UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-12
________________________________________________________________________________
DIGITAL LEARNING MANAGEMENT CORPORATION
________________________________________________________________________________
(Name of Registrant as Specified in its Charter)
________________________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
_______________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
_______________________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount of which the filing fee
is calculated and state how it was determined):
_______________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
_______________________________________________________________________
(5) Total fee paid:
_______________________________________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:___________________________________________
(2) Form, Schedule or Registration Statement No.:_____________________
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(4) Date Filed:_______________________________________________________
DIGITAL LEARNING MANAGEMENT CORPORATION
680 Langsdorf Drive, Suite 203
Fullerton, California, 92831
NOTICE OF SOLICITATION OF ACTION OF STOCKHOLDERS
BY WRITTEN CONSENT IN LIEU OF MEETING OF STOCKHOLDERS
-----------------------------------------------------
To our Stockholders:
Accompanying this letter is a Consent Solicitation Statement which
solicits the written consent of the stockholders of Digital Learning Management
Corporation relating to the following matters:
1. To approve a reverse split of our common stock in a ratio of one (1)
new share for every 11.97492 existing shares of common stock. There will be no
change to our current authorized shares of common stock and any fractional
shares will be rounded up,
2. To approve amendments to our Certificate of Incorporation to: (a)
effect a 1-for-11.97492 reverse stock split with respect to our common stock
while maintaining the current number of authorized shares of common stock, and
(b) change the name of the Company to "Nutradyne Group, Inc." (the "Amendment"),
and
3. To enter into a Share Exchange Agreement with Chang-chun Yongxin
Dirui Medical Co., Ltd, a China corporation ("Yongxin") and all of the
stockholders of Yongxin.
The written consent of stockholders owning not less than the majority
of the Company's outstanding shares of common stock are required in order to
effect the reverse stock split, change the Company's name, amend the Company's
Certificate of Incorporation and to enter into the Share Exchange Agreement with
Yongxin. In this regard, our shareholders owning approximately 65% of our
outstanding common stock have agreed to vote for these proposals, which is
greater than the vote necessary for their approval.
Pursuant to Section 228(a) of the Delaware General Corporation Law and
our By-laws, no meeting of stockholders will be held in connection with this
Consent Solicitation because this Consent Solicitation is in lieu of a special
meeting of stockholders. The attached Consent Solicitation Statement is provided
to you pursuant to Rule 14a-3 under the Securities Exchange Act of 1934. Please
read the Consent Solicitation Statement thoroughly. YOUR BOARD OF DIRECTORS HAS
UNANIMOUSLY APPROVED THE PROPOSAL AND UNANIMOUSLY RECOMMENDS THAT YOU CONSENT TO
THE PROPOSALS.
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The Board of Directors has fixed June 19, 2007, as the record date for
purposes of this Consent solicitation. Therefore, only holders who owned shares
of the Company's common stock as of the close of business on June 19, 2007 are
eligible to provide their written consent.
The proposals referred to above and the procedure to exercise your
rights in connection with this Consent Solicitation are described in the
accompanying Consent Solicitation Statement. THE COMPANY INTENDS TO TAKE THE
NECESSARY CORPORATE ACTION, IF ANY, WITH RESPECT TO EACH OF THE PROPOSALS AS
SOON AS THE COMPANY RECEIVES THE WRITTEN CONSENT OF STOCKHOLDERS OWNING NOT LESS
THAN THE MAJORITY OF THE COMPANY'S OUTSTANDING SHARES OF COMMON STOCK CONSENTING
TO THE RESPECTIVE PROPOSAL. It is requested that your written consent, using the
accompanying Consent Card, be delivered to the Company's transfer agent as soon
as possible but no later than _________, 2007. A pre-addressed return envelope
is enclosed for this purpose, which requires no postage if mailed in the United
States.
YOUR WRITTEN CONSENT IS IMPORTANT. PLEASE SIGN, DATE AND
RETURN YOUR CONSENT CARD AS SOON AS POSSIBLE.
By Order of the Board of Directors,
/s/Umesh Patel
- --------------
Umesh Patel, President, Chairman of the Board
Dated:________________ 2007
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DIGITAL LEARNING MANAGEMENT CORPORATION
680 Langsdorf Drive, Suite 203
Fullerton, California, 92831
CONSENT SOLICITATION STATEMENT
FOR THE SOLICITATION OF WRITTEN
CONSENTS IN LIEU OF MEETING OF STOCKHOLDERS
-------------------------------------------
This Consent Solicitation Statement is being furnished to holders of
the common stock of Digital Learning Management Corporation, a Delaware
corporation ("Company" "our" "us" "we"), in connection with the solicitation of
written consents by our Board of Directors.
This Consent Solicitation Statement contains information about a
proposal to: (a) effect a reverse split of our common stock in a ratio of 1 new
share for every 11.97492 existing shares of common stock, (b) to amend our
Certificate of Incorporation to (i) effect the reverse stock split while
maintaining the current number of authorized shares of common stock and to (ii)
change our corporate name to Nutradyne Group, Inc. and (c) enter into a Share
Exchange Agreement with Chang-chun Yongxin Dirui Medical Co., Ltd.
This Consent Solicitation Statement was prepared by our management for
the Board of Directors. This Consent Solicitation statement and the accompanying
Consent Card are first being mailed to stockholders on or about _________, 2007.
In order to eliminate the costs and management time involved in holding
a special meeting of stockholders and in order to effect the proposals described
above, the Board of Directors determined to seek the written consent of the
holders of a majority in interest of the Company's outstanding common stock. As
discussed in this Consent Solicitation Statement, the Board of Directors has
recommended the reverse stock split, the proposed amendment to our Certificate
of Incorporation and to enter into the Share Exchange Agreement.
The Company is distributing this Consent Solicitation Statement and the
accompanying Consent Card to the holders of record of the common stock as of the
close of business on June 19, 2007. This date is sometimes referred to as the
"record date." Written consents of stockholders representing a majority of the
outstanding shares of common stock at the record date are required to approve
the Proposals.
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Only stockholders of record as of June 19, 2007, are entitled to
consent, to withhold their consent, abstain or to revoke their consent, to the
proposals. If your shares are held in the name of your broker, a bank, or other
nominee, that party should give you instructions for voting your shares. Each
stockholder is entitled to one vote for each outstanding share of common stock
held at the record date and no shares are entitled to cumulative voting rights.
As of the record date, there were 65,862,072 issued and outstanding shares of
common stock.
Any consent to a proposal may be revoked or changed in writing at any
time prior to the close of business on the date that consents signed by holders
of a majority of the outstanding shares of common stock approving such proposal
are received by the Company.
The proposed amendment to the Certificate of Incorporation will be
approved if the Company holds unrevoked written consents of stockholders
approving the proposed amendment to the Certificate of Incorporation
representing a majority of the outstanding shares of common stock at the record
date at any time on or before the 60th day of the earliest dated consent
delivered to the Company or its agent.
The proposals to effect the reverse stock split, change the corporate
name to "Nutradyne Group, Inc." and to enter into the Share Exchange Agreement
will be approved if the Company holds unrevoked written consents of stockholders
approving the proposals representing a majority of the outstanding shares of
common stock at the record date at any time on or before the 60th day of the
earliest dated consent delivered to the Company or its agent.
The withholding of consent, abstention or the failure to deliver a
Consent Card will all have the effect of a vote against approval of each of the
proposals. If a stockholder holds his shares in "street name" and fails to
instruct his broker or nominee as to how to vote his shares, the broker or
nominee may not, pursuant to applicable stock exchange rules, vote such shares
and, accordingly, such inaction will have the effect of a vote against each of
the proposals.
Stockholders are requested to indicate consent to each of the proposals
by signing and dating the Consent Card, checking each box on the Consent Card
which indicates consent to each of the proposals, and delivering the Consent
Card to the Company or its agent. Withholding of consent to a particular
proposal, or abstention with respect to the consent to a particular proposal,
may be indicated by signing and dating the Consent Card, checking the box which
corresponds to withholding of consent for that particular proposal or abstention
with respect to the consent to a particular proposal, respectively, and
delivering the Consent Card to the Company or its agent.
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A CONSENT CARD WHICH HAS BEEN SIGNED, DATED AND DELIVERED TO THE COMPANY OR ITS
AGENT WITHOUT INDICATING CONSENT, WITHHOLDING OF CONSENT, OR ABSTENTION WILL
CONSTITUTE A CONSENT TO THE PROPOSAL TO EFFECT A REVERSE STOCK SPLIT, THE NAME
CHANGE, THE PROPOSED AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION AND
THE PROPOSAL TO ENTER INTO THE SHARE EXCHANGE AGREEMENT
The Company will pay for this consent Solicitation. In addition to
sending you these materials, some of our directors and employees may contact you
by telephone, by mail, or in person. None of our directors or employees will
receive any extra compensation for any such Solicitation.
The Board of Directors recommends that you consent to the proposal to
effect a reverse stock split, approve the proposed amendment to the Company's
Certificate of Incorporation including the name change, and consent to the
proposal to enter into the Share Exchange Agreement with Changchun Yongxin Dirui
Medical Co., Ltd. In this regard, our shareholders owning approximately 65% of
our outstanding common stock have agreed to vote for these proposals, which is
greater than the vote necessary for their approval.
The principal executive offices of the Company are located at 680
Langsdorf Drive, Suite 203, Fullerton, California, 92831, and the telephone
number of the Company is (310) 921-3444.
INFORMATION ABOUT THE CONSENT SOLICITATION
------------------------------------------
o WHAT IS THE PURPOSE OF THE SOLICITATION?
We are soliciting your consent for the purpose of obtaining stockholder
approval of the following proposals:
1. To effect a reverse split of the Company's common stock in a ratio of
one (1) new share for every 11.97492 existing shares of common stock. There will
be no change to the authorized number of shares or the par value of common stock
of the Company and any fractional shares will be rounded up,
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2. To amend our Certificate of Incorporation to: (i) effect a
1-for-11.97492 reverse stock split with respect to our common stock while
maintaining the current authorized shares of common stock and to (ii) change our
corporate name to Nutradyne Group, Inc.
3. To enter into a Share Exchange Agreement with Changchun Yongxin Dirui
Medical Co., Ltd, a China corporation ("Yongxin") and all of the stockholders of
Yongxin.
o WHO IS ENTITLED TO ACT ON THESE PROPOSALS?
Our Board of Directors has established June 19, 2007 as the record date
for purposes of the consent Solicitation. Only stockholders of record at the
close of business on that date will be entitled to act on the proposals and to
receive this Consent Solicitation Statement.
o WILL THESE PROPOSALS BE CONSIDERED AT A STOCKHOLDERS MEETING?
No. Our bylaws provide that stockholder approval of matters such as the
proposals may be obtained by written consent, without a meeting.
o WHAT ARE THE RIGHTS OF THE STOCKHOLDERS TO CONSENT TO THESE PROPOSALS?
Stockholders receiving this Consent Solicitation Statement are
entitled, in effect, to one vote per share with respect to each of the
proposals. Our bylaws provide that the consent of the holders of a majority of
the shares of our common stock outstanding on the June 19, 2007 record date will
be required for approval of each of the proposals. On the record date, there
were 65,862,072 shares of our common stock issued and outstanding.
Abstentions and so-called broker non-votes in response to this
Solicitation will have the same effect as the withholding of consent with
respect to of the proposals.
o WHEN WILL THE PROPOSALS BE EFFECTED?
The proposals will have been approved as soon as we have received valid
consents from the holders of a majority of the shares entitled to act on the
proposals. We will effect the proposed amendments to our Certificate of
Incorporation as soon as is practicable following receipt of such consents.
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o WHAT ARE THE BOARD'S RECOMMENDATIONS?
The recommendations of our Board of Directors are set forth together
with the description of each proposal. In summary, however, our Board of
Directors recommends a vote "FOR" each of the proposals.
o HOW DO I GRANT MY CONSENT TO THE PROPOSALS?
By indicating your consent on the enclosed consent form and returning
the consent form in accordance with the directions indicated on the consent
form. IF NO DIRECTIONS ARE INDICATED, CONSENT FORMS RETURNED TO US WILL BE
COUNTED "FOR" ALL PROPOSALS DESCRIBED IN THIS SOLICITATION STATEMENT.
o CAN I REVOKE MY CONSENT?
Yes, but in order for a revocation to be effective it must be received
by us prior to _________, 2007. A revocation may be submitted by:
- Giving written notice of revocation to our Corporate Secretary; or
- Properly submitting to us a duly executed consent form bearing a
later date.
All written notices of revocation or consent forms should be addressed
to: Digital Learning Management Corporation, 680 Langsdorf Drive, Suite 203,
Fullerton, California, 92831, Attention: Corporate Secretary.
o DO I NEED TO DO ANYTHING IF I AM OPPOSED TO THE PROPOSALS?
No. Your failure to return the enclosed consent form will be sufficient
to indicate the withholding of your consent.
o WHAT IS THE CUT-OFF DATE FOR RESPONDING TO THIS SOLICITATION?
_________, 2007. Each proposal as to which has the requisite consent
has been received as of the cut-off date will be effectuated as of that date. No
consents will be accepted after that date.
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On December 21, 2007 our Board of Directors unanimously approved all
proposals other than the name change, which was not before the Board at that
time. On May 1, 2007, our Board of Directors unanimously adopted and approved
all the proposals and directed that the proposals be submitted for approval by
our stockholders as required by the Delaware General Corporation Law. A copy of
the Certificate of Amendment to the Certificate of Incorporation is attached
hereto as Exhibit "A".
SUMMARY TERM SHEET FOR PROPOSAL 3
---------------------------------
This summary highlights selected information from this proxy statement
regarding the Share Exchange Agreement and may not contain all of the
information that is important to you. To understand the transaction fully, and
for a more complete description of the legal terms of the acquisition, you
should carefully read this entire proxy statement, including the Share Exchange
Agreement attached hereto as Exhibit "B". We have included page references in
this summary to direct you to the appropriate place in this proxy statement for
a more complete description of the topics presented.
o Contact Information
-------------------
Digital Learning Management Corporation
680 Langsdorf Drive, Suite 203
Fullerton, CA 92831
Telephone 310-921-3444
Attn: Umesh Patel, Chairman
Yongxin Medical Group, Ltd.
2152 San Huancheng Road
Chang Chun, China
Telephone 011-86-626-581-9069
Attn: Yongxin Lui
o Business Conducted
------------------
DIGITAL LEARNING MANAGEMENT CORPORATION (PAGE___).
We were incorporated in Delaware on February 18, 1999 under the name
FreePCSQuote.Com, Inc. Our principal business objective was to offer to
businesses our Internet technology solutions and services. Currently, we provide
enterprise e-learning solutions and related services to the education industry,
government agencies and corporate clients. Our patented Virtual University
Appliance ("VU Appliance") is a hardware and software package, which
incorporates the CourseMate Virtual University System.
9
CHANG-CHUN YONGXIN DIRUI MEDICAL CO., LTD.(PAGE___)
Yongxin was established in 1993 for the purpose of engaging in the
business of medicines wholesale, retail and third-party medicine logistics.
Yongxin is located in Changchun City, Jilin Provincial with a staff of 358 of
whom 18 are Licensed Pharmacists and 55% of whom have a college education.
In 2004, Yongxin incorporated as its wholly owned subsidiary Jilin
Province Yongxin Chain Drugstore Ltd. (the "Yongxin Drugstore") to focus on
developing a terminal network market. In July 2005, it obtained the franchise
right in Jilin province from American Medicine Shoppe (Meixin International
Medical Chains) and now has developed 4 chains of "Meixino Yongxin". As of
October 2006, Yongxin has developed 11 retail chains in the name of Yongxin
Drugstore which covers a larger business area in key business regions and the
large community inside Changchun city.
o The Acquisition (page __)
-------------------------
On December 21, 2006, our board of directors adopted a resolution, by
unanimous written consent, to enter into a Share Exchange Agreement with
Changchun Yongxin Dirui Medical Co., Ltd, a China corporation and its
stockholders. The Share Exchange Agreement was subsequently amended and
re-approved by our Board of Directors on May 1, 2007. On June 15, 2007 all
parties executed the Amended Share Exchange Agreement. The parties agreed that
we will acquire all of the issued and outstanding shares of stock of Yongxin in
exchange for the issuance in the aggregate of 21,000,000 of our shares of common
stock and 5 million shares of our newly designated Series A Convertible
Preferred Stock to the Yongxin Stockholders.
Proposal 3 asks our stockholders to consider the share exchange with
Yongxin pursuant to the terms and conditions of the Share Exchange Agreement.
We have issued no securities in connection with the intended
acquisition.
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o Share Exchange Agreement (page ___)
-----------------------------------
Upon the terms and subject to the conditions of the Amended Share
Exchange Agreement dated June 15, 2007, we will issue 21 million shares of
common stock and 5 million shares of Series A Convertible Preferred Stock in
exchange for all of the issued and outstanding shares of Yongxin on the closing
date.
The Series A Convertible Preferred Stock is convertible over a 3 year
period, into up to 30 million shares of common stock. In particular, the holder
of any share of shares of Series A Convertible Preferred Stock shall have the
right, at its option, (i) at any time hereafter (except that upon any
liquidation of the Corporation, the right of conversion shall terminate at the
close of business on the business day fixed for payment of the amount
distributable on the Series A Convertible Preferred Stock) to convert, any such
shares of Series A Convertible Preferred Stock into such number of fully paid
and nonassessable shares of Common Stock on a six (6) for one (1) basis. No more
than 1,666,666 shares of the Series A Convertible Preferred Stock may be
converted in each of the three periods following issuance. The conversion
formula is conditioned on the Corporation earning no less than 3 million dollars
of net income in the fiscal year endrd March 31, 2008; $4 million dollars of net
income in the fiscal year ended March 31, 2009 and $5 million dollars of net
income in the fiscal year ended March 31, 2010. In the event that in any of the
three fiscal years, the Corporation earns less than required net income amounts
for conversion, then the conversion right shall be proportionately reduced by
the amount of the shortfall below the required net income amount, with the
"catch-up" right to convert additional shares to the extent that the net income
exceeds 3 million, 4 million and 5 million dollars respectively in each of the
three consecutive years. In no event shall this conversion right allow for the
conversion of the Series A Preferred Stock into more than 6 common shares for
each share of Series A Preferred Stock over the course of the aforementioned
three calendar years. The net income requirements shall be based upon an audit
of the revenues for each fiscal year. All conversions shall be made within 30
days of the completion of such audit.
Each share of Series A Convertible Preferred Stock entitles the holder
to six (6) votes on all matters to be voted on by the stockholders.
11
The Series A Convertible Preferred Stock does not earn any dividends
during the conversion period. Following the conversion period, each share of
Series A Convertible Preferred Stock that has not been converted, earns a
dividend of $.10 per share per year.
