committee could not allocate an acceptable daily intake to stevioside because of the shortcomings of the research findings. The committee recommended that new studies should be performed before re-reviewing the toxicity of stevioside and asked that additional information regarding the pharmacological effects of stevioside on humans be provided by 2007. In 1999 the Scientific Committee on Food of the European Commission (now the European Union), citing both the findings of the Joint FAO/WHO Expert Committee on Food Additives and its own conclusions that additional studies on the safety of stevioside are needed, issued its opinion that stevioside is not acceptable as a sweetener on the then presently available data. Countries in both Central America and South America generally adhere to the European Union's guidelines as do the countries of the European Union. In response to the request by the European Commission for more research on the safety of stevioside, in 2003 Professors Jan Geuns of the Laboratory for Functional Biology and Johan Buyse of the Laboratory of Physiology and Immunology of Domestic Animals of the Katholieke Universiteit Leuven in Belgium set up the European Stevia Research Centre at K.U. Leuven in order to coordinate research on stevia and stevioside. One of the centre's goals is to develop a European quality label for stevioside which would hopefully lead to the eventual lifting of the European ban on stevioside. The European Stevia Research Centre held the first international symposium on the safety of stevioside in April 2004. Foreign specialists and K.U. Leuven scientists were invited to give an overview of the recent stevioside research. The proceeding of the symposium reached the general conclusion that the use of stevioside as a sweetener is safe. It is presently unknown, however, if or when the European Union will alter its initial findings and determine that the use of stevioside as a food additive is safe for humans. Our customers We sell stevioside on a wholesale basis to customers primarily located in China and Japan. Our target market for customers of our stevioside product are domestic food manufacturers and larger foreign trade companies which export the products from the PRC to Japan, Korea and Southeast Asia. Our major customers include China Minemetals Corporation, Shanghai Sanming Food Co., Ltd., Shandong Pharmaceutical & Healthcare Co., Ltd., Shanghai Folo Trade Co., Ltd. Hangzhou Tian-Mu-Shan Pharmaceutical Enterprises Co. Ltd. and Nanjing FenQin Bio-Chemical Co. Ltd. For the nine months ended January 31, 2005 revenues from two of our manufacturer customer represented approximately 15% and approximately 10% of our total net revenues from this product group. We do not have contracts with our customers and sales are made under a purchase order arrangement with payment in full on the order due prior to shipment. Raw materials In China, Shandong Province where our operations are located is the main stevioside planting and production base. To ensure the supply of raw material, we acquire raw materials through a combination of exclusive planting contracts with local farmers and purchases at market or from local farmers. Approximately 30% of our supply of stevia comes from growing contracts with several large plantations in China covering approximately 277 acres used to grow stevioside redaubina. Under the terms of these contracts we generally pay the farmer 30% of the contract price at the time the seed is planted, generally in March of each year, and the remaining 70% upon delivery of the leaves. We pay for leaves purchased at market or from local farmers at the time of purchase. In order to improve quality of the stevia and management to avoid degeneration, our company has set up a fine breed base so that we can enhance the control and correspond the prices of stevia raw material, seed and stevioside production. 20 Based upon our historical experience, the average price of dry leaves of stevia generally ranged from RMB 5,500 to RMB 6,000 per ton, or approximately $695 per ton, and the price of stevioside was approximately RMB 200,000 per ton, or approximately $24,160 per ton. In the later half of 2003, the raw material market in China was adversely affected by weather conditions. The South China planting bases were adversely affected as a result of a drought in the Jiangxi Province and excessive rains in the Henan, Jiangsu and Anhui Provinces. Certain agriculture policies enacted in North China had the effect of limiting the farmer's initiative to plant crops, including stevia. As a result, since September 2003,declining supply ofraw materials has resulted in a steady increase in the market price of dry leaves and finished product. The cost of stevioside went up, followed by the rising prices. Currently the price of stevia leaves is approximately RMB 15,000 per ton, or approximately $1,812 per ton, and the price of stevioside ranges from approximately RMB 270,000 to approximately RMB 280,000 per ton, or approximately $33,220 per ton. As a result of the planting contracts we have entered into with local farmers, and our inventory of dry leaves at the time of the price increases, we have been able to ensure our supply of stevia leaves at reasonable prices. Stevioside products are graded by the quality and the prices vary from different grades. Each grade has a national reference price which is fixed upon the national average cost of goods sold for a certain period. Taking into account the slight difference of producing cost at the same grade due to the different manufacturing environment, the selling price of stevioside products at the same grade may float within a 3% to 5% range based on the reference price. As a representative of the whole industry and a member of National Price Corresponding Team, our company also participants the setting of the national unitive reference price of the stevia seeds, dry leaves and stevioside. Extraction and packaging We use the traditional extraction technology of a natural "aqueous extraction" process which involves the use of purified water extraction and air dehydration to produce our stevioside. This all natural method results in a pure white stevia crystal, with no brownish coloring. We set our production schedules based on the market demand and our capability. In 2001, we increased our annual productivity of stevioside from 200 tons to 300 tons by utilizing an advanced technology alteration that improves the purity and production of the stevioside. We recently acquired new technology which enhances the extraction process enabling us to increase the purity of our stevioside which results in a more flavorful product. We are cooperating with the China Agriculture Institute and other national research facilities to increase the output of stevioside by improving the manufacturing protocol and developing new products. The extraction process for stevioside generally takes seven days. The plant leaves are first dried and then undergo a quality control inspection to ensure only good quality leaves are used in the extraction process. We then use a combined process involving a solid/liquid extraction step, followed by a liquid/liquid-purifying step, that is traditionally used to extract the steviosides from stevia. Once the extraction process has been completed, the final product is ready for packaging and shipment to our customers. We bulk package our stevioside in 10 kilo packages, two per box. 21 We generally maintain an inventory of stevia leaves equal to approximately one year of finished product as well as an inventory as we need approximately 200 tons of stevia leaves to maintain a regular production schedule. We generally maintain an inventory of finished product equal to approximately one month's average sales. Veterinary medicines We manufacture and sell a comprehensive group of veterinary medicines including seven series of more than 200 products. For the nine months ended January 31, 2005 sales of this product group represented approximately 24.6% of our total net revenues. We are one of the top three companies in this product category in Shandong Province and one of the top 50 in the PRC. We are a leading advocator of preparing the animal medicine from Chinese herbs, especially in antivirus and feed additives. We are concentrating our efforts in this product category on developing and producing medicines which are relevant to the needs of the animal stock industry in the PRC, and developing special veterinary medicines made from pure Traditional Chinese medicines or combining Traditional Chinese medicine with Western medicine Our products in this group include veterinary medicine (Traditional Chinese medicine and Western medicine), feed additives, feeds and disinfectors. These products are sold to 28 Provinces of China. We also manufacturer and sell animal feed additives. Historically, antibiotics were added to animal feed in an effort to produce healthier animals. However, scientists now believe that this practice can produce some unforeseen and unwanted effects. Some studies indicate that the antibiotics and chemical compound medicines that are contained in feeds will accumulate in the animal body, and can possibly cause harm to human beings. Penicillin, streptomycin and sulfanilamide medicines often emit allergic and abnormal reactions; aureomycin can lead to allergic reactions; chloromycetin can arouse anti-regenerating anemia, hemoblast reducing, and liver damnification; olaquindox can cause abnormal gene development; and furazolidone can create cancerous cells in animal organisms. Scientists also believe that incorporating antibiotics into animal feeds could, over a long period of time, convert some bacteria into antibiotic resistant bacteria. Under this assumption, these antibiotic resistant bacteria then spread the antibiotic resistant genes to other sensitive bacteria, generating the resistance to some medicines which then inhibit or prevent the cure of certain diseases that originally could be prevented and cured by such medicines. The use and/or abuse of antibiotics has affected countries around the world. For example, in Belgium, France, Germany and Holland, dioxins polluted the feeds and in turn caused damage to the livestock population. The outbreak of bovine spongiform encephalopathy (BSE or Mad Cow disease) in Britain not only decimated the British livestock markets but had a worldwide effect on beef production. It was reasoned that a certain population of virus in these cows might have developed a drug-resistant strain. In recent years, many countries have regulated the use of antibiotics additives through legislation. In the middle of the 1970's, the European Economic Council adopted regulations prohibiting the use of penicillin and acheomycin as feed additives. In 1977, U.S. Food and Drug Administration limited using bacteriophage as the feed additive and regulated the zinc-bacitracin as the special feed additive for the livestock and birds. Since olaquindox, furazolidone and chloromycetin were forbidden as applications on edible animals in the European Community, the EU began to forbid four antibiotics including zinc-bacitracin and tylosin to use in feeds at the end of 1998. 22 Animal feed additives based upon Traditional Chinese medicine are increasingly being regarded as desirable as they lack the drawbacks of chemical compounds, even though these Traditional Chinese medicines may not be as potent as chemical compounds in terms of stimulating growth of livestock. Many Traditional Chinese medicines have double functions of nourishment and medicament, which not only accelerate the sucrose metabolism of the organism and synthesis of the protein and enzyme, but also increase the efficiency of the antibody and the growth of the sex gland. The health growth of the sex gland would in turn enhance muscular system development. The Traditional Chinese medicines have the effect of sterilizing and resisting the bacteria and adjusting the organism immunity function. As a result of these benefits, many countries are developing and researching the natural Traditional Chinese medicine feed additives. Compared with antibiotics and chemical compounds feed additives, the natural Traditional Chinese medicine feed additives have the following advantages: * non-diathesis antibacterial function which can not only sterilize and resist bacteria, but also adjust organism immunity function; * no or little harmful remains; * pathogenic microbe can not generate the anti-medicine character easily; and * the materials are abundant and can be used locally. We sell a plant polysaccharid and flavonoid extraction compound feed additive that is all natural with no side effects and that can be substituted for antibiotics and the chemical compounds which are added in animal feeds. We believe our product provides a number of benefits, including resolving the harmful remains problem of meat, eggs and milk that could be toxic to humans, efficiently reducing the content of the fat and cholesterol, improving the taste of livestock and birds and producing safe and healthy animal foods. Some of the features of our polysaccharid and flavonoid extraction compound are: * Substitute the antibiotics and chemical compounds which reduce the levels of medicines which are present in the remains of the livestock and birds products. * Improves growth and improve the disease-resistance of the animal. * Balance the micro-circumstance of the animal intestines which in turn prevents or aids in the resistance to diseases. The plant Oligosaccharide which is contained in our product can greatly promote the multiplication of the lactobacilli and bifidus and adjust the PH parameter in intestines. Large molecules biologic active substances such as plant alkaloid can restrain the growth of the pathogeny in intestines and prevent the occurrence of intestines deceases effectively. 23 * Increase anti-stimulation response ability. It can relax the anti-stimulation action caused by high temperature and high density in breeding and can stabilize the production capability. * Reduce feeds cost. The product contains plant active substances such as flavonoid, multi-hydroxybenzene, which can restrain the growth of the mildew effectively, have an obvious function of food-luring. and largely increase the amount of food-taking. So it can reduce the dosage of the mildew-proof dose, acidification dose, anti-oxidizer, food-luring dose in the feeds. We also sell our brand of CIO2 food disinfector. ClO2, a chemical employed in both industrial and commercial applications, was developed successfully in 1985 by American Baihexing Company. It was regarded as a food disinfector by the European Environmental Protection Unit and the U.S. Environmental Protection Agency and was sanctioned as a food additive by the U.S. Food and Drug Administration. Japan, Australia, and the European countries followed and regarded it as the fourth generation of safe disinfector and food additive that substituted the chlorine serial disinfectors. Due to its good character, it was regarded as the A-grade safe additive by the World Health Organization and was strongly promoted on a global scale. China began to expand the use of the ClO2 disinfector at the beginning of the 1990s. In 1992, it was listed in health standard by the China National Food Additive Standard Committee. On February 19, 2004, we attended the Bird Flu convention conference organized by the Ministry of Agriculture in Beijing. The Ministry of Agriculture sanctioned our new ClO2 disinfector as a Ministry recommended product forBird Flu prevention. Our Sunwin brand ClO2 disinfector is a steady ClO2 disinfector and can be used directly without activation and dilution. The traditional ClO2 disinfector requires a stability dose to stabilize it after production and needs to be activated and diluted before use. If it is not used in time after activation, the effective substances will be depleted thoroughly in four to six hours. Our product can restrain the chemical activity of the activated ClO2 and can control the ClO2 to release the effective compounds slowly. The product has a storage life of 18 months after dilution. At present, this steady ClO2 disinfector product has been used in a wide variety of disinfectant and sterilization applications including waste and sewage disposal and sterilization of food utensils. Our customers We sell our veterinary medicine products on a wholesale and retail to livestock and poultry farmers, retail veterinary product outlets and large scale cultivating businesses. Our principal customers include Chengde Chengxing Animal Hospital, Ha'erbin Donghui Veterinary Products Store, Xiantan Golddragon Veterinary Co. Ltd., Gao'an Aquatic Bureau, Shandong Veterinary Supervision Office and Hebei Veterinary Station. No customer accounts for more than 10% of our net revenues in this product category. We do not have contracts with our customers and sales are made under a purchase order arrangement. General payment terms for our veterinary medicine products range from prepaid prior to shipment to net 60. 24 Raw Materials We purchase the raw materials for medicines and feed additives produced by us on the open market from a number of suppliers to ensure best price and high quality ingredients. For products which are based on traditional Chinese medicines, we use extract formulas produced by our traditional Chinese medicine formula extract group described below. We have not experienced any difficulty in obtaining the necessary raw materials for our veterinary medicine products. Traditional Chinese medicine formula extracts Our third product group is the manufacturing and sale of traditional Chinese medicine formula extracts. These extracts are used in products made for use by both humans and animals. For the nine months ended January 31, 2005 this product group represented approximately 26.7% of our total net revenues. Traditional Chinese medicine is based on a "five element theory" and those elements are wood, earth, metal, fire, and water. Our bodies have two energy channels (meridians) representing organ systems in each of those five elements of nature. Optimally, these all work in balance and in synchronized harmony. In the process of defending against diseases for thousands of years, Chinese herbal medicine has been developed and systemized based upon theoretical principles as a means of both the prevention and treatment of illness and disease. A complex system of diagnostic methods take into consideration the person as a whole, not just isolated symptoms. A "pattern of disharmony" is discovered and treated accordingly. The aim is not necessarily to eliminate or alleviate symptoms. The objective, rather, is to increase both the ability to function and the quality of life. The restoration of harmony is integral to Chinese herbal medicine. After a diagnosis is made, herbs are selected and combined, or a well-known traditional formula is prescribed and the formula is adjusted to fit the patient's symptoms and diagnosis. Modern medical science is experiencing a change from biological research to biological-psychological-social research with traditional medical science playing a more important role than ever. Many modern chemical medicines contain high toxicities and present numerous side-effects. Purely chemical medicines are difficult, time consuming and expensive to develop. We believe that natural Chinese traditional medicines represent advantages over chemical medicines and that the process of combining herbal extraction and chemical medicines is becoming a popular alternative, following the current trends of "natural" and "green" products in a variety of industries. There are over 400 different commonly used types of traditional Chinese medicine extracts. We manufacture and sell approximately 120 different extracts which can be divided into the following three categories: * single traditional Chinese medicine extracts, * compound traditional Chinese medicine extracts, and * purified extracts, including active parts and monomer compounds such as soy isoflavone. 25 The following formula extracts and single extracts are our main products. Veterinary medicine products * Epimedium powder which is used to tonify the kidney, invigorate yang, strengthen muscles and bones and as anantiheumaitc, * mixed powder which is used to prevent and cure chronic respiratory failure caused by septicemia and infective bronchitis, * Sihuang mixed powder which is used to cure colibacillois and hypercathasis of poultry, and * mixed powder used to cure seasonal febrile diseases of poultry and bursa of fabricius and epiornitic, Medium products for human medicine * Astragalus root extracted powder which is used to replenish qi and keep yang-qi ascending, to consolidate superficial resistance to cause diuresis and to promote pus discharge and tissue regeneration, * Scutellaria root extracted powder which is used to remove heat, dampness and toxic substances, to purge intense heat and to prevent miscarriage, * Honeysuckle flower extracted powder which is used to remove heat and toxic substance and to dispel wind-heat, * Liquorice extracted powder which is used to tonify the middle-jiao and replenish qi to remove heat and toxic substance, to moisturize the lung and arrest cough, and to relieve spasm and pain, and * Hawthorn fruit extracted powder which is used to remove food stagnancy and blood stasis. Our customers We sell our traditional Chinese medicine formula extracts on a wholesale basis to domestic traditional Chinese medicine manufacturers and large animal pharmaceutical manufacturers. Our primary customers include Zhucheng Xinde Foreign Trade Co., Ltd., Shangdong Liuhe Feed Co., Ltd., Najing Traditional Chinese Medicine University, Taiyuan Hengfengqiang Bio-Tech Development Co., Ltd., Beijing Xiangshang Veterinary Factory and Hefei Huarui Co., Ltd. No customer represented more than 10% of our net revenues from this product category. We do not have contracts with our customers and sales are made under a purchase order arrangement. We generally require 10% to 30% depositat the time when the order is submitted, and offer payment terms of between six months to one year for the balance of the order. The accounts receivable generated by our veterinary medicine product group represents 70% to 80% of our total accounts receivable from time to time. 26 Raw materials The business of extraction of Chinese herbs is a fast growing industry in China following its membership in the WTO. Many industries, including pharmaceutical companies, chemical companies, health products companies, biological engineering companies and research and development institutions, have entered the field. A key factor to success in this industry is where the herb grows. "San Qi", a very popular herb, grows in Yun Nan province so many companies engaging in extraction have established operations there. For the same reason, the companies in Inn Mongolia are focusing on production of "Gan Cao" extraction, and most companies in Ji Lin province are preparing the extraction of ginseng while in Xin Jiang province, companies are extracting the "Ma Huang Su" and "Gan Cao". Currently, most raw material purchases are from the country's well-known herbal planting bases in the Shangluo Area of Shanxi Province which is located in Qinlin Area and nicknamed the Chinese Traditional Medicine Treasury, as well as the Haozhou Area of Anhui Province and the Anguo Area of Hebei Province, which are the two largest herbal markets of China. We purchase raw materials from a number of suppliers to ensure favorable pricing, steady supplies as well asquality materials. Formulation, Manufacturing and packaging We manufacture approximately 120 extracts used in traditional Chinese medicine. The production time is generally seven days. These formulas are either commonly used formulas published in the National Medicine Dictionary or utilizing the Shandong Province industry standards, as well as formulas which may have been developed by university research scientists or internally developed by our R & D personnel. Formulas developed by our company must first be approved by the Shandong Bureau of Quality and Technical Supervision prior to use in our products. The raw materials are subjected to a combined process involving a solid/liquid extraction step, followed by a liquid/liquid-purifying step to obtain the purified extract. Once the purification process has been completed, the extract is concentrated and re-filtering at which time it is ready for packaging and shipment to our customers. The extracts are bulk packaged in 25 kilogram barrels. We utilize just in time manufacturing for our traditional Chinese medicine extracts and do not maintain an inventory of finished products. New Product Development We engage in new product development both through our internal research facilities and in partnership with a number of research facilities in the PRC including: * Shandong Medical University where are project is the joint development of molecular absorption purified rutoside, * Kelong Bio-Tech Co., Ltd. Biology and Physics Research Center of Chinese Acedemy of Science where the project is the joint development of soy bean oligosaccharide, and * Tianfulai Bio-Tech Technology Co. Ltd. (Beijing) where the project is the joint development of Traditional Chinese medicine polysaccharide anthone extracted powder for forage. 27 We also utilize the research facilities of Beijing Medical University, China Agriculture University and Taiwan Renshan Bio-Tech Co. We pay for the use of these facilities on an as needed basis and the costs are included in our research and development expenses. For the fiscal year ended April 30, 2004 and 2003 we spent approximately $810,000 and $677,000, respectively, on research and development. Our research findings which were developed jointly with Kelong Bio-Tech Co. Ltd., Biology and Physics Research Center of the Chinese Acedemy of Science and other findings in Chinese traditional medicine have been industrialized one by one. Since 2000 we have successfully developed more than 40 veterinary medicines used to treat infectious bursa of fabricius of poultry, prevention and cure of bird influent disease and infection of digestive canal, prevention and cure chronic respiratory failure caused by septicemic and infective bronchitis. We have an additional nine new medications under development aimed at treating diseases caused by protozoon and seasonal febrile diseases of poultry and bursa of fabricius and epiornitic. Our current research and development projects include saikosponin, a liquid used for headaches and a capsule for bursa. Competition All of our product groups operate in highly competitive markets. There are approximately 30 stevioside manufacturers in China, with only approximately 10 companies operating on a continuing basis. Of these 10 companies, our primary competitors are Huaxian Stevia Factory and Julong Stevia Company who, like our company, have an annual output of stevioside in excess of 100 tons. Other companies periodically enter the industry depending upon the market demand in that this part-time participant may choose to stop production when the market is in its downturn and the raw material is not available. This sporadic oversupply of product can adversely affect our market share. In addition to competing with other Chinese companies, we also compete with grower and processors in Japan, the world's largest market for stevioside. We believe we compete in this product segment based upon our production capabilities and product quality. In order to maintain our industry position and as we seek to increase our market share in both the domestic and international market, we have undertaken certain personnel reorganizations to improve our operations. Our principal competitors in the sale of veterinary medicine products are China Animal Husbandry Industry Co., Ltd., Qilu Animal Health Products Factory Co., Ltd. and Shinjaizhuang Huamu Animal Husbandry Co. Ltd. In addition, as China is a member of the WTO many good quality competitive products are imported into the Chinese market at reasonable prices. We believe we hold certain competitive advantages in this product segment based mainly on our manufacturing capacity and advanced technology. We have developed a number of new products for targeted markets and we have invested approximately RMB 10,000,000, or approximately $1,208,000, during the last two years in improvements in our manufacturing facility. We also focus on expanding our product offerings and quality control. In order to maintain what we believe to be a competitive position within this product segment we will need to change our existing product delivery system from tablets and injections to sprays which increases the convenience and accessibility for the end use. We also are challenged to broaden our product line to meet consumer demand and compete with foreign made products. The market in China for traditional medicine extracts is extremely competitive. According to official statistics, at peak time, there are more than 500 companies engaged in herb extraction in China. Companies in many different industries, including pharmaceutical companies, chemical companies, healthy products companies, herb extraction companies, biological engineering companies and research and development institutions, are now engaged in herb extraction. Our major competitors include Anhui Xuancheng Baicao Plants Industry & Trade Co., Ltd., Sichuan Shifangkangyuan Medicine Materials Co., Ltd. and Lanzhou Lantai Bio-Engineering Tech Co., Ltd. Most products from these companies are exported to overseas markets. Competitive factors primarily include price and quality. We believe that we are able to effectively compete in our market segment in China based upon the quality of the exclusive planting bases we have under contract and our reputation in the market place. Globally, as demand for our types of products expand we believe that we will be able to effectively compete against similar companies from other countries as a result of the lower costs of doing business in China, in particular the lower labor rates, and China's soil and growing conditions which enable us to produce high quality products. 28 However, because the barriers to entry in the market are relatively low and the potential market is large, we expect continued growth in existing competitors in all of our product groups and the entrance of new competitors in the future. Many of our current and potential competitors have significantly longer operating histories and significantly greater managerial, financial, marketing, technical and other competitive resources, as well as greater name recognition, than we do. Intellectual Property Our success depends in part on our ability to protect our intellectual property which includes various raw materials purification technologies used in our products. Qufu has registered the Shengwang trademark with China National Patent, Trademark and Intellectual Property Office. To protect our proprietary rights, we rely generally on confidentiality agreements with employees and third parties, and agreements with consultants, vendors and customers, although we have not signed such agreements in every case. Despite such protections, a third party could, without authorization, utilize our propriety technologies without our consent. We can give no assurance that our agreements with employees, consultants and others who participate in the production of our products will not be breached, or that we will have adequate remedies for any breach, or that our proprietary technologies will not otherwise become known or independently developed by competitors. Government Regulation Our business and operations are located in the People's Republic of China. We are subject to state and local environmental laws related to certification of water release. We are subject to registration and inspection by The Ministry of Agriculture of China with respect to the manufacture and distribution of veterinary medicines and the State Food and Drug Administration of China (SFDA) with respect to the manufacturing and distribution of traditional Chinese medicine extracts. We are also licensed by the Shandong Provincial Government to manufacture veterinary medicine and stevioside. We are in substantial compliance with all provisions of those registrations, inspections and licenses and have no reason to believe that they will not be renewed as required by the applicable rules of the Central Government and the Shandong Province. In addition, our operations must conform to general governmental regulations and rules for private (non-state owned) companies doing business in China. 29 PRC legal system Since 1979, many laws and regulations addressing economic matters in general have been promulgated in the PRC. Despite development of its legal system, the PRC does not have a comprehensive system of laws. In addition, enforcement of existing laws may be uncertain and sporadic, and implementation and interpretation thereof inconsistent. The PRC judiciary is relatively inexperienced in enforcing the laws that exist, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. Even where adequate law exists in the PRC, it may be difficult to obtain swift and equitable enforcement of such law, or to obtain enforcement of a judgment by a court of another jurisdiction. The PRC's legal system is based on written statutes and, therefore, decided legal cases are without binding legal effect, although they are often followed by judges as guidance. The interpretation of PRC laws may be subject to policy changes reflecting domestic political changes. As the PRC legal system develops, the promulgation of new laws, changes to existing laws and the preemption of local regulations by national laws may adversely affect foreign investors. The trend of legislation over the past 20 years has, however, significantly enhanced the protection afforded foreign investors in enterprises in the PRC. However, there can be no assurance that changes in such legislation or interpretation thereof will not have an adverse effect upon our business operations or prospects. Economic Reform Issues Since 1979, the Chinese government has reformed its economic systems. Because many reforms are unprecedented or experimental, they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. We cannot predict if this refining and readjustment process may negatively affect our operations in future periods. Over the last few years, China's economy has registered a high growth rate. Recently, there have been indications that rates of inflation have increased. In response, the Chinese government recently has taken measures to curb this excessively expansive economy. These measures have included devaluations of the Chinese currency, the RMB, restrictions on the availability of domestic credit, reducing the purchasing capability of certain of its customers, and limited re-centralization of the approval process for purchases of some foreign products. These austerity measures alone may not succeed in slowing down the economy's excessive expansion or control inflation, and may result in severe dislocations in the Chinese economy. The Chinese government may adopt additional measures to further combat inflation, including the establishment of freezes or restraints on certain projects or markets. To date reforms to China's economic system have not adversely impacted our operations and are not expected to adversely impact operations in the foreseeable future; however, there can be no assurance that the reforms to China's economic system will continue or that we will not be adversely affected by changes in China's political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions. 30 China's Accession into the WTO On November 11, 2001, China signed an agreement to become a member of the World Trade Organization (WTO), the international body that sets most trade rules, further integrating China into the global economy and significantly reducing the barriers to international commerce. China's membership in the WTO was effective on December 11, 2001. China has agreed upon its accession to the WTO to reduce tariffs and non-tariff barriers, remove investment restrictions, provide trading and distribution rights for foreign firms, and open various service sectors to foreign competition. China's accession to the WTO may favorably affect our business in that reduced market barriers and a more transparent investment environment will facilitate increased investment opportunities in China, while tariff rate reductions and other enhancements will enable us to develop better investment strategies for our clients. In addition, the WTO's dispute settlement mechanism provides a credible and effective tool to enforce members' commercial rights. Our History We were incorporated in Nevada on August 27, 1987 under the name Network USA, Inc. for the purposes of completing a merger or other business combination with an operating entity. From our inception through April 2002 we did not conduct business. On April 9, 2002, we acquired 20% of One Genesis, Inc., a privately-held Texas real estate corporation, from one of our then principal stockholders in exchange for approximately 4,333,332 shares of our common stock. The shares of One Genesis, Inc. were sold on July 31, 2002 for $120,000 in cash. Following this transaction, we continued to direct our efforts towards the investment and development of real estate, initially in the Houston, Texas market and also considered possible transactions in which a privately held business would merge into our company in a transaction in which control of our company would change hands. During fiscal 2003, we entered into a letter of intent with Aerospace Technologies Limited, however, the letter of intent was eventually terminated prior to the closing of any transaction. Effective on April 30, 2004, we acquired 100% of the issued and outstanding shares of Sunwin Tech Group, Inc., a newly-formed Florida corporation, ("Sunwin Tech") from its shareholders, in exchange for approximately 17,000,000 shares of our common stock which resulted in a change of control of our company. Concurrent with the closing of this transaction, our officers and directors resigned and our current officers and directors were appointed to their positions. In connection with the transaction, Sunwin Tech purchased 4,500,000 shares of our common stock owned by our former principal stockholders for $175,000, and, at the closing, Sunwin Tech distributed the 4,500,000 shares to Messrs. Baozhong Yuan, Laiwang Zhang, Xianfeng Kong and Lei Zhang, pro-rata to their ownership of Sunwin immediately prior to the closing. Following the transactions, the former Sunwin Tech shareholders own approximately 68 % of our issued and outstanding capital stock. Sunwin Tech owns 80% of Qufu Natural Green Engineering Company, Limited, a PRC company ("Qufu"). Sunwin Tech was organized in January 2004 and before that date did not have any business and operations. Effective February 1, 2004 Sunwin Tech acquired 80% of the capital stock of Qufu from Shandong Shengwang Pharmaceutical Corporation, Limited in exchange for 32,500,000 shares of Sunwin Tech's common stock. Shandong Shengwang Pharmaceutical Corporation, Limited is the minority shareholder of Qufu. 31 In July 2004 following the transaction with Sunwin Tech, we changed the name of our company from Network USA, Inc. to Sunwin International Neutraceuticals, Inc. In March 2005, we entered into a letter of intent to acquire 55% of the outstanding shares of Jining Stevia Manufacturing Company in a share exchange. Jining Stevoa Manufacturing is a manufacturer of stevioside, a low calorie natural sweetener.. Completion of the transaction is subject to the negotiation and execution of a mutually satisfactory stock exchange agreement, receipt of audited financial statements of Jining, receipt of necessary corporate approvals by both parties, satisfactory completion of due diligence, funds sufficient to satisfy a portion of the purchase price and other customary conditions of closing. We are currently in the very early stage of due diligence. Property Our executive offices are located at 6 Youpeng Road, Qufu, Shandong, China. We lease approximately 1,500,000 square feet of commercial office and manufacturing space, which includes approximately 65,000 square feet of office space, approximately 160,000 square feet for production and approximately 140,000 square feet devoted to a comprehensive testing building, from an unaffiliated third party under a lease expiring in August 2012. Our annual rent is USD $22,000, with each year payable in advance. We believe that these facilities, and our new manufacturing facility described below, are sufficient for our current needs. We have also established a research and development center at 6 Youpeng Road, Qufu, Shandong, China , to assist in our efforts to launch new products. Combining scientific research institutes abroad and domestic research, our goal is to expand product lines and offer technological services in coordination with our sales department. We employ a professional technology staff specializing in each production department to coordinate the efforts of our research and development department. We also lease land adjacent to our principal offices for our manufacturing facility. We invested approximately $500,000 to build a new building consisting of 13,123 square feet. This new manufacturing facility will provide us an aggregate production capacity of 300 tons per year. The main facilities are extraction technology and spray tower for high temperature drying. Our annual rent is USD $3,659 under a lease expiring in 2025. Legal Proceedings We are not a party to any pending legal proceeding, nor are we aware of any legal proceedings being contemplated against us by any governmental authority. We are not aware of any legal proceeding in which any of our officers, directors, affiliates or security holders is a party adverse to us or in which any of them have a material interest adverse to us. Employees As of May 17, 2005, we employed the following: Function (1) Management and administration 47 (2) Manufacturing (including quality control) and production 250 (3) Research and development 9 (4) Sales and marketing 85 -- Total 391 32 All employees are primarily based in Qufu, China while some managerial and sales staff work occasionally in other Chinese cities or overseas for different projects. Each full-time Chinese employee is a member of a local trade union. Labor relations have remained positive and we have not had any employee strikes or major labor disputes. Unlike trade union in western countries, trade unions in most parts of China are organizations mobilized jointly by the government and the management of the corporation. MANAGEMENT Directors and Executive Officers The following table includes the names, positions held and ages of our executive officers and directors. NAME AGE POSITION ---- --- -------- The following individuals are our executive officers and directors: Name Age Position Laiwang Zhang 43 President and Chairman Dongdong Lin 31 CEO, Secretary and director Fanjun Wu 31 Chief Financial Officer Chengxiang Yan 37 Director Laiwang Zhang. Mr. Zhang has served as our President and Chairman since April 30, 2004 and he has served as Chairman of our majority owned subsidiary Qufu Natural Green Engineering Company, Limited since January 2003. Mr. Zhang also serves as Chairman of Shandong Shengwang PharmaceuticalCorporation, Limited, a company engaged in the sale and distribution of Chinese herb medicines, since April 2000. Shandong Shengwang Pharmaceutical Corporation, Limited is a minority shareholder of our majority owned subsidiary Qufu. In 1996 Mr. Zhang founded Shandong Shengwang Group Corporation, a holding company with interests in companies operating in the areas of nutritional products, Chinese herb extracts, package products, animal health products, animal medicine and chemical products. Since April 1996 he has been General Manager of this company. From April 1992 to April 1996 Mr. Zhang served as Manager of our subsidiary Shengya Veterinery Drugs Factory (formerly Shangong Qufu Veterinary Medicine Plant). From 1984 to 1992 Mr. Zhang served a President of Shandong Qufu Amylum Plant, a company that manufactures amylum. Mr. Zhang graduated from Shandong Technical University in 1984 with a Masters Degree in Engineering. Dongdong Lin. Ms. Lin has served as our CEO, Secretary and a member of our Board of Directors since February 2005. Ms. Lin served as Manager of the Technology Information Department of Shandong Shengwang Pharmaceutical Corporation, Limited, a company engaged in the sale and distribution of Chinese herb medicines, from January 2003 to December 2004. Shandong Shengwang Pharmaceutical Corporation, Limited is a minority shareholder of our majority owned subsidiary Qufu. Ms. Lin joined Shandong Shengwang Group Corporation in 1996, serving as a supervisor from April 1998 to April 2000, and Manager of the Department of Export and Import from April 2000 to December 2002. Ms. Lin holds a Bachelors Degree in Technology English from Haerbing Industry University and a Masters Degree in Economics from the China Academy of Social Science. 33 Fanjun Wu. Mr. Wu has been our Chief Financial Officer since April 30, 2004. Since 1997 she has been employed by our subsidiary Qufu Natural Green Engineering Co., Ltd., serving as Director of Finance Section from 1997 to 1998 and thereafter as Chief Financial Officer. From 1992 to 1996 she was Director of Finance Section for our subsidiary Shengya Veterinery Drugs Factory (formerly Shandong Qufu Veterinary Medicine Plant). Chjengxiang Yan. Mr. Yan has been a member of our Board of Directors since April 30, 2004. Since 2001 he has served as a Director of Shandong Shenwang Pharmaceutical Corporation Limited, a company engaged in the sale and distribution of Chinese herb medicines. Shandong Shengwang Pharmaceutical Corporation, Limited is a minority shareholder of our majority owned subsidiary Qufu. From 1999 to 2004 he was the Director of the Marketing Department for that company. From 1996 to 1998 Mr. Yan was Director of the Marketing Department for Shandong Shengwang Group Corporation, a holding company with interests in companies operating in the areas of nutritional products, Chinese herb extracts, package products, animal health products, animal medicine and chemical products, and from 1993 to 1996 he was Director of the Marketing Section for our subsidiary Shengya Veterinery Drugs Factory (formerly Shangong Qufu Veterinary Medicine Plant). Mr. Yan graduated from Shandong Agriculture University in 1993 with a Bachelor's Degree in Farming. There are no family relationships between any of our officers and directors. All of our current management are located in the PRC and no member of our board of directors has previously served as an officer or a director of a U.S. public company. As a result of both the cultural differences between doing business in the PRC and doing business as a public company in the U.S. as well as the lack of experience of our board of directors with laws, rules and regulations which apply to public companies in the U.S., we are seeking to expand our board of directors to include qualified individuals who are also residents of the U.S. U.S. Advisor In May 2005 we engaged China Direct Investments, Inc., which provides consulting and advisory services to assist us. We selected China Direct Investments, Inc. in part because its staff includes Chinese-speaking individuals with experience in operation and regulatory framework applicable to U.S. public companies. The company has been engaged to advise our management in areas related to marketing and operational support in the U.S., media and public relations, financial advisory, SEC disclosure compliance and translation of all necessary documents relating to the foregoing. Under the terms of this two-month agreement we issued China Direct Investments, Inc. warrants to purchase 500,000 shares of our common stock at an exercise price of $.15 per share as compensation for their services. James Wang, Marc Siegel and David Stein are the officers, directors and shareholders of China Direct Investments, Inc. Director Independence, Audit Committee Of The Board Of Directors And Audit Committee Financial Expert None of the members of our Board of Directors are "independent" within the meaning of definitions established by the Securities and Exchange Commission. Our Board of Directors are presently comprised of individuals who were integral in either the start-up of our company or business of our subsidiaries, in the case of Mr. Zhang and Mr. Chjengxiang, or general business skills, in the case of Ms. Lin. As a result of our limited operating history and minimal resources, small companies such as ours generally have difficulty in attracting independent directors. In addition, we will require additional resources to obtain directors and officers insurance coverage which is generally necessary to attract and retain independent directors. As we grow, in the future our Board of Directors intends to seek additional members who are independent, have a variety of experiences and backgrounds, who will represent the balanced, best interests of all of our stockholders and at least one of which who is an "audit committee financial expert" described below. 34 Our Board of Directors has also not yet established an Audit Committee, and the functions of the Audit Committee are currently performed by the entire Board of Directors. At such time as we expand our Board of Directors to include independent directors, we intend to establish an Audit Committee of our Board of Directors. We are not currently subject to any law, rule or regulation, however, requiring that all or any portion of our Board of Directors include "independent" directors, nor are we required to establish or maintain an Audit Committee of our Board of Directors. None of our directors is an "audit committee financial expert" within the meaning of Item 401(e) of Regulation S-B. In general, an "audit committee financial expert" is an individual member of the audit committee or Board of Directors who: * understands generally accepted accounting principles and financial statements, * is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves, * has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements, * understands internal controls over financial reporting, and * understands audit committee functions. Code of Ethics In April 2005 we adopted a Code of Ethics applicable to our Chief Executive Officer, principal financial and accounting officers and persons performing similar functions. A Code of Ethics is a written standard designed to deter wrongdoing and to promote: * honest and ethical conduct, * full, fair, accurate, timely and understandable disclosure in regulatory filings and public statements, * compliance with applicable laws, rules and regulations, * the prompt reporting violation of the code, and * accountability for adherence to the Code. A copy of our Code of Ethics is filed as an exhibit to the registration statement of which this prospectus forms a part, and we will provide a copy, without charge, to any person desiring a copy of the Code of Ethics, by written request to us at our principal offices. 35 EXECUTIVE COMPENSATION Summary Compensation Table The table below sets forth information relating to the compensation paid by us during the past three fiscal years to: (i) the Chief Executive Officer; and (ii) each other executive officer who earned more than $100,000 during last three completed fiscal years ending April 30 (the "Named Executive Officers").
