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]
<page>
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
<table>
<caption>
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)
- -------------------- --------------- ------------------ ------------------ -------------------
<s> <c> <c> <c> <c>
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
====
</table>
(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
<page>
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.
<table>
Income Statement:
Nine Months Ended January 31, Years Ended April 30,
----------------------------- ---------------------
2005 2004 2004 2003
---- ---- ---- ----
(unaudited)
<s> <c> <c> <c> <c>
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
</table>
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
<page>
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
<page>
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
<page>
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
<page>
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
<page>
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
<page>
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
<page>
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".
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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.
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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.
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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.
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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.
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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;
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* 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
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Total $ 670,506
=======
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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* 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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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<page>
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.
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<page>
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.
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<page>
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 $100,000
during last three completed fiscal years ending April 30 (the "Named Executive
Officers").
<table>
<caption>
Annual Long-Term
Compensation Compensation
<s> <c> <c> <c> <c> <c> <c> <c>
Restricted Securities
Name and Other Annual Stock Underlying All
Principal Fiscal Salary Bonus Compensation Awards Options Other
Position Year ($) ($) ($) ($) 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-
</table>
(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)
<table>
NO. OF SECURITIES % OF TOTAL OPTIONS/SARs
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE EXPIRATION
NAME SARs GRANTED IN FISCAL YEAR PRICE DATE
------------- ---------------- ------------------------ ------------- ----------------
<s> <c> <c> <c> <c>
Baozhong Yuan 0 0 0 0
Richard J. Church 0 0 0 0
</table>
36
<page>
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
<table>
<caption>
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
- ---------- -------- ----- ----------- ------------- ----------- --------------
<s> <c> <c> <c> <c> <c> <c>
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
</table>
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.
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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.
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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
<page>
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
<page>
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
<page>
(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.
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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.
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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.
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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:
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* 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.
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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.
<table>
<caption>
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
- --------------- ----- -------- ------- -------------- --------
<s> <c> <c> <c> <c> <c>
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
</table>
* represents less than 1%
47
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(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.
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(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.
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(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.
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(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.
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(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
<page>
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
<page>
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
<page>
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
<table>
<caption>
ASSETS
<c>
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
</table>
<page>
SUNWIN INTERNATIONAL NEUTACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY NETWORK USA, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<table>
<caption>
For the Years Ended April 30,
-----------------------------------------
2004 2003
------------------- -------------------
<s> <c> <c>
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
=================== ===================
</table>
See notes to consolidated financial statements
F-3
<page>
SUNWIN INTERNATIONAL NEUTACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY NETWORK USA, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended April 30, 2004 and 2003
<table>
<caption>
Common Stock, $.001 Par Value
------------------------------- Additional Total
Number of Paid-in Retained Deferred Stockholders'
Shares Amount Capital Earnings Compensation Equity
-------------------------------- -------------- ---------------- ---------------- --------------
<s> <c> <c> <c> <c> <c> <c>
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
================================ ============== ============== =============== ==============
</table>
See notes to consolidated financial statements
F-4
<page>
SUNWIN INTERNATIONAL NEUTACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY NETWORK USA, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<table>
<caption>
Years Ended April 30,
----------------------------------------
2004 2003
------------------ ------------------
<s> <c> <c>
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 $ -
================== ==================
</table>
See notes to consolidated financial statements.
F-5
<page>
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
<page>
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
<page>
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
<page>
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
<page>
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
<page>
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
<page>
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
<page>
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY NETWORK USA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2004 and 2003
<table>
<caption>
NOTE 6 - LOANS PAYABLE
<s> <c>
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
=========================
</table>
F-13
<page>
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
<page>
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
<page>
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
<page>
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
<page>
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
<page>
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<table>
<caption>
For the Three Months For the Nine Months
Ended January 31, Ended January 31,
-------------------------------- ---------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ----------------
<s> <c> <c> <c> <c>
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
=============== =============== =============== ================
</table>
See notes to unaudited consolidated financial statements
F-19
<page>
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<table>
<caption>
For the Nine Months
Ended January 31,
---------------------------------------
2005 2004
------------------- -------------------
<s> <c> <c>
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 $ -
=================== ===================
</table>
See notes to unaudited consolidated financial statements.
F-20
<page>
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
<page>
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
<page>
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
<page>
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
<page>
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
<page>
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
<page>
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.
<page>
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.
<page>
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.
<page>
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.
<page>
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