In anticipation of the proposed transaction, our Board of Directors
approved the designation of the Series A Convertible Preferred Stock on May 25,
2007 and filed such designation with the State of Delaware on June 19, 2007.
Upon closing of this transaction as contemplated herein, a change of
control will take place, with the Yongxin stockholders owning approximately
seventy percent (70%) of our total issued and outstanding common stock. This
seventy percent is calculated based on post reverse split numbers and includes
the intended issuance of up to an additional 3,500,000 shares of common stock to
settle debt. Yongxin will remain our wholly-owned operating subsidiary. In
addition, we will change our name from Digital Learning Management Corporation
to "Nutradyne Group, Inc."
As a result of the numerous preconditions to Closing, a Closing date
has not been set, although, it is anticipated that such closing will take place
as soon as practicable following the satisfaction of the preconditions.
o Closing of the Agreement (page ___)
-----------------------------------
If the Agreement, the reverse stock split and the name change are
approved by our shareholders, the closing of the Agreement shall take place as
soon as practicable thereafter, at the offices of Legal & Compliance LLC.
o Conditions Precedent to the Agreement (page __)
-----------------------------------------------
The closing of the Agreement depends on the satisfaction or waiver of a
number of pre-conditions, including:
- our shareholder approval of the Agreement,
- each of the representations and warranties of the Parties shall be
true and correct at the time of the closing date,
- the Parties shall have performed or complied with all agreements,
terms and conditions required by the Agreement to be performed or satisfied
prior to the time of the Closing,
- Yongxin shall have received, and delivered documentation of, the
approvals required, if any, from the Ministry of Commerce of the People's
Republic of China, the China Securities Regulatory Commission, the State
Administration of Foreign Ex-change, or any other Chinese governmental agency
regulating the ownership of business operations in China by non-Chinese
nationals and/or the ownership of offshore companies doing business in China by
Chinese nationals,
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- we will have effectuated an approximate 12 for 1 reverse split of the
our Common Stock,
- we shall have settled, paid or otherwise resolved the Convertible
Notes payable in the principal amount of $3,000,000 plus accrued interest in the
approximate total amount of $1,202,217 as of March 31, 2007,
- No litigation shall have been instituted on or before the time of the
Closing by any person, the result of which did or could prevent or make illegal
the consummation of the trans-action contemplated by this Agreement, or which
had or could have a material adverse effect on our business operations,
- our stockholder approval of Proposals 1 and 2.
o Representations and Warranties in the Agreement (page __)
---------------------------------------------------------
The parties represent and warrant a number of conditions within the
Agreement, including the following:
- all of the parties have the requisite authority to execute the
Agreement,
- no parties have any legal conflicts, and
- the parties will go about their business in an ordinary fashion until
the closing of the Agreement.
o Interest of Executive Officers and Directors in the Agreement (page
-------------------------------------------------------------------
__)
Our executive officers and directors own shares of the Company but will
receive no additional shares on the close of the transactions and therefore have
similar interests to fellow stockholders.
o Change of Control (page __)
---------------------------
Following the closing of the Agreement, our present stockholders'
shares of common stock will be diluted by the issuance of up to 21,000,000
shares of common stock, which issuance will constitute a change of control in
ownership. The share exchange will result in a dilution of approximately 70% to
existing stockholders. Additionally, the closing of the Agreement will cause the
election of new directors and the appointment of new officers to manage the
Company, which additions will constitute a change in control of management.
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o New Management (page __)
------------------------
The number of members of our Board of Directors is currently five.
Under the Exchange Agreement, Yongxin will appoint nominees to serve as
directors after the closing of the exchange. Each director serves until the end
of the one-year term to which he or she is elected and until his or her
successor has been elected, or until his or her earlier resignation or removal.
o Consideration Offered to our Stockholders (page __)
---------------------------------------------------
There is no consideration being offered to our stockholders.
o The Reasons for Engaging in the Agreement (page __)
---------------------------------------------------
Our Board of Directors does not believe that our current business
operations can be sustained or expanded unless we grow revenues and/or limit our
expenses. We believe that greater opportunities exist if we identify new or
supplemental business opportunities which will likely become the major source of
revenues for the Company. We believe that the transaction with Yongxin
represents such an opportunity.
o Vote Required for Approval Of the Agreement (page __)
-----------------------------------------------------
Approval of Proposal 3 requires the affirmative vote of a majority of
the outstanding common stock of the Company. Our executive officers and
directors hold 23,876,675 shares of common stock, or approximately 32.88% of our
issued and outstanding shares, and plan to vote "for" Proposal 3.
o Material Differences in the Rights of Security Holders as a Result of
---------------------------------------------------------------------
the Agreement (page ___)
------------------------
There will be no material differences in the rights of security holders
as a result of the acquisition.
o Accounting Treatment of the Agreement (page __)
-----------------------------------------------
14
The acquisition will be accounted for as a recapitalization of the
Company, in accordance with U.S. generally accepted accounting principles.
o Federal Income Tax Consequences of the Agreement (page __)
----------------------------------------------------------
Our stockholders will not recognize a gain or loss as a result of the
acquisition. Neither the Company nor Yongxin will recognize any gain or loss as
a result of the acquisition, which will be deemed by the parties to be tax free.
o Regulatory Approvals (page __)
------------------------------
No material federal or state regulatory requirements must be complied
with or approvals obtained in connection with this transaction.
o Reports, Opinions, Appraisals (page __)
---------------------------------------
Our board of directors has received no reports, opinions, or appraisals
with regard to the transaction.
o Past Contracts, Transactions or Negotiations (page __)
------------------------------------------------------
None
o Financial Data (page __)
------------------------
Attached hereto are the audited financial statements for Yongxin for
the years ended December 31, 2005 and 2006 and the unaudited financial
statements for the quarter ended March 31, 2007.
PROPOSAL 1
Approval of Reverse Split of Common Stock
-----------------------------------------
PURPOSE. The purpose of the reverse stock split of one (1) new share
for every 11.97492 current shares is to attempt to increase the per share
trading value of our Common Stock. We believe that a decrease in the number of
shares outstanding is likely to increase the trading price for our Common Stock,
to increase the marketability of our stock to potential new investors and our
ability to attract institutional investors to hold our shares, while decreasing
the volatility of our stock price. In addition, we believe that effecting a
reverse split without adjusting the number of authorized shares will be more
beneficial to our stockholders and the overall value of the Company than raising
the number of authorized shares to complete the transaction with Yongxin (see
Proposal 3).
15
The amendment to our Articles of Incorporation will reflect the reverse
stock split while maintaining unchanged the amount of authorized shares.
EFFECT. After the effective date of the proposed reverse stock split,
each stockholder will own a reduced number of shares of Common Stock. Further,
any outstanding options, warrants and rights as of the effective date that are
subject to adjustment will be decreased accordingly.
The reverse stock split will affect all common stockholders uniformly
and will not affect any stockholders' percentage interest in the Company. There
will be no change to the authorized shares of common stock of the Company and
any fractional shares will be rounded up, so that no stockholder shall have less
than one share after the effectiveness of the reverse split.
An effect of the existence of authorized but un-issued capital stock
may be to enable the Company to render more difficult or to discourage an
attempt to obtain control of the company by means of a merger, tender offer,
proxy contest, or otherwise, and thereby to protect the continuity of the
Company's management. If, in the due exercise of its fiduciary obligations, for
example, the Board of Directors were to determine that a takeover proposal was
not in the Company's best interests, such shares could be issued by the Board of
Directors without stockholder approval in one or more private placements or
other transactions that might prevent, or render more difficult or costly,
completion of the takeover transaction by diluting the voting or other rights of
the proposed acquiror or insurgent stockholder or stockholder group, by creating
a substantial voting block in institutional or other hands that might undertake
to support the position of the incumbent board of directors, by effecting an
acquisition that might complicate or preclude the takeover, or otherwise. The
Company does not have any current plans, proposals, or arrangements to propose
any amendments to the Certificate of incorporation or bylaws that would have a
material anti-takeover effect.
We cannot predict the effect of any reverse stock split upon the market
price over an extended period and, in many cases the market value of a company's
common stock following a reverse split declines. We cannot assure you that the
trading price of our Common Stock after the reverse stock split will rise in
inverse proportion to the reduction in the number of shares of our Common Stock
outstanding as a result of the reverse stock split. Also, we cannot assure you
16
that a reverse stock split would lead to a sustained increase in the trading
price of our Common Stock. The trading price of our Common Stock may change due
to a variety of other factors, including our operating results and other factors
related to our business and general market conditions.
Further, as a result of any reverse split, some stockholders may own
less than 100 shares of our common stock. A purchase or sale of less than 100
shares, known as an "odd lot" transaction, may result in incrementally higher
trading costs through certain brokers, particularly "full service" brokers.
Therefore, those stockholders who own less than 100 shares following the reverse
split may be required to pay higher transaction costs if they sell their shares
of our common stock.
The table below shows the cumulative effect on our voting stock of the
reverse stock split that will occur on the Effective Date.
PRIOR TO AFTER
COMMON STOCK REVERSE SPLIT REVERSE SPLIT
- ------------ ------------- -------------
Authorized 75,000,000 75,000,000
Issued & Outstanding 65,862,072 5,500,001
Shares Authorized and Reserved 9,137,928 69,499,999
THE BOARD OF DIRECTORS RECOMMENDS
THAT STOCKHOLDERS CONSENT TO THE REVERSE SPLIT.
PROPOSAL 2
APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION
REGARDING REVERSE SPLIT AND NAME CHANGE OF THE COMPANY
------------------------------------------------------
The purpose and effect of the reverse stock split is discussed in
Proposal No. 1, above. The amendment to our Certificate of Incorporation will
reflect the reverse stock split while maintaining unchanged the amount of
authorized shares.
17
On May 1, 2007, our Board of Directors approved an amendment to our
Certificate of Incorporation to change our corporate name to "Nutradyne Group,
Inc." and directed that the amendment be submitted for approval by our
stockholders as required by Delaware corporations law. The text of the proposed
amendment is attached as Appendix "A" to this Consent Solicitation Statement.
The name change is contingent on the closing of the merger transaction
with Yongxin described in Proposal 3, below. Changing our corporate name will
have no effect on our corporate status in Delaware, or elsewhere, the rights of
our stockholders or the transferability of our outstanding shares of common
stock. Currently outstanding stock certificates bearing the name "Digital
Learning Management Corporation" will continue to be valid and to represent our
shares following the name change.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS
APPROVE THE AMENDMENT TO THE ARTICLES OF INCORPORATION
PROPOSAL 3
Approval of Share Exchange Agreement
------------------------------------
GENERAL. Our board of directors on May 1, 2007 adopted a resolution, by
unanimous written consent, to enter into an Amended Share Exchange Agreement
with Changchun Yongxin Dirui Medical Co., Ltd, a China corporation ("Yongxin")
and its stockholders (the "Stockholders"). The parties agreed that we will
acquire all of the issued and outstanding shares of stock of Yongxin in exchange
for the issuance in the aggregate of 21,000,000 of our shares of common stock
and 5 million shares of our Series A Convertible Preferred Stock to the
Stockholders.
The Series A Convertible Preferred Stock is convertible over a 3 year
period, into up to 30 million shares of common stock. In particular, the holder
of any share of shares of Series A Convertible Preferred Stock shall have the
right, at its option, (i) at any time hereafter (except that upon any
liquidation of the Corporation, the right of conversion shall terminate at the
close of business on the business day fixed for payment of the amount
distributable on the Series A Convertible Preferred Stock) to convert, any such
shares of Series A Convertible Preferred Stock into such number of fully paid
and nonassessable shares of Common Stock on a six (6) for one (1) basis. No more
than 1,666,666 shares of the Series A Convertible Preferred Stock may be
converted in each of the three periods following issuance. The conversion
formula is conditioned on the Corporation earning no less than 3 million dollars
of net income in for the fiscal year ending March 31, 2008; $4 million dollars
of net income in the fiscal year ending March 31, 2009 and $5 million dollars of
18
net income in the fiscal year ending March 31, 2010. In the event that in any of
the three fiscal years, the Corporation earns less than required net income
amounts for conversion, then the conversion right shall be proportionately
reduced by the amount of the shortfall below the required net income amount,
with the "catch-up" right to convert additional shares to the extent that the
net income exceeds 3 million; 4 million and 5 million dollars respectively in
each of the three consecutive years. In no event shall this conversion right
allow for the conversion of the Series A Preferred Stock into more than 6 common
shares for each share of Series A Preferred Stock over the course of the
aforementioned three calendar years. The net income requirements shall be based
upon an audit of the revenues for each fiscal year. All conversions shall be
made within 30 days of the completion of such audit.
Each share of Series A Convertible Preferred Stock entitles the holder
to six (6) votes on all matters to be voted on by the stockholders.
The Series A Convertible Preferred Stock does not earn any dividends
during the conversion period. Following the conversion period, each share of
Series A Convertible Preferred Stock that has not been converted, earns a
dividend of $.10 per share per year.
In anticipation of the proposed transaction, our Board of Directors
approved the designation of the Series A Convertible Preferred Stock on May 25,
2007 and filed such designation with the State of Delaware on June 19, 2007.
BACKGROUND OF THE AGREEMENT. Except with respect to the original and
Amended Share Exchange Agreement between us, Yongxin and its stockholders,
during the past two years there have been no agreements, consolidations,
acquisitions, tender offers or any material agreements of any kind or nature
which were entered into between the above parties.
REASONS FOR THE AGREEMENT; BOARD RECOMMENDATION. Our Board of Directors
does not believe that our current business operations can be sustained or
expanded unless we grow revenues and/or limit our expenses. We believe that
greater opportunities exist if we identify new or supplemental business
opportunities which will likely become the major source of revenues for the
Company. We believe that the transaction with Yongxin represents such an
opportunity.
19
We will continue to focus on our online e-Learning systems and related
services strategy, with sales and services focused around our VU Appliance
product, training and education.
EFFECTS OF THE AGREEMENT. The closing of the transaction is subject to
the following preconditions:
(a) each of the representations and warranties of the Parties shall be
true and correct at the time of the closing date except for changes permitted or
contemplated by the Agreement,
(b) the Parties shall have performed or complied with all agreements,
terms and conditions required by this Agreement to be performed or satisfied
prior to the time of the Closing,
(c) Yongxin shall have received, and delivered documentation of, the
approvals required, if any, from the Ministry of Commerce of the People's
Republic of China, the China Securities Regulatory Commission, the State
Administration of Foreign Exchange, or any other Chinese governmental agency
regulating the ownership of business operations in China by non-Chinese
nationals and/or the ownership of offshore companies doing business in China by
Chinese nationals,
(d) we will have effectuated an approximate 12 for 1 reverse split of
the our Common Stock prior to the time of closing,
(e) we shall have settled, paid or otherwise resolved the Convertible
Notes payable in the principal amount of $3,000,000 plus accrued interest in the
approximate total amount of $1,202,217 as of March 31, 2007, and
(f) No litigation shall have been instituted on or before the time of
the Closing by any person, the result of which did or could prevent or make
illegal the consummation of the transaction contemplated by this Agreement, or
which had or could have a material adverse effect on our business operations.
Assuming the preconditions are satisfied and the transaction closes as
contemplated, Yongxin will become our wholly-owned operating subsidiary. As a
result of the numerous preconditions to Closing, a Closing date has not been
set, although, it is anticipated that such closing will take place in as soon as
practicable thereafter.
20
Upon closing of this transaction as contemplated herein, a change of
control will take place, with the Yongxin stockholders owning approximately
seventy percent (70%) of our total issued and outstanding common stock. This
seventy percent is calculated based on post reverse split numbers and including
the intended issuance of up to an additional 3,500,000 shares of common stock to
settle debt. Yongxin will remain our wholly-owned operating subsidiary. In
addition, we will change our name from Digital Learning Management Corporation
to "Nutradyne Group, Inc."
In addition, the Company will change its name from Digital Learning
Management Corporation to "Nutradyne Group, Inc." and it is contemplated that
some or all of the current board of directors will tender their resignations and
that Yongxin will appoint up to four (4) additional Board Members.
Following the closing of the Agreement, there will be at least
26,500,001 shares of common stock issued and outstanding and up to 30,000,001 if
the Company issues up to an additional 3,500,000 shares to settle debt.
Moreover, the Yongxin shareholders will have, subject to meeting the prescribed
revenue goals, the right to convert the Series A Convertible Preferred Stock
into up to an additional 30,000,000 shares of common stock. The following
stockholders of Yongxin will beneficially own 21,000,000 million shares of the
outstanding common stock and 5 million shares of the preferred stock.
- ---------------------------------------------------- ----------------------- ------------------- --------------------
% OF OUTSTANDING
COMMON STOCK -
BASED ON NUMBER OF SHARES
NUMBER OF SHARES OF 30,000,001 SHARES OF PREFERRED
NAME COMMON STOCK OUTSTANDING STOCK
==================================================== ======================= =================== ====================
1. Misala Holdings Inc. BVI 600,000.00 2.00% 3,000,000.00
- ---------------------------------------------------- ----------------------- ------------------- --------------------
2. Boom Day Investments Ltd. BVI 5,400,000.00 18.00% 2,000,000.00
- ---------------------------------------------------- ----------------------- ------------------- --------------------
3. Accord Success Ltd., BVI 5,400,000.00 18.00%
- ---------------------------------------------------- ----------------------- ------------------- --------------------
4. Perfect Sum Investment Ltd. BVI 1,200,000.00 4.00%
- ---------------------------------------------------- ----------------------- ------------------- --------------------
5. Full Spring Group Ltd. BVI 1,800,000.00 6.00%
- ---------------------------------------------------- ----------------------- ------------------- --------------------
6. Grand Opus Co. Ltd., BVI 2,400,000.00 8.00%
- ---------------------------------------------------- ----------------------- ------------------- --------------------
7. Master Power Holdings Coup Ltd. BVI 4,200,000.00 14.00%
==================================================== ======================= =================== ====================
TOTAL 21,000,000.00 70.00% 5,000,000.00
- ---------------------------------------------------- ----------------------- ------------------- --------------------
21
YONGXIN BUSINESS.
Yongxin was established in 1993 for the purpose of engaging in the
business of medicines wholesale, retail and third-party medicine logistics.
Yongxin is located in Changchun City, Jilin Province with a staff of 358 of whom
18 are Licensed Pharmacist and 55% of whom have a college education. As of
fiscal year ended December 31, 2006 Yongxin had assets of $10,998,827 and
liabilities of $5,022,990.
With the business idea of "sustained operation, integrated innovation",
Yongxin has built a marketing network covering the Jilin province and radiating
through the northeast region wherein the brand image of "sustained innovation"
of Yongxin has enjoyed popular support. In 2003, Yongxin passed Jilin Provincial
FSDA Quality Certification System, National GSP Certification and won a number
of honorary titles several times such as "unit trusted by government", and the
development of Yongxin got strong support from national, provincial and
municipal governments.