Annual Long-Term Compensation Compensation Restricted Securities Name and Other Annual Stock Underlying All Principal Fiscal Salary Bonus Compensation Awards Options Other Position Year ($) ($) ($) ($) SAR (#) Compensation - ------------------------------------------------------------------------------------------------------------------- Baozhong Yuan(1), 2004 $5,000 -0- -0- -0- -0- -0- Chief Executive Officer Richard J.Church(2) 2003 $6,000 -0- -0- -0- -0- -0- 2002 -0- -0- -0- -0- -0- -0-
(1) Mr. Yuan served as our Chief Executive Officer from April 30, 2004 to February 2005. (2) Mr. Church served as president from April 2002 to April 30, 2004. The following table sets forth certain information with respect to stock options granted in fiscal 2004 to the Named Executive Officers. Option Grants in Year Ended April 30, 2004 (individual grants) NO. OF SECURITIES % OF TOTAL OPTIONS/SARs UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE EXPIRATION NAME SARs GRANTED IN FISCAL YEAR PRICE DATE ------------- ---------------- ------------------------ ------------- ---------------- Baozhong Yuan 0 0 0 0 Richard J. Church 0 0 0 0
36 The following table sets forth certain information regarding stock options held as of April 30, 2004 by the Named Executive Officers. Aggregate Option Exercises in Year Ended April 30, 2004 and Year-End Option Values
NO. OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES APRIL 30, 2004 April 30, 2004 ACQUIRED VALUE --------------------------- ------------------- ON REALIZED NAME EXERCISE $ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------- -------- ----- ----------- ------------- ----------- -------------- Baozhong Yuan 0 n/a n/a n/a n/a n/a Richard J. Church 0 n/a n/a n/a n/a n/a
STOCK OPTION PLAN On March 23, 2005, our Board of Directors authorized and adopted our 2005 Equity Compensation Plan. The purpose of the plan is to encourage stock ownership by our officers, directors, key employees and consultants, and to give these persons a greater personal interest in the success of our business and an added incentive to continue to advance and contribute to us. We have currently reserved 5,000,000 of our authorized but unissued shares of common stock for issuance under the plan, and a maximum of 5,000,000 shares may be issued, unless the plan is subsequently amended (subject to adjustment in the event of certain changes in our capitalization), without further action by our Board of Directors and stockholders, as required. Subject to the limitation on the aggregate number of shares issuable under the plan, there is no maximum or minimum number of shares as to which a stock grant or plan option may be granted to any person. Shares used for stock grants and plan options may be authorized and unissued shares or shares reacquired by us, including shares purchased in the open market. Shares covered by plan options which terminate unexercised will again become available for grant as additional options, without decreasing the maximum number of shares issuable under the plan, although such shares may also be used by us for other purposes. The plan is administered by our Board of Directors or an underlying committee. The Board of Directors or the committee determines from time to time those of our officers, directors, key employees and consultants to whom stock grants or plan options are to be granted, the terms and provisions of the respective option agreements, the time or times at which such options shall be granted, the type of options to be granted, the dates such plan options become exercisable, the number of shares subject to each option, the purchase price of such shares and the form of payment of such purchase price. All other questions relating to the administration of the plan, and the interpretation of the provisions thereof and of the related option agreements, are resolved by the Board or committee. 37 Plan options may either be options qualifying as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified options. Our officers, directors, key employees and consultants are eligible to receive stock grants and non-qualified options under the plan; only our employees are eligible to receive incentive options. In addition, the plan allows for the inclusion of a reload option provision which permits an eligible person to pay the exercise price of the option with shares of common stock owned by the eligible person and receive a new option to purchase shares of common stock equal in number to the tendered shares. Furthermore, compensatory stock grants may also be issued. Any incentive option granted under the plan must provide for an exercise price of not less than 100% of the fair market value of the underlying shares on the date of grant, but the exercise price of any incentive option granted to an eligible employee owning more than 10% of our outstanding common stock must not be less than 110% of fair market value on the date of the grant. The term of each plan option and the manner in which it may be exercised is determined by the Board of Directors or the committee, provided that no option may be exercisable more than ten years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more than 10% of the common stock, no more than five years after the date of the grant. The exercise price of non-qualified options shall be determined by the Board of Directors or the Committee, but shall not be less than the par value of our common stock on the date the option is granted. The per share purchase price of shares issuable upon exercise of a Plan option may be adjusted in the event of certain changes in our capitalization, but no such adjustment shall change the total purchase price payable upon the exercise in full of options granted under the Plan. All incentive stock options expire on or before the 10th anniversary of the date the option is granted; however, in the case of incentive stock options granted to an eligible employee owning more than 10% of the common stock, these options will expire no later than five years after the date of the grant. Non-qualified options expire 10 years and one day from the date of grant unless otherwise provided under the terms of the option grant. All plan options are nonassignable and nontransferable, except by will or by the laws of descent and distribution, and during the lifetime of the optionee, may be exercised only by such optionee. If an optionee dies while our employee or within three months after termination of employment by us because of disability, or retirement or otherwise, such options may be exercised, to the extent that the optionee shall have been entitled to do so on the date of death or termination of employment, by the person or persons to whom the optionee's right under the option pass by will or applicable law, or if no such person has such right, by his executors or administrators. In the event of termination of employment because of death while an employee or because of disability, the optionee's options may be exercised not later than the expiration date specified in the option or one year after the optionee's death, whichever date is earlier, or in the event of termination of employment because of retirement or otherwise, not later than the expiration date specified in the option or one year after the optionee's death, whichever date is earlier. If an optionee's employment by us terminates because of disability and such optionee has not died within the following three months, the options may be exercised, to the extent that the optionee shall have been entitled to do so at the date of the termination of employment, at any time, or from time to time, but not later than the expiration date specified in the option or one year after termination of employment, whichever date is earlier. If an optionee's employment terminates for any reason other than death or disability, the optionee may exercise the options to the same extent that the options were exercisable on the date of termination, for up to three months following such termination, or on or before the expiration date of the options, whichever occurs first. In the event that the optionee was not entitled to exercise the options at the date of termination or if the optionee does not exercise such options (which were then exercisable) within the time specified herein, the options shall terminate. If an optionee's employment shall terminate for any reason other than death, disability or retirement, all right to exercise the option shall terminate not later than 90 days following the date of such termination of employment. 38 The plan provides that, if our outstanding shares are increased, decreased, exchanged or otherwise adjusted due to a share dividend, forward or reverse share split, recapitalization, reorganization, merger, consolidation, combination or exchange of shares, an appropriate and proportionate adjustment shall be made in the number or kind of shares subject to the plan or subject to unexercised options and in the purchase price per share under such options. Any adjustment, however, does not change the total purchase price payable for the shares subject to outstanding options. In the event of our proposed dissolution or liquidation, a proposed sale of all or substantially all of our assets, a merger or tender offer for our shares of common stock, the Board of Directors may declare that each option granted under the plan shall terminate as of a date to be fixed by the Board of Directors; provided that not less than 30 days written notice of the date so fixed shall be given to each participant holding an option, and each such participant shall have the right, during the period of 30 days preceding such termination, to exercise the participant's option, in whole or in part, including as to options not otherwise exercisable. The Board of Directors or committee may amend, suspend or terminate the plan at any time. However, no such action may prejudice the rights of any holder of a stock grant or optionee who has prior thereto been granted options under the plan. Further, no amendment to the plan which has the effect of increasing the aggregate number of shares subject to the plan (except for adjustments due to changes in our capitalization), or changing the definition of "eligible person" under the plan, may be effective unless and until approved by our stockholder in the same manner as approval of the plan was required. Any such termination of the plan shall not affect the validity of any stock grants or options previously granted thereunder. Unless the Plan is approved by the Company's stockholders within one year of the Effective Date, all incentive stock options shall automatically be converted into non-qualified stock options. Unless the plan shall previously have been suspended or terminated by the Board of Directors, the plan, as it relates to grants of incentive stock options, terminates on March 23, 2015. Limitation on Liability and Indemnification Matters The Nevada Revised Statues allows us to indemnify each of our officers and directors who are made a party to a proceeding if: (a) the officer or director conducted himself or herself in good faith; (b) his or her conduct was in our best interests, or if the conduct was not in an official capacity, that the conduct was not opposed to our best interests; and (c) in the case of a criminal proceeding, he or she had no reasonable cause to believe that his or her conduct was unlawful. We may not indemnify our officers or directors in connection with a proceeding by or in our right, where the officer or director was adjudged liable to us, or in any other proceeding, where our officer or director are found to have derived an improper personal benefit. This provision limits our rights and the rights of our stockholders to recover monetary damages against a director for breach of the fiduciary duty of care except in the situations described above. This provision does not limit our rights or the rights of any stockholder to seek injunctive relief or rescission if a director breaches his duty of care. These provisions will not alter the liability of directors under federal securities laws. Our by-laws require us to indemnify directors and officers against, to the fullest extent permitted by law, liabilities which they may incur under the circumstances described above. 39 Our articles of incorporation further provide for the indemnification of any and all persons who serve as our director, officer, employee or agent to the fullest extent permitted under Nevada law. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling Sunwin pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. CERTAIN RELATINSHIPS AND RELATED PARTY TRANSACTIONS From time to time during fiscal 2002 and fiscal 2003 a former officer provided various funds to us for working capital. At April 30, 2002 we owed that individual $17,810. This balance was paid in full during fiscal 2003. The minority shareholder of Qufu, which owns 20% of that company, is Shandong Shengwang Pharmaceutical Corporation Limited. Shandong Shengwang Pharmaceutical Corporation Limited is controlled by Shandong Shengwang Group Corporation, and our President and Chairman, Laiwang Zhang, is the control person, of both Shandong Shengwang Pharmaceutical Corporation Limited and Shandong Shengwang Group Corporation. In addition, the remaining members of our management have been employed by one of those two companies prior to or in conjunction with their duties at Qufu and our company. From time to time we advance funds to Shandong Shengwang Pharmaceutical Corporation, Limited and certain of its affiliated entities to effectuate the purchase of equipment and hiring of construction services for our company at advantageous prices through the buying power provided by Shandong Shengwang Pharmaceutical Corporation, Limited in connection with our building an additional manufacturing line. At April 30, 2004 Shandong Shengwang Pharmaceutical Corporation, Limited owed us $513,785. As of January 31, 2005, Shandong Shengwang Pharmaceutical Corporation, Limited owed us $1,153,452 for advances we made that corporation for the purchase of equipment and hiring of construction services on our behalf. In May 2005 we engaged China Direct Investments, Inc., which provides consulting and advisory services to assist us. Under the terms of this two-month agreement we issued China Direct Investments, Inc. warrants to purchase 500,000 shares of our common stock at an exercise price of $.15 per share as compensation for their services. Marc Siegel, a 7.6% shareholder of our company, is an officer, director and principal shareholder of China Direct Investments, Inc. PRINCIPAL SHAREHOLDERS At May 17, 2005 we had 43,367,276 shares of common stock issued and outstanding. The following table sets forth information known to us as of May 17, 2005 relating to the beneficial ownership of shares of our common stock by: 40 o each person who is known by us to be the beneficial owner of more than five percent of our outstanding common stock; o each director; o each executive officer; and o all executive officers and directors as a group. Unless otherwise indicated, the address of each beneficial owner in the table set forth below is care of 6 Youpeng Road, Qufu, Shandong, China. We believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock shown as being owned by them. Under securities laws, a person is considered to be the beneficial owner of securities owned by him (or certain persons whose ownership is attributed to him) and that can be acquired by him within 60 days from the that date, including upon the exercise of options, warrants or convertible securities. We determine a beneficial owner's percentage ownership by assuming that options, warrants or convertible securities that are held by him, but not those held by any other person, and which are exercisable within 60 days of the that date, have been exercised or converted. Except as otherwise required by SEC rules relating to beneficial ownership, the table does not give effect to the issuance of up to 15,500,000 shares upon exercise of warrants. Name and Address of Amount Percent Beneficial Owner Beneficial Ownership of Class Laiwang Zhang 9,592,302 22.1% Dongdong Lin 0 n/a Chengxiang Yan 0 n/a Fanjun Wu 0 n/a All officers and directors as a group (five persons) 9,592,302 22.1% Baozhang Yuan (1) 3,969,234 9.2% Lei Zhang (2) 3,969,234 9.2% Xianfeng Kong 3,969,234 9.2% Alpha Capital Aktiengellschaft (4) 8,750,000 17.9% Marc Siegel (5) 3,440,000 7.6% * represents less than 1% (1) Mr. Yuan served as our CEO and a member of our board of directors from April 2004 until February 2005. Mr. Yuan's address is 6 Youpeng Road, Qufu, Shandong, China. (2) Mr. Zhang served as our Secretary from April 2004 until February 2005. Mr. Zhang's address is 6 Youpeng Road, Qufu, Shandong, China. (3) Mr. Kong served as our Treasurer and a member of our board of directors from April 2004 until December 2004. Ms. Kong's address is 6 Youpeng Road, Qufu, Shandong, China. 41 (4) Alpha Capital Aktiengellschaft owns 3,500,000 shares of our common stock and Class A Common Stock Purchase Warrants to purchase an additional 5,250,000 shares of our common stock at an exercise price of $0.15 per share. The resale of all of these shares, including the shares underlying the warrant, are covered by this prospectus. Alpha Capital Aktiengellschaft has agreed to limit the number of shares of our common stock acquired by the holder upon exercise of the warrants is limited to the extent necessary to ensure that following the exercise the total number of shares of our common stock beneficially owned by the holder at any one time does not exceed 4.99% of our issued and outstanding common stock subject to a waiver of this limitation by the holder upon 61 days notice to us. Until such time as its holdings are below this threshold or it waives this requirement, Alpha Capital Aktiengellschaft cannot exercise the warrant. Mr. Konrad Ackerman has voting and dispositive control over securities owned by Alpha Capital Aktiengellschaft. Alpha Capital Aktiengellschaft's address is Pradafant 7, 9490 Furstentums, Vaduz, Lichtenstein. (5) Includes: * 850,000 shares of our common stock presently outstanding, 375,000 shares of our common stock issuable upon the exercise of Class A Common Stock Purchase Warrants that have an exercise price of $0.15 per share and 600,000 shares of our common stock issuable upon the exercise of outstanding common stock purchase warrants with an exercise price of $0.17 per share owned by Edge Capital Partners Ltd., * 250,000 shares of our common stock presently outstanding, and 70,000 shares of our common stock issuable upon the exercise of Class A Common Stock Purchase Warrants with an exercise price of $0.15 per share which are owned by Marc Siegel IRA, * 500,000 shares of our common stock issuable upon the exercise of Class A Common Stock Purchase Warrants that have an exercise price of $0.15 per share owned by China Direct Investments, Inc. * 375,000 shares of our common stock issuable upon the exercise of Class A Common Stock Purchase Warrants that have an exercise price of $0.15 per share owned by Mr. Siegel, and * 420,000 shares of our common stock owned by Edge LLC. Mr. Siegel has voting and dispositive control over securities owned by each of Edge Capital Partners Ltd., Marc Siegel IRA, China Direct Investments and Edge LLC. The number of shares beneficially owned by Mr. Siegel excludes any securities owned by Alvin Siegel, Marc Siegel's father, or Progress Partners, Inc., a company controlled by Alvin Siegel. Please see footnotes 7 and 21 to the table appearing on pages 47 and 48 later in this prospectus under "Selling Security Holders." Mr. Siegel's address is 5301 N. Federal Highway, Suite 120, Boca Raton, FL 33487. 42 DESCRIPTION OF SECURITIES General The following description of our capital stock and provisions of our Articles of Incorporation is a summary thereof and is qualified by reference to our Articles of Incorporation, copies of which may be obtained upon request. Our authorized capital consists of 200,000,000 shares of common stock, par value $.001 per share, and 1,000,000 shares of preferred stock, par value $.001 per share. As of May 17, 2005 43,367,276 shares of common stock and no shares of preferred stock were issued and outstanding. Common Stock Holders of shares of common stock are entitled to share, on a ratable basis, such dividends as may be declared by the board of directors out of funds, legally available therefore. Upon our liquidation, dissolution or winding up, after payment to creditors, our assets will be divided pro rata on a per share basis among the holders of our common stock. Each share of common stock entitles the holders thereof to one vote. Holders of common stock do not have cumulative voting rights which means that the holders of more than 50% of the shares voting for the election of directors can elect all of the directors if they choose to do so, and, in such event, the holders of the remaining shares will not be able to elect any directors. Our By-Laws require that only a majority of our issued and outstanding shares need be represented to constitute a quorum and to transact business at a stockholders' meeting. Our common stock has no preemptive, subscription or conversion rights and is not redeemable by us. Preferred Stock We are authorized to issue up to 1,000,000 shares of preferred stock having such designations, rights, preferences, powers and limitations as may be determined by the board of directors at the time of designation. Our board of directors, without further stockholder approval, may issue preferred stock in one or more series from time to time and fix or alter the designations, relative rights, priorities, preferences, qualifications, limitations and restrictions of the shares of each series. The rights, preferences, limitations and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and other matters. Our board of directors may authorize the issuance of preferred stock which ranks senior to our common stock for the payment of dividends and the distribution of assets on liquidation. In addition, our board of directors can fix limitations and restrictions, if any, upon the payment of dividends on our common stock to be effective while any shares of preferred stock are outstanding. The rights granted to the holders of any series of preferred stock could adversely affect the voting power of the holders of common stock and issuance of preferred stock may delay, defer or prevent a change in our control. No preferred stock has yet been designated or issued, and we have no plans to issue any preferred stock at this time or in the near future. 43 Common Stock Purchase Warrants Class A Common Stock Purchase Warrants In April and May 2005 we issued Class A Common Stock Purchase Warrants to purchase an aggregate of 14,000,000 shares of our common stock. The terms of these warrants provide: * they are exercisable for a period of five years at $0.15 per share, * following the date of this prospectus and providing that the holder can sell the shares underlying the warrants pursuant to this prospectus, the exercise price of the warrants is payable only in cash. Otherwise, the warrants may be exercised by the holder using the optional cashless exercise provision which permits the holder, rather than paying the exercise price in cash, the option of surrendering a number of warrants equal to the exercise price of the warrants being exercised, * the number of shares issuable upon the exercise and the exercise price per share are subject to adjustment in the event we issue additional shares of common stock as a dividend or other distribution or for stock splits or combinations, * the number of shares of our common stock and the exercise price of the warrant are also subject to adjustment in the event we issue additional shares of our common stock or any other securities which are convertible or exercisable into shares of our common stock at a per share price less than the exercise price of the warrant, other than in certain specific instances, in which event the exercise price of the warrant would be reset to the lower price, and * the holders contractually agreed to limit the exercise of the warrants so that upon the exercise the holder's beneficial ownership would not exceed 4.99% of our common stock outstanding at the time of exercise, subject to a waiver of this limitation by the holder upon 61 days notice to us, and * if we fail to maintain an effective registration statement of which this prospectus is a part for the time periods required by the subscription agreement, or if the holder is unable to exercise the warrant as a result of our failure to maintain an effective registration statement, upon written demand by the holder we are obligated to pay the holder a sum equal to the closing price of our common stock on the trading day immediately preceding the notice, less the original purchase price of $0.10 per share. Other Outstanding Common Stock Purchase Warrants In July 2004 we issued two year common stock purchase warrants to purchase an aggregate of 1,500,000 shares of our common stock with an exercise price of $0.167 per share. These warrants contain standard anti-dilution protection for the warrant holder in the event of stock splits, recapitalization or reorganization by us. Transfer Agent and Registrar The transfer agent and registrar for our common stock is Colonial Stock Transfer Co., 66 Exchange Place, Salt Lake City, Utah 84111. Our transfer agent may be reached by telephone at 801-355-5740. SELLING SECURITY HOLDERS June 2004 Offering In July 2004, we sold 2.5 units to three accredited investors in a private transaction resulting in gross proceeds to us of $120,000. Each unit consisted of 600,000 shares of our common stock and two year common stock purchase warrants to purchase 600,000 shares of our common stock at an exercise price of $0.167 per share. This transaction resulted in the issuance of an aggregate of 1,500,000 shares of our common stock and warrants to purchase an additional 1,500,000 shares. A description of the terms of the warrants is contained earlier in this prospectus under "Description of Securities - Common Stock Purchase Warrants - Other Outstanding Common Stock Purchase Warrants" beginning on page 42. The shares and warrants were sold to a total of three investors, each of whom we had reasonable grounds to believe was an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act. Each investor was provided access to business and financial information about us and had such knowledge and experience in business and financial matters that they were able to evaluate the risks and merits of an investment in our company. Each certificate evidencing securities issued to the investors included a legend to the effect that the securities were not registered under the Securities Act and could not be resold absent registration or the availability of an applicable exemption from registration. No general solicitation or advertising was used in connection with the transactions. 44 The issuance of the shares and warrants was exempt from the registration requirements of the Securities Act by reason of Section 4(2) of the Securities Act and the rules and regulations, including Regulation D thereunder, as transactions by an issuer not involving a public offering. March 2005 Offering On April 12, 2005, we completed an $875,000 financing consisting of 8,750,000 shares of our common stock at $.10 per share, and Class A Common Stock Purchase Warrants to purchase an additional 13,125,000 shares. Each warrant entitles the holder to purchase one share of common stock for a period of five years, at an exercise price of $.15 per share, subject to adjustment. A description of the terms of the warrants is contained earlier in this prospectus under "Description of Securities - Common Stock Purchase Warrants - Class A Common Stock Purchase Warrants" beginning on page 41. The net proceeds from the transaction will be used for general working capital purposes. The shares and warrants were sold to a total of 12 investors, each of whom we had reasonable grounds to believe was an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act. Each investor was provided access to business and financial information about us and had such knowledge and experience in business and financial matters that they were able to evaluate the risks and merits of an investment in our company. Each certificate evidencing securities issued to the investors included a legend to the effect that the securities were not registered under the Securities Act and could not be resold absent registration or the availability of an applicable exemption from registration. No general solicitation or advertising was used in connection with the transactions. We paid unaffiliated finders a total of $87,500, in cash, and issued certain finders Class A Common Stock Purchase Warrants to purchase a total of 375,000 shares of common stock, exercisable at $.15 per share, subject to adjustment. One of the investors in the private offering received a finders fee and finders warrants. We also paid $15,000 in legal fees to the investors' counsel. The issuance of the shares and warrants was exempt from the registration requirements of the Securities Act by reason of Section 4(2) of the Securities Act and the rules and regulations, including Regulation D thereunder, as transactions by an issuer not involving a public offering. We agreed to file a registration statement covering the shares of common stock and the shares issuable upon exercise of the Class A Common Stock Purchase Warrants. This prospectus is part of that registration statement. In the event the registration statement was not filed by May 23, 2005 or does not become effective by October 5, 2005, we will be liable for the payment of liquidated damages in the amount of $18,000 per month, until the deficiency is cured. The transaction documents also provide for the payment of liquidated damages to the investors in certain events, including our failure to maintain an effective registration statement covering resale of the common stock or shares issuable upon exercise of the warrants, and our failure to deliver un-legended shares to the investors as and when required under the agreements. For the period ending on the earlier of 365 days from the date of this prospectus or until all of the shares purchased by the investors, including shares underlying the Class A Common Stock Purchase Warrants, have been resold or transferred by the investors either pursuant to this prospectus or under Rule 144 without regard to volume limitations, we have agreed not to file any additional registration statements, other than the registration statement of which this prospectus is a part, without the consent of the investors. For a period not to exceed one year from the date of this prospectus, we have granted the investors a one-year preferential right to participate in any proposed sale by us of our common stock on the same terms and conditions as are offered by a third party, other equity securities, obligations convertible or exercisable for equity securities or debt obligations except in connection with certain specified excepted issuance set forth as follows: 45 * full or partial consideration in connection with a strategic merger, consolidation or purchase of substantially all of the securities or assets of a corporation or other entity, * our issuance of securities in connection with a strategic license agreement or other partnering agreement so long as the issuance is not for the purpose of raising capital, * our issuance of common stock or the issuance or grant of options to purchase our common stock pursuant to stock option plans and employee stock purchase plans which presently exist or may be adopted which permit the issuance of up to 5,000,000 shares of our common stock, or * the exercise of the Class A Common Stock Purchase Warrants. If we should issue any shares of our common stock, or securities convertible or exercisable into shares of our common stock at a price per common share or exercise price per common share which is less than $0.10 per share, or less than $0.15 per share in the instance of the Class A Common Stock Purchase Warrants, without the consent of the investors who continue to own shares or Class A Common Stock Purchase Warrants, we have agreed to issue the investors additional shares and/or warrants to protect against our future issuance of common stock or securities convertible into common stock at less than the $.10 per share purchase price of the common stock and/or $.15 per share exercise price of the warrants, respectively. We have also agreed to file a registration statement covering these additional shares of common stock within 45 days from the issuance date of the shares. Selling Security Holders The following table sets forth: * the name of each selling security holder; * the number or shares of common stock beneficially owned by each selling security holder as of the date of this prospectus, giving effect to the exercise of the selling security holders' warrants; * the number of shares being offered by each selling security holder; and * the number of shares to be owned by each selling security holder following completion of this offering. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities and includes any securities which the person has the right to acquire within 60 days through the conversion or exercise of options, warrants, promissory notes and any other security or other right. The information as to the number of shares of our common stock owned by each selling security holder is based upon our records and information provided by our transfer agent. 46 We may amend or supplement this prospectus from time to time to update the disclosure set forth in the table. Because the selling security holders identified in the table may sell some or all of the shares owned by them which are included in this prospectus, and because there are currently no agreements, arrangements or understandings with respect to the sale of any of the shares, no estimate can be given as to the number of shares available for resale hereby that will be held by the selling security holders upon termination of the offering made hereby. We have therefore assumed, for the purposes of the following table, that the selling security holders will sell all of the shares owned by them that are being offered hereby, but will not sell any other shares of our common stock that they presently own. We do not believe that any of the selling security holders are broker-dealers or affiliated with broker-dealers. The shares of common stock being offered have been registered to permit public sales and the selling security holders may offer all or part of the shares for resale from time to time. All expenses of the registration of the common stock on behalf of the selling security holder are being borne by us. We will receive none of the proceeds of this offering.
