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.:_____________________
(3) Filing Party:_____________________________________________________
(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.
The Board of Directors has fixed August ___, 2007, as the record date for
purposes of this Consent solicitation. Therefore, only holders who August ___
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 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.
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.
Only stockholders of record as of August ___, 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.
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
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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 Virtual University Appliance ("VU
Appliance") is a hardware and software package, which incorporates the
CourseMate Virtual University System.
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.
o Past Contracts, Transactions or Negotiations (page __)
We have never engaged in a transaction with Yongxin nor had any past
contractual relationship other than the Proposed Acquisition. We began
negotiations for the Share Exchange Agreement with Yongxin in November 2006
following an introduction between our companies by our independent auditor,
Hamid Kabani.
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
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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
next 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 August ___, 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,
- we will have effectuated an approximate 12 for 1 reverse split of our
Common Stock,
- we shall have settled, paid or otherwise resolved our 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.
In addition, the following pre-condition has been waived by the parties:
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- 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,
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. Moreover, none of our directors or
executive officers have been made promises regarding employment or future
compensation. However, Mr. Umesh Patel has been offered the position of Vice
President but such offer has not yet included discussions of terms and
compensation.
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. All
of our current directors will resign from the Board of Directors following,
which changes will constitute a change in control of management.
o New Management (page __)
The number of members of our Board of Directors is currently four. Each of
our current Board of Directors shall resign and 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.
Following the acquisition we will continue to operate both the business of
Yongxin and the current business of Digital Learning for a period of time. The
two businesses shall operate in separate subsidiaries, as following the
acquisition Yongxin shall become a wholly owned subsidiary of the Company.
However, it is the Company's intention to divest itself of the current Digital
e-Learning business in the future. We have not determined for how long a period
of time we will maintain the current e-Learning business. In addition, we have
not yet determined how we shall divest ourselves of the e-Learning business,
which could be through a sale or spin-off.
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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 __)
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 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. Also attached hereto are the audited
financial statements for Digital Learning for the years ended December 31, 2005
and 2006 and the unaudited financial statements for the quarter ended June 30,
2007. Finally, attached hereto is certain pro forma financial information.
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 August ___, 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.
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.
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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.
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 WHO IS SOLICITING YOUR CONSENT?
Digital Learning Management, Inc. together with its Board of Directors is
soliciting your consent.
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,
8
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 August ___, 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 August ___, 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 NO DISSENTERS' RIGHTS
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.
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.
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.
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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.
On December 21, 2006 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".
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).
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.
10
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
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
Reserved for Issuance Upon Closing
Of Acquisition(1) 0 21,000,000
Reserved for Issuance Upon Conversion
Of Preferred Stock(1) 0 30,000,000
Reserved for Issuance to Settle Debt(2) 0 3,500,000
Authorized and Unreserved 9,317,928 14,999,999
(1) The Share Exchange Agreement provides 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 discussion of
Proposal 3 beginning on page ____ hereof contains a detailed description of the
rights, privileges and convertability of the preferred stock.
(2) The Company intends to settle obligations owed to our note holders, and
miscellaneous debts with common stock. We do not have a written agreement with
any creditors in this regard but have been provided with verbal assurances that
if the Proposals set forth herein are approved, our note holder and
miscellaneous other creditors would be amenable to settling obligations with
common stock. Moreover, although we believe we will be able to settle these
obligations with 3,500,000 shares additional shares may be required.
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.
11
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
------------------------------------
THE ACQUISITION. 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
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.
12
We have issued no securities in connection with the intended acquisition.
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
Virtual University Appliance ("VU Appliance") is a hardware and software package
which incorporates our CourseMate Virtual University System.
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
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.
MANAGEMENT DISCUSSION AND ANALYSYS FOR DIGITAL LEARNING
OVERVIEW
Digital Learning Management Corporation, a Delaware corporation
(hereinafter sometimes referred to as the "Company," "we," and "us"),
incorporated on February 18, 1999, under the name FreePCSQuote.Com, Inc., was a
development stage company with a principal business objective to allow
businesses the opportunity to generate revenues through the use of our Internet
technology solutions and services. Through the use of our computer software,
network technology, and systems management, we provided our customers outsourced
web site and application hosting solutions. We had yet to generate significant
revenues from operations through the end of fiscal 2004.
CHANGE IN BUSINESS STRATEGY AND RECENT EVENTS
Effective March 16, 2005, the Company decided to discontinue its vocational
schools and will no longer pursue acquisitions of accredited vocational schools
and campuses going forward. The Company will continue to focus on its online
e-Learning systems and related services strategy, with sales and services
focused around its VU Appliance product, training and education.
The VU Appliance product, which was introduced by the Company in October
2004, is a pre-packaged and "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 customers to create, publish and deliver courseware for
e-Learning in addition to managing their traditional classroom learning
environment. The Company utilizes its United States Patent in its VU Appliance.
The Company believes its success in the future lies in successfully marketing,
selling and improving its VU Appliance product and related services. The Company
intends to remain focused on further developing and adding to its intellectual
property assets, utilizing its expertise to help the online learning initiatives
of its customers with e-Learning systems solutions.
Our strategy is to grow our business utilizing our proprietary learning
management software by selling our learning management system to other schools,
colleges and businesses.
CRITICAL ACCOUNTING POLICIES
We prepare our financial statements in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the 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.
Management's estimates and judgments are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
13
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our condensed
consolidated financial statements:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its majority owned entities, collectively referred to as "Company" or "DGTL".
All significant inter-company transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions. Such estimates and assumptions 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 estimated amounts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of cash in banks and highly liquid
investments with original maturities of 90 days or less.
REVENUE RECOGNITION
Revenues from sales of the Company's VU Appliance include product, licensing of
the product and professional services such as hosting, customization, training,
courseware development and third party course license fees. Product revenues
consist of bundled hard-software product sales, annual licensing fees, and
client hosting engagement. The Company intends to sell its licenses, training
and hosting services under annually renewable agreements, which the clients will
generally pay annual fees in the beginning of the annual contract term. Billings
from these revenues are recognized as deferred revenues and are then recognized
ratably over the contract term. Product sale revenues are recognized upon the
shipment of the product to customers.
The Company does not currently have tuition revenues. However, when it has in
the past had such revenues, and when it does in the future have such revenues,
they are derived from courses taught in the Company'sschools. Tuition and fee
revenues are recognized pro-rata (on a straight-line basis) over the term of the
applicable course (usually two to four weeks for DLI). Tuition is billed after
the course has been completed for DLI. If a student withdraws from a course or
program, the paid but unearned portion of the student tuition is refunded.
ALLOWANCES FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts resulting from the
inability, failure or refusal of our students to make required payments. The
Company determines the adequacy of this allowance by regularly reviewing the
accounts receivable aging and applying various expected loss percentages to
certain student accounts receivable categories based upon historical bad debt
experience. The Company generally writes-off accounts receivable balances deemed
uncollectible as they are sent to collection agencies. As of December 31, 2006
the Company has an allowance for bad debts amounting $235,506, representing 100%
of accounts receivable.
EDUCATIONAL SERVICES
Educational services include direct operating expenses of the schools consisting
primarily of contract salaries, occupancy and supplies.
14
EARNINGS PER COMMON SHARE
The Company computes earnings per common share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128) The
Statement requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Basic loss per
share is computed by dividing loss available to common shareholders by the
weighted average number of common shares outstanding. The computation of diluted
loss per share is similar to the basic loss per share computation except the
denominator is increased to include the number of additional shares that would
have been outstanding if the dilutive potential common shares had been issued.
In addition, the numerator is adjusted for any changes in income or loss that
would result from the assumed conversions of those potential shares. However,
such presentation is not required if the effect is antidilutive. Accordingly,
the diluted per share amounts do not reflect the impact of warrants and options
because the effect of each is antidilutive.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation expense is provided on
a straight-line basis using estimated useful lives of 3-7 years. Expenditures
for maintenance and repairs are charged to operations as incurred while renewals
and betterments are capitalized. Gains and losses on disposals are included in
the results of operations. Depreciation expense was $13,408 and $85,579 for the
years ended December 31, 2006 and 2005, respectively. During the year ended
December 31, 2005, the Company wrote off certain property and equipment that was
not longer being used and took an impairment charge of $75,414.
FACILITIES
The Company leases office space from an unrelated party. Rent expense was
$33,338 and $140,655 for the years ended December 31, 2006 and 2005,
respectively.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Under this method, deferred income taxes are recorded to reflect the tax
consequences in future years of temporary differences between the tax basis of
assets and liabilities and their financial statement amounts at the end of each
reporting period. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
represents the tax payable for the current period and the change during the
period in deferred tax assets and liabilities. Deferred tax assets and
liabilities have been netted to reflect the tax impact of temporary differences.
Deferred tax assets arise primarily from the net operating loss carry-forward
and expenses accrued for book basis but not for tax basis. Deferred tax
liabilities primarily result from revenues recognized for book basis but not for
tax basis.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, notes payable, accounts payable
and accrued expenses approximate fair value because of the short maturity of
these items.
CONCENTRATIONS OF RISK
The Company maintains all cash and cash equivalents in financial institutions,
which at times may exceed federally insured limits. The Company has not
experienced a loss in such accounts.
Four customers accounted for 96% and two customers accounted for 60% of sales
during the years ended December 31, 2006 and 2005, respectively. The three
customers accounted for 21% of accounts receivable at December 31, 2006.
The Company performs regular evaluations concerning the ability of its customers
to satisfy their obligations and records a provision for doubtful accounts based
upon these evaluations, when necessary.
15
STOCK BASED COMPENSATION
The company adopted SFAS No. 123-r effective January 1, 2006 using the modified
prospective method. Under this transition method, stock compensation expense
includes compensation expense for all stock-based compensation awards granted on
or after January 1,2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS No. 123-R.
Prior to January 1, 2006, the Company measured stock compensation expense using
the intrinsic value method of accounting in accordance with Accounting
Principles Board (APB) opinion no. 25, accounting for stock issued to
employees," and related interpretations (APB No. 25) and has opted for the
disclosure provisions of SFAS No. 123. Thus, expense was generally not
recognized for the company's employee stock option and purchase plans.
There were no outstanding and unvested stock options as of December 31, 2005.
the company did not grant any new options during the year ended December 31,
2006.
VALUATION OF THE COMPANY'S COMMON STOCK
Unless otherwise disclosed, all stock based transactions entered into by the
Company have been valued at the market value of the Company's common stock on
the date the transaction was entered into or have been valued using the Modified
Black-Scholes Model to estimate the fair market value.
SOFTWARE DEVELOPMENT COSTS
The Company has developed software to enable students to access and take online
classes. The software development costs were expensed as research and
development costs as incurred until the software reached technological
feasibility in accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed" ("SFAS 86"). During the year ended December 31, 2005, the
Company wrote off development costs and took an impairment charge of $327,369.
RECLASSIFICATION
Certain amounts reported in the Company's financial statements for the year
ended December 31, 2005 have been reclassified to conform to current year
presentations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal
years beginning after November 15, 2007. Early adoption is permitted subject to
specific requirements outlined in the new Statement. Therefore, calendar-year
companies may be able to adopt FAS 159 for their first quarter 2007 financial
statements.
The new Statement allows entities to choose, at specified election dates, to
measure eligible financial assets and liabilities at fair value that are not
otherwise required to be measured at fair value. If a company elects the fair
value option for an eligible item, changes in that item's fair value in
subsequent reporting periods must be recognized in current earnings. FAS 159
also establishes presentation and disclosure requirements designed to draw
comparison between entities that elect different measurement attributes for
similar assets and liabilities. The management is currently evaluating the
effect of this pronouncement on financial statements.
16
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 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 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 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:
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.
17
This Statement is effective as of the beginning of the Company's first
fiscal year that begins after September 15, 2006. Management believes that
this statement will not have a significant impact on the consolidated
financial statements.
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
Company has in the process of evaluating the impact of this pronouncement
on its financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." This statement applies to all voluntary changes in accounting
principle and requires retrospective application to prior periods'
financial statements of changes in accounting principle, unless this would
be impracticable. This statement also makes a distinction between
"retrospective application" of an accounting principle and the
"restatement" of financial statements to reflect the correction of an
error. This statement is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005. We are
evaluating the effect the adoption of this interpretation will have on its
financial position, cash flows and results of operations.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 2006 AND 2005
YEAR ENDED
------------------------------
DECEMBER 31, DECEMBER 31,
2006 2005
-------------- --------------
REVENUES $ 93,856 $ 163,653
OPERATING EXPENSES:
Educational services - 135,481
General and administrative 645,482 1,511,379
Depreciation expense 13,408 85,579
Marketing and advertising - 121,359
Impairment expense - 402,783
-------------- --------------
TOTAL EXPENSES 658,890 2,256,581
-------------- --------------
LOSS FROM OPERATIONS (565,034) (2,092,928)
OTHER INCOME (EXPENSES):
Other income 3,682 -
Interest expense (559,271) (570,101)
Loss on settlement of debt (148,750) -
-------------- --------------
TOTAL OTHER EXPENSES (704,339) (570,101)
-------------- --------------
LOSS BEFORE PROVISION FOR INCOME TAXES
AND DISCONTINUED OPERATIONS (1,269,373) (2,663,029)
DISCONTINUED OPERATIONS
Gain (Loss) from discontinued operations 3,413 (458,522)
LOSS BEFORE INCOME TAX (1,265,960) (3,121,551)
-------------- --------------
PROVISION FOR INCOME TAXES 800 -
-------------- --------------
-------------- --------------
NET LOSS $ (1,266,760) $ (3,121,551)
============== ==============
18
REVENUES
Revenues decreased by $69,797 or 42.6% to $93,856 for the year ended
December 31, 2006 from $163,653 for the year ended December 31, 2005. The
decrease was due to the fact that the company could not close any sales during
the last six months of the year.
OPERATING EXPENSES
Operating expenses consist primarily of educational services expenses,
general and administrative expenses, and marketing and advertising expenses.
Operating expenses decreased by $1,597,691 or 71% to $658,890 for the year ended
December 31 2006 from $2,256,581 for the year ended December 31, 2005. The
decrease is principally due to a decrease in marketing and advertising,
educational, general and administrative expenses and impairment expense. The
overall decrease is a result of lesser operations change in focus of our
business as described above which resulted in significant downsizing.
EDUCATIONAL SERVICES. Educational services expenses include direct
operating expense of our schools consisting primarily of contract salaries,
occupancy and supplies expenses, and bad debt expense. The Company did not incur
any educational service expenses in the year ended December 31, 2006 as the
Company discontinued the educational services.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
corporate payroll related expenses, office occupancy expenses, professional fees
and other support related expenses. As a percentage of revenues, general and
administrative expenses reduced to 688% of revenues for the year ended December
31, 2006 from 924% for the year ended December 31, 2005. General and
administrative expenses decreased by $865,897 or 57% to $645,482 for the year
ended December 31, 2006 from $1,511,379 for the year ended December 31, 2005.
