SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the Securities Exchange
Act of 1934
Check the appropriate box:
[_] Preliminary Information Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14A-6(e)(2))
[x] Definitive Information Statement
China Medicine Corporation
(Name of Registrant as Specified In Its Charter)
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
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CHINA MEDICINE CORPORATION
51 Everett Drive; Suite A-20
Princeton Junction, New Jersey 08550
NOTICE OF ACTION BY WRITTEN CONSENT OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that the holders of more than a majority of the
outstanding common stock of China Medicine Corporation, a Delaware corporation,
have approved the following actions without a meeting of stockholders in
accordance with Section 228 of the Delaware General Corporation Law.
(1) The election of the following five directors to serve until the next
annual meeting of stockholders and until their successors are elected and
qualified: Senshan Yang, Minhua Liu, Robert Adler, Dr. Rachel Gong and Dr.
Yanfang Chen;
(2) The approval of the restated certificate of incorporation;
(3) The approval of the 2006 Long-Term Incentive Plan;
(4) The approval of the selection of Moore Stephens Wurth Frazer and Torbet,
LLC as the our independent registered accounting firm for the year ending
December 31, 2006
The action will become effective on the 20th day after this Information
Statement is mailed to our stockholders.
The enclosed information statement contains information pertaining to the
matters acted upon.
WE ARE NOT ASKING YOU FOR A PROXY,
AND YOU ARE REQUESTED NOT TO SEND US A PROXY
By order of the Board of Directors
Lin Li
Secretary
Princeton Junction, New Jersey
June 22, 2006
CHINA MEDICINE CORPORATION
51 Everett Drive; Suite A-20
Princeton Junction, New Jersey 08550
INFORMATION STATEMENT
Action by Written Consent of Stockholders
GENERAL INFORMATION
WE ARE NOT ASKING YOU FOR A PROXY,
AND YOU ARE REQUESTED NOT TO SEND US A PROXY
This information statement is being furnished in connection with the
action by written consent of stockholders taken without a meeting of a proposal
to approve the actions described in this information statement. We are mailing
this information statement to our stockholders on or about June 23, 2006.
What action was taken by written consent.
We obtained stockholder consent to the following action:
o The election of the following five directors to the board of
directors to serve until the next annual meeting of stockholders and
until their successors are elected and qualified: Senshan Yang,
Minhua Liu, Robert Adler, Dr. Rachel Gong and Dr. Yanfang Chen;
o The approval of our Restated Certificate of Incorporation;
o The approval of our 2006 Long-Term Incentive Plan; and
o The approval of the selection of Moore Stephens Wurth Frazer and
Torbet, LLC as our independent registered accounting firm for the
year ending December 31, 2006.
How many shares of common stock were outstanding on June 20, 2006?
On June 20, 2006, the date we received the consent of the holders of more
than a majority of the outstanding shares, there were 7,380,000 shares of common
stock outstanding.
What vote was obtained is required to elect directors and to approve the other
proposals described in this information statement?
We obtained the approval of the holders of more than 88% of our
outstanding shares of common stock that were entitled to give such consent.
Three stockholders, Senshan Yang, who is our chief executive officer, and a
director, Minhua Liu, who is our executive vice president and a director, and
Junhua Liu, who is the brother of Minhua Liu, who owned, in the aggregate, more
than 88% of our outstanding shares on June 20, 2006, have given such consent.
Who is paying the cost of this information statement?
We will pay for preparing, printing and mailing this information
statement. Our costs are estimated at $10,000.
ELECTION OF DIRECTORS
Our directors are elected annually by the stockholders to serve until the
next annual meeting of stockholders and until their respective successors are
duly elected. Our bylaws provide that the number of directors comprising the
whole board shall be determined from time to time by the board. The size of the
board for the ensuing year is five directors.
None of our directors were elected at a meeting for which we solicited
proxies. Senshan Yang and Minhua Liu were elected as directors contemporaneously
with the acquisition of Guangzhou Konzern Medicine Co. Ltd. ("Konzern") in
February 2006. Robert Adler, Dr. Rachel Gong and Dr. Yanfang Chen were elected
as directors in May 2006.
The following table sets forth certain information concerning our
directors:
Name Age Position with Us Director Since
---- --- ---------------- --------------
Senshan Yang 45 Chief executive officer and director 2006
Minhua Liu 38 Executive vice president and director 2006
Robert Adler(1) 71 Director 2006
Dr. Rachel Gong(1), (2) 38 Director 2006
Dr. Yanfang Chen(2) 42 Director 2006
(1) Member of the audit committee.
(2) Member of the compensation committee.
Mr. Senshan Yang has been our chief executive officer since February 8,
2006 and a director since February 10, 2006. He has been chairman and general
manager of Konzern since July 2000. For almost 20 years prior thereto, Mr. Yang
served as a manager associate for Guangdong Maoming Petroleum Corporation, a
state-owned company. Mr. Yang obtained his bachelor's degree from South China
University of Technology in 1981.
Ms. Minhua Liu has been our executive vice president and a director since
February 8, 2006 and a director since February 10, 2006. She has been vice
general manager of Konzern since July 2000. For two years prior thereto, she
served as a company herbalist doctor for China Military Science Qiming Research
Center in Beijing, responsible for all the health care of all staff of the
research center. Ms. Liu obtained her bachelor's degree from Beijing College of
Traditional Chinese Medicine in 1992.
Mr. Robert Adler is a private investor. During the past five years, Mr.
Adler has been an investment adviser with UBS Financial Services and most
recently he taught financial English for a semester in Shanghai University of
Finance and Economics. Mr. Adler's prior experience includes terms as a managing
director for ING Furman Selz Asset Management, Vice President and Senior
Investment Officer of BHF Securities Corp and DG Bank, New York Branch and Vice
President of Kuhn, Loeb & Co. Mr. Adler obtained a B.A. degree from Swarthmore
College and studied at NYU School of Business Administration. Mr. Adler is a
member of Institute of Chartered Financial Analysts.
Dr. Rachel Gong is an investment principal of Morningside, an
international investment group based in Hong Kong and has served in that
position since 2004. Prior to that, Dr. Gong served as an investment banker for
RBC Capital Markets from 2001 to 2004 and a senior auditor for
PricewaterhouseCoopers from 1999 to 2001. Dr. Gong obtained a Ph.D. in Medical
Science (Biochemistry and Molecular Biology) from University of South Florida
College of Medicine and an MBA from Johnson Graduate School of Management of
Cornell University.
Dr. Yanfang Chen is currently an assistant professor, of Department of
Pharmacology & Toxicology, Wright State University Boonshoft School of Medicine.
During the past five years, he has been research associate, senior research
associate and research assistant professor at the Department of Pharmacology &
Toxicology, Wright State University Boonshoft School of Medicine. He obtained a
Ph.D. from Medical Science Center, Peking University in China in 1995 and worked
for Guangdong Provincial People's Hospital from 1995 to 1999. Dr. Chen is a
professional member of American Heart Association and American Stroke
Association, and a member of American Society for Pharmacology and Experimental
Therapeutics. He has numerous publications in his field of research.
-2-
Our directors are elected for a term of one year.
Our certificate of incorporation provide that the no director shall be
personally liable to the Corporation or its stockholders for monetary damages
for any breach of fiduciary duty by such director as a director. Notwithstanding
the foregoing sentence, a director shall be liable to the extent provided by
applicable law, (i) for breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. If the
Delaware General Corporation Law hereafter is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the Corporation, in addition to the limitation on personal liability
provided herein, shall be limited to the fullest extent permitted by the amended
Delaware General Corporation Law. No amendment to or repeal of this provision
shall apply to or have any effect on the liability or alleged liability of any
director of the Corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment.
Directors' Compensation
Each independent director receives an annual directors' fee of $10,000. In
addition, pursuant to the 2006 long-term incentive plan, each newly-elected
independent director receives at the time of his or her election, a five-year
option to purchase 30,000 shares of common stock at the market price on the date
of his or her election. In addition, the plan provides for the annual grant to
each independent director of an option to purchase 5,000 shares of common stock
on first trading day in April of each calendar year, commencing in 2007.
Pursuant to these provisions, each of the three independent directors received a
stock option to purchase 30,000 shares of common stock at an exercise price of
$1.25 per share, subject to stockholder approval of the plan.
Board of Directors and Committee Meetings
Our business, property and affairs are managed by or under the direction
of the board of directors. Members of the board are kept informed of our
business through discussion with the chief executive and financial officers and
other officers, by reviewing materials provided to them and by participating at
meetings of the board and its committees.
Since May 9, 2006, when our independent directors were elected, our board
of directors has had two committees - the audit committee and the compensation
committee. Dr. Rachel Gong and Robert Adler were named to the audit committee,
with Dr. Gong as chairperson, and Dr. Yanfang Chen and Dr. Gong were named to
the compensation committee, with Dr. Chen as chairman.
Our audit committee will be involved in discussions with our independent
auditor with respect to the scope and results of our year-end audit, our
quarterly results of operations, our internal accounting controls and the
professional services furnished by the independent auditor.
Our board of directors has adopted a written charter for the audit
committee which the audit committee reviews and reassesses for adequacy on an
annual basis. A copy of the Audit Committee's current charter is attached to
this information statement as Appendix A.
The compensation committee serves as the stock option committee for our
stock option plan, and it reviews and approves any employment agreements with
management and changes in compensation for our executive officers.
-3-
Communications with our Board of Directors
Any stockholder who wishes to send a communication to our board of
directors should address the communication either to the board of directors or
to the individual director c/o Ms. Lin Li, Vice President and Secretary, China
Medicine Corporation, 51 Everett Drive, Suite A-20, Princeton Junction, New
Jersey 08550. Ms. Li will forward the communication either to all of the
directors, if the communication is addressed to the board, or to the individual
director, if the communication is directed to a director.
Nominees for Director
Any stockholder who wants to nominate a candidate for election to the
board must deliver timely notice to our secretary at our principal executive
offices. In order to be timely, the notice must be delivered
o in the case of an annual meeting, not less than 120 days prior to
the anniversary date of the immediately preceding annual meeting of
stockholders, although if we did not hold an annual meeting or the
annual meeting is called for a date that is not within 30 days of
the anniversary date of the prior year's annual meeting, the notice
must be received a reasonable time before we begin to print and mail
our proxy materials; and
o in the case of a special meeting of stockholders called for the
purpose of electing directors, the notice must be received a
reasonable time before we begin to print and mail our proxy
materials.
The stockholder's notice to the secretary must set forth:
o as to each person whom the stockholder proposes to nominate for
election as a director (a) his name, age, business address and
residence address, (b) his principal occupation and employment, (c)
the number of shares of our common stock are owned beneficially or
of record by him and (d) any other information relating to the
nominee that would be required to be disclosed in a proxy statement
or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to
Section 14 of the Exchange Act, and the rules and regulations of the
Commission thereunder; and
o as to the stockholder giving the notice (a) his name and record
address, (b) the number of shares of common stock of the corporation
which are owned beneficially or of record by him, (c) a description
of all arrangements or understandings between the stockholder and
each proposed nominee and any other person or persons (including
their names) pursuant to which the nomination(s) are to be made by
the stockholder, (d) a representation by him that he is a holder of
record of our stock entitled to vote at such meeting and that he
intends to appear in person or by proxy at the meeting to nominate
the person or persons named in his notice and (e) any other
information relating to the stockholder that would be required to be
disclosed in a proxy statement or other filings required to be made
in connection with solicitations of proxies for election of
directors pursuant to Section 14 of the Exchange Act and the rules
and regulations of the Commission thereunder.
The notice delivered by a stockholder must be accompanied by a written
consent of each proposed nominee to being named as a nominee and to serve as a
director if elected. The stockholder must be a stockholder of record on the date
on which he gives the notice described above and on the record date for the
determination of stockholders entitled to vote at the meeting.
Any person who desires to nominate a candidate for director at our 2007
annual meeting should provide the information required not later than January
15, 2007.
OUR RESTATED CERTIFICATE OF INCORPORATION
Our board of directors has proposed that we adopt the restated certificate
of incorporation, and we obtained consent to the adoption of the restated
certificate of incorporation. The following discussion is a summary of the key
changes affected by the restated certificate of incorporation, but this summary
is qualified in its entirety by reference to the full text of the restated
certificate of incorporation, a copy of which is included as Appendix B to this
information statement.
-4-
The restated certificate of incorporation adds the following provision to
our present certificate of incorporation.
"The terms and conditions of any rights, options and warrants approved by
the Board of Directors may provide that any or all of such terms and conditions
may be waived or amended only with the consent of the holders of a designated
percentage of a designated class or classes of capital stock of the Corporation
(or a designated group or groups of holders within such class or classes,
including but not limited to disinterested holders), and the applicable terms
and conditions of any such rights, options or warrants so conditioned may not be
waived or amended absent such consent."
The adoption of this provision is required by the preferred stock purchase
agreement dated February 8, 2006, between us and the purchasers of our series A
preferred stock. Pursuant to that agreement, we issued warrants to 7,389,476
shares of common stock. The warrants provide that, except in the case of a
merger, the holders of the warrant may not exercise the warrants to the extent
that such exercise would result in the holder, together with the holder's
affiliates, owning beneficially more than 4.9% of our outstanding stock. The
warrant provides that this provision may not be amended. Beneficial ownership
shall be determined in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended, and Regulation 13d-3 thereunder.
The amendment gives us the authority to grant rights, warrants and options
which provide that they cannot be amended without the consent a specified
percentage of stockholders or classes or groups of stockholders, and such
provisions would be prohibit us from amending the rights, warrants and options
unless the requisite consent were obtained. With respect to the warrants that
were issued pursuant to the preferred stock purchase agreement, the amendment
would prohibit us from amending the warrants to remove the 4.9% limitation.
Our certificate of incorporation presently gives our directors broad power
to define the rights, preferences, privileges and limitation of the holders of
any class or series of preferred stock. The restated certificate of
incorporation enumerates specific types of rights which the board may grant;
however, this change does not give the board of directors any additional rights
which it does not presently have.
APPROVAL OF THE 2006 LONG-TERM INCENTIVE PLAN
The board of directors believes that in order to attract and retain the
services of executive and other key employees, it is necessary for us to have
the ability and flexibility to provide a compensation package which compares
favorably with those offered by other companies. Accordingly, in February 2006,
the board of directors adopted, subject to stockholder approval, which was
obtained by the written consent,, the 2006 long-term incentive plan, covering
1,575,000 shares of common stock. Set forth below is a summary of the 2006 plan,
as amended, but this summary is qualified in its entirety by reference to the
full text of the 2006 plan, a copy of which is included as Appendix C to this
information statement.
