Document:

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                                  EXHIBIT 10.3
                               SECURITY AGREEMENT

        1. GRANT OF SECURITY INTEREST. For valuable consideration, the
undersigned Houston Dynamic Service, Inc., a Texas corporation ("HOUSTON
DYNAMIC"), hereby grants and transfers to Mountain Compressed Air, Inc.
("LENDER") a security interest in the property of Houston Dynamic, the property
set forth in EXHIBIT A hereto, further described as follows (collectively, the
"COLLATERAL"):

        (a) all inventory, goods held for sale or lease or to be furnished under
contracts for service, or goods so leased or furnished, raw materials, component
parts, work in process and other materials used or consumed in Houston Dynamic's
business, now or at any time hereafter owned or acquired by Houston Dynamic,
wherever located, and all products thereof, whether in the possession of Houston
Dynamic, any warehousemen, any bailee or any other person, or in process of
delivery, and whether located at Houston Dynamic's places of business or
elsewhere;

        (b) all warehouse receipts, bills of sale, bills of lading and other
documents of every kind (whether or not negotiable) in which Houston Dynamic now
has or at any time hereafter acquires any interest, and all additions and
accessions thereto, whether in the possession or custody of Houston Dynamic, any
bailee or any other person for any purpose; and

        (c) all Houston Dynamic's goods, tools, machinery, furnishings,
furniture and other equipment and fixtures of every kind now existing or
hereafter acquired, and improvements, replacements, accessions and additions
thereto, whether located on any property owned or leased by Houston Dynamic or
elsewhere, including without limitation, any of the foregoing now or at any time
hereafter located at or installed on the land or in the improvements at any of
the real property owned or leased by Houston Dynamic, and all such goods after
they have been severed and removed from any of said real property; together with
whatever is receivable or received when any of the foregoing or the proceeds
therefore are sold, leased, collected, exchanged or otherwise disposed of,
whether such disposition is voluntary or involuntary, including without
limitation, all rights to payment, including returned premiums with respect to
any insurance relating to the foregoing, and all rights to payment with respect
to any cause of action affecting or relating to any of the foregoing
(collectively, the "PROCEEDS").

        2. OBLIGATIONS SECURED. The obligations secured hereby are the payment
and performance of: (a) all present and future Indebtedness of Houston Dynamic
and Clayton Lau to Lender; (b) all obligations of Houston Dynamic and rights of
Lender under this Agreement; and (c) all present and future obligations of
Houston Dynamic and Clayton Lau to Lender of other kinds. The word
"INDEBTEDNESS" is used herein in its most comprehensive sense and includes any
and all advances, debts, obligations and liabilities of Houston Dynamic,
heretofore, now or hereafter made, incurred or created, whether voluntary or
involuntary and however arising, whether due or not due, absolute or contingent,
including, without limitation, all obligations of

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Houston Dynamic to Lender, liquidated or unliquidated, determined or
undetermined, and whether Houston Dynamic may be liable individually or jointly
with others, or whether recovery upon such Indebtedness may be or hereafter
becomes unenforceable including, without limitation, that certain Term Note
dated as of November 30, 2001 in the original principal amount of $930,000.00;
all executed by Houston Dynamic and Clayton Lau and payable to the order of
Lender (collectively, the "NOTE") pursuant to that certain Stock Purchase
Agreement dated November 30, 2001, between Houston Dynamic and Lender (the
"STOCK PURCHASE AGREEMENT"); and all renewals, extensions, rearrangements,
amendments, modifications, and/or increases of any of the aforesaid.

        3. TERMINATION. This Agreement will terminate upon the performance of
all obligations of Houston Dynamic and Clayton Lau to Lender including, without
limitation, the payment of all Indebtedness of Houston Dynamic to Lender
existing at the time Lender receives written notice from Houston Dynamic of the
termination of this Agreement.

        4. REPRESENTATIONS AND WARRANTIES. Houston Dynamic represents and
warrants to Lender that: (a) Houston Dynamic is the owner of the Collateral and
Proceeds; (b) Houston Dynamic has the right to grant a security interest in the
Collateral and Proceeds; (c) all Collateral and Proceeds are genuine, free from
liens, adverse claims, setoffs, default, prepayment, defenses and conditions
precedent of any kind or character, except the lien created hereby in favor of
Lender, or as otherwise agreed to by Lender, or as heretofore disclosed by
Houston Dynamic to Lender, in writing; (d) all statements contained herein and,
where applicable, in the Collateral are true and complete in all material
respects; (e) no financing statement covering any of the Collateral or Proceeds,
and naming any secured party other than Lender, is on file in any public office;
(f) where Collateral consists of rights to payment, all persons appearing to be
obligated on the Collateral and Proceeds have authority and capacity to contract
and are bound as they appear to be, all property subject to chattel paper has
been properly registered and filed in compliance with law and to perfect the
interest of Houston Dynamic in such property, and all such Collateral and
Proceeds comply with all applicable laws concerning form, content and manner of
preparation and execution, including where applicable Federal Reserve Regulation
Z and any State consumer credit laws; (g) where the Collateral consists of
equipment, Houston Dynamic is not in the business of selling goods of the kind
included within such Collateral, and Houston Dynamic acknowledges that no sale
of any such Collateral, including without limitation, any such Collateral which
Houston Dynamic may deem to be surplus, has been consented to or acquiesced in
by Lender, except as specifically set forth in writing by Lender; and (h) none
of the Collateral at this time constitutes fixtures and in the event it should
in the future, should Houston Dynamic acquire fixtures, at least thirty (30)
days prior thereto, Houston Dynamic shall notify Lender thereof, furnish Lender
with a description of said fixtures, furnish Lender with a description of the
real estate to which the fixtures are attached, and execute all such documents
as may be required by Lender to properly perfect Lender's first priority
security interest therein.

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        5. COVENANTS OF HOUSTON DYNAMIC

        (a) Houston Dynamic agrees in general: (i) to pay Indebtedness secured
hereby when due; (ii) to indemnify Lender against all losses, claims, demands,
liabilities and expenses of every kind caused by property subject hereto; (iii)
to pay all costs and expenses, including reasonable attorneys' fees, incurred by
Lender in the perfection and preservation of the Collateral or Lender's interest
therein and/or the realization, enforcement and exercise of Lender's rights,
powers and remedies hereunder; (iv) to permit Lender to exercise its powers; (v)
to execute and deliver such documents as Lender deems necessary to create,
perfect and continue the security interests contemplated hereby; and (vi) not to
change its jurisdiction of organization or the places where Houston Dynamic
keeps any of the Collateral or Houston Dynamic's records concerning the
Collateral and Proceeds without first giving Lender written notice of the
address to which Houston Dynamic is moving same.

        (b) Houston Dynamic agrees with regard to the Collateral and Proceeds,
unless Lender agrees otherwise in writing: (i) where applicable, to insure the
Collateral with Lender as loss payee, in form, substance and amounts, under
agreements, against risks and liabilities, and with insurance companies
satisfactory to Lender; (ii) where applicable, to operate the Collateral in
accordance with all applicable statutes, rules and regulations relating to the
use and control thereof, and not to use any Collateral for any unlawful purpose
or in any way that would void any insurance required to be carried in connection
therewith; (iii) not to remove the Collateral from Houston Dynamic's premises,
except (A) for deliveries to buyers in the ordinary course of Houston Dynamic's
business and (B) Collateral which consists of mobile goods as defined in the
Texas Business and Commerce Code in which case Houston Dynamic agrees not to
remove or permit the removal of such Collateral from its state of domicile for a
period in excess of thirty (30) calendar days; (iv) to pay when due all license
fees, registration fees and other charges in connection with any Collateral; (v)
not to permit any lien on the Collateral or Proceeds, including without
limitation, liens arising from repairs to or storage of the Collateral, except
in favor of Lender; or as provided in the Stock Purchase Agreement (vi) not to
sell, hypothecate or dispose of, nor permit the transfer by operation of law of,
any of the Collateral or Proceeds or any interest therein, except sales of
inventory to buyers in the ordinary course of Houston Dynamic's business; (vii)
to permit Lender to inspect the Collateral at any time; (viii) to keep, in
accordance with generally accepted accounting principles, complete and accurate
records regarding all Collateral and Proceeds, and to permit Lender to inspect
the same and make copies thereof at any reasonable time; (ix) to use reasonable
diligence to collect Collateral consisting of accounts and other rights to
payment and Proceeds; (x) not to commingle Collateral or Proceeds, or
collections thereunder, with other property; (xi) to give only normal allowances
and credits and to advise Lender thereof immediately in writing if they affect
any rights to payment or Proceeds in any material respect; (xii) in the event
Lender elects to receive payments of rights to payment or Proceeds hereunder, to
pay all expenses incurred by Lender in connection therewith, including expenses
of accounting, correspondence, collection efforts, reporting to account or
contract debtors, filing, recording, record keeping and expenses incidental
thereto; and (xiii) to provide any service and do any other acts which may be
necessary to maintain, preserve and protect all Collateral and, as appropriate
and applicable, to keep all Collateral in good and saleable condition, to deal
with the Collateral in accordance with the standards and

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practices adhered to generally by users and manufacturers of like property, and
to keep all Collateral and Proceeds free and clear of all defenses, rights of
offset and counterclaims.