The decrease was primarily due to our cost cutting measures in 2006.
MARKETING AND ADVERTISING. The Company did not incur any marketing and
advertising expenses during the year ended December 31, 2006 due to lack of
funds to spend on marketing and advertising. The marketing and advertising
expenses incurred in the year ended December 31, 2005 were $121,359.
IMPAIRMENT EXPENSE. There were no impairment expenses during the year ended
December 31, 2006. During the year ended December 31, 2005, we wrote off assets
with a net book value of $402,783 that were no longer being used for in the
current business model.
DEPRECIATION EXPENSE .The depreciation expense reduced by 84% in the year
ended December 31, 2006 to $13,408 as significant assets were impaired as of
December 31, 2005.
LOSS FROM OPERATIONS. Loss from operations was $565,034 for the year ended
December 31, 2006, as compared to $2,092,928 for the year ended December 31,
2005. This loss from operations constituted 602% of gross revenues for the year
ended December 31, 2006 compared to 1,278.9% of revenues for the year ended
December 31, 2005. The increase in loss from operations resulted primarily from
a significant revenue decline in our telecom seminar classroom business because
of change in business strategy offset by lower operating expenses.
INTEREST EXPENSE. Interest expenses decreased by $10,830 or 1.9% to
$559,271 for the year ended December 31, 2006 from $570,101 for the year ended
December 31, 2005. The interest expense was higher in 2005 as the Company used a
line of credit for part of the year 2005.
19
NET LOSS FROM CONTINUING OPERATIONS. We incurred a net loss from continuing
operations of $1,269,373 during the year ended December 31 2006, as compared to
$2,663,029 during the same period in 2005. The loss for the year ended December
31 2006 relates primarily to a revenue loss for the Company. The loss for the
year ended December 31 2005 relates primarily to a $402,783 impairment charge
related to write down of assets and other marketing and advertising costs.
DISCONTINUED OPERATIONS
On March 30, 2005, Software Education of America, Inc., filed a petition in
bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. The petition was
necessitated because SEA was unable to continue to meet its financial
obligations. Also, in March 2005, the Company decided to discontinue the
operations of Global. SEA and Global are presented in the accompanying financial
statements as discontinued operations.
Statement of operations information for SEA and Global for the years ended
December 31, 2006 and 2005 are below:
2006 2005
-------------- --------------
Revenue $ - $ 38,144
Operating expenses - 495,344
Interest expense - 1,322
Other income 3,413 -
Net income (loss) 3,413 (458,522)
Balance Sheet information for SEA and Global as of December 31, 2006 is as
follows:
December 31, 2006
---------------------
Total assets $ -
Liabilities:
Accounts payable $ 227,422
Accrued expenses 238,581
Notes payable 162,666
---------------------
Total liabilities $ 628,669
---------------------
Net liabilities of discontinued operations $ 628,669
=====================
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO JUNE 30, 2006
REVENUES
Revenues decreased by $20,112 or 31.36% to $44,013 for the six months ended June
30, 2007 from $64,125 for the six months ended June 30, 2006. The decrease was
due a decrease in the sales of our University Appliance ("VU Appliance")
hardware and software packages.
OPERATING EXPENSES
Operating expenses consist primarily of educational services expenses, general
and administrative expenses, and marketing and advertising expenses. Operating
expenses decreased by $15,789 or 5.01% to $299,086 for the six months ended June
30, 2007 from $314,875 for the six months ended June 30, 2006. The decrease is
principally due to a decrease in general and administrative expenses. The
overall decrease is a result of the change in focus of our business as described
above which resulted in significant downsizing.
20
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
corporate payroll related expenses, office occupancy expenses, professional fees
and other support related expenses. General and administrative expenses
decreased by $15,193 or 4.93% to $292,732 for the six months ended June 30, 2007
from $307,925 for the six months ended June 30, 2006. The decrease was primarily
due to our corporate downsizing.
LOSS FROM OPERATIONS. Loss from operations was $255,073 for the six months ended
June 30, 2007, as compared to $250,750 for the six months ended June 30, 2006.
The increase in loss from operations resulted primarily from the decrease in
revenues in 2007.
INTEREST EXPENSE. Interest expenses decreased by $1,776 to $277,769 for the six
months ended June 30, 2007 from $279,545 for the six months ended June 30, 2006.
There is no significant change in the interest expense.
DISCONTINUED OPERATIONS
On June 30, 2005, Software Education of America, Inc., filed a petition in
bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. The petition was
necessitated because SEA was unable to continue to meet its financial
obligations. Also, in June 2005, the Company divided to discontinue the
operations of Global. SEA and Global are presented in the accompanying financial
statements as discontinued operations.
Statement of operations information for SEA and Global for the six months ended
June 30, 2007 and 2006 are below:
Six Months Ended June 30,
-------------------------------
2007 2006
---------- ----------
Revenue $ -- $ --
Operating expenses -- --
Interest expense -- --
Other income 1,838 2,739
Net income 1,838 2,739
Balance Sheet information for SEA and Global as of June 30, 2007 is as follows:
June 30, 2007
-------------
Assets:
Cash $ 52
Liabilities:
Accounts payable $ 227,636
Accrued expenses 238,581
Notes payable 162,666
-------------
Total liabilities $ 628,883
-------------
Net liabilities of discontinued operations $ 628,831
=============
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO JUNE 30,
2006
REVENUES
Revenues increased by $17,972 or 149.48% to $29,995 for the three months ended
June 30, 2007 from $12,023 for the three months ended June 30, 2006. The
increase was due an increase in the sales of our University Appliance ("VU
Appliance") hardware and software packages.
21
OPERATING EXPENSES
Operating expenses consist primarily of educational services expenses, general
and administrative expenses, and marketing and advertising expenses. Operating
expenses increased by 21,307 or 14.24% to $170,888 for the three months ended
June 30, 2007 from $149,481 for the three months ended June 30, 2006. The
decrease is principally due to a decrease in general and administrative
expenses. The overall decrease is a result of the change in focus of our
business as described above which resulted in significant downsizing.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
corporate payroll related expenses, office occupancy expenses, professional fees
and other support related expenses. General and administrative expenses
increased by $21,305 or 14.55% to $167,693 for the three months ended June 30,
2007 from $146,388 for the three months ended June 30, 2006. The decrease was
primarily due to our corporate downsizing.
LOSS FROM OPERATIONS. Loss from operations was $140,893 for the three months
ended June 30, 2007, as compared to $137,558 for the three months ended June 30,
2006. The decrease in loss from operations resulted primarily from the increase
in revenues in 2007.
INTEREST EXPENSE. Interest expenses decreased by $1,202 to $137,831 for the
three months ended June 30, 2007 from $139,033 for the three months ended June
30, 2006. There is no significant change in the interest expense.
DISCONTINUED OPERATIONS
On June 30, 2005, Software Education of America, Inc., filed a petition in
bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. The petition was
necessitated because SEA was unable to continue to meet its financial
obligations. Also, in June 2005, the Company divided to discontinue the
operations of Global. SEA and Global are presented in the accompanying financial
statements as discontinued operations.
Statement of operations information for SEA and Global for the three months
ended June 30, 2007 and 2006 are below:
Three Months Ended June 30,
-------------------------------
2007 2006
---------- ----------
Revenue $ -- $ --
Operating expenses -- --
Interest expense -- --
Other income 2,030 946
Net income 2,030 946
22
Balance Sheet information for SEA and Global as of June 30, 2007 is as follows:
June 30,
2007
--------
Assets:
Cash $ 52
Liabilities:
Accounts payable $227,636
Accrued expenses 238,581
Notes payable 162,666
--------
Total liabilities $628,883
--------
Net liabilities of discontinued operations $628,831
========
SEASONALITY AND OTHER FACTORS AFFECTING QUARTERLY RESULTS
Our revenues normally fluctuate as a result of seasonal variations in our
business. We expect quarterly fluctuations in operating results as a result of
many factors and operating results for any quarter are not necessarily
indicative of the results for any future period.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our cash flow requirements through the issuance of debt and
equity securities, advances from officers and cash generated from operations. As
of June 30, 2007 we had cash and cash equivalents of $9,868.
Cash flows used in operating activities amounted to $19,189 for the six months
ended June 30, 2007 compared to cash flows provided by operating activities
amounted to $3,045 for the six months ended June 30, 2006. The increase is due
to the decrease in payables and increase in receivables during the three months
ended June 30, 2007.
We do not believe that our current cash and cash equivalents, together with cash
generated by operations, will be sufficient to meet our anticipated cash
requirements though 2007. We will need to raise additional capital through
public or private equity offerings or debt financings. If cash generated from
operations is insufficient to satisfy our liquidity requirements and we cannot
raise needed funds on acceptable terms or at all, we may not be able to develop
or enhance our products, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements. A material shortage of
capital may require us to take drastic steps such as reducing our level of
operations, disposing of selected assets or seeking an acquisition partner.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
YONGXIN BUSINESS AND MANAGEMENT DISCUSSION AND ANALYSIS.
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."
Yongxin was established in 1993, for the purpose of engaging in the business of
the sale of medicines wholesale, retail and third-party medicine logistics.
Yongxin is located in Changchun City, Jilin Provincial with a staff of 358 of
which 18 are Licensed Pharmacists and 55% of which have a college education As
of fiscal year end December 31, 2005 Yongxin had assets of $10,218,204 and
liabilities of $5,550,465. For the nine months ended September 30, 2006, Yongxin
had assets of $13,337,855 and liabilities of $7,373,424.
With the business idea of "sustained operation, integrated innovation", Yongxin
has built a marketing network covering the whole Jilin province and radiating
the northeast region, and the brand image of "sustained innovation" of Yongxin
has firmly enjoyed popular support. In 2003, Yongxin passed Jilin Provincial
FSDA Quality Certification System, National GSP Certification and won a number
of honorary titles for several times such as "unit trusted by government", and
the development of Yongxin got strong support from national, provincial and
municipal governments.
23
In 2004, Yongxin Medical established "Jilin procinceYongxin Chain Drugstore
Ltd."(Hereinafter referred to Yongxin Drugstore) with an investment of RMB
2,500,000 (equivalent to $303,000) to focus on developing a terminal network
market. In July 2005, the company obtained the franchise right in Jilin province
from American Medicine Shoppe (Meixin International Medical Chains) and now has
developed 4 chains of "Meixino Yongxin". As of October 2006, Yongxin has
developed 11 retail chains in the name of Yongxin Drugstore which covers a
business area of 8,000 m2, scattered in key business region and large community
inside Changchun city.
CRITICAL ACCOUNTING POLICIES
1 Basis of Presentation
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. Our
functional currency is the Chinese Renminbi; however the accompanying financial
statements have been translated and presented in United States Dollars ($).
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.
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.
24
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.
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.
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.
25
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:
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.
26
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 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.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 2006 AND 2005
YEAR ENDED
--------------------------
DECEMBER 31, DECEMBER 31,
2006 2005
----------- -----------
REVENUES $39,982,388 $37,935,885
COST OF REVENUES 36,854,304 34,936,260
----------- -----------
GROSS PROFIT 3,128,084 2,999,626
----------- -----------
OPERATING EXPENSES:
Selling Expenses 1,301,260 1,142,676
General and administrative 1,658,528 1,036,053
----------- -----------
TOTAL OPERATING EXPENSES 2,959,788 2,178,729
----------- -----------
INCOME FROM OPEARTIONS 168,297 820,896
----------- -----------
OTHER INCOME (EXPENSES) 1,604,425 770,626
----------- -----------
NET INCOME $ 1,772,721 $ 1,591,522
27
Net Revenues. For the year ended December 31, 2006, our net revenues increased
approximately 5.39% from $37,935,885 to $39,982,388 relative to the same period
ended December 31, 2005. The sales revenue includes $38.06 million sales revenue
from pharmaceutical manufacturing, which increased by $1.27 million or 3%
compared to last year. The sales revenue from drug stores was $5.55 million,
which decreased by approximately $79 thousand or 1%. The main reasons for the
decrease are twofold. Firstly, the road construction around Chongqing branch
adversely affected the sales revenue last year. Secondly, there were 5 more new
branches opened in 2006, which brought in additional $0.5 million sales revenue,
but the total sales revenue for drug stores decreased by 1% compared with last
year. The increase in revenues resulted mainly from the remodeling of the stores
and due to stronger market.
Cost of Sales. Cost of sales increased from $34,936,260, or approximately 92% of
net revenues for the year ended December 31, 2005, to $36,854,304, or
approximately 92% of net sales for the year ended December 31, 2006. The cost of
revenue remained in the same proportion as the sales.
Gross Profit. Gross profit increased approximately 4.28% from $2,999,626 for the
year ended December 31, 2005 to $3,128,084 for the year ended December 31, 2006.
This increase in gross profit was primarily due to the increase in the revenues.
Operating Expenses. For the year ended December 31, 2006, overall operating
expenses increased approximately 35.85% from $2,178,729 to $2,959,788 relative
to the year ended December 31, 2005. This increase was mainly due to the
following:
Selling Expenses. Selling expenses increased approximately 13.88% from
$1,142,676 for the year ended December 31, 2005 to $1,301,260 for the year ended
December 31, 2006. This increase was related to an increase in revenues for the
period. The sales expense was $1.7 million which increased by $125 thousand or
11% compared to 2005. The changes in commission policies reduced the wage
expenses by $45 thousand or 7%. The sales expense of drug stores increased $0.17
million, mainly due to the increased sales expense from new branches as well as
management adjustment for accounting accounts such as sales expense and
administrative expense.
General and Administrative Expenses. General and administrative expenses were
$1,036,053 for the year ended December 31, 2005, as compared to $1,658,528 for
the year ended December 31, 2006, an increase of 60.08%. This increase is the
result of hiring more people to render better customer service and also due to
an increase in the rent expense. The administrative expense in 2006 was $1.64
million, which increased $0.51 million or 56%. This included administrative
expense for pharmaceutical manufactories $1.43 million, which increased $0.76
million or 112% compared to last year. The auditing fee was included in the
administrative expense. The administrative expense for drug stores was $0.2
million, which decreased by $0.17 million. The management adjustment for
accounting accounts such as sales expense and administrative expense.
Other income. Other income in 2006 was $1,662,249 which increased by 833,799 or
108%. Other income from pharmaceutical business increased by about 53% due to
the increase in the expansion of product variety which in turn increased the
profits returned from supplies. Other income from drug stores increased by 180%
due to increased profits returned from supplies.
Net Income/(Loss). Net income increased approximately 11.39% from a net income
of $1,591,522 for the year ended December 31, 2005 to a net income of $1,772,721
for the year ended December 31, 2006.