The 2006 plan provides for the grant of incentive and non-qualified
options, stock grants, stock appreciation rights and other equity-based
incentives to employees, including officers, and consultants. The 2006 plan is
to be administered by a committee of independent directors. In the absence of a
committee, the plan is administered by the board of directors. The 2006 plan is
administered by the compensation committee. Independent directors are not
eligible for discretionary options. However, each newly elected independent
director receives at the time of his election, a five-year option to purchase
30,000 shares of common stock at the market price on the date of his or her
election. In addition, the plan provides for the annual grant of an option to
purchase 5,000 shares of common stock on the first trading day in April April
1st of each year, commencing in April, 2007. Pursuant to the 2006 plan, at the
time we acquired Konzern, we granted stock options to purchase an aggregate of
430,000 shares of common stock at $1.25 per share, of which options to purchase
120,000 shares were granted to Meiyi Xia and options to purchase 50,000 shares
were granted to Lin Li. On March 22, 2006, we granted Meiyi Xia options to
purchase an additional 450,000 shares and Lin Li options to purchase an
additional 400,000 shares at $1.25 per share. The options are subject to
stockholder approval of the 2006 Plan.
-5-
Options intended to be incentive stock options must be granted at an
exercise price per share which is not less than the fair market value of the
common stock on the date of grant and may have a term which is not longer than
ten years. If the option holder holds 10% of our common stock, the exercise
price must be at least 110% of the fair market value on the date of grant and
the term of the option cannot exceed five years.
Federal Income Tax Consequences
The following is a brief summary of the federal income tax consequences as
of the date hereof with respect to awards under the 2006 plan for participants
who are both citizens and residents of the United States. This description of
the federal income tax consequences is based upon law and Treasury
interpretations in effect on the date of this information statement (including
proposed and temporary regulations which may be changed when finalized), and it
should be understood that this summary is not exhaustive, that the law may
change and further that special rules may apply with respect to situations not
specifically discussed herein, including federal employment taxes, foreign,
state and local taxes and estate or inheritance taxes. In particular, this
discussion does not deal with the tax status of option grants or other
equity-based incentives under the tax laws of the Commonwealth of Puerto Rico.
Accordingly, participants are urged to consult with their own qualified tax
advisors.
Non-Qualified Options
No taxable income will be realized by the participant upon the grant of a
non-qualified option. On exercise, the excess of the fair market value of the
stock at the time of exercise over the option price of such stock will be
compensation and (i) will be taxable at ordinary income tax rates in the year of
exercise, (ii) will be subject to withholding for federal income tax purposes
and (iii) generally will be an allowable income tax deduction to us. The
participant's tax basis for stock acquired upon exercise of a non-qualified
option will be equal to the option price paid for the stock, plus any amounts
included in income as compensation. If the participant pays the exercise price
of an option in whole or in part with previously-owned shares of common stock,
the participant's tax basis and holding period for the newly-acquired shares is
determined as follows: As to a number of newly-acquired shares equal to the
number of previously-owned shares used by the participant to pay the exercise
price, no gain or loss will be recognized by the participant on the date of
exercise and the participant's tax basis and holding period for the
previously-owned shares will carry over to the newly-acquired shares on a
share-for-share basis, thereby deferring any gain inherent in the
previously-owned shares. As to each remaining newly acquired share, the
participant's tax basis will equal the fair market value of the share on the
date of exercise and the participant's holding period will begin on the day
after the exercise date. The participant's compensation income and our deduction
will not be affected by whether the exercise price is paid in cash or in shares
of common stock. Special rules, discussed below under "Incentive Stock Options -
Disposition of Incentive Option Shares," will apply if a participant surrenders
previously-owned shares acquired upon the exercise of an incentive option that
have not satisfied certain holding period requirements in payment of any or all
of the exercise price of a non-qualified option.
Disposition of Option Shares
When a sale of the acquired shares occurs, a participant will recognize
capital gain or loss equal to the difference between the sales proceeds and the
tax basis of the shares. Such gain or loss will be treated as capital gain or
loss if the shares are capital assets. The capital gain or loss will be
long-term capital gain or loss treatment if the shares have been held for more
than twelve months. There will be no tax consequences to us in connection with a
sale of shares acquired under an option.
-6-
Incentive Stock Options
The grant of an ISO will not result in any federal income tax to a
participant. Upon the exercise of an incentive option, a participant normally
will not recognize any income for federal income tax purposes. However, the
excess of the fair market value of the shares transferred upon the exercise over
the exercise price of such shares (the "spread") generally will constitute an
adjustment to income for purposes of calculating the alternative minimum tax of
the participant for the year in which the option is exercised. As a result of
the exercise a participant's federal income tax liability may be increased. If
the holder of an incentive stock option pays the exercise price, in full or in
part, with shares of previously acquired common stock, the exchange should not
affect the incentive stock option tax treatment of the exercise. No gain or loss
should be recognized on the exchange and the shares received by the participant,
equal in number to the previously acquired shares exchanged therefor, will have
the same basis and holding period as the previously acquired shares. The
participant will not, however, be able to utilize the old holding period for the
purpose of satisfying the incentive stock option holding period requirements
described below. Shares received in excess of the number of previously acquired
shares will have a basis of zero and a holding period, which commences as of the
date the common stock is issued to the participant upon exercise of the
incentive option. If an exercise is effected using shares previously acquired
through the exercise of an incentive stock option, the exchange of the
previously acquired shares will be considered a disposition of such shares for
the purpose of determining whether a disqualifying disposition has occurred.
Disposition of Incentive Option Shares. If the incentive option holder disposes
of the stock acquired upon the exercise of an incentive stock option (including
the transfer of acquired stock in payment of the exercise price of another
incentive stock option) either within two years from the date of grant or within
one year from the date of exercise, the option holder will recognize ordinary
income at the time of such disqualifying disposition to the extent of the
difference between the exercise price and the lesser of the fair market value of
the stock on the date the incentive option is exercised or the amount realized
on such disqualifying disposition. Any remaining gain or loss is treated as a
short-term or long-term capital gain or loss, depending on how long the shares
were held prior to the disqualifying disposition. In the event of such
disqualifying disposition, the incentive stock option alternative minimum tax
treatment described above may not apply (although, where the disqualifying
disposition occurs subsequent to the year the incentive stock option is
exercised, it may be necessary for the participant to amend his return to
eliminate the tax preference item previously reported).
Our Deduction. We are not entitled to a tax deduction upon either exercise of an
incentive option or disposition of stock acquired pursuant to such an exercise,
except to the extent that the option holder recognized ordinary income in a
disqualifying disposition.
Stock Grants
A participant who receives a stock grant under the 2006 plan generally
will be taxed at ordinary income rates on the fair market value of shares when
they vest, if subject to vesting or other restrictions, or, otherwise, when
received. However, a participant who, within 30 days after receiving such
shares, makes an election under Section 83(b) of the Code, will recognize
ordinary income on the date of issuance of the stock equal to the fair market
value of the shares on that date. If a Section 83(b) election is made, the
holding period for the shares will commence on the day after the shares are
received and no additional taxable income will be recognized by the participant
at the time the shares vest. However, if shares subject to a Section 83(b)
election are forfeited, no tax deduction is allowable to the participant for the
forfeited shares. Taxes are required to be withheld from the participant at the
time and on the amount of ordinary income recognized by the participant. We will
be entitled to a deduction at the same time and in the same amount as the
participant recognizes income.
-7-
Stock Appreciation Rights
The grant of stock appreciation rights will not result in any federal
income tax to a participant. Upon the exercise of a stock appreciation or
phantom stock right, a participant will recognize ordinary income in an amount
equal to the cash or the fair market value of the stock, if any, received by the
participant. At such time, we will be entitled to a tax deduction for the amount
of income recognized by the participant. To date, we have not granted stock
appreciation rights under any of our plans.
SELECTION OF INDEPENDENT AUDITOR
We obtained consent to the selection of Moore Stephens Wurth Frazer and
Torbet, LLC ("Moore Stephens") as our independent public accountant for the year
ending December 31, 2006. The audit committee has approved the selection of
Moore Stephens as our independent public accountant.
Moore Stephens has been the independent accountant for Konzern prior to
our acquisition of Konzern in February 2006, and its report on the financial
statements of Konzern at December 31, 2005 and for the two years then ended is
included in our annual report on Form 10-KSB for the year ended December 31,
2006.
At no time since its engagement by Konzern has Moore Stephens had any
direct or indirect financial interest in or any connection with us, with Konzern
or with any of our respective subsidiaries other than as independent accountant.
Our former auditor was Marcum & Kliegman LLP ("MK"), who was replaced on
March 8, 2006. MK was our independent accountant since August 25, 2005. From
that date until the termination of MK's engagement, there were no disagreements
with MK, whether or not resolved, on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
Audit Fees
The following lists fees paid to MK during the period from February 10,
2005 (inception) to December 31, 2005:
Audit Fees $12,500(1)
Audit Related Fees None
Tax Fees None
All Other Fees None
The following lists fees billed by Moore Stephens from the date on
which Moore Stephens was engaged by the Company through the March 31, 2006:
Audit Fees $40,000(2)
Audit Related Fees None
Tax Fees None
All Other Fees None
----------
(1) Fees billed in connection with MK's audit of the financial statement from
February 10, 2005 to April 30, 2005 for the purpose of the registration
statement on Form 10-SB filed on June 23, 2005 and their review of our interim
financial statements for the fiscal quarters ended June 30, 2005 and September
30, 2005.
(2) Fees billed for services provided in connection with the audit of our
financial statements for the year ended December 31, 2005.
Audit Fees: Audit fees represent fees for professional services performed
by the independent registered accounting firm for the audit of our annual
financial statements and the review of our quarterly financial statements, as
well as services that are normally provided in connection with statutory and
regulatory filings or engagements.
Audit Related Fees: Audit-related fees represent fees for assurance and
related services performed by the independent registered accounting firm that
are reasonably related to the performance of the audit or review of our
financial statements. We did not incur any audit-related fees for 2005.
Tax Fees: Tax fees represent fees for services rendered by the independent
registered accounting firm for tax compliance, tax advice and tax planning
services. We did not incur any tax fees in 2005.
-8-
All other fees: Neither of the independent registered accounting firms
performed any services other than the services described above for 2005.
Independence of Auditor
Our audit committee determines whether the provision of services by Moore
Stephens other than for audit services is compatible with maintaining the
independence of Moore Stephens as our independent accountant. Through March 31,
2006, Moore Stephens was not engaged to perform any services other than audit
services.
BENEFICIAL OWNERSHIP OF SECURITIES AND SECURITY OWNERSHIP OF MANAGEMENT
The following table provides information at to shares of common stock
beneficially owned as of May 31, 2006 by:
o each director;
o each officer named in the summary compensation table;
o each person owning of record or known by us, based on information
provided to us by the persons named below, to own beneficially at
least 5% of our common stock; and
o all directors and executive officers as a group.
Shares of Common Stock
Name Beneficially Owned Percentage
---- ------------------ ----------
Senshan Yang 3,265,000 44.2%
Room 702 Guangri Mansion No. 8,
South Wuyang Xin Chengsi, Guangzhou,
China
Minhua Liu 2,612,000 35.4%
Room 702 Guangri Mansion No. 8,
South Wuyang Xin Chengsi, Guangzhou,
China
Junhua Liu 653,000 8.9%
Room 702 Guangri Mansion No. 8,
South Wuyang Xin Chengsi, Guangzhou,
China
All officers and directors as a group (four 6,064,500 82.2%
individuals)
Except as otherwise indicated each person has the sole power to vote and
dispose of all shares of common stock listed opposite his name. Each person is
deemed to own beneficially shares of common stock which are issuable upon
exercise or warrants or options or upon conversion of convertible securities if
they are exercisable or convertible within 60 days of April 30, 2006.
Barron Partners owns shares of series A preferred stock and warrants
which, if fully converted and exercised, would result in the ownership of more
than 5% of our outstanding common stock. However, the series A preferred stock
may not be converted and the warrants may not be exercised if such conversion or
exercise would result in Barron Partners owning more than 4.9% of our
outstanding common stock. This limitation may not be waived.
MANAGEMENT
The following table sets forth certain information with respect to our
executive officers.
-9-
Name Age Position
---- --- --------
Senshan Yang 45 Chief executive officer and director
Minhua Liu 38 Executive vice president and director
Huizhen Yu 26 Chief financial officer
Meiyi Xia 55 Vice president
Lin Li 36 Vice president and Secretary
Information concerning Mr. Yang and Ms. Lui is included under "Election of
Directors."
Senshan Yang has been our chief executive officer since February 8, 2006
and a director since February 10, 2006. He has been chairman and general manager
of Konzern since July 2000. For almost 20 years prior thereto, Mr. Yang served
as a manager associate for Guangdong Maoming Petroleum Corporation, a
state-owned company. Mr. Yang obtained his bachelor's degree from South China
University of Technology in 1981.
Minhua Liu has been our executive vice president and a director since
February 8, 2006 and a director since February 10, 2006. She has been vice
general manager of Konzern since July 2000. For two years prior thereto, she
served as a company herbalist doctor for China Military Science Qiming Research
Center in Beijing, responsible for all the health care of all staff of the
research center. Ms. Liu obtained her bachelor's degree from Beijing College of
Traditional Chinese Medicine in 1992
Huizhen Yu has been our chief financial officer since February 10, 2006.
She has been chief financial officer of Konzern since October 2002. From 2000
until 2002, Ms. Yu was an accountant for Shenzhen Liuge Bicycle Equipment Co.,
Ltd., and from 1997 to 2000, she was an accountant for Guangzhou JoinWin
Consultancy Ltd. She received her bachelor's degree from Jinan University in
Guangzhou and middle level accountant certificate in China in 2002.
Meiyi Xia has been vice president since March 22, 2006, having served as
our president and from February 7, 2006 until March 21, 2006, and a director
from February 7 through February 10, 2006. Ms. Xia has been a partner of
Princeton Capital Group since December 2005 and a partner of Spring Asset
Management LLC since November 2003. From January 2004 to December 2005, Ms. Xia
was chief executive officer of AiDi Financial Investment LLC, an financial
consulting company working mainly with companies in the Peoples Republic of
China. From July 2002 until January 2004, she was a financial advisor at Morgan
Stanley. From January 1999 until June 2002, she was president of Asia Pacific
Consulting and Asia Pacific Securities, a broker dealer. She obtained her MBA
from Long Island University and Diploma of Graduate School in Financial
Management from Scuola Mattei, Milan, Italy. Ms. Xia devotes only a portion of
her time to our business.
Lin Li has been vice president and secretary since February 8, 2006. Ms.
Li has been a partner of Princeton Capital Group since December 2005. From
January 2005 until December 2005, Ms. Li was an executive assistant at AiDi
Financial Investment LLC. From 2003 to 2004, Ms. Li was a financial analyst at
NYU Medical Center. From 2002 to 2003, she was an accountant for Princeton Ecom
Corporation, a information technology company, and from 2000 to 2001 she was an
accountant for Genesis Health Ventures, a senior health care provider. Ms. Li
obtained her MBA degree from University of Delaware and Bachelor of Science
degree in finance from Renmin University of China. Ms. Li devotes only a portion
of her time to our business.