        6. POWERS OF LENDER. Houston Dynamic appoints Lender its true attorney
in fact to perform any of the following powers, which are coupled with an
interest, are irrevocable until termination of this Agreement and may be
exercised from time to time by Lender's officers and employees, or any of them,
whether or not Houston Dynamic is in default: (a) to perform any obligation of
Houston Dynamic hereunder in Houston Dynamic's name or otherwise; (b) to give
notice to account debtors or others of Lender's rights in the Collateral and
Proceeds, to enforce the same and make extension agreements with respect
thereto; (c) to release persons liable on Collateral or Proceeds and to give
receipts and acquittances and compromise disputes in connection therewith; (d)
to release security; (e) to resort to security in any order; (f) to prepare,
execute, file, record or deliver notes, assignments, schedules, designation
statements, financing statements, continuation statements, termination
statements, statements of assignment, applications for registration or like
papers to perfect, preserve or release Lender's interest in the Collateral and
Proceeds; (g) to receive, open and read mail addressed to Houston Dynamic; (h)
to verify facts concerning the Collateral and Proceeds by inquiry of obligors
thereon, or otherwise, in its own name or a fictitious name; (i) to endorse,
collect, deliver and receive payment under instruments for the payment of money
constituting or relating to Proceeds; (j) to prepare, adjust, execute, deliver
and receive payment under insurance claims, and to collect and receive payment
of and endorse any instrument in payment of loss or returned premiums or any
other insurance refund or return, and to apply such amounts received by Lender,
at Lender's sole option, toward repayment of the Indebtedness or, where
appropriate, replacement of the Collateral; (k) to exercise all rights, powers
and remedies which Houston Dynamic would have, but for this Agreement, with
respect to all Collateral and Proceeds subject hereto; (l) to enter onto Houston
Dynamic's premises in inspecting the Collateral; and (m) to do all acts and
things and execute all documents in the name of Houston Dynamic or otherwise,
deemed by Lender as necessary, proper and convenient in connection with the
preservation, perfection or enforcement of its rights hereunder.

        7. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Houston
Dynamic agrees to pay, prior to delinquency, all insurance premiums, taxes,
charges, liens and assessments against the Collateral and Proceeds, and upon the
failure of Houston Dynamic to do so, Lender at its option may pay any of them
and shall be the sole judge of the legality or validity thereof and the amount
necessary to discharge the same. Any such payments made by Lender shall be
obligations of Houston Dynamic to Lender, due and payable immediately upon
demand, together with interest at a rate determined in accordance with the
provisions of Section 14 hereof, and shall be secured by the Collateral and
Proceeds, subject to all terms and conditions of this Agreement.

        8. EVENTS OF DEFAULT. The occurrence of any of the following and the
failure of Houston Dynamic to correct such item within ten (10) days of
receiving a written request from Lender to correct the default shall constitute
an "EVENT OF DEFAULT"

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under this Agreement: (a) any default in the payment or performance of any of
the Indebtedness, or any obligation, or any defined event of default, under (i)
any contract or instrument evidencing any Indebtedness, including without
limitation, the Note, or (ii) any other agreement between Houston Dynamic,
Clayton Lau, and Lender; (b) any representation or warranty made by Houston
Dynamic herein shall prove to be incorrect, false or misleading in any material
respect when made; (c) Houston Dynamic shall fail to observe or perform any
obligation or agreement contained herein; (d) any attachment or like levy on any
property of Houston Dynamic; and (e) Lender, in good faith, believes any or all
of the Collateral and/or Proceeds to be in danger of misuse, dissipation,
commingling, loss, theft, damage or destruction, or otherwise in jeopardy or
unsatisfactory in character or value.

        9. REMEDIES. Upon the occurrence of any Event of Default, Lender shall
have the right to declare immediately due and payable all or any Indebtedness
secured hereby. Lender shall have all other rights, powers, privileges and
remedies granted to a secured party upon default under the Texas Business and
Commerce Code (with respect to Collateral located within the State of Texas), or
as otherwise provided by law, including without limitation, the right to contact
all persons obligated to Houston Dynamic or Clayton Lau on any Collateral or
Proceeds and to instruct such persons to deliver all Collateral and/or Proceeds
directly to Lender. All rights, powers, privileges and remedies of Lender shall
be cumulative. No delay, failure or discontinuance of Lender in exercising any
right, power, privilege or remedy hereunder shall affect or operate as a waiver
of such right, power, privilege or remedy; nor shall any single or partial
exercise of any such right, power, privilege or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power, privilege or remedy. Any waiver, permit, consent or approval
of any kind by Lender of any default hereunder, or any such waiver of any
provisions or conditions hereof, must be in writing and shall be effective only
to the extent set forth in writing. It is agreed that public or private sales,
for cash or on credit, to a wholesaler or retailer or investor, or user of
property of the types subject to this Agreement, or public auction, are all
commercially reasonable since differences in the sales prices generally realized
in the different kinds of sales are ordinarily offset by the differences in the
costs and credit risks of such sales. While an Event of Default exists: (a)
Houston Dynamic will deliver to Lender from time to time, as requested by
Lender, current lists of all Collateral and Proceeds; (b) Houston Dynamic will
not dispose of any of the Collateral or Proceeds except on terms approved by
Lender; (c) at Lender's request, Houston Dynamic will assemble and deliver all
Collateral and Proceeds, and books and records pertaining thereto, to Lender at
a reasonably convenient place designated by Lender; and (d) Lender may, without
notice to Houston Dynamic, enter onto Houston Dynamic's premises and take
possession of the Collateral. With respect to any sale by Lender of any
Collateral subject to this Agreement, Houston Dynamic hereby expressly grants to
Lender the right to sell such Collateral using any or all of Houston Dynamic's
trademarks, trade names, trade name rights and/or proprietary labels or marks.

        10. DISPOSITION OF COLLATERAL AND PROCEEDS. Upon the transfer of all or
any part of the Indebtedness, Lender may transfer all or any part of the
Collateral or Proceeds and shall be fully discharged thereafter from all
liability and

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responsibility with respect to any of the foregoing so transferred, and the
transferee shall be vested with all rights and powers of Lender hereunder with
respect to any of the foregoing so transferred; but with respect to any
Collateral or Proceeds not so transferred, Lender shall retain all rights,
powers, privileges and remedies herein given. Any proceeds of any disposition of
any of the Collateral or Proceeds, or any part thereof, may be applied by Lender
to the payment of expenses incurred by Lender in connection with the foregoing,
including reasonable attorneys' fees, and the balance of such proceeds may be
applied by Lender toward the payment of the Indebtedness in such order of
application as Lender may from time to time elect.

        11. STATUTE OF LIMITATIONS. Until all Indebtedness shall have been paid
in full, the power of sale and all other rights, powers, privileges and remedies
granted to Lender hereunder shall continue to exist and may be exercised by
Lender at any time and from time to time irrespective of the fact that the
Indebtedness or any part thereof may have become barred by any statute of
limitations, or that the personal liability of Houston Dynamic and Clayton Lau
may have ceased, unless such liability shall have ceased due to the payment in
full of all Indebtedness secured hereunder.

        12. MISCELLANEOUS. (a) Houston Dynamic hereby waives any right (i) to
require Lender to make any presentment or demand, or give any notices of any
kind, including without limitation any notice of nonpayment or nonperformance,
protest, notice of protest, notice of dishonor, notice of the intention to
accelerate or notice of acceleration hereunder when such notice is specifically
required by this agreement, (ii) to direct the application of payments or
security for any Indebtedness of Houston Dynamic, or indebtedness of customers
of Houston Dynamic, or (iii) to require proceedings against others or to require
exhaustion of security; and (b) Houston Dynamic hereby consents to extensions,
forbearances or alterations of the terms of Indebtedness, the release or
substitution of security, and the release of any guarantors. Until all
Indebtedness shall have been paid in full, Houston Dynamic and Clayton Lau shall
not have any right of subrogation or contribution, and Houston Dynamic hereby
waives any benefit of or right to participate in any of the Collateral or
Proceeds or any other security now or hereafter held by Lender. Unless otherwise
prohibited by law, any requirement of reasonable notice to Houston Dynamic with
respect to the sale or other disposition of Collateral shall be met if such
notice is given pursuant to the requirements of Section 14 hereof at least 5
days before the date of any public sale or the date after which any private sale
or other disposition will be made.