28
LIQUIDITY AND CAPITAL RESOURCES
We have financed our cash flow requirements through the issuance of debt and
equity securities, advances from officers and cash generated from operations. As
of December 31, 2006 we had cash and cash equivalents of $1,248,404.
Cash flows used in operating activities amounted to $398,513 for the year ended
December 31, 2006 compared to $30,240 for the year ended December 31, 2005.
Cash flows used in investing activities amounted to $255,894 for the year ended
December 31, 2006 compared to $518,794 for the year ended December 31, 2005 The
significant decrease is because of substantial reduction in the purchases of
equipment in the year 2006.
Cash flows provided by financing activities for the year ended December 31, 2006
was $393,248 compared to cash flows provided by financing activities of $555,117
for the year ended December 31, 2005. The decrease was due primarily because in
2005, the shareholders contributed significant capital in 2005, whereas, no
capital was contributed in 2006. Third party loans were raised in 2006.
We believe that our current cash and cash equivalents will be sufficient to meet
our anticipated cash requirements though 2007.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
While our significant accounting policies are more fully described in Note 1 to
our consolidated financial statements appearing at Exhibit 99.1, we believe that
the following accounting policies are the most critical to aid you in fully
understanding and evaluating this management discussion and analysis.
2 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.
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.
29
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
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:
d. A brief description of the provisions of this Statement
e. The date that adoption is required
f. 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.
30
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.
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.
Comparison of Three Month Period Ended March 31, 2007 and March 31, 2006.
The following table sets forth the results of our operations for the
periods indicated:
For the Three Month Periods Ended
March 31,
--------------------------------
2007 2006
------------- -----------
(Unaudited) (Unaudited)
NET REVENUES $10,076,930 $7,060,072
COST OF SALES 8,497,963 6,525,163
GROSS PROFIT 1,578,967 534,909
OPERATING EXPENSES:
Selling expenses 389,088 268,090
General and administrative 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 (Expense) 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 currency translation gain 85,545 55,980
NET COMPREHENSIVE INCOME $ 714,362 $ 541,290
31
Comparison of Three Month Period Ended March 31, 2007 and March 31, 2006.
Net Revenues. For the three months ended March 31, 2007, our net revenues
increased approximately 42.73% from $7,060,072 to $10,076,930 relative to the
same period ended March 31, 2006. The increase in revenues resulted mainly from
the remodeling of the stores and due to stronger market.
Cost of Sales. Cost of sales decreased from $6,525,863, or approximately
92% of net revenues for the three months ended March 31, 2006, to $8,497,863, or
approximately 84% of net sales for the year ended March 31, 2007. The
approximately 8% decrease was primarily due to the economies of scale due to
higher purchases with the increase in revenue.
Gross Profit. Gross profit increased approximately 195% from $534,909 for
the three months ended March 31, 2006 to $1,578,967 for the three months ended
March 31, 2007. This increase in gross profit was primarily due to the increase
in the revenues and the reduction in the cost of sales during the period.
Operating Expenses. For the three months ended March 31, 2007, overall
operating expenses increased approximately 107% from $347,522 to $719,961
relative to the three months ended March 31, 2006. This increase was mainly due
to the following:
Selling Expenses. Selling expenses increased approximately 45% from
$268,090 for the three months ended March 31, 2006 to $389,088 for the same
period in 2007. This increase was related to an increase in revenues for the
period.
General and Administrative Expenses. General and administrative expenses
were $79,432 for the three months ended March 31, 2006, as compared to $330,873
for the three months ended March 31, 2007, an increase of 317%. This increase is
the result of hiring more people to render better customer service and also due
to an increase in the rent expense.
Net Income/(Loss). Net income increased approximately 30% from a net income
of 485,310 for the three months ended March 31, 2006 to a net income of $628,817
for the three months ended March 31, 2007.
Liquidity and Capital Resources
At March 31, 2007, we had cash on hand of $ 2,011,303.
At March 31, 2007, we had loans payable to various unrelated parties amounting
to $ 905,072.
The Company believes that the existing cash and cash equivalents, and cash
generated from operating activities will be sufficient to meet the needs of its
current operations, including anticipated capital expenditures and scheduled
debt repayments, for the next twelve months and on a long term basis. The
Company may also seek additional financing to meet the needs of its long-term
strategic plan.
The Company will continue its growth from internal resources by modifying/making
it look attractive to get most customer. We will have at least 10% internal
growth from our current resources.
We are planning to raise capital to do acquisition and increase our revenue by
25%.
Cash Flows
Three Months Ended March 31, 2007and 2006
Net cash flow provided by operating activities was $242,731 for the three
months ended March 31, 2007 and $868,926 for the three months ended March 31,
2006. For the three months ended March 31, 2007, decrease in cash flows provided
by operating activities was attributable to an increase in accounts receivables
of $2,128,841 and increase in inventory of $507,953 offset by our net income of
$628,817 and the non-payment of accounts payable of $1,331,619 and tax payable
of $361,482. For the three months ended March 31, 2006, cash flows provided by
operating activities was attributable to our net income of $485,310, decrease in
inventory of $552,270, increase in accounts payable of 482,953, increase in
other payable of $351,261,increase in accrued expenses of 144,578 offset by an
increase in accounts receivables of $140,251, an increase in other receivable of
$425,413, an increase in advances to suppliers of $205,318, and the repayment of
tax payable of $199,040 and customer deposits of $216,403.
32
The Company did not incur any cash outflows in investing activities during
the three months ended March 31, 2007, as compared to $445,519 used in investing
activities for the same period in 2006 for the purchase of property & equipment.
We raised a loan of $903,189 from bank during the three months ended March
31, 2007 and repaid loan payable to a third party of $361,276 advances from
certain related parties. For the same period in 2006, we raised $94,357 from
related party advances.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
We have certain fixed contractual obligations and commitments that include
future estimated payments. Changes in our business needs, cancellation
provisions, changing interest rates, and other factors may result in actual
payments differing from the estimates. We cannot provide certainty regarding the
timing and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash flows.
The following tables summarize our contractual obligations as of March 31,
2007, and the effect these obligations are expected to have on our liquidity and
cash flows in future periods.
- -----------------------------------------------------------------------------------------
Annual Lease
Payment (in US Years to be
Branch Dollars) Lease Term used
- -----------------------------------------------------------------------------------------
1 Office 51,116 From 2005-7-1 To 2020-6-30 5 years
2 Nanhuan 13,584 From 2006-1-1 to 2006-12-31 1 year
3 Nanhuan 13,584 From 2007-1-1 To 2007-12-31 1 year
4 Hongqi 45,102 From 2006-8-16 to 2008-8-17 2 years
5 Shuangyang 8,770 From 2006-4-21 to 2009-4-22 3 years
6 Jiutai 8,770 From 2006-4-30 to 2011-5-1 5 years
7 Lingdong 6,890 From 2006-6-1 to 2009-5-31 3 years
8 Jianshe 26,310 From 2006-7-13 to 2007-8-13 1 year
9 Chuongqin 68,906 From 2006-9-1 to 2011-8-30 5 years
10 Dongling 9,404 From 2006-12-23 to 2007-12-22 1 year
11 Guilin 82,687 From 2004-7-1 to 2009-6-30 5 years
Other indebtedness includes long-time loans, short-time loans, and loans
borrowed from individuals.
Operating lease amounts include leases for payable taxes, employees'
profits and construction cost.
Purchase obligations consist of payable materials.
We currently have no material commitments for capital expenditures. Other
than working capital and loans, we presently have no other alternative source of
working capital. We may need to raise additional working capital to complete the
projects. We may seek to raise additional capital through the sale of equity
securities. No assurances can be given that we will be successful in obtaining
additional capital, or that such capital will be available in terms acceptable
to our company. At this time, we have no commitments or plans to obtain
additional capital.
Research and Development
- ------------------------
We currently do not engage in research and development.
33
Expected sale of a Plant or Significant Equipment or Assets
- -----------------------------------------------------------
None.
Expected Change in Number of Employees
- --------------------------------------
None.
Off-balance Sheet Arrangements
- ------------------------------
We have not entered into any other financial guarantees or other
commitments to guarantee the payment obligations of any third parties. We have
not entered into any derivative contracts that are indexed to our shares and
classified as stockholder's equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or contingent
interest in assets transferred to an unconsolidated entity that serves as
credit, liquidity or market risk support to such entity. We do not have any
variable interest in any unconsolidated entity that provides financing,
liquidity, market risk or credit support to us or engages in leasing or hedging
services with us.
Related Party Transactions
There are no related party transactions.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We know of no person who owns, beneficially or of record, either
individually or together with associates, five percent (5%) or more of the
outstanding shares of Common Stock, except as set forth in the table below. The
following table sets forth, as of August 14, 2007, the number and percentage of
shares of Common Stock beneficially owned, directly or indirectly, by each of
our directors, the Named Executive Officer and principal shareholders and by our
current directors and executive officers as a group. The shares "beneficially
owned" are determined under applicable Securities and Exchange Commission rules,
and do not necessarily indicate ownership for any other purpose. In general,
beneficial ownership includes shares over which the director, principal
shareholder or executive officer has sole or shared voting or investment power
and shares which such person has the right to acquire within 60 days of August
14, 2007. Each person in the table, except as noted has sole voting and
investment powers over the shares beneficially owned. There are no preferred
shares currently outstanding.
PERCENTAGE OF
SHARES OF COMMON PERCENTAGE OF COMMON STOCK
STOCK BENEFICIALLY OUTSTANDING OWNED POST
NAME OWNED COMMON STOCK(2) CLOSING(4)
---- ----- --------------- ----------
Umesh Patel 18,777,808 (1) 28.51% 5.23%
Craig Nagasugi 1,650,000 2.51% ..46%
Al Jinnah 3,306,117 5.02% ..92%
Gregory Frazer 50,000 0.07% ..01%
All directors and executive 23,783,925 36.11%
officers as a group
(4 individuals)
Faisel H. Khan 4,845,000 7.36% 1.35%
Brad Stewart(3) 7,620,000 11.57% 2.12%
Total 36,248,925 55.04%
34
(1) includes options to purchase 42,750 shares of common stock, all of which
are held by the Patel Family Trust.
(2) based on 65,862,072 total shares outstanding
(3) Shares are owned individually and by Linear Group, Inc., Linear Group, LLC
and TMD Consulting, Inc. business entities for which Mr. Stewart has
beneficial ownership
(4) Based on the reverse split of 11.97492 to 1 and subsequent issuance of
21,000,000 shares to the Yongxin shareholder for 30,000,001 total shares
outstanding. Does not include an additional 3,500,000 shares which have
been reserved to settle debt, as the Company does not have any definitive
agreements for the settlement of such debts or issuance of such shares.
Immediately following the closing of the Agreement, the Yongxin
Shareholders will beneficially own 21,000,000 million shares of the outstanding
common stock and 5 million shares of the preferred stock. The table below
reflects the ownership of the 21,000,000 shares of common stock and 5,000,000
shares of preferred stock to be received by the Yongxin shareholders in the
Share Exchange as well as ownership directly or indirectly, by each of our
directors, the Named Executive Officer and principal shareholders and by our
Directors and officers as a group following the Closing of the Share Exchange
transaction.
% OF OUTSTANDING
COMMON STOCK -
BASED ON NUMBER OF SHARES
NUMBER OF SHARES OF 30,000,001 SHARES OF PREFERRED
NAME COMMON STOCK OUTSTANDING STOCK
========================================== ==================== ================= =================
Yongxin Liu(1) 600,000 2.00% 3,000,000
Samuel Liu(10) 0
Yongkui Liu(2) 5,400,000 18.00% 2,000,000
Yongmei Wang(3) 1,200,000 4.00% 0
Umesh Patel 1,568,095 5.23% 0
Officers and Directors as a Group 8,768,095 29.23% 5,000,000(4)
Accord Success Ltd., BVI(5) 5,400,000 18.00%
Full Spring Group Ltd. BVI(6) 1,800,000 6.00%
- ------------------------------------------ -------------------- ----------------- -----------------
Grand Opus Co. Ltd., BVI(7) 2,400,000 8.00%
- ------------------------------------------ -------------------- ----------------- -----------------
Master Power Holdings Coup Ltd. BVI(8) 4,200,000 14.00%
========================================== ==================== ================= =================
Total 22,568,095(9)
(1) Owned through Misala Holdings, Inc. BVI C24-402 Mingzhu, Changchun, China
(2) Owned through Boom Day Investments, Ltd. BVI, C24-402 Mingzhu, Changchun,
China
(3) Owned through Perfect Sum Investments Ltd. BVI, 5-608 Siping Rd, Changchun,
China
(4) Represents 100% of the outstanding Preferred Stock
(5) Owned by Tao Wang, 1-11B City Oasis, Futian, Shezhen, China
(6) Owned by Dawei Sun, 2152 Nan Huancheng Rdm, Changchun, Jilin China
(7) Owned by Huang Hai, 10D-A Caifu, Shenzhen, China
(8) Owned by Yong Liu, 15-g Mingyue Garden, Shenzhen, China
(9) Reflects the 21,000,000 distributed in the Share Exchange transaction plus
the post Closing shares owned by Umesh Patel.
(10) Mr. Liu's address is 22128 Steeplechase Lane, Diamond Bar, CA 91765
35
PAST CONTRACTS, TRNSACTIONS OR NEGOTIATIONS AND 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, negotiations, consolidations, acquisitions, tender offers or
any material agreements of any kind or nature which were entered into between
the above parties.
We began negotiations for the Share Exchange Agreement with Yongxin in
November 2006 following an introduction between our companies by our independent
auditor, Hamid Kabani. Mr. Umesh Patel from our Company entered into discussion
with and negotiated with Sam Liu and Yongxin Liu from Yongxin. Following a few
discussions both companies agreed to pursue a merger or acquisition transaction
using stock, as opposed to cash, as the consideration for the transaction. We
then enlisted the services of an attorney to advise and assist with the legal
form of the transaction, which resulted in a draft of the Share Exchange
Agreement being circulated.
Yongxin indicated that it would only consummate a transaction which would
result in the Yongxin shareholders owning eighty five percent (85%) of the
issued and outstanding common stock of Digital Learning. Moreover, Yongxin
required that as a precondition to Closing, the outstanding notes in the
principal amount of $3,000,000 and accrued interest would be satisfied. We were
amenable to this based upon a belief that Yongxin would achieve net profits of
$3,000,000 or greater for fiscal year end December 2006. We determined that a
reverse split followed by an issuance would be the more beneficial to our
shareholders than increasing the authorized common stock to accomplish our goals
and Yongxin agreed. Accordingly, a Share Exchange Agreement was drafted and
executed by the parties on December 28, 2006 whereby the Company would complete
an approximate 12:1 reverse split and issue the Yongxin shareholders 51,000,000
shares of common stock. Based on this Share Exchange Agreement, we filed a 14C
information statement on January 4, 2007.