In 2004, Yongxin formed "Jilin Province Yongxin Chain Drugstore
Ltd."("Yongxin Drugstore") with an investment of RMB 2,500,000 (equivalent to
$303,000) to focus on developing a terminal network market. In July 2005, it
obtained the franchise right in Jilin province from American Medicine Shoppe
(Meixin International Medical Chains) and now has developed 4 chains of "Meixino
Yongxin". As of October 2006, Yongxin had developed 11 retail chains in the name
of Yongxin Drugstore which covers a business area of 8,000 m2, scattered in key
business regions and the large community inside Changchun city.
For the fiscal year ended December 31, 2006, Yongxin had net revenue of
$39,982,388 and net income of $1,772,721.
Yongxin has recently received national approvals and authorizations
from the Chinese government to expand its retail outlets all over China. Its
business is comprised of 50% wholesale and 50% retail, its products are a mix of
Chemical, Herbal medicines and other accessories.
Yongxin's strategy is to become one of the largest companies in its
market in China. To achieve its objective, it intends to grow organically and
via acquisition. In addition, it intends to raise capital in the U.S. securities
markets and has also signed an LOI with certain entities in China to acquire
manufacturing companies and certain strategic retail outlets.
22
Demographically the company will extend its reach from its existing
regional market to Tianjian , the 3rd largest city in China and near Peking and
other major metropolitan centers across China. The company has no labor
agreements and no compliance or legal issues with the employees, government,
suppliers or customers.
Yongxin has continued its expansion of the Yongxin Drugstore chain and
as of October 2006 it had developed eleven retail outlets of Yongxin Drugstore.
Combining this two pronged approach in the wholesale and retail end-user market,
the company extensively covers the business areas in key business regions and
the large community inside Changchun City and other strategic locations in the
Northeast Region. This market strategy has given it a solid brand position in
its market. It has become the largest wholesale distribution company in the
region and a premier retail outlet to the consumer. The company's business is
comprised of 50% wholesale and 50% retail where its products are a mix of
chemical, herbal medicines and other accessories.
YONGXIN PRODUCTS.
Yongxin business products include six (6) classes of medicines:
1. Chinese patent medicine,
2. Traditional Chinese medicines prepared in ready-to-use forms,
3. Chemical preparation,
4. Health products,
5. Foods and,
6. Medical devices which account for almost 10,000 products.
YONGXIN CUSTOMER BASE.
Yongxin has about 3,000,000 retail customers buying medicines in any
one month and it processes 30,000 orders a day. Other than the retail customers
the company's other key customers include various major hospitals, clinics,
health clinics, community health care and retail pharmacies in the Jilin
Province and the surrounding region. The company has thirty-six (36) retail
outlets and a major distribution and processing center with a state-of art I.T.
infrastructure and around-the-clock customer service.
23
OBJECTIVES AND ACHIEVEMENTS
Yongxin's overall concept and the long term vision is to be a "Turn Key
Solution"; a one stop shop for all of the regional and national medicine needs
of the consumer and wholesale market. Regional and national coverage would be
attained via sales and acquisitions.
To achieve that objective the company, in a phased approach, launched
wholesale distribution to its reseller clients, retail outlets and most recently
the Franchised model of distribution to the end consumer. This has resulted in
the company establishing its brand identity and awareness in most of the
Northeast regions of China. The company has become a premier supplier of
medicines in Jilin Province, Heilongjiang Province, Liaoning Province and the
Inner Mongolian Municipality.
Presently Yongxin has strategic relations and agreements with over
2,300 suppliers and it distributes over 7,000 different types of medicines in
these regions. In July of 2005, the company entered into a Joint Venture
agreement with American Medicine Shoppe International Chain, the biggest
medicine retailing brand in the world. This has brought to the company a
sophisticated and state of the art professional pharmacy technology and premier
brand franchise rights in an emerging and a double digit growth market segment.
Combination of the company's strategic investments in the region and joint
venture agreements has given the company a significant edge over its
competition. With the know how and the tools that the company has acquired it
hopes to continue to be in a leadership position.
The company continuously strives to provide ultimate satisfaction to
the consumer. Its enhanced IT infrastructure, 24/7 processing and customer
service and the state of art professional pharmacy technology implementation,
distribution and logistics technologies, knowledge and training has helped it
achieve its objective in timely deliverables with a measured quality and
satisfaction to its consumer and other reseller markets.
With Yongxin's commitment to ultimate satisfaction and its efficiency
of deliverables to its customers, the company and made significant investments
in IT and backbone infrastructure. It owns the largest distribution center and
storage facility in the region which conforms to international standard of GSP
certification. The facility is 43,000 meters in size with a capacity to store
over 500,000 items. The company utilizes the facility as a central HUB for its
24
regional wholesale and end consumer distribution, storage and IT infrastructure.
Its IT infrastructure has enabled the company's distribution processes to be
completely automated and conform with the latest technically oriented supply
chain management methodology.
This technology has also enabled Yongxin to be the only one in the
region to offer a 24/7 customer service and product deliverables. As it
processes 30,000 orders a day, Yongxin guarantees delivery of goods within four
hours inside Changchun City, twenty four hours anywhere within the Jilin
Province and thirty six hours anywhere within the Northeast region which
represents an area of 1,000 km. Recently the company has been awarded approvals
and authorizations to extend its reach of retail outlets all across China.
Acquisition of pharmaceutical manufacturers will give the company
operating efficiencies, ultimate cost control, increased quality and a
significant increase in revenue and profits. The company is presently realigning
its business and logistics to create operating efficiencies in its overall
operations. This expansion will drive an increase in revenues, profits and
customer satisfaction. It will also implement a new central customer payment
system and a discount membership marketing plan to its end user customers. The
Company will employ an acquisition/franchise creation process of 100 units/year
using the "Equity Purchase" concept and develop new profit generation services
for existing outlets and franchisees thus achieving its regional and national
revenue, brand identity and leadership objective while conduct itself with
trustworthiness and provide superior customer service.
MARKET AND COMPETITION
Yongxin has a solid position in the northeast region of China which
boasts a population of over 100,000,000 (One hundred million) people.
The consumer product industry is constantly evolving and with almost 30
years of reform and opening of business markets to non-government business
entities China's consumer demands are steadily increasing. It can be reasonably
projected that the need for a variety of drug products will increase over the
decades to come. The markets trends for the Company are very favorable as
evidenced by the customers acceptance of the retail and distribution services
and the retention of approvals by the central government allowing the company to
extend its retail businesses into the whole of China. The other important trend
25
is the participation of The Medicine Shoppe's franchise organization. This has
brought sophistication in processes, state-of-art pharmaceutical IT
infrastructure, the best practice supply chain management methodology, other
know how and tools to the Chinese retail and distribution markets. China has one
of the largest pharmaceutical markets, only after the United States, Europe and
Japan. And the market is still rapidly growing. The pharmaceutical distribution
market in medicine retail industry in recent years is changing towards oligarch
monopoly.
China today represents an over USD$55 billion market for pharmaceutical
products and growing at a compound rate of over 20% a year. It has been
predicted that China will become the world's fifth largest single pharmaceutical
market by 2010. With such a fast-growing market segment and a huge population,
simply getting pharmaceuticals to the patients and healthcare providers is
becoming a daunting task. Chinese pharmaceutical distributors have an arduous
task of supplying to 1.3 billion people residing over 9.6 million square
kilometers. Distributing pharmaceuticals to more than 700 million people located
in rural areas is especially difficult. In China, the term "medicines" broadly
includes all products used in the diagnosis, treatment, or prevention of
diseases. Drug distribution was rigorously controlled by the Chinese government.
To ensure this control, state-owned distributors have monopolized the drug
distribution sector for many years. Consequently, the expansion of Chinese
pharmaceutical products has been closely linked to the evolution of the
country's pharmaceutical distribution framework and change in the government's
policies and reforms. Chinese pharmaceutical distributors are growing in the
following directions:
o Scale-up to achieve economies of scale,
o Merging with domestic and foreign-owned companies,
o Narrowing their focus to specific geographic market or healthcare areas
and, Enhancing modern logistics management.
The Chinese pharmaceutical market is broken into the following
segments:
26
o Chemical Medicine 70%
o Herbal Medicine 20%
o Accessories 10%
Ever increasing demand and a shortage of approved distributors has
created a tremendous opportunity for a well organized company with a strong
infrastructure to take a leadership position and reap significant benefits. This
has created a significant growth potential for privately owned enterprises in
the pharmaceutical industry and they are becoming a force in China's
pharmaceutical distribution sector. To meet the demands and the acute shortage
of pharmaceutical distribution networks, the central government has launched a
state-supported pharmaceutical logistics and electronics trade system that has
been put into operation in major cities across the China. Also the central
government has launched a government policy of privatization of the medical
manufacturing and the distribution sector. This has given an opportunity for
acquisition of the government controlled entities at an extremely discounted
price by private corporations. There is an unprecedented opportunity for growth
at an exponential level for regional premier brand and well capitalized
companies, with good IT and best practice infrastructure, by extending their
reach to a national level via acquisition of these government owned entities
Yongxin's website is www.nutradyneusa.com.
DIGITAL LEARNING MANAGEMENT CORPORATION BUSINESS.
We are a provider of enterprise e-learning solutions and related
services to the education industry, government agencies and corporate clients.
Our patented Virtual University Appliance ("VU Appliance") is a hardware and
software package which incorporates our CourseMate Virtual University System.
We operate post-secondary education training primarily in the business,
information technology, and telecommunications trade fields, offering
certificates, degrees and college credits through strategic partners. Revenues
generated from these schools consist primarily of tuition and fees paid by
students or their employers, generally from public universities and large
corporations.
The VU Appliance product, which was introduced by us in October 2004,
is a pre-packaged, turn-key hardware and software solution designed to address
the e-Learning needs of corporations and educational institutions. It is a
comprehensive out-of-the-box virtual learning solution that allows customers to
quickly create 100% web-based virtual learning environments. The platform allows
27
customers to create, publish and deliver courseware for e-Learning in addition
to managing their traditional classroom learning environment. We believe our
success in the future lies in successfully marketing, selling and improving our
VU Appliance product and related services. We intend to remain focused on
further developing and adding to our intellectual property assets, utilizing our
expertise to help the online learning initiatives of our customers with
e-Learning systems solutions.
NEW MANAGEMENT.
The number of members of our Board of Directors is currently five.
Under the Exchange Agreement, Yongxin will appoint nominees to serve as
directors and officers after the closing of the exchange. Each director serves
until the end of the one-year term to which he or she is elected and until his
or her successor has been elected, or until his or her earlier resignation or
removal.
Yonxin has nominated the following individuals to serve as directors
and officers, as applicable:
o Yongxin Liu - Chairman of the Board, Chief Executive Officer.
o Samuel Liu - Director, President, Chief Operating Officer.
o Yongkui Liu - Director, Vice President, Chief Financial Officer.
o Yongmei Wang - Director, Vice President, Treasurer.
o Umesh Patel - Vice President
Each of these individuals has consented to serve as a director and
officer, as the case may be, if the exchange is completed. Umesh Patel is a
current director of Digital Learning.
The background and experience of the nominees for directors and
officers are as follows:
Yongxin Liu (age 39). Yongxin Liu is a seasoned and well respected
Chinese business executive. In 1994, after he graduate from Northeast Normal
Uninventive, Mr. Liu worked as a General Manager of Yongxin medicine group.
After 2001 Mr. Liu serves as Chairman & CEO of CYDM. He studied in Beijing
University in 2003-2004. Yongxin Liu is not related to either Samuel Liu or
Yongkui Liu.
28
Samuel Liu (age 45). Samuel Liu is a senior manager in a large trading
company (annul revenues over 300 million dollars) in America from 1986 - 1993.
From 1994 - 2002 he was the president of a nutri-ceuticals manufacturer (annual
revenues over 80 million dollars). Mr. Liu is active in founding, organizing and
managing a number of foreign investment projects to China, and he counsels China
companies in doing business in US, and in mergers with public companies in
America. Mr. Liu has a Master of Arts degree from Beijing University, 1985.
Samuel Liu is not related to either Yongxin Liu or Yongkui Liu.
Yongkui Liu (age 37). Yongkui Liu started work as worked as a Deputy
General Manager of Yongxin medicine group since 1993. In 2001, he became
President & COO of CYDM. He was co-founder of CYDM. He studied in Beijing Renmin
University in 2004-2006.
Yongmei Wang (age 33). Yongxin Wang started work as Business Manager of
CYDM since 1998.
Umesh Patel (age 50). Mr. Patel has over 15 years experience in
business development and sales. From 1990 to 2001, Mr. Patel served as the
President of Tech Med Billing Services, where he was responsible for managing
and projecting financials for the company. In 2001, Mr. Patel co-founded the
School of I.T. Mr. Patel served as its Vice President and was responsible for
marketing. Mr. Patel currently is President of Digital Learning Management
Corporation.
The description of the transactions contemplated by the Share Exchange
Agreement set forth herein does not purport to be complete and is qualified in
its entirety by reference to the full text of the Share Exchange Agreement
attached hereto as Exhibit "B".
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS
CONSENT TO THE EXECUTION OF THE SHARE EXCHANGE AGREEMENT.
29
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD
& SUBSIDIARY
FINANCIAL STATEMENTS
DECEMBER 31, 2006
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheet F-3
Consolidated Statements of Income F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Stockholders' Equity F-6
Notes to Consolidated Financial Statements F-7 - F-14
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
The Board of Directors and Stockholders
Changchun Yongxin Dirui Medical Co., Ltd & Subsidiaries
We have audited the accompanying balance sheet of Changchun Yongxin Dirui
Medical Co., Ltd & Subsidiary (the "Company") as of December 31, 2006, and the
related statements of income, stockholders' equity, and cash flows for the years
ended December 31, 2006 and 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 required 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 amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2006, and the results of its operations and its cash flows for the years ended
December 31, 2006 an 2005, in conformity with US generally accepted accounting
principles.
/S/ KABANI & COMPANY, INC.
- --------------------------
Los Angeles, California
March 23, 2007
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,248,404
Accounts receivable, net 2,668,505
Other receivable, net 222,230
Advances to employees 28,495
Advances to suppliers 2,046,404
Prepaid expenses 206,224
Inventory 3,405,048
-----------
TOTAL CURRENT ASSETS 9,825,309
PROPERTY, PLANT & EQUIPMENT, NET 1,173,518
-----------
TOTAL ASSETS $10,998,827
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,221,020
Other payable 133,599
Loan payable 358,176
Loan from related party 36,418
Accrued expenses 397,586
Advances from customers 21,337
-----------
TOTAL CURRENT LIABILITIES 3,168,136
STOCKHOLDERS' EQUITY:
Capital stock 1,827,805
Other comprehensive income 336,004
Retained earnings 5,666,882
-----------
Total Stockholders' Equity 7,830,691
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,998,827
===========
The accompanying notes are an integral part of these
consolidated financials statements
F-2
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
------------ ------------
NET REVENUE $ 39,982,388 $ 37,935,885
COST OF REVENUE 36,854,304 34,936,260
------------ ------------
Gross Profit 3,128,084 2,999,626
------------ ------------
OPERATING EXPENSES
Selling expense 1,301,260 1,142,676
General and administrative expenses 1,658,528 1,036,053
------------ ------------
Total operating expenses 2,959,788 2,178,729
------------ ------------
INCOME FROM OPERATIONS 168,297 820,896
------------ ------------
OTHER INCOME ( EXPENSE)
Other income 1,662,249 858,113
Other expenses (19,349) (27,735)
Others net (38,475) (59,752)
------------ ------------
1,604,425 770,626
------------ ------------
NET INCOME 1,772,721 1,591,522
OTHER COMPREHENSIVE ITEM:
Foreign Currency Translation Gain 221,898 114,106
------------ ------------
NET COMPREHENSIVE INCOME $ 1,994,620 $ 1,705,628
============ ============
The accompanying notes are an integral part of these
consolidated financials statements
F-3
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,772,721 $ 1,591,522
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 131,284 131,932
(Increase) / decrease in assets:
Accounts receivable (1,124,212) (338,773)
Advances to employees 30,775 100,680
Other receivable (168,754) (4,033)
Advances to suppliers (1,971,782) 6,065
Prepaid expenses (97,721) (31,307)
Deferred assets -- (34,668)
Inventory 2,611,412 (635,276)
Increase / (decrease) in liabilities:
Accounts payable (1,556,637) (188,455)
Other payable 18,426 64,098
Accrued expense 218,092 (689,971)
Advances from customers (262,117) (2,054)
----------- -----------
Total Adjustments (2,171,235) (1,621,762)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (398,513) (30,240)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property & equipment, net (255,894) (518,703)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts of loan from third party 351,204 --
Receipts (repayment) of Loan from related party 41,044 (55,113)
Contribution of share capital -- 610,230
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 392,248 555,117
----------- -----------
NET (DECREASE)/ INCREASE IN CASH AND CASH EQUIVALENTS (262,159) 6,175
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 40,968 73,000
----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING BALANCE 1,469,595 1,390,420
----------- -----------
CASH AND CASH EQUIVALENTS, ENDING BALANCE $ 1,248,404 $ 1,469,595
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest paid $ -- $ --
=========== ===========
Income tax paid $ -- $ --
=========== ===========
The accompanying notes are an integral part of these
consolidated financials statements
F-4
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
OTHER TOTAL
CAPITAL STOCK COMPREHENSIVE RETAINED STOCKHOLDERS'
AMOUNT INCOME EARNINGS EQUITY
---------- ---------- ---------- ----------
Balance December 31, 2004 $1,208,240 $ -- $2,302,639 $3,510,879
Contributed capital 619,565 -- -- 619,565
Foreing exchange translation gain -- 114,106 -- 114,106
Net income for the year -- -- 1,591,522 1,591,522
---------- ---------- ---------- ----------
BALANCE DECEMBER 31, 2005 1,827,805 114,106 3,894,161 5,836,072
Foreing exchange translation gain -- 221,898 -- 221,898
Net income for the year -- -- 1,772,721 1,772,721
---------- ---------- ---------- ----------
BALANCE DECEMBER 31, 2006 $1,827,805 $ 336,004 $5,666,882 $7,830,691
========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financials statements
F-5
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 1 - ORGANIZATION
Changchun Yongxin Dirui Medical Co, Inc. & Subsidiaries ("the
Company"), was established in 1993. The Company operates the business
of medicines wholesale, retail and third-party. The Company is located
in Changchun City, Jilin Provincial.