        13. NOTICES. All notices, requests and demands required under this
Agreement must be in writing, addressed to Lender at the address specified in
any other documents entered into between Houston Dynamic and Lender, and to
Houston Dynamic at the address of its chief executive office (or personal
residence, if applicable) specified below or to such other address as any party
may designate by written notice to each other party, and shall be deemed to have
been given or made as follows: (a) if personally delivered, upon delivery; (b)
if sent by mail, upon the earlier of the date of receipt or three (3) days after
deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by
telecopy, upon receipt.

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        14. COSTS, EXPENSES AND ATTORNEYS' FEES. Houston Dynamic and Clayton Lau
shall pay to Lender immediately upon demand the full amount of all payments,
advances, charges, costs and expenses, including reasonable attorneys' fees (to
include outside counsel), incurred by Lender in exercising any right, power,
privilege or remedy conferred by this Agreement or in the enforcement thereof,
whether incurred at the trial or appellate level, in an arbitration proceeding
or otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Lender or any other person) relating to
Houston Dynamic or in any way affecting any of the Collateral or Lender's
ability to exercise any of its rights or remedies with respect thereto. All of
the foregoing shall be paid by Houston Dynamic from the date of demand to the
date paid in full with interest at the maximum rate permitted by applicable law.

        15. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding upon
and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties, and may be amended or
modified only in writing signed by Lender, Houston Dynamic and Clayton Lau.

        16. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall
be held to be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or any remaining provisions
of this Agreement.

        17. GOVERNING LAW. Unless otherwise provided herein, this Agreement
shall be governed by and construed in accordance with the laws of the State of
Texas.

        18. SUBMISSION TO JURISDICTION.

        (a) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT SHALL
BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, AND, BY EXECUTION AND DELIVERY OF
THIS AGREEMENT, HOUSTON DYNAMIC AND CLAYTON LAU HEREBY ACCEPTS FOR ITSELF AND
(TO THE EXTENT PERMITTED BY LAW) IN RESPECT OF THE COLLATERAL, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. HOUSTON DYNAMIC AND
CLAYTON LAU HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF
FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY
SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS. THIS SUBMISSION TO
JURISDICTION IS NON-EXCLUSIVE AND DOES NOT PRECLUDE LENDER FROM OBTAINING
JURISDICTION OVER HOUSTON DYNAMIC AND CLAYTON LAU IN ANY COURT OTHERWISE HAVING
JURISDICTION.

        (b) HOUSTON DYNAMIC AND CLAYTON LAU HEREBY IRREVOCABLY CONSENTS TO THE
SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR
PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL,
POSTAGE PREPAID, TO HOUSTON DYNAMIC AT ITS

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SAID ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH
MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF LENDER TO SERVE PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE
PROCEED AGAINST HOUSTON DYNAMIC, CLAYTON LAU OR THE COLLATERAL IN ANY OTHER
JURISDICTION.

        19. WAIVER OF JURY TRIAL. To the fullest extent permitted by applicable
law, Houston Dynamic hereby irrevocably and expressly waives all right to a
trial by jury in any action, proceeding, or counterclaim (whether based upon
contract, tort or otherwise) arising out of or relating to this agreement or the
transactions contemplated thereby or the actions of Lender in the negotiation,
administration or enforcement thereof.

        20. ADDITIONAL REPRESENTATIONS. Houston Dynamic warrants that it is a
Texas corporation, validly existing and in good standing under the laws of the
State of Texas, its Charter I.D. No. is 3845920, its taxpayer I.D. No. is
74-1881196, and its chief executive office is located at the following address:
8150 Lawndale, Houston, Texas 77012.

        Houston Dynamic warrants that the Collateral (except goods in transit)
is located or domiciled at the address above.

    [The remainder of this page intentionally blank; Signature page follows]

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        IN WITNESS WHEREOF, this Agreement has been duly executed this day of
_______________________, 2001.

                                    HOUSTON DYNAMIC SERVICE, INC., a Texas
                                    corporation

                                    By:_______________________________________
                                         Name:________________________________
                                         Title:_______________________________

                                    Clayton Lau, Individually

                                    MOUNTAIN COMPRESSED AIR, INC., a Texas
                                    corporation

                                    __________________________________________
                                    Munawar H. Hidayatallah,
                                    Chief Executive OfficerNEW DRAGON ASIA CORP.

 

EXHIBIT 10.1

 

AMENDED AND RESTATED EXCHANGE AGREEMENT

     THIS EXCHANGE AGREEMENT, dated as of December 13, 2001 is by and among
Bio-Aqua Systems, Inc., a Florida corporation (the “Company”); Max Rutman and
Flagship Import Export LLC, a Nevada limited liability company (the
“Shareholders”); and New Dragon Asia Food Limited, a company organized under
the laws of the British Virgin Islands (“New Dragon”).

W I T N E S S E T H:

     WHEREAS, New Dragon owns 100% of the shares of the equity interests of
four companies organized under the laws of the British Virgin Islands (each a
“Subsidiary” and, collectively the “Subsidiaries”) each of which in turn hold
an interest in a separate sino-foreign joint venture as described on Schedule I
attached hereto, which equity interests constitute all of the issued and
outstanding equity interests of the Subsidiaries ( the “Equity Interests”);

     WHEREAS, concurrently with the execution of this Agreement the Company
desires to acquire from New Dragon, and New Dragon desires to sell to the
Company, all of the Equity Interests in exchange (the “Exchange”) for the
issuance by the Company of an aggregate of 37,963,263 shares (the “Company
Shares”) of the Company’s Class A common stock, par value $.0001 per share (the
“Company Common Stock”), on the terms and conditions set forth below;

     WHEREAS, the Shareholders will benefit from the transactions contemplated
herein,

     NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and agreements set forth herein, the parties hereto
agree as follows:

ARTICLE I

EXCHANGE

     1.1 Exchange. Subject to the terms and conditions of this Agreement, on
the Closing Date (as hereinafter defined):

          (a) The Company shall issue and deliver an aggregate of 37,963,263 Company
Shares to New Dragon and its designee(s), which Shares shall constitute 93% of
the voting power of the Company’s issued and outstanding capital stock on a
fully diluted basis after giving effect to the Exchange.

          (b) As the consideration, New Dragon shall transfer to the Company the
Equity Interests in the Subsidiaries along with appropriate transfer documents
in favor of the Company.

     1.2 Time and Place of Closing. The closing of the transactions
contemplated hereby (the “Closing”) shall take place at the offices of Loeb and
Loeb LLP, 10100 Santa Monica Boulevard, Suite 2200, Los Angeles, California
90067 on November 6, 2001 (the “Closing Date”) or at such other place as the
Company and New Dragon may agree.

 

 

ARTICLE II

REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS

     The Company and the Shareholders jointly and severally represent and
warrant to New Dragon that now and/or as of the Closing:

     2.1 Due Organization and Qualification; Subsidiaries; Due Authorization.

          (a) The Company and each subsidiary of the Company is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of formation, with full corporate power and authority to own,
lease and operate its respective business and properties and to carry on its
respective business in the places and in the manner as presently conducted or
proposed to be conducted. The Company and each subsidiary of the Company is in
good standing as a foreign corporation in each jurisdiction in which the
properties owned, leased or operated, or the business conducted, by it requires
such qualification except for any such failure, which when taken together with
all other failures, is not likely to have a material adverse effect on the
business of the Company taken as a whole.

          (b) Except as set forth in Schedule 2.1(b) attached hereto, the Company
does not own, directly or indirectly, any capital stock, equity or interest in
any corporation, firm, partnership, joint venture or other entity.

          (c) The Company has all requisite corporate power and authority to execute
and deliver this Agreement, and to consummate the transactions contemplated
hereby and thereby. The Company has taken all corporate action necessary for
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, and this Agreement constitutes the valid and
binding obligation of the Company, enforceable against the Company in
accordance with its respective terms, except as may be affected by bankruptcy,
insolvency, moratoria or other similar laws affecting the enforcement of
creditors’ rights generally and subject to the qualification that the
availability of equitable remedies is subject to the discretion of the court
before which any proceeding therefore may be brought.

     2.2 No Conflicts or Defaults. The execution and delivery of this
Agreement by the Company and the consummation of the transactions contemplated
hereby do not and shall not (a) contravene the Articles of Incorporation or
Bylaws of the Company or (b) with or without the giving of notice or the
passage of time (i) violate, conflict with, or result in a breach of, or a
default or loss of rights under, any material covenant, agreement, mortgage,
indenture, lease, instrument, permit or license to which the Company is a party
or by which the Company is bound, or any judgment, order or decree, or any law,
rule or regulation to which the Company is subject, (ii) result in the creation
of, or give any party the right to create, any lien, charge, encumbrance or any
other right or adverse interest (“Liens”) upon any of the assets of the
Company, (iii) terminate or give any party the right to terminate, amend,
abandon or refuse to perform, any material agreement, arrangement or commitment
to which the Company is a party or by which the Company’s assets are bound, or
(iv) accelerate or modify, or give any party the right to accelerate or modify,
the time within which, or the terms under which, the Company is to

2

 

perform any duties or obligations or receive any rights or benefits under
any material agreement, arrangement or commitment to which it is a party.