Number Percentage Shares Shares to Percentage Name of Selling of shares owned before to be be owned owned after Security Holder owned offering offered after offering offering - --------------- ----- -------- ------- -------------- -------- Lake Street Fund, L.P. (1) 2,500,000 5.6% 2,500,000 0 n/a Fred L. Astman (2) 1,250,000 2.8% 1,250,000 0 n/a George L. Williams I.R.A. (3) 1,250,000 2.8% 1,250,000 0 n/a Monarch Capital Fund Ltd. (4) 2,500,000 5.6% 2,500,000 0 n/a Richard J. Church (5) 2,599,196 5.8% 2,599,196 0 n/a Edge Capital Partners Ltd. (6) 1,825,000 4.1% 1,825,000 0 n/a Alvin Siegel (7) 625,000 1.4% 625,000 0 n/a Paul Prager (8) 625,000 1.4% 625,000 0 n/a Marc Siegel (9) 625,000 1.4% 625,000 0 n/a Sharon Standowski (10) 625,000 1.4% 625,000 0 n/a Osher Capital, Inc. (11) 737,500 1.7% 737,500 0 n/a Alpha Capital Aktiengellschaft (12) 8,750,000 18.0% 8,750,000 0 n/a Era Capital Management, Inc. (13) 595,000 1.3% 595,000 0 n/a China Direct Investments (14) 500,000 1.1 500,000 0 n/a CIIC Investment Banking Services Company (Shanghai), Limited (15) 1,000,002 2.3% 1,000,002 0 n/a David Stein (16) 130,002 * 130,002 0 n/a Edge LLC (17) 420,000 * 420,000 0 n/a Genesis Technology Group, Inc. (18) 1,500,000 2.7% 1,500,000 0 n/a Michael L. Mead (19) 275,806 * 275,806 0 n/a Libra Finance, S.A. (20) 87,500 * 87,500 0 n/a Progress Partners, Inc. (21) 750,000 1.7% 750,000 0 n/a vFinance Investments, Inc. (22) 30,000 * 30,000 0 n/a Yewen Xi (23) 1,050,000 2.4% 1, 050,000 0 n/a 30,250,006
* represents less than 1% 47 (1) The number of shares owned and offered includes 1,000,000 shares of our common stock presently outstanding and 1,500,000 shares of our common stock issuable upon the exercise of our Class A Common Stock Purchase Warrants which have an exercise price of $0.15 per share. The number of shares of our common stock acquired by the holder upon exercise of the warrants is limited to the extent necessary to ensure that following the exercise the total number of shares of our common stock beneficially owned by the holder at any one time does not exceed 4.99% of our issued and outstanding common stock subject to a waiver of this limitation by the holder upon 61 days notice to us. Mr. Scott Hood has voting and dispositive control over securities owned by Lake Street Fund, L.P. (2) The number of shares owned and offered includes 500,000 shares of our common stock presently outstanding and 750,000 shares of our common stock issuable upon the exercise of Class A Common Stock Purchase Warrants that have an exercise price of $0.15 per share. The number of shares of our common stock acquired by the holder upon exercise of the warrants is limited to the extent necessary to ensure that following the exercise the total number of shares of our common stock beneficially owned by the holder at any one time does not exceed 4.99% of our issued and outstanding common stock subject to a waiver of this limitation by the holder upon 61 days notice to us. (3) The number of shares owned and offered includes 500,000 shares of our common stock presently outstanding and 750,000 shares of our common stock issuable upon the exercise of Class A Common Stock Purchase Warrants that have an exercise price of $0.15 per share. The number of shares of our common stock acquired by the holder upon exercise of the warrants is limited to the extent necessary to ensure that following the exercise the total number of shares of our common stock beneficially owned by the holder at any one time does not exceed 4.99% of our issued and outstanding common stock subject to a waiver of this limitation by the holder upon 61 days notice to us. Mr. George L. Williams has voting and dispositive control over securities owned by George L. Williams I.R.A. (4) The number of shares owned and offered includes 1,000,000 shares of our common stock presently outstanding and 1,500,000 shares of our common stock issuable upon the exercise of Class A Common Stock Purchase Warrants that have an exercise price of $0.15 per share. The number of shares of our common stock acquired by the holder upon exercise of the warrants is limited to the extent necessary to ensure that following the exercise the total number of shares of our common stock beneficially owned by the holder at any one time does not exceed 4.99% of our issued and outstanding common stock subject to a waiver of this limitation by the holder upon 61 days notice to us. Solomon Eisenberg has voting and dispositive control over securities owned by Monarch Capital Fund Ltd. (5) The number of shares owned and offered includes 1,474,196 shares of our common stock presently outstanding, of which 724,196 shares were received as compensation for business development and advisory services, and 1,125,000 shares of our common stock issuable upon the exercise of Class A Common Stock Purchase Warrants that have an exercise price of $0.15 per share. The number of shares of our common stock acquired by the holder upon exercise of the warrants is limited to the extent necessary to ensure that following the exercise the total number of shares of our common stock beneficially owned by the holder at any one time does not exceed 4.99% of our issued and outstanding common stock subject to a waiver of this limitation by the holder upon 61 days notice to us. Mr. Church served as an executive officer and director of our company from May 2000 until April 2004. 48 (6) The number of shares owned and offered includes 850,000 shares of our common stock presently outstanding, 375,000 shares of our common stock issuable upon the exercise of Class A Common Stock Purchase Warrants that have an exercise price of $0.15 per share and 600,000 shares of our common stock issuable upon the exercise of outstanding common stock purchase warrants with an exercise price of $0.167 per share. The number of shares of our common stock acquired by the holder upon exercise of the Class A Common Stock Purchase Warrants is limited to the extent necessary to ensure that following the exercise the total number of shares of our common stock beneficially owned by the holder at any one time does not exceed 4.99% of our issued and outstanding common stock subject to a waiver of this limitation by the holder upon 61 days notice to us. Mr. Marc Siegel has voting and dispositive control over securities owned by Edge Capital Partners Ltd. The number of shares beneficially owned by Edge Capital Partners Ltd. as disclosed in this footnote exclude any holdings of Mr. Siegel individually or the holdings of Marc Siegel IRA, China Direct Investments or Edge LLC, entities over which he holds voting and dispositive power. See footnotes 9, 14 and 17 to this table. (7) The number of shares owned and offered includes 250,000 shares of our common stock presently outstanding and 375,000 shares of our common stock issuable upon the exercise of Class A Common Stock Purchase Warrants that have an exercise price of $0.15 per share. The number of shares of our common stock acquired by the holder upon exercise of the warrants is limited to the extent necessary to ensure that following the exercise the total number of shares of our common stock beneficially owned by the holder at any one time does not exceed 4.99% of our issued and outstanding common stock subject to a waiver of this limitation by the holder upon 61 days notice to us. The shares owned by Mr. Siegel excludes securities owned by Progress Partners, Inc. as disclosed in footnote 21 to this table. (8) The number of shares owned and offered includes 250,000 shares of our common stock presently outstanding and 375,000 shares of our common stock issuable upon the exercise of Class A Common Stock Purchase Warrants that have an exercise price of $0.15 per share. The number of shares of our common stock acquired by the holder upon exercise of the warrants is limited to the extent necessary to ensure that following the exercise the total number of shares of our common stock beneficially owned by the holder at any one time does not exceed 4.99% of our issued and outstanding common stock subject to a waiver of this limitation by the holder upon 61 days notice to us. (9) The number of shares owned and offered includes 250,000 shares of our common stock owned by Marc Siegel IRA which are presently outstanding, 375,000 shares of our common stock issuable upon the exercise of Class A Common Stock Purchase Warrants that have an exercise price of $0.15 per share The number of shares of our common stock acquired by the holder upon exercise of the warrants is limited to the extent necessary to ensure that following the exercise the total number of shares of our common stock beneficially owned by the holder at any one time does not exceed 4.99% of our issued and outstanding common stock subject to a waiver of this limitation by the holder upon 61 days notice to us. Mr. Siegel has voting and dispositive control over securities owned by Marc Siegel IRA. The number of shares beneficially owned by Marc Siegel IRA. as disclosed in this footnote exclude any holdings of Mr. Siegel individually or the holdings of Edge Capital Partners Ltd., China Direct Investments or Edge LLC, entities over which he holds voting and dispositive power. See footnotes 6, 14 and 17 to this table. 49 (10) The number of shares owned and offered includes 250,000 shares of our common stock presently outstanding and 375,000 shares of our common stock issuable upon the exercise of Class A Common Stock Purchase Warrants that have an exercise price of $0.15 per share. The number of shares of our common stock acquired by the holder upon exercise of the warrants is limited to the extent necessary to ensure that following the exercise the total number of shares of our common stock beneficially owned by the holder at any one time does not exceed 4.99% of our issued and outstanding common stock subject to a waiver of this limitation by the holder upon 61 days notice to us. (11) The number of shares owned and offered includes 250,000 shares of our common stock presently outstanding and 487,500 shares of our common stock issuable upon the exercise of Class A Common Stock Purchase Warrants that have an exercise price of $0.15 per share. Osher Capital Inc. received 112,500 of these warrants as partial compensation for a finders' fee. The number of shares of our common stock acquired by the holder upon exercise of the warrants is limited to the extent necessary to ensure that following the exercise the total number of shares of our common stock beneficially owned by the holder at any one time does not exceed 4.99% of our issued and outstanding common stock subject to a waiver of this limitation by the holder upon 61 days notice to us. Mr. Yisroel Kluger has voting and dispositive control over securities owned by Osher Capital Inc. (12) Alpha Capital Aktiengellschaft owns 3,500,000 shares of our common stock and Class A Common Stock Purchase Warrants to purchase an additional 5,250,000 shares of our common stock at an exercise price of $0.15 per share. The number of shares of our common stock acquired by the holder upon exercise of the warrants is limited to the extent necessary to ensure that following the exercise the total number of shares of our common stock beneficially owned by the holder at any one time does not exceed 4.99% of our issued and outstanding common stock subject to a waiver of this limitation by the holder upon 61 days notice to us. Mr. Konrad Ackerman has voting and dispositive control over securities owned by Alpha Capital Aktiengellschaft. (13) The number of shares owned and offered includes 420,000 shares of our common stock presently outstanding, received as compensation for business development and advisory services, and 175,000 shares of our common stock issuable upon the exercise of Class A Common Stock Purchase Warrants that have an exercise price of $0.15 per share. Era Capital Management, Inc. received these warrants as partial compensation for a finders' fee. The number of shares of our common stock acquired by the holder upon exercise of the warrants is limited to the extent necessary to ensure that following the exercise the total number of shares of our common stock beneficially owned by the holder at any one time does not exceed 4.99% of our issued and outstanding common stock subject to a waiver of this limitation by the holder upon 61 days notice to us. Lei Li has voting and dispositive control over securities owned by Era Capital Management, Inc. Ms. Lei Li is the spouse of James Wang. Mr. Wang disclaims beneficial ownership of all such shares. 50 (14) The number of shares owned and offered includes 500,000 shares of our common stock issuable upon the exercise of Class A Common Stock Purchase Warrants that have an exercise price of $0.15 per share. China Direct Investments received these warrants as compensation under a consulting agreement for advisory services rendered or to be rendered for a two month period. Messrs. James Wang, David Stein and Marc Siegel have voting and dispositive control over securities owned by China Direct Investments. The number of shares owned beneficially by China Direct Investments as disclosed in this footnote excludes any holdings of Messrs. Wang, Stein or Siegel or other entities affiliated with them over which they have voting and dispositive control. Please see footnotes 6, 9, 13, 16 and 17 to this table. China Direct Investments is an advisor to our company. Please see "Management - U.S. Advisor" beginning on page 33 of this prospectus. (15) The number of shares owned and offered includes 1,000,002 shares of our common stock which are presently outstanding and received in satisfaction of a debt due CIIC Investment Banking Services Company (Shanghai) Limited by our company. Professor Shan Ting Ting has voting and dispositive control over securities owned by CIIC Investment Banking Services Company (Shanghai) Limited. The shares beneficially owned by CIIC Investment Banking Services Company (Shanghai) Limited excludes any securities owned by Genesis Technology Group, Inc., a joint venture partner in this company. See footnote 18 to this table. (16) The number of shares owned and offered includes 130,002 shares of our common stock which are presently outstanding and received as compensation for business development and advisory services. The number of shares owned beneficially by Mr. Stein as disclosed in this footnote excludes any securities owned by China Direct Investment, an entity over which he has voting and dispositive control. Please see footnote 14 to this table. (17) The number of shares owned and offered includes 420,000 shares of our common stock which are presently outstanding and received as compensation for business development and advisory services. Mr. Marc Siegel has voting and dispositive control over securities owned by Edge LLC. The number of shares beneficially owned by Edge LLC as disclosed in this footnote exclude any holdings of Mr. Siegel individually or the holdings of Edge Capital Partners Ltd., China Direct Investments or Marc Siegel IRA, entities over which he holds voting and dispositive power. See footnotes 6, 9 and 14 to this table. (18) The number of shares owned includes 900,000 shares of our common stock presently outstanding and 600,000 shares of our common stock underlying common stock purchase warrants exercisable at $0.167 per share. Mr. Gary Wolfson holds voting and dispositive power over securities held by Genesis Technology Group, Inc. The number of shares beneficially owned by Genesis Technology Group, Inc. excludes any securities owned by CIIC Investment Banking Services Company (Shanghai) Limited, a company of which Genesis Technology Group, Inc. is a joint venture partner. Please see footnote 15 to this table. (19) The number of shares owned and offered includes 275,806 shares of our common stock which are presently outstanding and received as compensation for business development and advisory services. Mr. Mead served as an executive officer and director of our company from May 2000 until April 2004. 51 (20) The number of shares owned and offered includes 87,500 shares of our common stock issuable upon the exercise of Class A Common Stock Purchase Warrants. Pacific Rim Partners, Inc. received these warrants as partial compensation for a finder's fee. The number of shares of our common stock acquired by the holder upon exercise of the warrants is limited to the extent necessary to ensure that following the exercise the total number of shares of our common stock beneficially owned by the holder at any one time does not exceed 4.99% of our issued and outstanding common stock subject to a waiver of this limitation by the holder upon 61 days notice to us Seymour Braun has the voting and dispositive control over securities owned by Libra Finance. S.A. (21) The number of shares owned and offered includes 750,000 shares of our common stock which are presently outstanding and received as compensation for business development and advisory services. Mr. Alvin Siegel holds voting and dispositive control over securities owned by Progress Partners, Inc. The securities owned beneficially by Progress Partners, Inc. excludes securities owned by Mr. Siegel individually. Please see footnote 7 above. (22) The number of shares owned and offered includes 30,000 shares of our common stock which are presently outstanding and received as compensation for business development and advisory services. Leonard Sokolou has the voting and dispositive control over securities owned by vFinance Investments, Inc. (23) The number of shares owned and offered includes 750,000 shares of our common stock which are presently outstanding, of which 450,000 shares were received as compensation for business development and advisory services, and 300,000 shares of our common stock underlying common stock purchase warrants with an exercise price of $0.167 per share. None of the selling security holders are broker-dealers or affiliates of broker-dealers, other than vFinance Investments, Inc., an investment banking firm which is a member of the NASD, and received the securities as compensation for business development and advisory services. None of these firms or individuals have any arrangement with any person to participate in the distribution of such securities. None of the selling security holders has, or within the past three years has had, any position, office or other material relationship with us or any of our predecessors or affiliates, other than as described previously in this section. PLAN OF DISTRIBUTION The selling security holders and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling security holders may use any one or more of the following methods when selling shares: o ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; o block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker-dealer as principal and resale by the broker-dealer for its account; o an exchange distribution in accordance with the rules of the applicable exchange; 52 o privately negotiated transactions; o settlement of short sales; o broker-dealers may agree with the selling security holders to sell a specified number of such shares at a stipulated price per share; o a combination of any such methods of sale; and o any other method permitted pursuant to applicable law. The selling security holders may also sell shares under Rule 144 under the Securities Act of 1933, if available, rather than under this prospectus. Broker-dealers engaged by the selling security holders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling security holders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling security holders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. Broker-dealers may agree to sell a specified number of such shares at a stipulated price per share, and, to the extent such broker-dealer is unable to do so acting as agent for us or a selling stockholder, to purchase as principal any unsold shares at the price required to fulfill the broker-dealer commitment. Broker-dealers who acquire shares as principal may thereafter resell such shares from time to time in transactions, which may involve block transactions and sales to and through other broker-dealers, including transactions of the nature described above, in the over-the-counter markets or otherwise at prices and on terms then prevailing at the time of sale, at prices then related to the then-current market price or in negotiated transactions. In connection with such resales, broker-dealers may pay to or receive from the purchasers of such shares, commissions as described above. In the event that shares are resold to any broker-dealer, as principal, who is acting as an underwriter, we will file a post-effective amendment to the registration statement of which this prospectus forms a part, identifying the broker-dealer(s), providing required information relating to the plan of distribution and filing any agreement(s) with such broker-dealer(s) as an exhibit. The involvement of a broker-dealer as an underwriter in the offering will require prior clearance of the terms of underwriting compensation and arrangements from the Corporate Finance Department of the National Association of Securities Dealers, Inc. The selling security holders may, from time to time, pledge or grant a security interest in some or all of the shares or common stock or warrants owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424 (b)(3) or other applicable provision of the Securities Act of 1933 amending the list of selling security holders to include the pledgee, transferee or other successors-in-interest as selling security holders under this prospectus. 53 The selling security holders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors-in-interest will be the selling beneficial owners for purposes of this prospectus. The selling security holders and any broker-dealers or agents that are involved in selling the shares may be deemed to be "underwriters" within the meaning of the Securities Act of 1933 in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act of 1933. The selling security holders have informed us that they do not have any agreement or understanding, directly or indirectly, with any person to distribute the common stock. We are required to pay all fees and expenses incident to the registration of the shares. We have agreed to indemnify the selling security holders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act of 1933. SHARES ELIGIBLE FOR FUTURE SALE As of May 17, 2005, we had 43,367,276 shares of common stock issued and outstanding. Of the issued and outstanding shares, approximately 33,117,276 shares of our common stock (21,920,004 of which are owned by our officers, directors and principal stockholders) have been held for in excess of one year and will be available for public resale pursuant to Rule 144 promulgated under the Securities Act commencing 90 days following the date of this prospectus. As of the date of this prospectus, the 14,750,006 shares being offered by selling security holders can be publicly transferred. Not included in the foregoing are 15,500,000 shares issuable on exercise of outstanding warrants. They may be resold by their holders as long as they are covered by a current registration statement or under an available exemption from registration. In general, Rule 144 permits a shareholder who has owned restricted shares for at least one year, to sell without registration, within a three month period, up to one percent of our then outstanding common stock. We must be current in our reporting obligations in order for a shareholder to sell shares under Rule 144. In addition, shareholders other than our officers, directors or 5% or greater shareholders who have owned their shares for at least two years may sell them without volume limitation or the need for our reports to be current. We cannot predict the effect, if any, that market sales of common stock or the availability of these shares for sale will have on the market price of the shares from time to time. Nevertheless, the possibility that substantial amounts of common stock may be sold in the public market could adversely affect market prices for the common stock and could damage our ability to raise capital through the sale of our equity securities. 54 LEGAL MATTERS The legality of the securities offered by this prospectus will be passed upon for us by Schneider Weinberger & Beilly LLP, Boca Raton, Florida. EXPERTS Our financial statements as of and for the years ended April 30, 2004 and 2003 included in this prospectus has been audited by Sherb & Co. LLP, independent registered public accounting firm, as indicated in their report with respect thereto, and have been so included in reliance upon the report of such firm given on their authority as experts in accounting and auditing. ADDITIONAL INFORMATION We have filed with the SEC the registration statement on Form SB-2 under the Securities Act for the common stock offered by this prospectus. This prospectus, which is a part of the registration statement, does not contain all of the information in the registration statement and the exhibits filed with it, portions of which have been omitted as permitted by SEC rules and regulations. For further information concerning us and the securities offered by this prospectus, we refer to the registration statement and to the exhibits filed with it. Statements contained in this prospectus as to the content of any contract or other document referred to are not necessarily complete. In each instance, we refer you to the copy of the contracts and/or other documents filed as exhibits to the registration statement, and these statements are qualified in their entirety by reference to the contract or document. The registration statement, including all exhibits, and other materials we file with the SEC, may be inspected without charge at the SEC's Public Reference Room at 450 Fifth Street, N.W. Washington, D.C. 20549. Copies of these materials may also be obtained from the SEC's Public Reference at 450 Fifth Street, N.W., Room 1024, Washington D.C. 20549, upon the payment of prescribed fees. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We file annual and special reports and other information with the SEC. Certain of our SEC filings are available over the Internet at the SEC's web site at http://www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facilities: Public Reference Room Office 450 Fifth Street, N.W. Room 1024 Washington, D.C. 20549 You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Callers in the United States can also call 1-800-732-0330 for further information on the operations of the public reference facilities. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors Sunwin International Neutraceuticals, Inc. (Formerly Network USA, Inc.) Shandong, China We have audited the accompanying consolidated balance sheet of Sunwin International Neutraceuticals, Inc. (Formerly Network USA, Inc.) as of April 30, 2004, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended April 30, 2004 and 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amount and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sunwin International Neutraceuticals, Inc. (Formerly Network USA, Inc.) as of April 30, 2004, and the results of their operations and their cash flows for the years ended April 30, 2004 and 2003, in conformity with accounting principles generally accepted in the United States of America. /s/Sherb & Co., LLP Certified Public Accountants New York, New York August 31, 2004 F-1 SUNWIN INTERNATIONAL NEUTACEUTICALS, INC. AND SUBSIDIARIES (FORMERLY NETWORK USA, INC.) CONSOLIDATED BALANCE SHEET April 30, 2004
ASSETS CURRENT ASSETS: Cash $ 543,078 Accounts receivable (net of allowance for doubtful accounts of $1,576,899) 2,623,036 Inventories (net of allowance for obsolete inventory of $61,366) 3,877,217 Due from related parties 513,785 Prepaid expenses and other 580,530 ------------- Total Current Assets 8,137,646 ------------- PROPERTY AND EQUIPMENT - Net 2,071,914 ------------- OTHER ASSETS: Other assets 12,077 ------------- Total Other Assets 12,077 ------------- Total Assets $ 10,221,637 ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Loans payable $ 1,353,235 Accounts payable and accrued expenses 2,259,715 Advances from customers 1,030,376 ------------- Total Current Liabilities 4,643,326 OTHER PAYABLES 130,290 ------------- Total Liabilities 4,773,616 ------------- MINORITY INTEREST 1,655,066 ------------- STOCKHOLDERS' EQUITY: Preferred stock ($.001 Par Value;1,000,000 Shares Authorized; no shares issued and outstanding) - Common stock ($.001 Par Value; 200,000,000 Shares Authorized; 31,617,276 shares issued and outstanding) 31,617 Additional paid-in capital 313,383 Retained earnings 3,547,955 Less: Deferred compensation (100,000) ------------- Total Stockholders' Equity 3,792,955 ------------- Total Liabilities and Stockholders' Equity $ 10,221,637 ============= See notes to consolidated financial statements F-2
SUNWIN INTERNATIONAL NEUTACEUTICALS, INC. AND SUBSIDIARIES (FORMERLY NETWORK USA, INC.) CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended April 30, ----------------------------------------- 2004 2003 ------------------- ------------------- NET REVENUES $ 10,887,670 $ 8,104,074 COST OF SALES 7,749,821 5,467,886 ------------------- ------------------- GROSS PROFIT 3,137,849 2,636,188 ------------------- ------------------- OPERATING EXPENSES: Non-cash compensation 112,500 - Selling expenses 1,007,466 857,655 General and administrative 1,044,139 461,233 ------------------- ------------------- Total Operating Expenses 2,164,105 1,318,888 ------------------- ------------------- INCOME FROM OPERATIONS 973,744 1,317,300 OTHER INCOME (EXPENSE): Other income 48,349 3,985 Interest expense, net (59,228) (104,468) ------------------- ------------------- Total Other Income (Expense) (10,879) (100,483) ------------------- ------------------- INCOME BEFORE INCOME TAXES 962,865 1,216,817 INCOME TAXES (352,713) (414,801) ------------------- ------------------- INCOME BEFORE MINORITY INTEREST 610,152 802,016 MINORITY INTEREST IN INCOME OF SUBSIDIARY (144,842) (165,673) ------------------- ------------------- NET INCOME $ 465,310 $ 636,343 =================== =================== NET INCOME PER COMMON SHARE - BASIC AND DILUTED: Net income per common share $ 0.03 $ 0.04 =================== =================== Weighted Common Shares Outstanding - basic and diluted 17,040,051 17,000,004 =================== ===================
See notes to consolidated financial statements F-3 SUNWIN INTERNATIONAL NEUTACEUTICALS, INC. AND SUBSIDIARIES (FORMERLY NETWORK USA, INC.) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended April 30, 2004 and 2003
Common Stock, $.001 Par Value ------------------------------- Additional Total Number of Paid-in Retained Deferred Stockholders' Shares Amount Capital Earnings Compensation Equity -------------------------------- -------------- ---------------- ---------------- -------------- Balance, April 30, 2002 17,000,004 $ 17,000 $ 15,500 $ 2,541,302 $ - $ 2,573,802 Net income for the year - - - 636,343 - 636,343 -------------------------------- -------------- --------------- --------------- -------------- Balance, April 30, 2003 17,000,004 17,000 15,500 3,177,645 - 3,210,145 Issuance of common stock pursuant to share exchange agreement 11,492,268 11,492 (11,492) (95,000) - (95,000) Common stock issued for debt 1,000,002 1,000 99,000 - - 100,000 Common stock issued for services 2,125,002 2,125 210,375 - (100,000) 112,500 Net income for the year - - - 465,310 - 465,310 -------------------------------- -------------- --------------- --------------- -------------- Balance, April 30, 2004 31,617,276 $ 31,617 $ 313,383 $ 3,547,955 $ (100,000) $ 3,792,955 ================================ ============== ============== =============== ==============
See notes to consolidated financial statements F-4 SUNWIN INTERNATIONAL NEUTACEUTICALS, INC. AND SUBSIDIARIES (FORMERLY NETWORK USA, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended April 30, ---------------------------------------- 2004 2003 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 465,310 $ 636,343 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 510,667 193,924 Stock-based compensation 112,500 - Minority interest 144,841 165,673 Allowance for doubtful accounts 18,700 18,171 Changes in assets and liabilities: Accounts receivable (473,547) (790,486) Inventories 276,089 (669,777) Prepaid and other current assets 29,239 23,790 Due from related parties (271,091) (202,991) Other assets (12,077) 17,536 Accounts payable and accrued expenses (154,834) 295,110 Advances to customers 307,760 716,299 ------------------ ------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 953,557 403,592 ------------------ ------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Investment related to acquisition (95,000) - Capital expenditures (602,639) (481,934) ------------------ ------------------ NET CASH FLOWS USED IN INVESTING ACTIVITIES (697,639) (481,934) ------------------ ------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from loans payable 1,184,300 791,063 Payments on loans payable (1,045,690) (723,333) ------------------ ------------------ NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 138,610 67,730 ------------------ ------------------ NET INCREASE (DECREASE) IN CASH 394,528 (10,612) CASH - beginning of year 148,550 159,162 ------------------ ------------------ CASH - end of year $ 543,078 $ 148,550 ================== ================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Common stock issued for debt $ 100,000 $ - ================== ==================