Subsequently, we determined that a 14A Proxy Consent Solicitation would
need to be filed. During the process of preparing this consent solicitation, the
audited financial statements for Yongxin's fiscal year end December 31, 2006
were completed revealing a net income of less than $3,000,000. Accordingly we
entered into discussions with Yongxin to issue less than the 51,000,000 shares
representing 85% of the Company's total equity. As a result of these
discussions, we both agreed to create a class of preferred stock with conversion
features based on revenue goals. Soon thereafter the Amended Share Exchange
Agreement described herein was executed.
SHARE EXCHANGE AGREEMENT
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.
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.
36
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.
CLOSING OF THE AGREEMENT
If the Agreement, the reverse stock split and the name change are approved
by our shareholders, and if the conditions precedent are satisfied or waived,
the Closing of the Agreement shall take place as soon as practicable thereafter
at the offices of Legal & Compliance, LLC. 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.
CONDITIONS PRECEDENT TO 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) we will have effectuated an approximate 12 for 1 reverse split of the
our Common Stock prior to the time of closing,
(d) 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
(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, or which had
or could have a material adverse effect on our business operations.
In addition, in receipt upon correspondence from Zi Lin Zhongyan Law
Office, which correspondence was provided to the Company by Yongxin, the parties
have executed a waiver as to the following precondition:
(a) 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,
37
REPRESENTATIONS AND WARRANTIES IN THE AGREEMENT
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.
INTEREST OF EXECUTIVE OFFICERS AND DIRECTORS IN THE AGREEMENT
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.
CHANGE OF CONTROL
Assuming the preconditions are satisfied and the transaction closes as
contemplated, Yongxin will become our wholly-owned operating subsidiary.
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
all of the current board of directors will tender their resignations. 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.
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. Immediately following the
closing of the Agreement, the Yongxin Shareholders will beneficially own
21,000,000 million shares of the outstanding common stock and 5 million shares
of the preferred stock. For a more detailed explanation of the post closing
ownership schedule please see "Security Ownership of Certain Beneficial Owners
and Management" on page ___ hereof
- ---------------------------------------------------- ----------------------- ------------------- --------------------
% 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
- ---------------------------------------------------- ----------------------- ------------------- --------------------
38
NEW MANAGEMENT.
The number of members of our Board of Directors is currently five each of
which shall tender their resignation. 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. None of our directors, executive officers or
beneficial owners of more than 5% of our outstanding common stock is a party to
a proceeding adverse to us or has a material interest adverse to us.
Our current directors and executive officers are as follows:
Name Positions Age
---- --------- ---
Umesh I Patel Chairman, President and Chief Financial Officer
and director 50
Craig Nagasugi Chief Executive Officer 49
Al Jinnah, General Counsel and Secretary 67
Gregory Frazer Director 53
Khalid Sheikh Director 67
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 School of I.T. Mr. Patel served as
its Vice President and was responsible for marketing.
Mr. Nagasugi has been President, Chief Executive Officer and Chairman of
the Board of Precision Direct, Inc. of Irvine, California since 1994.
Mr. Jinnah has been a practicing attorney for over 35 years. He has wide
experience in business law and civil litigation, having served as in-house
counsel in various industries. He has operated his own private practice for the
past 5 years.
From 1996 to 2001, Dr. Frazer was Vice-President of Business Development
and on the Board of Directors of Sonus-USA, Inc., a publicly traded corporation.
>From 2001 to 2003, Dr. Frazer was a professor at Arizona School for Health
Sciences in the Au.D. Program. In 2003 , Dr. Frazer entered private practice and
is now the Director of Audiology at Pecific Eye & Ear Specialists, Inc. in
Brentwood, California.
Dr. Sheik has a Doctorate degree in Physiology from the University of
London. His entire career has been devoted to the hospital environment. Since
1985, he has been a consultant in the Radiation Oncology department at Long
Beach Memorial Medical center. In his career Dr. Sheik has served on numerous
Boards in the medical field. At present, he serves on the Board of
Endocurietherapy research Foundation, Long Beach, California.
None of our directors were selected pursuant to any arrangement or
understanding other than with our directors and executive officers acting within
their capacities as such. There are no family relationships between any of our
directors.
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.
The background and experience of the nominees for directors and officers
are as follows. None of the nominees are directors of any Company subject to the
reporting requirements of the Securities Exchange Act. None of the nominees are
parties to or have been parties in the last five years to a legal proceeding
which require disclosure herein.
Yongxin Liu (age 39). Yongxin Liu is a seasoned and well respected Chinese
business executive. Mr. Liu has been with Yongxin since 1994. In 1994, after he
graduate from Northeast NormalUninventive, Mr. Liu worked as a General Manager
of Yongxin medicine group. After 2001 Mr. Liu serves as Chairman & CEO of
Yongxin. He studied in Beijing University in 2003-2004. Yongxin Liu is not
related to either Samuel Liu or Yongkui Liu.
Samuel Liu (age 45). Samuel Liu is a senior manager in a large trading
company (annual 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 the 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.
39
Yongkui Liu (age 37). Mr. Liu has been with Yonxin since 1993. Yongkui Liu
started work as worked as a Deputy General Manager of Yongxin medicine group
since 1993. In 2001, he became President & COO of Yongxin. He was co-founder of
Yongxin. He studied in Beijing Renmin University in 2004-2006.
Yongmei Wang (age 33). Mr. Wang has been with Yongxin since 1998. Yongmei
Wang started work as Business Manager of Yongxin 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.
None of the nominee directors have previously received compensation from us.
Mr. Patel's compensation is as follows:
Annual Compensation
Options/
Name and Principal Position Year Salary Bonus Sars
- --------------------------- ---- ------ ----- ----
Umesh Patel, Chairman, 2006 (1) $240,000 $-- --
President and 2005 (1) 240,00 -- --
Chief Financial Officer 2004 120,000 -- --
(1) amounts were accrued but not paid
THE BOARD OF DIRECTORS AND COMMITTEES
Our Board does not maintain a separate audit, nominating or compensation
committee. Functions customarily performed by such committees are performed by
the Board as a whole. We are not required to maintain such committees under the
applicable rules of the Over-the-Counter Bulletin Board. None of our independent
directors qualify as an "audit committee financial expert."
CODE OF ETHICS
We adopted a Code of Ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer or controller
or persons performing similar functions.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors
and certain executive officers and persons who own more than ten percent (10%)
of a registered class of our equity securities (collectively, the "Reporting
Persons"), to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. The Reporting Persons are required by
Securities and Exchange Commission regulation to furnish us with copies of all
Section 16(a) forms they file.
To our knowledge, based solely on our review of the copies of such forms
received by it, or written representations from the Reporting Persons, all of
our insiders complied with all filing requirements during fiscal year end 2006.
None of the Yongxin appointees are currently subject to Section 16(a)
reporting requirements with respect to our Company.
CONSIDERATION OFFERED TO OUR STOCKHOLDERS
There is no consideration being offered to our stockholders.
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. Moreover, we believed initially, and continue to
believe, that Yongxin will create an opportunity for us to market and expand our
e-Learning systems in China.
40
Following the acquisition we will continue to operate both the business of
Yongxin and the current business of Digital Learning for a period of time. The
two businesses shall operate in separate subsidiaries, as following the
acquisition Yongxin shall become a wholly owned subsidiary of the Company.
In the short term 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. In particular, we have begun
and will continue to market our online training programs in China and believe
that the transaction with Yongxin will be extremely beneficial in this regard.
Following a sufficient level of growth of the e-Learning business, it is the
Company's intention to divest itself of that business. We have not determined
for how long a period of time we will maintain the current e-Learning business.
In addition, we have not yet determined how we shall divest ourselves of the
e-Learning business, which could be through a sale or spin-off transaction.
VOTE REQUIRED FOR APPROVAL OF THE AGREEMENT
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.
MATERIAL DIFFERENCES IN THE RIGHTS OF SECURITY HOLDERS AS A RESULT OF
THE AGREEMENT
There will be no material differences in the rights of security holders as
a result of the acquisition.
ACCOUNTING TREATMENT OF THE AGREEMENT
The acquisition will be accounted for as a recapitalization of the Company,
in accordance with U.S. generally accepted accounting principles.
FEDERAL INCOME TAX CONSEQUENCES OF THE AGREEMENT
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.
REGULATORY APPROVALS
No material federal or state regulatory requirements must be complied with
or approvals obtained in connection with this transaction.
REPORTS, OPINIONS, APPRAISALS
Our board of directors has received no reports, opinions, or appraisals
with regard to the transaction.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our accounting firm is Kabani & Company. We do not expect a change in accounting
firms as a result of the acquisition.
The following table sets forth fees billed to us by our independent registered
accounting firm, Kabani & Company during the fiscal years ended December 31,
2006 and 2005 for: (i) services rendered for the audit of our annual financial
statements and the review of our quarterly financial statements, (ii) services
by our auditor that are reasonably related to the performance of the audit or
review of our financial statements and that are not reported as Audit Fees, and
(iii) services rendered in connection with tax compliance, tax advice and tax
planning. We did not engage our auditors for any other services during 2006 and
2005.
December 31, 2006 December 31, 2005
----------------- -----------------
Audit Fees $ 30,000 $ 90,830
Audit Related Fees $ - $ -
Tax Fees $ - $ -
All Other Fees $ - $ -
FINANCIAL DATA
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. Also attached hereto are the audited
financial statement for Digital Learning for the years ended December 31, 2005
and 2006 and the unaudited financial statements for the quarter ended March 31,
2007. Finally, attached hereto is certain pro forma financial information.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS
CONSENT TO THE EXECUTION OF THE SHARE EXCHANGE AGREEMENT.
41
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
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2006
CONTENTS
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of December 31, 2006 F-3
Consolidated Statements of Operations for the years ended
December 31, 2006 and 2005 F-4
Consolidated Statement of Stockholders' Deficit for the
years ended December 31, 2006 and 2005 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2006 and 2005 F-6
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Digital Learning Management Corporation
Fullerton, California
We have audited the accompanying consolidated balance sheet of Digital Learning
Management Corporation and subsidiaries as of December 31, 2006, and the related
consolidated statements of operations, stockholders' deficit 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 require that we plan
and perform the audits 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 Digital Learning Management
Corporation and subsidiaries as of December 31, 2006, and the results of their
operations and their cash flows for the years ended December 31, 2006 and 2005,
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred a significant loss for the year
ended December 31, 2006 and at December 31, 2005, had a stockholders' deficit
and a working capital deficit. In addition, the Company is in default on its
convertible debentures. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Kabani & Company, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Los Angeles, California
March 24, 2007
F-2
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
2006
---------------
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 4,252
---------------
PROPERTY AND EQUIPMENT, net 10,664
INTANGIBLE ASSETS, net 2,580
---------------
TOTAL ASSETS $ 17,496
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Convertible notes payable $ 3,000,000
Accounts payable and accrued expenses 1,729,220
Accrued compensation 1,044,269
Due to related party 431,048
Shares to be issued 35,000
Loan payable 25,433
Net liabilities of discontinued operations 628,669
---------------
TOTAL CURRENT LIABILITIES 6,893,638
---------------
COMMITMENTS -
STOCKHOLDERS' DEFICIT
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; 0 shares issued and outstanding -
Common stock; $0.001 par value; 75,000,000 shares
authorized; 65,862,072 shares issued and outstanding 65,862
Additional paid-in capital 3,458,069
Prepaid consulting (27,500)
Accumulated deficit (10,372,574)
---------------
TOTAL STOCKHOLDERS' DEFICIT (6,876,143)
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 17,496
===============
The accompanying notes are an integral part of these consolidated
financial statements
F-3
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIRIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31
2006 2005
-------------- --------------
NET REVENUES $ 93,856 $ 163,653
OPERATING EXPENSES
Educational services - 135,481
General and administrative 645,482 1,511,379
Depreciation expense 13,408 85,579
Marketing and advertising - 121,359
Impairment expense - 402,783
-------------- --------------
Total operating expenses 658,890 2,256,581
-------------- --------------
LOSS FROM CONTINUING OPERATIONS BEFORE OTHER INCOME AND EXPENSES (565,034) (2,092,928)
Other income (expense)
Other income 3,682 -
Loss on settlement of debt (148,750) -
Interest expense (559,271) (570,101)
-------------- --------------
Total other income (expenses) (704,339) (570,101)
-------------- --------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (1,269,373) (2,663,029)
DISCONTINUED OPERATIONS
Gain/(Loss) from discontinued operations 3,413 (458,522)
-------------- --------------
Loss before income tax (1,265,960) (3,121,551)
Provision for taxes 800 -
-------------- --------------
NET LOSS $ (1,266,760) $ (3,121,551)
============== ==============
EARNINGS(LOSS) PER SHARE - BASIC & DILUTED:
CONTINUING OPERATIONS $ (0.02) $ (0.04)
============== ==============
DISCONTINUED OPERATIONS $ 0.00 $ (0.01)
============== ==============
NET LOSS $ (0.02) $ (0.05)
============== ==============
BASIC & DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON STOCK OUTSTANDING* 61,685,086 60,612,072
============== ==============
The accompanying notes are an integral part of these consolidated financial statements
* Weighted average number of shares used to compute basic and diluted loss per share is the same
since the effect of dilutive securities is anti-dilutive.
* The basic and diluted net loss per share has been stated to retroactively effect 1:3 forward
split in July, 2006.