Minhua Lin and Junhua Liu are sister and brother. There are no other
relationships among our officers, directors and principal stockholders.
Compliance with Section 16(a) of the Securities Exchange Act
-10-
Section 16(a) of the Securities Exchange Act of 1934, requires our
directors, executive officers and persons who own more than 10% of our common
stock to file with the SEC initial reports of ownership and reports of changes
in ownership of common stock and other of our equity securities. To our
knowledge, during the calendar year ended December 31, 2005, the Forms 3 filed
on September 29, 2005 by Capital Markets Advisory Group and on September 26,
2005 by Allen Mark were filed late.
Compensation
SUMMARY COMPENSATION TABLE
The following table presents compensation information related to our chief
executive officer for 2005, 2004 and 2003. No other officer received
compensation in excess of $100,000 for those years.
Name and Position Year Salary Other Compensation
----------------- ---- ------- ------------------
Senshan Yang, chief executive officer 2005 $25,488 $ -0-
2004 3,608 -0-
2003 5,562 -0-
Prior to February 8, 2006, Senshan Yang, Minhua Liu and Junhua Liu were
the owners of all of the equity of Konzern. During 2005, Konzern made
distributions to its stockholders in the amount of approximately $3.1 million
consisting of $1.9 million in cash and $1.2 million in inventory. Konzern made
distributions with respect to the year ended December 31, 2004 in the amount of
$2.6 million. These distributions were allocated to the equity holders in
proportion to their interest in Konzern -- 50% to Mr. Yang, 40% to Ms. Liu and
10% to Mr. Liu.
No bonuses were paid to any of the officers and no stock or other equity
compensation was provided to any of the officers during 2005, 2004 or 2003.
Employment Agreements
We do not have employment agreements with any of our officers except Ms.
Minhua Liu, who has a five-year contract pursuant to which she serves as our
executive vice president in charge of sales and internal controls at an annual
salary of $7,650.
Information concerning our 2006 long-term incentive plan is included under
"Approval of the 2006 Long-Term Incentive Plan."
RELATED PARTY TRANSACTIONS
On February 8, 2006, we purchased 928,000 shares of common stock from
Capital Markets for $200,000. The purchase price was funded from the sale of the
series A preferred stock and warrants in the February 2006 private placement. At
the time of the purchase, Capital Markets owned approximately 97.3% of our
outstanding common stock.
Contemporaneously with the February 2006 private placement, we issued an
aggregate of 750,000 shares for services, including 150,000 shares to Meiyi Xia
and 37,500 shares to Lin Li. In connection with the February 2006 private
placement, we paid a consulting fee of $100,000 to AiDi Financial Investment
LLC. Ms. Xia was chief executive officer of AiDi Financial Investment from
January 2003 to December 2005.
Pursuant to the agreement by which we acquired Konzern, we issued the
following shares in exchange for all of the equity interest in Konzern.
-11-
Name Shares
---- ------
Senshan Yang 3,265,000
Minhua Liu 2,612,000
Junhua Liu 653,000
We received two loans in the amount of $19,898 and $12,500 respectively
from an affiliate of one of the founding stockholders. These loans were
subsequently paid when the reverse acquisition on February 8, 2006 took place.
FINANCIAL STATEMENTS
A copy of our Form 10-KSB for the year ended December 31, 2005 and our
Form 10-QSB for the three months ended March 31, 2006, without exhibits,
accompany this information statement. Stockholders are referred to the reports
for financial and other information about us.
Additional copies of our Form 10-KSB for the year ended December 31, 2005,
the 10-QSB for the quarter ended March 31, 2006 may be obtained without charge
by writing to Ms. Lin Li, Vice President and Secretary, China Medicine
Corporation, 51 Everett Drive; Suite A-20, Princeton Junction, New Jersey 08550.
Exhibits will be furnished upon request and upon payment of a handling charge of
$.25 per page, which represents our reasonable cost on furnishing such exhibits.
The Commission maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of such site is http//www.sec.gov.
OTHER MATTERS
Deadline for Submission of Stockholder Proposals for the 2007 Annual Meeting
Proposals of stockholders intended to be presented at the 2007 Annual
Meeting of Stockholders pursuant to SEC Rule 14a-8 must be received at our
principal office not later than December 31, 2006 to be included in the proxy
statement for that meeting.
In addition, in order for a stockholder proposal to be presented at our
meeting without it being included in our proxy materials, notice of such
proposal must be delivered to the Secretary of our company at our principal
offices no later than January 31, 2007. If notice of any stockholder proposal is
received after January 31, 2007, then the notice will be considered untimely and
we are not required to present such proposal at the 2007 annual meeting. If the
board of directors chooses to present a proposal submitted after January 31,
2007 at the 2007 annual meeting, then the persons named in proxies solicited by
the board of directors for the 2007 annual meeting may exercise discretionary
voting power with respect to such proposal.
By Order of the Board of Directors
Senshan Yang
Chief Executive Officer
June 23, 2006
-12-
Appendix A
CHINA MEDICINE CORPORATION
AUDIT COMMITTEE CHARTER
Purpose
The Audit Committee is appointed by the Board of Directors (the "Board")
of China Medicine Corporation (the "Company") to: (1) assist the Board in
monitoring (a) the integrity of the financial reporting process, systems of
internal controls and financial statements and reports of the Company, (b) the
performance of the Company's internal audit function, and (c) the compliance by
the Company with legal and regulatory requirements; and (2) be directly
responsible for the appointment, compensation and oversight of the Company's
independent auditor employed by the Company for the purpose of preparing or
issuing an audit report or related work (the "Outside Auditor").
Committee Membership
The Audit Committee shall consist of no fewer than three members, as
determined annually by the Board; provided, however, that in the event the
Company has less than three independent directors, as hereinafter defined, the
Audit Committee shall have such number of members as equals the number of
independent directors. Notwithstanding the foregoing, if the Company is a small
business company and its stock is not listed or traded on a market or exchange
that requires that the audit committee consist of three members, the Board may
appoint an Audit Committee of not less than two members. The members of the
Audit Committee shall meet the independence and expertise requirements of the
principal stock exchange or market on which the Company's securities are traded
and Section 10A(m)(3) of the Securities Exchange Act of 1934 (the "Exchange
Act") and the rules and regulations of the Securities and Exchange Commission
(the "Commission"); provided, however, that if the Company's securities are not
traded on an exchange or market which has a definition of independence, then
independence shall be determined in accordance with the rules of the Nasdaq
Stock Market. Audit Committee members shall not serve simultaneously on the
audit committees of more than two other public companies without the approval of
the full Board.
The members of the Audit Committee shall be appointed annually by the
Board. Audit Committee members may be replaced by the Board at any time. The
Board shall designate the Chairman or Chairwoman ("Chairperson") of the Audit
Committee.
Committee Authority and Responsibilities
The basic responsibility of the members of the Audit Committee is to
exercise their business judgment to act in what they reasonably believe to be in
the best interests of the Company and its stockholders. In discharging that
obligation, members should be entitled to rely on the honesty and integrity of
the Company's senior executives and its outside advisors and auditors, to the
fullest extent permitted by law.
The Audit Committee shall prepare any report which required by the rules
of the Commission to be included in the Company's proxy statement for its annual
meeting.
The Audit Committee shall be responsible directly for the appointment
(subject, if applicable, to stockholder ratification), retention, termination,
compensation and terms of engagement, evaluation, and oversight of the work of
the Outside Auditor (including resolution of disagreements between management
and the Outside Auditor regarding financial reporting). The Outside Auditor
shall report directly to the Audit Committee.
A-1
The Audit Committee shall oversee the integrity of the audit process,
financial reporting and internal accounting controls of the Company, oversee the
work of the Company's management, internal auditors (the "Internal Auditors")
and the Outside Auditor in these areas, oversee management's development of, and
adherence to, a sound system of internal accounting and financial controls,
review whether the Internal Auditors and the Outside Auditor objectively assess
the Company's financial reporting, accounting practices and internal controls,
and provide an open avenue of communication among the Outside Auditor, the
Internal Auditors and the Board. It is the responsibility of:
o management of the Company and the Outside Auditor, under the
oversight of the Audit Committee and the Board, to plan and conduct
financial audits and to determine that the Company's financial
statements and disclosures are complete and accurate in accordance
with generally accepted accounting principles ("GAAP") and
applicable rules and regulations and fairly present, in all material
respects, the financial condition of the Company;
o management of the Company, under the oversight of the Audit
Committee and the Board, to assure compliance by the Company with
applicable legal and regulatory requirements; and
o the Internal Auditors, under the oversight of the Audit Committee
and the Board, to review the Company's internal transactions and
accounting which do not require involvement in the detailed
presentation of the Company's financial statements.
The Audit Committee shall pre-approve all audit services and non-audit
services (including the fees and terms thereof) to be performed for the Company
by the Outside Auditor to the extent required by and in a manner consistent with
applicable law.
The Audit Committee shall meet as often as it determines necessary or
appropriate, but not less frequently than quarterly. The Chairperson shall
preside at each meeting and, in the absence of the Chairperson, one of the other
members of the Audit Committee shall be designated as the acting chair of the
meeting. The Chairperson (or acting chair) may direct appropriate members of
management and staff to prepare draft agendas and related background information
for each Audit Committee meeting. To the extent practical, any background
materials, together with the agenda for the meeting, should be distributed to
the Audit Committee members in advance of the meeting. All meetings of the Audit
Committee shall be held pursuant to the by-laws of the Company with regard to
notice and waiver thereof, and written minutes of each meeting, in the form
approved by the Audit Committee, shall be duly filed in the Company records.
Reports of meetings of the Audit Committee shall be made to the Board at its
next regularly scheduled meeting following the Audit Committee meeting
accompanied by any recommendations to the Board approved by the Audit Committee.
The Audit Committee may form and delegate authority to subcommittees
consisting of one or more members when appropriate.
The Audit Committee shall have the authority, to the extent it deems
necessary or appropriate, to retain independent legal, accounting or other
advisers. The Company shall provide for appropriate funding, as determined by
the Audit Committee, for payment of compensation to the Outside Auditor for the
purpose of rendering or issuing an audit report and to any advisers employed by
the Audit Committee, subject only to any limitations imposed by applicable rules
and regulations. The Audit Committee may request any officer or associate of the
Company or the Company's outside counsel or Outside Auditor to attend a meeting
of the Audit Committee or to meet with any members of, or consultants to, the
Audit Committee. The Audit Committee shall meet with management, the Internal
Auditors and the Outside Auditor in separate executive sessions at least
quarterly to discuss matters for which the Audit Committee has responsibility.
A-2
The Audit Committee shall make regular reports to the Board. The Audit
Committee shall review and reassess the adequacy of this Charter annually and
recommend any proposed changes to the Board for approval. The Audit Committee
shall annually review its own performance.
In performing its functions, the Audit Committee shall undertake those
tasks and responsibilities that, in its judgment, would contribute most
effectively to and implement the purposes of the Audit Committee. In addition to
the general tasks and responsibilities noted above, the following are the
specific functions of the Audit Committee:
Financial Statement and Disclosure Matters
1. Review and discuss with management, and to the extent the Audit Committee
deems necessary or appropriate, the Internal Auditors and the Outside
Auditor, the Company's disclosure controls and procedures that are
designed to ensure that the reports the Company files with the Commission
comply with the Commission's rules and forms.
2. Review and discuss with management, the Internal Auditors and the Outside
Auditor the annual audited financial statements, including disclosures
made in management's discussion and analysis, and recommend to the Board
whether the audited financial statements should be included in the
Company's Form 10-KSB.
3. Review and discuss with management, the Internal Auditors and the Outside
Auditor the Company's quarterly financial statements, including
disclosures made in management's discussion and analysis, prior to the
filing of its Form 10-QSB, including the results of the Outside Auditor's
reviews of the quarterly financial statements.
4. Review and discuss quarterly reports from the Outside Auditor on:
(a) All critical accounting policies and practices to be used;
(b) All alternative treatments within GAAP for policies and practices
related to material items that have been discussed with management,
including ramifications of the use of such alternative disclosures
and treatments, and the treatment preferred by the Outside Auditor;
(c) The internal controls adhered to by the Company, management, and the
Company's financial, accounting and internal auditing personnel, and
the impact of each on the quality and reliability of the Company's
financial reporting; and
(d) Other material written communications between the Outside Auditor
and management, such as any management letter or schedule of
unadjusted differences.
A-3
5. Discuss in advance with management the Company's practice with respect to
the types of information to be disclosed and the types of presentations to
be made in earnings press releases, including the use, if any, of "pro
forma" or "adjusted" non-GAAP information, as well as financial
information and earnings guidance provided to analysts and rating
agencies.
6. Review and discuss with management, the Internal Auditors and the Outside
Auditor:
(a) Significant financial reporting issues and judgments made in
connection with the preparation of the Company's financial
statements;
(b) The clarity of the financial disclosures made by the Company;
(c) The development, selection and disclosure of critical accounting
estimates and the analyses of alternative assumptions or estimates,
and the effect of such estimates on the Company's financial
statements;
(d) Potential changes in GAAP and the effect such changes would have on
the Company's financial statements;
(e) Significant changes in accounting principles, financial reporting
policies and internal controls implemented by the Company;
(f) Significant litigation, contingencies and claims against the Company
and material accounting issues that require disclosure in the
Company's financial statements;
(g) Information regarding any "second" opinions sought by management
from an independent auditor with respect to the accounting treatment
of a particular event or transaction;
(h) Management's compliance with the Company's processes, procedures and
internal controls;
(i) The adequacy and effectiveness of the Company's internal accounting
and financial controls and the recommendations of management, the
Internal Auditors and the Outside Auditor for the improvement of
accounting practices and internal controls; and
(j) Any difficulties encountered by the Outside Auditor or the Internal
Auditors in the course of their audit work, including any
restrictions on the scope of activities or access to requested
information, and any significant disagreements with management.
7. Discuss with management and the Outside Auditor the effect of regulatory
and accounting initiatives as well as off balance sheet structures and
aggregate contractual obligations on the Company's financial statements.
8. Discuss with management the Company's major financial risk exposures and
the steps management has taken to monitor and control such exposures,
including the Company's risk assessment and risk management policies.
A-4
9. Discuss with the Outside Auditor the matters required to be discussed by
Statement on Auditing Standards ("SAS") No. 61 relating to the conduct of
the audit. In particular, discuss:
(a) The adoption of, or changes to, the Company's significant internal
auditing and accounting principles and practices as suggested by the
Outside Auditor, Internal Auditors or management; and
(b) The management letter provided by the Outside Auditor and the
Company's response to that letter.