In 2004, Yongxin Medical established "Jilin provinceYongxin Chain
Drugstore Ltd."(Hereinafter referred to Yongxin Drugstore) with an
investment of RMB 2,500,000 (equivalent to $303,000) to focus on
developing terminal network market. In July 2005, the company achieved
the franchise right in Jilin province from American Medicine Shoppe
(Meixin International Medical Chains) and by now has developed 4 chains
of "Meixino Yongxin". Until to October 2006, there have developed 11
retail chains in the name of Yongxin Drugstore which covers a large
community inside Changchun city.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
---------------------
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America. Our functional currency is the Chinese Renminbi; however the
accompanying financial statements have been translated and presented in
United States Dollars ($).
FOREIGN CURRENCY TRANSLATION
----------------------------
The Company uses the United States dollar ("U.S. dollars") for
financial reporting purposes. The Company maintains books and records
in their functional currency, being the primary currency of the
economic environment in which the operations are conducted. In general,
the Company translates the assets and liabilities into U.S. dollars
using the applicable exchange rates prevailing at the balance sheet
date, and the statement of income is translated at average exchange
rates during the reporting period. Gain or loss on foreign currency
transactions are reflected on the income statement. Gain or loss on
financial statement translation from foreign currency are recorded as a
separate component in the equity section of the balance sheet, as
component of comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income" as a component of shareholders' equity
USE OF 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 revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
F-6
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
RISKS AND UNCERTAINTIES
-----------------------
The Company is subject to substantial risks from, among other things,
intense competition associated with the industry in general, other
risks associated with financing, liquidity requirements, rapidly
changing customer requirements, limited operating history, foreign
currency exchange rates and the volatility of public markets.
CASH AND CASH EQUIVALENTS
-------------------------
Cash and cash equivalents include cash in hand and cash in time
deposits, certificates of deposit and all highly liquid debt
instruments with original maturities of three months or less.
ACCOUNTS RECEIVABLE
-------------------
The Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable
and analyzes historical bad debts, customer concentrations, customer
credit worthiness, current economic trends and changes in customer
payment patterns to evaluate the adequacy of these reserves. Reserves
are recorded primarily on a specific identification basis.
ADVANCES TO SUPPLIERS
---------------------
The Company advances to certain vendors for purchase of its material.
The advances to suppliers are interest free and unsecured.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method over useful lives of 5 to 10 years. The
building is computed using the straight-line method over useful live of
39 years. The cost of assets sold or retired and the related amounts of
accumulated depreciation are removed from the accounts in the year of
disposal. Any resulting gain or loss is reflected in current
operations. Assets held under capital leases are recorded at the lesser
of the present value of the future minimum lease payments or the fair
value of the leased property. Expenditures for maintenance and repairs
are charged to operations as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------
The Company adopted Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144"), which addresses financial accounting and reporting for
the impairment or disposal of long-lived assets and supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations
for a Disposal of a Segment of a Business." The Company periodically
evaluates the carrying value of long-lived assets to be held and used
in accordance with SFAS 144. SFAS 144 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amounts.
In that event, a loss is recognized based on the amount by which the
carrying amount exceeds the fair market value of the long-lived assets.
Loss on long-lived assets to be disposed of is determined in a similar
manner, except that fair market values are reduced for the cost of
disposal. Based on its review, the Company believes that, as of
September 30, 2006 and 2005, there were no significant impairments of
its long-lived assets used in operations.
F-7
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
Statement of Financial Accounting Standard No. 107, "Disclosures about
Fair Value of Financial Instruments", requires that the Company
disclose estimated fair values of financial instruments.
The Company's financial instruments primarily consist of cash and cash
equivalents, accounts receivable, other receivables, advances to
suppliers, accounts payable, other payable, tax payable, and related
party advances and borrowings.
As of the balance sheet dates, the estimated fair values of the
financial instruments were not materially different from their carrying
values as presented on the balance sheet. This is attributed to the
short maturities of the instruments and that interest rates on the
borrowings approximate those that would have been available for loans
of similar remaining maturity and risk profile at respective balance
sheet dates
REVENUE RECOGNITION
-------------------
Sale of goods
Revenue is recognized at the date of shipment to customers when a
formal arrangement exists, the price is fixed or determinable, the
delivery is completed, no other significant obligations of the Company
exist and collectibility is reasonably assured. Payments received
before all of the relevant criteria for revenue recognition are
satisfied are recorded as advances from customers.
INCOME TAXES
------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
FOREIGN CURRENCY TRANSACTIONS AND COMPREHENSIVE INCOME
------------------------------------------------------
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Certain
statements, however, require entities to report specific changes in
assets and liabilities, such as gain or loss on foreign currency
translation, as a separate component of the equity section of the
balance sheet. Such items, along with net income, are components of
comprehensive income. The functional currency of the Company is Chinese
Renminbi. The unit of Renminbi is in Yuan. During the years ended
December 31 2006 and 2005 other comprehensive income includes
translation gain of $221,898 and $114,106 respectively.
F-8
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
STATEMENT OF CASH FLOWS
-----------------------
In accordance with Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows," cash flows from the Company's operations is
calculated based upon the local currencies. As a result, amounts
related to assets and liabilities reported on the statement of cash
flows will not necessarily agree with changes in the corresponding
balances on the balance sheet.
SEGMENT REPORTING
-----------------
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosure about Segments of an Enterprise and Related Information"
requires use of the "management approach" model for segment reporting.
The management approach model is based on the way a company's
management organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based on
products and services, geography, legal structure, management
structure, or any other manner in which management disaggregates a
company. SFAS 131 has no effect on the Company's financial statements
as the Company consists of one reportable business segment. All revenue
is from customers in People's Republic of China. All of the Company's
assets are located in People's Republic of China.
PRINCIPLES OF CONSOLIDATION
---------------------------
The accompanying consolidated financial statements include the accounts
of Changchun Yongxin Dirui Medical Co, Inc. and its 100% wholly-owned
subsidiary Yongxin Chain Drugstore Ltd.". All significant inter-company
accounts and transactions have been eliminated in consolidation.
RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
In February 2006, FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments". SFAS No. 155 amends SFAS No 133,
"Accounting for Derivative Instruments and Hedging Activities", and
SFAF No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". SFAS No. 155, permits fair
value remeasurement for any hybrid financial instrument that contains
an embedded derivative that otherwise would require bifurcation,
clarifies which interest-only strips and principal-only strips are not
subject to the requirements of SFAS No. 133, establishes a requirement
to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring
bifurcation, clarifies that concentrations of credit risk in the form
of subordination are not embedded derivatives, and amends SFAS No. 140
to eliminate the prohibition on the qualifying special-purpose entity
from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument.
This statement is effective for all financial instruments acquired or
issued after the beginning of the Company's first fiscal year that
begins after September 15, 2006. The management is currently evaluating
the effect of this pronouncement on financial statements.
In March 2006 FASB issued SFAS 156 `Accounting for Servicing of
Financial Assets' this Statement amends FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, with respect to the accounting for
separately recognized servicing assets and servicing liabilities. This
Statement:
F-9
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
1. Requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract.
2. Requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value,
if practicable.
3. Permits an entity to choose `Amortization method' or Fair
value measurement method' for each class of separately
recognized servicing assets and servicing liabilities:
4. At its initial adoption, permits a one-time reclassification
of available-for-sale securities to trading securities by
entities with recognized servicing rights, without calling
into question the treatment of other available-for-sale
securities under Statement 115, provided that the
available-for-sale securities are identified in some manner as
offsetting the entity's exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer
elects to subsequently measure at fair value.
5. Requires separate presentation of servicing assets and
servicing liabilities subsequently measured at fair value in
the statement of financial position and additional disclosures
for all separately recognized servicing assets and servicing
liabilities.
An entity should adopt this Statement as of the beginning of its first
fiscal year that begins after September 15, 2006. The management is
currently evaluating the effect of this pronouncement on financial
statements.
In September 2006, FASB issued SFAS 157 `Fair Value Measurements'. This
Statement defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or permit
fair value measurements, the Board having previously concluded in those
accounting pronouncements that fair value is the relevant measurement
attribute. Accordingly, this Statement does not require any new fair
value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years. The management
is currently evaluating the effect of this pronouncement on financial
statements.
In September 2006, FASB issued SFAS 158 `Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans--an amendment of
FASB Statements No. 87, 88, 106, and 132(R)' This Statement improves
financial reporting by requiring an employer to recognize the over
funded or under funded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its
statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This Statement also improves financial
reporting by requiring an employer to measure the funded status of a
plan as of the date of its year-end statement of financial position,
with limited exceptions. An employer with publicly traded equity
securities is required to initially recognize the funded status of a
defined benefit postretirement plan and to provide the required
disclosures as of the end of the fiscal year ending after December 15,
2006. An employer without publicly traded equity securities is required
to recognize the funded status of a defined benefit postretirement plan
and to provide the required disclosures as of the end of the fiscal
F-10
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
year ending after June 15, 2007. However, an employer without publicly
traded equity securities is required to disclose the following
information in the notes to financial statements for a fiscal year
ending after December 15, 2006, but before June 16, 2007, unless it has
applied the recognition provisions of this Statement in preparing those
financial statements:
a. A brief description of the provisions of this Statement
b. The date that adoption is required
c. The date the employer plans to adopt the recognition
provisions of this Statement, if earlier.
The requirement to measure plan assets and benefit obligations as of
the date of the employer's fiscal year-end statement of financial
position is effective for fiscal years ending after December 15, 2008.
The management is currently evaluating the effect of this pronouncement
on financial statements.
In February of 2007 the FASB issued SFAS 159, "The Fair Value Option
for Financial Assets and Financial Liabilities--including an amendment
of FASB Statement No. 115." The statement permits entities to choose to
measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. The
statement is effective as of the beginning of an entity's first fiscal
year that begins after November 15, 2007. The management is currently
evaluating the effect of this pronouncement on financial statements.
CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
---------------------------------------------------
Two customers purchased 19.95%, and 13.12% of the Company's materials
for the year ended December 31, 2006. The accounts receivable balance
from these parties amounted to $446,697 at December 31, 2006.
The Company's operations are carried out in the PRC. Accordingly, the
Company's business, financial condition and results of operations may
be influenced by the political, economic and legal environments in the
PRC, by the general state of the PRC's economy. The Company's business
may be influenced by changes in governmental policies with respect to
laws and regulations, anti-inflationary measures, currency conversion
and remittance abroad, and rates and methods of taxation, among other
things.
NOTE 4- ACCOUNTS RECEIVABLE AND OTHER RECEIVABLE
Accounts receivable as of December 31, 2006 consisted of the following:
F-11
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
Accounts receivables $ 2,885,467
Less: allowance for doubtful accounts (216,962)
================
$ 2,668,505
================
Other receivable represents funds advances to third party for the
amount of $222,230 as of December 31, 2006. The amount is interest
free, unsecured, and payable on demand.
NOTE 5- ADVANCES TO EMPLOYEES
The Company made advances to employees amounting to $28,495 as of
December 31, 2006. The amount is interest free, due on demand and
unsecured.
NOTE 6- ADVANCES TO SUPPLIERS
The Company made advances to suppliers to purchase inventory. This
amount represents the advances made by the Company to suppliers of
$2,046,404 at December 31, 2006.
NOTE 7- PREPAID EXPENSES
The Company prepaid expenses as part of operations. As of December 31,
2006 prepaid expense amounting to $206,224.
NOTE 8- INVENTORIES
Inventories are valued at the lower of cost (determined on a first-in,
first-out basis) or market. The Management compares the cost of
inventories with the market value and allowance is made for writing
down their inventories to market value, if lower. As of December 31,
2006, inventory consisted of finished goods of $3,405,048.
NOTE 9- PROPERTIES AND EOUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance
and repairs are charged to earnings as incurred; additions, renewals
and betterments are capitalized. When property and equipment are
retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts, and any gain or
loss is included in operations. Depreciation of property and equipment
is provided using the straight-line method for substantially all assets
with estimated lives of:
Office Equipment 5 years
Vehicles 5 years
Computer Hardware and Software 5 years
Buildings 20-40 years
The balance of Company property and equipment as of December 31, 2006
is summarized as follows:
F-12
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
Office Equipment $ 195,767
Vehicles 206,092
Buildings 973,088
Computer software 77,081
-------------
1,452,028
Less: Accumulated depreciation (278,510)
-------------
$ 1,173,518
=============
Depreciation expenses for the years ended December 31, 2006 and 2005
was $131,284 and $131,932 respectively.
NOTE 10 ACCRUED EXPENSES
Accrued expenses as of December 31, 2006 are summarized as follows:
Accrued rent $ 48,154
Other accruals 349,432
-------------
$ 397,586
=============
NOTE 11 LOANS PAYABLE
Loans from third party and loans from related party are temporary
advances for working capital purpose and are interest free, unsecured
and payable on demand.
NOTE 12 COMMITMENTS
a) Operating Leases
The Company leases its offices and facilities under long-term,
non-cancelable lease agreements expiring at various dates through April
4, 2010. The non-cancelable operating lease agreements provide that the
Company pays certain operating expenses applicable to the leased
premises according to the Chinese Law.
The future minimum annual lease payments required under the operating
leases are as follows:
------------------------------------------------------------------------
Year Ending December Payments
2007 414,972
2008 450,405
2009 370,895
2010 226,804
====================
Total future lease payments $ 1,463,076
=====================
F-13
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 13 SHAREHOLDERS' EQUITY
a) Registered capital and paid in capital:
The registered capital is RMB 15,000,000 equivalent to $1,827,805
approximately.
The registered and paid in capital of the Company as of December 31,
2006 are as follows:
Liu YongXin $ 926,149
Liu YongKui 901,656
--------------
Total $ 1,827,805
==============
NOTE 14 INCOME TAXES
The company received income tax exemption from the People's Republic of
China for the three year period ended December 31, 2006.
NOTE 15 SUBSEQUENT EVENTS (UNAUDITED)
On June 15, 2007, Digital Learning Management Corporation ("Digital")
entered into an Amended Exchange Agreement with Changchun Yongxin Dirui
Medical Co., Ltd, a China corporation ("Yongxin") and all of the
shareholders of Yongxin.
In accordance with the Amended Exchange Agreement, and subject to
certain preconditions to Closing, including the completion of an
approximate 1:12 reverse split, appropriate shareholder consents, the
filing of necessary disclosures with the Securities and Exchange
Commission, and the settlement of certain debt, Digital agreed to issue
21,000,000 shares of newly issued common stock and 5 million shares of
Series A Preferred Stock to the Yongxin shareholders or their
designees, representing, immediately following closing, 79% of the
total issued and outstanding shares of common stock and voting rights
of approximately 85% of the total voting rights of the Company.
Digital would remain a wholly owned operating subsidiary of the Company
following Closing. As a result of the numerous preconditions to
Closing, a Closing date has not been set, although, it is anticipated
that such closing will take place in July, 2007.
F-14
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2007
TABLE OF CONTENTS
Unaudited Consolidated Balance Sheet
As of March 31, 2007 F-15
Unaudited Consolidated Statements of Income
For the three month periods ended March 31, 2007 and 2006 F-16
Unaudited Consolidated Statements of Cash Flows
For the three month periods ended March 31, 2007 and 2006 F-17
Notes to Unaudited Consolidated Financial Statements F-18 - F-24
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2007
(UNAUDITED)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,011,303
Accounts receivable, net 4,830,488
Other receivable, net 168,843
Advance to suppliers 1,718,425
Prepaid expenses 157,497
Inventory 3,950,687
-----------
TOTAL CURRENT ASSETS 12,837,243
PROPERTY, PLANT & EQUIPMENT, NET 1,142,610
-----------
$13,979,853
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,579,306
Accrued expenses 819,396
Other payable 109,460
Customer deposits 21,565
Short-term loan 905,072
-----------
TOTAL CURRENT LIABILITIES 5,434,800
STOCKHOLDERS' EQUITY:
Capital stock 1,827,805
Other comprehensive income 421,549
Accumulated profit 6,295,698
-----------
TOTAL STOCKHOLDERS' EQUITY 8,545,053
-----------
$13,979,853
===========
The accompanying notes are an integral part of this unaudited
consolidated financial statements
F-15
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
2007 2006
------------ ------------
NET REVENUES $ 10,076,930 $ 7,060,072
COST OF GOODS SOLD 8,497,963 6,525,163
------------ ------------
Gross profit 1,578,967 534,909
------------ ------------
OPERATING EXPENSES:
Selling expenses 389,088 268,090
General and administrative expenses 330,873 79,432
------------ ------------
Total operating expenses 719,961 347,522
------------ ------------
INCOME FROM OPERATIONS 859,006 187,387
------------ ------------
OTHER INCOME (EXPENSE):
Other income 142,170 313,332
Other expense (20,184) (16,022)
Interest income (expense) (30,559) 612
------------ ------------
Total other income 91,427 297,922
------------ ------------
INCOME BEFORE INCOME TAX 950,433 485,310
PROVISION FOR INCOME TAX 321,616 --
------------ ------------
NET INCOME 628,817 485,310
OTHER COMPREHENSIVE ITEM:
Foreign exchange translation gain 85,545 55,980
------------ ------------
NET COMPREHENSIVE INCOME $ 714,362 $ 541,290
============ ============
The accompanying notes are an integral part of these unaudited
consolidated financial statements
F-16
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 628,817 $ 485,310
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 43,440 28,937
(Increase) / decrease in current assets:
Accounts receivable (2,128,841) (140,251)
Other receivable 84,404 (425,413)
Advances to suppliers 349,263 (205,318)
Prepaid expenses 50,839 35,902
Deferred assets -- (25,860)
Inventory (507,953) 552,270
Increase / (decrease) in current liabilities:
Accounts payable 1,331,619 482,953
Other payable (25,523) 351,261
Accrued expense 55,183 144,578
Tax payble 361,482 (199,040)
Customer deposits -- (216,403)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 242,731 868,926
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment on purchase of property & equipment -- (445,519)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipt of Loan from bank 903,189 --
Repayment of loan payable to third party (361,276) --
Receipt of (payment to) related party (36,734) 94,357
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 505,180 94,357
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 747,911 517,764
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 14,988 (167,432)
CASH AND CASH EQUIVALENTS, BEGINNING BALANCE 1,248,404 1,469,595
----------- -----------
CASH AND CASH EQUIVALENTS, ENDING BALANCE $ 2,011,303 $ 1,819,927
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 13,208 $ --
=========== ===========
Income tax paid $ -- $ --
=========== ===========
The accompanying notes are an integral part of these unaudited
consolidated financial statements
F-17
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 1 - ORGANIZATION
Changchun Yongxin Dirui Medical Co, Inc. & Subsidiaries ("the Company" or
"We")), was established in 1993. The Company operates the business of medicines
wholesale, retail and third-party. The Company is located in Changchun City,
Jilin Provincial.