F-4
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2006 & 2005
ADDITIONAL TOTAL
COMMON STOCK PAID-IN PREPAID ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL CONSULTING DEFICIT DEFICIT
------ ------ ------- ---------- ------- -------
BALANCE, DECEMBER 31, 2004 60,612,072 $ 60,612 $ 3,171,569 $ (24,750) $ (5,984,263) $ (2,776,832)
Issuance of shares for services - - - - - -
Amortization of prepaid consulting - - - 24,750 - 24,750
Net loss - - - - (3,121,551) (3,121,551)
------------ ----------- -------------- ------------ --------------- --------------
BALANCE, DECEMBER 31, 2005 60,612,072 60,612 3,171,569 - (9,105,814) (5,873,633)
Issuance of shares for services 4,000,000 4,000 219,000 - 223,000
Issuance of shares for services - - - (27,500) - (27,500)
Issuance of shares for debt set 1,250,000 1,250 67,500 - - 68,750
Net loss - - - - (1,266,760) (1,266,760)
------------ ----------- -------------- ------------ --------------- --------------
BALANCE, DECEMBER 31, 2006 65,862,072 $ 65,862 $ 3,458,069 $ (27,500) $ (10,372,574) $ (6,876,143)
============ =========== ============== ============ =============== ==============
The accompanying notes are an integral part of these consolidated financial statements
F-5
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31
-----------------------------------
2006 2005
---------------- ----------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (1,266,760) $ (3,121,551)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 13,408 85,579
Common stock issued for services rendered 223,000 35,000
Bad debts 33,148 -
Amortization of prepaid consulting - 24,750
(Gain)/Loss on settlement of debt 148,750 -
Writedown of assets - 402,783
Changes in operating assets and liabilities:
Accounts receivable 10,740 205,952
Prepaid expenses (27,500) 20,009
Income tax refund receivable - 135,000
Other current assets - 132,826
Accounts payable and accrued expenses 446,152 738,959
Accounts payable, related party 62,350 336,058
Due to factor - (124,424)
Accrued compensation 338,850 513,219
Unearned Revenue (8,330) 8,330
---------------- ----------------
Net cash used in operating activities from continuing operations (26,192) (607,510)
Net cash provided by (used in) operating activities of discontinued operations (914) 386,299
---------------- ----------------
Net cash used in operating activities (27,106) (221,211)
---------------- ----------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of equipment and software development - (612)
---------------- ----------------
Cash advanced to discontinued business - (86,335)
---------------- ----------------
Net cash used in investing activities from continuing operations - (86,947)
---------------- ----------------
Net cash used in investing activities - (86,947)
---------------- ----------------
CASH FLOW FROM FINANCING ACTIVITIES:
Loans raised 25,433 -
---------------- ----------------
Net cash provided by financing activities from continuing operations 25,433 -
Net cash provided by financing activities of discontinued operations - 145,279
---------------- ----------------
Net cash provided by financing activities 25,433 145,279
---------------- ----------------
CHANGE IN CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS - (2,056)
DECREASE IN CASH AND CASH EQUIVALENTS (1,673) (164,935)
CASH AND CASH EQUIVALENTS, Beginning of period 5,925 170,860
---------------- ----------------
CASH AND CASH EQUIVALENTS, End of period $ 4,252 $ 5,925
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ - $ 28,915
================ ================
Income taxes paid $ - $ -
================ ================
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Shares issued for settlement of debt $ 68,750 $ -
================ ================
The accompanying notes are an integral part of these consolidated financial statements
F-6
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 1 - ORGANIZATION, NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION
Digital Learning Management Corporation (the "Company" or "DGTL"), formerly
FreePCSQuote.com, Inc. acquired Digital Learning Institute, Inc. on January 16,
2004 in a transaction accounted for as a reverse merger. The financial
statements in the filings of FreePCSQuote.com, Inc. became those of Digital
Learning Institute, Inc. In addition on March 19, 2004, FreePCSQuote.com, Inc.
changed its name to Digital Learning Management Corporation. Thus, the
historical financial statements are still those of "Digital Learning Institute,
Inc."
On January 16, 2004, Digital Learning Institute, Inc. ("DLI"), FPQT Acquisition
Corporation, a Nevada corporation ("Merger Sub") and FreePCSQuote.com, Inc., a
publicly held Nevada corporation ("Free"), entered into an Agreement and Plan of
Merger (the "Agreement"). Free, through its wholly-owned subsidiary, Merger Sub,
acquired DLI in exchange for shares of Free's common stock (the "Merger");
17,372,839 shares were issued to the stockholders of DLI and 300,000 shares were
issued into escrow to cover indemnification obligations, if any, of DLI. Merger
Sub was merged with and into DLI. The separate existence of Merger Sub ceased,
and DLI continued as the surviving corporation (the "Surviving Corporation")
under the name Digital Learning Institute, Inc. Immediately after the Merger was
consummated and further to the Agreement, the controlling stockholder of Free
cancelled 19,670,000 shares of Free's Common Stock held by him (the
"Cancellation"). In addition, the Company issued an aggregate of 819,984 shares
of its common stock to certain individuals identified by the Company's
investment banker.
The stockholders of DLI as of the closing date of the Merger and after giving
effect to the Cancellation, owned approximately 86.8% of the Company's common
stock outstanding as of January 16, 2004. Each share of DLI's common stock (an
aggregate of 5,000,000 shares) was converted into one share of the Company's
common stock in the Merger at an exchange ratio of 1 to .441606 (the "Exchange
Ratio").
For accounting purposes, this transaction is being accounted for as a reverse
merger, since the stockholders of DLI own a majority of the issued and
outstanding shares of common stock of the Company, and the directors and
executive officers of DLI became the directors and executive officers of the
Company.
STOCK SPLIT
In March 2004, the Company enacted a 7.8680269-for-1 forward stock split. All
per share amounts and number of shares outstanding have been retroactively
restated for this adjustment. In July 2006, the Company enacted a 3-for-1
forward stock split. All per share amounts and number of shares outstanding have
been retroactively restated for this adjustment.
NATURE OF BUSINESS
The Company is a provider of enterprise e-learning solutions and related
services to the education industry, government agencies and corporate clients.
Its patented Virtual University Appliance ("VU Appliance") is a hardware and
software package, which incorporates its CourseMate Virtual University System.
F-7
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
The Company operates post-secondary education training primarily in the
business, information technology, telecommunications and other 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 Company did not have any operation from October 1, 2006
through December 31, 2006.
DLI entered into an agreement to acquire Software Education of America, Inc.
("SEA") on January 13, 2004. The transaction was subject to approval of the
change-of-control of SEA from the California Bureau for Private Postsecondary
Vocational Education ("BPPVE") and the Accrediting Commission of Career Schools
and Colleges of Technology ("ACCSCT"). The BPPVE approval was received during
the quarter ended June 30, 2004 and as of May 1, 2004, DLI assumed
responsibility for the marketing and managing of SEA sales and providing working
capital. DLI advanced funding to SEA pending final closing of the transaction
which occurred on July 1, 2004 after receipt of the formal approval from ACCSCT
on July 1, 2004. Effective July 1, 2004 SEA became a wholly-owned subsidiary of
DLI. SEA filed for bankruptcy in March of 2005 and is being accounted for as a
discontinued operation. The bankruptcy was dismissed by the court in January,
2006.
DLI entered into an agreement to acquire Global Computer Systems, Inc.
("Global") on April 30, 2004. The transaction was subject to approval of the
change-of-control of Global from the BPPVE and the ACCSCT. As of September 1,
2004, DLI assumed responsibility for the marketing and managing of Global sales
and providing working capital. DLI advanced funding to Global pending final
closing of the transaction. Effective November 15, 2004 Global became a
wholly-owned subsidiary of DLI. In May 2005, the Company closed Global and
returned all of its fixed assets to the former shareholder of Global. Global is
being accounted for as a discontinued operation.
GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company incurred a net loss of $1,266,760 for the year ended December 31, 2006,
had an accumulated deficit of $10,372,574 and a working capital deficit of
$6,854,386. In addition, the Company is in default on its convertible debenture
obligations, its SEA subsidiary is in bankruptcy and it has closed its Global
subsidiary. These conditions raise substantial doubt as to the Company's ability
to continue as a going concern. These consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
These consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts, or amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
The Company is in the process of restructuring its capital structure (See note
12 for details).
F-8
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
BANKRUPTCY OF SUBSIDIARY
On March 30, 2005, Software Education of America, Inc., filed a petition in
bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. The petition was
necessitated because SEA was unable to continue to meet its financial
obligations. On January 12, 2006, SEA's bankruptcy petition was dismissed by the
court due to failure of the debtor to appear before the court for examination.
Any discharge entered in the case was vacated in entirety.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its majority owned entities, collectively referred to as "Company" or "DGTL".
All significant inter-company transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions. Such estimates and assumptions 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 estimated amounts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of cash in banks and highly liquid
investments with original maturities of 90 days or less.
MARKETING AND ADVERTISING COSTS
Marketing and advertising costs are charged to expense during the period
incurred. These costs arise primarily from training vouchers offered to
students.
REVENUE RECOGNITION
Revenues from sales of the Company's VU Appliance include product, licensing of
the product and professional services such as hosting, customization, training,
courseware development and third party course license fees. Product revenues
consist of bundled hard-software product sales, annual licensing fees, and
client hosting engagement. The Company intends to sell its licenses, training
and hosting services under annually renewable agreements, which the clients will
generally pay annual fees in the beginning of the annual contract term. Billings
from these revenues are recognized as deferred revenues and are then recognized
ratably over the contract term. Product sale revenues are recognized upon the
shipment of the product to customers.
Tuition revenue and fees are derived from courses taught in the Company's
schools. Tuition and fee revenues are recognized pro-rata (on a straight-line
basis) over the term of the applicable course (usually two to four weeks for
DLI). Tuition is billed after the course has been completed for DLI. If a
student withdraws from a course or program, the paid but unearned portion of the
student tuition is refunded.
F-9
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
ALLOWANCES FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts resulting from the
inability, failure or refusal of our students to make required payments. The
Company determines the adequacy of this allowance by regularly reviewing the
accounts receivable aging and applying various expected loss percentages to
certain student accounts receivable categories based upon historical bad debt
experience. The Company generally writes-off accounts receivable balances deemed
uncollectible as they are sent to collection agencies. As of December 31, 2006
the Company has an allowance for bad debts amounting $235,506, representing 100%
of accounts receivable.
EDUCATIONAL SERVICES
Educational services include direct operating expenses of the schools consisting
primarily of contract salaries, occupancy and supplies.
EARNINGS PER COMMON SHARE
The Company computes earnings per common share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128) The
Statement requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Basic loss per
share is computed by dividing loss available to common shareholders by the
weighted average number of common shares outstanding. The computation of diluted
loss per share is similar to the basic loss per share computation except the
denominator is increased to include the number of additional shares that would
have been outstanding if the dilutive potential common shares had been issued.
In addition, the numerator is adjusted for any changes in income or loss that
would result from the assumed conversions of those potential shares. However,
such presentation is not required if the effect is antidilutive. Accordingly,
the diluted per share amounts do not reflect the impact of warrants and options
because the effect of each is antidilutive.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation expense is provided on
a straight-line basis using estimated useful lives of 3-7 years. Expenditures
for maintenance and repairs are charged to operations as incurred while renewals
and betterments are capitalized. Gains and losses on disposals are included in
the results of operations. Depreciation expense was $13,408 and $85,579 for the
years ended December 31, 2006 and 2005, respectively. During the year ended
December 31, 2005, the Company wrote off certain property and equipment that was
not longer being used and took an impairment charge of $75,414.
F-10
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
FACILITIES
The Company leases office space owned by a related party as well as additional
office space from unrelated parties. Rent expense was $33,338 and $140,655 for
the years ended December 31, 2006 and 2005, respectively.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Under this method, deferred income taxes are recorded to reflect the tax
consequences in future years of temporary differences between the tax basis of
assets and liabilities and their financial statement amounts at the end of each
reporting period. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
represents the tax payable for the current period and the change during the
period in deferred tax assets and liabilities. Deferred tax assets and
liabilities have been netted to reflect the tax impact of temporary differences.
Deferred tax assets arise primarily from the net operating loss carry-forward
and expenses accrued for book basis but not for tax basis. Deferred tax
liabilities primarily result from revenues recognized for book basis but not for
tax basis.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, notes payable, accounts payable
and accrued expenses approximate fair value because of the short maturity of
these items.
CONCENTRATIONS OF RISK
The Company maintains all cash and cash equivalents in financial institutions,
which at times may exceed federally insured limits. The Company has not
experienced a loss in such accounts.
Four customers accounted for 96% and two customers accounted for 60% of sales
during the years ended December 31, 2006 and 2005, respectively. The three
customers accounted for 21% of accounts receivable at December 31, 2006.
The Company performs regular evaluations concerning the ability of its customers
to satisfy their obligations and records a provision for doubtful accounts based
upon these evaluations, when necessary.
STOCK BASED COMPENSATION
THE COMPANY ADOPTED SFAS NO. 123-R EFFECTIVE JANUARY 1, 2006 USING THE MODIFIED
PROSPECTIVE METHOD. UNDER THIS TRANSITION METHOD, STOCK COMPENSATION EXPENSE
INCLUDES COMPENSATION EXPENSE FOR ALL STOCK-BASED COMPENSATION AWARDS GRANTED ON
OR AFTER JANUARY 1,2006, BASED ON THE GRANT-DATE FAIR VALUE ESTIMATED IN
ACCORDANCE WITH THE PROVISIONS OF SFAS NO. 123-R.
PRIOR TO JANUARY 1, 2006, THE COMPANY MEASURED STOCK COMPENSATION EXPENSE USING
THE INTRINSIC VALUE METHOD OF ACCOUNTING IN ACCORDANCE WITH ACCOUNTING
PRINCIPLES BOARD (APB) OPINION NO. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES," AND RELATED INTERPRETATIONS (APB NO. 25) AND HAS OPTED FOR THE
DISCLOSURE PROVISIONS OF SFAS NO. 123. THUS, EXPENSE WAS GENERALLY NOT
RECOGNIZED FOR THE COMPANY'S EMPLOYEE STOCK OPTION AND PURCHASE PLANS.
F-11
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
THERE WERE NO OUTSTANDING AND UNVESTED STOCK OPTIONS AS OF DECEMBER 31, 2005.
THE COMPANY DID NOT GRANT ANY NEW OPTIONS DURING THE YEAR ENDED DECEMBER 31,
2006.
VALUATION OF THE COMPANY'S COMMON STOCK
Unless otherwise disclosed, all stock based transactions entered into by the
Company have been valued at the market value of the Company's common stock on
the date the transaction was entered into or have been valued using the Modified
Black-Scholes Model to estimate the fair market value.
SOFTWARE DEVELOPMENT COSTS
The Company has developed software to enable students to access and take online
classes. The software development costs were expensed as research and
development costs as incurred until the software reached technological
feasibility in accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed" ("SFAS 86"). During the year ended December 31, 2005, the
Company wrote off development costs and took an impairment charge of $327,369.
RECLASSIFICATION
Certain amounts reported in the Company's financial statements for the year
ended December 31, 2005 have been reclassified to conform to current year
presentations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal
years beginning after November 15, 2007. Early adoption is permitted subject to
specific requirements outlined in the new Statement. Therefore, calendar-year
companies may be able to adopt FAS 159 for their first quarter 2007 financial
statements.
The new Statement allows entities to choose, at specified election dates, to
measure eligible financial assets and liabilities at fair value that are not
otherwise required to be measured at fair value. If a company elects the fair
value option for an eligible item, changes in that item's fair value in
subsequent reporting periods must be recognized in current earnings. FAS 159
also establishes presentation and disclosure requirements designed to draw
comparison between entities that elect different measurement attributes for
similar assets and liabilities. 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 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:
F-12
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
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 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 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:
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.
F-13
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
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.
This Statement is effective as of the beginning of the Company's first
fiscal year that begins after September 15, 2006. Management believes that
this statement will not have a significant impact on the consolidated
financial statements.