10. Receive and review disclosures made to the Audit Committee by the
Company's Chief Executive Officer and Chief Financial Officer during their
certification process for the Company's Form 10-KSB and Form 10-QSB, to
the extent required to be included in the certification process, about (a)
any significant deficiencies in the design or operation of internal
controls or material weakness therein, (b) any fraud involving management
or other associates who have a significant role in the Company's internal
controls and (c) any significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to
the date of their evaluation.
Oversight of the Company's Relationship with the Outside Auditor
11. Review the experience and qualifications of the senior members of the
Outside Auditor team.
12. Obtain and review a report from the Outside Auditor at least annually
regarding (a) the Outside Auditor's internal quality-control procedures,
(b) any material issues raised by the most recent internal quality-control
review, or peer review, of the firm, or by any inquiry or investigation by
governmental or professional authorities, within the preceding five years
respecting one or more independent audits carried out by the firm, (c) any
steps taken to deal with any such issues, and (d) all relationships
between the Outside Auditor and the Company, including the written
disclosures and the letter required by Independence Standards Board
Standard 1, as that standard may be modified or supplemented from time to
time.
13. Evaluate the qualifications, performance and independence of the Outside
Auditor, including considering whether the Outside Auditor's quality
controls are adequate and the provision of non-audit services is
compatible with maintaining the Outside Auditor's independence, and taking
into account the opinions of management and the Internal Auditor. The
Audit Committee shall present its conclusions to the Board.
14. Oversee the rotation of the lead (or coordinating) audit partner having
primary responsibility for the audit and the audit partner responsible for
reviewing the audit to the extent that rotation is required under the
rules of the Commission, and oversee the rotation of other audit partners,
in accordance with the rules of the Commission.
15. Recommend to the Board policies for the Company's hiring of present and
former associates of the Outside Auditor who have participated in any
capacity in the audit of the Company, in accordance with the rules of the
Commission.
A-5
16. To the extent the Audit Committee deems necessary or appropriate, discuss
with the national office of the Outside Auditor issues on which they were
consulted by the Company's audit team and matters of audit quality and
consistency.
17. Discuss with management, the Internal Auditors and the Outside Auditor any
accounting adjustments that were noted or proposed by the Outside Auditor,
but were not adopted or reflected.
18. Meet with management, the Internal Auditors and the Outside Auditor prior
to the audit to discuss and review the scope, planning and staffing of the
audit.
19. Obtain from the Outside Auditor the information required to be disclosed
to the Company by generally accepted auditing standards in connection with
the conduct of an audit.
20. Require the Outside Auditor to review the financial information included
in the Company's Form 10-QSB in accordance with the rules of the
Commission prior to the Company filing such reports with the Commission
and to provide to the Company for inclusion in the Company's Form 10-QSB
any reports of the Outside Auditor required by such rules.
Oversight of the Company's Internal Audit Function
21. Take such steps to reasonably ensure that the Company has an internal
audit function.
22. Review and concur in the appointment, replacement, reassignment or
dismissal of the senior internal auditing executive, and the compensation
package for such person.
23. Review the significant reports to management prepared by the internal
auditing department and management's responses.
24. Communicate with management and the Internal Auditors to obtain
information concerning internal audits, accounting principles adopted by
the Company, internal controls of the Company, management, and the
Company's financial and accounting personnel, and review the impact of
each on the quality and reliability of the Company's financial statements.
25. Evaluate the internal auditing department and its impact on the accounting
practices, internal controls and financial reporting of the Company.
26. Discuss with the Outside Auditor the internal audit department's
responsibilities, budget and staffing and any recommended changes in the
planned scope of the internal audit.
Compliance Oversight Responsibilities
27. Obtain from the Outside Auditor the reports required to be furnished to
the Audit Committee under Section 10A of the Exchange Act and obtain from
the Outside Auditor any information with respect to illegal acts in
accordance with Section 10A.
28. Obtain reports from management, the Company's senior internal auditing
executive and the Outside Auditor concerning whether the Company and its
subsidiary/foreign affiliated entities are in compliance with applicable
legal requirements and the any applicable code of ethics.
A-6
29. Obtain and review reports and disclosures of insider and affiliated party
transactions. Advise the Board with respect to the Company's policies and
procedures regarding compliance with applicable laws and regulations and
the applicable code of ethics.
30. Establish procedures for (a) the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal
accounting controls or auditing matters, and (b) the confidential,
anonymous submission by associates of the Company of concerns regarding
questionable accounting or auditing matters.
31. Discuss with management and the Outside Auditor any correspondence between
the Company and regulators or governmental agencies and any associate
complaints or published reports that raise material issues regarding the
Company's financial statements or accounting policies.
32. Discuss with the Company's counsel legal matters that may have a material
impact on the financial statements or the Company's compliance policies.
Additional Responsibilities
33. If required by the rules of the Commission or the regulations of the
principal stock exchange or market on which the Company's securities are
traded, prepare annually a report for inclusion in the Company's proxy
statement relating to its annual stockholders meeting.
34. Conduct or authorize investigations into any matters within the Audit
Committee's scope of responsibilities.
35. Review the Company's Related-Party Transaction Policy and recommend any
changes to the Compensation Committee and then to the Board for approval.
Review and determine whether to approve or ratify transactions covered by
such policy, as appropriate.
A-7
Appendix B
RESTATED CERTIFICATE OF INCORPORATION
OF
CHINA MEDICINE CORPORATION
China Medicine Corporation, a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify:
1. The name of the Corporation is China Medicine Corporation. The
Corporation was organized under the name Lounsberry Holdings III, Inc. on
February 10, 2005.
2. The Certificate of Incorporation of the Corporation is hereby amended
and restated to read as follows:
FIRST: The name of the Corporation is China Medicine Corporation (the
"Corporation").
SECOND: The address of its registered office in the State of Delaware is
2711 Centerville Road, Suite 400, Wilmington, Delaware 19808, County of New
Castle. The name of its registered agent at such address is the Corporation
Service Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH: The Corporation is to have perpetual existence.
FIFTH: (a) The total number of shares of capital stock which the
Corporation shall have authority to issue is one hundred million (100,000,000),
of which (i) 90,000,000 shares are designated as common stock with a par value
of $.0001 per share ("Common Stock") and (ii) 10,000,000 shares are designated
as preferred stock with a par value of $.0001 per share ("Preferred Stock").
(b) The Preferred Stock of the Corporation shall be issued by the
Board of Directors of the Corporation in one or more classes or one or more
series within any class and such classes or series shall have such voting
powers, full or limited, or no voting powers, and such designations,
preferences, limitations or restrictions as the Board of Directors of the
Corporation may determine, from time to time, including but not limited to:
(i) the designation of such class or series;
(ii) the dividend rate of such class or series, the conditions
and dates upon which such dividends shall be payable, the preference or relation
which such dividends shall bear to the dividends payable on any other class or
classes or of any other series of capital stock, whether such dividends shall be
cumulative or non-cumulative, and whether such dividends may be paid in shares
of any class or series of capital stock or other securities of the Corporation;
(iii) whether the shares of such class or series shall be
subject to redemption by the Corporation, and, if made subject to such
redemption, the times, prices and other terms and conditions of such redemption;
B-1
(iv) the terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such class or series;
(v) whether or not the shares of such class or series shall be
convertible into or exchangeable for shares of any other class or classes or
series of capital stock or other securities of the Corporation, and, if
provision be made for conversion or exchange, the times, prices, rates,
adjustment and other terms and conditions of such conversion or exchange;
(vi) the extent, if any, to which the holders of the shares of
such class or series shall be entitled to vote, as a class or otherwise, with
respect to the election of the directors or otherwise, and the number of votes
to which the holder of each share of such class or series shall be entitled;
(vii) the restrictions, if any, on the issue or reissue of any
additional shares or any class or series of Preferred Stock; and
(viii) the rights of the holders of the shares of such class
or series upon the dissolution of, or upon the distribution of assets of, the
Corporation.
(c) Holders of shares of Common Stock shall be entitled to cast one
vote for each share held at all stockholders' meetings for all purposes,
including the election of directors. The Common Stock does not have cumulative
voting rights.
(d) No holder of shares of stock of any class shall be entitled as a
matter of right to subscribe for or purchase or receive any part of any new or
additional issue of shares of stock of any class, or of securities convertible
into shares of stock of any class, whether now hereafter authorized or whether
issued for money, for consideration other than money, or by way of dividend.
SIXTH: The Board of Directors shall have the power to adopt, amend or
repeal the by-laws of the Corporation.
SEVENTH: No director shall be personally liable to the Corporation or its
stockholders for monetary damages for any breach of fiduciary duty by such
director as a director. Notwithstanding the foregoing sentence, a director shall
be liable to the extent provided by applicable law, (i) for breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the General
Corporation Law or (iv) for any transaction from which the director derived an
improper personal benefit. If the General Corporation Law hereafter is amended
to authorize the further elimination or limitation of the liability of
directors, then the liability of a director of the Corporation, in addition to
the limitation on personal liability provided herein, shall be limited to the
fullest extent permitted by the amended General Corporation Law. No amendment to
or repeal of this Article SEVENTH shall apply to or have any effect on the
liability or alleged liability of any director of the Corporation for or with
respect to any acts or omissions of such director occurring prior to such
amendment.
EIGHTH: The Corporation shall indemnify, to the fullest extent permitted
by Section 145 of the General Corporation Law, as amended from time to time,
each person that such section grants the Corporation the power to indemnify.
B-2
3. Set forth as Exhibit A to this Restated Certificate of Incorporation is
a Statement of Designations setting forth the rights, preferences and privileges
of a series of Preferred Stock consisting of five million (5,000,000) shares and
designated as the Series A Convertible Preferred Stock.
4. This Restated Certificate of Incorporation has been duly adopted in
accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of Delaware.
5. The capital of the Corporation will not be reduced under or by reason
of any amendment herein certified.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by its president this th day of July, 2006.
/s/
-------------------------------------
Senshan Yang, Chief Executive Officer
B-3
Exhibit A
STATEMENT OF DESIGNATIONS
Section 1. Definitions. Capitalized terms used and not otherwise defined
herein that are defined in the Purchase Agreement (as defined below) shall have
the meanings given such terms in the Purchase Agreement. For the purposes
hereof, the following terms shall have the following meanings:
"Bankruptcy Event" means any of the following events: (a) the
Company or any Significant Subsidiary (as such term is defined in Rule
1.02(s) of Regulation S-X) thereof commences a case or other proceeding
under any bankruptcy, reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law
of any jurisdiction relating to the Company or any Significant Subsidiary
thereof; (b) there is commenced against the Company or any Significant
Subsidiary thereof any such case or proceeding that is not stayed or
dismissed within 90 days after commencement; (c) the Company or any
Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any
order of relief or other order approving any such case or proceeding is
entered; (d) the Company or any Significant Subsidiary thereof suffers any
appointment of any custodian or the like for it or any substantial part of
its property that is not discharged or stayed within 90 days; (e) the
Company or any Significant Subsidiary thereof makes a general assignment
for the benefit of creditors; (f) the Company or any Significant
Subsidiary thereof calls a meeting of its creditors with a view to
arranging a composition, adjustment or restructuring of its debts; or (g)
the Company or any Significant Subsidiary thereof, by any act or failure
to act, expressly indicates its consent to, approval of or acquiescence in
any of the foregoing or takes any corporate or other action for the
purpose of effecting any of the foregoing.
"Closing Date" means the Closing Date, as defined in the Purchase
Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's common stock, par value $.0001
per share, and stock of any other class into which such shares may
hereafter have been reclassified or changed.
"Common Stock Equivalents" means any securities of the Company or
the Subsidiaries which would entitle the holder thereof to acquire at any
time Common Stock, including without limitation, any debt, preferred
stock, rights, options, warrants or other instrument that is at any time
convertible into or exchangeable for, or otherwise entitles the holder
thereof to receive, Common Stock.
"Conversion Date" shall have the meaning set forth in Section 6(a).
"Conversion Ratio" shall have the meaning set forth in Section 6(a).
"Conversion Price" shall mean the price paid for one share of
Preferred Stock divided by the number of shares of Common Stock issuable
upon conversion of one share of Preferred Stock.
B-4
"Conversion Shares" means, collectively, the shares of Common Stock
into which the shares of Series A Preferred Stock are convertible in
accordance with the terms hereof.
"Conversion Shares Registration Statement" means a registration
statement that meets the requirements of the Registration Rights Agreement
and registers the resale of all Conversion Shares by the Holder, who shall
be named as a "selling stockholder" thereunder, all as provided in the
Registration Rights Agreement.
"Dilutive Issuance" shall have the meaning set forth in Section 7(b)
hereof.
"Effective Date" means the date that the Conversion Shares
Registration Statement is declared effective by the Commission.
"EBITDA" shall have the meaning set forth in the Purchase Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exempt Issuance" shall have the meaning set forth in Section 1.3.10
of the Purchase Agreement.
"Fundamental Transaction" shall have the meaning set forth in
Section 7(f)(iv) hereof.
"Holder" shall have the meaning given such term in Section 2 hereof.
"Investors" shall mean the persons named in Schedule A to the
Purchase Agreement.
"Junior Securities" means the Common Stock and all other equity or
equity equivalent securities of the Company other than those securities
that are explicitly senior in rights or liquidation preference to the
Series A Preferred Stock.
"Original Issue Date" shall mean the date of the first issuance of
any shares of the Series A Preferred Stock regardless of the number of
transfers of any particular shares of Series A Preferred Stock and
regardless of the number of certificates which may be issued to evidence
such Series A Preferred Stock.
"Person" means a corporation, an association, a partnership, a
limited liability company, a business association, an individual, a trust,
a government or political subdivision thereof or a governmental agency.
"Purchase Agreement" means the Preferred Stock Purchase Agreement,
dated as of the February 8, 2006, to which the Company and the original
Holders are parties, as amended, modified or supplemented from time to
time in accordance with its terms, a copy of which is on file at the
principal offices of the Company.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Closing Date, to which the Company and the
original Holder are parties, as amended, modified or supplemented from
time to time in accordance with its terms.
"Securities" shall have the meaning set forth in Section 1.3.17 of
the Purchase Agreement.
B-5
"Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
"Series A Preferred Stock" shall have the meaning set forth in
Section 2.
"Subscription Amount" shall mean the three million nine hundred
thousand dollars ($3,900,000) to be paid for the Preferred Stock and
Warrants purchased pursuant to the Purchase Agreement, in United States
Dollars and in immediately available funds.
"Subsidiary" shall mean a corporation, limited liability company,
partnership, joint venture or other business entity of which the Company
owns beneficially or of record more than a majority of the equity
interest.
"Trading Day" means a day on which the Common Stock is traded on a
Trading Market.
"Trading Market" means the following markets or exchanges on which
the Common Stock is listed or quoted for trading on the date in question:
the Nasdaq SmallCap Market, the American Stock Exchange, the New York
Stock Exchange, the Nasdaq National Market or the OTC Bulletin Board.
"Transaction Documents" shall have the meaning set forth in the
Purchase Agreement.