     2.3 Capitalization. Except as set forth on Schedule 2.3, the authorized
capital stock of the Company immediately prior to giving effect to the
transactions contemplated hereby consists of 20,000,000 shares of Class A
Common Stock par value $.0001 per share, of which 1,048,794 shares are issued
and outstanding; 1,700,000 shares of Class B Common Stock par value $.0001 per
share, of which 1,700,000 shares are issued and outstanding; and 5,000,000
shares of Preferred Stock, none of which are outstanding. All of the
outstanding shares of capital stock are, and the Company Shares when issued in
accordance with the terms hereof will be, duly authorized, validly issued,
fully paid and non-assessable, and have not been or, with respect to the
Company Shares, will not be, issued in violation of any preemptive right of
stockholders. The Company Shares are not subject to any preemptive or
subscription right, any voting trust agreement or other contract, agreement,
arrangement, option, warrant, call, commitment or other right of any character
obligating or entitling the Company to issue, sell, redeem or repurchase any of
its securities. There are outstanding options to purchase an aggregate of
300,000 shares of Class A Common Stock. The options are exercisable at prices
ranging from $1.50 per share to $1.65 per share. In addition, there are 850,000
Common Stock Purchase Warrants outstanding. The Company has not granted
registration rights to any person.

     2.4 Financial Statements. Schedule 2.4 contains copies of the
consolidated balance sheet of the Company at December 31, 2000 and the related
statements of operations, stockholders’ equity and cash flows for the fiscal
year then ended, including the notes thereto, as audited by Spear, Safer,
Harmon & Co., certified public accountants and the unaudited balance sheet of
the Company at March 31, 2001, and the related consolidated statements of
operations, stockholders’ equity and cash flows for the three month period then
ended prepared by the Company’s management (collectively, the “Company
Financial Statements”). The Company Financial Statements have been prepared in
accordance with U.S. generally accepted accounting principles applied on a
basis consistent throughout all periods presented, subject to, in the case of
the interim statements, audit adjustments, which are not expected to be
material. Such statements present fairly the financial position of the Company
as of the dates and for the periods indicated. The books of account and other
financial records of the Company have been maintained in accordance with good
business practices.

     2.5 Further Financial Matters. The Company does not have any liabilities
or obligations, whether secured or unsecured, accrued, determined, absolute or
contingent, asserted or unasserted or otherwise, which are required to be
reflected or reserved in a balance sheet or the notes thereto under generally
accepted accounting principles, but which are not reflected in the Company
Financial Statements.

     2.6 Taxes. The Company and each subsidiary of the Company has filed all
United States federal, state, county, local and foreign national, provincial
and local returns and reports which were required to be filed on or prior to
the date hereof in respect of all income, withholding, franchise, payroll,
excise, property, sales, use, value added or other taxes or levies, imposts,
duties, license and registration fees, charges, assessments or withholdings of
any nature whatsoever (together, “Taxes”), and has paid all Taxes (and any
related penalties, fines and interest) which have become due pursuant to such
returns or reports or pursuant to any

3

 

assessment which has become payable, or, to the extent its liability for
any Taxes (and any related penalties, fines and interest) has not been fully
discharged, the same have been properly reflected as a liability on the books
and records of the Company or such subsidiary and adequate reserves therefore
have been established. All such returns and reports filed on or prior to the
date hereof have been properly prepared and are true, correct (and to the
extent such returns reflect judgments made by the Company, as the case may be,
such judgments were reasonable under the circumstances) and complete in all
material respects. No tax return or tax return liability of the Company or
such subsidiary has been audited or, presently under audit. The Company has
not given or been requested to give waivers of any statute of limitations
relating to the payment of any Taxes (or any related penalties, fines and
interest). There are no claims pending or, to the knowledge of the Company,
threatened, against the Company or such subsidiary for past due Taxes. All
payments for withholding taxes, unemployment insurance and other amounts
required to be paid for periods prior to the date hereof to any governmental
authority in respect of employment obligations of the Company or such
subsidiary, including, without limitation, amounts payable pursuant to the
Federal Insurance Contributions Act, have been paid or shall be paid prior to
the Closing and have been duly provided for on the books and records of the
Company and in the Company Financial Statements.

     2.7 Indebtedness; Contracts; No Defaults.

          (a) Schedule 2.7 sets forth a true, complete and correct list of all
material instruments, agreements, indentures, mortgages, guarantees, notes,
commitments, accommodations, letters of credit or other arrangements or
understandings, whether written or oral, to which the Company or any subsidiary
of the Company is a party (collectively, the “Company Agreements”).

          (b) Except as disclosed in Schedule 2.7, neither the Company or any
subsidiary of the Company nor, to the Company’s knowledge, any other person or
entity is in breach in any material respect of, or in default in any material
respect under, any material contract, agreement, arrangement, commitment or
plan to which the Company or any subsidiary of the Company is a party, and no
event or action has occurred, is pending or is threatened, which, after the
giving of notice, passage of time or otherwise, would constitute or result in
such a material breach or material default by the Company or any subsidiary of
the Company or, to the knowledge of the Company, any other person or entity.
Neither the Company nor any subsidiary of the Company has received any notice
of default under any contract, agreement, arrangement, commitment or plan to
which it is a party, which default has not been cured to the satisfaction of,
or duly waived by, the party claiming such default on or before the date
hereof.

     2.8 Personal Property. The Company has good and marketable title to all
of its tangible personal property and assets, including, without limitation,
all of the assets reflected in the Company Financial Statements that have not
been disposed of in the ordinary course of business and such property is free
and clear of all Liens or mortgages.

     2.9 Real Property. Schedule 2.9 sets forth a true and complete list of
all real property owned by, or leased or subleased by or to, the Company or any
subsidiary of the Company.

4

 

     2.10 Compliance with Law. Neither the Company nor any subsidiary of the
Company is conducting its business or affairs in violation of any applicable
foreign, federal, state or local law, ordinance, rule, regulation, court or
administrative order, decree or process, or any requirement of insurance
carriers. The Company has not received any notice of violation or claimed
violation of any such law, ordinance, rule, regulation, order, decree, process
or requirement.

     2.11 No Adverse Changes. There have not been (a) any material adverse
change in the business, prospects, the financial or other condition, or the
respective assets or liabilities of the Company or any subsidiary of the
Company as reflected in the Company Financial Statements, (b) any material loss
sustained by the Company or any subsidiary of the Company, including, but not
limited to any loss on account of theft, fire, flood, explosion, accident or
other calamity, whether or not insured, which has materially and adversely
interfered, or may materially and adversely interfere, with the operation of
the Company’s or such subsidiary’s business, or (c) any event, condition or
state of facts, including, without limitation, the enactment, adoption or
promulgation of any law, rule or regulation, the occurrence of which materially
and adversely does or would affect the results of operations or the business or
financial condition of the Company or any subsidiary of the Company.
Notwithstanding the foregoing, the Company’s business operations are currently
inactive.

     2.12 Litigation. Except as set forth on Schedule 2.12, there is no claim,
dispute, action, suit, proceeding or investigation pending or, to the knowledge
of the Company, threatened, against or affecting the business of the Company or
any subsidiary of the Company, or challenging the validity or propriety of the
transactions contemplated by this Agreement, at law or in equity or admiralty
or before any federal, state, local, foreign or other governmental authority,
board, agency, commission or instrumentality, nor to the knowledge of the
Company, has any such claim, dispute, action, suit, proceeding or investigation
been pending or threatened, during the 12-month period preceding the date
hereof; (b) there is no outstanding judgment, order, writ, ruling, injunction,
stipulation or decree of any court, arbitrator or federal, state, local,
foreign or other governmental authority, board, agency, commission or
instrumentality, against or materially affecting the business of the Company or
any subsidiary of the Company; and (c) the Company has not received any written
or verbal inquiry from any federal, state, local, foreign or other governmental
authority, board, agency, commission or instrumentality concerning the possible
violation of any law, rule or regulation or any matter disclosed in respect of
its business.

     2.13 Insurance. Except as set forth on Schedule 2.13 attached hereto, the
Company does not currently maintain any form of insurance.