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 Company has in the process of evaluating the
impact of this pronouncement on its financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." This statement applies to all voluntary changes in accounting
principle and requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless this would be
impracticable. This statement also makes a distinction between "retrospective
application" of an accounting principle and the "restatement" of financial
statements to reflect the correction of an error. This statement is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. We are evaluating the effect the adoption of this
interpretation will have on its financial position, cash flows and results of
operations.
F-14
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 2 - PROPERTY AND EQUIPMENT
The cost of property and equipment at December 31, 2006 consisted of the
following:
Computers and office equipment $ 102,298
Furniture and fixtures 11,550
-------------
113,848
Less accumulated depreciation (103,184)
-------------
$ 10,664
=============
The cost of intangible assets at December 31, 2006 consisted of the following:
Software $ 32,376
Less accumulated amortization 29,796
-------------
$ 2,580
=============
The amortization schedule is as follows:
2007 $2,580
NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As of December 31, 2006, accounts payable and accrued expenses, comprised of the
following:
Accounts Payable $ 595,893
Other accrued payables 109,524
Sales tax payable 13,072
Accrued promotional expense 11,121
Accrued interest 999,610
--------------
Total 1,729,220
NOTE 4 - LOAN PAYABLE
Loan payable of $25,433 as of December 31, 2006 comprises of non- interest
bearing, unsecured, due on demand advances from unrelated parties.
F-15
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 5 -ACCRUED COMPENSATION
As of December 31, 2006 the accrued compensation comprised of $1,044,269 of
accrued employee and officer compensation.
NOTE 6 - CONVERTIBLE NOTES PAYABLE AND THE RESULTING NON-CASH BENEFICIAL
CONVERSION FEATURE CHARGE
On February 27, 2004, the Company raised a total of $3,000,000 from three
investors in an offering of 7% convertible debenture notes through a private
placement. The terms of the debentures are for a period of seven years. Interest
accrues at 7% per annum and is due and payable monthly beginning April 1, 2004.
The debentures mature on February 27, 2011, at which time all remaining unpaid
principal and interest will be payable in full. If the debentures are not sooner
redeemed or converted, as provided in the loan, commencing February 27, 2007 and
continuing on the first day of each successive month prior to maturity, the
Company will pay to the lenders monthly principal installments of $10 per $1,000
of the then remaining principal balance. These debentures are convertible, at
the holder's option, into common stock at a rate of $0.4478 per share, entitling
the holders to 6,699,833 shares of the Company's common stock.
These debentures are immediately convertible and therefore the Company has
expensed the calculated value of the beneficial conversion feature, as a
one-time non-cash debenture interest expense of $3,000,000 and a one time
non-cash increase in additional paid-in capital during the three months ended
March 31, 2004. Management believes that the value assigned to the beneficial
conversion feature is the result of assuming that the closing market price on
the day of issuance reflects the true fair value of the Company's common stock.
The Company accounted for the beneficial conversion feature of these convertible
notes in accordance with Emerging Issues Task Force 98-5 "Accounting For
Convertible Securities With Beneficial Conversion Features Or Contingently
Adjustable Conversion Ratios" ("EITF 98-5"). This value, calculated as the
difference between the conversion price of $ 0.4478 and the fair value of $0.92
(adjusted closing price on the day of the debenture issue) of the common stock
multiplied by the number of shares (6,699,833) into which the debenture is
convertible, amounts to $3,163,846. According to EITF 98-5 the value of the
beneficial conversion feature cannot exceed the value of the proceeds received
from the debt issuance of $3,000,000.
On February 22, 2005, the Company received a notice of default from the holders
of the convertible debentures. The notice states that the Company has failed to
make interest payments in the amount of $5,945 to each debenture holder and that
such failure to pay has remained un-remedied for more than three days.
Consequently, the debentures holders have declared the unpaid principal amount
of and all interest accrued but unpaid on, the debentures due and payable.
Pursuant to the terms of the Convertible Loan Agreement, the debenture holders
have further demanded that the Company redeem all the unpaid principal amount of
the debentures, together with an amount equal to an 18% annual yield on the
principal amount through the redemption date of the debentures.
The Company had accrued interest of $1,030,945 as of December 31, 2006. Interest
expense on the notes for the years ended December 31, 2006 and 2005 amounted to
$540,000 and $485,000, respectively.
F-16
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 7 - COMMON STOCK
COMMON STOCK
The Company amended its articles of incorporation to change its number of
authorized common stock shares from 20,000,000 to 75,000,000. The Company is
also authorized to issue 5,000,000 shares of preferred stock with a $.001 par
value.
In July 2006, the Company enacted a 3-for-1 forward stock split. All per share
amounts and number of shares outstanding have been retroactively restated for
this adjustment.
Following is the summary of stock issuance activity during the year ended
December 31, 2006 and 2005.
During the year ended December 31, 2006 the Company agreed with certain debtors
to settle the outstanding debts, by issuing the shares of the Company. In that
regard, the Company issued 3,500,000 shares for the settlement. These shares
were recorded at the fair marked value of shares at the date of issuance. The
Company recorded net loss on settlement of debt of $90,000.
The Company has prepaid consulting of $27,500 paid to consultant through
issuance of 500,000 shares to be amortized over the period of service and
recorded at the fair market value at the date of signing of agreement.
The Company also issued 1,250,000 shares to settle loan payable amounting to
$10,000 and recorded $58,750 as loss on settlement of debt.
On April 20, 2005, the Company entered an agreement with a software consultant
whereby the Company issued the consultant 500,000 shares of the Company's common
stock for services performed and to be performed. The stock was valued at
$35,000, the fair market value of the stock on the date the agreement was
signed. As of December 31, 2006 these shares are not yet issued and recorded as
shares to be issued. The shares to be issued are being reflected under the
current liabilities in the accompanying financial statements.
OPTIONS AND WARRANTS
The following table summarizes all warrants granted by the Company:
F-17
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
WEIGHTED
AVERAGE
WARRANTS EXERCISE
PRICE
--------------- -------------
Balance, December 31, 2005 3,796,500 $ 0.20
Granted - $ -
---------------
Balance, December 31, 2006 3,796,500 $ 0.20
===============
Granted - $ -
===============
Exercisable, December 31, 2006 3,796,500 $ 0.20
===============
The weighted average remaining contractual life of warrants outstanding is 1.40
years at December 31, 2006. The exercise price of warrants outstanding at
December 31, 2006 were as follows:
NUMBER OF EXERCISE INTRINSIC VALUE
WARRANTS PRICE
-------------- -------------------------------------
1,230,000 $0.83 $ -
2,010,000 $0.15 -
150,000 $0.33 -
256,500 $0.67 -
150,000 $1.00 -
--------------
3,796,500 $ -
==============
NOTE 8 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial statement
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 2006 are as
follows:
F-18
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
Deferred tax assets:
Accrued compensation $ 392,645
Accounts payable and accrued expenses 650,187
Accounts payable, related party 162,074
Net operating loss carry forwards 1,265,374
Less valuation allowance (2,470,280)
---------------
--
---------------
The components of deferred income tax expense (benefit) are as follows:
DECEMBER 31, DECEMBER 31,
2006 2005
--------------- ---------------
Property and equipment $ (128,265) $ 168,202
Accrued compensation (163,116) (157,920)
Accounts receivable (16,502) (77,438)
Prepaid expense -- 7,523
Accounts payable and accrued expense (159,344) (318,483)
Accounts payable, related party (145,453) (4,468)
Net operating loss carry forward (476,302) (375,600)
Increase in valuation allowance 1,088,981 758,184
--------------- ---------------
Income tax expense $ -- $ --
=============== ===============
Following is a reconciliation of the amount of income tax expense (benefit) that
would result from applying the statutory federal income tax rates to pre-tax
income and the reported amount of income tax expense (benefit):
F-19
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
DECEMBER 31, DECEMBER 31,
2006 2005
--------------- ---------------
Tax benefit at federal statutory rates $ (2,470,280) $ (1,061,327)
Depreciation expense - (461)
California income tax expense - -
Meals and entertainment - -
Officers life insurance - 1,636
Shell Acquisition Costs - -
Asset Impairment - 188,542
Accrual to cash conversion 1,204,906 520,071
Beneficial Conversion Feature - -
Stock based compensation - 11,900
Net operating loss carry forward 1,265,374 339,639
--------------- ---------------
Income tax (benefit) expense $ - $ -
=============== ===============
At December 31, 2006, the Company has provided a valuation allowance for the
deferred tax assets since management has not been able to determine that the
realization of that asset is more likely than not. The net change in valuation
allowance for the years ended December 31, 2006 and 2005 was an increase of
$1,712,096 and $758,184. Net operating loss carry forwards of approximately
$3,400,000 expire starting in 2019.
NOTE 9 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2005, two of the Company's officers advanced
the Company $324,175 to pay operating expenses. These advances accrue interest
at 6% per annum and are payable upon demand. As of December 31, 2006 of $431,048
is due to these two officers of the Company, which includes accrued interest.
Interest expense of $19,450 and $11,883 was recorded on the related party
payables during the years ended December 31, 2006 and 2005.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
LITIGATION
As of December 31, 2006, the Company is not a party to any pending or threatened
litigation, claim or assessment except for the following. After dismissal of
SEA's petition in Bankruptcy the previously stayed litigation against it has
been revived. It is anticipated that SEA will consent to judgment on this claim
in the amount of $219,000. This claim is duplicative and not additional to the
Judgment previously entered against Digital Learning Institute, Inc. The claim
arises out of the same circumstances under which judgment was obtained against
Digital Learning Institute, Inc
F-20
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
CONTRACTS
The Company has entered into employment agreements with two members of its
management for two years commencing April 1, 2003. The agreements allow for
participation in any annual incentive plan. The Company is required to pay base
salaries of $240,000 each. The employment agreements expired on December 13,
2005. One of these employment agreements that expired on December 13, 2005 was
automatically extended for next 2 years, as per the agreement.
On April 27, 2005, Global Computer Systems, Inc. settled its litigation with its
landlord. Global has agreed to pay the equivalent of two months rent and to
vacate the rented premises. The cost of the settlement was $24,950 and is
payable in four monthly installments commencing May 20, 2005. The Company has
not made any of these payments
LEASES
The Company currently leases office space in Fullerton, California on a
month-to-month basis.
NOTE 11 - DISCONTINUED OPERATIONS
On March 30, 2005, Software Education of America, Inc., filed a petition in
bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. The petition was
necessitated because SEA was unable to continue to meet its financial
obligations. SEA is presented in the accompanying financial statements as a
discontinued operation.
Statement of operations information for SEA and Global for the years ended
December 31, 2006 and 2005 are below:
Years Ended December 31,
------------------------------------
2006 2005
------------- -------------
Revenue $ - $ 38,144
Operating expenses - 495,344
Interest expense - 1,322
Other income 3,413 -
Net income (loss) 3,413 (458,522)
F-21
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
Balance Sheet information for SEA and Global as of December 31, 2006 is as
follows:
December 31,
2006
--------------
Total assets $ -
Liabilities:
Accounts payable $ 227,422
Accrued expenses 238,581
Notes payable 162,666
--------------
Total liabilities $ 628,669
--------------
Net liabilities of discontinued operations $ 628,669
==============
Notes payable consist of two unsecured, non-interest bearing notes payable to
two former stockholders of SEA totaling $16,666 due January 15, 2005. No
payments have been made.
Notes payable also include a $146,000 line of credit acquired from SEA and
converted into a term loan payable with interest at the prime rate plus 3.5%
secured by all assets of SEA of approximately $83,000 and guaranteed by the
former stockholders of SEA. This loan is payable in monthly principal payments
of $6,083 plus interest until November 15, 2006, at which time all unpaid
principal and accrued interest is due. A technical event of default occurred
with this note.
NOTE 11 - EARNINGS PER SHARE
The Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share are computed by dividing
income (loss) available to common stockholders by the weighted average number of
common shares available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Diluted earnings (loss) per share have not been presented
since the effect of the assumed conversion of warrants to purchase common shares
would have an anti-dilutive effect. The following potential common shares have
been excluded from the computation of diluted net loss per share for the years
ended December 31, 2006 and 2005 were 3,795,000 and 3,795,000, respectively.
NOTE 12 - SUBSEQUENT EVENTS
The board of directors on December 21, 2006 adopted a resolution, by unanimous
written consent, to approve and ratify entering into a Share Exchange Agreement
with Changchun Yongxin Dirui Medical Co., Ltd, a China corporation ("Yongxin")
and its shareholders, pursuant to which the parties agreed that the Company will
acquire all of the issued and outstanding shares of stock of Yongxin in exchange
for the issuance in the aggregate of 51,000,000 of the Company's shares of
common stock to the shareholders. Yongxin's wholly-owned subsidiary, Jilin
province Yongxin Chain Drugstore Ltd, is a company formed under the laws of the
People's Republic of China. Yongxin and its subsidiary are hereafter referred to
as "Yongxin".
The closing of the transaction is subject to numerous preconditions. As a result
of the preconditions to Closing, a Closing date has not been set.
F-22
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
JUNE
30, 2007
------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,868
PROPERTY AND EQUIPMENT, net 5,910
INTANGIBLE ASSETS, net 980
------------
TOTAL ASSETS $ 16,758
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Convertible notes payable $ 3,000,000
Accounts payable and accrued expenses 2,072,639
Accrued compensation 1,229,119
Due to related party 381,380
Shares to be issued 35,000
Loan payable 50,238
Net liabilities of discontinued operations 628,831
------------
TOTAL CURRENT LIABILITIES 7,397,205
------------
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' DEFICIT
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; 0 shares issued and outstanding --
Common stock; $0.001 par value; 75,000,000 shares
authorized; 66,012,072 shares issued and outstanding 65,862
Additional paid-in capital 3,458,069
Accumulated deficit (10,904,378)
------------
TOTAL STOCKHOLDERS' DEFICIT (7,380,447)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 16,758
============
The accompanying notes are an integral part of these unaudited
consolidated financial statements
3
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
FOR THE THREE MONTH PERIODS ENDED FOR THE SIX MONTH PERIODS ENDED
JUNE 30 JUNE 30
2007 2006 2007 2006
------------ ------------ ------------ ------------
NET REVENUES $ 29,995 $ 12,023 $ 44,013 $ 64,125
OPERATING EXPENSES
General and administrative 167,693 146,388 292,732 307,925
Depreciation expense 3,195 3,193 6,354 6,950
------------ ------------ ------------ ------------
Total operating expenses 170,888 149,581 299,086 314,875
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE OTHER INCOME
AND EXPENSES (140,893) (137,558) (255,073) (250,750)
Other income (expense)
Interest expense (137,831) (139,033) (277,769) (279,545)
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND DISCONTINUED OPERATIONS (278,724) (276,591) (532,842) (530,294)
DISCONTINUED OPERATIONS
Income from discontinued operations 2,030 946 1,838 2,739
------------ ------------ ------------ ------------
Loss before income tax (276,694) (275,644) (531,004) (527,555)
Provision for taxes -- -- 800 800
------------ ------------ ------------ ------------
NET LOSS $ (276,694) $ (275,644) $ (531,804) $ (528,355)
============ ============ ============ ============
LOSS PER SHARE FROM CONTINUING OPERATIONS $ (0.004) $ (0.005) $ (0.008) $ (0.009)
============ ============ ============ ============
EARNINGS PER SHARE FROM DISCONTINUED OPERATIONS $ 0.000 $ 0.000 $ 0.000 $ 0.000
============ ============ ============ ============
LOSS PER SHARE BASIC AND DILUTED* $ (0.004) $ (0.005) $ (0.008) $ (0.009)
============ ============ ============ ============
BASIC & DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON STOCK OUTSTANDING* 65,862,072 61,027,457 65,862,072 60,820,912
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited consolidated financial statements
* Weighted average number of shares used to compute basic and diluted loss
per share is the same since the effect of dilutive securities is
anti-dilutive.