See notes to consolidated financial statements. F-5 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES (FORMERLY NETWORK USA, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004 and 2003 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Sunwin International Neutraceuticals, Inc. (the "Company") was incorporated on August 27, 1987 in the State of Nevada as Network USA, Inc. (Network). The Company does not have any substantive operations of its own and substantially all of its primary business operations are conducted through its 80%-owned subsidiary, Qufu Natural Green Engineering Company Limited and its subsidiaries ("Qufu"). On April 30, 2004, under a Share Exchange Agreement, the Company issued 17,000,004 shares of the Company's common stock for the acquisition of all of the outstanding capital stock of Sunwin Tech Group, Inc., ("Sunwin") a Florida corporation, from its four shareholders: Baozhong Yuan, Laiwang Zhang, Xianfeng Kong and Lei Zhang. For financial accounting purposes, the exchange of stock was treated as a recapitalization of Sunwin with the former shareholders of the Company retaining 11,492,268 or approximately 36.3% of the outstanding stock. The consolidated financials statements reflect the change in the capital structure of the Company due to the recapitalization and the consolidated financial statements reflect the operations of the Company and its subsidiaries for the periods presented. In connection with the transaction, Sunwin purchased 4,500,000 shares of the common stock of Network USA owned by the former principal shareholders of Network for $175,000, and, at the closing, Sunwin distributed the 4,500,000 shares to Baozhong Yuan, Laiwang Zhang, Xianfeng Kong and Lei Zhang, pro-rata to their ownership of Sunwin immediately prior to the closing. Effective July 27, 2004 Network changed its name to Sunwin International Neutraceuticals, Inc. The Company filed an amendment to its Articles of Incorporation on July 12, 2004 to change its name, and to increase the number of shares of common stock it is authorized to issue to 200,000,000 shares, $.001 par value per share. Also, effective July 27, 2004, the Company effected a six for one (6:1) forward stock split of its issued and outstanding common stock. Each stockholder of record at the close of business on July 27, 2004 will receive five additional shares of common stock for each share of common stock held. All share and per-shares information has been restated to reflect this forward stock split. On January 26, 2004, effective February 1, 2004, the Company entered into a Stock Purchase Agreement with Shandong Shengwang Pharmaceutical Group Corporation ("Shandong"), a 90% shareholder of Qufu and its subsidiaries. Qufu is a Chinese limited liability company with principal offices in Qufu City, Shandong, China. Qufu was founded in July 1999 and was re-registered in January 2004 in order to change its capital structure. Under this agreement, Shandong exchanged 80% of the issued and outstanding capital stock of Qufu in exchange for 100% of the issued and outstanding capital stock of Sunwin Tech Group, Inc. ("Sunwin") with a fair market value of $95,000. The Stock Purchase Agreement has been accounted for as a reverse acquisition under the purchase method for business combinations. Accordingly, the combination of the two companies is recorded as a recapitalization of Qufu, pursuant to which Sunwin is treated as the continuing entity. F-6 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES (FORMERLY NETWORK USA, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004 and 2003 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Company (Continued) The Company has an 80% ownership in Qufu Natural Green Engineering Company, Limited ("Qufu"), a company organized under the laws of the Peoples Republic of China. Qufu is engaged in the areas of essential traditional Chinese medicine, 100 percent organic herbal medicine, nutraceutical products, natural sweetener (beet sugar), and animal medicine prepared from 100% organic herbal ingredients. Basis of presentation The consolidated statements include the accounts of Sunwin International Neutraceuticals, Inc and its wholly and partially-owned subsidiaries. All significant inter-company balances and transactions have been eliminated. Cash and cash equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. Inventories Inventories, consisting of raw materials and finished goods related to the Company's products are stated at the lower of cost or market utilizing the first-in, first-out method. Fair value of financial instruments The carrying amounts reported in the balance sheet for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, loans and amounts due from related parties approximate their fair market value based on the short-term maturity of these instruments. Income taxes The Company files federal and state income tax returns in the United States for its domestic operations, and files separate foreign tax returns for the Company's Chinese subsidiaries. Income taxes are accounted for under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. F-7 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES (FORMERLY NETWORK USA, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004 and 2003 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income (Loss) per Share Net income (loss) per common share for the years ended April 30, 2004 and 2003 is based upon the weighted average common shares and dilutive common stock equivalents outstanding during the year as defined by Statement of Financial Accounting Standards, Number 128 "Earnings Per Share." As of April 30, 2004 and 2003, there were no outstanding common stock equivalents. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated economic lives of the assets, which are from five to ten years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Foreign currency translation Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in determining net income or loss. For foreign operations with the local currency as the functional currency, assets and liabilities are translated from the local currencies into U.S. dollars at the exchange rate prevailing at the balance sheet date. Revenues and expenses are translated at weighted average exchange rates for the period to approximate translation at the exchange rates prevailing at the dates those elements are recognized in the financial statements. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive loss. The functional and reporting currency is the U.S. dollar. The functional currency of the Company's Chinese subsidiary, Qufu, is the local currency. The financial statements of the subsidiaries are translated into United States dollars using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not material during the periods presented because the Chinese dollar (RMB) fluctuates with the United States dollar. The cumulative translation adjustment and effect of exchange rate changes on cash at April 30, 2004 and 2003 was not material F-8 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES (FORMERLY NETWORK USA, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004 and 2003 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Comprehensive loss The Company uses Statement of Financial Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive Income". Comprehensive income is comprised of net loss and all changes to the statements of stockholders' equity, except those due to investments by stockholders', changes in paid-in capital and distributions to stockholders. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The Company places its cash with high credit quality financial institutions. Almost all of the Company's sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk. Stock based compensation The Company accounts for stock options issued to employees in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation cost is measured on the date of grant as the excess of the current market price of the underlying stock over the exercise price. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant. The Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for Stock-Based Compensation -Transition and Disclosure", which permits entities to provide pro forma net income (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants as if the fair-valued based method defined in SFAS No. 123 had been applied. The Company accounts for stock options and stock issued to non-employees for goods or services in accordance with the fair value method of SFAS 123. F-9 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES (FORMERLY NETWORK USA, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004 and 2003 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Research and development Research and development costs are expensed as incurred. Revenue recognition The Company follows the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin 104 for revenue recognition. In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. The following policies reflect specific criteria for the various revenues streams of the Company: The Company's revenues from the sale of products are recorded when the goods are shipped, title passes, and collectibility is reasonably assured. Advertising Advertising is expensed as incurred. Advertising expenses for the years ended April 30, 2004 and 2003 totaled approximately $150,203 and $43,534, respectively. Minority Interest Under generally accepted accounting principles when losses applicable to the minority interest in a subsidiary exceed the minority interest in the equity capital of the subsidiary, the excess is not charged to the majority interest since there is no obligation of the minority interest to make good on such losses. The Company, therefore, has included losses applicable to the minority interest against its interest since the minority owners have no obligation to make good on the losses. If future earnings do materialize, the Company shall be credited to the extent of such losses previously absorbed. Shipping and costs Shipping costs are included in selling and marketing expenses and totaled $194,430 and $50,879 for the years ended April 30, 2004 and 2003, respectively. F-10 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES (FORMERLY NETWORK USA, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004 and 2003 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent accounting pronouncements In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 requires that its provisions are effective immediately for all arrangements entered into after January 31, 2003. The Company does not have any variable interest entities created after January 31, 2003. For those arrangements entered into prior to January 31, 2003, the FIN 46 provisions are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. The Company has not identified any variable interest entities to date and will continue to evaluate whether it has variable interest entities that will have a significant impact on its consolidated balance sheet and results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the first interim period beginning after June 15, 2003, with certain exceptions. The adoption of SFAS No. 150 did not have a significant impact on our consolidated financial position or results of operations. NOTE 2 - INVENTORIES At April 30, 2004, inventories consisted of the following: Raw materials $ 2,028,547 Finished goods 1,848,670 -------------- $ 3,877,217 ============== F-11 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES (FORMERLY NETWORK USA, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004 and 2003 NOTE 3 - PROPERTY AND EQUIPMENT At April 30, 2004, property and equipment consisted of the following: Estimated Life Office Furniture 7 Years $ 1,990 Computer Equipment 5 Years 8,878 Auto and Truck 10 Years 3,805 Manufacturing Equipment 7 Years 2,908,428 Building 20 Years 578,126 Office Equipment 5 Years 33,729 -------------- 3,534,956 Less: Accumulated Depreciation (1,463,042) -------------- $ 2,071,914 ============== For the years ended April 30, 2004 and 2003, depreciation expense amounted to $510,6672 and $193,924, respectively. NOTE 4 - RELATED PARTY TRANSACTIONS Due from related parties The consolidated financial statements include balances and transactions with related parties. At April 30, 2004, the Company had a receivable from Shengwang and its affiliated entities of $513,785. NOTE 5 - ACQUISITIONS On January 26, 2004, effective February 1, 2004, the Company entered into a Stock Purchase Agreement with Shandong Shengwang Pharmaceutical Group Corporation ("Shandong"), a 90% shareholder of Qufu Natural Green Engineering Company Limited and its subsidiaries ("Qufu"). Qufu is a Chinese limited liability company with principal offices in Qufu City, Shandong, China. Under this agreement, Shandong exchanged 80% of the issued and outstanding capital stock of Qufu in exchange for 100% of the issued and outstanding capital stock of Sunwin Tech Group, Inc. with a fair market value of $95,000. The Company accounted for this acquisition using the purchase method of accounting. The Stock Purchase Agreement has been accounted for as a reverse acquisition under the purchase method for business combinations. Accordingly, the combination of the two companies is recorded as a recapitalization of Qufu, pursuant to which Sunwin is treated as the continuing entity. F-12 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES (FORMERLY NETWORK USA, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004 and 2003
NOTE 6 - LOANS PAYABLE Loans payable consisted of the following at April 30, 2004: Note to Bank of China dated February 8, 2004, due in monthly $ 246,377 installments through February 8, 2005. Interest rate at 6.03%. Secured by equipment Note to Qufu City Credit Union dated May 10, 2003, due in monthly installments on November 9, 2004. Interest rate at 6.34%. Secured by equipment 12,077 Note to Qufu City Department of Treasury dated December 28, 2003, due on June 28, 2004. Interest rate at 5.58%. Secured by equipment 103,876 Note to various employees payable on demand through August 2004. Interest rate at 5.58%. Secured by equipment and inventory. 38,647 Note to CICB dated March 10, 2004, due in monthly installments through March 2005. Interest rate at 5.58%. Secured by equipment and inventory. 36,578 Note to Bank of China dated July 16, 2003, due on July 15, 2004. Interest rate at 6.675%. Secured by equipment and inventory. 331,380 Note to various individuals payable on demand through December 2004. Interest rate between 9%-10%. 45,894 Note to Bank of China dated October 16, 2003, due on October 15, 2004. Interest rate at 6.90%. Secured by equipment and inventory. 178,744 Note payable to individual, non-interest bearing, payable on demand, unsecured. 100,000 Note payable to individual, non-interest bearing, payable on demand, unsecured. 259,662 ------------------------ Total $ 1,353,235 =========================
F-13 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES (FORMERLY NETWORK USA, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004 and 2003 NOTE 7 - INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" "SFAS 109". SFAS 109 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. SFAS 109 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. The Company's subsidiaries in China are governed by the Income Tax Law of the People's Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws (the "PRC Income Tax Law"). Pursuant to the PRC Income Tax Law, wholly-owned foreign enterprises are subject to tax at a statutory rate of 33% (30% state income tax plus 3% local income tax). The Company has a minimal net operating loss carryforward for tax purposes at April 30, 2004 expiring through the year 2024. Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carryforwards after a change in control (generally greater than a 50% change in ownership). The table below summarizes the differences between the Company's effective tax rate and the statutory federal rate as follows for years ended April 30, 2004 and 2003: 2004 2003 ----------------- ---------------------- Computed "expected" tax expense 34.0 % 34.0 % State income taxes 5.0 % 5.0 % Other permanent differences (35.0)% (35.0)% Foreign income taxes 7.0 % 34.0 % ----------------- ---------------------- Effective tax rate 37.0 % 34.0 % ================= ====================== NOTE 8 - STOCKHOLDERS' EQUITY Preferred stock The Company is authorized to issue 1,000,000 shares of Preferred Stock, par value $.001, with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Common Stock On July 27, 2004, the Company's board of directors approved a 6 for 1 forward stock split. All per share data included in the accompanying consolidated financial statement have been adjusted retroactively to reflect the forward split. F-14 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES (FORMERLY NETWORK USA, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004 and 2003 NOTE 8 - STOCKHOLDERS' EQUITY (continued) On April 30, 2004, the Company issued 1,000,002 shares of common stock for debt. The Company valued these shares at the quoted trading price on the date of grant of $0.10 per common share. In connection with these shares, the Company reduces a loan payable by $100,000. On April 30, 2004, the Company granted 2,125,002 shares of common stock to consultants for business development and marketing services. The Company valued these shares at the quoted trading price on the date of grant of $0.10 per common share. In connection with these shares, the Company recorded consulting expense of $112,500 and deferred consulting expense of $100,000, which will be amortized into consulting expense over the term of the contract. NOTE 9 - COMMITMENTS Operating Leases The Company leases office and manufacturing space under leases In Shandong, China that expire through xxxx. Future minimum rental payments required under these operating leases are as follows: Period Ended April 30, 2005 $ 21,739 Period Ended April 30, 2006 $ 21,739 Period Ended April 30, 2007 $ 21,739 Period Ended April 30, 2007 $ 21,739 Period Ended April 30, 2007 $ 21,739 Thereafter $ 108,695 Rent expense for the years ended April 30, 2004 and 2003 amounted to $29,167 and $25,845, respectively. NOTE 10 - LEGAL PROCEEDINGS The Company is not a party to any pending legal proceeding. No federal, state or local governmental agency is presently contemplating any proceeding against the Company. No director, executive officer or affiliate of the Company or owner of record or beneficially of more than five percent of the Company's common stock is a party adverse to the company or has a material interest adverse to the Company in any proceeding. NOTE 11 - CHINA CONTRIBUTION PLAN AND PROFIT APPROPRIATION The Company's subsidiaries in China participate in a government-mandated multi-employer defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided to employees. Chinese labor regulations require the Company's subsidiaries to pay to the local labor bureau a monthly contribution at a stated contribution rate based on the monthly basic compensation of qualified employees. The relevant local labor bureau is responsible for meeting all retirement benefit obligations; the Company has no further commitments beyond its monthly contribution. F-15 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES (FORMERLY NETWORK USA, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004 and 2003 NOTE 11 - CHINA CONTRIBUTION PLAN AND PROFIT APPROPRIATION (continued) Pursuant to the laws applicable to China's Foreign Investment Enterprises, each of the Company's subsidiaries in China must make appropriations from its after-tax profit to non-distributable reserve funds as determined by the Board of Directors. These reserve funds include a (i) general reserve, (ii) enterprise expansion fund and (iii) staff bonus and welfare fund. The general reserve fund requires annual appropriations of 10% of after-tax profit (as determined under PRC GAAP) until these reserves equal 50% of the amount of paid-in capital; the other fund appropriations are at the Company's discretion. At April 30, 2004, Qufu has made an appropriation of approximately $587,054 to the general reserve fund which, upon certain regulatory approvals, can be used to increase Qufu's PRC GAAP capital. NOTE 12 - OPERATING RISK (a) Country risk Currently, the Company's revenues are mainly derived from sale of herbs, beet sugar and veterinary products in the Peoples Republic of China (PRC). The Company hopes to expand its operations to countries outside the PRC, however, such expansion has not been commenced and there are no assurances that the Company will be able to achieve such an expansion successfully. Therefore, a downturn or stagnation in the economic environment of the PRC could have a material adverse effect on the Company's financial condition. (b) Products risk In addition to competing with other companies, the Company could have to compete with larger US companies who have greater funds available for expansion, marketing, research and development and the ability to attract more qualified personnel if access is allowed into the PRC market. If US companies do gain access to the PRC markets, they may be able to offer products at a lower price. There can be no assurance that the Company will remain competitive should this occur. (c) Exchange risk The Company can not guarantee that the current exchange rate will remain steady, therefore there is a possibility that the Company could post the same amount of profit for two comparable periods and because of a fluctuating exchange rate actually post higher or lower profit depending on exchange rate of Chinese Remnibi converted to US dollars on that date. The exchange rate could fluctuate depending on changes in the political and economic environments without notice. F-16 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES (FORMERLY NETWORK USA, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004 and 2003 NOTE 12 - OPERATING RISK (continued) (d) Political risk Currently, PRC is in a period of growth and is openly promoting business development in order to bring more business into PRC. Additionally PRC allows a Chinese corporation to be owned by a United States corporation. If the laws or regulations are changed by the PRC government, the Company's ability to operate the PRC subsidiaries could be affected. (e) Key personnel risk The Company's future success depends on the continued services of executive management in China. The loss of any of their services would be detrimental to the Company and could have an adverse effect on business development. The Company does not currently maintain key-man insurance on their lives. Future success is also dependent on the ability to identify, hire, train and retain other qualified managerial and other employees. Competition for these individuals is intense and increasing. (f) Performance of subsidiaries risk Currently, a majority of the Company's revenues are derived via the operations of the subsidiaries. Economic, governmental, political, industry and internal company factors outside of the Company's control affect each of the subsidiaries. If the subsidiaries do not succeed, the value of the assets and the price of our common stock could decline. Some of the material risks relating to the partner companies include the fact that three of the subsidiaries are located in China and have specific risks associated with that and the intensifying competition for the Company's products and services and those of the subsidiaries NOTE 13 - SUBSEQUENT EVENTS On May 1, 2004, the Company entered into three one-year consulting agreements with third party consultants for business development services. In connection with these consulting agreements, the Company granted an aggregate of 1,500,000 shares of common stock. In connection with these shares, the Company recorded deferred consulting expense of $150,000, which will be amortized into consulting expense over the term of the contract. F-17 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET January 31, 2005 (Unaudited) ASSETS CURRENT ASSETS: Cash $ 670,506 Accounts receivable (net of allowance for doubtful accounts of $1,583,704) 2,236,974 Inventories (net of allowance for obsolete inventory of $183,419) 2,324,669 Due from related parties 1,153,452 Prepaid expenses and other 1,058,022 ------------ Total Current Assets 7,443,623 PROPERTY AND EQUIPMENT - Net 2,747,961 ------------ Total Assets $ 10,191,584 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Loans payable $ 593,006 Accounts payable and accrued expenses 1,950,927 Income taxes payable 391,187 Advances from customers 790,560 ------------ Total Current Liabilities 3,725,680 OTHER PAYABLES 130,290 ------------ Total Liabilities 3,855,970 ------------ MINORITY INTEREST 1,813,083 ------------ STOCKHOLDERS' EQUITY: Preferred stock ($.001 Par Value;1,000,000 Shares Authorized; no shares issued and outstanding) - Common stock ($.001 Par Value; 200,000,000 Shares Authorized; 34,617,276 shares issued and outstanding) 34,617 Additional paid-in capital 586,872 Retained earnings 3,901,042 ------------ Total Stockholders' Equity 4,522,531 ------------ Total Liabilities and Stockholders' Equity $ 10,191,584 ============ See notes to unaudited consolidated financial statements F-18 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months For the Nine Months Ended January 31, Ended January 31, -------------------------------- --------------------------------- 2005 2004 2005 2004 --------------- --------------- --------------- ---------------- NET REVENUES $ 2,705,396 $ 2,502,636 $ 9,163,681 $ 7,720,279 COST OF SALES 1,768,743 1,719,781 6,276,338 5,229,339 --------------- --------------- --------------- ---------------- GROSS PROFIT 936,653 782,855 2,887,343 2,490,940 --------------- --------------- --------------- ---------------- OPERATING EXPENSES: Non-cash compensation 45,000 - 220,000 - Selling expenses 289,655 209,236 987,267 712,830 General and administrative 233,401 164,284 749,099 445,667 --------------- --------------- --------------- ---------------- Total Operating Expenses 568,056 373,520 1,956,366 1,158,497 --------------- --------------- --------------- ---------------- INCOME FROM OPERATIONS 368,597 409,335 930,977 1,332,443 OTHER INCOME (EXPENSE): Other income (expense) (551) (169) 24,881 (221) Interest expense, net (24,455) (8,607) (55,608) (54,492) --------------- --------------- --------------- ---------------- Total Other Income (Expense) (25,006) (8,776) (30,727) (54,713) --------------- --------------- --------------- ---------------- INCOME BEFORE INCOME TAXES 343,591 400,559 900,250 1,277,730 INCOME TAXES (89,244) (132,185) (389,146) (421,651) --------------- --------------- --------------- ---------------- INCOME BEFORE MINORITY INTEREST 254,347 268,374 511,104 856,079 MINORITY INTEREST IN INCOME OF SUBSIDIARY (60,649) (53,675) (158,017) (171,216) --------------- --------------- --------------- ---------------- NET INCOME $ 193,698 $ 214,699 $ 353,087 $ 684,863 =============== =============== =============== ================ NET INCOME PER COMMON SHARE - BASIC AND DILUTED: Net income per common share - basic and diluted $ 0.01 $ 0.01 $ 0.01 $ 0.04 =============== =============== =============== ================ Weighted Common Shares Outstanding - basic and diluted 34,617,276 17,000,004 34,198,798 17,000,004 =============== =============== =============== ================
See notes to unaudited consolidated financial statements F-19 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended January 31, --------------------------------------- 2005 2004 ------------------- ------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 353,087 $ 684,863 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 168,895 179,386 Stock-based compensation 250,000 - Minority interest 158,017 171,215 Allowance for doubtful accounts (8,782) - Changes in assets and liabilities: Accounts receivable 394,844 (179,867) Inventories 1,552,548 (121,379) Prepaid and other current assets (477,492) 28,916 Due from related parties (639,667) (69,635) Other assets 12,077 - Accounts payable and accrued expenses (302,299) 333,939 Income taxes payable 391,187 72,956 Advances to customers (239,816) 117,947 ------------------- ------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,612,599 1,218,341 ------------------- ------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (844,942) (883,553) ------------------- ------------------- NET CASH FLOWS USED IN INVESTING ACTIVITIES (844,942) (883,553) ------------------- ------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of common stock 120,000 - Payments on loans payable (760,229) (301,329) ------------------- ------------------- NET CASH FLOWS USED IN FINANCING ACTIVITIES (640,229) (301,329) ------------------- ------------------- NET INCREASE IN CASH 127,428 33,459 CASH - beginning of year 543,078 148,550 ------------------- ------------------- CASH - end of period $ 670,506 $ 182,009 =================== =================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Common stock issued for deferred compensation $ 150,000 $ - =================== ===================
See notes to unaudited consolidated financial statements. F-20 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2005 (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Sunwin International Neutraceuticals, Inc. (the "Company") was incorporated on August 27, 1987 in the State of Nevada as Network USA, Inc. (Network). The Company does not have any substantive operations of its own and substantially all of its primary business operations are conducted through its 80%-owned subsidiary, Qufu Natural Green Engineering Company Limited and its subsidiaries ("Qufu"), a company organized under the laws of the Peoples Republic of China. Qufu is engaged in the areas of traditional Chinese medicine, 100 percent organic herbal medicine, nutraceutical products, natural sweetener (beet sugar), and animal medicine prepared from 100% organic herbal ingredients. On January 26, 2004, effective February 1, 2004, Sunwin Tech Group, Inc. a Florida corporation that is now a wholly-owned subsidiary of the Company ("Sunwin Tech") entered into a Stock Purchase Agreement with Shandong Shengwang Pharmaceutical Group Corporation ("Shandong"), a 90% shareholder of Qufu and its subsidiaries. Qufu is a Chinese limited liability company with principal offices in Qufu City, Shandong, China. Qufu was founded in July 1999 and was re-registered in January 2004 in order to change its capital structure. Under this agreement, Shandong exchanged 80% of the issued and outstanding capital stock of Qufu in exchange for 100% of the issued and outstanding capital stock of Sunwin Tech with a fair market value of $95,000. The Stock Purchase Agreement has been accounted for as a reverse acquisition under the purchase method for business combinations. Accordingly, the combination of the two companies is recorded as a recapitalization of Qufu, pursuant to which Sunwin is treated as the continuing entity. On April 30, 2004, under a Share Exchange Agreement, the Company issued 17,000,004 shares of the Company's common stock for the acquisition of all of the outstanding capital stock of Sunwin Tech from its four shareholders: Baozhong Yuan, Laiwang Zhang, Xianfeng Kong and Lei Zhang. For financial accounting purposes, the exchange of stock was treated as a recapitalization of Sunwin Tech with the former shareholders of the Company retaining 11,492,268 or approximately 36.3% of the outstanding stock. The consolidated financial statements reflect the change in the capital structure of the Company due to the recapitalization and the consolidated financial statements reflect the operations of the Company and its subsidiaries for the periods presented. In connection with the Share Exchange Agreement, Sunwin Tech purchased 4,500,000 shares of the common stock of Network owned by the former principal shareholders of Network for $175,000, and, at the closing, Sunwin distributed the 4,500,000 shares to Baozhong Yuan, Laiwang Zhang, Xianfeng Kong and Lei Zhang, pro-rata to their ownership of Sunwin Tech immediately prior to the closing. F-21 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2005 (UNAUDITED) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Company (Continued) The Company filed an amendment to its Articles of Incorporation on July 12, 2004 to change its name, and to increase the number of shares of common stock it is authorized to issue to 200,000,000 shares, $.001 par value per share. Also, effective July 27, 2004, the Company effected a six for one (6:1) forward stock split of its issued and outstanding common stock. Each stockholder of record at the close of business on July 27, 2004 received five additional shares of common stock for each share of common stock held. All share and per-share information has been restated to reflect this forward stock split. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The accompanying consolidated financial statements for the interim periods are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods presented. The consolidated financial statements include the accounts of the Company and its wholly and partially owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. These consolidated financial statements should be read in conjunction with the financial statements for the year ended April 30, 2004 and notes thereto contained on Form 10-KSB of the Company as filed with the Securities and Exchange Commission. The results of operations for the nine months ended January 31, 2005 are not necessarily indicative of the results for the full fiscal year ending April 30, 2005. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. F-22 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JANUARY 31, 2005 (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Net income (loss) per share Net income (loss) per common share for the nine months ended January 31, 2005 and 2004 is based upon the weighted average common shares and dilutive common stock equivalents outstanding during the year as defined by Statement of Financial Accounting Standards, Number 128 "Earnings Per Share." Inventories Inventories, consisting of raw materials and finished goods related to the Company's products are stated at the lower of cost or market utilizing the first-in, first-out method. Foreign currency translation Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in determining net income or loss. For foreign operations with the local currency as the functional currency, assets and liabilities are translated from the local currencies into U.S. dollars at the exchange rate prevailing at the balance sheet date. Revenues and expenses are translated at weighted average exchange rates for the period to approximate translation at the exchange rates prevailing at the dates those elements are recognized in the financial statements. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive loss. The reporting currency is the U.S. dollar. The functional currency of the Company's Chinese subsidiary, Qufu, is the local currency. The financial statements of the subsidiaries are translated into United States dollars using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not material during the periods presented because the Chinese dollar (RMB) fluctuates with the United States dollar. The cumulative translation adjustment and effect of exchange rate changes on cash at January 31, 2005 was not material F-23 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JANUARY 31, 2005 (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Stock-based compensation The Company accounts for stock options issued to employees in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation cost is measured on the date of grant as the excess of the current market price of the underlying stock over the exercise price. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant. The Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for Stock-Based Compensation -Transition and Disclosure", which permits entities to provide pro forma net income (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants as if the fair-valued based method defined in SFAS No. 123 had been applied. The Company accounts for stock options and stock issued to non-employees for goods or services in accordance with the fair value method of SFAS 123. Revenue recognition The Company follows the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin 104 for revenue recognition. In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. The following policies reflect specific criteria for the various revenues streams of the Company: The Company's revenues from the sale of products are recorded when the goods are shipped, title passes, and collectibility is reasonably assured. NOTE 2 - INVENTORIES At January 31, 2005, inventories consisted of the following: Raw materials $ 1,586,367 Finished goods 738,302 -------------- $ 2,324,669 ============== F-24 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JANUARY 31, 2005 (UNAUDITED) NOTE 3 - RELATED PARTY TRANSACTIONS Due from related parties The consolidated financial statements include balances and transactions with related parties. At January 31, 2005, the Company had a receivable from Shengwang and its affiliated entities of $1,153,452. The receivable is payable on demand NOTE 4 - STOCKHOLDERS EQUITY Common Stock On May 1, 2004, the Company entered into three one-year consulting agreements with third party consultants for business development services and for management services relating to the payment of professionals for legal and accounting services. In connection with these consulting agreements, the Company granted an aggregate of 1,500,000 shares of common stock. The Company valued these shares at the quoted trading price on the date of grant of $0.10 per common share. For the nine months ended January 31, 2005, in connection with these shares, the Company recorded stock-based consulting expense of $120,000 and professional fees of $30,000. On July 27, 2004, the Company's board of directors approved a 6 for 1 forward stock split. All per share data included in the accompanying consolidated financial statement have been adjusted retroactively to reflect the forward split. In July 2004, the Company sold 2.5 units to three accredited investors in a private transaction exempt from registration under the Securities Act of 1933 in reliance on an exemption available under Regulation D. Each unit consists of 600,000 shares of our common stock and two-year common stock warrants to purchase 600,000 shares of our common stock at an exercise price of $0.167 per share. As of July 15, 2004, the Company issued 1,500,000 shares of common stock and granted 1,500,000 warrants for net proceeds of $120,000. NOTE 5 - OPERATING RISK (a) Country risk Currently, the Company's revenues are mainly derived from sale of herbs, beet sugar and veterinary products in the Peoples Republic of China (PRC). The Company hopes to expand its operations to countries outside the PRC, however, such expansion has not been commenced and there are no assurances that the Company will be able to achieve such an expansion successfully. Therefore, a downturn or stagnation in the economic environment of the PRC, or other factors affecting the political, economic or social conditions in the PRC could have a material adverse effect on the Company's financial condition. F-25 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JANUARY 31, 2005 (UNAUDITED) NOTE 5 - OPERATING RISK (continued) (b) Products risk In addition to competing with other companies, the Company could have to compete with larger US companies who have greater funds available for expansion, marketing, research and development and the ability to attract more qualified personnel if access is allowed into the PRC market. If US companies do gain access to the PRC markets, they may be able to offer products at a lower price. There can be no assurance that the Company will remain competitive should this occur. (c) Exchange risk The Company cannot guarantee that the current exchange rate will remain steady, therefore there is a possibility that the Company could post the same amount of profit or loss for two comparable periods and because of a fluctuating exchange rate actually post higher or lower profit or loss depending on exchange rate of Chinese Remnibi converted to US dollars on that date. The exchange rate could fluctuate depending on changes in the political and economic environments without notice. (d) Political risk Currently, PRC is in a period of growth and is openly promoting business development in order to bring more business into PRC. Additionally PRC allows a Chinese corporation to be owned by a United States corporation. If the laws or regulations are changed by the PRC government, the Company's ability to operate the PRC subsidiaries could be affected. (e) Key personnel risk The Company's future success depends on the continued services of executive management in China. The loss of any of their services would be detrimental to the Company and could have an adverse effect on business development. Moreover, the Company is dependent upon a consultant who has been engaged to act as the Company's representative in the United States and who is primarily responsible for serving as the United States liaison with the Company's legal and accounting professionals. The Company does not currently maintain key-man insurance on their lives. Future success is also dependent on the ability to identify, hire, train and retain other qualified managerial and other employees and consultants. Competition for these individuals is intense and increasing. (f) Performance of subsidiaries' risk Currently, a majority of the Company's revenues are derived via the operations of the subsidiaries. Economic, governmental, political, industry and internal company factors outside of the Company's control affect each of the subsidiaries. If the subsidiaries do not succeed, the value of the assets and the price of our common stock could decline. Some of the material risks relating to the partner companies include the fact that three of the subsidiaries are located in China and have specific risks associated with that and the intensifying competition for the Company's products and services and those of the subsidiaries. F-26 No dealer, sales representative or any other person has been authorized to give any information or to make any representations other than those contained in this prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the company or any of the underwriters. This prospectus does not constitute an offer of any securities other than those to which it relates or an offer to sell, or a solicitation of any offer to buy, to any person in any jurisdiction where such an offer or solicitation would be unlawful. Neither the delivery of this prospectus nor any sale made hereunder shall, under any circumstances, create an implication that the information set forth herein is correct as of any time subsequent to the date hereof. Until _________, 2005 (45 days after the date of this prospectus), all dealers that effect transactions these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. TABLE OF CONTENTS Page Prospectus Summary.......................... Risk Factors................................ 30,250,006 SHARES Use of Proceeds............................. SUNWIN INTERNATIONAL Market for Common Stock NEUTRACEUTICALS, INC. and Dividend Policy...................... Forward-Looking Statements.................. Management's Discussion and Analysis or Plan of Operation............. Business.................................... Management.................................. PROSPECTUS Executive Compensation...................... Certain Transactions........................ Principal Shareholders...................... Description of Securities................... Selling Security Holders.................... Plan of Distribution........................ Shares Eligible for Future Sale............. ________________, 2005 Legal Matters............................... Experts..................................... Additional Information...................... Financial Statements........................ F-1 PART TWO INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Nevada Revised Statutes allows us to indemnify each of our officers and directors who are made a party to a proceeding if: (a) the officer or director conducted himself or herself in good faith; (b) his or her conduct was in our best interests, or if the conduct was not in an official capacity, that the conduct was not opposed to our best interests; and (c) in the case of a criminal proceeding, he or she had no reasonable cause to believe that his or her conduct was unlawful. We may not indemnify our officers or directors in connection with a proceeding by or in our right, where the officer or director was adjudged liable to us, or in any other proceeding, where our officer or director are found to have derived an improper personal benefit. Our by-laws require us to indemnify directors and officers against, to the fullest extent permitted by law, liabilities which they may incur under the circumstances described above. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the registrant has been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as express in the act and is therefore unenforceable. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses in connection with the distribution of the securities being registered, all of which are payable by Sunwin, are as follows: SEC Registration and Filing Fee.............................................$523 Legal Fees and Expenses*..................................................25,000 Accounting Fees and Expenses*.............................................10,000 Financial Printing*........................................................5,000 Transfer Agent Fees*.......................................................1,000 Blue Sky Fees and Expenses*................................................2,500 Miscellaneous*............................................................ _ TOTAL..........................................................$44,023 ======= * Estimated ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES Following are all issuances of securities by the small business issuer during the past three years which were not registered under the Securities Act of 1933, as amended (the "Securities Act"). In each of these issuances the recipient represented that he was acquiring the shares for investment purposes only, and not with a view towards distribution or resale except in compliance with applicable securities laws. The recipients had access to business and financial information concerning our company. No general solicitation or advertising was used in connection with any transaction, and the certificate evidencing the securities that were issued contained a legend restricting their transferability absent registration under the Securities Act or the availability of an applicable exemption therefrom. Unless specifically set forth below, no underwriter participated in the transaction and no commissions were paid in connection with the transactions. In April 2002, we acquired 20% of One Genesis, Inc., a privately-held Texas real estate corporation, from one of our then principal stockholders in exchange for 4,333,332 shares of our common stock. Effective on April 30, 2004, we acquired 100% of the issued and outstanding shares of Sunwin Tech from its shareholders, in exchange for approximately 17,000,000 shares of our common stock which resulted in a change of control of our company. In connection with the transaction, Sunwin Tech purchased 4,500,000 shares of our common stock owned by our former principal shareholders, and, at the closing, Sunwin Tech distributed the 4,500,000 shares to Messrs. Baozhong Yuan, Xianfeng Kong and Lei Zhang (former officers and directors) and Laiwang Zhang, pro-rata to their ownership of Sunwin Tech immediately prior to the closing. The securities were issued in reliance on an exemption from registration provided by Section 4(2) of the Securities Act. On April 30, 2004 we issued 1,000,002 shares of our common stock to an unaffiliated third party in satisfaction of $100,000 due that party by our company. We valued these shares at $0.10 per share. The securities were issued in reliance on an exemption from registration provided by Section 4(2) of the Securities Act. On April 30, 2004 we also issued an aggregate of 2,125,002 shares of our common stock to eight individuals and entities as compensation for business development and advisory services under agreements for services rendered or to be rendered for a six month period. We valued these shares at $0.10 per share, resulting in consulting expense of $112,500 for fiscal 2004 and deferred consulting expense of $100,000. These issuances included 709,680 shares issued to Mr. Richard J. Church and 290,322 shares issued to Mr. Michael L. Mead, former officers and directors of our company. The securities were issued in reliance on an exemption from registration provided by Section 4(2) and Regulation D of the Securities Act. On May 1, 2004 we issued an aggregate of 1,500,000 shares of our common stock to two companies and one individual as compensation under one year consulting agreements. Included in these issuances were 300,000 shares of our common stock issued to Genesis Technology Group, Inc. as compensation for their services to us as an advisor to our company, which services were terminated December 2004. The securities were issued in reliance on an exemption from registration provided by Section 4(2) of the Securities Act. We valued these shares at $150,000. In July 2004, we sold 2.5 units to three accredited investors in a private transaction exempt from registration under the Securities Act of 1933 in reliance on an exemption available under Section 4(2) and Regulation D of the Securities Act. Each unit consists of 600,000 shares of our common stock and two year common stock purchase warrants to purchase 600,000 shares of our common stock at an exercise price of $0.167 per share. This transaction resulted in the issuance of an aggregate of 1,500,000 shares of our common stock and warrants to purchase an additional 1,500,000 shares. We received gross proceeds of $120,000. In April 2005, we sold 8,750,000 shares of our common stock at $.10 per share, and issued five year common stock purchase warrants to purchase an additional 13,125,000 shares at an exercise price of $0.15 per share to 12 accredited investors in a private transaction exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(2) of the Securities Act and the rules and regulations, including Regulation D thereunder, as transactions by an issuer not involving a public offering. We paid unaffiliated finders a total of $87,500, in cash, and issued certain finders five-year warrants to purchase a total of 375,000 shares of common stock, exercisable at $.15 per share, subject to adjustment. The net proceeds from the transaction will be used for general working capital purposes. In May 2005, we issued five-year warrants to purchase 500,000 shares of our common stock, at an exercise price of $.15 per share, to China Direct Investments, Inc. as compensation under a consulting agreement for advisory services rendered or to be rendered for a two month period. We valued these shares at $39,221. The securities were issued in reliance on an exemption from registration provided by Section 4(2) of the Securities Act. ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Exhibit No Description of Document - ----------- ----------------------- 3.1 Articles of Incorporation (1) 3.2 Certificate of Amendment to Articles of Incorporation (2) 3.3 By-Laws (1) 4.1 Form of Class A Common Stock Purchase Warrant * 4.2 Form of $0.167 common stock purchase warrant* 5.1 Opinion of Schneider Weinberger & Beilly LLP ** 10.1 Share Exchange Agreement dated April 30, 2004 between Network USA, Inc. and the shareholders of Sunwin Tech Group, Inc. (3) 10.2 Lease for principal offices (4) 10.3 Consulting Agreement with Genesis Technology Group, Inc. (4) 10.4 Form of Stevia rebaudiana Planting Agreement (4) 10.5 Stock Purchase Agreement between Sunwin Tech Group, Inc., Qufu Natural Green Engineering Company, Limited and Shandong Shengwang Pharmaceutical Group Corporation (4) 10.6 2005 Equity Compensation Plan (5) 10.7 Form of Subscription Agreement * 10.8 Consulting Agreement with China Direct Investments, Inc.* 14.1 Code of Ethics * 23.1 Consent of Sherb & Co. LLP * 23.2 Consent of Schneider Weinberger & Beilly LLP (included in Exhibit 5.1)** - ---------------------------------- * filed herewith ** to be filed by amendment (1) Incorporated by reference to the Form 10-KSB for the fiscal year ended April 30, 2000 (2) Incorporated by reference to the Form 8-K/A as filed with the SEC on July 30, 2004. (3) Incorporated by reference to the Report on Form 8-K as filed with the SEC on May 12, 2004. (4) Incorporated by reference to the Annual Report on Form 10-KSB for the fiscal year ended April 30, 2004. (5) Incorporated by reference to the Report on Form 8-K as filed with the SEC on April 28, 2005. ITEM 28. UNDERTAKINGS The undersigned Registrant also undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3 or Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Securities Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission (the "Commission") such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or preceding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this amendment to registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Qufu, Shandong, China on May 26, 2005. SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. By: /s/ Dongdong Lin Dongdong Lin, Principal Executive Officer By: /s/ Fanjun Wu Fanjun Wu, Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this amendment to Form SB-2 registration statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE - --------- ----- ---- /s/ Laiwang Zhang President and Chairman May 26, 2005 - ----------------- Laiwang Zhang /s/ Dongdong Lin CEO, principal executive officer, May 26, 2005 - ---------------- Secretary and director Dongdong Lin /s/ Fanjun Wu Chief Financial Officer and May 26, 2005 - ------------- principal accounting officer Fanjun Wu /s/ Chengxiang Yan Director May 26, 2005 - --------------- Chengxiang Yan EX-4 2 ex41.txt EXHIBIT 4.1 THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED. Right to Purchase _______ shares of Common Stock of Sunwin International Neutraceuticals, Inc. (subject to adjustment as provided herein) CLASS A COMMON STOCK PURCHASE WARRANT No. 2005-A-00__ Issue Date: April 12, 2005 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC., a corporation organized under the laws of the State of Nevada (the "Company"), hereby certifies that, for value received, _________________________________, or its assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company at any time after the Issue Date until 5:00 p.m., E.S.T on the fifth (5th) anniversary of the Issue Date (the "Expiration Date"), up to _______ fully paid and nonassessable shares of Common Stock at a per share purchase price of $0.15. The aforedescribed purchase price per share, as adjusted from time to time as herein provided, is referred to herein as the "Purchase Price." The number and character of such shares of Common Stock and the Purchase Price are subject to adjustment as provided herein. The Company may reduce the Purchase Price without the consent of the Holder. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Subscription Agreement (the "Subscription Agreement"), dated April 12, 2005, entered into by the Company and Holder's of the Company's Securities. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include Sunwin International Neutraceuticals, Inc. and any corporation which shall succeed or assume the obligations of Sunwin International Neutraceuticals, Inc. hereunder. (b) The term "Common Stock" includes (a) the Company's Common Stock, $.001 par value per share, as authorized on the date of the Subscription Agreement, and (b) any other securities into which or for which any of the securities described in (a) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 5 or otherwise. 1. Exercise of Warrant. 1.1. Number of Shares Issuable upon Exercise. From and after the Issue Date through and including the Expiration Date, the Holder hereof shall be entitled to receive, upon exercise of this Warrant in whole in accordance with the terms of subsection 1.2 or upon exercise of this Warrant in part in accordance with subsection 1.3, shares of Common Stock of the Company, subject to adjustment pursuant to Section 4. 1.2. Full Exercise. This Warrant may be exercised in full by the Holder hereof by delivery of an original or facsimile copy of the form of subscription attached as Exhibit A hereto (the "Subscription Form") duly executed by such Holder and surrender of the original Warrant within four (4) days of exercise, to the Company at its principal office or at the office of its Warrant Agent (as provided hereinafter), accompanied by payment, in cash, wire transfer or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then exercisable by the Purchase Price then in effect. 1.3. Partial Exercise. This Warrant may be exercised in part (but not for a fractional share) by surrender of this Warrant in the manner and at the place provided in subsection 1.2 except that the amount payable by the Holder on such partial exercise shall be the amount obtained by multiplying (a) the number of whole shares of Common Stock designated by the Holder in the Subscription Form by (b) the Purchase Price then in effect. On any such partial exercise, the Company, at its expense, will forthwith issue and deliver to or upon the order of the Holder hereof a new Warrant of like tenor, in the name of the Holder hereof or as such Holder (upon payment by such Holder of any applicable transfer taxes) may request, the whole number of shares of Common Stock for which such Warrant may still be exercised. 1.4. Fair Market Value. Fair Market Value of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (a) If the Company's Common Stock is traded on an exchange or is quoted on the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ"), National Market System, the NASDAQ SmallCap Market or the American Stock Exchange, LLC, then the closing or last sale price, respectively, reported for the last business day immediately preceding the Determination Date; (b) If the Company's Common Stock is not traded on an exchange or on the NASDAQ National Market System, the NASDAQ SmallCap Market or the American Stock Exchange, Inc., but is traded in the over-the-counter market, then the average of the closing bid and ask prices reported for the last business day immediately preceding the Determination Date; (c) Except as provided in clause (d) below, if the Company's Common Stock is not publicly traded, then as the Holder and the Company agree, or in the absence of such an agreement, by arbitration in accordance with the rules then standing of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided; or (d) If the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company's charter, then all amounts to be payable per share to holders of the Common Stock pursuant to the charter in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation under the charter, assuming for the purposes of this clause (d) that all of the shares of Common Stock then issuable upon exercise of all of the Warrants are outstanding at the Determination Date. 1.5. Company Acknowledgment. The Company will, at the time of the exercise of the Warrant, upon the request of the Holder hereof acknowledge in writing its continuing obligation to afford to such Holder any rights to which such Holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such Holder any such rights. 1.6. Trustee for Warrant Holders. In the event that a bank or trust company shall have been appointed as trustee for the Holder of the Warrants pursuant to Subsection 3.2, such bank or trust company shall have all the powers and duties of a warrant agent (as hereinafter described) and shall accept, in its own name for the account of the Company or such successor person as may be entitled thereto, all amounts otherwise payable to the Company or such successor, as the case may be, on exercise of this Warrant pursuant to this Section 1. 1.7 Delivery of Stock Certificates, etc. on Exercise. The Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within four (4) business days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder hereof, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct in compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share of Common Stock, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 2. Cashless Exercise. (a) If a Registration Statement (as defined in the Subscription Agreement) ("Registration Statement") is effective and the Holder may sell its shares of Common Stock upon exercise hereof pursuant to the Registration Statement, this Warrant may be exercisable in whole or in part for cash only as set forth in Section 1 above. If no such Registration Statement is available during the time that such Registration Statement is required to be effective pursuant to the terms of the Subscription Agreement, then payment upon exercise may be made at the option of the Holder either in (i) cash, wire transfer or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Purchase Price, (ii) by delivery of Common Stock issuable upon exercise of the Warrants in accordance with Section (b) below or (iii) by a combination of any of the foregoing methods, for the number of Common Stock specified in such form (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the holder per the terms of this Warrant) and the holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or Other Securities) determined as provided herein. (b) If the Fair Market Value of one share of Common Stock is greater than the Purchase Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being cancelled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Subscription Form in which event the Company shall issue to the holder a number of shares of Common Stock computed using the following formula: X=Y (A-B) ------------ A Where X= the number of shares of Common Stock to be issued to the holder Y= the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation) A= the Fair Market Value of one share of the Company's Common Stock (at the date of such calculation) B= Purchase Price (as adjusted to the date of such calculation) (c) The Holder may employ the cashless exercise feature described in Section (b) above only during the pendency of a Non-Registration Event as described in Section 11 of the Subscription Agreement. For purposes of Rule 144 promulgated under the 1933 Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have commenced, on the date this Warrant was originally issued pursuant to the Subscription Agreement. 3. Adjustment for Reorganization, Consolidation, Merger, etc. 3.1. Reorganization, Consolidation, Merger, etc. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder of this Warrant, on the exercise hereof as provided in Section 1, at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4. 3.2. Dissolution. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the Holder of the Warrants after the effective date of such dissolution pursuant to this Section 3 to a bank or trust company (a "Trustee") having its principal office in New York, NY, as trustee for the Holder of the Warrants. 3.3. Continuation of Terms. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the Other Securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any Other Securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 4. In the event this Warrant does not continue in full force and effect after the consummation of the transaction described in this Section 3, then only in such event will the Company's securities and property (including cash, where applicable) receivable by the Holder of the Warrants be delivered to the Trustee as contemplated by Section 3.2. 3.4 Share Issuance. Until the Expiration Date, if the Company shall issue any Common Stock except for the Excepted Issuances (as defined in the Subscription Agreement), prior to the complete exercise of this Warrant for a consideration less than the Purchase Price that would be in effect at the time of such issue, then, and thereafter successively upon each such issue, the Purchase Price shall be reduced to such other lower issue price. For purposes of this adjustment, the issuance of any security or debt instrument of the Company carrying the right to convert such security or debt instrument into Common Stock or of any warrant, right or option to purchase Common Stock shall result in an adjustment to the Purchase Price upon the issuance of the above-described security, debt instrument, warrant, right, or option and again at any time upon any subsequent issuances of shares of Common Stock upon exercise of such conversion or purchase rights if such issuance is at a price lower than the Purchase Price in effect upon such issuance. The reduction of the Purchase Price described in this Section 3.4 is in addition to the other rights of the Holder described in the Subscription Agreement. 4. Extraordinary Events Regarding Common Stock. In the event that the Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Purchase Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The number of shares of Common Stock that the Holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be adjusted to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of which (a) the numerator is the Purchase Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Purchase Price in effect on the date of such exercise. 5. Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of the Warrants, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the Holder of the Warrant and any Warrant Agent of the Company (appointed pursuant to Section 11 hereof). 6. Reservation of Stock, etc. Issuable on Exercise of Warrant; Financial Statements. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrants, all shares of Common Stock (or Other Securities) from time to time issuable on the exercise of the Warrant. This Warrant entitles the Holder hereof to receive copies of all financial and other information distributed or required to be distributed to the holders of the Company's Common Stock. 7. Assignment; Exchange of Warrant. Subject to compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a "Transferor"). On the surrender for exchange of this Warrant, with the Transferor's endorsement in the form of Exhibit B attached hereto (the "Transferor Endorsement Form") and together with an opinion of counsel reasonably satisfactory to the Company that the transfer of this Warrant will be in compliance with applicable securities laws, the Company at its expense, twice, only, but with payment by the Transferor of any applicable transfer taxes, will issue and deliver to or on the order of the Transferor thereof a new Warrant or Warrants of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a "Transferee"), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor. No such transfers shall result in a public distribution of the Warrant. 8. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense, twice only, will execute and deliver, in lieu thereof, a new Warrant of like tenor. 9. Registration Rights. The Holder of this Warrant has been granted certain registration rights by the Company. These registration rights are set forth in the Subscription Agreement. The terms of the Subscription Agreement are incorporated herein by this reference. Upon the occurrence of a Non-Registration Event, or in the event the Company is unable to issue Common Stock upon exercise of this Warrant that has been registered in a Registration Statement described in Section 11 of the Subscription Agreement, within the time periods described in the Subscription Agreement, which Registration Statement must be effective for the periods set forth in the Subscription Agreement, then upon written demand made by the Holder, the Company will pay to the Holder of this Warrant, in lieu of delivering Common Stock, a sum equal to the closing price of the Company's Common Stock on the principal market or exchange upon which the Common Stock is listed for trading on the trading date immediately preceding the date notice is given by the Holder, less the Purchase Price, for each share of Common Stock designated in such notice from the Holder. 10. Maximum Exercise. The Holder shall not be entitled to exercise this Warrant on an exercise date, in connection with that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its affiliates on an exercise date, and (ii) the number of shares of Common Stock issuable upon the exercise of this Warrant with respect to which the determination of this limitation is being made on an exercise date, which would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock on such date. For the purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not be limited to aggregate exercises which would result in the issuance of more than 4.99%. The restriction described in this paragraph may be waived in whole or in part, upon sixty-one (61) days prior notice from the Holder to the Company. The Holder may allocate which of the equity of the Company deemed beneficially owned by the Subscriber shall be included in the 4.99% amount described above and which shall be allocated to the excess above 4.99% provided such allocations are consistent with applicable law. 11. Warrant Agent. The Company may, by written notice to the Holder of the Warrant, appoint an agent (a "Warrant Agent") for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7, and replacing this Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such Warrant Agent. 12. Transfer on the Company's Books. Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 13. Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: (i) if to the Company to: Sunwin International Neutraceuticals, Inc., 6 Youpeng Road, Qufu, Shandong, China 273100, Attn: Dongdong Lin, CEO, telecopier number: 011-86-537-441-3350, with a copy by telecopier only to: Steven I. Weinberger, Esq., Schneider Weinberger & Beilly LLP, 2200 Corporate Blvd., NW, Suite 210, Boca Raton, FL 33431, telecopier number: (561) 362-9612, and (ii) if to the Holder, to the address and telecopier number listed on the first paragraph of this Warrant, with an additional copy by telecopier only to: Grushko & Mittman, P.C., 551 Fifth Avenue, Suite 1601, New York, New York 10176, telecopier number: (212) 697-3575 14. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with and governed by the laws of New York. Any dispute relating to this Warrant shall be adjudicated in New York County in the State of New York. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above. SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. By: Name: Title: Witness: Exhibit A FORM OF SUBSCRIPTION (to be signed only on exercise of Warrant) TO: SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. The undersigned, pursuant to the provisions set forth in the attached Warrant (No.____), hereby irrevocably elects to purchase (check applicable box): ___ ________ shares of the Common Stock covered by such Warrant; or ___ the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in Section 2. The undersigned herewith makes payment of the full purchase price for such shares at the price per share provided for in such Warrant, which is $___________. Such payment takes the form of (check applicable box or boxes): ___ $__________ in lawful money of the United States; and/or ___ the cancellation of such portion of the attached Warrant as is exercisable for a total of _______ shares of Common Stock (using a Fair Market Value of $_______ per share for purposes of this calculation); and/or ___ the cancellation of such number of shares of Common Stock as is necessary, in accordance with the formula set forth in Section 2, to exercise this Warrant with respect to the maximum number of shares of Common Stock purchasable pursuant to the cashless exercise procedure set forth in Section 2. The undersigned requests that the certificates for such shares be issued in the name of, and delivered to ___________________________________ whose address is - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Number of Shares of Common Stock Beneficially Owned on the date of exercise: Less than five percent (5%) of the outstanding Common Stock of Sunwin International Neutraceuticals, Inc.. The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Securities Act"), or pursuant to an exemption from registration under the Securities Act. Dated:___________________ ---------------------------------------- (Signature must conform to name of holder as specified on the face of the Warrant) ----------------------------- (Address) Exhibit B FORM OF TRANSFEROR ENDORSEMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading "Transferees" the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. to which the within Warrant relates specified under the headings "Percentage Transferred" and "Number Transferred," respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. with full power of substitution in the premises. Transferees Percentage Transferred Number Transferred - ----------- -------------------------- ---------------------------------- - ----------- -------------------------- ---------------------------------- - ----------- -------------------------- ---------------------------------- - ----------- -------------------------- ---------------------------------- Dated: ______________, ___________ ------------------------ (Signature must conform to name of holder as specified on the face of the warrant) Signed in the presence of: - ----------------------- ---------------------------------- (Name) (address) ACCEPTED AND AGREED: [TRANSFEREE] ---------------------------------- (address) - -------------------------- (Name) EX-4 3 ex42.txt EXHIBIT 4.2 Warrant to Purchase Common Stock of Sunwin International Neutraceuticals, Inc. FOR VALUE RECEIVED, Sunwin International Neutraceuticals, Inc., a Florida corporation (the "Company"), promises to issue in the name of, and sell and deliver to __________________ (the "Holder") a certificate or certificates for an aggregate of ________shares of the Company's common stock, par value $0.001 per share (the "Common Stock"), upon payment by the Holder of $.167 per share (the "Exercise Price"), with the Exercise Price being subject to adjustment in the circumstances set forth below. 1. Exercise of Warrant A. Exercise Period. The Holder may exercise this Warrant, in whole or in part (but not as to fractional shares), at any time and time to time commencing on the date hereof and ending at 5:00 p.m., Eastern Time, and expiring on July 31, 2007 (the "Exercise Period"). B. Exercise Procedure. i. This Warrant will be deemed to have been exercised at such time as the Company has received all of the following items (the "Exercise Date"): a. a completed Exercise Agreement, in the form attached hereto as Exhibit 1, executed by the Holder (the "Purchaser"); and b. a certified check or other immediately available funds payable to the Company in an amount equal to the sum of the product of the Exercise Price multiplied by the number of shares of Common Stock being purchased upon such exercise. ii. Certificates for the shares of Common Stock purchased upon exercise of this Warrant will be delivered by the Company to the Purchaser within ten (10) business days after the Exercise Date. Unless this Warrant has expired or all of the purchase rights represented hereby have been exercised, the Company will prepare a new Warrant representing the rights formerly represented by this Warrant that have not expired or been exercised. The Company will, within such ten (10) day period, deliver such new Warrant to the Holder at the address set forth in this Warrant. iii. The shares of Common Stock issuable upon the exercise of this Warrant will be deemed to have been transferred to the Purchaser on the Exercise Date, and the Purchaser will be deemed for all purposes to have become the record holder of such Common Stock on the Exercise Date. iv. The issuance of certificates for shares of Common Stock upon the exercise of this Warrant will be made without charge to the Purchaser for any issuance tax in respect thereof or any other cost incurred by the Company in connection with such exercise and related transfer of the shares; provided, however, that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any certificate or instrument in a name other than that of the Holder of this Warrant, and that the Company shall not be required to issue or deliver any such certificate or instrument unless and until the person or persons requiring the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. v. Unless the Company shall have registered the shares of Common Stock underlying this Warrant, the shares of Common Stock issuable upon the exercise of this Warrant will be "restricted securities" as that term is defined in the Securities Act of 1933. The Company may insert the following or similar legend on the face of the certificates evidencing shares of Common Stock if required in compliance with state securities laws: "These securities have not been registered under any state securities laws and may not be sold or otherwise transferred or disposed of except pursuant to an effective registration statement under any applicable state securities laws, or an opinion of counsel satisfactory to counsel to the Company that an exemption from registration under any applicable state securities laws is available." C. Fractional Shares. The Company shall not be required to issue fractions of shares of Common Stock on the exercise of this Warrant. The Company shall not be obligated to issue any fractional share interests or fractional warrant interests upon the exercise of this Warrant, nor shall it be obligated to issue scrip or pay cash in lieu of fractional interests, provided, however, that if a holder exercises all the Warrants held of record by such holder, the Company shall at its option (i) eliminate the fractional interests by rounding any fraction up to the nearest whole number of shares or (ii) within 30 days after the Exercise Date, deliver to the Purchaser a check payable to the Purchaser, in lieu of such fractional share, in an amount equal to the value of such fractional share as determined by the closing price of the Company's Common Stock as reported on the principal exchange on which the Company's Common Stock is then traded, as of the close of business on the Exercise Date. 2. Effect of Reorganization, Reclassification, Consolidation, Merger or Sale A. Recapitalization or Reclassification of Common Stock. In case the Company shall at any time prior to the satisfaction of the note underlying this Warrant, or the Exercise of this Warrant, or the expiration of the Exercise Period, whichever first occurs, effect a recapitalization or reclassification of such character that its Common Stock shall be changed into or become exchangeable for a larger or smaller number of shares, then, upon the effective date thereof, the number of shares of Common Stock that the Holder of this Warrant shall be entitled to purchase upon exercise hereof shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in such number of shares of Common Stock by reason of such recapitalization or reclassification, and the Exercise Price of such recapitalized or reclassified Common Stock shall, in the case of an increase in the number of shares, be proportionately decreased and, in the case of a decrease in the number of shares, be proportionately increased. B. Consolidation, Merger or Sale. In case the Company shall at any time prior to the satisfaction of the note underlying this Warrant, or the exercise of this Warrant, or the expiration of the Exercise Period, whichever first occurs, consolidate or merge with any other corporation (unless the Company shall be the surviving entity) or transfer all or substantially all of its assets to any other corporation preparatory to a dissolution, then the Company shall, as a condition precedent to such transaction, cause effective provision to be made so that the Holder of this Warrant, upon the exercise thereof after the effective date of such transaction, shall be entitled to receive the kind and amount of shares, evidences of indebtedness, and/or other property receivable on such transaction by a holder of the number of shares of Common Stock as to which the Warrant was exercisable immediately prior to such transaction (without giving effect to any restriction upon such exercise); and, in any such case, appropriate provision shall be made with respect to the rights and interests of the Holder hereof to the effect that the provisions of this Warrant shall thereafter be applicable (as nearly as may be practicable) with respect to any shares, evidences of indebtedness, or other securities or assets thereafter deliverable upon exercise of this Warrant. C. Notice of Adjustment. Whenever the number of shares of Common Stock purchasable upon exercise of this Warrant shall be adjusted as provided herein, the Company shall file with its corporate records a certificate of its Chief Financial Officer setting forth the computation and the adjusted number of shares of Common Stock purchasable hereunder resulting from such adjustments, and a copy of such certificate shall be mailed to the Holder. Any such certificate or letter shall be conclusive evidence as to the correctness of the adjustment or adjustments referred to therein and shall be available for inspection by the holders of the Warrants on any day during normal business hours. 3. Reservation of Common Stock. The Company will at all time reserve and keep available such number of shares of Common Stock as will be sufficient to permit the exercise in full of this Warrant. Upon exercise of this Warrant pursuant to its terms, the Holder will acquire fully paid and non-assessable ownership rights of the Common Stock, free and clear of any liens, claims or encumbrances except as otherwise provided herein. 4. No Shareholder Rights or Obligations. This Warrant will not entitle the Holder hereof to any voting rights or other rights as a shareholder of the Company. Until the shares of Common Stock issuable upon the exercise of this Warrant are recorded as issued on the books and records of the Company's transfer agent, the Holder shall not be entitled to any voting rights or other rights as a shareholder; provided, however, the Company uses its best efforts to ensure that, upon receipt of the Exercise Agreement and payment of the Exercise Price, the appropriate documentation necessary to effectuate the exercise of the Warrant and the issuance of the Common Stock is accomplished as expeditiously as possible. No provision of this Warrant, in the absence of affirmative action by the Holder to purchase Common Stock, and no enumeration in this Warrant of the rights or privileges of the Holder, will give rise to any obligation of such Holder for the Exercise Price or as a stockholder of the Company. 5. Transferability. Subject to the terms hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed Assignment in the form of Exhibit 2 hereto at the principal offices of the Company. This Warrant and the underlying shares of Common Stock may not be offered, sold or transferred except in compliance with the Act, and any applicable state securities laws, and then only against receipt of an agreement of the person to whom such offer or sale or transfer is made to comply with the provisions of this Warrant with respect to any resale or other disposition of such securities; provided that no such agreement shall be required from any person purchasing this Warrant or the underlying shares of Common Stock pursuant to a registration statement effective under the Act. The Holder of this Warrant agrees that, prior to the disposition of any security purchased on the exercise hereof other than pursuant to a registration statement then effective under the Act, or any similar statute then in effect, the Holder shall give written notice to the Company, expressing his intention as to such disposition. Upon receiving such notice, the Company shall present a copy thereof to its securities counsel. If, in the sole opinion of such counsel, which such opinion shall not be unreasonably withheld, the proposed disposition does not require registration of such security under the Act, or any similar statute then in effect, the Company shall, as promptly as practicable, notify the Holder of such opinion, whereupon the Holder shall be entitled to dispose of such security in accordance with the terms of the notice delivered by the Holder to the Company. 