     2.14 Articles of Incorporation and By-laws; Minute Books. The copies of
the Articles of Incorporation and Bylaws (or similar governing documents) of
the Company and all amendments to each are true, correct and complete. The
minute books of the Company and each subsidiary of the Company contain true and
complete records of all meetings and consents in lieu of meetings of their
respective Board of Directors (and any committees thereof), or similar
governing bodies, since the time of their respective organization.

     2.15 Employee Benefit Plans. The Company does not maintain, nor has the
Company maintained in the past, any employee benefit plans (“as defined in
Section 3(3) of the Employee

5

 

Retirement Income Security Act of 1974, as amended (“ERISA”)), or any
plans, programs, policies, practices, arrangements or contracts (whether group
or individual) providing for payments, benefits or reimbursements to employees
of the Company, former employees, their beneficiaries and dependents under
which such employees, former employees, their beneficiaries and dependents are
covered through an employment relationship with the Company, any entity
required to be aggregated in a controlled group or affiliated service group
with the Company for purposes of ERISA or the Internal Revenue Code of 1986
(the “Code”) (including, without limitation, under Section 414(b), (c), (m) or
(o) of the Code or Section 4001 of ERISA, at any relevant time (“Benefit
Plans”).

     2.16 Patents; Trademarks and Intellectual Property Rights. The Company
does not own or possesses any patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information, Internet web site(s) or
proprietary rights of any nature.

     2.17 Affiliate Transactions. Except as disclosed in Schedule 2.17,
neither the Company nor any officer, director or employee of the Company (or
any of the relatives or Affiliates of any of the aforementioned Persons) is a
party to any agreement, contract, commitment or transaction with the Company or
affecting the business of the Company, or has any interest in any property,
whether real, personal or mixed, or tangible or intangible, used in or
necessary to the Company which will subject the Sellers to any liability or
obligation from and after the Closing Date.

     2.18 Trading. The Company’s Common Stock is currently listed for trading
on the American Stock Exchange (“AMEX”), and the Company has received notice
that its Common Stock is subject to being delisted therefrom. The Company is
deficient in several listing requirements.

     2.19 Compliance. The Company and the Shareholders have complied in all
material respects with all applicable foreign, federal and state laws, rules
and regulations, including, without limitation, the requirements of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the
Securities Act of 1933, as amended, (the “Securities Act”) and is current in
its filings.

     2.20 Filings. None of the filings made by the Company under the
Securities Act or the Exchange act make any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
made, in light of the circumstances under which they were made, not misleading.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF NEW DRAGON

     New Dragon represents and warrants to the Company that now and/or as of
the Closing:

     3.1 Due Organization and Qualification; Subsidiaries; Due Authorization.

          (a) Each Subsidiary is an entity duly organized, validly existing and in
good standing under the laws of the British Virgin Islands, with full power and
authority to own, lease

6

 

and operate its business and properties and to carry on its business in
the places and in the manner as presently conducted or proposed to be
conducted.

          (b) The Subsidiaries do not own, directly or indirectly, any capital
stock, equity or interest in any corporation, firm, partnership, joint venture
or other entity, except as set forth on Schedule 3.1. Except as set forth on
Schedule 3.1, each entity listed on Schedule 3.1 is wholly owned by the
applicable Subsidiary. All the outstanding shares of capital stock of each
Subsidiary listed on Schedule 3.1 are owned free and clear of all liens. There
is no contract, agreement, arrangement, option, warrant, call, commitment or
other right of any character obligating or entitling any such Subsidiary to
issue, sell, redeem or repurchase any of its securities, and there is no
outstanding security of any kind convertible into or exchangeable for
securities of any such entity.

          (c) New Dragon has requisite power and authority to execute and deliver
this Agreement, and to consummate the transactions contemplated hereby and
thereby. New Dragon has taken all action necessary for the execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby, and this Agreement constitutes the valid and binding
obligation of New Dragon, enforceable against New Dragon in accordance with its
terms, except as may be affected by bankruptcy, insolvency, moratoria or other
similar laws affecting the enforcement of creditors’ rights generally and
subject to the qualification that the availability of equitable remedies is
subject to the discretion of the court before which any proceeding therefore
may be brought.

     3.2 No Conflicts or Defaults. The execution and delivery of this
Agreement by New Dragon and the consummation of the transactions contemplated
hereby do not and shall not (a) contravene the organizational documents of New
Dragon or any Subsidiary, or (b) with or without the giving of notice or the
passage of time, (i) violate, conflict with, or result in a breach of, or a
default or loss of rights under, any material covenant, agreement, mortgage,
indenture, lease, instrument, permit or license to which New Dragon or such
Subsidiary is a party or by which New Dragon or such Subsidiary or any of their
respective assets are bound, or any judgment, order or decree, or any law, rule
or regulation to which New Dragon, such Subsidiary or any of their respective
assets are subject, (ii) result in the creation of, or give any party the right
to create, any Lien upon any of the assets of any Subsidiary, or (iii)
terminate or give any party the right to terminate, amend, abandon or refuse to
perform, any material agreement, arrangement or commitment to which any
Subsidiary is a party or by which any Subsidiary or any of its assets are
bound, or (iv) accelerate or modify, or give any party the right to accelerate
or modify, the time within which, or the terms under which any Subsidiary is to
perform any duties or obligations or receive any rights or benefits under any
material agreement, arrangement or commitment to which it is a party.

     3.3 Capitalization. Set forth on Schedule 3.3 is a list of all Equity
Interests in the Subsidiaries, setting forth the names, addresses and number of
shares owned. All of the Equity Interests in such Subsidiaries are, and when
transferred in accordance with the terms hereof, will be, duly authorized,
validly issued, fully paid and nonassessable, and have not been or will not be
transferred in violation of any rights of third parties. The shares are not
subject to any preemptive or subscription right, any voting trust agreement or
other contract, agreement, arrangement, option, warrant, call, commitment or
other right of any character obligating or

7

 

entitling any Subsidiary to issue, sell, redeem or repurchase any of its
securities, and there is no outstanding security of any kind convertible into
or exchangeable for shares.

     3.4 Financial Statements. Schedule 3.4 contains copies of the draft
audited combined balance sheet of New Dragon relating solely to the
Subsidiaries as at December 25, 2000, and the related combined Statement of
Operations, Stockholders’ Equity and Cash Flows for the period then ended,
including the notes thereto, (the “New Dragon Financial Statements”). The New
Dragon Financial Statements, together with the notes thereto, have been
prepared in accordance with generally accepted accounting principles all
subject to audit adjustments, which are not expected to be material. The New
Dragon Financial Statements present fairly the consolidated financial position
of the Subsidiaries as of the date and for the period indicated. The books of
account and other financial records of New Dragon as they pertain to the
Subsidiaries have been maintained in accordance with good business practices.
On or prior to the Closing, New Dragon will deliver to the Company audited New
Dragon Financial Statements which will substantially conform to the draft
financial statements.

     3.5 Further Financial Matters. Except as set forth on Schedule 3.5, the
Subsidiaries have no material liabilities or obligations, whether secured or
unsecured, accrued, determined, absolute or contingent, asserted or unasserted
or otherwise, which are required to be reflected or reserved in a balance sheet
or the notes thereto under generally accepted accounting principles, but which
are not reflected in the New Dragon Financial Statements.

     3.6 Taxes. Except as indicated on Schedule 3.6, the Subsidiaries have
complied with all relevant legal requirements relating to registration or
notification for taxation purposes. All tax returns and reports filed on or
prior to the date hereof have been properly prepared and are true, correct (and
to the extent such returns reflect judgments made by the Subsidiaries, such
judgments were reasonable under the circumstances) and complete in all material
respects. Except as indicated on Schedule 3.6, no extension for the filing of
any such return or report is currently in effect. Except as indicated on
Schedule 3.6, no tax return or tax return liability of the Subsidiaries has
been audited or, presently under audit. All taxes which have been asserted to
be payable as a result of any audits have been paid or have been provided for
in the New Dragon Financial Statements. Except as indicated on Schedule 3.6,
the Subsidiaries have not given or been requested to give waivers of any
statute of limitations relating to the payment of any Taxes (or any related
penalties, fines and interest). Except as indicated on Schedule 3.6, all
payments for withholding taxes, unemployment insurance and other amounts
required to be paid for periods prior to the date hereof to any governmental
authority in respect of employment obligations of the Subsidiaries have been
paid or shall be paid prior to the Closing and have been duly provided for on
the books and records of the Subsidiaries and in the New Dragon Financial
Statements.

     3.7 Indebtedness; Contracts; No Defaults.

          (a) Schedule 3.7 sets forth a true, complete and correct list of all
material instruments, agreements, indentures, mortgages, guarantees, notes,
commitments, accommodations, letters of credit or other arrangements or
understandings, whether written or oral, to which the Subsidiaries are a party
(collectively, the “New Dragon Operating Agreements”). An agreement shall not
be considered material for the purposes of this

8

 

Section 3.7(a) if it provides for expenditures or receipts of less than US
$100,000 and has been entered into by any Subsidiary in the ordinary course of
business. The New Dragon Operating Agreements constitute all of the contracts,
agreements, understandings and arrangements required for the operation of the
business of the Subsidiaries or which have a material effect thereon. Copies
of all such material written New Dragon Operating Agreements have previously
been delivered or otherwise made available to the Company and such copies are
true, complete and correct as of the date hereof.