* The basic and diluted net loss per share has been stated to retroactively
effect 1:3 forward split in July, 2006.
4
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
FOR THE SIX MONTH PERIODS ENDED
JUNE 30
2007 2006
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(531,804) $(528,355)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization expense 6,354 6,950
Common stock issued for services rendered 36,000
Bad debts 13,800
Amortization of prepaid consulting 27,500
Changes in operating assets and liabilities:
Accounts receivable -- 30,088
Accounts payable and accrued expenses 343,417 286,090
Accounts payable, related party (49,668) 9,408
Accrued compensation 184,850 143,050
Unearned Revenue -- 7,745
--------- ---------
Net cash provided by (used in) operating activities
from continuing operations (19,351) 4,776
Net cash provided by (used in) operating activities
of discontinued operations 162 (1,731)
--------- ---------
Net cash provided by (used in) operating activities (19,189) 3,045
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Loans raised 24,805 --
Advances from officers -- 20,000
--------- ---------
Net cash provided by financing activities 24,805 20,000
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 5,616 23,045
CASH AND CASH EQUIVALENTS, Beginning of period 4,252 5,925
--------- ---------
CASH AND CASH EQUIVALENTS, End of period $ 9,868 $ 28,970
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ -- $ --
========= =========
Income taxes paid $ -- $ --
========= =========
The accompanying notes are an integral part of these unaudited
consolidated financial statements
5
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements have been prepared by Digital
Learning Management Corporation (the "Company"), in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-QSB and Regulation S-B as promulgated by the Securities
and Exchange Commission ("SEC"). Accordingly, these consolidated financial
statements do not include all of the disclosures required by generally accepted
accounting principles in the United States of America for complete financial
statements. These unaudited interim consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and the
notes thereto include on Form 10-KSB for the period ended December 31, 2006 In
the opinion of management, the unaudited interim consolidated financial
statements furnished herein include all adjustments, all of which are of a
normal recurring nature, necessary for a fair statement of the results for the
interim period presented. The results of the six month period ended June 30,
2007 are not necessarily indicative of the results to be expected for the full
year ending December 31, 2007.
Organization
- ------------
Digital Learning Management Corporation (the "Company" or "DGTL"), formerly
FreePCSQuote.com, Inc. acquired Digital Learning Institute, Inc. on January 16,
2004 in a transaction accounted for as a reverse merger. The financial
statements in the filings of FreePCSQuote.com, Inc. became those of Digital
Learning Institute, Inc. In addition on June 19, 2004, FreePCSQuote.com, Inc.
changed its name to Digital Learning Management Corporation. Thus, the
historical financial statements are still those of "Digital Learning Institute,
Inc."
For accounting purposes, this transaction is being accounted for as a reverse
merger, since the stockholders of DLI own a majority of the issued and
outstanding shares of common stock of the Company, and the directors and
executive officers of DLI became the directors and executive officers of the
Company.
Stock split
- -----------
In June 2004, the Company enacted a 7.8680269-for-1 forward stock split. All per
share amounts and number of shares outstanding have been retroactively restated
for this adjustment. In July 2006, the Company enacted a 3-for-1 forward stock
split. All per share amounts and number of shares outstanding have been
retroactively restated for this adjustment.
Nature of Business
- ------------------
The Company is a provider of enterprise e-learning solutions and related
services to the education industry, government agencies and corporate clients.
Its patented Virtual University Appliance ("VU Appliance") is a hardware and
software package, which incorporates its CourseMate Virtual University System.
The Company operates post-secondary education training primarily in the
business, information technology, telecommunications and other 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.
6
DLI entered into an agreement to acquire Software Education of America, Inc.
("SEA") on January 13, 2004. The transaction was subject to approval of the
change-of-control of SEA from the California Bureau for Private Postsecondary
Vocational Education ("BPPVE") and the Accrediting Commission of Career Schools
and Colleges of Technology ("ACCSCT"). The BPPVE approval was received during
the quarter ended June 30, 2004 and as of May 1, 2004, DLI assumed
responsibility for the marketing and managing of SEA sales and providing working
capital. DLI advanced funding to SEA pending final closing of the transaction
which occurred on July 1, 2004 after receipt of the formal approval from ACCSCT
on July 1, 2004. Effective July 1, 2004 SEA became a wholly-owned subsidiary of
DLI. SEA filed for bankruptcy in June of 2005 and is being accounted for as a
discontinued operation. The bankruptcy was dismissed by the court in January,
2006.
DLI entered into an agreement to acquire Global Computer Systems, Inc.
("Global") on April 30, 2004. The transaction was subject to approval of the
change-of-control of Global from the BPPVE and the ACCSCT. As of September 1,
2004, DLI assumed responsibility for the marketing and managing of Global sales
and providing working capital. DLI advanced funding to Global pending final
closing of the transaction. Effective November 15, 2004 Global became a
wholly-owned subsidiary of DLI. In May 2005, the Company closed Global and
returned all of its fixed assets to the former shareholder of Global. Global is
being accounted for as a discontinued operation.
Going Concern
- -------------
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company incurred a net loss of $504,304 for the six months ended June 30, 2007.
As of June 30, 2007, the Company had an accumulated deficit of $10,876,878 and a
working capital deficit of $7,387,337. In addition, the Company is in default on
its convertible debenture obligations. These conditions raise substantial doubt
as to the Company's ability to continue as a going concern. These consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. These consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts, or amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
The board of directors on December 21, 2006 adopted a resolution, by unanimous
written consent, to approve and ratify entering into a Share Exchange Agreement
with Changchun Yongxin Dirui Medical Co., Ltd, a China corporation ("Yongxin")
and its shareholders, pursuant to which the parties agreed that the Company will
acquire all of the issued and outstanding shares of stock of Yongxin in exchange
for the issuance in the aggregate of 51,000,000 of the Company's shares of
common stock to the shareholders. Yongxin's wholly-owned subsidiary, Jilin
province Yongxin Chain Drugstore Ltd, is a company formed under the laws of the
People's Republic of China. Yongxin and its subsidiary are hereafter referred to
as "Yongxin".
On June 15, 2007, the Company 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.
7
Yongxin would remain a wholly owned operating subsidiary of the Company
following Closing and the acquisition will be accounted for as a reverse
acquisition under the purchase method of accounting since the shareholders of
Yongxin will obtain the control of the consolidated entity..
As a result of the numerous preconditions to Closing, a Closing date has not
been set.
Bankruptcy of Subsidiary
- ------------------------
On June 30, 2005, Software Education of America, Inc., filed a petition in
bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. The petition was
necessitated because SEA was unable to continue to meet its financial
obligations. On January 12, 2006, SEA's bankruptcy petition was dismissed by the
court due to failure of the debtor to appear before the court for examination.
Any discharge entered in the case was vacated in entirety
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions. Such estimates and assumptions 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 estimated amounts.
Revenue Recognition
- -------------------
Revenues from sales of the Company's VU Appliance include product, licensing of
the product and professional services such as hosting, customization, training,
courseware development and third party course license fees. Product revenues
consist of bundled hard-software product sales, annual licensing fees, and
client hosting engagement. The Company intends to sell its licenses, training
and hosting services under annually renewable agreements, which the clients will
generally pay annual fees in the beginning of the annual contract term. Billings
from these revenues are recognized as deferred revenues and are then recognized
ratably over the contract term. Product sale revenues are recognized upon the
shipment of the product to customers.
Tuition revenue and fees are derived from courses taught in the Company's
schools. Tuition and fee revenues are recognized pro-rata (on a straight-line
basis) over the term of the applicable course (usually two to four weeks for
DLI). Tuition is billed after the course has been completed for DLI. If a
student withdraws from a course or program, the paid but unearned portion of the
student tuition is refunded.
Earnings Per Common Share
- -------------------------
The Company computes earnings per common share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128) The
Statement requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Basic loss per
share is computed by dividing loss available to common shareholders by the
weighted average number of common shares outstanding. The computation of diluted
loss per share is similar to the basic loss per share computation except the
denominator is increased to include the number of additional shares that would
8
have been outstanding if the dilutive potential common shares had been issued.
In addition, the numerator is adjusted for any changes in income or loss that
would result from the assumed conversions of those potential shares. However,
such presentation is not required if the effect is antidilutive. Accordingly,
the diluted per share amounts do not reflect the impact of warrants and options
because the effect of each is antidilutive. At June 30, 2007, the Company had a
total of 3,796,500 of warrants and options outstanding restated for the 3-for-1
forward stock split.
Stock Options
- -------------
The Company accounts for its stock-based compensation in accordance with SFAS
No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123." The
Company recognizes in the statement of operations the grant-date fair value of
stock options and other equity-based compensation issued to employees and
non-employees. The Company did not grant any new options and no options were
cancelled or exercised during the six months ended June 30, 2007.
Reclassifications
- -----------------
Certain amounts in previously issued financial statements have been reclassified
to conform to the current presentation.
Recent Pronouncements
- ---------------------
In February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal
years beginning after November 15, 2007. Early adoption is permitted subject to
specific requirements outlined in the new Statement. Therefore, calendar-year
companies may be able to adopt FAS 159 for their first quarter 2007 financial
statements.
The new Statement allows entities to choose, at specified election dates, to
measure eligible financial assets and liabilities at fair value that are not
otherwise required to be measured at fair value. If a company elects the fair
value option for an eligible item, changes in that item's fair value in
subsequent reporting periods must be recognized in current earnings. FAS 159
also establishes presentation and disclosure requirements designed to draw
comparison between entities that elect different measurement attributes for
similar assets and liabilities. 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
9
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:
1. A brief description of the provisions of this Statement
2. The date that adoption is required
3. 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 the consolidated 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 the consolidated financial
statements.
NOTE 2 - PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS
The cost of property and equipment at June 30, 2007 consisted of the following:
Computers and office equipment $ 102,298
Furniture and fixtures 11,550
---------
113,848
Less accumulated depreciation (107,938)
---------
$ 5,910
=========
The cost of intangible assets at June 30, 2007 consisted of the following:
Software $ 32,376
Less accumulated depreciation (31,396)
---------
$ 980
=========
10
NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As of June 30, 2007, accounts payable and accrued expenses, comprised of the
following:
Accounts Payable $ 592,623
Other accrued payables 115,775
Sales tax payable 13,072
Accrued promotional expense 11,121
Accrued interest 1,340,048
----------
Total 2,072,639
NOTE 4 - LOAN PAYABLE
Loan payable of $50,238 as of June 30, 2007 comprises of non- interest bearing,
unsecured, due on demand advances from unrelated parties.
NOTE 5 -ACCRUED COMPENSATION
As of June 30, 2007 the accrued compensation comprised of $1,229,119 of accrued
employee and officer compensation.
NOTE 6 - CONVERTIBLE NOTES PAYABLE AND THE RESULTING NON-CASH BENEFICIAL
CONVERSION FEATURE CHARGE
On February 27, 2004, the Company raised a total of $3,000,000 from three
investors in an offering of 7% convertible debenture notes through a private
placement. The terms of the debentures are for a period of seven years. Interest
accrues at 7% per annum and is due and payable monthly beginning April 1, 2004.
The debentures mature on February 27, 2011, at which time all remaining unpaid
principal and interest will be payable in full. If the debentures are not sooner
redeemed or converted, as provided in the loan, commencing February 27, 2007 and
continuing on the first day of each successive month prior to maturity, the
Company will pay to the lenders monthly principal installments of $10 per $1,000
of the then remaining principal balance. These debentures are convertible, at
the holder's option, into common stock at a rate of $0.4478 per share, entitling
the holders to 6,699,833 shares of the Company's common stock.
On February 22, 2005, the Company received a notice of default from the holders
of the convertible debentures. The notice states that the Company has failed to
make interest payments in the amount of $5,945 to each debenture holder and that
such failure to pay has remained un-remedied for more than three days.
Consequently, the debentures holders have declared the unpaid principal amount
of and all interest accrued but unpaid on, the debentures due and payable.
Pursuant to the terms of the Convertible Loan Agreement, the debenture holders
have further demanded that the Company redeem all the unpaid principal amount of
the debentures, together with an amount equal to an 18% annual yield on the
principal amount through the redemption date of the debentures.
11
The Company had accrued interest due of $1,300,945 on these debentures as of
June 30, 2007. Interest expense for the three month and six month periods ended
June 30, 2007 are $135,000 and $270,000 respectively. Interest expense for the
three month and six month periods ended June 30, 2006 are $135,000 and $270,000
respectively.
NOTE 7 - STOCKHOLDERS' EQUITY
PREFERRED STOCK
- ---------------
On May 25, 2007, the Company Board of Directors approved the filing of a
Certificate of Designation, Preferences and Rights of the Terms of the Series A
Preferred Stock with the state of Delaware, which certificate of designation
designated 5,000,000 shares of Series A Preferred Stock. The Company intends to
issue the stock in accordance with and upon the Closing of the Amended Share
Exchange Agreement.
Each share of series A convertible preferred stock entitles the holder thereof
to six (6) votes at any meeting of shareholders or any action by written consent
of shareholders.
The holder of any share or 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 $5
million dollars of net income in the fiscal year end March 31, 2010. In the
event that in any of the three fiscal years, the Corporation earns less than
required net income amounts for conversion, then the conversion right shall be
proportionately reduced by the amount of the shortfall below the required net
income amount, with the "catch-up" right to convert additional shares to the
extent that the net income exceeds 3 million; 4 million and 5 million dollars in
each of the three consecutive years. In no event shall this conversion right
allow for the conversion of the Series A Preferred Stock into more than 6 common
shares for each share of Series A Preferred Stock over the course of the
aforementioned three calendar years. The net income requirements shall be based
upon an audit of the revenues for each fiscal year. All conversions shall be
made within 30 days of the completion of such audit.