In 2004, Yongxin Medical established "Jilin provinceYongxin Chain Drugstore
Ltd."(Hereinafter referred to Yongxin Drugstore) with an investment of RMB
2,500,000 (equivalent to $303,000) to focus on developing terminal network
market. In July 2005, the company achieved the franchise right in Jilin province
from American Medicine Shoppe (Meixin International Medical Chains) and by now
has developed 4 chains of "Meixino Yongxin". Up until October 2006, 11 retail
chains have been established in the name of Yongxin Drugstore which covers a
large community inside Changchun city.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION
- ---------------------------------------
The consolidated interim financial statements included herein have been prepared
by the Company, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading.
These statements reflect all adjustments, consisting of normal recurring nature,
which, in the opinion of management, are necessary for fair presentation of the
information contained herein. It is suggested that these consolidated financial
statements be read in conjunction with the audited financial statements and
notes thereto for the year ended December 31, 2006. Results of operations for
the interim periods are not indicative of annual results.
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The accompanying consolidated financial statements include the accounts of
Changchun Yongxin Dirui Medical Co, Inc. and its 100% wholly-owned subsidiary
Yongxin Chain Drugstore Ltd. All significant inter-company accounts and
transactions have been eliminated in consolidation.
USE OF 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-18
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
RISKS AND UNCERTAINTIES
- -----------------------
The Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
REVENUE RECOGNITION
- -------------------
Revenue is recognized at the date of shipment to customers when a formal
arrangement exists, the price is fixed or determinable, the delivery is
completed, no other significant obligations of the Company exist and
collectibility is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as advances
from customers.
LOCAL PRC INCOME TAX
- --------------------
The Company is subject to People's Republic of China ("PRC") Enterprise Income
Tax at a rate of 33% on the net income.
FOREIGN CURRENCY TRANSACTIONS AND COMPREHENSIVE INCOME
- ------------------------------------------------------
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Certain statements, however, require
entities to report specific changes in assets and liabilities, such as gain or
loss on foreign currency translation, as a separate component of the equity
section of the balance sheet. Such items, along with net income, are components
of comprehensive income. The functional currency of the Company is Chinese
Renminbi. The unit of Renminbi is in Yuan. During the period ended March 31 2007
and 2006, the consolidated statements of income includes foreign exchange
translation gain of $85,545 and $55,980 respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS
- ------------------------------------
In September 2006, FASB issued SFAS 157 `Fair Value Measurements'. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The management is currently
evaluating the effect of this pronouncement on financial statements.
In September 2006, FASB issued SFAS 158 `Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans--an amendment of FASB Statements
No. 87, 88, 106, and 132(R)' This Statement improves financial reporting by
requiring an employer to recognize the over funded or under funded status of a
defined benefit postretirement plan (other than a multiemployer plan) as an
asset or liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur through
comprehensive income of a business entity or changes in unrestricted net assets
of a not-for-profit organization. This Statement also improves financial
F-19
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
reporting by requiring an employer to measure the funded status of a plan as of
the date of its year-end statement of financial position, with limited
exceptions. An employer with publicly traded equity securities is required to
initially recognize the funded status of a defined benefit postretirement plan
and to provide the required disclosures as of the end of the fiscal year ending
after December 15, 2006. An employer without publicly traded equity securities
is required to recognize the funded status of a defined benefit postretirement
plan and to provide the required disclosures as of the end of the fiscal year
ending after June 15, 2007. However, an employer without publicly traded equity
securities is required to disclose the following information in the notes to
financial statements for a fiscal year ending after December 15, 2006, but
before June 16, 2007, unless it has applied the recognition provisions of this
Statement in preparing those financial statements:
a. A brief description of the provisions of this Statement
b. The date that adoption is required
c. The date the employer plans to adopt the recognition provisions of this
Statement, if earlier.
The requirement to measure plan assets and benefit obligations as of the date of
the employer's fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. The management is currently
evaluating the effect of this pronouncement on financial statements.
In February of 2007 the FASB issued SFAS 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--including an amendment of FASB
Statement No. 115." The statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The statement is effective as of the beginning of an entity's first
fiscal year that begins after November 15, 2007. The management is currently
evaluating the effect of this pronouncement on financial statements.
In March 2007, the Emerging Issues Task Force ("EITF") reached a consensus on
issue number 06-10, "Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance
Arrangements," ("EITF 06-10"). EITF 06-10 provides guidance to help companies
determine whether a liability for the postretirement benefit associated with a
collateral assignment split-dollar life insurance arrangement should be recorded
in accordance with either SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (if, in substance, a postretirement
benefit plan exists), or Accounting Principles Board Opinion No. 12 (if the
arrangement is, in substance, an individual deferred compensation contract).
EITF 06-10 also provides guidance on how a company should recognize and measure
the asset in a collateral assignment split-dollar life insurance contract. EITF
06-10 is effective for fiscal years beginning after December 15, 2007 (Novell's
fiscal 2008), though early adoption is permitted. The management is currently
evaluating the effect of this pronouncement on financial statements.
F-20
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
- ---------------------------------------------------
The Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, by the general state of
the PRC's economy. The Company's business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
NOTE 4- ACCOUNTS RECEIVABLE
Accounts receivable as of March 31, 2007 consisted of the following:
Accounts receivables $ 5,123,635
Less: allowance for doubtful accounts (293,147)
------------
$ 4,830,488
============
NOTE 5- OTHER RECEIVABLES
As of March 31, 2007, the Company had $168,843 other receivables, including
$2,847 advance to employees, $118,248 receivables from other individuals, and
$47,748 from outside companies. These receivables are interest free, unsecured,
and due on demand.
NOTE 6- ADVANCES TO SUPPLIERS
The Company made advances to suppliers to purchase inventory. This amount
represents the advances paid by the Company to suppliers of $ 1,718,425 at March
31, 2007.
NOTE 7- PREPAID EXPENSES
The balance of Company prepaid expenses as of March 31, 2007 is $157,497. This
amount represents prepaid insurance, rent and other operating expenses.
F-21
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 8- INVENTORIES
Inventories are valued at the lower of cost (determined on a first-in, first-out
basis) or market. The Management compares the cost of inventories with the
market value and allowance is made for writing down their inventories to market
value, if lower. As of March 31, 2007, inventory consisted of finished goods of
$3,950,687.
NOTE 9- PROPERTIES AND EOUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to earnings as incurred; additions, renewals and betterments
are capitalized. When property and equipment are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the
respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method for substantially all assets with estimated lives of:
Office Equipment 5 years
Vehicles 5 years
Computer Hardware and Software 5 years
Buildings 20-40 years
The balance of Company property and equipment as of March 31, 2007 is summarized
as follows:
Office Equipment $ 804,190
Vehicles 212,635
Buildings 380,405
Computer software 60,433
-------------
1,447,663
Less: Accumulated depreciation (315,053)
-------------
Property and equipment, net $ 1,142,610
=============
Depreciation expenses were $43,440 and $28,937 for the three month periods ended
March 31, 2007 and 2006, respectively.
NOTE 10 SHORT-TERM LOAN
The Company has a loan outstanding amount of $905,072 at March 31, 2007. The
Company obtained this loan from Changchun Erdaohe District Ruifeng Rural Credit
Union ("Credit Union") in the amount of 7million RMB ($905,072 approx.) with
one-year term started on January 26, 2007. The loan has an annual interest rate
of 9.18%. The loan was secured by the Company's properties through a Mortgage
Agreement between the Company and Credit Union.
F-22
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 11 ACCOUNTS PAYABLE
The Company has accounts payable related to the purchase of inventory. This
amount represents the accounts payable by the Company to the suppliers of
$3,579,306 at March 31, 2007.
NOTE 12 ACCRUED EXPENSES AND OTHER PAYABLE
The other payable represents the deposits made by the sales representatives and
sales distributors for the right to sale products for the Company. As of March
31, 2007, the other payable amounted to $109,460.
Accrued expense included the accrued interest, accrued rent and tax payable
totaling $819,396 as of March 31, 2007.
NOTE 13 COMMITMENTS
a) Operating Leases
The Company leases its offices and facilities under long-term, non-cancelable
lease agreements expiring at various dates through April 4, 2010. The
non-cancelable operating lease agreements provide that the Company pays certain
operating expenses applicable to the leased premises according to the Chinese
Law.
The future minimum annual lease payments required under the operating leases are
as follows:
------------------------------------------------------------------------
Year Ending December Payments
2007 414,972
2008 450,405
2009 370,895
2010 226,804
Total future lease payments $ 1,463,076
-------------------
NOTE 14 SHAREHOLDERS' EQUITY
a) Registered capital and paid in capital:
The registered capital is RMB 15,000,000 equivalent to $1,827,805 approximately.
The registered and paid in capital of the Company as of March 31, 2007 are as
follows:
F-23
CHANGCHUN YONGXIN DIRUI MEDICAL CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
Liu YongXin $ 926,149
Liu YongKui 901,656
-----------------
Total $ 1,827,805
=================
NOTE 15 SUBSEQUENT EVENTS
On June 15, 2007, Digital Learning Management Corporation ("Digital") entered
into an Amended Exchange Agreement with Changchun Yongxin Dirui Medical Co.,
Ltd, a China corporation ("Yongxin") and all of the shareholders of Yongxin.
In accordance with the Amended Exchange Agreement, and subject to certain
preconditions to Closing, including the completion of an approximate 1:12
reverse split, appropriate shareholder consents, the filing of necessary
disclosures with the Securities and Exchange Commission, and the settlement of
certain debt, Digital agreed to issue 21,000,000 shares of newly issued common
stock and 5 million shares of Series A Preferred Stock to the Yongxin
shareholders or their designees, representing, immediately following closing,
79% of the total issued and outstanding shares of common stock and voting rights
of approximately 85% of the total voting rights of the Company.
Digital would remain a wholly owned operating subsidiary of the Company
following Closing. As a result of the numerous preconditions to Closing, a
Closing date has not been set, although, it is anticipated that such closing
will take place in July, 2007.
F-24
FEDERAL SECURITIES LAW CONSEQUENCES
- -----------------------------------
All shares of our common stock that Yongxin Stockholders will receive
in the exchange will be restricted securities under the Securities Act of 1933,
as amended, and will be issued in reliance on an exemption from registration
under Section 4(2) and Regulation 506 under the Securities Act, based in part on
the representations and warranties made by the Stockholders in the Share
Exchange Agreement. The Stockholders do not have any registration rights with
respect to the shares of our common stock which they receive in, or as a
consequence of, this exchange, although there is no assurance that such rights
may not be granted with respect to certain of such shares in the future.
Accordingly, they may sell their shares only in accordance with the requirements
under Rule 144 of the Securities Act.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------
The following table sets forth as of June 19, 2007, the number of
outstanding common shares of the Company beneficially owned by (i) each person
known to the Company to beneficially own more than 5% of its outstanding common
shares, (ii) each director, (iii) each nominee for director, (iv) each executive
officer, and (v) all executive officers and directors as a group.
The number of shares of Common Stock outstanding as of May 1, 2007 was
65,862,072.
Name Shares Percentage
- ---- ------ ----------
Umesh Patel(1) 18,820,558(1) 25.92%
Craig Nagasugi(2) 1,650,000 2.27%
Al Jinnah(3) 3,306,117 4.55%
Gregory Frazer(4) 50,000 0.07%
Khalid Sheik(4) 50,000 0.07%
Officers and Directors 23,876,675 32.88%
as a group (5 persons)
(1) President, Chief Financial Officer and Chairman. Includes options to
purchase 42,750 shares of common stock, all of which are held by the Patel
Family Trust.
(2) Chief Executive Officer
(3) Director and Secretary
(4) Director
30
INDIVIDUAL COMPENSATION ARRANGEMENTS
NONE
OUTSTANDING SECURITIES AND VOTING RIGHTS
As of June 19, 2007, the Company had authorized: (1) 75 Million shares
of common stock, $0.001 par value, 65,862,072 of which were issued and
outstanding, and (2) 5 million shares of blank check preferred stock, $0.001 par
value, none of which were issued or outstanding.
Each holder of Common Stock is entitled to one vote for each share of
Common Stock held on all matters submitted to a vote of Stockholders. Under
Delaware law, any action that may be taken at any stockholders' meeting may be
taken by written consent of the requisite number of stockholders required to
take such action. The proposals require the affirmative vote or written consent
of the holders of a majority of the Company's outstanding common stock.
STOCKHOLDERS' RIGHTS
The affirmative vote of the holders of a majority of the outstanding
common stock of the Company is required to adopt the resolutions described in
this Proxy Statement. Delaware law does not require that the proposed action be
approved by a majority of the disinterested stockholders or provide for the
rights of appraisal. Holders of the common stock of record as of June 19, 2007
("Record Date") are entitled to submit their consent to the Board of Directors
resolutions described in this Proxy Statement,
Whether or not stockholders submit consents will not affect their
rights as stockholders regarding the proposed stockholder action by written
consent that approves the resolution of the Board of Directors being adopted.
Other stockholders, who desire to submit their consents must do so by
__________, 2007, in writing to the Company's corporate office, attention:
Secretary of the Corporation. Once submitted, said consents will be irrevocable.
A total of 65,862,072 outstanding shares of common stock, as of the Record Date
will be entitled to vote on the Company's proposed action described herein.
Pursuant to Section 228 of the Delaware General Corporation Law, the
Company is required to provide prompt notice of the taking of a corporate action
by written consent to the Company's stockholders who have not consented in
writing to such action. This Information Statement serves as the notice required
by Section 228.
31
NO DISSENTERS' RIGHTS
We are distributing this Proxy Statement to our stockholders in full
satisfaction of any notice requirements we may have under the Securities and
Exchange Act of 1934, as amended, and the Delaware General Corporation Law. No
dissenters' rights under the Delaware General Corporation Law are afforded to
the our stockholders as a result of the actions proposed in this Information
Statement.
A copy of the Certificate of Amendment effecting the reverse stock
split and the name change, in substantially the form to be filed with the
Secretary of State of Delaware, is attached to this Information Statement as
Exhibit "A".
OTHER ACTION
No other action was taken or authorized by the stockholders' written
consent to corporate action to which this Information Statement pertains.
COSTS OF PROXY STATEMENT
This Proxy Statement has been prepared by us and our Board of
Directors. We will bear the costs of distributing this Proxy Statement to
stockholders, including the expense of preparing assembling, printing and
mailing the Proxy Statement. Although there is no formal agreement to do so, we
may reimburse banks, brokerage houses and other custodians, nominees and
fiduciaries for their reasonable expenses in forwarding this Proxy Statement and
related materials to stockholders. We may pay for and use the services of other
individuals or companies not regularly employed by us in connection with the
distribution of this Information Statement if our Board of Directors determines
that this is advisable.
ADDITIONAL INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance with the requirements thereof, file
reports, proxy statements and other information with the Securities and Exchange
Commission ("SEC"). Copies of these reports, proxy statements and other
information can be obtained at the SEC's public reference facilities at Room
1580, 100 F Street, N.W., Washington, D.C., 20549. Additionally, these filings
may be viewed at the SEC website at www.sec.gov. Stockholders may also request a
copy of the Company's financial reports filed with the SEC by contacting the
Company's Secretary in writing at 680 Langsdorf Drive, Suite 203 Fullerton,
California, 92831 or by calling 714-870-4539.
32
SHAREHOLDER PROPOSALS
Shareholders of our Company may submit proposals to be considered for
shareholder action at the next shareholders meeting if they do so in accordance
with applicable regulations of the SEC and the laws of the State of Delaware. In
order to be considered for inclusion in the Company's next Proxy Statement, our
Chief Executive Officer must receive proposals no later than __________, 2007.
Shareholder proposals should be addressed to Digital Learning Management
Corporation at 680 Langsdorf Drive, Suite 203 Fullerton, California, 92831.
By Order of the Board of Directors
/s/ Umesh Patel
-----------------------------
Umesh Patel, President, Chairman
33
DIGITAL LEARNING MANAGEMENT CORPORATION
CONSENT SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS TO BE MAILED ON OR ABOUT _________, 2007
The undersigned, a shareholder of Digital Learning Management
Corporation (the "Company"), does hereby consent to the adoption of the
following resolution and to the taking of any action required or permitted
thereby.
The shares represented by this Consent will be voted only if this
Consent is properly executed and timely returned. In that event, such shares
will be voted in the manner directed herein. If no direction is made on how you
desire your shares to be voted, the Company will vote your shares "FOR" the
proposal.
(PROPOSAL NO. 1)
THE BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" THE FOLLOWING:
Resolved, that the Company effect a reverse split of the Company's
common stock in a ratio of one (1) new share for every 11.97492 existing shares
of common stock, with no change to the authorized shares of common stock of the
Company.
FOR [ ] AGAINST [ ] WITHHOLD [ ]
(PROPOSAL NO. 2)
THE BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" THE FOLLOWING:
Resolved, that the Company amend its Articles of Incorporation to
effect a reverse split of its common stock, par value $.001 per share, of one
for 11.97492 with the number of shares of common stock, with no change to the
authorized shares of common stock of the Company and to change its name from
"Digital Learning Management Corporation" to "Nutradyne Group, Inc."
FOR [ ] AGAINST [ ] WITHHOLD [ ]
(PROPOSAL NO. 3)
THE BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" THE FOLLOWING:
Resolved, that the Company To enter into the Share Exchange Agreement
with Changchun Yongxin Dirui Medical Co., Ltd, a China corporation ("Yongxin")
and all of the stockholders of Yongxin.
FOR [ ] AGAINST [ ] WITHHOLD [ ]
NOTE: As to shares held in joint names, each joint owner should sign.
If the signer is a corporation, please sign full corporate name by a duly
authorized officer. If a partnership, please sign in partnership name by an
authorized person. If signing as attorney, executor, administrator, trustee,
guardian, or in other representative capacity, please give full title as such.
PLEASE MARK, SIGN AND DATE THIS CONSENT CARD AND PROPERLY RETURN IT USING THE
ENCLOSED ENVELOPE.
Number of Shares Owned: _________________________________
Dated: ________________, 2007
Signature: ________________________________
Name: _____________________________________
Address: __________________________________
Dated: ________________, 2007
Signature: _____________________________________
Name: __________________________________
Address: ________________________________
TO BE EFFECTIVE, THIS CONSENT MUST BE SIGNED AND DATED, AND RECEIVED AT THE
OFFICES OF THE COMPANY ON OR BEFORE ____________, 2007, UNLESS THE COMPANY
AGREES TO EXTEND SUCH DATE.
EXHIBIT "A"
STATE OF DELAWARE
CERTIFICATE OF AMENDMENT
to
CERTIFICATE of INCORPORATION
of
DIGITAL LEARNING MANAGEMENT CORPORATION
---------------------------------------
FIRST: That the Board of Directors of Digital Learning Management
Corporation (the "Corporation") by Written Consent to Action by the Board of
Directors without a Meeting dated December 21, 2006, and pursuant to the written
consents of stockholders owning a majority of the Corporation's issued and
outstanding common shares on ____________, 2007, adopted resolutions setting
forth amendments to the Certificate of Incorporation of the Corporation as
heretofore described (the "Amendment").