          (b) Except as disclosed on Schedule 3.7, each Subsidiary, or to New
Dragon’s knowledge, any other person or entity, is not in breach in any
material respect of, or in default in any material respect under, any material
contract, agreement, arrangement, commitment or plan to which any Subsidiary is
a party, and no event or action has occurred, is pending or is threatened,
which, after the giving of notice, passage of time or otherwise, would
constitute or result in such a material breach or material default by such
Subsidiary to the knowledge of any other person or entity. No Subsidiary has
received any notice of default under any contract, agreement, arrangement,
commitment or plan to which it is a party, which default has not been cured to
the satisfaction of, or duly waived by, the party claiming such default on or
before the date hereof.

     3.8 Personal Property. Except as set forth on Schedule 3.8, the
Subsidiaries have good and marketable title to all of its tangible personal
property and assets, including, without limitation, all of the assets reflected
in the New Dragon Financial Statements that have not been disposed of in the
ordinary course of business since December 25, 2000, free and clear of all
Liens or mortgages, except for any Lien for current taxes not yet due and
payable and such restrictions, if any, on the disposition of securities as may
be imposed by federal or applicable state securities laws.

     3.9 Real Property.

          (a) Schedule 3.9 sets forth a true and complete list of all real property
owned by, or leased or subleased by or to, the Subsidiaries.

          (b) Except as set forth on Schedule 3.9, each lease to which the
Subsidiary is a party is valid, binding and in full force and effect with
respect to such Subsidiary and, to the knowledge of New Dragon, all other
parties thereto; no notice of default or termination under any such lease is
outstanding.

     3.10 Compliance with Law. Except as set forth on Schedule 3.10, each
Subsidiary is conducting its respective business or affairs in material
compliance with applicable law, ordinance, rule, regulation, court or
administrative order, decree or process, or any requirement of insurance
carriers. No Subsidiary has received any notice of violation or claimed
violation of any such law, ordinance, rule, regulation, order, decree, process
or requirement.

     3.11 Permits and Licenses. Except as set forth on Schedule 3.11, each
Subsidiary has all certificates of occupancy, rights, permits, certificates,
licenses, franchises, approvals and other authorizations as are reasonably
necessary to conduct its respective business and to own, lease, use, operate
and occupy its assets, at the places and in the manner now conducted and

9

 

operated, except those the absence of which would not materially adversely
affect its respective business. Except as set forth on Schedule 3.11, as of
the date hereof, the Subsidiaries have not received any written or oral notice
or claim pertaining to the failure to obtain any material permit, certificate,
license, approval or other authorization required by any agency or other
regulatory body, the failure of which to obtain would materially and adversely
affect its business.

     3.12 No Adverse Changes. Except as set forth on Schedule 3.12, since
December 25, 2000, there has not been (a) any material adverse change in the
business, prospects, the financial or other condition, or the respective assets
or liabilities of the Subsidiaries as reflected in the New Dragon Financial
Statements, (b) any material loss sustained by any Subsidiary, including, but
not limited to any loss on account of theft, fire, flood, explosion, accident
or other calamity, whether or not insured, which has materially and adversely
interfered, or may materially and adversely interfere, with the operation of
the Subsidiaries’ business, or (c) to the best knowledge of New Dragon, any
event, condition or state of facts, including, without limitation, the
enactment, adoption or promulgation of any law, rule or regulation, the
occurrence of which materially and adversely does or would affect the results
of operations or the business or financial condition of the Subsidiaries.

     3.13 Litigation. (a) Except as set forth on Schedule 3.13, there is no
claim, dispute, action, suit, proceeding or investigation pending or, to the
knowledge of New Dragon threatened, against or affecting the business of any
Subsidiary, or challenging the validity or propriety of the transactions
contemplated by this Agreement, at law or in equity or admiralty or before any
authority, board, agency, commission or instrumentality, nor to the knowledge
of New Dragon, has any such claim, dispute, action, suit, proceeding or
investigation been pending or threatened, during the 12-month period preceding
the date hereof; (b) there is no outstanding judgment, order, writ, ruling,
injunction, stipulation or decree of any court, arbitrator or federal, state,
local, foreign or other governmental authority, board, agency, commission or
instrumentality, against or materially affecting the business of any
Subsidiary; and (c) no Subsidiary has received any written or verbal inquiry
from any federal, state, local, foreign or other governmental authority, board,
agency, commission or instrumentality concerning the possible violation of any
law, rule or regulation or any matter disclosed in respect of its business.

     3.14 Insurance. The Subsidiaries maintain insurance against all risks
customarily insured against by companies in its industry. All such policies
are in full force and effect, and no Subsidiary has received any notice from
any insurance company suspending, revoking, modifying or canceling (or
threatening such action) any insurance policy issued to such Subsidiary.

     3.15 Articles of Association; Minute Books. The copies of the Articles of
Association of the Subsidiaries, and all amendments to each are true, correct
and complete. The minute books of the Subsidiaries contain true and complete
records of all meetings and consents in lieu of meetings of their Board of
Directors (and any committees thereof), or similar governing bodies, since the
time of their respective organization. The stock records of the Subsidiaries
are true, correct and complete.

     3.16 Employee Benefit Plans. Except as set forth on Schedule 3.17, the
Subsidiaries do not have in existence any share incentive, share option scheme
or profit sharing bonus or

10

 

other such incentive scheme for any of its directors or employees. Except
as set forth in Item 3.17 or required under the applicable laws, there are no
arrangements, schemes, customs or practices (whether legally enforceable or
not) in operation for the payment of or contributions towards any provident
fund, pensions, allowances, lump sums or other like benefits on retirement or
on death or during periods of sickness or disablement for the benefit of any
director or former director or employee or former employee or for the benefit
of the dependents of any such persons nor has any proposal been announced to
establish any such agreement or agreements.

     3.17 Patents; Trademarks and Intellectual Property Rights. Each
Subsidiary owns or possesses sufficient legal rights to all patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information, internet web site(s) proprietary rights and processes necessary
for its business as now conducted without any conflict with or infringement of
the rights of others. Except as set forth on Schedule 3.18, there are no
outstanding options, licenses or agreements of any kind relating to the
foregoing, and no Subsidiary is bound by, or a party to, any options, licenses
or agreements of any kind with respect to the patents, trademarks, service
marks, trade names, copyrights, trade secrets, licenses, information,
proprietary rights and processes of any other person or entity.

     3.18 Brokers. Except as set forth on Schedule 3.18, all negotiations
relative to this Agreement and the transactions contemplated hereby have been
carried without the intervention of any Person in such a manner as to give rise
to any valid claim by any Person against any Seller for a finder’s fee,
brokerage commission or similar payment.

     3.19 Purchase for Investment.

          (a) New Dragon is acquiring the Company Shares for investment for New
Dragon’s own account and not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and New Dragon has no present
intention of selling, granting any participation in, or otherwise distributing
the same. New Dragon further represents that it does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or
grant participation to such person or to any third person, with respect to any
of the Company Shares.

          (b) New Dragon understands that the Company Shares are not registered
under the Securities Act on the ground that the sale and the issuance of
securities hereunder is exempt from registration under the Securities Act
pursuant to Section 4(2) thereof, and that the Company’s reliance on such
exemption is predicated on New Dragon’s representations set forth herein. New
Dragon is an “accredited investor” as that term is defined in Rule 501(a) of
Regulation D under the Securities Act.

     3.20 Investment Experience. New Dragon acknowledges that New Dragon can
bear the economic risk of its investment, and has such knowledge and experience
in financial and business matters that it is capable of evaluating the merits
and risks of the investment in the Company Shares.

     3.21 Information. New Dragon has carefully reviewed such information as
New Dragon deemed necessary to evaluate an investment in the Company Shares.
To the full

11

 

satisfaction of New Dragon, it has been furnished all materials that it
has requested relating to the Company and the issuance of the Company Shares
hereunder, and New Dragon has been afforded the opportunity to ask questions of
representatives of the Company to obtain any information necessary to verify
the accuracy of any representations or information made or given to New Dragon.
Notwithstanding the foregoing, nothing herein shall derogate from or otherwise
modify the representations and warranties of the Company set forth in this
Agreement, on which each of New Dragon has relied in making an exchange of the
Equity Interests of the Company Shares.