The Series A Convertible Preferred Stock shall not earn or be entitled to any
dividends until the right to convert has expired. Beginning upon the date of
expiration of such conversion rights, each share of issued and outstanding
Series A Convertible Preferred Stock shall be entitled to a preferential
dividend at the rate of ten cents ($.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.
COMMON STOCK
- ------------
The Company did not issue any stock during the six month period ended June 30,
2007.
On June 30, 2006, the Company issued to a financial consultant 200,000 shares of
the Company's common stock for services rendered. The stock was valued at
$36,000, the fair market value of the stock on the date the stock was issued.
12
On April 20, 2005, the Company entered an agreement with a software consultant
whereby the Company issued the consultant 500,000 shares of the Company's common
stock for services performed and to be performed. The stock was valued at
$35,000, the fair market value of the stock on the date the agreement was
signed. As of June 30, 2007 these shares are not yet issued and recorded as
shares to be issued. The shares to be issued are being reflected under the
current liabilities in the accompanying financial statements.
WARRANTS
- --------
The following table summarizes all warrants granted by the Company:
WEIGHTED
AVERAGE AGGREGATE
EXERCISE INTRINSIC
WARRANTS PRICE VALUE
------------- --------- ---------
Balance, December 31, 2006 3,796,500 $ 0.20 $ --
Granted -- $ --
===========
Balance, June 30, 2007 3,796,500 $ 0.20 $ --
The weighted average remaining contractual life of warrants outstanding
is 0.9 years at June 30, 2007. The exercise price of warrants
outstanding at June 30, 2007 was as follows:
Outstanding Warrants Exercisable Warrants
- ------------------------------ -------------------------------------------
Range of Exercise Number Average Remaining Average Exercise Number Average
Price Contractual Life Price Exercise Price
- ------------------ ----------- ------------------ ----------------- ---------- --------------
$0.15-$1.00 3,796,500 0.9 years $0.20 3,796,500 $0.20
NOTE 8 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2005, two of the Company's officers advanced
the Company money to pay operating expenses. These advances accrue interest at
6% per annum and are payable upon demand. During the six month period ended June
30, 2007 one of the two officers advanced the Company another $13,000. As of
June 30, 2007 $381,380 is due to these two officers of the Company. Accrued
interest on the notes as of June 30, 2007 amounted to $39,102. Interest expense
on these advances for the three month and six month periods ended June 30, 2007
are $2,830 and $7,768 respectively. Interest expense on these advances for the
three month and six month periods ended June 30, 2006 are $4,863 and $9,725
respectively
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Litigation
- ----------
As of June 30, 2007, the Company is not a party to any pending or threatened
litigation, claim or assessment except for the following. After dismissal of
SEA's petition in Bankruptcy the previously stayed litigation against it has
been revived. It is anticipated that SEA will consent to judgment on this claim
in the amount of $219,000. This claim is duplicative and not additional to the
Judgment previously entered against Digital Learning Institute, Inc. The claim
arises out of the same circumstances under which judgment was obtained against
Digital Learning Institute, Inc.
13
Contracts
- ---------
The Company has entered into employment agreements with two members of its
management for two years commencing April 1, 2003. The agreements allow for
participation in any annual incentive plan. The Company is required to pay base
salaries of $240,000 each. The employment agreements expired on December 13,
2005. One of these employment agreements that expired on December 13, 2005 was
automatically extended for next 2 years, as per the agreement.
On April 27, 2005, Global Computer Systems, Inc. settled its litigation with its
landlord. Global has agreed to pay the equivalent of two months rent and to
vacate the rented premises. The cost of the settlement was $24,950 and is
payable in four monthly installments commencing May 20, 2005. The Company has
not made any of these payments.
Leases
- ------
The Company currently leases office space in Fullerton, California on a
month-to-month basis.
NOTE 10 - DISCONTINUED OPERATIONS
On June 30, 2005, Software Education of America, Inc., filed a petition in
bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. The petition was
necessitated because SEA was unable to continue to meet its financial
obligations. SEA is presented in the accompanying financial statements as a
discontinued operation.
Statement of operations information for SEA and Global for the three month and
six month periods ended June 30, 2007 and 2006 are below:
Three Month Periods
Ended June 30,
------------------------
2007 2006
------ ------
Revenue $ -- $ --
Operating expenses -- --
Interest expense -- --
Other income 2,030 946
Net income 2,030 946
Six Month Periods
Ended June 30,
------------------------
2007 2006
------ ------
Revenue $ -- $ --
Operating expenses -- --
Interest expense -- --
Other income 1,838 2,739
Net income 1,838 2,739
14
Balance Sheet information for SEA and Global as of June 30, 2007 is as follows:
June 30,
2007
--------
Assets:
Cash $ 52
Liabilities:
Accounts payable $227,636
Accrued expenses 238,581
Notes payable 162,666
--------
Total liabilities $628,883
--------
Net liabilities of discontinued operations $628,831
========
Notes payable consist of two unsecured, non-interest bearing notes payable to
two former stockholders of SEA totaling $16,666 due January 15, 2005. No
payments have been made.
Notes payable also include a $146,000 line of credit acquired from SEA and
converted into a term loan payable with interest at the prime rate plus 3.5%
secured by all assets of SEA of approximately $83,000 and guaranteed by the
former stockholders of SEA. This loan is payable in monthly principal payments
of $6,083 plus interest until November 15, 2006, at which time all unpaid
principal and accrued interest is due. A technical event of default occurred
with this note.
15
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
December 31, 2006
-------------------------------
Changchun
Digtal Learning Yongxin Dirui
Management Medical Co.,
Corporation and Ltd. And Pro Forma
Assets Subsidiaries Subsidiary Adjustments Pro Forma
------------- -------------- ------------- --------------
Current Assets
Cash and cash equivalents $ 4,252 $ 1,248,404 $ 1,252,656
Accounts receivable - 2,668,505 2,668,505
Inventory - 3,405,048 3,405,048
Other receivable - 2,503,353 2,503,353
------------- -------------- --------------
Total Current Assets 4,252 9,825,310 9,829,562
Fixed assets, net 10,664 1,173,517 1,184,181
------------- -------------- --------------
Other Assets
Investment in subisiaries 1 2,040,000 -
3 (2,040,000)
Intangible asset 2,580 2,580
-------------
Total Other Assets 2,580 - 2,580
------------- -------------- --------------
Total Assets $ 17,496 $ 10,998,827 $ 11,016,323
============= ============== ==============
Liabilities and Stockholders' Equity
Current Liabilities
Convertible notes payable $ 3,000,000 $ 4 (3,000,000) $ -
Accounts payable and accrued expenses 1,729,220 2,618,606 4 (1,030,945) 3,316,881
Due to related party 431,048 36,418 467,466
Unearned revenue - -
Accrued compensation 1,044,269 - 1,044,269
Other current liabilities 154,936 154,936
Loan payable 25,433 358,176 4 (25,433) 358,176
Net liabilities of discontinued operations 628,669 - 628,669
------------- --------------
Total Current Liabilites 6,858,639 3,168,136 5,970,397
------------- -------------- --------------
Stockholders' Equity
Common stock 65,862 1,827,805 1 21,000 90,362
2 (1,827,805)
4 3,500
5 (60,389)
Preferred stock 1 5,000 5,000
Additional paid in capital 3,458,069 1 2,014,000 9,312,752
2 1,827,805
3 (2,040,000)
4 4,052,878
5 60,389
Shares to be issued 35,000 35,000
Prepaid consulting (27,500) (27,500)
Other comprehensive income 336,004 336,004
Retained earnings (deficits) (10,372,574) 5,666,882 (4,705,692)
------------- -------------- -------------- --------------
Total Stockholders' Equity (6,841,143) 7,830,691 5,045,926
------------- -------------- --------------
Total Liabilities and
Stockholders' Equity $ 17,496 $ 10,998,827 $ 11,016,323
============= ============== ==============
DIGITAL LEARNING MANAGEMENT CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
For the year ended December 31, 2006
-------------------------------
Changchun
Digtal Learning Yongxin Dirui
Management Medical Co.,
Corporation and Ltd. And Pro Forma
Subsidiaries Subsidiary Adjustments Pro Forma
------------- -------------- ------------- --------------
Net revenue $ 93,856 $ 39,982,388 $ 40,076,244
------------- -------------- --------------
93,856 39,982,388 40,076,244
------------- -------------- --------------
Cost of revenue 36,854,304 36,854,304
------------- -------------- --------------
- 36,854,304 36,854,304
------------- -------------- --------------
Gross Profit 93,856 3,128,084 3,221,940
------------- -------------- --------------
General, selling and
administrative expenses 658,890 2,959,788 3,618,678
------------- -------------- --------------
Operating income ( loss ) (565,034) 168,296 (396,738)
Nonoperating (income) expense 700,926 1,604,425 2,305,351
------------- -------------- --------------
Income ( loss ) before provision for income tax (1,265,960) (1,436,129) (2,702,089)
Provision for income tax 800 - 800
------------- -------------- --------------
Net income ( loss ) (1,266,760) (1,436,129) (2,702,889)
Other comprehensive income:
Foreign currency translation income (loss) - 221,898 221,898
------------- -------------- --------------
Net comprehensive income (loss) $ (1,266,760) (1,214,231) $ (2,480,991)
============== ============== ==============
Net income (loss) per share:
Basic & diluted $ (0.04)
==============
Weighted average number of shares outstanding:
Basic & diluted 61,685,086
==============
EXHIBIT "A"
-----------
Certificate of Amendment to the Certificate of Incorporation
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
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EXHIBIT "B"
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Amended Share Exchange Agreement
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:
3
THE EXCHANGE
.1 The Exchange. Subject to the terms and conditions of this Agreement, on
the Closing Date (as hereinafter defined):
.1 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
.2 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
.3 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.
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.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.
.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.
.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.
4
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:
.1 Due Organization and Qualification; Due Authorization.
.1 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
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).
.2 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 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.
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.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 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 770,000 warrants of which 670,000 are
exercisable at $0.12 per share and 50,000 are exercisable at $3.00 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.
.4 Financial Statements(g) . 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.
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 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.
.5 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.
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2.9 Real Property. The Company does not own or lease any real property.
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.
.6 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.
.7 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.
.8 Insurance. The Company does not currently maintain any form of
insurance.
.9 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.
.10 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.
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.
46
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.
5
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:
.1 Due Organization and Qualification; Subsidiaries, Due Authorization.
.1 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.
.2 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.
47
.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.
.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.
.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.
.5 Financial Statements(h) . 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.
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:
48
(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.
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.
.6 Litigation.
.1 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;
.2 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
.3 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.
49
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
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.
50
6
REPRESENTATION AND WARRANTIES OF THE SHAREHOLDERS
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:
.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.
.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.
.3 Purchase for Investment.
.1 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.
.2 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 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.
.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.
.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.
51
.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.
.1 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.
.2 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:
.A 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;
.B The Shareholder is not acquiring the Company Shares for the
account or benefit of, directly or indirectly, any U.S. Person;
.C The Shareholder is a resident of the People's Republic of
China;
.D 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;
.E 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,
.F and the Shareholder covenants with Company that:
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
The Shareholder will not engage in hedging transactions with
respect to the Company Shares until after the expiration of
the Distribution Compliance Period.
52
7
COVENANTS
.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.
8
DELIVERIES
.1 Items to be delivered to the Shareholders prior to or at Closing by the
Company.
.1 Articles of Incorporation and amendments thereto, By-laws and
amendments thereto, and a certificate of good standing in the Company's state of
incorporation;
.2 all applicable schedules hereto;
.3 all minutes and resolutions of board of director and shareholder
meetings in possession of the Company;
.4 shareholder list;
.5 all financial statements and all tax returns in possession of the
Company;
.6 resolution from the Company's Board appointing the designees of the
Shareholders to the Company's Board of Directors;
.7 resolution from the Company's Board, and if applicable, shareholder
resolutions approving this transaction and authorizing the issuances of the
shares hereto;
.8 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);
.9 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;
.10 any other document reasonably requested by the Shareholders that
it deems necessary for the consummation of this transaction.
.2 Items to be delivered to the Company prior to or at Closing by Yongxin
and the Shareholders.
.1 all applicable schedules hereto;
.2 instructions from Yongxin appointing its designees to the Company's
Board of Directors;
53
.3 share certificates and duly executed stock powers from the
Shareholders transferring the Yongxin Shares to the Company;
.4 resolutions from the Board of Directors of Yongxin, if applicable,
and shareholder resolutions approving the transactions contemplated hereby; and
.5 any other document reasonably requested by the Company that it
deems necessary for the consummation of this transaction.
9
CONDITIONS PRECEDENT
.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:
.1 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.
.2 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;
.3 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.
.4 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.
.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:
.1 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
.2 The Company shall have complied with Rule 14(f)(1) of the Exchange
Act, if required.
.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:
54
.1 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
.2 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.
10
INDEMNIFICATION
.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.
.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.
.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.
55
11
TERMINATION
.1 Termination. This Agreement may be terminated at any time before or, at
Closing, by:
.1 The mutual agreement of the Parties;
.2 Either the Corporation or Yongxin, but not by a Shareholder if-
.A Any provision of this Agreement applicable to a party shall be
materially untrue or fail to be accomplished; or
.B Any legal proceeding shall have been instituted or shall be
imminently threatening to delay, restrain or prevent the consummation of this
Agreement;
.3 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.
12
COVENANTS SUBSEQUENT TO CLOSING
.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
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.
13
MISCELLANEOUS
.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.
.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.
56
.3 Further Assurances. If, at any time after the Closing, the parties shall
consider or be advised that any further deeds, assignments or assurances in law
or that any other things are necessary, desirable or proper to complete the
merger in accordance with the terms of this 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.
.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:
With a copy to:
Danton Mak
Sheldon Mak Rose & Anderson
225 South Lake Avenue, 9th Floor
Pasadena, CA 91101-3021
Fax: 626-795-6321
.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.
57
.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.
.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.
.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.
.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.
.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
58
[SIGNATURE PAGES FOR SHAREHOLDERS FOLLOW]
59
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
- ---------------------------------------------------- -------------------------------- --------------------------------
SCHEDULE 2.1(a)
DIGITAL LEARNING MANAGEMENT, INC. ARTICLES AND BYLAWS
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
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.
SCHEDULE 2.12
LITIGATION
SCHEDULE 3.5
YONGXIN FINANCIAL STATEMENTS
SCHEDULE 4.1
YONGXIN CAPITAL OWNERSHIP SCHEDULE
Name % of Yongxin owned
---- ------------------
1. Yongxin Liu 51%
2. Yongkui Liu 49%
TOTAL 100%
EXHIBIT "C"
-----------
Certificate of Designation, Preferences and
Rights of the Terms of the Series A Preferred Stock
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.)
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.
(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 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.
(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
Umesh Patel, President and
Chairman