The resolutions setting forth the proposed amendments are as follows:
Resolved, that the Certificate of Incorporation of the Corporation be
amended by changing Article thereof numbered "Article I" so that, as amended,
said Article shall be amended to read as follows:
ARTICLE I: "The name of the corporation shall be Nutradyne
Group, Inc."
Resolved, that the Certificate of Incorporation of the Corporation be
amended by changing Article thereof numbered "Article IV" so that, as amended,
said Article shall be amended to add the following provision:
ARTICLE IV:
(a) Each 11.97492 shares of Common Stock outstanding
at 9:00 a.m. on the effective date, shall be deemed to be one (1) share of
Common Stock of the Corporation, par value $0.001 per share. There shall be no
fractional shares. Odd lots shall be rounded up.
SECOND: All other provisions of Article IV, including, but not limited
to, the authorized shares of common and preferred stock, shall remain unchanged.
THIRD: That in lieu of a meeting and vote of stockholders, the
stockholders have given written consent to the proposal to amend the Certificate
of Incorporation as set forth herein in accordance with the provisions of
Section 228 of the General Corporation Law of the State of Delaware and written
notice of the adoption of the proposal and enactment of the amendment has been
given as provided in Section 228 of the General Corporation Law of the State of
Delaware to every stockholder entitled to such notice.
FOURTH: That said amendments were duly adopted in accordance with the
provisions of Section 228 and 242 of the General Corporation Law of the State of
Delaware.
Fifth: The effective date shall be ________, 2007.
By: ____________________________
President, Chairman
Name: Umesh Patel
EXHIBIT "B"
AMENDED SHARE EXCHANGE AGREEMENT
THIS AMENDED SHARE EXCHANGE AGREEMENT, dated as of the [__] day of
June, 2007 (the "Agreement"), by and among Digital Learning Management
Corporation., a Delaware corporation (the "Company"); Changchun Yongxin Dirui
Medical Co., Ltd, a China corporation ("Yongxin"); and all of the shareholders
of Yongxin, each of whom has executed a counterpart signature page to this
Agreement (each, a "Shareholder" and collectively, the "Shareholders"). The
Company, Yongxin and the Shareholders are collectively referred to herein as the
"Parties".
W I T N E S S E T H:
WHEREAS, the Shareholders own all of the issued and outstanding capital
of Yongxin (the "Yongxin Shares"), which in turn wholly owns Jilin
procinceYongxin Chain Drugstore Ltd, a company formed under the laws of the
People's Republic of China (the "Subsidiary").
WHEREAS, the Company desires to acquire from Shareholders, and
Shareholders desire to sell to the Company, the Yongxin Shares in exchange for
the issuance by the Company of an aggregate of 21,000,000 shares of Company
Common Stock and 5,000,000 shares of the Company Preferred Stock (the "Company
Shares") (post Roll Back) to the Shareholders and/or their designees on the
terms and conditions set forth herein (the "Exchange").
WHEREAS, after giving effect to the Exchange, and the Roll Back (as
each is described herein), there will be approximately 26,500,001 shares of
Company Common Stock issued and outstanding, 3,500,000 shares set aside for
issuance upon conversion of debt, 30,000,001 shares set aside for conversion of
the Series A Convertible Preferred Stock and 75,000,000 shares of Common Stock
authorized.
WHEREAS, the parties intend, by executing this Agreement, to implement
a tax-deferred exchange of property governed by Section 351 of the United States
Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration, of the promises and of the mutual
representations, warranties and agreements set forth herein, the parties hereto
agree as follows:
ARTICLE I
THE EXCHANGE
1.1 THE EXCHANGE. Subject to the terms and conditions of this
Agreement, on the Closing Date (as hereinafter defined):
(a) the Company shall issue and deliver to the Shareholders
and/or their designees the number of authorized but unissued shares of Company
Common Stock and Company Preferred Stock set forth opposite their and/or their
designee's names set forth on SCHEDULE 1.1(a) hereto or pursuant to separate
instructions to be delivered prior to Closing, and
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(b) each share of Company Preferred Stock shall be convertible
into Company common shares and have the rights and preferences as set forth in
the attached Certificate of Designation, Preferences and Rights of the Terms of
the Series A Preferred Stock, and
(c) Each Yongxin Shareholder agrees to contribute, transfer,
assign and convey at Closing all of their Yongxin Shares to the Corporation,
together with all other rights, claims and interests he or she may have with
respect to Yongxin or its respective assets, and all claims he may have against
its officers and directors, including, but not limited to, all rights to unpaid
dividends and all claims and causes of action arising from or in connection with
the ownership of Yongxin Shares or its issuance, excluding any right, claim or
interest of same arising under this Agreement or in connection with the
transaction contemplated by this Agreement. Each Yongxin Shareholder shall
deliver to Yongxin all of his evidence of ownership representing the Yongxin
Shares, together with legally valid transfer authority therefore, duly executed
in blank, to be held by Yongxin for delivery at Closing.
1.2 TIME AND PLACE OF CLOSING. The closing of the transactions
contemplated hereby (the "Closing") shall take place upon satisfaction or waiver
by the appropriate parties of all conditions precedent, at the offices of Legal
& Compliance LLC on or before [_________], 2007 (the "Closing Date") at 3:00
p.m. Pacific Time, or at such place and time as mutually agreed upon by the
parties hereto.
1.3 EFFECTIVE TIME. The Exchange shall become effective (the "Effective
Time") at such time as all of the conditions to set forth in Article VII hereof
have been satisfied or waived by the Parties hereto.
1.4 TAX CONSEQUENCES. It is intended by the parties hereto that for
United States income tax purposes, the contribution and transfer of the Yongxin
Shares by the Shareholders to the Company in exchange for Company Shares
constitutes a tax-deferred exchange within the meaning of Section 351 of the
Code.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Yongxin and the Shareholders
each of which the Corporation represents to be true and correct on the date
hereof and (except as the Corporation may notify Yongxin in writing prior to the
Closing) shall be deemed made again as of the Closing and represented by the
Corporation to be true and correct at the time of the Closing:
2.1 DUE ORGANIZATION AND QUALIFICATION; DUE AUTHORIZATION.
(a) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware, with full
corporate power and authority to own, lease and operate its respective business
and properties and to carry on its business in the places and in the manner as
presently conducted or proposed to be conducted. The Corporation has the full
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power and authority to conduct the business in which it will engage upon
completion of the transaction contemplated herein. 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. Accurate, current and complete copies of the Articles of
Incorporation and Bylaws of the Corporation are attached hereto as SCHEDULE
2.1(a).
(b) The Company does not own, directly or indirectly, any
capital stock, equity or interest in any corporation, firm, partnership, joint
venture or other entity except its subsidiaries a list of which are set forth on
SCHEDULE 2.1(b).
(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 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, 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, as
amended, or By-laws of the Company or (b) with or without the giving of notice
or the passage of time (i) violate, conflict with, or result in a breach of, or
a default or loss of rights under, any material covenant, agreement, mortgage,
indenture, lease, instrument, permit or license to which the Company is a party
or by which the Company is bound, or any judgment, order or decree, or any law,
rule or regulation to which the Company is subject, (ii) result in the creation
of, or give any party the right to create, any lien, charge, encumbrance or any
other right or adverse interest ("Liens") upon any of the assets of the Company,
(iii) terminate or give any party the right to terminate, amend, abandon or
refuse to perform, any material agreement, arrangement or commitment to which
the Company is a party or by which the Company's assets are bound, or (iv)
accelerate or modify, or give any party the right to accelerate or modify, the
time within which, or the terms under which, the Company is to perform any
duties or obligations or receive any rights or benefits under any material
agreement, arrangement or commitment to which it is a party.
2.3 CAPITALIZATION. The authorized capital stock of the Company
immediately prior to giving effect to the transactions contemplated hereby
consists of 80,000,000 shares of which 75,000,000 , have been designated as
Company Common Stock $.001 par value and 5,000,000 shares have been designed as
authorized Series A Convertible Preferred stock. As of the date hereof, there
are 65,862,072 shares of Company Common Stock issued and outstanding. As of the
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date immediately proceeding the Exchange, and taking into account the proposed
reverse split and anticipated share issuances, there will be 5,500,001 shares of
the Company Common Stock issued and outstanding and an additional 3,500,000
shares set aside for issuance upon conversion of debt. All of the outstanding
shares of Company Common Stock are, and the Company Shares when issued in
accordance with the terms hereof, will be, duly authorized, validly issued,
fully paid and nonassessable, and have not been or, with respect to the Company
Shares will not be issued in violation of any preemptive right of stockholders.
As of the date hereof, there are 754,000 warrants of which 704,000 are
exercisable at $0.12 per share and 50,000 are exercisable at $3.00 per share and
160,000 options of which 110,000 are exercisable at $0.388 per share and 50,000
are exercisable at $1.00 per share, outstanding. There is no outstanding voting
trust agreement or other contract, agreement, arrangement, call, commitment or
other right of any character obligating or entitling the Company to issue, sell,
redeem or repurchase any of its securities, and there is no outstanding security
of any kind convertible into or exchangeable for Company Common Stock. The
Company has not granted registration rights to any person.
2.4 FINANCIAL STATEMENTS. Available for review on the Securities and
Exchange Commission, EDGAR system are the (i) balance sheet of the Company at
December 31, 2005, and the related statements of operations, stockholders'
equity (deficit) and cash flows for the fiscal year then ended, including the
notes thereto, as audited by Kabani & Company, Inc., independent registered
public accounting firm and (ii) unaudited balance sheet of the Company at March
31, 2007, and the related statements of operations, and cash flows for the nine
month period then ended (the "Financial Statements"). The Financial Statements,
together with the notes thereto, have been prepared in accordance with U.S.
generally accepted accounting principles applied on a basis consistent
throughout all periods presented. The Financial 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 No Assets or Liabilities. Except as set forth on the Financial
Statements and as incurred in the ordinary course of business, or for those not
incurred in the ordinary course of business as set forth on Schedule 2.5 hereto,
the Company does not have any (a) assets of any kind or (b) liabilities or
obligations, whether secured or unsecured, accrued, determined, absolute or
contingent, asserted or unasserted or otherwise.
2.6 Taxes. The Company has filed all United States federal, state,
county 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
4
returns or reports or pursuant to any assessment which has become payable, or,
to the extent its liability for any Taxes (and any related penalties, fines and
interest) has not been fully discharged, the same have been properly reflected
as a liability on the books and records of the Company and adequate reserves
therefore have been established.
2.7 INDEBTEDNESS; CONTRACTS; NO DEFAULTS. Except as otherwise
disclosed, the Corporation's periodic reports available on the EDGAR filing
system contain an accurate, current and complete list and description of each
contract and agreement, whether written or oral ("Contract"), (other than this
Agreement) to which the Corporation is a party or by which the Corporation or
any of its assets are bound. An accurate, current and complete copy of each
Contract has been or will be made available to Yongxin for inspection and
copying. No claim of breach of contract, tort, product liability or other claim,
contingent or otherwise, has been asserted or threatened against the Corporation
nor, to the best of the Corporation's knowledge, is capable of being asserted by
any employee, creditor, claimant or other person against the Corporation. No
state of facts exists or has existed, nor has any event occurred, which could
give rise to the assertion of any such claim by any person.
2.8 OFFERS. Other than in the normal daily operations, there are no
outstanding offers, bids, proposals or quotations made by the Corporation which,
if accepted, would create a Contract with the Corporation.
2.9 REAL PROPERTY. The Company does not own or lease any real property.
2.10 COMPLIANCE WITH LAW. The Company is in compliance with all
applicable federal, state, local and foreign laws and regulations relating to
the protection of the environment and human health. There are no claims,
notices, actions, suits, hearings, investigations, inquiries or proceedings
pending or, to the knowledge of the Company, threatened against the Company that
are based on or related to any environmental matters or the failure to have any
required environmental permits, and there are no past or present conditions that
the Company has reason to believe are likely to give rise to any material
liability or other obligations of the Company under any environmental laws. The
Corporation has not generated any hazardous wastes or engaged in activities
which are or could be interpreted to be potential violations of laws or judicial
decrees in any manner regulating the generation or disposal of hazardous waste.
There are no on-site or off-site locations where the Corporation has stored,
disposed or arranged for the disposal of chemicals, pollutants, contaminants,
wastes, toxic substances, petroleum or petroleum products; there are no
underground storage tanks located on property owned or leased by the
Corporation, and no polychlorinated biphenyls are used or stored at any property
owned or leased by the Corporation.
2.11 PERMITS AND LICENSES. The Company has all certificates of
occupancy, rights, permits, certificates, licenses, franchises, approvals and
other authorizations as are reasonably necessary to conduct its respective
business and to own, lease, use, operate and occupy its assets, at the places
and in the manner now conducted and operated, except those the absence of which
would not materially adversely affect its respective business.
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2.12 LITIGATION. 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 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 twelve month period
preceding the date hereof. Except as disclosed on Schedule 2.12 hereto, 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 except as set out in schedule IV. 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. The Company does not currently maintain any form of
insurance.
2.14 PATENTS; TRADEMARKS AND INTELLECTUAL PROPERTY RIGHTS. The Company
does not own or possess any patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information, Internet web site(s) or
proprietary rights of any nature.
2.15 SECURITIES LAW COMPLIANCE. The Company has complied with all of
the applicable 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 has complied with all applicable blue sky laws.
2.16 OFFICERS, DIRECTORS, AGENTS, ETC. Umesh I Patel, Gregory Frazer,
Khalid Sheikh, Al Jinnah and Craig Nagasugi are the sole officers and directors
of the Corporation. Umesh Patel and Craig Nagasugi have employment agreements.
2.17 LABOR MATTERS. The Corporation is not a party to: (i) any profit
sharing, pension, retirement, deferred compensation, bonus, stock option, stock
purchase, retainer, consulting, health, welfare or incentive plan or agreement
or other employee benefit plan, whether legally binding or not; or (ii) any plan
providing for "fringe benefits" to its employees, including, but not limited to,
vacation, disability, sick leave, medical, hospitalization and life insurance
and other insurance plans, or related benefits; or (iii) any employment
agreements other than those particular employment agreements with Umesh Patel
and Craig Nagasugi. No person or party (including, but not limited to,
governmental agencies of any kind) has any claim or basis for any action or
proceeding against the Corporation arising out of any statute, ordinance or
regulation relating to discrimination in employment or to employment practices
or occupational safety and health standards.
6
2.18 BOOKS AND RECORDS. The Corporation's books and records are and
have been properly prepared and maintained in form and substance adequate for
preparing audited financial statements in accordance with generally accepted
accounting principles, and fairly and accurately reflect all of the
Corporation's assets, obligations and accruals, and all transactions (normally
reflected in books and records in accordance with generally accepted accounting
principles) to which the Corporation is or was a party or by which the
Corporation or any of its assets are or were affected.
2.19 CONSENTS. The execution, delivery and performance by the
Corporation of this Agreement and the consummation by the Corporation of the
transactions contemplated hereby do not require any consent that has not been
received prior to the date hereof.
2.20 IMPROPER PAYMENTS. Neither the Corporation, nor any of its current
or former shareholders, directors, officers or employees or agents, nor any
person acting on behalf of the Corporation, has, directly or indirectly, made
any bribe, kickback or other payment of a similar or comparable nature, whether
lawful or not, to any person, public or private, regardless of form, whether in
money, property or services, to obtain favorable treatment for business secured
or special concessions already obtained. No funds or assets of the Corporation
were donated, lent or made available directly or indirectly for the benefit of,
or for the purpose of supporting or opposing, any government or subdivision
thereof, political party, candidate or committee, either domestic or foreign.
The Corporation has not maintained and does not maintain a bank account, or any
other account of any kind, whether domestic or foreign, which account was not or
is not reflected in the Corporation's books and records, or which account was
not listed, titled or identified in the name of the Corporation.
2.21 FULL DISCLOSURE. All the representations and warranties made by
the Corporation herein or in any Schedule, and all of the statements, documents
or other information pertaining to the transaction contemplated herein made or
given by the Corporation, its agents or representatives, are complete and
accurate, and do not omit any information required to make the statements and
information provided, in light of the transaction contemplated herein,
non-misleading, accurate and meaningful.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF YONGXIN
Yongxin and the Shareholders severally represent and warrant to the
Company each of which Yongxin and the Shareholders represents to be true and
correct on the date hereof and (except as Yongxin and the Shareholders may
notify the Corporation in writing prior to the Closing) shall be deemed made
again as of the Closing and represented by Yongxin and the Shareholders to be
true and correct at the time of the Closing:
3.1 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES, DUE
AUTHORIZATION.
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(a) Yongxin is a corporation duly incorporated, validly
existing and in good standing under the laws of the China, with full corporate
power and authority to own, lease 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. Yongxin 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 Yongxin. Yongxin has the full
power and authority to conduct the business in which it will engage upon
completion of the transaction contemplated herein.
(b) Yongxin does not own, directly or indirectly, any capital
stock, equity or interest in any corporation, firm, partnership, joint venture
or other entity, other than the Subsidiary. The Subsidiary is wholly owned by
Yongxin , 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 Yongxin 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 Yongxin or the Subsidiary.
(c) Yongxin has all requisite power and authority to execute
and deliver this Agreement, and to consummate the transactions contemplated
hereby and thereby. Yongxin 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 Yongxin, enforceable against Yongxin 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 Yongxin and the consummation of the transactions contemplated
hereby do not and shall not (a) contravene the governing documents of Yongxin or
any of the Subsidiaries, 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 Yongxin or any of the
Subsidiaries is a party or by which Yongxin or any of the Subsidiaries or any of
their respective assets are bound, or any judgment, order or decree, or any law,
rule or regulation to which their 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 Yongxin or any of the Subsidiaries, (iii) terminate or give any parry
the right to terminate, amend, abandon or refuse to perform any material
agreement, arrangement or commitment to which Yongxin is a party or by which
Yongxin 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 Yongxin 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.
8
3.3 CAPITALIZATION. The authorized capital stock of Yongxin immediately
prior to giving effect to the transactions contemplated hereby consists of
$1,827,805 registered capital. Except as set forth herein, all of the registered
capital of Yongxin is duly authorized, validly issued, fully paid and
nonassessable, and have not been or, with respect to Yongxin Shares, will not be
transferred in violation of any rights of third parties. The Yongxin 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 Yongxin to issue, sell,
redeem or repurchase any of its securities, and there is no outstanding security
of any kind convertible into or exchangeable for common shares. All of the
Yongxin Shares are owned of record and beneficially by the Shareholders free and
clear of any liens, claims, encumbrances, or restrictions of any kind.