6. Miscellaneous A. Notices. Any notices, requests or consents hereunder shall be deemed given, and any instruments delivered, two days after they have been mailed by first class mail, postage prepaid, or upon receipt if delivered personally or by facsimile transmission, as follows: If to the Company: Sunwin International Neutraceuticals, Inc., Inc. 9858 Glades Road, Suite 213 Boca Raton, Florida 33428 Attn: ________________ If to the Holder: ______________________ except that any of the foregoing may from time to time by written notice to the other designate another address which shall thereupon become its effective address for the purposes of this paragraph. B. Entire Agreement. This Warrant, including the exhibits and documents referred to herein which are a part hereof, contain the entire understanding of the parties hereto with respect to the subject matter and may be amended only by a written instrument executed by the parties hereto or their successors or assigns. Any paragraph headings contained in this Warrant are for reference purposes only and shall not affect in any way the meaning or interpretation of this Warrant. C. Governing Law. This Warrant is governed by, interpreted under and construed in all respects in accordance with the substantive laws of the State of Florida, without regard to the conflicts of law provision thereof, and irrespective of the place of domicile or resident of the party. In the event of a controversy arising out of the interpretation, construction, performance or breach of this Warrant, the parties hereby agree and consent to the jurisdiction and venue of the Courts of the State of Florida, or the United States District Court for the Southern District of Florida; and further agree and consent that personal service of process in any such action or preceding outside the State of Florida shall be tantamount to service in person in Florida. IN WITNESS WHEREOF, this Warrant has been duly executed and the corporate seal affixed hereto, all as of the day and year first above written. Sunwin International Neutraceuticals, Inc., - ----------------------------------- Sign name - ----------------------------------- Print name August 1, 2004 - --------------- Date EX-10 4 ex107.txt Exhibit 10.7 (Subscription Agreement) SUBSCRIPTION AGREEMENT THIS SUBSCRIPTION AGREEMENT (this "Agreement"), dated as of April 12, 2005, by and among Sunwin International Neutraceuticals, Inc., a Nevada corporation (the "Company"), and the subscribers identified on the signature page hereto (each a "Subscriber" and collectively "Subscribers"). WHEREAS, the Company and the Subscribers are executing and delivering this Agreement in reliance upon an exemption from securities registration afforded by the provisions of Section 4(2), Section 4(6) and/or Regulation D ("Regulation D") as promulgated by the United States Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "1933 Act"). WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Subscribers, as provided herein, and the Subscribers, in the aggregate, shall purchase for up to Five Hundred Thousand Dollars ($500,000) (the "Purchase Price") of shares of the Company's common stock, $.001 par value (the "Common Stock") at a per share price of $0.10, and share purchase warrants (the "Warrants") in the form attached hereto as Exhibit A, to purchase shares of Common Stock (the "Warrant Shares"). The shares of Common Stock (the "Shares"), the Warrants and the Warrant Shares are collectively referred to herein as the "Securities"; and WHEREAS, the aggregate proceeds of the sale of the Shares and the Warrants contemplated hereby, and the other documents, instruments and payments contemplated hereby shall be held in escrow pursuant to the terms of a Funds Escrow Agreement to be executed by the parties substantially in the form attached hereto as Exhibit B (the "Escrow Agreement"). NOW, THEREFORE, in consideration of the mutual covenants and other agreements contained in this Agreement the Company and the Subscribers hereby agree as follows: 1. Conditions To Closing. Subject to the satisfaction or waiver of the terms and conditions of this Agreement, on the "Closing Date" (as defined in Section 2 below), each Subscriber shall purchase and the Company shall sell to each Subscriber the Shares and Warrants designated on the signature page hereto for the portion of the Purchase Price set forth on the signature page hereto. 2. Closing. The consummation of the transactions contemplated herein shall take place at the offices of Grushko & Mittman, P.C., 551 Fifth Avenue, Suite 1601, New York, New York 10176, upon the satisfaction of all conditions to Closing set forth in this Agreement ("Closing Date").. 3. Class A Warrants. On the Closing Date, the Company will issue and deliver Class A Warrants to the Subscribers. One and one-half Class A Warrants will be issued for each one Share issued on the Closing Date. The per Warrant Share exercise price to acquire a Warrant Share upon exercise of a Class A Warrant shall be $0.15. The Class A Warrants shall be exercisable until five (5) years after the Closing Date. 4. Subscriber's Representations and Warranties. Each Subscriber hereby represents and warrants to and agrees with the Company only as to such Subscriber that: (a) Organization and Standing of the Subscribers. If the Subscriber is an entity, such Subscriber is a corporation, partnership or other entity duly incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization. (b) Authorization and Power. Each Subscriber has the requisite power and authority to enter into and perform this Agreement and to purchase the Shares and Warrants being sold to it hereunder. The execution, delivery and performance of this Agreement by such Subscriber and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate or partnership action, and no further consent or authorization of such Subscriber or its Board of Directors, stockholders, partners, members, as the case may be, is required. This Agreement has been duly authorized, executed and delivered by such Subscriber and constitutes, or shall constitute when executed and delivered, a valid and binding obligation of the Subscriber enforceable against the Subscriber in accordance with the terms thereof. (c) No Conflicts. The execution, delivery and performance of this Agreement and the consummation by such Subscriber of the transactions contemplated hereby or relating hereto do not and will not (i) result in a violation of such Subscriber's charter documents or bylaws or other organizational documents or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of any agreement, indenture or instrument or obligation to which such Subscriber is a party or by which its properties or assets are bound, or result in a violation of any law, rule, or regulation, or any order, judgment or decree of any court or governmental agency applicable to such Subscriber or its properties (except for such conflicts, defaults and violations as would not, individually or in the aggregate, have a material adverse effect on such Subscriber). Such Subscriber is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement or to purchase the Securities in accordance with the terms hereof, provided that for purposes of the representation made in this sentence, such Subscriber is assuming and relying upon the accuracy of the relevant representations and agreements of the Company herein. (d) Information on Company. The Subscriber has been furnished with or has had access at the EDGAR Website of the Commission to the Company's Form 10-KSB for the year ended April 30, 2004 as filed with the Commission, together with all subsequently filed Forms 10-QSB, 8-K, and filings made with the Commission available at the EDGAR website (hereinafter referred to collectively as the "Reports"). In addition, the Subscriber has received in writing from the Company such other information concerning its operations, financial condition and other matters as the Subscriber has requested in writing (such other information is collectively, the "Other Written Information"), and considered all factors the Subscriber deems material in deciding on the advisability of investing in the Securities. (e) Information on Subscriber. The Subscriber is presently, and will be at the time of the exercise of the Warrants, an "accredited investor", as such term is defined in Regulation D promulgated by the Commission under the 1933 Act, is experienced in investments and business matters, has made investments of a speculative nature and has purchased securities of United States publicly-owned companies in private placements in the past and, with its representatives, has such knowledge and experience in financial, tax and other business matters as to enable the Subscriber to utilize the information made available by the Company to evaluate the merits and risks of and to make an informed investment decision with respect to the proposed purchase, which represents a speculative investment. The Subscriber has the authority and is duly and legally qualified to purchase and own the Securities. The Subscriber is able to bear the risk of such investment for an indefinite period and to afford a complete loss thereof. The information set forth on the signature page hereto regarding the Subscriber is accurate. The Subscriber is not required to be registered as a broker-dealer under Section 15 of the Securities Exchange Act of 1934, as amended (the "1934 Act") and the Subscriber is not a broker-dealer. (f) Purchase of Shares and Warrants. On the Closing Date, the Subscriber will purchase the Shares and Warrants as principal for its own account for investment only and not with a view toward, or for resale in connection with, the public sale or any distribution thereof. (g) Compliance with Securities Act. The Subscriber understands and agrees that the Securities have not been registered under the 1933 Act or any applicable state securities laws, by reason of their issuance in a transaction that does not require registration under the 1933 Act (based in part on the accuracy of the representations and warranties of Subscriber contained herein), and that such Securities must be held indefinitely unless a subsequent disposition is registered under the 1933 Act or any applicable state securities laws or is exempt from such registration. In any event, and subject to compliance with applicable securities laws, the Subscriber may enter into lawful hedging transactions with third parties, which may in turn engage in short sales of the Securities in the course of hedging the position they assume and the Subscriber may also enter into short positions or other derivative transactions relating to the Securities, or interests in the Securities, and deliver the Securities, or interests in the Securities, to close out their short or other positions or otherwise settle short sales or other transactions, or loan or pledge the Securities, or interests in the Securities, to third parties that in turn may dispose of these Securities. (h) Shares Legend. The Shares and the Warrant Shares shall bear the following or similar legend: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED." (i) Warrants Legend. The Warrants shall bear the following or similar legend: "THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT OR ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED." (j) Communication of Offer. The offer to sell the Securities was directly communicated to the Subscriber by the Company. At no time was the Subscriber presented with or solicited by any leaflet, newspaper or magazine article, radio or television advertisement, or any other form of general advertising or solicited or invited to attend a promotional meeting. (k) Authority; Enforceability. This Agreement and other agreements delivered together with this Agreement or in connection herewith have been duly authorized, executed and delivered by the Subscriber and are valid and binding agreements enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity; and Subscriber has full corporate power and authority necessary to enter into this Agreement and such other agreements and to perform its obligations hereunder and under all other agreements entered into by the Subscriber relating hereto. (l) Restricted Securities. Subscriber understands that the Securities have not been registered under the 1933 Act and such Subscriber will not sell, offer to sell, assign, pledge, hypothecate or otherwise transfer any of the Securities unless pursuant to an effective registration statement under the 1933 Act. Notwithstanding anything to the contrary contained in this Agreement, such Subscriber may transfer (without restriction and without the need for an opinion of counsel) the Securities to its Affiliates (as defined below) provided that each such Affiliate is an "accredited investor" under Regulation D and such Affiliate agrees to be bound by the terms and conditions of this Agreement. For the purposes of this Agreement, an "Affiliate" of any person or entity means any other person or entity directly or indirectly controlling, controlled by or under direct or indirect common control with such person or entity. For purposes of this definition, "control" means the power to direct the management and policies of such person or firm, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. (m) No Governmental Review. Each Subscriber understands that no United States federal or state agency or any other governmental or state agency has passed on or made recommendations or endorsement of the Securities or the suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities. (n) No Market Manipulation. No Subscriber has taken, and will not take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Securities or affect the price at which the Securities may be issued or resold. (o) No Group Participation. No Subscriber is a member of any group, nor is any Subscriber acting in concert with any other person, including any other Subscriber, with respect to its acquisition of the Securities. (p) Correctness of Representations. Each Subscriber represents as to such Subscriber that the foregoing representations and warranties are true and correct as of the date hereof and, unless a Subscriber otherwise notifies the Company prior to each Closing Date shall be true and correct as of each Closing Date. (q) Survival. The foregoing representations and warranties shall survive the Closing Date for a period of three years. 5. Company Representations and Warranties. Except as set forth in the Disclosure Schedule (attached hereto as Attachment 1) and the Reports, the Company represents and warrants to and agrees with each Subscriber that: (a) Due Incorporation. The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the requisite corporate power to own its properties and to carry on its business as disclosed in the Reports. The Company is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction where the nature of the business conducted or property owned by it makes such qualification necessary, other than those jurisdictions in which the failure to so qualify would not have a Material Adverse Effect. For purpose of this Agreement, a "Material Adverse Effect" shall mean a material adverse effect on the financial condition, results of operations, properties or business of the Company taken as a whole. (b) Outstanding Stock. All issued and outstanding shares of capital stock of the Company has been duly authorized and validly issued and are fully paid and nonassessable. (c) Authority; Enforceability. This Agreement, the Warrants, the Escrow Agreement, and any other agreements delivered together with this Agreement or in connection herewith (collectively "Transaction Documents") have been duly authorized, executed and delivered by the Company and are valid and binding agreements enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity. The Company has full corporate power and authority necessary to enter into and deliver the Transaction Documents and to perform its obligations thereunder. (d) Additional Issuances. There are no outstanding agreements or preemptive or similar rights affecting the Company's common stock or equity and no outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, or agreements or understandings with respect to the sale or issuance of any shares of common stock or equity of the Company or other equity interest in any of the Subsidiaries of the Company except as described on Schedule 5(d). (e) Consents. No consent, approval, authorization or order of any court, governmental agency or body or arbitrator having jurisdiction over the Company, or any of its Affiliates, the Bulletin Board nor the Company's shareholders is required for the execution by the Company of the Transaction Documents and compliance and performance by the Company of its obligations under the Transaction Documents, including, without limitation, the issuance and sale of the Securities. (f) No Violation or Conflict. Assuming the representations and warranties of the Subscribers in Section 4 are true and correct, neither the issuance and sale of the Securities nor the performance of the Company's obligations under this Agreement and all other agreements entered into by the Company relating thereto by the Company will: (i) violate, conflict with, result in a breach of, or constitute a default (or an event which with the giving of notice or the lapse of time or both would be reasonably likely to constitute a default) under (A) the articles or certificate of incorporation, charter or bylaws of the Company, (B) to the Company's knowledge, any decree, judgment, order, law, treaty, rule, regulation or determination applicable to the Company of any court, governmental agency or body, or arbitrator having jurisdiction over the Company or over the properties or assets of the Company or any of its Affiliates, (C) the terms of any bond, debenture, note or any other evidence of indebtedness, or any agreement, stock option or other similar plan, indenture, lease, mortgage, deed of trust or other instrument to which the Company or any of its Affiliates is a party, by which the Company or any of its Affiliates is bound, or to which any of the properties of the Company or any of its Affiliates is subject, or (D) the terms of any "lock-up" or similar provision of any underwriting or similar agreement to which the Company, or any of its Affiliates is a party except, in each case, the violation, conflict, breach, or default of which would not have a Material Adverse Effect; or (ii) except as contemplated hereby, result in the creation or imposition of any lien, charge or encumbrance upon the Securities or any of the assets of the Company or any of its Affiliates; or (iii) result in the activation of any anti-dilution rights or a reset or repricing of any debt or security instrument of any other creditor or equity holder of the Company, nor result in the acceleration of the due date of any obligation of the Company; or (iv) result in the activation of any piggy-back registration rights of any person or entity holding securities of the Company or having the right to receive securities of the Company. (g) The Securities. The Securities upon issuance: (i) are, or will be, free and clear of any security interests, liens, claims or other encumbrances, subject to restrictions upon transfer under the 1933 Act and any applicable state securities laws; (ii) have been, or will be, duly and validly authorized and on the date of issuance of the Shares and upon exercise of the Warrants, the Shares and Warrant Shares will be duly and validly issued, fully paid and nonassessable or if registered pursuant to the 1933 Act, and resold pursuant to an effective registration statement will be free trading and unrestricted); (iii) will not have been issued or sold in violation of any preemptive or other similar rights of the holders of any securities of the Company; (iv) will not subject the holders thereof to personal liability by reason of being such holders; and (v) will not result in a violation of Section 5 under the Act. (h) Litigation. There is no pending or, to the best knowledge of the Company,threatened action, suit, proceeding or investigation before any court, governmental agency or body, or arbitrator having jurisdiction over the Company, or any of its Affiliates that would affect the execution by the Company or the performance by the Company of its obligations under the Transaction Documents. Except as disclosed on the Disclosure Schedule or in the Reports, there is no pending or, to the best knowledge of the Company, basis for or threatened action, suit, proceeding or investigation before any court, governmental agency or body, or arbitrator having jurisdiction over the Company, or any of its Affiliates which litigation if adversely determined would have a Material Adverse Effect. (i) Reporting Company. The Company is a publicly-held company that files periodic and other reports required by Section 15(d) of the 1934 Act. Pursuant to the provisions of the 1934 Act, the Company has timely filed all reports and other materials required to be filed thereunder with the Commission during the preceding twelve months. (j) No Market Manipulation. The Company and its Affiliates have not taken, and will not take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Securities or affect the price at which the Securities may be issued or resold. (k) Information Concerning Company. The Reports contain all material information relating to the Company and its operations and financial condition as of their respective dates which information is required to be disclosed therein. Since the date of the financial statements included in the Reports, and except as modified in the Other Written Information or in the Schedules hereto, there has been no Material Adverse Event relating to the Company's business, financial condition or affairs not disclosed in the Reports. The Reports do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances when made. (l) Stop Transfer. The Company will not issue any stop transfer order or other order impeding the sale, resale or delivery of any of the Securities, except as may be required by any applicable federal or state securities laws and unless contemporaneous notice of such instruction is given to the Subscriber. (m) Defaults. The Company is not in violation of its articles of incorporation or bylaws. The Company is (i) not in default under or in violation of any other material agreement or instrument to which it is a party or by which it or any of its properties are bound or affected, which default or violation would have a Material Adverse Effect, (ii) not in default with respect to any order of any court, arbitrator or governmental body or subject to or party to any order of any court or governmental authority arising out of any action, suit or proceeding under any statute or other law respecting antitrust, monopoly, restraint of trade, unfair competition or similar matters, or (iii) to the Company's knowledge not in violation of any statute, rule or regulation of any governmental authority which violation would have a Material Adverse Effect. (n) No Integrated Offering. Neither the Company, nor any of its Affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offer of the Securities pursuant to this Agreement to be integrated with prior offerings by the Company for purposes of the 1933 Act or any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of the Bulletin Board. Nor will the Company or any of its Affiliates take any action or steps that would cause the offer or issuance of the Securities to be integrated with other offerings. The Company will not conduct any offering other than the transactions contemplated hereby that will be integrated with the offer or issuance of the Securities. (o) No General Solicitation. Neither the Company, nor any of its Affiliates, nor to its knowledge, any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the 1933 Act) in connection with the offer or sale of the Securities. (p) Listing. The Company's common stock is quoted on the Bulletin Board. The Company has not received any oral or written notice that its common stock is not eligible nor will become ineligible for quotation on the OTC Bulletin Board ("Bulletin Board") nor that its common stock does not meet all requirements for the continuation of such quotation and the Company satisfies all the requirements for the continued quotation of its common stock on the Bulletin Board. (q) No Undisclosed Liabilities. The Company has no liabilities or obligations which are material, individually or in the aggregate, which are not disclosed in the Reports and Other Written Information, other than those incurred in the ordinary course of the Company's businesses since April 30, 2004 and which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect, except as disclosed on Schedule 5(q). (r) No Undisclosed Events or Circumstances. Since April 30, 2004, no event or circumstance has occurred or exists with respect to the Company or its businesses, properties, operations or financial condition, that, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed in the Reports. (s) Capitalization. The authorized and outstanding capital stock of the Company as of the date of this Agreement and the Closing Date (not including the Securities) are set forth on Schedule 5(d). Except as set forth on Schedule 5(d), there are no options, warrants, or rights to subscribe to, securities, rights or obligations convertible into or exchangeable for or giving any right to subscribe for any shares of capital stock of the Company or any of its Subsidiaries. All of the outstanding shares of Common Stock of the Company have been duly and validly authorized and issued and are fully paid and nonassessable. (t) Dilution. The Company's executive officers and directors understand the nature of the Securities being sold hereby and recognize that the issuance of the Securities will have a potential dilutive effect on the equity holdings of other holders of the Company's equity or rights to receive equity of the Company. The board of directors of the Company has concluded, in its good faith business judgment that the issuance of the Securities is in the best interests of the Company. The Company specifically acknowledges that its obligation to issue the Warrant Shares upon exercise of the Warrants is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company or parties entitled to receive equity of the Company. (u) No Disagreements with Accountants and Lawyers. There are no disagreements of any kind presently existing, or reasonably anticipated by the Company to arise, between the Company and the accountants and lawyers formerly or presently employed by the Company, including but not limited to disputes or conflicts over payment owed to such accountants and lawyers. (v) DTC Status. The Company's transfer agent is a participant in and the Common Stock is eligible for transfer pursuant to the Depository Trust Company Automated Securities Transfer Program. (w) Investment Company. Neither the Company nor any Affiliate is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (x) Subsidiary Representations. The Company makes each of the representations contained in Sections 5(a), (b), (d), (f), (h), (k), (m), (q) through (s), (u) and (w) of this Agreement, as same relate to each Subsidiary of the Company. For purposes of this Agreement, "Subsidiary" means, with respect to any entity at any date, any corporation, limited or general partnership, limited liability company, trust, estate, association, joint venture or other business entity) of which more than 50% of (i) the outstanding capital stock having (in the absence of contingencies) ordinary voting power to elect a majority of the board of directors or other managing body of such entity, (ii) in the case of a partnership or limited liability company, the interest in the capital or profits of such partnership or limited liability company or (iii) in the case of a trust, estate, association, joint venture or other entity, the beneficial interest in such trust, estate, association or other entity business is, at the time of determination, owned or controlled directly or indirectly through one or more intermediaries, by such entity. All the Company's Subsidiaries as of the Closing Date are set forth on Schedule 5(x) hereto (y) Company Predecessor. All representations made by or relating to the Company of a historical or prospective nature and all undertaking described in Sections 9.1(g) through 9.1(l) shall relate and refer to the Company, its predecessors, and the Subsidiaries. (z) Correctness of Representations. The Company represents that the foregoing representations and warranties are true and correct as of the date hereof in all material respects, and, unless the Company otherwise notifies the Subscribers prior to the Closing Date, shall be true and correct in all material respects as of each Closing Date. (AA) Survival. The foregoing representations and warranties shall survive the Closing Date for a period of three years. 6. Regulation D Offering. The offer and issuance of the Securities to the Subscribers is being made pursuant to the exemption from the registration provisions of the 1933 Act afforded by Section 4(2) or Section 4(6) of the 1933 Act and/or Rule 506 of Regulation D promulgated thereunder. On the Closing Date, the Company will provide an opinion reasonably acceptable to Subscriber from the Company's legal counsel opining on the availability of an exemption from registration under the 1933 Act as it relates to the offer and issuance of the Securities and other matters reasonably requested by Subscribers. A form of the legal opinion is annexed hereto as Exhibit C. The Company will provide, at the Company's expense, such other legal opinions in the future as are reasonably necessary for the issuance and resale of the Shares and Warrant Shares pursuant to an effective registration statement. 7. Escrow Arrangements; Form of Payment. Upon execution hereof by the parties and pursuant to the terms of the Escrow Agreement, each Subscriber agrees to make the deliveries required of such Subscriber as set forth in the Escrow Agreement and the Company agrees to make the deliveries required of the Company as set forth in the Escrow Agreement. 8. Finder/Legal Fees. (a) Finder's Fee. The Company on the one hand, and each Subscriber (for himself only) on the other hand, agree to indemnify the other against and hold the other harmless from any and all liabilities to any persons claiming brokerage commissions or finder's fees other than the finders identified on Schedule 8 hereto (each a "Finder") on account of services purported to have been rendered on behalf of the indemnifying party in connection with this Agreement or the transactions contemplated hereby and arising out of such party's actions. The Company agrees that it will pay the Finders, in the aggregate, on the Closing Date a cash finder's fee of ten percent (10%) of the Purchase Price ("Finder's Fees") as described on Schedule 8 hereto directly out of the funds held pursuant to the Escrow Agreement. The Company represents that there are no other parties entitled to receive fees, commissions, or similar payments in connection with the Offering except the Finders. (b) Finder's Warrants. On the Closing Date, the Company will issue to the Finders Warrants similar to and carrying the same rights as the A Warrants issuable to the Subscribers ("Finder's Warrants"). The Finders will receive, in the aggregate, one Finder's Warrant for each ten (10) Shares issuable to the Subscribers on the Closing Date. All the representations, covenants, warranties, undertakings, remedies, liquidated damages, indemnification, and other rights including but not limited to reservation requirements and registration rights made or granted to or for the benefit of the Subscribers are hereby also made and granted to the Finders in respect of the Finder's Warrants. (c) Legal Fees. The Company shall pay to Grushko & Mittman, P.C., a fee of $15,000 ("Legal Fees") (of which $7,500 has been paid) as reimbursement for services rendered to the Subscribers in connection with this Agreement and the purchase and sale of the Shares and Warrants (the "Offering") and acting as Escrow Agent for the Offering. The Legal Fees will be payable out of funds held pursuant to the Escrow Agreement. 9.1. Covenants of the Company. The Company covenants and agrees with the Subscribers as follows: (a) Stop Orders. The Company will advise the Subscribers, promptly after it receives notice of issuance by the Commission, any state securities commission or any other regulatory authority of any stop order or of any order preventing or suspending any offering of any securities of the Company, or of the suspension of the qualification of the Common Stock of the Company for offering or sale in any jurisdiction, or the initiation of any proceeding for any such purpose. (b) Listing. The Company shall promptly secure the listing of the Shares and the Warrant Shares upon each national securities exchange, or electronic or automated quotation system upon which they are or become eligible for listing and shall maintain such listing so long as any Shares or Warrants are outstanding. The Company will maintain the listing of its Common Stock on the American Stock Exchange, Nasdaq SmallCap Market, Nasdaq National Market System, Bulletin Board, or New York Stock Exchange (whichever of the foregoing is at the time the principal trading exchange or market for the Common Stock (the "Principal Market")), and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the Principal Market, as applicable. The Company will provide the Subscribers copies of all notices it receives notifying the Company of the threatened and actual delisting of the Common Stock from any Principal Market. As of the date of this Agreement and the Closing Date, the Bulletin Board is and will be the Principal Market. (c) Market Regulations. The Company shall notify the Commission, the Principal Market and applicable state authorities, in accordance with their requirements, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Securities to the Subscribers and promptly provide copies thereof to Subscriber. (d) Filing Requirements. From the date of this Agreement and until the sooner of (i) three (3) years after the Closing Date, or (ii) until all the Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitation, the Company will (A) cause its Common Stock to continue to be subject to the reporting obligations of Section 15(d), 12(b) or 12(g) of the 1934 Act, (B) comply in all respects with its reporting and filing obligations under the 1934 Act, (C) comply with all reporting requirements that are applicable to an issuer subject to Section 15(d) of the 1934 Act, or, if a class of its securities is registered under Section 12(b) or 12(g) of the 1934 Act, to all reporting requirements that are applicable to an issuer with a class of shares registered pursuant to Section 12(b) or 12(g) of the 1934 Act, as applicable, and (D) comply with all requirements related to any registration statement filed pursuant to this Agreement. The Company will use its best efforts not to take any action or file any document (whether or not permitted by the 1933 Act or the 1934 Act or the rules thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said acts until three (3) years after the Closing Date. Until the earlier of the resale of the Common Stock and the Warrant Shares by each Subscriber or three (3) years after the Warrants have been exercised, the Company will use its best efforts to continue the listing or quotation of the Common Stock on a Principal Market and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the Principal Market. The Company agrees to timely file a Form D with respect to the Securities if required under Regulation D and to provide a copy thereof to each Subscriber promptly after such filing. (e) Use of Proceeds. The proceeds of the Offering will be employed by the Company for the purposes set forth on Schedule 9.1(e) hereto. Except as set forth on Schedule 9.1(e), the Purchase Price may not and will not be used for accrued and unpaid officer and director salaries, payment of financing related debt, redemption of outstanding notes or equity instruments of the Company nor non-trade obligations outstanding on a Closing Date. (f) Reservation. Prior to the Closing Date, the Company undertakes to reserve, pro rata, on behalf of each holder of Shares or Warrants, from its authorized but unissued common stock, a number of common shares equal to the Shares and Warrant Shares issuable upon exercise of the Warrants. Failure to have sufficient shares reserved pursuant to this Section 9.1(f) for three (3) consecutive business days or ten (10) days in the aggregate shall be a material default of the Company's obligations under this Agreement. (g) Taxes. From the date of this Agreement and until the sooner of (i) three (3) years after the Closing Date, or (ii) until all the Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitations, the Company will promptly pay and discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon the income, profits, property or business of the Company; provided, however, that any such tax, assessment, charge or levy need not be paid if the validity thereof shall currently be contested in good faith by appropriate proceedings and if the Company shall have set aside on its books adequate reserves with respect thereto, and provided, further, that the Company will pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefore. (h) Insurance. From the date of this Agreement and until the sooner of (i) three (3) years after the Closing Date, or (ii) until all the Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitations, the Company will keep its assets which are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire, explosion and other risks customarily insured against by companies in the Company's line of business, in amounts sufficient to prevent the Company from becoming a co-insurer and not in any event less than one hundred percent (100%) of the insurable value of the property insured; and the Company will maintain, with financially sound and reputable insurers, insurance against other hazards and risks and liability to persons and property to the extent and in the manner customary for companies in similar businesses similarly situated and to the extent available on commercially reasonable terms. (i) Books and Records. From the date of this Agreement and until the sooner of (i) three (3) years after the Closing Date, or (ii) until all the Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitations, the Company will keep true records and books of account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and affairs in accordance with generally accepted accounting principles applied on a consistent basis. (j) Governmental Authorities. From the date of this Agreement and until the sooner of (i) three (3) years after the Closing Date, or (ii) until all the Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitations, the Company shall duly observe and conform in all material respects to all valid requirements of governmental authorities relating to the conduct of its business or to its properties or assets. (k) Intellectual Property. From the date of this Agreement and until the sooner of (i) three (3) years after the Closing Date, or (ii) until all the Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitations, the Company shall maintain in full force and effect its corporate existence, rights and franchises and all licenses and other rights to use intellectual property owned or possessed by it and reasonably deemed to be necessary to the conduct of its business. (l) Properties. From the date of this Agreement and until the sooner of (i) three (3) years after the Closing Date, or (ii) until all the Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement (as defined in Section 11.1(iv) hereof) or pursuant to Rule 144, without regard to volume limitations, the Company will keep its properties in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all necessary and proper repairs, renewals, replacements, additions and improvements thereto; and the Company will at all times comply with each provision of all leases to which it is a party or under which it occupies property if the breach of such provision could reasonably be expected to have a Material Adverse Effect. (m) Confidentiality/Public Announcement. From the date of this Agreement and until the sooner of (i) three (3) years after the Closing Date, or (ii) until all the Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitations, the Company agrees that except in connection with a Form 8-K or the Registration Statement, it will not disclose publicly or privately the identity of the Subscribers unless expressly agreed to in writing by a Subscriber or only to the extent required by law and then only upon five days prior notice to Subscriber. In any event and subject to the foregoing, the Company shall file a Form 8-K or make a public announcement describing the Offering not later than the first business day after the Closing Date. In the Form 8-K or public announcement, the Company will specifically disclose the amount of common stock outstanding immediately after the Closing. A form of the proposed Form 8-K or public announcement to be employed in connection with the Offering is annexed hereto as Exhibit D. (n) Further Registration Statements. Except for a registration statement filed on behalf of the Subscribers pursuant to Section 11 of this Agreement the Company will not file any registration statements or amend any already filed registration statement with the Commission or with state regulatory authorities without the consent of the Subscriber until the sooner of (i) the Registration Statement shall have been current and available for use in connection with the public resale of the Shares and Warrant Shares for 365 days or (ii) until all the Shares have been resold or transferred by the Subscribers pursuant to the Registration Statement or Rule 144, without regard to volume limitations ("Exclusion Period"). The Exclusion Period will be tolled during the pendency of a Non-Registration Event as defined in Section 11.4 hereof. With respect to Form S-8, the Exclusion Period shall be determined only pursuant to Section 9(n)(ii) above. (o) Non-Public Information. The Company covenants and agrees that neither it nor any other person acting on its behalf will provide any Subscriber or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto such Subscriber shall have agreed in writing to receive such information. The Company understands and confirms that each Subscriber shall be relying on the foregoing representations in effecting transactions in securities of the Company. 