     3.22 Restricted Securities. New Dragon understands that the Company
Shares may not be sold, transferred, or otherwise disposed of without
registration under the Act or an exemption there from, and that in the absence
of an effective registration statement covering the Company Shares or any
available exemption from registration under the Securities Act, the Company
Shares must be held indefinitely. New Dragon is aware that the Company Shares
may not be sold pursuant to Rule 144 promulgated under the Securities Act
unless all of the conditions of that Rule are met. Among the conditions for
use of Rule 144 may be the availability of current information to the public
about the Company.

ARTICLE IV

INDEMNIFICATION

     4.1 Indemnity of the Company and the Shareholders. The Company and the
Shareholders agree to jointly and severally defend, indemnify and hold harmless
New Dragon from and against, and to reimburse New Dragon with respect to, all
liabilities, losses, costs and expenses, including, without limitation,
reasonable attorneys’ fees and disbursements, asserted against or incurred by
New Dragon by reason of, arising out of, or in connection with any material
breach of any representation or warranty contained in this Agreement made by
the Company or the Shareholders or in any document or certificate delivered by
the Company or the Shareholders pursuant to the provisions of this Agreement or
in connection with the transactions contemplated thereby.

     4.2 Indemnity of the Company. New Dragon agrees to defend, indemnify and
hold harmless the Company from and against, and to reimburse the Company with
respect to, all liabilities, losses, costs and expenses, including, without
limitation, reasonable attorneys’ fees and disbursements, asserted against or
incurred by the Company by reason of, arising out of, or in connection with any
material breach of any representation or warranty contained in this Agreement
and made by New Dragon or in any document or certificate delivered by New
Dragon pursuant to the provisions of this Agreement or in connection with the
transactions contemplated thereby.

     4.3 Indemnification Procedure. A party (an “Indemnified Party”) seeking
indemnification shall give prompt notice to the other party (the “Indemnifying
Party”) of any claim for indemnification arising under this Article 4. The
Indemnifying Party shall have the right to assume and to control the defense of
any such claim with counsel reasonably acceptable to such Indemnified Party, at
the Indemnifying Party’s own cost and expense, including the cost and expense
of reasonable attorneys’ fees and disbursements in connection with such
defense, in

12

 

which event the Indemnifying Party shall not be obligated to pay the fees
and disbursements of separate counsel for such in such action. In the event,
however, that such Indemnified Party’s legal counsel shall determine that
defenses may be available to such Indemnified Party that are different from or
in addition to those available to the Indemnifying Party, in that there could
reasonably be expected to be a conflict of interest if such Indemnifying Party
and the Indemnified Party have common counsel in any such proceeding, or if the
Indemnified Party has not assumed the defense of the action or proceedings,
then such Indemnifying Party may employ separate counsel to represent or defend
such Indemnified Party, and the Indemnifying Party shall pay the reasonable
fees and disbursements of counsel for such Indemnified Party. No settlement of
any such claim or payment in connection with any such settlement shall be made
without the prior consent of the Indemnifying Party which consent shall not be
unreasonably withheld.

ARTICLE V

DELIVERIES

     5.1 Items to be delivered to New Dragon prior to or at Closing by the
Company.

          (a) articles of incorporation and amendments thereto, bylaws and
amendments thereto, certificate of good standing in the Company’s state of
incorporation;

          (b) all applicable schedules hereto;

          (c) all minutes and resolutions of board of director and shareholder
meetings in possession of the Company;

          (d) shareholder list;

          (e) all financial statements and tax returns in possession of the Company;

          (f) resolution from the Company’s current directors appointing designees
of New Dragon to the Company’s Board of Directors;

          (g) letters of resignation from the Company’s current officers and
directors to be effective upon Closing and after the appointments described in
this section;

          (h) instructions for the issuance of certificates representing 38,060,763
Company Shares issued in the denominations as set forth opposite the respective
names as designated by New Dragon on or before the Closing, duly authorized,
validly issued, fully paid for and non-assessable;

          (i) copies of board, and if applicable, shareholder resolutions approving
this transaction and authorizing the issuances of the shares hereto;

          (j) any other document reasonably requested by New Dragon that it deems
necessary for the consummation of this transaction.

     5.2 Items to be delivered to the Company prior to or at Closing by New
Dragon.

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          (a) articles of association and amendments thereto and amendments thereto
with respect to each Subsidiary;

          (b) all applicable schedules hereto;

          (c) all minutes and resolutions of board of director and shareholder
meetings of each Subsidiary in possession of New Dragon;

          (d) shareholder list;

          (e) all financial statements and tax returns in possession of the
Subsidiaries;

          (f) resolution from New Dragon’s current directors appointing designees of
New Dragon to the Company’s Board of Directors;

          (g) copies of board, and if applicable, shareholder resolutions approving
this transaction and authorizing the issuances of the shares hereto; and

          (h) any other document reasonably requested by the Company that it deems
necessary for the consummation of this transaction.

ARTICLE VI

CONDITIONS PRECEDENT

     6.1 Conditions Precedent to Closing. The obligations of the parties under
this Agreement shall be and are subject to fulfillment, prior to or at the
Closing, of each of the following conditions:

          (a) That each of the representations and warranties of the parties
contained herein shall be true and correct at the time of the Closing Date as
if such representations and warranties were made at such time.

          (b) That the parties shall have performed or complied with all agreements,
terms and conditions required by this Agreement to be performed or complied
with by them prior to or at the time of the Closing.

          (c) No material adverse change shall have occurred in the financial,
business or trading conditions of the Company and the Subsidiaries, taken as a
whole, as the case may be, from the date hereof up to and including the Closing
Date.

     6.2 Conditions to Obligations New Dragon. The obligations of New Dragon
shall be subject to fulfillment prior to or at the Closing of each of the
following conditions:

          (a) The Shareholders shall have paid all of the costs and expenses of the
Company associated with the transactions contemplated by this Agreement;

14

 

          (b) As of the Closing, the Company shall have transferred all of its
assets and assigned all of its liabilities whatsoever, contingent or otherwise,
to the effect that immediately prior to the Exchange, the Company will have no
assets or liabilities. All such transfers and assignments shall be in form and
substance reasonably satisfactory to New Dragon and its counsel.

          (c) The Company shall have entered into a registration rights agreement
with all the Sellers in the form attached as Exhibit 6.2(c) (the “Registration
Rights Agreement”).

          (d) The Company shall have delivered evidence reasonably satisfactory to
New Dragon regarding the approval of the shareholders of the Company for this
Agreement, the transfer of the Company’s assets referred to in Section 6.2(b)
(the “Transferred Assets”) and the change of the Company’s name as may be
designated by New Dragon after the date hereof (the “Name Change”).

          (e) The Company and New Dragon shall have received notification from AMEX
that the Company’s Common Stock shall be continued to be listed for trading on
AMEX which condition has been waived by New Dragon.

          (f) The Company and the Shareholders shall have entered into a Pledge
Agreement respecting the Company’s and the Shareholders’ obligations pursuant
to Section 4.1 hereof, in form and substance reasonably satisfactory to New
Dragon.

          (g) The Company shall have increased the authorized shares of Class A
Common Stock to 100,000,000 (the “Share Increase”).

          (h) All of the shareholders holding shares of Class B Common Stock shall
have converted such shares to shares of Class A Common Stock on a one-for-one
basis so that, immediately prior to the Closing, the Company shall have no more
than 2,852,000 (excluding certain shares and options described in 2.3) shares
of Common Stock outstanding on a fully diluted basis.

ARTICLE VII

COVENANTS

     7.1 Shareholders Vote. As soon as practicable after the date hereof, the
Company shall (a) cause the preparation and filing with the Securities and
Exchange Commission a proxy statement with respect to this Agreement, the
transfer of the Transferred Assets, the Share Increase and the Name Change and
(b) call a special meeting of the Shareholders (the “Special Meeting”) to
approve such matters.

     7.2 AMEX Application. New Dragon shall provide such information as may be
reasonably requested by AMEX relating to the continued listing of the Company’s
Common Stock on AMEX.

15

 

     7.3 Shareholders Vote. Each of the Shareholders agrees to vote all shares
beneficially owned by such Shareholder at the Special Meeting in favor of the
matters referred to in Section 7.1.

ARTICLE VIII

NO PUBLIC DISCLOSURE

     8.1 No Public Disclosure. Without the prior written consent of the
others, none of the Company or New Dragon will, and will each cause their
respective representatives not to, make any release to the press or other
public disclosure with respect to either the fact that discussions or
negotiations have taken place concerning the transactions contemplated by this
Agreement, the existence or contents of this Agreement or any prior
correspondence relating to this transactions contemplated by this Agreement,
except for such public disclosure as may be necessary, in the written opinion
of outside counsel (reasonably satisfactory to the other parties) for the party
proposing to make the disclosure not to be in violation of or default under any
applicable law, regulation or governmental order. If either party proposes to
make any disclosure based upon such an opinion, that party will deliver a copy
of such opinion to the other party, together with the text of the proposed
disclosure, as far in advance of its disclosure as is practicable, and will in
good faith consult with and consider the suggestions of the other party
concerning the nature and scope of the information it proposes to disclose.