"VWAP" means, for any date, the price determined by the first of the
following clauses that applies: (a) if the Common Stock is then listed or
quoted on a Trading Market, the daily volume weighted average price of the
Common Stock for such date (or the nearest preceding date) on the primary
Trading Market on which the Common Stock is then listed or quoted as
reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30
a.m. EST to 4:02 p.m. Eastern Time) using the VAP function; (b) if the
Common Stock is not then listed or quoted on the Trading Market and if
prices for the Common Stock are then reported in the "Pink Sheets"
published by the National Quotation Bureau Incorporated (or a similar
organization or agency succeeding to its functions of reporting prices),
the most recent bid price per share of the Common Stock so reported; or
(c) in all other cases, the fair market value of a share of Common Stock
as determined by a nationally recognized-independent appraiser selected in
good faith by Purchasers holding a majority of the principal amount of
Series A Preferred Stock then outstanding.
"Warrants" shall have the meaning set forth in the Purchase
Agreement.
Section 2. Designation, Amount and Par Value. The series of preferred
stock, par value $.0001 per share ("Preferred Stock") consisting of five million
(5,000,000 shares) shall be designated as the Company's Series A Convertible
Preferred Stock (the "Series A Preferred Stock") and the number of shares so
designated shall be (which shall not be subject to increase without the consent
of all of the holders of 75% of the then outstanding shares of Series A
Preferred Stock (each a "Holder" and collectively, the "Holders")). In the event
of the conversion of shares of Series A Preferred Stock into this Company's
Common Stock, pursuant to Section 6 hereof, or in the event that the Company
shall otherwise acquire and cancel any shares of Series A Preferred Stock, the
shares of Series A Preferred Stock so converted or otherwise acquired and
canceled shall have the status of authorized but unissued shares of preferred
stock, without designation as to series until such stock is once more designated
as part of a particular Series by the Company's Board of Directors. In addition,
if the Company shall not issue the maximum number of shares of Series A
Preferred Stock, the Company may, from time to time, by resolution of the Board
of Directors and the approval of the holders of a majority of the outstanding
shares of Series A Preferred Stock, reduce the number of shares of Series A
Preferred Stock authorized, provided, that no such reduction shall reduce the
number of authorized shares to a number which is less than the number of shares
of Series A Preferred Stock then issued or reserved for issuance. The number of
shares by which the Series A Preferred Stock is reduced shall have the status of
authorized but unissued shares of Preferred Stock, without designation as to
series, until such stock is once more designated as part of a particular Series
by the Company's Board of Directors. The Board of Directors shall cause to be
filed with the Secretary of State of the State of Delaware such certificate as
shall be necessary to reflect any reduction in the number of shares constituting
the Series A Preferred Stock.
B-6
Section 3. Dividends and Other Distributions. No dividends shall be
payable with respect to the Series A Preferred Stock. No dividends shall be
payable with respect to the Common Stock while the Series A Preferred Stock is
outstanding. The Common Stock shall not be redeemed while the Series A Preferred
Stock is outstanding.
Section 4. Voting Rights. The Series A Preferred Stock shall have no
voting rights. However, so long as any shares of Series A Preferred Stock are
outstanding, the Company shall not, without the affirmative approval of the
Holders of 75% of the shares of the Series A Preferred Stock then outstanding,
(a) alter or change adversely the powers, preferences or rights given to the
Series A Preferred Stock or alter or amend this Certificate of Designation, (b)
authorize or create any class of stock ranking as to dividends or distribution
of assets upon a Liquidation (as defined in Section 5) senior to or otherwise
pari passu with the Series A Preferred Stock, or any of preferred stock
possessing greater voting rights or the right to convert at a more favorable
price than the Series A Preferred Stock, (c) amend its certificate of
incorporation or other charter documents in breach of any of the provisions
hereof, (d) increase the authorized number of shares of Series A Preferred
Stock, or (e) enter into any agreement with respect to the foregoing. The
holders of the Series A Preferred Stock will not be entitled to vote as a class
with respect to the increase or decrease in the number of authorized shares of
preferred stock; provided, however, that the provisions of Section 6(c) of this
Certificate of Designation may not be amended or waived.
Section 5. Liquidation. Upon any liquidation, dissolution or winding-up of
the Company, whether voluntary or involuntary (a "Liquidation"), the Holders
shall be entitled to receive out of the assets of the Company, whether such
assets are capital or surplus, for each share of Series A Preferred Stock an
amount equal to one and 25/100 dollars ($1.25), which amount is referred to as
the "Liquidation Value," before any distribution or payment shall be made to the
holders of any Junior Securities and after any distributions or payments made to
holders of any class or series of securities which are senior to the Series A
Preferred Stock upon voluntary or involuntary liquidation, dissolution or
winding up, and if the assets of the Company shall be insufficient to pay in
full such amounts, then the entire assets to be distributed to the Holders shall
be distributed among the Holders ratably in accordance with the respective
amounts that would be payable on such shares if all amounts payable thereon were
paid in full. In the event the assets of the Company available for distribution
to the holders of shares of Series A Preferred Stock upon dissolution,
liquidation or winding up of the Company, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which such holders are
entitled pursuant to Section 5, no such distribution shall be made on account of
any shares of any other class or series of capital stock of the Company ranking
on a parity with the shares of Series A Preferred Stock upon such dissolution,
liquidation or winding up unless proportionate distributive amounts shall be
paid on account of the shares of Series A Preferred Stock, ratably, in
proportion to the full distributable amounts for which holders of all such
parity shares are respectively entitled upon such dissolution, liquidation or
winding up. At the election of a Holder made by written notice delivered to the
Company at least two (2) business days prior to the effective date of the
subject transaction, as to the shares of Series A Preferred Stock held by such
Holder, a Fundamental Transaction (excluding for purposes of this Section 5 any
Fundamental Transaction described in Section 7(f)(iv)(A) or 7(f)(iv)(B)) or
Change of Control shall be treated as a Liquidation as to such Holder.
B-7
Section 6. Conversion.
a) Conversions at Option of Holder. Each share of Series A Preferred
Stock shall be initially convertible (subject to the limitations set forth in
Section 6(c)), into one (1) share of Common Stock (as adjusted as provided
below, the "Conversion Ratio") at the option of the Holders, at any time and
from time to time from and after the Original Issue Date. Holders shall effect
conversions by providing the Company with the form of conversion notice attached
hereto as Annex A (a "Notice of Conversion") as fully and originally executed by
the Holder, together with the delivery by the Holder to the Company of the stock
certificate(s) representing the number of shares of Series A Preferred Stock so
converted, with such stock certificates being duly endorsed in full for transfer
to the Company or with an applicable stock power duly executed by the Holder in
the manner and form as deemed reasonable by the transfer agent of the Common
Stock. Each Notice of Conversion shall specify the number of shares of Series A
Preferred Stock to be converted, the number of shares of Series A Preferred
Stock owned prior to the conversion at issue, the number of shares of Series A
Preferred Stock owned subsequent to the conversion at issue, the stock
certificate number and the shares of Series A Preferred Stock represented
thereby which are accompanying the Notice of Conversion, and the date on which
such conversion is to be effected, which date may not be prior to the date the
Holder delivers such Notice of Conversion and the applicable stock certificates
to the Company by overnight delivery service (the "Conversion Date"). If no
Conversion Date is specified in a Notice of Conversion, the Conversion Date
shall be the Trading Day immediately following the date that such Notice of
Conversion and applicable stock certificates are received by the Company. The
calculations and entries set forth in the Notice of Conversion shall control in
the absence of manifest or mathematical error. Shares of Series A Preferred
Stock converted into Common Stock in accordance with the terms hereof shall be
canceled and may not be reissued. The Conversion Price of the Series A Preferred
Stock shall be equal to one and 25/100 dollars ($1.25) per share. If the initial
Conversion Price is adjusted pursuant to Section 7 or as otherwise provided
herein, the Conversion Ratio shall likewise be adjusted and the new Conversion
Ratio shall equal the Liquidation Value divided by the new Conversion Price.
Thereafter, subject to any further adjustments in the Conversion Price, each
share of Series A Preferred Stock shall be initially convertible into that
number of shares of Common Stock equal to the new Conversion Ratio.
b) Automatic Conversion Upon Change of Control. Subject to Section
5, all of the outstanding shares of Series A Preferred Stock shall be
automatically converted into the Conversion Shares upon the close of business on
the business day immediately preceding the date fixed for consummation of any
transaction resulting in a Change of Control of the Company (an "Automatic
Conversion Event"). A "Change in Control" means a consolidation or merger of the
Company with or into another company or entity in which the Company is not the
surviving entity or the sale of all or substantially all of the assets of the
Company to another company or entity not controlled by the then existing
stockholders of the Company in a transaction or series of transactions. The
Company shall not be obligated to issue certificates evidencing the Conversion
Shares unless certificates evidencing the shares of Series A Preferred Stock so
converted are either delivered to the Company or its transfer agent or the
holder notifies the Company or its transfer agent in writing that such
certificates have been lost, stolen, or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith. Upon the conversion of the Series A Preferred Stock
pursuant to this Section 6(b), the Company shall promptly send written notice
thereof, by hand delivery or by overnight delivery, to the holder of record of
all of the Series A Preferred Stock at its address then shown on the records of
the Company, which notice shall state that certificates evidencing shares of
Series A Preferred Stock must be surrendered at the office of the Company (or of
its transfer agent for the Common Stock, if applicable).
B-8
c) Beneficial Ownership Limitation. Except as provided in Section
6(b) of this Statement of Designation, which shall apply as stated therein if an
Automatic Conversion Event shall occur, the Company shall not effect any
conversion of the Series A Preferred Stock, and the Holder shall not have the
right to convert any portion of the Series A Preferred Stock to the extent that
after giving effect to such conversion, the Holder (together with the Holder's
affiliates), as set forth on the applicable Notice of Conversion, would
beneficially own in excess of 4.9% of the number of shares of the Common Stock
outstanding immediately after giving effect to such conversion. For purposes of
the foregoing sentence, the number of shares of Common Stock beneficially owned
by the Holder and its affiliates shall include the number of shares of Common
Stock issuable upon conversion of the Series A Preferred Stock with respect to
which the determination of such sentence is being made, but shall exclude the
number of shares of Common Stock which would be issuable upon (A) conversion of
the remaining, non-converted shares of Series A Preferred Stock beneficially
owned by the Holder or any of its affiliates, so long as such shares of Series A
Preferred Stock are not convertible within sixty (60) days from the date of such
determination, and (B) exercise or conversion of the unexercised or
non-converted portion of any other securities of the Company (including the
Warrants) subject to a limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by the Holder or any of its
affiliates, so long as such other securities of the Company are not exercisable
nor convertible within sixty (60) days from the date of such determination. For
purposes of this Section 6(c), in determining the number of outstanding shares
of Common Stock, the Holder may rely on the number of outstanding shares of
Common Stock as reflected in the most recent of the following: (A) the Company's
most recent quarterly reports, Form 10-Q, Form 10-QSB, Annual Reports, Form
10-K, or Form 10-KSB, as the case may be, as filed with the Commission under the
Exchange Act (B) a more recent public announcement by the Company or (C) any
other written notice by the Company or the Company's transfer agent setting
forth the number of shares of Common Stock outstanding. Upon the written or oral
request of the Holder, the Company shall within two (2) Trading Days confirm
orally and in writing to the Holder the number of shares of Common Stock then
outstanding. In any case, the number of outstanding shares of Common Stock shall
be determined after giving effect to the conversion or exercise of securities of
the Company, including the Series A Preferred Stock, by the Holder or its
affiliates since the date as of which such number of outstanding shares of
Common Stock was publicly reported by the Company. For purposes of this Section
6(c), beneficial ownership shall be calculated in accordance with Section 13(d)
of the Exchange Act. This Section 6(c) may be not be waived or amended.
d) Mechanics of Conversion
i. Delivery of Certificate Upon Conversion. Except as
otherwise set forth herein, not later than three Trading Days after each
Conversion Date (the "Share Delivery Date"), the Company shall deliver to the
Holder (A) a certificate or certificates which, after the Effective Date, shall
be free of restrictive legends and trading restrictions (other than those
required by the Purchase Agreement) representing the number of shares of Common
Stock being acquired upon the conversion of shares of Series A Preferred Stock,
and (B) a bank check in the amount of accrued and unpaid dividends (if the
Company has elected or is required to pay accrued dividends in cash). After the
Effective Date, the Company shall, upon request of the Holder, deliver any
certificate or certificates required to be delivered by the Company under this
Section electronically through the Depository Trust Company or another
established clearing Company performing similar functions if the Company's
transfer agent has the ability to deliver shares of Common Stock in such manner.
If in the case of any Notice of Conversion such certificate or certificates are
not delivered to or as directed by the applicable Holder by the third Trading
Day after the Conversion Date, the Holder shall be entitled to elect by written
notice to the Company at any time on or before its receipt of such certificate
or certificates thereafter, to rescind such conversion, in which event the
Company shall immediately return the certificates representing the shares of
Series A Preferred Stock tendered for conversion.