3.4 TAXES. Yongxin has filed all returns and reports which were
required to be filed on or prior to the date hereof, and has paid all Taxes (and
any related penalties, fines and interest) which have become due pursuant to
such returns or reports or pursuant to any assessment which has become payable,
or, to the extent its liability for any Taxes (and any related penalties, fines
and interest) has not been fully discharged, the same have been properly
reflected as a liability on the books and records of Yongxin 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 Yongxin such judgments
were reasonable under the circumstances) and complete in all material respects.
Except as indicated in 3.4 of the Disclosure Schedule, no extension for the
filing of any such return or report is currently in effect. Except as indicated
in Item 3.4 of the Disclosure Schedule, no tax return or tax return liability of
Yongxin has been audited or, presently under audit. All taxes and any penalties,
fines and interest which have been asserted to be payable as a result of any
audits have been paid. Except as indicated in Item 3.4 of the Disclosure
Schedule, Yongxin 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 for past due Taxes. Except as
indicated in Item 3.4 of the Disclosure Statement, 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 Yongxin have been paid or shall be paid prior to the Closing and
have been duly provided for on the books and records of Yongxin and in the
Yongxin Financial Statements.
3.5 FINANCIAL STATEMENTS. Item 3.5 of the Disclosure Schedule to this
Agreement, includes copies the (i) balance sheet of the Company at December 31,
2006, and the related statements of operations, stockholders' equity (deficit)
and cash flows for the fiscal year then ended, including the notes thereto, as
audited by Kabani & Company, independent registered public accounting firm (the
"Financial Statements"). The Financial Statements, together with the notes
thereto, have been prepared in accordance with U.S. generally accepted
accounting principles applied on a basis consistent throughout all periods
presented. The Financial 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.
9
3.6 CONDUCT SINCE DATE OF BALANCE SHEET. Except as otherwise set forth
herein), none of the following has occurred since the date of the Balance Sheet:
(a) Any material adverse change in the financial condition,
obligations, capitalization, business, prospects or operations of Yongxin, nor
are there any circumstances known to Yongxin which might result in such a
material adverse change or such an effect;
(b) Any increase of indebtedness of Yongxin other than in the
ordinary course of business;
(c) Any settlement or other resolution of any dispute or
proceeding other than in the ordinary course of business;
(d) Any cancellation by Yongxin, without payment in full, of
any obligation to Yongxin of any shareholder, director, officer or employee of
Yongxin (or any member of their respective families), or any entity in which any
shareholder, director or officer of Yongxin (or any member of their respective
families) has any direct or indirect interests;
(e) Any obligation incurred by Yongxin other than in the
ordinary course of business;
(f) Any payment, discharge or satisfaction of any obligation
or judgment, other than in the ordinary course of business; or
(i) Any agreement obligating Yongxin to do or take any of the
actions referred to in this Section 3.5 outside the ordinary course of business.
3.7 Compliance with Law. Yongxin and the Subsidiary are conducting
their respective businesses in material compliance with all applicable law,
ordinance, rule, regulation, court or administrative order, decree or process,
or any requirement of insurance carriers material to its business. Neither
Yongxin nor the Subsidiary has received any notice of violation or claimed
violation of any such law, ordinance, rule, regulation, order, decree, process
or requirement. Yongxin has not generated any hazardous wastes or engaged in
activities which are or could be interpreted to be potential violations of laws
or judicial decrees in any manner regulating the generation or disposal of
hazardous waste. There are no on-site or off-site locations where Yongxin has
stored, disposed or arranged for the disposal of chemicals, pollutants,
contaminants, wastes, toxic substances, petroleum or petroleum products; there
are no underground storage tanks located on property owned or leased by Yongxin.
10
3.8 LITIGATION.
(a) There is no claim, dispute, action, suit, proceeding or
investigation pending or threatened, against or affecting Yongxin or any of the
Subsidiary 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, 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 Yongxin or any of the
Subsidiaries; and
(c) neither Yongxin nor the 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.
3.9 CONSENTS. The execution, delivery and performance by Yongxin of
this Agreement and the consummation by Yongxin of the transactions contemplated
hereby do not require any consent that has not been received prior to the date
hereof.
3.10 CONTRACTS. An accurate, current and complete copy of each material
Contract has been furnished to the Corporation.
3.11 OFFERS. There are no outstanding offers, bids, proposals or
quotations made by Yongxin which, if accepted, would create a Contract with
Yongxin.
3.12 OFFICERS, DIRECTORS, AGENTS, ETC. Yongxin Liu, Yongkui Liu, Fan
Wenbo and Yongmei Wang are the sole officers and directors of Yongxin.
3.13 LABOR MATTERS. Yongxin is not and has never been a party to: (i)
any profit sharing, pension, retirement, deferred compensation, bonus, stock
option, stock purchase, retainer, consulting, health, welfare or incentive plan
or agreement or other employee benefit plan, whether legally binding or not; or
(ii) any plan providing for "fringe benefits" to its employees, including, but
not limited to, vacation, disability, sick leave, Yongxin, hospitalization and
life insurance and other insurance plans, or related benefits; or (iii) any
employment agreement. No former employee of Yongxin has any claim against
Yongxin (whether under federal or state law, any employment agreement or
otherwise) on account of or for: (i) overtime pay; (ii) wages or salary for any
period; (iii) vacation, time-off or pay in lieu of vacation or time-off; or (iv)
any violation of any statute, ordinance or regulation relating to minimum wages
or maximum hours of work. No person or party (including, but not limited to,
governmental agencies of any kind) has any claim or basis for any action or
proceeding against Yongxin arising out of any statute, ordinance or regulation
relating to discrimination in employment or to employment practices or
occupational safety and health standards.
3.14 BOOKS AND RECORDS. Yongxin's books and records are and have been
properly prepared and maintained in form and substance adequate for preparing
audited financial statements in accordance with generally accepted accounting
principles, and fairly and accurately reflect all of Yongxin's assets,
obligations and accruals, and all transactions (normally reflected in books and
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records in accordance with generally accepted accounting principles) to which
Yongxin is or was a party or by which Yongxin or any of its assets are or were
affected.
3.15 OTHER LIABILITIES. No claim of breach of contract, tort, product
liability or other claim (whether arising from Yongxin's business operations or
otherwise), contingent or otherwise, has been asserted or threatened against
Yongxin nor, to the best of Yongxin's knowledge, is capable of being asserted by
any employee, creditor, claimant or other person against Yongxin. No state of
facts exists or has existed, nor has any event occurred, which could give rise
to the assertion of any such claim by any person.
3.16 CONSENTS. The execution, delivery and performance by Yongxin of
this Agreement and the consummation by Yongxin of the transactions contemplated
hereby do not require any consent that has not been received prior to the date
hereof.
3.17 JUDGMENTS. There is no outstanding judgment against Yongxin. There
is no health or safety problem involving or affecting Yongxin. There are no open
workers compensation claims against Yongxin, or any other obligation, fact or
circumstance which would give rise to any right of indemnification on the part
of any current or former shareholder, partner, director, officer, employee or
agent of Yongxin, or any heir or personal representative thereof, against
Yongxin or any successor to the business of Yongxin.
3.18 IMPROPER PAYMENTS. Neither Yongxin, nor any of its current or
former shareholders, partners, directors, officers or employees or agents, nor
any person acting on behalf of Yongxin, has, directly or indirectly, made any
bribe, kickback or other payment of a similar or comparable nature, whether
lawful or not, to any person, public or private, regardless of form, whether in
money, property or services, to obtain favorable treatment for business secured
or special concessions already obtained. No funds or assets of Yongxin were
donated, lent or made available directly or indirectly for the benefit of, or
for the purpose of supporting or opposing, any government or subdivision
thereof, political party, candidate or committee, either domestic or foreign.
Yongxin has not maintained and does not maintain a bank account, or any other
account of any kind, whether domestic or foreign, which account was not or is
not reflected in the Yongxin corporate books and records, or which account was
not listed, titled or identified in the name of Yongxin.
3.19 FULL DISCLOSURE. All the representations and warranties made by
Yongxin herein or in any Schedule hereto, and all of the statements, documents
or other information pertaining to the transaction contemplated herein made or
given by Yongxin, its agents or representatives are complete and accurate, and
do not omit any information required to make the statements and information
provided, in light of the transaction contemplated herein, non-misleading,
accurate and meaningful.
ARTICLE IV
REPRESENTATION AND WARRANTIES OF THE SHAREHOLDERS
12
Each Shareholder for himself, herself or itself only, and not with
respect to any other Shareholder, hereby severally represents and warrants to
the Company that now and/or as of the Closing:
4.1 TITLE TO SHARES. Each of the Shareholders is the legal and
beneficial owner of the Yongxin Shares to be transferred to the Company by such
Shareholders as set forth opposite each Shareholder's name in SCHEDULE 4.1
hereto, and upon consummation of the exchange contemplated herein, the Company
will acquire from each of the Shareholders good and marketable title to the
Yongxin Shares, free and clear of all liens excepting only such restrictions
upon future transfers by the Company, if any, as maybe imposed by applicable
law. The information set forth on SCHEDULE 4.1 with respect to each Shareholder
is accurate and complete.
4.2 DUE AUTHORIZATION. Each of the Shareholders has all requisite power
and authority to execute and deliver this Agreement, and to consummate the
transactions contemplated hereby and thereby. This Agreement constitutes the
valid and binding obligation of each of the Shareholders, enforceable against
such Shareholders 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.
4.3 PURCHASE FOR INVESTMENT.
(a) Each of the Shareholders is acquiring the Company Shares
for investment for each of the Shareholders' own account and not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof,
and such Shareholders has no present intention of selling, granting any
participation in, or otherwise distributing the same. Each of the Shareholders
further represents that he, she or 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) Each of the Shareholders 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
Act pursuant to Section 4(2) thereof, and that the Company's reliance on such
exemption is predicated on each of the Shareholders' representations set forth
herein.
4.4 INVESTMENT EXPERIENCE. Each of the Shareholders acknowledges that
he, she or it can bear the economic risk of his or her investment, and has such
knowledge and experience in financial and business matters that he, she or it is
capable of evaluating the merits and risks of the investment in the Company
Shares.
13
4.5 INFORMATION. Each of the Shareholders has carefully reviewed such
information as such Shareholders deemed necessary to evaluate an investment in
the Company Shares. To the full satisfaction of each of the Shareholders, he,
she or it has been furnished all materials that he, she or it has requested
relating to the Company and the issuance of the Company Shares hereunder, and
each Shareholder 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 the
Shareholders. 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 the Shareholders has relied in making an exchange of
the Yongxin Shares for the Company Shares.
4.6 RESTRICTED SECURITIES. Each of the Shareholders 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 Act, the Company Shares must
be held indefinitely. Each of the Shareholders 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.
4.7 EXEMPT ISSUANCE. Each of the Shareholders acknowledges that he, she
or it must assure the Company that the offer and sale of the Company Shares to
such Shareholder qualifies for an exemption from the registration requirements
imposed by the Securities Act and from applicable securities laws of any state
of the United States. Each of the Shareholders agrees that he meets the criteria
established in one or more of subsections (a) or (b), below.
(a) ACCREDITED INVESTOR, SECTION 4(2) OF THE SECURITIES ACT
AND/OR RULE 506 OF REGULATION D. The Shareholder qualifies as an "accredited
investor", as that term is defined in Rule 501 of Regulation D, promulgated
under the Securities Act.
(b) OFFSHORE INVESTOR, RULE 903 OF REGULATION S. The
Shareholder is not a U.S. Person, as defined in Rule 901 of Regulation S,
promulgated under the Securities Act, and the Shareholder, severally but not
jointly, represents and warrants to the Company that:
(i) The Shareholder is not acquiring the Company
Shares as a result of, and such Shareholder covenants that e, she or it will not
engage in any "directed selling efforts" (as defined in Regulation S under the
Securities Act) in the United States in respect of the Company Shares which
would include any activities undertaken for the purpose of, or that could
reasonably be expected to have the effect of, conditioning the market in the
United States for the resale of any of the Company Shares;
(ii) The Shareholder is not acquiring the Company
Shares for the account or benefit of, directly or indirectly, any U.S. Person;
14
(iii) The Shareholder is a resident of the People's
Republic of China;
(iv) the offer and the sale of the Company Shares to
such Shareholder as contemplated in this Agreement complies with or is exempt
from the applicable securities legislation of the People's Republic of China;
(v) the Shareholder is outside the United States when
receiving and executing this Agreement and that the Shareholder will be outside
the United States when acquiring the Company Shares,
(vi) and the Shareholder covenants with Company that:
(1) offers and sales of any of the
Company Shares prior to the
expiration of a period of one year
after the date of original issuance
of the Company Shares (the one year
period hereinafter referred to as
the "Distribution Compliance
Period") shall only be made in
compliance with the safe harbor
provisions set forth in Regulation
S, pursuant to the registration
provisions of the Securities Act or
an exemption therefrom, and that
all offers and sales after the
Distribution Compliance Period
shall be made only in compliance
with the registration provisions of
the Securities Act or an exemption
therefrom and in each case only in
accordance with applicable state
securities laws; and
(2) The Shareholder will not engage in
hedging transactions with respect
to the Company Shares until after
the expiration of the Distribution
Compliance Period.
ARTICLE V
COVENANTS
5.1 FURTHER ASSURANCES. Each of the Parties shall use its reasonable
commercial efforts to proceed promptly with the transactions contemplated
herein, to fulfill the conditions precedent for such parry's benefit or to cause
the same to be fulfilled and to execute such further documents and other papers
and perform such further acts as may be reasonably required or desirable to
carry out the provisions of this Agreement and to consummate the transactions
contemplated herein.
ARTICLE VI
DELIVERIES
6.1 Items to be delivered to the Shareholders prior to or at Closing by
the Company.
15
(a) Articles of Incorporation and amendments thereto, By-laws
and amendments thereto, and a 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 all tax returns in possession
of the Company;
(f) resolution from the Company's Board appointing the
designees of the Shareholders to the Company's Board of Directors;
(g) resolution from the Company's Board, and if applicable,
shareholder resolutions approving this transaction and authorizing the issuances
of the shares hereto;
(h) letters of resignation from the Company's current officers
and directors to be effective upon Closing and after the appointments described
in Section 6.1(f);
(i) certificates representing shares of the Company Shares
issued in the denominations as set forth opposite the name of the Shareholders
and/or its designees on SCHEDULE I to this Agreement;
(j) any other document reasonably requested by the
Shareholders that it deems necessary for the consummation of this transaction.
6.2 Items to be delivered to the Company prior to or at Closing by
Yongxin and the Shareholders.
(a) all applicable schedules hereto;
(b) instructions from Yongxin appointing its designees to the
Company's Board of Directors;
(c) share certificates and duly executed stock powers from the
Shareholders transferring the Yongxin Shares to the Company;
(d) resolutions from the Board of Directors of Yongxin, if
applicable, and shareholder resolutions approving the transactions contemplated
hereby; and
(e) any other document reasonably requested by the Company
that it deems necessary for the consummation of this transaction.
ARTICLE VII
CONDITIONS PRECEDENT
7.1 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:
16
(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 except for
changes permitted or contemplated by this Agreement.
(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) Yongxin and the Subsidiary shall have received, and
delivered documentation of, the approvals required, if any, from the Ministry of
Commerce of the People's Republic of China, the China Securities Regulatory
Commission, the State Administration of Foreign Exchange, or any other Chinese
governmental agency regulating the ownership of business operations in China by
non-Chinese nationals and/or the ownership of offshore companies doing business
in China by Chinese nationals.
(d) The Company will effectuate an approximate 12 for 1
reverse split of the Company Common Stocks of the Company prior to the time of
closing.
(e) That the Company shall have settled, paid or otherwise
resolved the Convertible Notes payable in the principal amount of $3,000,000
plus accrued interest in the approximate total amount of $1,202,217.
(f) ABSENCE OF LITIGATION. No litigation shall have been
instituted on or before the time of the Closing by any person, the result of
which did or could prevent or make illegal the consummation of the transaction
contemplated by this Agreement, or which had or could have a material adverse
effect on the business of the Corporation.
7.2 CONDITIONS TO OBLIGATIONS OF SHAREHOLDERS. The obligations of
Shareholders shall be subject to fulfillment prior to or at the Closing, of each
of the following conditions:
(a) The Company shall have received all of the regulatory,
shareholder and other third party consents, permits, approvals and
authorizations necessary to consummate the transactions contemplated by this
Agreement; and
(b) The Company shall have complied with Rule 14(f)(1) of the
Exchange Act, if required.
7.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of the
Company shall be subject to fulfillment at or prior to or at the Closing, of
each of the following conditions:
17
(a) Yongxin and the Shareholders shall have received all of
the regulatory, shareholder and other third party consents, permits, approvals
and authorizations necessary to consummate the transactions contemplated by this
Agreement; and
(b) The Shareholders shall have delivered to the Company the
share certificates and duly executed stock powers from the Shareholders
transferring the Yongxin Shares to the Company.
(c) All representations and warranties made by Yongxin and the
Yongxin Shareholders contained in this Agreement and the Schedules hereto shall
be true and correct in all respects on the date hereof, and shall be true and
correct in all respects at the time of the Closing as though such
representations were again made, without exception or deviation, at the time of
the Closing.
(d) Yongxin and the Yongxin Shareholders shall have duly
performed or complied with all of the covenants and obligations under this
Agreement to be performed or complied with by them on or prior to the Closing.
(e) No litigation shall have been instituted on or before the
time of the Closing by any person, the result of which did or could prevent or
make illegal the consummation of the transaction contemplated by this Agreement.
ARTICLE VIII
INDEMNIFICATION
8.1 INDEMNITY OF THE COMPANY. The Company agrees as to defend,
indemnify and hold harmless the Shareholders from and against, and to reimburse
the Shareholders with respect to, all liabilities, losses, costs and expenses,
including, without limitation, reasonable attorneys' fees and disbursements
(collectively the "Losses") asserted against or incurred by the Shareholders 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 in
any document or certificate delivered by the Company pursuant to the provisions
of this Agreement or in connection with the transactions contemplated thereby.
8.2 INDEMNITY OF THE SHAREHOLDERS. The Shareholders, joint and
severally, agree to defend, indemnify and hold harmless the Company from and
against, and to reimburse the Company with respect to, all losses, 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 the Shareholders or in any document or certificate
delivered by the Shareholders pursuant to the provisions of this Agreement or in
connection with the transactions contemplated thereby, it being understood that
the Shareholders shall have responsibility hereunder only for the
representations and warranties made by the Shareholders.
18
8.3 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 VIII. 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
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 Parry which consent shall not be
unreasonably withheld.
ARTICLE IX
TERMINATION
9.1 TERMINATION. This Agreement may be terminated at any time before
or, at Closing, by:
(a) The mutual agreement of the Parties;
(b) Either the Corporation or Yongxin, but not by a
Shareholder if-
(i) Any provision of this Agreement applicable to a
party shall be materially untrue or fail to be accomplished; or
(ii) Any legal proceeding shall have been instituted
or shall be imminently threatening to delay, restrain or prevent the
consummation of this Agreement;
(c) Upon termination of this Agreement for any reason, in
accordance with the terms and conditions set forth in this paragraph, each said
party shall bear all costs and expenses as each party has incurred.