10. Covenants of the Company and Subscriber Regarding Indemnification. (a) The Company agrees to indemnify, hold harmless, reimburse and defend the Subscribers, the Subscribers' officers, directors, agents, Affiliates, control persons, and principal shareholders, against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Subscriber or any such person which results, arises out of or is based upon (i) any material misrepresentation by Company or breach of any warranty by Company in this Agreement or in any Exhibits or Schedules attached hereto, or other agreement delivered pursuant hereto; or (ii) after any applicable notice and/or cure periods, any breach or default in performance by the Company of any material covenant or undertaking to be performed by the Company hereunder, or any other agreement entered into by the Company and Subscriber relating hereto. (b) Each Subscriber agrees to indemnify, hold harmless, reimburse and defend the Company and each of the Company's officers, directors, agents, Affiliates, control persons against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Company or any such person which results, arises out of or is based upon (i) any material misrepresentation by such Subscriber in this Agreement or in any Exhibits or Schedules attached hereto, or other agreement delivered pursuant hereto; or (ii) after any applicable notice and/or cure periods, any breach or default in performance by such Subscriber of any covenant or undertaking to be performed by such Subscriber hereunder, or any other agreement entered into by the Company and Subscribers, relating hereto. (c) In no event shall the liability of any Subscriber or permitted successor hereunder or under any Transaction Document or other agreement delivered in connection herewith be greater in amount than the dollar amount of the net proceeds actually received by such Subscriber upon the sale of Registrable Securities (as defined herein). (d) The procedures set forth in Section 11.6 shall apply to the indemnification set forth in Sections 10(a) and 10(b) above. 11.1. Registration Rights. The Company hereby grants the following registration rights to holders of the Securities. (i) On one occasion, for a period commencing ninety-one (91) days after the Closing Date, but not later than two (2) years after the Closing Date ("Request Date"), upon a written request therefor from any record holder or holders of more than 50% of the Shares and Warrant Shares actually issued upon exercise of the Warrants, the Company shall prepare and file with the Commission a registration statement under the 1933 Act registering the Shares and Warrant Shares issuable upon exercise of the Warrants and Warrant Shares issuable upon exercise of the Finder's Warrants (collectively "Registrable Securities") which are the subject of such request for unrestricted public resale by the holder thereof. For purposes of Sections 11.1(i) and 11.1(ii), Registrable Securities shall not include Securities (A) which are registered for resale in an effective registration statement, (B) included for registration in a pending registration statement, or (C) which have been issued without further transfer restrictions after a sale or transfer pursuant to Rule 144 under the 1933 Act. Upon the receipt of such request, the Company shall promptly give written notice to all other record holders of the Registrable Securities that such registration statement is to be filed and shall include in such registration statement Registrable Securities for which it has received written requests within ten (10) days after the Company gives such written notice. Such other requesting record holders shall be deemed to have exercised their demand registration right under this Section 11.1(i). (ii) If the Company at any time proposes to register any of its securities under the 1933 Act for sale to the public, whether for its own account or for the account of other security holders or both, except with respect to registration statements on Forms S-4, S-8 or another form not available for registering the Registrable Securities for sale to the public, provided the Registrable Securities are not otherwise registered for resale by the Subscribers or Holder pursuant to an effective registration statement, each such time it will give at least fifteen (15) days' prior written notice to the record holder of the Registrable Securities of its intention so to do. Upon the written request of the holder, received by the Company within ten (10) days after the giving of any such notice by the Company, to register any of the Registrable Securities not previously registered, the Company will cause such Registrable Securities as to which registration shall have been so requested to be included with the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent required to permit the sale or other disposition of the Registrable Securities so registered by the holder of such Registrable Securities (the "Seller" or "Sellers"). In the event that any registration pursuant to this Section 11.1(ii) shall be, in whole or in part, an underwritten public offering of common stock of the Company, the number of shares of Registrable Securities to be included in such an underwriting may be reduced by the managing underwriter if and to the extent that the Company and the underwriter shall reasonably be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein; provided, however, that the Company shall notify the Seller in writing of any such reduction. Notwithstanding the foregoing provisions, or Section 11.4 hereof, the Company may withdraw or delay or suffer a delay of any registration statement referred to in this Section 11.1(ii) without thereby incurring any liability to the Seller. (iii) If, at the time any written request for registration is received by the Company pursuant to Section 11.1(i), the Company has determined to proceed with the actual preparation and filing of a registration statement under the 1933 Act in connection with the proposed offer and sale for cash of any of its securities for the Company's own account and the Company actually does file such other registration statement, such written request shall be deemed to have been given pursuant to Section 11.1(ii) rather than Section 11.1(i), and the rights of the holders of Registrable Securities covered by such written request shall be governed by Section 11.1(ii). (iv) The Company shall file with the Commission a Form SB-2 registration statement (the "Registration Statement") (or such other form that it is eligible to use) in order to register the Registrable Securities for resale and distribution under the 1933 Act not later than forty-five (45) days after the Closing Date (the "Filing Date"), and cause to be declared effective not later than one hundred and eighty (180) days after the Closing Date (the "Effective Date"). The Company will register not less than a number of shares of common stock in the aforedescribed registration statement that is equal to the Shares and Warrant Shares issuable pursuant to this Agreement upon exercise of the Warrants. The Registrable Securities shall be reserved and set aside exclusively for the benefit of each Subscriber and Warrant holder, pro rata, and not issued, employed or reserved for anyone other than each such Subscriber and Warrant holder. The Registration Statement will immediately be amended or additional registration statements will be immediately filed by the Company as necessary to register additional shares of Common Stock to allow the public resale of all Common Stock included in and issuable by virtue of the Registrable Securities. Without the written consent of the Subscriber, no securities of the Company other than the Registrable Securities will be included in the Registration Statement, except as described on Schedule 11.1. 11.2. Registration Procedures. If and whenever the Company is required by the provisions of Section 11.1(i), 11.1(ii), or (iv) to effect the registration of any Registrable Securities under the 1933 Act, the Company will, as expeditiously as possible: (a) subject to the timelines provided in this Agreement, prepare and file with the Commission a registration statement required by Section 11, with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as herein provided), promptly provide to the holders of the Registrable Securities copies of all filings and Commission letters of comment and notify Subscribers (by telecopier and by e-mail addresses provided by Subscribers) and Grushko & Mittman, P.C. (by telecopier and by email to Counslers@aol.com) on or before 6:00 PM EST on the first business day following the day the Company receives notice that (i) the Commission has no comments or no further comments on the Registration Statement, and (ii) the registration statement has been declared effective (failure to timely provide notice as required by this Section 11.2(a) shall be a material breach of the Company's obligation and a Non-Registration Event as defined in Section 11.4 of this Agreement); (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective until such registration statement has been effective for a period of three (3) years, and comply with the provisions of the 1933 Act with respect to the disposition of all of the Registrable Securities covered by such registration statement in accordance with the Sellers' intended method of disposition set forth in such registration statement for such period; (c) furnish to the Sellers, at the Company's expense, such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as such persons reasonably may request in order to facilitate the public sale or their disposition of the securities covered by such registration statement; (d) use its commercially reasonable best efforts to register or qualify the Registrable Securities covered by such registration statement under the securities or "blue sky" laws of New York and such jurisdictions as the Sellers shall request in writing, provided, however, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction; (e) if applicable, list the Registrable Securities covered by such registration statement with any securities exchange on which the Common Stock of the Company is then listed; (f) immediately notify the Sellers when a prospectus relating thereto is required to be delivered under the 1933 Act, of the happening of any event of which the Company has knowledge as a result of which the prospectus contained in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; and (g) provided same would not be in violation of the provision of Regulation FD under the 1934 Act, make available for inspection by the Sellers, and any attorney, accountant or other agent retained by the Seller or underwriter, all publicly available, non-confidential financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all publicly available, non-confidential information reasonably requested by the seller, attorney, accountant or agent in connection with such registration statement. 11.3. Provision of Documents. In connection with each registration described in this Section 11, each Seller will furnish to the Company in writing such information and representation letters with respect to itself and the proposed distribution by it as reasonably shall be necessary in order to assure compliance with federal and applicable state securities laws. 11.4. Non-Registration Events. The Company and the Subscribers agree that the Sellers will suffer damages if the Registration Statement is not filed by the Filing Date and not declared effective by the Commission by the Effective Date, and any registration statement required under Section 11.1(i) or 11.1(ii) is not filed within 60 days after written request and declared effective by the Commission within 120 days after such request, and maintained in the manner and within the time periods contemplated by Section 11 hereof, and it would not be feasible to ascertain the extent of such damages with precision. Accordingly, if (A) the Registration Statement is not filed on or before the Filing Date, (B) is not declared effective on or before the Effective Date, (C) the Registration Statement is not declared effective within three (3) business days after receipt by the Company or its attorneys of a written or oral communication from the Commission that the Registration Statement will not be reviewed or that the Commission has no further comments, (D) if the registration statement described in Sections 11.1(i) or 11.1(ii) is not filed within 60 days after such written request, or is not declared effective within 120 days after such written request, or (E) any registration statement described in Sections 11.1(i), 11.1(ii) or 11.1(iv) is filed and declared effective but shall thereafter cease to be effective for a period of time which shall exceed 30 days in the aggregate per year (defined as a period of 365 days commencing on the date the Registration Statement is declared effective) or more than 20 consecutive days (each such event referred to in clauses A through E of this Section 11.4 is referred to herein as a "Non-Registration Event"), then the Company shall deliver to the holder of Registrable Securities, as Liquidated Damages, an amount equal to two percent (2%) for each thirty (30) days or part thereof, thereafter of the Purchase Price of the Shares owned of record by such holder which are subject to such Non-Registration Event. The Company must pay the Liquidated Damages in cash. The Liquidated Damages must be paid within ten (10) days after the end of each thirty (30) day period or shorter part thereof for which Liquidated Damages are payable. In the event a Registration Statement is filed by the Filing Date but is withdrawn prior to being declared effective by the Commission, then such Registration Statement will be deemed to have not been filed. All oral or written comments received from the Commission relating to the Registration Statement must be satisfactorily responded to within ten (10) business days after receipt of comments from the Commission. Failure to timely respond to Commission comments is a Non-Registration Event for which Liquidated Damages shall accrue and be payable by the Company to the holders of Registrable Securities at the same rate set forth above. Notwithstanding the foregoing, the Company shall not be liable to the Subscriber under this Section 11.4 for any events or delays occurring as a consequence of the acts or omissions of the Subscribers contrary to the obligations undertaken by Subscribers in this Agreement. Liquidated Damages will not accrue nor be payable pursuant to this Section 11.4 nor will a Non-Registration Event be deemed to have occurred for times during which Registrable Securities are transferable by the holder of Registrable Securities pursuant to Rule 144(k) under the 1933 Act. 11.5. Expenses. All expenses incurred by the Company in complying with Section 11, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including reasonable counsel fees) incurred in connection with complying with state securities or "blue sky" laws, fees of the National Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents and registrars, costs of insurance and fee of one counsel for all Sellers are called "Registration Expenses." All underwriting discounts and selling commissions applicable to the sale of Registrable Securities, including any fees and disbursements of one counsel to the Seller, are called "Selling Expenses." The Company will pay all Registration Expenses in connection with the registration statement under Section 11. Selling Expenses in connection with each registration statement under Section 11 shall be borne by the Seller and may be apportioned among the Sellers in proportion to the number of shares sold by the Seller relative to the number of shares sold under such registration statement or as all Sellers thereunder may agree. 11.6. Indemnification and Contribution. (a) In the event of a registration of any Registrable Securities under the 1933 Act pursuant to Section 11, the Company will, to the extent permitted by law, indemnify and hold harmless the Seller, each officer of the Seller, each director of the Seller, each underwriter of such Registrable Securities thereunder and each other person, if any, who controls such Seller or underwriter within the meaning of the 1933 Act, against any losses, claims, damages or liabilities, joint or several, to which the Seller, or such underwriter or controlling person may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities was registered under the 1933 Act pursuant to Section 11, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances when made, and will subject to the provisions of Section 11.6(c) reimburse the Seller, each such underwriter and each such controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable to the Seller to the extent that any such damages arise out of or are based upon an untrue statement or omission made in any preliminary prospectus if (i) the Seller failed to send or deliver a copy of the final prospectus delivered by the Company to the Seller with or prior to the delivery of written confirmation of the sale by the Seller to the person asserting the claim from which such damages arise, (ii) the final prospectus would have corrected such untrue statement or alleged untrue statement or such omission or alleged omission, or (iii) to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by any such Seller, or any such controlling person in writing specifically for use in such registration statement or prospectus. (b) In the event of a registration of any of the Registrable Securities under the 1933 Act pursuant to Section 11, each Seller severally but not jointly will, to the extent permitted by law, indemnify and hold harmless the Company, and each person, if any, who controls the Company within the meaning of the 1933 Act, each officer of the Company who signs the registration statement, each director of the Company, each underwriter and each person who controls any underwriter within the meaning of the 1933 Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such officer, director, underwriter or controlling person may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Registrable Securities were registered under the 1933 Act pursuant to Section 11, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such officer, director, underwriter and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the Seller will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to such Seller, as such, furnished in writing to the Company by such Seller specifically for use in such registration statement or prospectus, and provided, further, however, that the liability of the Seller hereunder shall be limited to the net proceeds actually received by the Seller from the sale of Registrable Securities covered by such registration statement. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this Section 11.6(c) and shall only relieve it from any liability which it may have to such indemnified party under this Section 11.6(c), except and only if and to the extent the indemnifying party is prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 11.6(c) for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected, provided, however, that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified parties, as a group, shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. (d) In order to provide for just and equitable contribution in the event of joint liability under the 1933 Act in any case in which either (i) a Seller, or any controlling person of a Seller, makes a claim for indemnification pursuant to this Section 11.6 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 11.6 provides for indemnification in such case, or (ii) contribution under the 1933 Act may be required on the part of the Seller or controlling person of the Seller in circumstances for which indemnification is not provided under this Section 11.6; then, and in each such case, the Company and the Seller will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Seller is responsible only for the portion represented by the percentage that the public offering price of its securities offered by the registration statement bears to the public offering price of all securities offered by such registration statement, provided, however, that, in any such case, (y) the Seller will not be required to contribute any amount in excess of the public offering price of all such securities sold by it pursuant to such registration statement; and (z) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 11.7. Delivery of Unlegended Shares. (a) Within three (3) business days (such third business day being the "Unlegended Shares Delivery Date") after the business day on which the Company has received (i) a notice that Shares or Warrant Shares have been sold pursuant to the Registration Statement or Rule 144 under the 1933 Act, (ii) a representation that the prospectus delivery requirements, or the requirements of Rule 144, as applicable and if required, have been satisfied, and (iii) the original share certificates representing the shares of Common Stock that have been sold, and (iv) in the case of sales under Rule 144, customary representation letters of the Subscriber and/or Subscriber's broker regarding compliance with the requirements of Rule 144, the Company at its expense, (y) shall deliver, and shall cause legal counsel selected by the Company to deliver to its transfer agent (with copies to Subscriber) an appropriate instruction and opinion of such counsel, directing the delivery of shares of Common Stock without any legends including the legend set forth in Section 4(h) above, reissuable pursuant to any effective and current Registration Statement described in Section 11 of this Agreement or pursuant to Rule 144 under the 1933 Act (the "Unlegended Shares"); and (z) cause the transmission of the certificates representing the Unlegended Shares together with a legended certificate representing the balance of the submitted Shares certificate, if any, to the Subscriber at the address specified in the notice of sale, via express courier, by electronic transfer or otherwise on or before the Unlegended Shares Delivery Date. Transfer fees shall be the responsibility of the Seller. (b) In lieu of delivering physical certificates representing the Unlegended Shares, if the Company's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program, upon request of a Subscriber, so long as the certificates therefor do not bear a legend and the Subscriber is not obligated to return such certificate for the placement of a legend thereon, the Company shall cause its transfer agent to electronically transmit the Unlegended Shares by crediting the account of Subscriber's prime Broker with DTC through its Deposit Withdrawal Agent Commission system. Such delivery must be made on or before the Unlegended Shares Delivery Date. (c) The Company understands that a delay in the delivery of the Unlegended Shares pursuant to Section 11 hereof later than two business days after the Unlegended Shares Delivery Date could result in economic loss to a Subscriber. As compensation to a Subscriber for such loss, the Company agrees to pay late payment fees (as liquidated damages and not as a penalty) to the Subscriber for late delivery of Unlegended Shares in the amount of $100 per business day after the Delivery Date for each $10,000 of purchase price of the Unlegended Shares subject to the delivery default. If during any 360 day period, the Company fails to deliver Unlegended Shares as required by this Section 11.7 for an aggregate of thirty (30) days, then each Subscriber or assignee holding Securities subject to such default may, at its option, require the Company to redeem all or any portion of the Shares and Warrant Shares subject to such default at a price per share equal to 120% of the Purchase Price of such Common Stock and Warrant Shares ("Unlegended Redemption Amount"). The amount of the aforedescribed liquidated damages that have accrued or have been paid for the twenty day period prior to the receipt by the Subscriber of the Unlegended Redemption Amount shall be credited against the Unlegended Redemption Amount. The Company shall pay any payments incurred under this Section in immediately available funds upon demand. (d) In addition to any other rights available to a Subscriber, if the Company fails to deliver to a Subscriber Unlegended Shares as required pursuant to this Agreement, within seven (7) business days after the Unlegended Shares Delivery Date and the Subscriber purchases (in an open market transaction or otherwise) shares of common stock to deliver in satisfaction of a sale by such Subscriber of the shares of Common Stock which the Subscriber was entitled to receive from the Company (a "Buy-In"), then the Company shall pay in cash to the Subscriber (in addition to any remedies available to or elected by the Subscriber) the amount by which (A) the Subscriber's total purchase price (including brokerage commissions, if any) for the shares of common stock so purchased exceeds (B) the aggregate purchase price of the shares of Common Stock delivered to the Company for reissuance as Unlegended Shares together with interest thereon at a rate of 15% per annum, accruing until such amount and any accrued interest thereon is paid in full (which amount shall be paid as liquidated damages and not as a penalty). For example, if a Subscriber purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to $10,000 of purchase price of shares of Common Stock delivered to the Company for reissuance as Unlegended Shares, the Company shall be required to pay the Subscriber $1,000, plus interest. The Subscriber shall provide the Company written notice indicating the amounts payable to the Subscriber in respect of the Buy-In. (e) In the event a Subscriber shall request delivery of Unlegended Shares as described in Section 11.7 and the Company is required to deliver such Unlegended Shares pursuant to Section 11.7, the Company may not refuse to deliver Unlegended Shares based on any claim that such Subscriber or any one associated or affiliated with such Subscriber has been engaged in any violation of law, or for any other reason, unless, an injunction or temporary restraining order from a court, on notice, restraining and or enjoining delivery of such Unlegended Shares or exercise of all or part of said Warrant shall have been sought and obtained and the Company has posted a surety bond for the benefit of such Subscriber in the amount of 120% of the amount of the aggregate purchase price of the Common Stock and Warrant Shares which are subject to the injunction or temporary restraining order, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such Subscriber to the extent Subscriber obtains judgment in Subscriber's favor. 12. (a) Right of First Refusal. Until the end of the Exclusion Period, the Subscribers shall be given not less than seven (7) business days prior written notice of any proposed sale by the Company of its common stock, other equity securities, obligations convertible or exercisable for equity securities or debt obligations, except in connection with (i) full or partial consideration in connection with a strategic merger, consolidation or purchase of substantially all of the securities or assets of corporation or other entity, and (ii) the Company's issuance of securities in connection with strategic license agreements and other partnering arrangements so long as such issuances are not for the purpose of raising capital, (iii) the Company's issuance of Common Stock or the issuance or grants of options to purchase Common Stock pursuant to the Company's stock option plans and employee stock purchase plans as they now exist, copies of which such plans have been delivered to the Subscribers or are filed with the Reports or as may be adopted which will allow the issuance of no more than 5,000,000 shares of Common Stock, (iv) as a result of the exercise of Warrants which are granted or issued pursuant to this Agreement, (v) in the aggregate, including the Offering, a maximum of 9,000,000 shares of Common Stock and 13,500,000 common stock purchase warrants at the same issue and exercise prices payable by the Subscribers herein and having the same anti-dilution and adjustment rights as granted to the Subscribers herein, and (vi) as has been described in this Agreement or in the Reports or Other Written Information filed with the Commission or delivered to the Subscribers prior to the Closing Date (collectively the foregoing are "Excepted Issuances"). The Subscribers who exercise their rights pursuant to this Section 12(a) shall have the right during the seven (7) business days following receipt of the notice to purchase such offered common stock, debt or other securities in accordance with the terms and conditions set forth in the notice of sale in the same proportion to each other as their purchase of Shares in the Offering. In the event such terms and conditions are modified during the notice period, the Subscribers shall be given prompt notice of such modification and shall have the right during the seven (7) business days following the notice of modification, whichever is longer, to exercise such right. (b) Offering Restrictions. Until the end of the Exclusion Period, or during the pendency of a Non-Registration Event, or when any compensation or liquidated damages are accruing or are outstanding other than the Excepted Issuances, the Company will not enter into an agreement to nor issue any equity, convertible debt or other securities convertible into common stock or equity of the Company nor modify any of the foregoing which may be outstanding at anytime, without the prior written consent of the Subscriber, which consent may be withheld for any reason. Until the end of the Exclusion Period, the Company will not enter into any equity line of credit or similar agreement, nor issue or agree to issue any floating or variable priced equity linked instruments nor any of the foregoing or equity with price reset rights. (c) Favored Nations Provision. Other than the Excepted Issuances, if at any time Shares are held by a Subscriber, the Company shall offer, issue or agree to issue any common stock or securities convertible into or exercisable for shares of Common Stock (or modify any of the foregoing which may be outstanding) to any person or entity at a price per common share or exercise price per common share which shall be less than the per Share Purchase Price in respect of the Shares, or if less than the Warrant exercise price in respect of the Warrant Shares, without the consent of each Subscriber holding Shares, Warrants, or Warrant Shares, then the Company shall issue, for each such occasion, additional shares of Common Stock to each Subscriber so that the average per share purchase price of the shares of Common Stock issued to the Subscriber (of only the Common Stock or Warrant Shares still owned by the Subscriber) is equal to such other lower price per share and the Warrant Exercise Price shall automatically be reduced to such other lower price per share. The average Purchase Price of the Shares and average exercise price in relation to the Warrant Shares shall be calculated separately for the Shares and Warrant Shares. The delivery to the Subscriber of the additional shares of Common Stock shall be not later than the closing date of the transaction giving rise to the requirement to issue additional shares of Common Stock. The Subscriber is granted the registration rights described in Section 11 hereof in relation to such additional shares of Common Stock except that the Filing Date and Effective Date vis-a-vis such additional common shares shall be, respectively, theforty-fifth (45th) and ninetieth (90th) date after the closing date giving rise to the requirement to issue the additional shares of Common Stock. For purposes of the issuance and adjustment described in this paragraph, the issuance of any security of the Company carrying the right to convert such security into shares of Common Stock or of any warrant, right or option to purchase Common Stock shall result in the issuance of the additional shares of Common Stock upon the sooner of the agreement to or actual issuance of such convertible security, warrant, right or option and again at any time upon any subsequent issuances of shares of Common Stock upon exercise of such conversion or purchase rights if such issuance is at a price lower than the per Share Purchase Price or Warrant exercise price in effect upon such issuance. The rights of the Subscriber set forth in this Section 12 are in addition to any other rights the Subscriber has pursuant to this Agreement, any Transaction Document, and any other agreement referred to or entered into in connection herewith. (d) Option Plan Restrictions. The only officer, director, employee and consultant stock option or stock incentive plan currently in effect or contemplated by the Company has been submitted to the Subscribers or filed with the Reports. No other plan will be adopted nor may any options or equity not included in such plan be issued until the end of the Exclusion Period except as included in the Excepted Issuances. (e) Maximum Exercise of Rights. In the event the exercise of the rights described in Sections 12(a) and 12(c) would result in the issuance of an amount of common stock of the Company that would exceed the maximum amount that may be issued to a Subscriber calculated in the manner described in Section 10 of the Class A Warrant, then the issuance of such additional shares of Common Stock of the Company to such Subscriber will be deferred in whole or in part until such time as such Subscriber is able to beneficially own such common stock without exceeding the maximum amount set forth calculated in the manner described in Section 10 of the Class A Warrant. The determination of when such common stock may be issued shall be made by each Subscriber as to only such Subscriber. 13. Miscellaneous. (a) Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: (i) if to the Company, to: Sunwin International Neutraceuticals, Inc., 6 Youpeng Road, Qufu, Shandong, China 273100, Attn: Dongdong Lin, CEO, telecopier number: 011-86-537-441-3350, with a copy by telecopier only to: Steven I. Weinberger, Esq., Schneider Weinberger & Beilly LLP, 2200 Corporate Blvd., NW, Suite 210, Boca Raton, FL 33431, telecopier number: (561) 362-9612, and (ii) if to the Subscribers, to: the one or more addresses and telecopier numbers indicated on the signature pages hereto, with an additional copy by telecopier only to: Grushko & Mittman, P.C., 551 Fifth Avenue, Suite 1601, New York, New York 10176, telecopier number: (212) 697-3575. (b) Nothing contained herein or in any document referred to herein or delivered in connection herewith shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest or dividends required to be paid or other charges hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Company to the Subscriber and thus refunded to the Company. (c) Entire Agreement; Assignment. This Agreement and other documents delivered in connection herewith represent the entire agreement between the parties hereto with respect to the subject matter hereof and may be amended only by a writing executed by both parties. Neither the Company nor the Subscribers have relied on any representations not contained or referred to in this Agreement and the documents delivered herewith. No right or obligation of the Company shall be assigned without prior notice to and the written consent of the Subscribers. (d) Counterparts/Execution. This Agreement may be executed in any number of counterparts and by the different signatories hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. This Agreement may be executed by facsimile signature and delivered by facsimile transmission. (e) Law Governing this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of laws principles that would result in the application of the substantive laws of another jurisdiction. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of New York or in the federal courts located in the state of New York. The parties and the individuals executing this Agreement and other agreements referred to herein or delivered in connection herewith on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. (f) Specific Enforcement, Consent to Jurisdiction. The Company and Subscriber acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to one or more preliminary and final injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which any of them may be entitled by law or equity. Subject to Section 13(e) hereof, each of the Company, Subscriber and any signator hereto in his personal capacity hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction in New York of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. Nothing in this Section shall affect or limit any right to serve process in any other manner permitted by law. (g) Independent Nature of Subscribers. The Company acknowledges that the obligations of each Subscriber under the Transaction Documents are several and not joint with the obligations of any other Subscriber, and no Subscriber shall be responsible in any way for the performance of the obligations of any other Subscriber under the Transaction Documents. The Company acknowledges that each Subscriber has represented that the decision of each Subscriber to purchase Securities has been made by such Subscriber independently of any other Subscriber and independently of any information, materials, statements or opinions as to the business, affairs, operations, assets, properties, liabilities, results of operations, condition (financial or otherwise) or prospects of the Company which may have been made or given by any other Subscriber or by any agent or employee of any other Subscriber, and no Subscriber or any of its agents or employees shall have any liability to any Subscriber (or any other person) relating to or arising from any such information, materials, statements or opinions. The Company acknowledges that nothing contained in any Transaction Document, and no action taken by any Subscriber pursuant hereto or thereto (including, but not limited to, the (i) inclusion of a Subscriber in the Registration Statement and (ii) review by, and consent to, such Registration Statement by a Subscriber) shall be deemed to constitute the Subscribers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Subscribers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. The Company acknowledges that each Subscriber shall be entitled to independently protect and enforce its rights, including without limitation, the rights arising out of the Transaction Documents, and it shall not be necessary for any other Subscriber to be joined as an additional party in any proceeding for such purpose. The Company acknowledges that it has elected to provide all Subscribers with the same terms and Transaction Documents for the convenience of the Company and not because Company was required or requested to do so by the Subscribers. The Company acknowledges that such procedure with respect to the Transaction Documents in no way creates a presumption that the Subscribers are in any way acting in concert or as a group with respect to the Transaction Documents or the transactions contemplated thereby. (h) Resales Absent Effective Registration Statement. Each of the Subscribers understands and acknowledges that (i) the Transaction Documents may require the Company to issue and deliver Shares and/or Warrant Shares to the Subscriber, without legend restricting their transferability under the 1933 Act, and (ii) is aware that resales of the Shares and/or Warrant Shares may not be made unless, at the time of resale, there is an effective registration statement under the 1933 Act covering such Subscriber's resale(s) or an applicable exemption from registration. Accordingly, each Subscriber hereby covenants and agrees that, commencing from the time it is advised by the Company that any registration statement theretofore covering resale of the Shares and/or Warrant Shares is no longer effective, until such time as the Company advises the Subscriber there is an effective registration statement covering resale of the Shares and Warrant Shares, Subscriber will not sell, assign, pledge, transfer or otherwise dispose of any of the Shares or Warrant Shares without the prior written consent of the Company unless an exemption from registration is available to the Subscriber. [THIS SPACE INTENTIONALLY LEFT BLANK] SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (A) Please acknowledge your acceptance of the foregoing Subscription Agreement by signing and returning a copy to the undersigned whereupon it shall become a binding agreement between us. SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. a Nevada corporation By:_________________________________ Name: Dongdong Lin Title: CEO Dated: March _____, 2005 - --------------------- ------------------ -------------------- ----------------- SUBSCRIBER PURCHASE PRICE SHARES OF COMMON CLASS A WARRANTS STOCK - --------------------- ------------------ -------------------- ----------------- ALPHA CAPITAL AKTIENGESELLSCHAFT $350,000.00 3,500,000 Pradafant 7 9490 Furstentums Vaduz, Lichtenstein Fax: 011-42-32323196 - ---------------------------------- (Signature) By: SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (B) Please acknowledge your acceptance of the foregoing Subscription Agreement by signing and returning a copy to the undersigned whereupon it shall become a binding agreement between us. SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. a Nevada corporation By:_________________________________ Name: Dongdong Lin Title: CEO Dated: March _____, 2005 - ----------------------- ------------------ -------------------- ---------------- SUBSCRIBER PURCHASE PRICE SHARES OF COMMON CLASS A WARRANTS STOCK - ----------------------- ------------------ -------------------- ---------------- OSHER CAPITAL INC. $25,000.00 250,000 5 Sansberry Lane Spring Valley, NY 10977 Fax: (917) 591-3401 - -------------------------------------- (Signature) By: LIST OF EXHIBITS AND SCHEDULES Attachment 1 Disclosure Schedule Exhibit A Form of Class A Warrant Exhibit B Escrow Agreement Exhibit C Form of Legal Opinion Exhibit D Form of Public Announcement or Form 8-K Schedule 5(d) Additional Issuances / Capitalization Schedule 5(q) Undisclosed Liabilities Schedule 5(x) Subsidiaries Schedule 8 Finders Schedule 9.1(e) Use of Proceeds Schedule 11.1 Other Securities to be Registered SCHEDULE 5(d) TO SUBSCRIPTION AGREEMENT DATED APRIL 12, 2005 CAPITALIZATION Capital Stock Class Number of Shares Number of Shares Authorized Outstanding - ---------------------------- ---------------- ------------------ Common Stock, $.01 par value 80,000,000 34,617,276* - ---------------------------- ---------------- ------------------ Undesignated Preferred Stock, 20,000,000 0 $.01 par value - ---------------------------- ---------------- ------------------ * Prior to the issuance of any shares described in Section 12(a)(v) of the Subscription Agreement. Options Source Number of Shares Number of Shares Number of Shares Authorized Awarded Remaining Available - -------------------------- --------------- ------------------ ---------------- 2005 Equity Incentive Plan 5,000,000 0 5,000,000 Common Stock Purchase Warrants Number of Shares Issuable Exercise Price Expiration Date - --------------------------- ------------------- ------------------------ 1,500,000** $.167 July 15, 2006 - --------------------------- ------------------- ------------------------ ** Prior to the issuance of any warrants described in Section 12(a)(v) of the Subscription Agreement. SCHEDULE 5(q) TO SUBSCRIPTION AGREEMENT DATED APRIL 12, 2005 UNDISCLOSED LIABILITIES None. SCHEDULE 5(x) TO SUBSCRIPTION AGREEMENT DATED APRIL 12, 2005 SUBSIDIARIES - ------------------------------------- -------------------------------------- -------------------------------------- Name of Subsidiary Jurisdiction of Organization Ownership Interest - ------------------------------------- -------------------------------------- -------------------------------------- Sunwin Tech Group, Inc. Florida 100% owned by Sunwin International Neutraceuticals, Inc. - ------------------------------------- -------------------------------------- -------------------------------------- Qufu Natural Green Engineering Company Peoples Republic of China 80% owned by Sunwin Tech Group, Inc. Limited ("Qufu") - ------------------------------------- -------------------------------------- -------------------------------------- Shengyuan Veterinary Drugs Factory Peoples Republic of China 100% owned by Qufu Company, limited - ------------------------------------- -------------------------------------- -------------------------------------- Shengyuan Herb Extracted Company, Peoples Republic of China 100% owned by Qufu Limited - ------------------------------------- -------------------------------------- --------------------------------------
SCHEDULE 8 FINDERS - -------------------------------------- -------------------- -------------------- FINDER CASH FINDER'S FEES FINDER'S WARRANTS - -------------------------------------- -------------------- -------------------- ERA CAPITAL MANAGEMENT $17,500.00 175,000 Warrants 5301 North Federal Highway, Suite 120 Boca Raton, FL 33487 Fax: (561) 989-9206 - -------------------------------------- -------------------- -------------------- LIBRA FINANCE, S.A. $8,750.00 87,500 Warrants P.O. Box 4603 Zurich, Switzerland Fax: 011-411-201-6262 - -------------------------------------- -------------------- -------------------- OSHER CAPITAL INC. $11,250.00 112,500 Warrants 5 Sansberry Lane Spring Valley, NY 10977 Fax: (917) 591-3401 - -------------------------------------- -------------------- -------------------- SCHEDULE 9.1(e) TO SUBSCRIPTION AGREEMENT DATED APRIL 12, 2005 USE OF PROCEEDS Working capital. SCHEDULE 11.1(iv) TO SUBSCRIPTION AGREEMENT DATED APRIL 12, 2005 Exceptions to Last Sentence of Section 11.1(iv) The registration statement will cover: (a) Up to 9,000,000 shares of common stock and shares issuable upon exercise of up to 9,000,000 common stock purchase warrants described in Section 12(a)(v) of the Subscription Agreement, plus up to 900,000 shares issuable upon exercise of warrants issued to finder's in connection therewith; and (b) Up to 8,000,000 shares of outstanding common stock and up to 1,500,000 shares of common stock issuable upon exercise of outstanding warrants. EX-10 5 ex108.txt EXHIBIT 10.8 CONSULTING AGREEMENT THIS AGREEMENT is entered into as of May 1, 2005 by Sunwin International Neturacuticals, Inc., organized and existing under the laws of Nevada State ("Sunwin" or "Company") and China Direct Investments, Inc. existing under the laws of Florida State ("CDI or Consultant"), WITNESSETH: In consideration of the premises and mutual covenants hereinafter contained, the parties hereto agree as follows: 1. THE SERVICES Consultant will provide Company consulting services in capital markets including, but not limited to, a. Providing all necessary assistance in accounting, auditing and legal services b. Providing assistance in preparation of SB-2 registration statement c. Translation of all necessary documents d. Providing general business consulting services e. Providing funding sources f. Providing assistance in preparing all offering documents In addition, the Company appoints the Consultant as its representative in the United States, and that the Consultant, through Dr. James Wang, as the CEO of the Consultant, is authorized to communicate with, translate to and provide instructions to and from the Company to and from the Company's professionals in the United States, including the Company's attorneys and accountants, on all matters relating to the Company, including but not limited to the filings made with the United States Securities and Exchange Commission. 2. WORK FOR HIRE It is the intention of the parties hereto that all rights, including without limitation copyright in any reports, surveys, marketing promotional and collateral materials prepared by the Consultant pursuant to the terms of this Agreement, or otherwise for Company (hereinafter "the Work") vest in Company. The parties expressly acknowledge that the Work was specially ordered or commissioned by Company, and further agree that it shall be considered a "Work Made for Hire" within the meaning of the copyright laws of the United States and that Company is entitled as author to the copyright and all other rights therein, throughout the world, including, but not limited to, the right to make such changes therein and such uses thereof, as it may determine in its sole and absolute discretion. 3. PROPRIETARY INFORMATION a. For purposes of this Agreement, "proprietary information" shall mean any information relating to the business of Company or any entity in which Company has a controlling interest and shall include (but shall not be limited to) information encompassed in all drawings, designs, programs, plans, formulas, proposals, marketing and sales plans, financial information, costs, pricing information, customer information, and all methods, concepts or ideas in or reasonably related to the business of Company. b. Consultant agrees to regard and preserve as confidential, all proprietary information, whether Consultant has such information in memory or in writing or other physical form. Consultant shall not, without written authority from Company to do so, directly or indirectly, use for the benefit or purposes, nor disclose to others, either during the term of its engagement hereunder or thereafter, except as required by the conditions of Consultant's engagement hereunder, any proprietary information. c. Consultant shall not disclose any reports, recommendations, conclusions or other results of the Services or the existence or the subject matter of this contract without the prior written consent of Company. In Consultant's performance hereunder, Consultant shall comply with all legal obligations it may now or hereafter have respecting the information or other property of any other person, firm or corporation. d. The Consultant expressly agrees that the covenants set forth in this Paragraph are being given to Company in connection with the engagement of the Consultant by Company and that such covenants are intended to protect Company against the competition by the Consultant, within the terms stated, to the fullest extent deemed reasonable and permitted in law and equity. In the event that the foregoing limitations upon the conduct of the Consultant are beyond those permitted by law, such limitations, both as to time and geographical area, shall be, and be deemed to be, reduced in scope and effect to the maximum extent permitted by law. e. The foregoing obligations of this Paragraph shall not apply to any part of the information that (i) has been disclosed in publicly available sources of information, (ii) is, through no fault of the Consultant, hereafter disclosed in publicly available sources of information, (iii) is now in the possession of Consultant without any obligation or confidentiality, or (iv) has been or is hereafter lawfully disclosed to Consultant by any third party, but only to the extent that the use or disclosure there of has been or is rightfully authorized by that third party. 4. FEES AND REIMBURSEMENT OF CERTAIN EXPENSES a. Company shall pay Consultant consulting fee for 500,000 warrants at purchase 500,000 shares of Sunwin's common stock (OTCBB: SUWN) at $0.15 per share. 5. BENEFITS The Consultant, as an independent contractor, shall not be entitled to any other benefits. 6. DUTY TO REPORT INCOME The Consultant acknowledges and agrees that it is an independent contractor and not an employee of the Company and that it is Consultant's sole obligation to report as income all compensation received from Company pursuant to this Agreement. The Consultant further agrees that the Company shall not be obligated to pay withholding taxes, social security, unemployment taxes, disability insurance premiums, or similar items, in connection with any payments made to the Consultant pursuant to the terms of this Agreement. 7. TERM This Agreement shall be effective beginning as of first day of May 1, 2005, and shall end on June 30, 2005. 8. NOTICES All notices and billings shall be in writing and sent via first class mail to the respective addresses of the parties set forth at the beginning of this Agreement or to such other address as any party may designate by notice delivered hereunder to the other party. 9. GENERAL a. The terms and conditions of Paragraphs 3, 4 and 5 hereof shall survive the termination of this Agreement or completion of the Services as the case may be. b. Neither the Company nor Consultant shall assign this Agreement or delegate its duties hereunder and shall not subcontract any of the Services to be performed hereunder without the prior written consent of the other party hereto. c. Consultant shall perform the Services as an independent contractor and shall not be considered an employee of Company or Partner, joint venture or otherwise related to Company for any purpose. d. This Agreement shall be governed by the laws of the State of Florida. e. This Agreement constitutes the entire understanding between Consultant and Company respecting the Services described herein. The terms and conditions of any purchase order shall have no effect upon this Agreement and shall be used for accounting purposes only. f. The failure of either party to exercise its rights under this Agreement shall not be deemed to be a waiver of such rights or a waiver of any subsequent breach. g. Any delay or nonperformance of any provision of this Agreement caused by conditions beyond the reasonable control of the performing party shall not constitute a breach of this Agreement, provided that the delayed party has taken reasonable measures to notify the other of the delay in writing. The delayed party's time for performance shall be deemed to be extended for a period equal to the duration of the conditions beyond its control. "Conditions beyond a party's reasonable control" include, but are not limited to, natural disasters, acts of government after the date of the Agreement, power failure, fire, flood, acts of God, labor disputes, riots, acts of war and epidemics. Failure of subcontractors and inability to obtain materials shall not be considered a condition beyond a party's reasonable control. h. Non-Solicitation of Consultant's Employees: Company agrees not to knowingly hire or solicit Consultant's employees during performance of this Agreement and for a period of two years after termination of this Agreement without Consultant's written consent. i. Mediation and Arbitration: If a dispute arises under this Agreement, the parties agree to first try to resolve the dispute with the help of a mutually agreed-upon mediator in Palm Beach County, FL. Any costs and fees other than attorney fees associated with the mediation shall be shared equally by the parties. If the dispute is not resolved through mediation, the parties agree to submit the dispute to binding arbitration in Florida under the rules of the American Arbitration Association. Judgment upon the award rendered by the arbitrator may be entered in any court with jurisdiction to do so. j. Attorney Fees: If any legal action is necessary to enforce this Agreement, the prevailing party shall be entitled to reasonable attorney fees, costs and expenses. k. Complete Agreement: This Agreement together with all exhibits, appendices or other attachments, which are incorporated herein by reference, is the sole and entire Agreement between the parties. This Agreement supersedes all prior understandings, agreements and documentation relating to such subject matter. In the event of a conflict between the provisions of the main body of the Agreement and any attached exhibits, appendices or other materials, the Agreement shall take precedence. Modifications and amendments to this Agreement, including any exhibit or appendix hereto, shall be enforceable only if they are in writing and are signed by authorized representatives of both parties. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. Sunwin International Neutraceuticals, Inc. Signature: ______________________________ Dongdong Lin China Direct Investments, Inc. Signature: _______________________________ Dr. James Wang, CEO EX-14 6 ex141.txt EXHIBIT 14.1 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. CODE OF BUSINESS CONDUCT AND ETHICS (Adopted by the Board of Directors on April __, 2005) Introduction This Code of Business Conduct and Ethics covers a wide range of business practices and procedures. It does not cover every issue that may arise but it sets out basic principles to guide all employees of Sunwin International Neutraceuticals, Inc. (the "Company"). All of our officers, directors and employees must conduct themselves accordingly and seek to avoid even the appearance of improper behavior. The code should also be provided to and followed by the Company's agents and representatives, including consultants. If a law conflicts with a policy in this Code, you must comply with the law. If you have any questions about these conflicts, you should ask your supervisor how to handle the situation. Those who violate standards in this Code will be subject to disciplinary action, up to and including termination of employment. If you are in a situation that you believe may violate or lead to a violation of this Code, follow the guidelines described in Section 14 of this Code. 1. Compliance with Laws, Rules and Regulations Obey the law, both in letter and in spirit, is the foundation on which our ethical standards are built. All employees must respect and obey the laws of the cities, states and countries in which we operate. Although not all employees are expected to know the details of these laws, it is important to know enough about them to determine when to seek advice from supervisors, managers or other appropriate personnel. 2. Conflicts of Interest A "conflict of interest" exists when a person's private interests interferes in any way with the interests of the Company. A conflict situation can arise when an employee, officer or director takes actions or has interests that may make it difficult to perform his or her Company work objectively and efficiently. Conflicts of interest may also arise when an employee, officer or director, or members of his or her family, receives improper personal benefits as a result of his or her position in the Company. Loans to, or guarantees of obligations of, employees and their family members may create conflicts of interest. It is almost always a conflict of interest for a Company employee to work simultaneously for a competitor, customer or supplier. You are not allowed to work for a competitor as a consultant or board member. The best policy is to avoid any direct or indirect business connection with our customers, suppliers or competitors, except on our behalf. Conflicts of interest are prohibited as a matter of Company policy, except under guidelines approved by our Board of Directors. Conflicts of interest may not always be clear-cut, so if you have a question, you should consult with higher levels of management. Any employee, officer or director who becomes aware of a conflict or potential conflict should bring it to the attention of a supervisor, manager or other appropriate personnel or consult with the procedures described in Section 14 of this Code. 3. Insider Trading Employees who have access to confidential information are not permitted to use or share that information for stock trading purposes or for any other purpose except the conduct of our business. All non-public information about the Company should be considered confidential information. To use non-public information for persona financial benefit or to "tip" others who might make an investment decision on the basis of this information is not only unethical but also illegal. 4. Corporate Opportunities Employees, officer and directors are prohibited from taking for themselves personally, opportunities that are discovered through the use of corporate property, information or position without the consent of the Board of Directors. No employee may use corporate property, information or position for improper personal gain, and no employee may compete with the Company, directly or indirectly. 5. Competition and Fair Dealing We seek to outperform our competition fairly and honestly. Stealing proprietary information, possessing trade secret information that was obtained without the owner's consent, or inducing such disclosures by past or present employees of other companies is prohibited. Each officer, director and employee should respect the rights of and deal fairly with the Company's customers, suppliers, competitors and employees. No employee should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional unfair-dealing practice. The purpose of business entertainment and gifts in a commercial setting is to create good will and sound working relationships, not to gain unfair advantage with customers. No gift, or entertainment should ever be offered, given, provided or accepted by any Company employee, family member of an employee or agent, unless it (a) is not in cash, (b) is consistent with customary business practices, (c) is not excessive in value, (d) cannot be construed as a bribe or payoff and (e) does not violate any laws or regulations. Please discuss with your supervisor any gifts or proposed gifts that you are not certain are appropriate. 6. Discrimination and Harassment The diversity of the Company's employees is a tremendous asset. We are firmly committed to providing equal opportunity in all respects aspects of employment and will not tolerate illegal discrimination or harassment of any kind. Examples include derogatory comments based on racial or ethnic characteristics and unwelcome sexual advances. 7. Health and Safety The Company strives to provide each employee with a safe and healthy work environment. Each employee has responsibility for maintaining a safe and healthy workplace for all employees by following safety and health rules and practices and reporting accidents, injuries and unsafe equipment, practices or conditions. Violence and threatening behavior are not permitted. Employees should report to work in condition to perform their duties, free from the influence of illegal drugs or alcohol. The use of alcohol and/or illegal drugs in the workplace will not be tolerated. 8. Record-Keeping The Company requires honest and accurate recording and reporting of information in order to make responsible business decisions. For example, only the true and actual number of hours worked should be reported. Many employees regularly use business expense accounts, which must be documented and recorded accurately. If you are not sure whether a certain expense is legitimate, ask your supervisor or the Company's controller or chief financial officer. All of the Company's books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect the Company's transactions and must conform to both applicable legal requirements and to the Company's systems of accounting and internal controls. Unrecorded or "off the books" funds or assets should not be maintained unless permitted by applicable laws or regulations. Business records and communications often become public, and we should avoid exaggeration, derogatory remarks, guesswork or inappropriate characterizations of people and companies that can be misunderstood. This applies equally to e-mail, internal memos and formal reports. Records should always be retained or destroyed according to the Company's record retention policies. In accordance with these policies, in the event of litigation or governmental investigation please consultant your supervisor. All e-mail communications are the property of the Company and employees, officers and directors should not expect that Company or personal e-mail communications are private. All e-mails are the property of the Company. No employee, officer or director shall use Company computers, including to access the internet, for personal or non-Company business. 9. Confidentiality Employees must maintain the confidentiality of confidential information entrusted to them by the Company or its customers, except when disclosure is required by laws or regulations. Confidential information includes all non-public information that might be of use to competitors, or harmful to the Company or its customers, if disclosed. It also includes information that suppliers and customers have entrusted to us. The obligation to preserve confidential information continues even after employment ends. In connection with this obligation, employees, officers and directors may be required to execute confidentiality agreements confirming their agreement to be bound not to disclose confidential information. If you are uncertain whether particular information is confidential or non-public, please consult your supervisor. 10. Protection and Proper Use of Company Assets All officers, directors and employees should endeavor to protect the Company's assets and ensure their efficient use. Theft, carelessness and waste have a direct impact on the Company's profitability. Any suspected incident of fraud or theft should be immediately reported for investigation. Company equipment should not be used for non-Company business. The obligation of officers, directors and employees to protect the Company's assets includes it proprietary information. Proprietary information includes intellectual property such as trade secrets, patents, trademarks and copyrights, as well as business, marketing and service plans, engineering and manufacturing ideas, designs, databases, records, salary information and any unpublished financial data and reports. Unauthorized use or distribution of this information would violate Company policy. It could also be illegal and result in civil or even criminal penalties. 11. Payments to Government Personnel The Unites States Foreign Corrupt Practices Act prohibits giving anything of value, directly or indirectly, to officials of foreign governments or foreign political candidates in order to obtain or retain business. It is strictly prohibited to make illegal payments to government officials of any country. In addition, the U. S. government has a number of laws and regulations regarding business gratuities that may be accepted by U. S. government personnel. The promise, offer or delivery to an official or employee of the U. S. government of a gist, favor or other gratuity in violation of these rules would not only violate Company policy, but could also be a criminal offense. State and local governments, as well as foreign governments, may have similar rules. 12. Waivers of the Code of Business Conduct and Ethics Any waiver of the provisions of this Code may be made only by the Board of Directors and will be promptly disclosed as required by law or stock exchange rule or regulation. 13. Reporting any Illegal or Unethical Behavior Employees are encouraged to talk with supervisors, managers or Company officials about observed illegal or unethical behavior, and when in doubt about the best course of action in a particular situation. It is the Company's policy not to allow retaliation for reports of misconduct by others made in good faith by employees. Employees are expected to cooperate in internal investigations of misconduct, and the failure to do so could serve as grounds for termination. Any employee may submit a good faith concern regarding questionable accounting or auditing matters without fear of dismissal or retaliation of any kind. 14. Compliance Procedures We must all work to ensure prompt and consistent action against violations of this Code. However, in some situations, it is difficult to know if a violation has occurred. Since we cannot anticipate every situation that may arise, it is important that we have a way to approach a new question or problem. These are steps to keep in mind: o Make sure you have all the facts. In order to reach the rights solutions, we must be as fully informed as possible. o Ask yourself, what specifically am I being asked to do - does it seem unethical or improper? This will enable you to focus on the specific question you are faced with, and the alternatives you have. Use your judgment and common sense; if something seems unethical or improper, it probably is. o Clarify your responsibility and role. In most situations, there is shared responsibility. Are your colleagues informed? It may help to get others involved and discuss the problem. o Discuss the problem with your supervisor. This is the basic guidance for all situations. In many cases, your supervisor will be more knowledgeable about the question, and will appreciate being brought into the decision-making process. Keep in mind that it is your supervisor's responsibility to help solve problems. If your supervisor does not or cannot remedy the situation, or you are uncomfortable binging the problem to the attention of your supervisor, bring the issue to the attention of the human resources supervisor, or to an officer of the Company. o You may report ethical violations in confidence and without fear of retaliation. If your situation requires that your identity be kept secret, your anonymity will be protected. The Company does not permit retaliation of any kind for good faith reports of ethical violations. o Always ask first - act later. If you are unsure of what to do in any situation, seek guidance before your act. CODE OF ETHICS FOR THE CHIEF EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERS OF SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. Sunwin International Neutraceuticals, Inc. (the "Company") has a Code of Business Conduct and Ethics applicable to all employees, officers and directors of the Company. The Chief Executive Officer (CEO) and senior financial officers of the Company, including its chief financial officer and principal accounting officer, are bound by the provisions set forth therein relating to ethical conduct, conflicts of interest and compliance with law. In addition to the Code of Business Conduct and Ethics, the CEO and senior financial officers of the Company are also subject to the following specific policies: 1. The CEO and senior financial officers are responsible for full, fair, accurate, timely and understandable disclosure in the periodic reports and other filings required to be made by the Company with the Securities and Exchange Commission. Accordingly, it is the responsibility of the CEO and each senior financial officer promptly to bring to the attention of the Board of Directors any material information of which he or she may become aware that affects the disclosures made by the Company in its public filings or otherwise impairs the ability of the Company to make full, fair, accurate, timely and understandable public disclosures. 2. The CEO and each senior financial officer shall promptly bring to the attention of the Company's Audit Committee any information he or she may have concerning (a) significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's financial reporting, disclosures or internal controls. 3. The CEO and each senior financial officer shall promptly bring to the attention of the Board of Directors and the Audit Committee any information he or she may have concerning any violation of the Company's Code of Business Conduct and Ethics, including any actual or apparent conflicts of interest between personal and processional relationships, involving management or other employees who have a significant rule in the Company's financial reporting, disclosures or internal controls. 4. The CEO and each senior financial officer shall promptly bring to the attention of the Board of Directors and Audit Committee any information he or she may have concerning evidence of a material violation of the securities or other laws, rules or regulations applicable to the Company and the operation of its business, by the Company or any agent thereof, or of violation of the Code of Business Conduct and Ethics or of these additional procedures. 5. The Board of Directors shall determine, or designate appropriate persons to determine, appropriate actions to be taken in the event of violations of the Code of Business Conduct and Ethics of these additional procedures by the CEO and the Company's senior financial officers. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to the Code of Business Conduct and Ethics and to these additional procedures, and shall include written notices to the individual involved that the Board has determined that there has been a violation, censure by the Board, demotion or reassignment of the individual involved, suspension with or without pay or benefits (as determined by the Board) and termination of the individual's employment. In determining what action is appropriate in a particular case, the Board of Directors or such designee shall take into account all relevant information, including the nature and severity of the violation, whether the violation was a single occurrence or repeated occurrences, whether the violation appears to have been intentional or inadvertent, whether the individual in question had been advised prior to the violation as to the proper course of action and whether or not the individual in question had committed other violations in the past. EX-23 7 ex231.txt SHERB & CO., LLP 805 Third Avenue New York, NY 10022 Voice: 212 838-5100 Fax: 212 838-2676 - ------------------------------------------------------------------------------- Certified Public Accountants Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT We consent to the incorporation in this Registration Statement on Form SB-2, of our report dated August 31, 2004 for the period ended April 30, 2004 relating to the balance sheet of Sunwin International Neutraceuticals, Inc. and Subsidiaries as of April 30, 2004 and the related statements of operations, stockholders' equity, and cash flows for the years ended April 30, 2004 and 2003. We also consent to the reference to our firm under the caption "Experts" in the Prospectus. /s/Sherb & Co, LLP Sherb & Co., LLP Certified Public Accountants New York, New York May 27, 2005 -----END PRIVACY-ENHANCED MESSAGE-----