B-9
ii. Obligation Absolute; Partial Liquidated Damages. The
Company's obligations to issue and deliver the Conversion Shares upon conversion
of Series A Preferred Stock in accordance with the terms hereof are absolute and
unconditional, irrespective of any action or inaction by the Holder to enforce
the same, any waiver or consent with respect to any provision hereof, the
recovery of any judgment against any Person or any action to enforce the same,
or any setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder or any other Person of any obligation to
the Company or any violation or alleged violation of law by the Holder or any
other person, and irrespective of any other circumstance which might otherwise
limit such obligation of the Company to the Holder in connection with the
issuance of such Conversion Shares. In the event a Holder shall elect to convert
any or all of its Series A Preferred Stock, the Company may not refuse
conversion based on any claim that such Holder or any one associated or
affiliated with the Holder of has been engaged in any violation of law,
agreement or for any other reason (other than the inability of the Company to
issue shares of Common Stock as a result of the limitation set forth in Section
6(c) hereof) unless, an injunction from a court, on notice, restraining and or
enjoining conversion of all or part of this Series A Preferred Stock shall have
been sought and obtained and the Company posts a surety bond for the benefit of
the Holder in the amount of 150% of the Conversion Value of Series A Preferred
Stock outstanding, which is subject to the injunction, which bond shall remain
in effect until the completion of arbitration/litigation of the dispute and the
proceeds of which shall be payable to such Holder to the extent it obtains
judgment. In the absence of an injunction precluding the same, the Company shall
issue Conversion Shares or, if applicable, cash, upon a properly noticed
conversion. If the Company fails to deliver to the Holder such certificate or
certificates pursuant to Section 6(d)(i) within two Trading Days of the Share
Delivery Date applicable to such conversion, the Company shall pay to such
Holder, in cash, as liquidated damages and not as a penalty, for each $5,000 of
Conversion Value of Series A Preferred Stock being converted, $50 per Trading
Day (increasing to $100 per Trading Day after three (3) Trading Days and
increasing to $200 per Trading Day six (6) Trading Days after such damages begin
to accrue) for each Trading Day after the Share Delivery Date until such
certificates are delivered. Nothing herein shall limit a Holder's right to
pursue actual damages for the Company's failure to deliver certificates
representing shares of Common Stock upon conversion within the period specified
herein and such Holder shall have the right to pursue all remedies available to
it hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief.
iii. Compensation for Buy-In on Failure to Timely Deliver
Certificates Upon Conversion. If the Company fails to deliver to the Holder such
certificate or certificates pursuant to Section 6(d)(i) by a Share Delivery
Date, and if after such Share Delivery Date the Holder purchases (in an open
market transaction or otherwise) Common Stock to deliver in satisfaction of a
sale by such Holder of the Conversion Shares which the Holder was entitled to
receive upon the conversion relating to such Share Delivery Date (a "Buy-In"),
then the Company shall pay in cash to the Holder the amount by which (x) the
Holder's total purchase price (including brokerage commissions, if any) for the
Common Stock so purchased exceeds (y) the product of (1) the aggregate number of
shares of Common Stock that such Holder was entitled to receive from the
conversion at issue multiplied by (2) the price at which the sell order giving
rise to such purchase obligation was executed. For example, if the Holder
purchases Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to an attempted conversion of shares of Series A Preferred
Stock with respect to which the aggregate sale price giving rise to such
purchase obligation is $10,000, under clause (A) of the immediately preceding
sentence the Company shall be required to pay the Holder $1,000. The Holder
shall provide the Company written notice indicating the amounts payable to the
Holder in respect of the Buy-In, together with applicable confirmations and
other evidence reasonably requested by the Company. Nothing herein shall limit a
Holder's right to pursue any other remedies available to it hereunder, at law or
in equity including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Company's failure to timely deliver
certificates representing shares of Common Stock upon conversion of the shares
of Series A Preferred Stock as required pursuant to the terms hereof.
B-10
iv. Reservation of Shares Issuable Upon Conversion. The
Company covenants that it will at all times reserve and keep available out of
its authorized and unissued shares of Common Stock solely for the purpose of
issuance upon conversion of the Series A Preferred Stock, each as herein
provided, free from preemptive rights or any other actual contingent purchase
rights of persons other than the Holders, not less than such number of shares of
the Common Stock as shall (subject to any additional requirements of the Company
as to reservation of such shares set forth in the Purchase Agreement) be
issuable (taking into account the adjustments and restrictions of Section 7)
upon the conversion of all outstanding shares of Series A Preferred Stock. The
Company covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly authorized, issued and fully paid,
nonassessable and, if the Conversion Shares Registration Statement is then
effective under the Securities Act, registered for public sale in accordance
with such Conversion Shares Registration Statement.
v. Fractional Shares. Upon a conversion hereunder, the Company
shall not be required to issue stock certificates representing fractions of
shares of the Common Stock. All fractional shares shall be carried forward and
any fractional shares which remain after a Holder converts all of his or her
Series A Preferred Stock shall be dropped and eliminated.
vi. Transfer Taxes. The issuance of certificates for shares of
the Common Stock on conversion of the Series A Preferred Stock shall be made
without charge to the Holders thereof for any documentary stamp or similar taxes
that may be payable in respect of the issue or delivery of such certificate,
provided that the Company shall not be required to pay any tax that may be
payable in respect of any transfer involved in the issuance and delivery of any
such certificate upon conversion in a name other than that of the Holder of such
shares of Series A Preferred Stock so converted and the Company shall not be
required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
vii. Absolute Obligation. Except as expressly provided herein,
no provision of this Certificate of Designation shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
liquidated damages (if any) on, the shares of Series A Preferred Stock at the
time, place, and rate, and in the coin or currency, herein prescribed.
B-11
Section 7. Certain Adjustments.
a) Stock Dividends and Stock Splits. If the Company, at any time while the
Series A Preferred Stock is outstanding: (A) shall pay a stock dividend or
otherwise make a distribution or distributions on shares of its Common Stock or
any other equity or equity equivalent securities payable in shares of Common
Stock (which, for avoidance of doubt, shall not include any shares of Common
Stock issued by the Company pursuant to this Series A Preferred Stock), (B)
subdivide outstanding shares of Common Stock into a larger number of shares, (C)
combine (including by way of reverse stock split) outstanding shares of Common
Stock into a smaller number of shares, or (D) issue by reclassification of
shares of the Common Stock any shares of capital stock of the Company, then the
Conversion Value shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and of which the denominator shall be the number
of shares of Common Stock outstanding after such event. Any adjustment made
pursuant to this Section shall become effective immediately after the record
date for the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or re-classification.
b) Price Adjustment. Until such time as the Investors hold no Securities,
except for (i) Exempt Issuances, (ii) issuances covered by Sections 7(a), 7(c)
and 7(d) hereof or (iii) an issuance of Common Stock upon exercise or upon
conversion of warrants, options or other convertible securities for which an
adjustment has already been made pursuant to this Section 7, as to all of which
this Section 7(b) does not apply, if the Company closes on the sale or issuance
of Common Stock at a price, or warrants, options, convertible debt or equity
securities with a exercise price per share or exercise price per share which is
less than the Conversion Price then in effect (such lower sales price,
conversion or exercise price, as the case may be, being referred to as the
"Lower Price"), the Conversion Price in effect from and after the date of such
transaction shall be reduced to the Lower Price. For purpose of determining the
exercise price of warrants issued by the Company, the price, if any, paid per
share for the warrants shall be added to the exercise price of the warrants. The
"Conversion Price" shall mean the price paid for one share of Preferred Stock
divided by the number of shares of Common Stock issuable upon conversion of one
share of Preferred Stock. The "Conversion Rate" is the number of shares of
Common Stock issuable upon conversion of one (1) share of Preferred Stock. The
initial Conversion Rate is one (1) share of Common Stock per share of Preferred
Stock and the initial Conversion Price is one and 25/100 dollars ($1.25).
c) Conversion Price Adjustment Based on Pre-Tax Income Per Share and
Adjusted EBITDA.
i. In the event Konzern's Adjusted EBITDA for the year ended
December 31, 2005 is less than $5,650,000, then the Conversion Price shall
be reduced by the percentage shortfall, up to a maximum of 30%. Thus, if
Adjusted EBITDA for 2005 is $3,955,000 or less, the Conversion Price shall
be reduced by 30%. As used in this Section 7(c)(i), Adjusted EBITDA shall
mean shall mean earnings before interest, taxes, depreciation and
amortization, determined in accordance with U.S. GAAP, minus capital
expenditures. Such reduction shall be made at the time the Company files
its Form 10-KSB for the year ended March 31, 2006, and shall apply to the
all of the Series A Preferred Stock which is outstanding on the date the
Form 10-KSB is filed, or, if not filed on time, on the date that filing
was required.
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ii. In addition to any adjustment pursuant to Section 7(c)(i) of
this Warrant, in the event the Company's fully-diluted Pre-Tax Income, as
defined in Section 1.3.14 of the Purchase Agreement, Per Share for the
year ended December 31, 2006 is between $0.40 and $0.20 (50% Decline) per
share on a fully-diluted basis, then the conversion price shall be reduced
proportionately by 0% if the fully-diluted Pre Tax Income is $0.40 per
share or greater and by 50% if the fully-diluted Pre Tax Income is $0.20
per share (50% decrease) or less. For example if the earnings are $0.32
per share (20% Decline) then the Conversion Price, as defined in the
Certificate of Designation, shall be reduced by 20% of the then current
conversion price per share. Fully-diluted Pre-Tax Income Per Share shall
be based on the number of outstanding shares of Common Stock plus all
shares of Common Stock issuable upon conversion of all outstanding
convertible securities and upon exercise of all outstanding warrants,
options and rights, regardless of whether (i) such shares would be
included in determining diluted earnings per share and (ii) such
convertible securities are subject to a restriction or limitation on
exercise. Thus, for purpose of determining fully-diluted Pre-Tax Income
Per Share, the 4.9% Limitation shall be disregarded. The adjustment to the
conversion price shall be made within five business days of the audited
numbers being reported to the SEC and shall apply to the all of the Series
A Preferred Stock which is outstanding on the date the Form 10-KSB or Form
10-K for the year ended December 31, 2006 is filed, or, if not filed on
time, on the date that filing was required.
d) Pro Rata Distributions. If the Company, at any time while Series A
Preferred Stock is outstanding, shall distribute to all holders of Common Stock
(and not to Holders) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security, then in each such case the
Conversion Price shall be determined by multiplying such Conversion Price in
effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the VWAP determined as of the record date mentioned above,
and of which the numerator shall be such VWAP on such record date less the then
fair market value at such record date of the portion of such assets or evidence
of indebtedness so distributed applicable to one outstanding share of the Common
Stock as determined by the Board of Directors in good faith. In either case the
adjustments shall be described in a statement provided to the Holders of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
e) Calculations. All calculations under this Section 7 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be. The
number of shares of Common Stock outstanding at any given time shall not include
shares owned or held by or for the account of the Company or any of its
subsidiaries. For purposes of this Section 7, the number of shares of Common
Stock deemed to be issued and outstanding as of a given date shall be the sum of
the number of shares of Common Stock (excluding treasury shares and shares owned
by subsidiaries, if any) actually issued and outstanding.
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f) Notice to Holders.
i. Adjustment to Conversion Price. Whenever the Conversion Price is
adjusted pursuant to any of this Section 7, the Company shall promptly
mail to each Holder a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment. If the Company issues a variable rate security, despite the
prohibition thereon in the Purchase Agreement, the Company shall be deemed
to have issued Common Stock or Common Stock Equivalents at the lowest
possible conversion or exercise price at which such securities may be
converted or exercised in the case of a Variable Rate Transaction (as
defined in the Purchase Agreement), or the lowest possible adjustment
price in the case of an MFN Transaction (as defined in the Purchase
Agreement).
ii. Notices of Other Events. If (A) the Company shall declare a
dividend (or any other distribution) on the Common Stock; (B) the Company
shall declare a redemption of the Common Stock; (C) the Company shall
authorize the granting to all holders of the Common Stock rights or
warrants to subscribe for or purchase any shares of capital stock of any
class or of any rights; (D) the approval of any stockholders of the
Company shall be required in connection with any reclassification of the
Common Stock or any Fundamental Transaction, (E) the Company shall
authorize the voluntary or involuntary dissolution, liquidation or winding
up of the affairs of the Company; then in each case, the Company shall
cause to be filed at each office or agency maintained for the purpose of
conversion of the Series A Preferred Stock, and shall cause to be mailed
to the Holders at their last addresses as they shall appear upon the stock
books of the Company, at least 30 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the
date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be
taken, the date as of which the holders of the Common Stock of record to
be entitled to such dividend, distributions, redemption, rights or
warrants are to be determined or (y) the date on which such
reclassification is expected to become effective or close, and the date as
of which it is expected that holders of the Common Stock of record shall
be entitled to exchange their shares of the Common Stock for securities,
cash or other property deliverable upon such reclassification or
Fundamental Transaction; provided, that the failure to mail such notice or
any defect therein or in the mailing thereof shall not affect the validity
of the corporate action required to be specified in such notice.
iii. Exempt Issuance. Notwithstanding the foregoing, no adjustment
in the Conversion Price will be made in respect of an Exempt Issuance.
iv. Fundamental Transaction. If, at any time while this Series A
Preferred Stock is outstanding, (A) the Company effects any merger or
consolidation of the Company with or into another Person, (B) the Company
effects any sale of all or substantially all of its assets in one or a
series of related transactions, (C) any tender offer or exchange offer
(whether by the Company or another Person) is completed pursuant to which
holders of Common Stock are permitted to tender or exchange their shares
for other securities, cash or property, or (D) the Company effects any
reclassification of the Common Stock or any compulsory share exchange
pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (in any such case, a
"Fundamental Transaction"), then upon any subsequent conversion of this
Series A Preferred Stock, the Holder shall have the right to receive, for
each Conversion Share that would have been issuable upon such conversion
absent such Fundamental Transaction, the same kind and amount of
securities, cash or property as it would have been entitled to receive
upon the occurrence of such Fundamental Transaction if it had been,
immediately prior to such Fundamental Transaction, the holder of one share
of Common Stock (the "Alternate Consideration"). For purposes of any such
conversion, the determination of the Conversion Price shall be
appropriately adjusted to apply to such Alternate Consideration based on
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the amount of Alternate Consideration issuable in respect of one share of
Common Stock in such Fundamental Transaction, and the Company shall
apportion the Conversion Price among the Alternate Consideration in a
reasonable manner reflecting the relative value of any different
components of the Alternate Consideration. If holders of Common Stock are
given any choice as to the securities, cash or property to be received in
a Fundamental Transaction, then the Holder shall be given the same choice
as to the Alternate Consideration it receives upon any conversion of this
Series A Preferred Stock following such Fundamental Transaction. To the
extent necessary to effectuate the foregoing provisions, any successor to
the Company or surviving entity in such Fundamental Transaction shall file
a new Certificate of Designations with the same terms and conditions and
issue to the Holder new preferred stock consistent with the foregoing
provisions and evidencing the Holder's right to convert such preferred
stock into Alternate Consideration. The terms of any agreement pursuant to
which a Fundamental Transaction is effected shall include terms requiring
any such successor or surviving entity to comply with the provisions of
this paragraph (f)(iv) and insuring that this Series A Preferred Stock (or
any such replacement security) will be similarly adjusted upon any
subsequent transaction analogous to a Fundamental Transaction.
Notwithstanding the foregoing or any other provisions of this Certificate
of Designations, in the event that the agreement relating to a Fundamental
Transaction provides for the conversion or exchange of the Series A
Preferred Stock into equity or debt securities, cash or other
consideration and the agreement is approved by the holders of a majority
of the. then-outstanding shares of Series A Preferred Stock, then the
holders of the Series A Preferred Stock shall have only the rights set
forth in such agreement.
Section 8. Miscellaneous.
a) Notices. Any and all notices or other communications or deliveries to
be provided by the Holders hereunder, including, without limitation, any Notice
of Conversion, shall be in writing and delivered personally, by facsimile, sent
by a nationally recognized overnight courier service, addressed to the Company,
at its principal address as reflected in its most recent filing with the
Commission. Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service
addressed to each Holder at the facsimile telephone number or address of such
Holder appearing on the books of the Company, or if no such facsimile telephone
number or address appears, at the principal place of business of the Holder. Any
notice or other communication or deliveries hereunder shall be deemed given when
received, and any notice by telecopier shall be effective if confirmation of
receipt is given by the party to whom the notice is transmitted.
b) Lost or Mutilated Preferred Stock Certificate. If a Holder's Series A
Preferred Stock certificate shall be mutilated, lost, stolen or destroyed, the
Company shall execute and deliver, in exchange and substitution for and upon
cancellation of a mutilated certificate, or in lieu of or in substitution for a
lost, stolen or destroyed certificate, a new certificate for the shares of
Series A Preferred Stock so mutilated, lost, stolen or destroyed but only upon
receipt of evidence of such loss, theft or destruction of such certificate, and
of the ownership thereof, and indemnity, if requested, all reasonably
satisfactory to the Company.
c) Next Business Day. Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day.