ARTICLE IX

CONFIDENTIAL INFORMATION

     9.1 Confidential Information. In connection with the negotiation of this
Agreement and the consummation of the transactions contemplated hereby, each
party hereto will have access to data and confidential information relating to
the other party. Each party hereto shall treat such data and information as
confidential, preserve the confidentiality thereof and not duplicate or use
such data or information, except in connection with the transactions
contemplated hereby, and in the event of the termination of this Agreement for
any reason whatsoever, each party hereto shall return to the other all
documents, work papers and other material (including all copies thereof)
obtained in connection with the transactions contemplated hereby and will use
reasonable efforts, including instructing its employees who have had access to
such information, to keep confidential and not to use any such data or
information; provided, however, that such obligations shall not apply to any
data and information (i) which at the time of disclosure, is available
publicly, (ii) which, after disclosure, becomes available publicly through no
fault of the receiving party, (iii) which the receiving party knew or to which
the receiving party had access prior to disclosure by the disclosing party,
(iv) which is required by law, regulation or exchange rule, or in connection
with legal process, to be disclosed, (v) which is disclosed by a receiving
party to its attorneys or accountants, who shall respect the above
restrictions, or (vi) which is obtained in connection with any Tax matters and
is disclosed in connection with the filing of Tax returns or claims for refund
or in conducting an audit or other proceeding.

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ARTICLE X

TERMINATION

     10.1 Termination. This Agreement may be terminated at any time before or,
at Closing, by:

          (a) The mutual agreement of the constituent parties;

          (b) Any party if:

               (i) Any provision of this Agreement applicable to a party shall be
materially untrue or fail to be accomplished;

               (ii) Any legal proceeding shall have been instituted or shall be
imminently threatening to delay, restrain or prevent the consummation of this
Agreement; or

               (iii) If by November 9, 2001, the conditions precedents to Closing are not
satisfied or waived.

ARTICLE XI

MISCELLANEOUS

     11.1 Survival of Representations, Warranties and Agreements. All
representations and warranties and statements made by a party to in this
Agreement or in any document or certificate delivered pursuant hereto shall
survive the Closing Date for so long as the applicable statute of limitations
shall remain open. Each of the parties hereto is executing and carrying out
the provisions of this agreement in reliance upon the representations,
warranties and covenants and agreements contained in this agreement or at the
closing of the transactions herein provided for and not upon any investigation
which it might have made or any representations, warranty, agreement, promise
or information, written or oral, made by the other party or any other person
other than as specifically set forth herein.

     11.2 Access to Books and Records. During the course of this transaction
through Closing, each party agrees to make available for inspection all
corporate books, records and assets, and otherwise afford to each other and
their respective representatives, reasonable access to all documentation and
other information concerning the business, financial and legal conditions of
each other for the purpose of conducting a due diligence investigation thereof.
Such due diligence investigation shall be for the purpose of satisfying each
party as to the business, financial and legal condition of each other for the
purpose of determining the desirability of consummating the proposed
transaction. The Parties further agree to keep confidential and not use for
their own benefit, except in accordance with this Agreement any information or
documentation obtained in connection with any such investigation.

     11.3 Further Assurances. If, at any time after the Closing, the parties
shall consider or be advised that any further deeds, assignments or assurances
in law or that any other things are necessary, desirable or proper to complete
the merger in accordance with the terms of this

17

 

agreement or to vest, perfect or confirm, of record or otherwise, the
title to any property or rights of the parties hereto, the Parties agree that
their proper officers and directors shall execute and deliver all such proper
deeds, assignments and assurances in law and do all things necessary, desirable
or proper to vest, perfect or confirm title to such property or rights and
otherwise to carry out the purpose of this Agreement, and that the proper
officers and directors the parties are fully authorized to take any and all
such action.

     11.4 Notice. All communications, notices, requests, consents or demands
given or required under this Agreement shall be in writing and shall be deemed
to have been duly given when delivered to, or received by prepaid registered or
certified mail or recognized overnight courier addressed to, or upon receipt of
a facsimile sent to, the party for whom intended, as follows, or to such other
address or facsimile number as may be furnished by such party by notice in the
manner provided herein:

	 	If to the Company:

	 	BioAqua Systems Inc.

350 E. Las Olas Blvd., Suite 1700

Ft. Lauderdale, FL 33301

Attention: President

Tel: 954-763-1200

Fax: 954-766-7800

	 	If to the Shareholders:

	 	c/o Robert Heiss

99 University Place, 8th Floor

New York, NY 10003

	 	If to New Dragon:

	 	Suite 1304, 13th Floor

Wing On Centre

Connaught Road Central

Hong Kong

Tel: 852-2815-9892

Fax: 852-2815-9839

Attention: Willie Lai

Email: willie@longfeng.com.hk

	 	Or such other as New Dragon may notify to the other parties to the
Agreement by not less than five (5) Business Day’s notice.

     11.5 Entire Agreement. This Agreement, the Schedules and any instruments
and agreements to be executed pursuant to this Agreement, sets forth the entire
understanding of the parties hereto with respect to its subject matter, merges
and supersedes all prior and contemporaneous understandings with respect to its
subject matter and may not be waived or modified, in whole or in part, except
by a writing signed by each of the parties hereto. No

18

 

waiver of any provision of this Agreement in any instance shall be deemed
to be a waiver of the same or any other provision in any other instance.
Failure of any party to enforce any provision of this Agreement shall not be
construed as a waiver of its rights under such provision.

     11.6 Successors and Assigns. This Agreement shall be binding upon,
enforceable against and inure to the benefit of, the parties hereto and their
respective heirs, administrators, executors, personal representatives,
successors and assigns, and nothing herein is intended to confer any right,
remedy or benefit upon any other person. This Agreement may not be assigned by
any party hereto except with the prior written consent of the other parties,
which consent shall not be unreasonably withheld.

     11.7 Governing Law. This Agreement shall in all respects be governed by
and construed in accordance with the laws of the State of California are
applicable to agreements made and fully to be performed in such state, without
giving effect to conflicts of law principles.

     11.8 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

     11.9 Construction. Headings contained in this Agreement are for
convenience only and shall not be used in the interpretation of this Agreement.
References herein to Articles, Sections and Exhibits are to the articles,
sections and exhibits, respectively, of this Agreement. The Disclosure
Schedules are hereby incorporated herein by reference and made a part of this
Agreement. As used herein, the singular includes the plural, and the
masculine, feminine and neuter gender each includes the others where the
context so indicates.

     11.10 Severability. If any provision of this Agreement is held to be
invalid or unenforceable by a court of competent jurisdiction, this Agreement
shall be interpreted and enforceable as if such provision were severed or
limited, but only to the extent necessary to render such provision and this
Agreement enforceable.

     11.11 Costs and Expenses. Except as set forth in Section 6.2(a), each
party hereto shall pay its own costs and expenses hereunder, provided that if
the transactions contemplated herein are not completed because (i) of the
failure of the Company or the Shareholders to satisfy any condition precedent
in favor of the Sellers, then the Company and the Shareholders shall forthwith
indemnify and reimburse the Sellers for their costs and expenses, or (ii) of
the failure of the Sellers to satisfy any condition precedent in favor of the
Company, then the Sellers shall forthwith indemnify and reimburse the Company
for its costs and expenses.

     11.12 Equitable Relief. The parties hereto agree that money damages would
not be a sufficient remedy for any breach or threatened breach of any provision
herein and that, in addition to all other remedies which any party may have,
each party will be entitled to specific performance and injunctive or other
equitable relief as a remedy therefor.

19

 

     IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement
as of the date first set forth above.

BIO AQUA SYSTEMS INC.

	 	 	 	 
	By:	 	 
	 	 	

Max Rutman

 

NEW DRAGON ASIA FOOD LIMITED

	 	 	 	 
	By:	 	 
	 	 	

 

Shareholders:

	 	 
	

        Max Rutman	 

 

FLAGSHIP IMPORT EXPORT LLC

	 	 	 	 
	By:	 	 
	 	 	

 

20

 

EXHIBIT

	 	 	 	 	 
	Name	 	Shares to be Issued
	
	 	

	New Dragon Asia Food Limited
	 	 	34,999,469	 
	Dynasty Gold Limited
	 	 	1,627,882	 
	Orient Financial Services Limited
	 	 	1,220,912	 
	David Mayer
	 	 	100,000	 
	Atlas Pearlman, P.A.
	 	 	15,000	 
	 
	 	 	
	 
	Total
	 	 	37,963,263	 

21

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