Xiangshui Luyuan Chemical Co., Ltd.

Xiangshui Luyuan Chemical Co. Ltd. ("Luyuan") is a manufacturer and supplier of specialized chemical products for the industrial market. Luyuan also provides intermediate chemicals for the textile industry. The main products of Luyuan are dihydroxyacetophenone, 2-Amino-4, 6-dimethoxypyrimidine and pigment red 177.

In 2008, the Company’s subsidiary, Luyuan Chemical Co., Ltd., was a defendant in seven lawsuits filed by six individuals requesting Luyuan to repay loans and interest that were allegedly borrowed by Luyuan before being acquired by McVicar’s 100% owned subsidiary, Zhejiang Hongbo Chemical Co.,Ltd (“Hongbo”), in April 2008, and one lawsuit filed by a former employee of Luyuan for wrongful dismissal. In 2009 the local court had ruled against Luyuan. As of June 30, 2010, the total amounts in connection with these legal proceedings determined by the court rulings was RMB2,402,100 ($375,688) of principal and RMB742,699 ($116,158) of compounded interest, and some contingent interest to be determined.

The Company has been able to negotiate with those plaintiffs to settle the disputes by the Company paying approximately RMB1,600,000 ($246,560) to the plaintiffs. The settlement agreements have been signed with those plaintiffs and the Company has paid the amount. As of today’s date, all the disputes have been settled and the Company’s 80% ownership interest in Luyuan are now free of charges.

Based on the original purchase agreement signed by Hongbo, Luyuan believed it had a strong defence to all these claims and thus could reclaim all these pending payments from Luyuan’s previous controlling shareholder, currently a 10% minority shareholder of Luyuan, who had guaranteed all of the existing and any contingent liabilities incurred prior to the period of acquisition. The Company has not yet decided what action will be taken against this Luyuan shareholder.

Before the settlement of the obligations, Luyuan in previous periods had accrued $375,360 (RMB2,400,000) for the contingent liabilities as at June 30, 2010 (December 31, 2009 - $367,200; RMB2,400,000). In addition, as at June 30, 2010 Luyuan had written off the value of its inventory by RMB597,148 ($93,394) and written down the capital assets of Luyuan by RMB1,000,000 ($156,400). These provisions reflect the Company’s best estimate of possible losses according to information available at June 30, 2010. The actual settlement amount is less than management’s former estimate.

As these disputes have now been settled, Luyuan has been able to resume the ownership of inventory with a value of RMB334,142 ($52,260) previously seized by court orders. The Company is in the processes of resuming Luyuan's operations, which were suspended in July 2009. The processes to resume operations include purchase of necessary equipment to use newer technology and increase the production efficiency, repairs and maintenance, and recruiting and training of staff. Management plans to invest approximately $1.2 million (RMB 8 million, including working capital) in resuming the production. Newer technology with better efficiency and lower production costs will be used in Luyuan to produce dihydroxyacetophenone, a key product of Luyuan that is used as material by Hongbo (another subsidiary of the Company) in production for goods supplied to Dupont, a key customer of the Company.

website: www.yclyhg.com