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d) Headings. The headings contained herein are for convenience only, do
not constitute a part of this Certificate of Designations and shall not be
deemed to limit or affect any of the provisions hereof.
e) Rank of Series. For purposes of this Certificate of Designation, any
stock of any series or class of the Company shall be deemed to rank
(i) prior to the shares of Series A Preferred Stock, as to dividends
or upon liquidation, dissolution or winding up, as the case may be, if the
holders of such class or classes shall be entitled to the receipt of dividends
or of amounts distributable upon dissolution, liquidation or winding up of the
Company, as the case may be, in preference or priority to the holders of shares
of Series A Preferred Stock;
(ii) on a parity with shares of Series A Preferred Stock, as to
dividends or upon liquidation, dissolution or winding up, as the case may be,
whether or not the dividend rates, dividend payment dates or redemption or
liquidation prices per share or sinking fund provisions, if any, be different
from those of Series A Preferred Stock, if the holders of such stock shall be
entitled to the receipt of dividends or of amounts distributable upon
dissolution, liquidation or winding up of the Company, as the case may be, in
proportion to their respective dividend rates or liquidation prices, without
preference or priority, one over the other, as between the holders of such stock
and the holders of shares of Series A Preferred Stock; and
(iii) junior to shares of Series A Preferred Stock as to dividends
or upon liquidation, dissolution or winding up, as the case may be, if such
class shall be Common Stock or if the holders of shares of Series A Preferred
Stock shall be entitled to receipt of dividends or of amounts distributable upon
dissolution, liquidation or winding up of the Company, as the case may be, in
preference or priority to the holders of shares of such class or classes.
f) Amendment. This Certificate of Designation may be amended with the
approval of the Company's board of directors and the consent of the holders of
seventy-five percent (75%) of the outstanding shares of Series A Preferred
Stock, except that the conversion limitation set forth in Section 6.2(b) shall
not be amended.
B-16
ANNEX A
NOTICE OF CONVERSION
(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT SHARES
OF SERIES A PREFERRED STOCK)
The undersigned hereby elects to convert the number of shares of Series A
Convertible Preferred Stock indicated below, into shares of common stock, par
value $0.0001 per share (the "Common Stock"), of Lounsberry Holdings III, Inc.,
a Delaware corporation (the "Company"), according to the conditions hereof, as
of the date written below. If shares are to be issued in the name of a person
other than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations:
Date to Effect Conversion: _______________________________________________
Number of shares of Common Stock owned prior to Conversion: ______________
Number of shares of Series A Preferred Stock to be Converted: ____________
Value of shares of Series A Preferred Stock to be Converted: _____________
Number of shares of Common Stock to be Issued: ___________________________
Certificate Number of Series A Preferred Stock attached hereto: __________
Number of Shares of Series A Preferred Stock represented by
attached certificate: _________
Number of shares of Series A Preferred Stock subsequent to
Conversion: ________________
[HOLDER]
By: ____________________________________
Name: _____________________________
Title: _____________________________
B-17
Appendix C
CHINA MEDICINE CORPORATION
2006 Long-Term Incentive Plan
1. Purpose; Definitions.
The purpose of the China Medicine Corporation 2006 Long-Term Incentive
Plan (the "Plan") is to enable China Medicine Corporation (the "Company") to
attract, retain and reward key employees of the Company and its Subsidiaries and
Affiliates, and others who provide services to the Company and its Subsidiaries
and Affiliates, and strengthen the mutuality of interests between such key
employees and such other persons and the Company's stockholders, by offering
such key employees and such other persons incentives and/or other equity
interests or equity-based incentives in the Company, as well as
performance-based incentives payable in cash.
For purposes of the Plan, the following terms shall be defined as set
forth below:
(a) "Affiliate" means any corporation, partnership, limited liability
company, joint venture or other entity, other than the Company and its
Subsidiaries, that is designated by the Board as a participating employer under
the Plan, provided that the Company directly or indirectly owns at least 20% of
the combined voting power of all classes of stock of such entity or at least 20%
of the ownership interests in such entity.
(b) "Board" means the Board of Directors of the Company.
(c) "Book Value" means, as of any given date, on a per share basis (i) the
stockholders' equity in the Company as of the last day of the immediately
preceding fiscal year as reflected in the Company's consolidated balance sheet,
subject to such adjustments as the Committee shall specify at or after grant,
divided by (ii) the number of then outstanding shares of Stock as of such
year-end date, as adjusted by the Committee for subsequent events.
(d) "Cause" means a felony conviction of a participant, or the failure of
a participant to contest prosecution for a felony, or a participant's willful
misconduct or dishonesty, or breach of trust or other action by which the
participant obtains personal gain at the expense of or to the detriment of the
Company or conduct which results in civil or criminal liability or penalties,
including penalties pursuant to a consent decree, order or agreement, on the
part of the Company; provided, however, that if the participant has an
Employment Agreement with the Company, a Subsidiary or Affiliate which includes
a definition of "cause," then "cause" shall have the meaning as defined in such
Employment Agreement.
(e) "Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any successor thereto.
(f) "Commission" means the Securities and Exchange Commission or any
successor thereto.
(g) "Committee" means the Committee referred to in Section 2 of the Plan.
If at any time no Committee shall be in office, then the functions of the
Committee specified in the Plan shall be exercised by the Board.
(h) "Company" means China Medicine Corporation, a Delaware corporation, or
any successor corporation.
(i) "Deferred Stock" means an award made pursuant to Section 8 of the Plan
of the right to receive Stock at the end of a specified deferral period.
(j) "Disability" means disability as determined under procedures
established by the Committee for purposes of the Plan; provided that if the
participant has an Employment Agreement with the Company, a Subsidiary or
Affiliate which includes a definition of "disability," then "disability" shall
have the meaning as defined in such Employment Agreement.
C-1
(k) "Early Retirement" means retirement, with the express consent for
purposes of the Plan of the Company at or before the time of such retirement,
from active employment with the Company and any Subsidiary or Affiliate pursuant
to the early retirement provisions of the applicable pension plan of such
entity.
(l) "Employment Agreement" shall mean an employment or consulting
agreement or other agreement pursuant to which the participant performs services
for the Company or a Subsidiary or Affiliate.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as amended,
from time to time, and any successor thereto.
(n) "Fair Market Value" means, as of any given date, the market price of
the Stock as determined by or in accordance with the policies established by the
Committee in good faith; provided, that, in the case of an Incentive Stock
Option, the Fair Market Value shall be determined in accordance with the Code
and the Treasury regulations under the Code.
(o) "Incentive Stock Option" means any Stock Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section 422 of
the Code.
(p) "Independent Director" shall mean a "non-employee director" as set
forth in Rule 16b-3 of the Commission pursuant to the Exchange Act or any
successor definition adopted by the Commission; provided that in the event that
said rule (or successor rule) shall not have such a definition, the term
Independent Director shall mean a director of the Company who is not otherwise
employed by the Company or any Subsidiary or Affiliate; provided, however, an
Independent Director shall also be an independent director as determined by the
rules or regulations of the principal stock exchange or market on which the
Stock is traded or, if the Stock is not listed or traded on such exchange, as
defined under the rules of the Nasdaq Stock Market.
(q) "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
(r) "Normal Retirement" means retirement from active employment with the
Company and any Subsidiary or Affiliate on or after age 65 or such other age as
is designated by the Company, Subsidiary or Affiliate as the normal retirement
age.
(s) "Other Stock-Based Award" means an award under Section 10 of the Plan
that is valued in whole or in part by reference to, or is otherwise based on,
Stock.
(t) "Plan" means this China Medicine Corporation 2005 Long-Term Incentive
Plan, as hereinafter amended from time to time.
(u) "Restricted Stock" means an award of shares of Stock that is subject
to restrictions under Section 7 of the Plan.
(v) "Retirement" means Normal Retirement or Early Retirement.
(w) "Stock" means the common stock, par value $.0001 per share, of the
Company or any class of common stock into which such common stock may hereafter
be converted or for which such common stock may be exchanged pursuant to the
Company's certificate of incorporation or as part of a recapitalization,
reorganization or similar transaction.
(x) "Stock Appreciation Right" means the right pursuant to an award
granted under Section 6 of the Plan to surrender to the Company all (or a
portion) of a Stock Option in exchange for an amount equal to the difference
between (i) the Fair Market Value, as of the date such award or Stock Option (or
such portion thereof) is surrendered, of the shares of Stock covered by such
Stock Option (or such portion thereof), subject, where applicable, to the
pricing provisions in Section 6(b)(ii) of the Plan and (ii) the aggregate
exercise price of such Stock Option or base price with respect to such award (or
the portion thereof which is surrendered).
(y) "Stock Option" or "Option" means any option to purchase shares of
Stock (including Restricted Stock and Deferred Stock, if the Committee so
determines) granted pursuant to Section 5 of the Plan.
(z) "Stock Purchase Right" means the right to purchase Stock pursuant to
Section 9 of the Plan.
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(aa) "Subsidiary" means any corporation or other business association,
including a partnership (other than the Company) in an unbroken chain of
corporations or other business associations beginning with the Company if each
of the corporations or other business associations (other than the last
corporation in the unbroken chain) owns equity interests (including stock or
partnership interests) possessing 50% or more of the total combined voting power
of all classes of equity in one of the other corporations or other business
associations in the chain. The Board may elect to treat as a Subsidiary an
entity in which the Company possesses less than 50% of the total combined voting
power of all classes of equity if, under generally accepted accounting
principles, the Company may include the financial statements of such entity as
part of the Company's consolidated financial statements (other than as a
minority interest or other single line item).
In addition, the terms "Change in Control," "Potential Change in Control"
and "Change in Control Price" shall have meanings set forth, respectively, in
Sections 11(b), (c) and (d) of the Plan.
2. Administration.
(a) The Plan shall be administered by a Committee of not less than two
directors all of whom shall be Independent Directors, who shall be appointed by
the Board and who shall serve at the pleasure of the Board. If and to the extent
that no Committee exists which has the authority to administer the Plan, the
functions of the Committee specified in the Plan shall be exercised by the
Board.
(b) The Committee shall have full authority to grant, pursuant to the
terms of the Plan, to officers and other persons eligible under Section 4 of the
Plan, provided that Independent Directors shall not be eligible for options or
other benefits pursuant to the Plan other than as provided in Sections 4(b) and
4(c) of the Plan: Stock Options, Stock Appreciation Rights, Restricted Stock,
Deferred Stock, Stock Purchase Rights and/or Other Stock-Based Awards. In
particular, the Committee shall have the authority:
(i) to select the officers and other eligible persons to whom Stock
Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock
Purchase Rights and/or Other Stock-Based Awards may from time to time be granted
pursuant to the Plan;
(ii) to determine whether and to what extent Incentive Stock
Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted
Stock, Deferred Stock, Stock Purchase Rights and/or Other Stock-Based Awards, or
any combination thereof, are to be granted pursuant to the Plan, to one or more
eligible persons;
(iii) to determine the number of shares to be covered by each such
award granted pursuant to the Plan;
(iv) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted under the Plan, including, but not
limited to, the share price or exercise price and any restriction or limitation,
or any vesting, acceleration or waiver of forfeiture restrictions regarding any
Stock Option or other award and/or the shares of Stock relating thereto, based
in each case on such factors as the Committee shall, in its sole discretion,
determine;
(v) to determine whether, to what extent and under what
circumstances a Stock Option may be settled in cash, Restricted Stock and/or
Deferred Stock under Section 5(b)(x) or (xi) of the Plan, as applicable, instead
of Stock;
(vi) to determine whether, to what extent and under what
circumstances Option grants and/or other awards under the Plan and/or other cash
awards made by the Company are to be made, and operate, on a tandem basis with
other awards under the Plan and/or cash awards made outside of the Plan in a
manner whereby the exercise of one award precludes, in whole or in part, the
exercise of another award, or on an additive basis;
(vii) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to an award under
this Plan shall be deferred either automatically or at the election of the
participant, including any provision for any determination or method of
determination of the amount (if any) deemed be earned on any deferred amount
during any deferral period;
C-3
(viii) to determine the terms and restrictions applicable to Stock
Purchase Rights and the Stock purchased by exercising such Rights; and
(ix) to determine an aggregate number of awards and the type of
awards to be granted to eligible persons employed or engaged by the Company
and/or any specific Subsidiary, Affiliate or division and grant to management
the authority to grant such awards, provided that no awards to any person
subject to the reporting and short-swing profit provisions of Section 16 of the
Exchange Act may be granted awards except by the Committee.
(c) In the event that any officers or other participants have Employment
Agreements with the Company which provide for the grant of options to such
participants, unless the Committee or the Board otherwise determines, the
options shall be treated for all purposes as if they were granted pursuant to
this Plan as long as there is a sufficient number of shares available for grant
pursuant to this Plan.
(d) The Committee shall have the authority to adopt, alter and repeal such
rules, guidelines and practices governing the Plan as it shall, from time to
time, deem advisable; to interpret the terms and provisions of the Plan and any
award issued under the Plan and any agreements relating thereto, and otherwise
to supervise the administration of the Plan.
(e) All decisions made by the Committee pursuant to the provisions of the
Plan shall be made in the Committee's sole discretion and shall be final and
binding on all persons, including the Company and Plan participants.
3. Stock Subject to Plan.
(a) The total number of shares of Stock reserved and available for
distribution under the Plan shall be one million five hundred seventy five
thousand (1,575,000) shares of Stock. In the event that awards are granted in
tandem such that the exercise of one award precludes the exercise of another
award then, for the purpose of determining the number of shares of Stock as to
which awards shall have been granted, the maximum number of shares of Stock
issuable pursuant to such tandem awards shall be used.
(b) Subject to Section 6(b)(v) of the Plan, if any shares of Stock that
have been optioned cease to be subject to a Stock Option, or if any such shares
of Stock that are subject to any Restricted Stock or Deferred Stock award, Stock
Purchase Right or Other Stock-Based Award granted under the Plan are forfeited
or any such award otherwise terminates without a payment being made to the
participant in the form of Stock, such shares shall again be available for
distribution in connection with future awards under the Plan.