ARTICLE X
COVENANTS SUBSEQUENT TO CLOSING
10.1 SUBSEQUENT SEC FILINGS. The Chief Executive Officer and Chief
Financial Officer, or other principal administrative and financial officers, of
the Company shall cooperate with and assist Yongxin with the preparation of the
first Quarterly or Annual Report, as applicable, to be filed with the Commission
subsequent to the Closing to the extent disclosure is required regarding the
19
prior operations, financial condition, or actions of, or other information
pertaining to, the Company for the period(s) ended prior to the Closing. Such
cooperation and assistance shall include, but not be limited to, provision of
subcertifications regarding the disclosures controls and procedures and internal
control over financial reporting of the Company, provision of and participation
in review of interim financial statements, and review and provision of feedback
on a draft of the required Report.
10.2 Umesh Patel shall assist the Company in negotiating and resolving
outstanding debts.
ARTICLE XI
MISCELLANEOUS
11.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. 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. Except as specifically set forth in this Agreement,
representations and warranties and statements made by a party to in this
Agreement or in any document or certificate delivered pursuant hereto shall not
survive the Closing Date, and no claims made by virtue of such representations,
warranties, agreements and covenants shall be made or commenced by any party
hereto from and after the Closing Date. Each warranty and representation made by
a party in this Agreement or pursuant hereto is independent of all other
warranties and representations made by the same party in this Agreement or
pursuant hereto (whether or not covering identical, related or similar matters)
and must be independently and separately satisfied. Exceptions or qualifications
to any such warranty or representation shall not be construed as exceptions or
qualifications to any other warranty or representation.
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
20
the merger in accordance with the terms of this 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:
Attention:
If to the Shareholders and Yongxin:
Yongxin Medical Group, Ltd.
2152 San Huancheng Road
Chang Chun, China
Attention:
With a copy to:
Laura E. Anthony, Esquire
Legal & Compliance, LLC
330 Clematis Street
Suite 217
West Palm Beach, FL 33401
Office: 561-514-0936
Fax: 561-514-0832
If to the Company:
Digital Learning Management Corporation
680 Langsdorf Drive, Suite 203
Fullerton, CA 92831
Attn: Umesh Patel, Chairman
Fax:
21
With a copy to:
Danton Mak
Sheldon Mak Rose & Anderson
225 South Lake Avenue, 9th Floor
Pasadena, CA 91101-3021
Fax: 626-795-6321
11.5 ENTIRE AGREEMENT. This Agreement, the Disclosure 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 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 Delaware 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 Schedule
is 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.
22
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 LITIGATION. If any party hereto is required to engage in
litigation or arbitration against any other party hereto, either as plaintiff or
as defendant, in order to enforce or defend any of its or his rights under this
Agreement, and such litigation results in a final judgment in favor of such
party (the "Prevailing Party"), then the party or parties against whom said
final judgment is obtained shall reimburse the Prevailing Party for all direct,
indirect or incidental expenses incurred by the Prevailing Party in so enforcing
or defending its or his rights hereunder, including, but not limited to, all
attorneys' fees, paralegals' fees, court costs and other expenses incurred
throughout all negotiations, trials or appeals undertaken in order to enforce
the Prevailing Party's rights hereunder.
IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of
the date first set forth above.
DIGITAL LEARNING MANAGEMENT CORPORATION.
By:_____________________________
Name: Umesh Patel
Title: Chairman
YONGXIN MEDICAL GROUP, LTD.
By:_____________________________
Name:
Title: Chief Executive Officer
[SIGNATURE PAGES FOR SHAREHOLDERS FOLLOW]
23
YONGXIN MEDICAL GROUP, LTD.
SHAREHOLDERS' SIGNATURE PAGE TO
SHARE EXCHANGE AGREEMENT
Dated [________], 2007
Among Digital Learning Management Corporation.,
Yongxin Medical Group, Ltd., and
The Shareholders of Yongxin Medical Group, Ltd.
The undersigned Shareholder hereby executes and delivers the Share
Exchange Agreement (the "AGREEMENT") to which this Signature Page is attached,
which, together with all counterparts of the Agreement and Signature Pages of
the other parties named in said Agreement, shall constitute one and the same
document in accordance with the terms of the Agreement.
-----------------------------------------------------------------------
(Signature)
-----------------------------------------------------------------------
(Type or print name)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(Type or print name as it should appear on certificate, if different)
Address:
---------------------------------------------------------------
---------------------------------------------------------------
Telephone: ( )
---------------------------------------------
Facsimile: ( )
---------------------------------------------
NUMBER OF YONGXIN SHARES HELD: ________________
SCHEDULE 1.1(a)
- ---------------------------------------------------- -------------------------------- --------------------------------
NAME NUMBER OF COMMON STOCK NUMBER OF PREFERRED STOCK
==================================================== ================================ ================================
1. Misala Holdings Inc. BVI 600,000.00 3,000,000.00
- ---------------------------------------------------- -------------------------------- --------------------------------
2. Boom Day Investments Ltd. BVI 5,400,000.00 2,000,000.00
- ---------------------------------------------------- -------------------------------- --------------------------------
3. Accord Success Ltd., BVI 5,400,000.00
- ---------------------------------------------------- -------------------------------- --------------------------------
4. Perfect Sum Investment Ltd. BVI 1,200,000.00
- ---------------------------------------------------- -------------------------------- --------------------------------
5. Full Spring Group Ltd. BVI 1,800,000.00
- ---------------------------------------------------- -------------------------------- --------------------------------
6. Grand Opus Co. Ltd., BVI 2,400,000.00
- ---------------------------------------------------- -------------------------------- --------------------------------
7. Master Power Holdings Coup Ltd. BVI 4,200,000.00
==================================================== ================================ ================================
TOTAL 21,000,000.00 5,000,000.00
- ---------------------------------------------------- -------------------------------- --------------------------------
-i-
SCHEDULE 2.1(a)
DIGITAL LEARNING MANAGEMENT, INC. ARTICLES AND BYLAWS
-ii-
SCHEDULE 2.1(b)
DIGITAL LEARNING MANAGEMENT, INC. SUBSIDIARIES
Digital Learning Institute Inc., a Delaware corporation.
In addition, Digital Learning Institute has the following subsidiaries:
Software Education of America, a California corporation
Mckinley Education Services, a California corporation
Digital Knowledge Works, a Delaware corporation
Coursemate, a California corporation
-iii-
SCHEDULE 2.5
SHEDULE OF ADJUSTMENT TO DIGITAL LEARNING FINANCIAL STATEMENTS
Since the date of the last financial statements, the Company has incurred debts
in the ordinary course of business in the approximate amount of $120,000.00.
-iv-
SCHEDULE 2.12
LITIGATION
-v-
SCHEDULE 3.5
YONGXIN FINANCIAL STATEMENTS
-vi-
SCHEDULE 4.1
YONGXIN CAPITAL OWNERSHIP SCHEDULE
NAME % OF YONGXIN OWNED
---- ------------------
1. Yongxin Liu 51%
2. Yongkui Liu 49%
TOTAL 100%
-vii-
EXHIBIT "C"
DIGITAL LEARNING MANAGEMENT CORPORATION
Certificate of Designation, Preferences and
Rights of the Terms of the Series A Preferred Stock
---------------------------------------------------
The undersigned President and Chairman of the Board of Directors of
Digital Learning Management Corporation (the "Corporation"), organized and
existing under the General Corporation Law of the State of Delaware, in
accordance with the provisions of Section 103 thereof, do hereby certify:
That pursuant to the authority conferred upon the Board of Directors by
the Certificate of Incorporation of the Corporation, the Board of Directors on
May 25, 2007, adopted the following resolution creating a series of 5,000,000
shares of Preferred Stock designated as Series A Convertible Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of its
Certificate of Incorporation, a series of Preferred Stock of the Corporation be
and hereby is created, and that the designation and amount thereof and the
powers, preferences and relative, participating, optional and other special
rights of the shares of such series, and the qualifications, limitations or
restrictions thereof are as follows:
Section A. Designation and Amount. The shares of such series shall be
designated as "Series A Convertible Preferred Stock" (the "Series A Preferred
Stock"), $0.001 par value per share, and the number of shares constituting such
series shall be 5,000,000.
1. Voting. Except as may be otherwise provided by law or by
the Certificate of Incorporation, the Series A Convertible Preferred Stock shall
vote together with all other classes and series of stock of the Corporation as a
single class on all actions to be taken by the shareholders of the Corporation.
In addition, the Series A Convertible Preferred Stock shall vote separately as
its own class on all actions to be taken by the shareholders of the Corporation.
Each share of Series A Convertible Preferred Stock shall entitle the holder
thereof to six (6) votes on all matters that come before the shareholders for
vote.
2. Dividends. The Series A Convertible Preferred Stock shall
not earn or be entitled to any dividends until the right to convert has expired
as set forth in Paragraph 4 hereto. Beginning upon the date of expiration of
such conversion rights, each share of issued and outstanding Series A
Convertible Preferred Stock shall be entitled to a preferential dividend at the
rate of ten cents ($.10) per annum. Dividends on the Series A Convertible
Preferred Stock shall accrue on the dates stated above and shall be paid from
time to time as determined by the Board of Directors when and if such payment is
legally acceptable in accordance with the Delaware General Corporations Law, and
shall be in preference to and have priority over dividends upon the Common Stock
and all other shares junior to the Series A Convertible Preferred Stock.
("Shares junior to the Series A Convertible Preferred Stock" shall mean shares
of any class of the Corporation if the Series A Convertible Preferred Stock has
priority over such class with respect to dividend and liquidation rights.)
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3. Liquidation Preference. In the event of a liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the holders of Series A Convertible Preferred Stock shall be entitled to receive
out of the assets of the Corporation, whether such assets are stated capital or
surplus of any nature, an amount equal to the dividends accrued and unpaid
thereon to the date of final distribution to such holders, whether or not
declared, without interest, and a sum equal to $1.00 per share, and no more,
before any payment shall be made or any assets distributed to the holders of
Common Stock or any other class or series of the Corporation's capital stock
ranking junior as to liquidation rights to the Series A Convertible Preferred
Stock (the "Junior Liquidation Stock") provided, however, that such rights shall
accrue to the holders of Series A Convertible Preferred Stock only in the event
that the Corporation's payments with respect to the liquidation preferences of
the holders of capital stock of the Corporation ranking senior as to liquidation
rights to the Series A Convertible Preferred Stock (the "Senior Liquidation
Stock") are fully met. The entire assets of the Corporation available for
distribution after the liquidation preferences of the Senior Liquidation stock
are fully met shall be distributed ratably among the holders of the Series A
Convertible Preferred Stock and any other class or series of the Corporation's
capital stock which may hereafter be created having parity as to liquidation
rights with the Series A Convertible Preferred Stock in proportion to the
respective preferential amounts to which each is entitled (but only to the
extent of such preferential amounts). Neither a consolidation or merger of the
Corporation with another corporation nor a sale or transfer of all or part of
the Corporation's assets for cash, securities or other property will be
considered a liquidation, dissolution or winding up of the Corporation.
4. Conversions. The holders of shares of Series A Convertible
Preferred Stock shall have the following conversion rights:
(a) Right to Convert.Subject to the terms and
conditions of this paragraph 4, the holder of any share of shares of Series A
Convertible Preferred Stock shall have the right, at its option, (i) at any time
hereafter (except that upon any liquidation of the Corporation, the right of
conversion shall terminate at the close of business on the business day fixed
for payment of the amount distributable on the Series A Convertible Preferred
Stock) to convert, in each of the three succeeding periods as set forth herein,
any such shares of Series A Convertible Preferred Stock into such number of
fully paid and nonassessable shares of Common Stock on a six (6) for one (1)
basis subject to the limitations herein. No more than 1,666,666 of the Series A
Convertible Preferred Stock may be converted in each of the three periods
following the date hereof. The conversion formula is conditioned on the
Corporation earning no less than 3 million dollars of net income in for the
fiscal year end March 31, 2008; $4 million dollars of net income in the fiscal
year end March 31, 2009 and $5 million dollars of net income in the fiscal year
end March 31, 2010. In the event that in any of the three fiscal years, the
Corporation earns less than required net income amounts for conversion, then the
conversion right shall be proportionately reduced by the amount of the shortfall
below the required net income amount, with the "catch-up" right to convert
additional shares to the extent that the net income exceeds 3 million; 4 million
and 5 million dollars in each of the three consecutive years. In no event shall
this conversion right allow for the conversion of the Series A Preferred Stock
into more than 6 common shares for each share of Series A Preferred Stock over
the course of the aforementioned three calendar years. The net income
requirements shall be based upon an audit of the revenues for each fiscal year.
All conversions shall be made within 30 days of the completion of such audit.
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(b) Issuance of Certificates; Time Conversion
Effected. Promptly after the receipt of the written notice referred to in
subparagraph 4(a)(i) and upon receipt of written notice with respect to
subparagraph 4(a)(ii) (which notice must be received by the Corporation within
twenty (20) days after the Corporation provides notice to shareholders of its
intent to pursue a public offering) and surrender of the certificate or
certificates for the share or shares of Series A Convertible Preferred Stock to
be converted, the Corporation shall issue and deliver, or cause to be issued and
delivered, when effective, to the holder, registered in such name or names as
such holder may direct, a certificate or certificates for the number of shares
of Common Stock issuable upon the conversion of such share or shares of Series A
Convertible Preferred Stock. To the extent permitted by law, such conversion
shall be deemed to have been effected as of the close of business on the date on
which such written notice shall have been received by the Corporation and the
certificate or certificates for such share or shares shall have been surrendered
as aforesaid, and at such time the rights of the holder of such shares of Series
A Convertible Preferred Stock shall cease, and the person or persons in whose
name or names any certificate or certificates for shares of Common Stock shall
be issuable upon such conversion shall be deemed to have become the holder or
holders of record of the shares represented thereby.
(c) Dividends; Partial Conversion. At the time of
each conversion, the Corporation shall pay, if available and advisable in the
Board of Directors' discretion, in cash an amount equal to all dividends unpaid
on the shares of Series A Convertible Preferred Stock surrendered for conversion
to the date upon which such conversion is deemed to take place as provided in
subparagraph 4(b). In case the number of shares of Series A Convertible
Preferred Stock represented by the certificate or certificates surrendered
pursuant to subparagraph 4(a) exceeds the number of shares converted, the
Corporation shall, upon such conversion, execute and deliver to the holder, at
the expense of the Corporation, a new certificate or certificates for the number
of shares of Series A Convertible Preferred Stock represented by the certificate
or certificates surrendered which are not to be converted.
(d) Subdivision or Combination of Common Stock. In
case the Corporation shall at any time subdivide (by any stock split, stock
dividend or otherwise) its outstanding shares of Common Stock into a greater
number of shares, the Conversion Price in effect immediately prior to such
subdivision shall be proportionately reduced, and, conversely, in case the
outstanding shares of Common Stock shall be combined into a smaller number of
shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased.
(e) Reorganization or Reclassification. If any
capital reorganization or reclassification of the capital stock of the
Corporation shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganization or
reclassification, lawful and adequate provisions shall be made whereby each
holder of a share or shares of Series A Convertible Preferred Stock shall
thereupon have the right to receive, upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of Common Stock
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immediately theretofore receivable upon the conversion of such share or shares
of Series A Convertible Preferred Stock, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for a number
of outstanding shares of such Common Stock equal to the number of shares of such
Common Stock immediately theretofore receivable upon such conversion had such
reorganization or reclassification not taken place, and in any such case
appropriate provisions shall be made with respect to the rights and interests of
such holder to the end that the provisions hereof (including, without
limitation, provisions for adjustments of the Conversion Price) shall thereafter
be applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise of such conversion
rights.
(f) Notice of Adjustment. Upon any adjustment of the
Conversion Price then and in each such case the Corporation shall give written
notice thereof, by first class mail, postage prepaid, addressed to each holder
of shares of Series A Convertible Preferred Stock at the address of such holder
as shown on the books of the Corporation, which notice shall state the price
resulting from such adjustment, setting forth in reasonable detail the method
upon which such calculation is based.
(g) Other Notices. In case at any time:
(i) the Corporation shall declare any
dividend upon its Common Stock payable in cash or stock or make any other
distribution to the holders of its Common Stock;
(ii) the Corporation shall offer for
subscription pro rata to the holders of its Common Stock any additional shares
of stock of any class or other rights;
(iii) there shall be any capital
reorganization or reclassification of the capital stock of the Corporation, or a
consolidation or merger of the Corporation with or into, or a sale of all or
substantially all its assets to, another entity or entities; or
(iv) there shall be a voluntary or
involuntary dissolution, liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by first
class mail, postage prepaid, addressed to each holder of any shares of Series A
Convertible Preferred Stock at the address of such holder as shown on the books
of the Corporation, (y) at least twenty (20) days' prior written notice of the
date on which the books of the Corporation shall close or record shall be taken
for such dividend, distribution or subscription rights or for determining rights
to vote in respect of any reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, and (z) in the case of any
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least twenty (20) days' prior written notice of
the date when the same shall take place. Such notice in accordance with the
foregoing clause (y) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto and such notice in accordance with the foregoing
clause (z) shall also specify the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, as the case may be.
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(h) Stock to be Reserved. The Corporation
shall at all times reserve and keep available out of its authorized Common
Stock, solely for the purpose of issuance upon the conversion of Series A
Convertible Preferred Stock as herein provided, such number of shares of Common
Stock as shall then be issuable upon the conversion of all outstanding shares of
Series A Convertible Preferred Stock. The Corporation covenants that all shares
of Common Stock which shall be so issued shall be duly and validly issued and
fully paid and nonassessable and free from all taxes, liens and charges with
respect to the issue thereof, and, without limiting the generality of the
foregoing, the Corporation covenants that it will from time to time take all
such action as may be requisite to assure that the par value per share of the
Common Stock is at all times equal to or less than the Conversion Price in
effect at the time. The Corporation will take all such action as may be
necessary to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or regulation, or of any requirement of
any national securities exchange upon which the Common Stock may be listed. The
Corporation shall not take any action which results in any adjustment of the
Conversion Price if the total number of shares of Common Stock issued and
issuable after such action upon conversion of the Series A Convertible Preferred
Stock would exceed the total number of shares of Common Stock then authorized by
these Certificate of Incorporation.
IN WITNESS WHEREOF, we have executed and subscribed this Certificate
and do affirm the foregoing as true under the penalties of perjury this ____day
of ________, 2007.
/s/ Umesh Patel
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Umesh Patel, President and
Chairman
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