(c) In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, stock distribution, reverse
split, combination of shares or other change in corporate structure affecting
the Stock, such substitution or adjustment shall be made in the aggregate number
of shares reserved for issuance under the Plan, in the base number of shares, in
the number and option price of shares subject to outstanding Options granted
under the Plan, in the number and purchase price of shares subject to
outstanding Stock Purchase Rights under the Plan, and in the number of shares
subject to other outstanding awards granted under the Plan as may be determined
to be appropriate by the Committee, in its sole discretion, provided that the
number of shares subject to any award shall always be a whole number, and
provided that the treatment of such options and rights shall be consistent with
the nature of the event. Such adjusted option price shall also be used to
determine the amount payable by the Company upon the exercise of any Stock
Appreciation Right associated with any Stock Option.
4. Eligibility.
(a) Officers and other key employees and directors of, and consultants and
independent contractors to, the Company and its Subsidiaries and Affiliates (but
excluding, except as to Sections 4(b) and 4(c) of the Plan, Independent
Directors) who are responsible for or contribute to the management, growth
and/or profitability of the business of the Company and/or its Subsidiaries and
Affiliates are eligible to be granted awards under the Plan.
C-4
(b) On each the first trading day in April of each year, commencing in
2007, each person who is a Independent Director on such date shall automatically
be granted a Non-Qualified Stock Option to purchase five thousand (5,000) shares
of Stock (or such lesser number of shares of Stock as remain available for grant
at such date under the Plan, divided by the number of Independent Directors at
such date). Such Stock Options shall be exercisable at a price per share equal
to the greater of the Fair Market Value on the date of grant or the par value of
one share of Stock. The Non-Qualified Stock Options granted pursuant to this
Section 4(b) and pursuant to Section 4(c) of the Plan shall become exercisable
cumulatively as to fifty percent (50%) of the shares subject thereto six months
from the date of grant and as to the remaining fifty percent (50%), eighteen
months from the date of grant, and shall expire on the earlier of (i) five years
from the date of grant, or (ii) seven (7) months from the date such Independent
Director ceases to be a director if such Independent Director ceases to be a
director other than as a result of his death or Disability. The provisions of
this Section 4(b) and said Section 4(c) may not be amended more than one (1)
time in any six (6) month period other than to comply with changes in the Code
or the Employee Retirement Income Security Act ("ERISA") or the rules
thereunder.
(c) At the time an Independent Director is first elected to the Board,
such person shall automatically be granted a Non-Qualified Stock Option to
purchase thirty thousand (30,000) shares of Stock (or such lesser number of
shares of Stock as remain available for grant at such date under the Plan,
divided by the number of Independent Directors who are elected as directors at
such date). Such Stock Options shall be exercisable at a price per share equal
to the greater of the Fair Market Value on the date of grant or the par value of
one share of Stock.
5. Stock Options.
(a) Administration. Stock Options may be granted alone, in addition to or
in tandem with other awards granted under the Plan and/or cash awards made
outside of the Plan. Any Stock Option granted under the Plan shall be in such
form as the Committee may from time to time approve. Stock Options granted under
the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified
Stock Options. The Committee shall have the authority to grant to any optionee
Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock
Options (in each case with or without Stock Appreciation Rights).
(b) Option Grants. Options granted under the Plan shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Committee, in
its sole discretion, shall deem desirable:
(i) Option Price. The option price per share of Stock purchasable
under a Stock Option shall be determined by the Committee at the time of grant.
(ii) Option Term. The term of each Stock Option shall be fixed by
the Committee, but no Stock Option shall be exercisable more than ten (10) years
after the date the Option is granted.
(iii) Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined by
the Committee at or after grant. If the Committee provides, in its sole
discretion, that any Stock Option is exercisable only in installments, the
Committee may waive such installment exercise provisions at any time at or after
grant in whole or in part, based on such factors as the Committee shall, in its
sole discretion, determine.
(iv) Method of Exercise.
(A) Subject to whatever installment exercise provisions apply
under Section 5(b)(iii) of the Plan, Stock Options may be exercised in whole or
in part at any time during the option period, by giving written notice of
exercise to the Company specifying the number of shares to be purchased. Such
notice shall be accompanied by payment in full of the purchase price, either by
check, note or such other instrument, securities or property as the Committee
may accept. As and to the extent determined by the Committee, in its sole
discretion, at or after grant, payments in full or in part may also be made in
the form of Stock already owned by the optionee or, in the case of the exercise
of a Non-Qualified Stock Option, Restricted Stock or Deferred Stock subject to
an award hereunder (based, in each case, on the Fair Market Value of the Stock
on the date the option is exercised, as determined by the Committee).
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(B) If payment of the option exercise price of a Non-Qualified
Stock Option is made in whole or in part in the form of Restricted Stock or
Deferred Stock, the Stock issuable upon such exercise (and any replacement
shares relating thereto) shall remain (or be) restricted or deferred, as the
case may be, in accordance with the original terms of the Restricted Stock award
or Deferred Stock award in question, and any additional Stock received upon the
exercise shall be subject to the same forfeiture restrictions or deferral
limitations, unless otherwise determined by the Committee, in its sole
discretion, at or after grant.
(C) No shares of Stock shall be issued until full payment
therefor has been received by the Company. In the event of any exercise by note
or other instrument, the shares of Stock shall not be issued until such note or
other instrument shall have been paid in full, and the exercising optionee shall
have no rights as a stockholder until such payment is made.
(D) Subject to Section 5(b)(iv)(C) of the Plan, an optionee
shall generally have the rights to dividends or other rights of a stockholder
with respect to shares subject to the Option when the optionee has given written
notice of exercise, has paid in full for such shares, and, if requested, has
given the representation described in Section 14(a) of the Plan.
(v) Non-Transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution, and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee.
(vi) Termination by Death. Subject to Section 5(b)(ix) of the Plan
with respect to Incentive Stock Options, if an optionee's employment by the
Company and any Subsidiary or Affiliate terminates by reason of death, any Stock
Option held by such optionee may thereafter be exercised, to the extent such
option was exercisable at the time of death or on such accelerated basis as the
Committee may determine at or after grant (or as may be determined in accordance
with procedures established by the Committee), by the legal representative of
the estate or by the legatee of the optionee under the will of the optionee, for
a period of one year (or such other period as the Committee may specify at
grant) from the date of such death or until the expiration of the stated term of
such Stock Option, whichever period is the shorter.
(vii) Termination by Reason of Disability or Retirement. Subject to
Section 5(b)(ix) of the Plan with respect to Incentive Stock Options, if an
optionee's employment by the Company and any Subsidiary or Affiliate terminates
by reason of a Disability or Normal or Early Retirement, any Stock Option held
by such optionee may thereafter be exercised by the optionee, to the extent it
was exercisable at the time of termination or on such accelerated basis as the
Committee may determine at or after grant (or as may be determined in accordance
with procedures established by the Committee), for a period of one year (or such
other period as the Committee may specify at grant) from the date of such
termination of employment or until the expiration of the stated term of such
Stock Option, whichever period is the shorter; provided, however, that, if the
optionee dies within such one-year period (or such other period as the Committee
shall specify at grant), any unexercised Stock Option held by such optionee
shall thereafter be exercisable to the extent to which it was exercisable at the
time of death for a period of one year from the date of such death or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter. In the event of termination of employment by reason of Disability or
Normal or Early Retirement, if an Incentive Stock Option is exercised after the
expiration of the exercise periods that apply for purposes of Section 422 of the
Code, such Stock Option will thereafter be treated as a Non-Qualified Stock
Option.
(viii) Other Termination. Unless otherwise determined by the
Committee (or pursuant to procedures established by the Committee) at or after
grant, if an optionee's employment by the Company and any Subsidiary or
Affiliate terminates for any reason other than death, Disability or Normal or
Early Retirement, the Stock Option shall thereupon terminate; provided, however,
that if the optionee is involuntarily terminated by the Company or any
Subsidiary or Affiliate without Cause, including a termination resulting from
the Subsidiary, Affiliate or division in which the optionee is employed or
engaged, ceasing, for any reason, to be a Subsidiary, Affiliate or division of
the Company, such Stock Option may be exercised, to the extent otherwise
exercisable on the date of termination, for a period of three months (or seven
months in the case of a person subject to the reporting and short-swing profit
provisions of Section 16 of the Exchange Act) from the date of such termination
or until the expiration of the stated term of such Stock Option, whichever is
shorter.
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(ix) Incentive Stock Options.
(A) Anything in the Plan to the contrary notwithstanding, no
term of the Plan relating to Incentive Stock Options shall be interpreted,
amended or altered, nor shall any discretion or authority granted under the Plan
be so exercised, so as to disqualify the Plan under Section 422 of the Code, or,
without the consent of the optionee(s) affected, to disqualify any Incentive
Stock Option under such Section 422.
(B) To the extent required for "incentive stock option" status
under Section 422(d) of the Code (taking into account applicable Treasury
regulations and pronouncements), the Plan shall be deemed to provide that the
aggregate Fair Market Value (determined as of the time of grant) of the Stock
with respect to which Incentive Stock Options are exercisable for the first time
by the optionee during any calendar year under the Plan and/or any other stock
option plan of the Company or any Subsidiary or parent corporation (within the
meaning of Section 425 of the Code) shall not exceed $100,000. If Section 422 is
hereafter amended to delete the requirement now in Section 422(d) that the plan
text expressly provide for the $100,000 limitation set forth in Section 422(d),
then this Section 5(b)(ix)(B) shall no longer be operative and the Committee may
accelerate the dates on which the incentive stock option may be exercised.
(C) To the extent permitted under Section 422 of the Code or
the applicable regulations thereunder or any applicable Internal Revenue Service
pronouncement:
(I) If (x) a participant's employment is terminated by
reason of death, Disability or Retirement and (y) the portion of any Incentive
Stock Option that is otherwise exercisable during the post-termination period
specified under Sections 5(b)(vi) and (vii) of the Plan, applied without regard
to the $100,000 limitation contained in Section 422(d) of the Code, is greater
than the portion of such option that is immediately exercisable as an "incentive
stock option" during such post-termination period under Section 422, such excess
shall be treated as a Non-Qualified Stock Option; and
(II) if the exercise of an Incentive Stock Option is
accelerated by reason of a Change in Control, any portion of such option that is
not exercisable as an Incentive Stock Option by reason of the $100,000
limitation contained in Section 422(d) of the Code shall be treated as a
Non-Qualified Stock Option.
(x) Buyout Provisions. The Committee may at any time offer to buy
out for a payment in cash, Stock, Deferred Stock or Restricted Stock an option
previously granted, based on such terms and conditions as the Committee shall
establish and communicate to the optionee at the time that such offer is made.
(xi) Settlement Provisions. If the option agreement so provides at
grant or is amended after grant and prior to exercise to so provide (with the
optionee's consent), the Committee may require that all or part of the shares to
be issued with respect to the spread value of an exercised Option take the form
of Deferred or Restricted Stock which shall be valued on the date of exercise on
the basis of the Fair Market Value (as determined by the Committee) of such
Deferred or Restricted Stock determined without regard to the deferral
limitations and/or forfeiture restrictions involved.
6. Stock Appreciation Rights.
(a) Grant and Exercise.
(i) Stock Appreciation Rights may be granted in conjunction with all
or part of any Stock Option granted under the Plan. In the case of a
Non-Qualified Stock Option, such rights may be granted either at or after the
time of the grant of such Stock Option. In the case of an Incentive Stock
Option, such rights may be granted only at the time of the grant of such Stock
Option.
(ii) A Stock Appreciation Right or applicable portion thereof
granted with respect to a given Stock Option shall terminate and no longer be
exercisable upon the termination or exercise of the related Stock Option,
subject to such provisions as the Committee may specify at grant where a Stock
Appreciation Right is granted with respect to less than the full number of
shares covered by a related Stock Option.
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(iii) A Stock Appreciation Right may be exercised by an optionee,
subject to Section 6(b) of the Plan, in accordance with the procedures
established by the Committee for such purpose. Upon such exercise, the optionee
shall be entitled to receive an amount determined in the manner prescribed in
said Section 6(b). Stock Options relating to exercised Stock Appreciation Rights
shall no longer be exercisable to the extent that the related Stock Appreciation
Rights have been exercised.
(b) Terms and Conditions. Stock Appreciation Rights shall be subject to
such terms and conditions, not inconsistent with the provisions of the Plan, as
shall be determined from time to time by the Committee, including the following:
(i) Stock Appreciation Rights shall be exercisable only at such time
or times and to the extent that the Stock Options to which they relate shall be
exercisable in accordance with the provisions of this Section 6 and Section 5 of
the Plan; provided, however, that any Stock Appreciation Right granted to an
optionee subject to Section 16(b) of the Exchange Act subsequent to the grant of
the related Stock Option shall not be exercisable during the first six months of
its term, except that this special limitation shall not apply in the event of
death or Disability of the optionee prior to the expiration of the six-month
period. The exercise of Stock Appreciation Rights held by optionees who are
subject to Section 16(b) of the Exchange Act shall comply with Rule 16b-3
thereunder to the extent applicable.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee
shall be entitled to receive an amount in cash and/or shares of Stock equal in
value to the excess of the Fair Market Value of one share of Stock over the
option price per share specified in the related Stock Option multiplied by the
number of shares in respect of which the Stock Appreciation Right shall have
been exercised, with the Committee having the right to determine the form of
payment. When payment is to be made in shares of Stock, the number of shares to
be paid shall be calculated on the basis of the Fair Market Value of the shares
on the date of exercise. When payment is to be made in cash, such amount shall
be based upon the Fair Market Value of the Stock on the date of exercise,
determined in a manner not inconsistent with Section 16(b) of the Exchange Act
and the rules of the Commission thereunder.
(iii) Stock Appreciation Rights shall be transferable only when and
to the extent that the underlying Stock Option would be transferable under
Section 5(b)(v) of the Plan.
(iv) Upon the exercise of a Stock Appreciation Right, the Stock
Option or part thereof to which such Stock Appreciation Right is related shall
be deemed to have been exercised only to the extent of the number of shares
issued under the Stock Appreciation Right at the time of exercise based on the
value of the Stock Appreciation Right at such time.
(v) In its sole discretion, the Committee may grant Stock
Appreciation Rights that become exercisable only in the event of a Change in
Control and/or a Potential Change in Control, subject to such terms and
conditions as the Committee may specify at grant; provided that any such Stock
Appreciation Rights shall be settled solely in cash.
(vi) The Committee, in its sole discretion, may also provide that,
in the event of a Change in Control and/or a Potential Change in Control, the
amount to be paid upon the exercise of a Stock Appreciation Right shall be based
on the Change in Control Price, subject to such terms and conditions as the
Committee may specify at grant.
7. Restricted Stock.
(a) Administration. Shares of Restricted Stock may be issued either alone,
in addition to or in tandem with other awards granted under the Plan and/or cash
awards made outside of the Plan. The Committee shall determine the eligible
persons to whom, and the time or times at which, grants of Restricted Stock will
be made, the number of shares to be awarded, the price (if any) to be paid by
the recipient of Restricted Stock, subject to Section 7(b) of the Plan, the time
or times within which such awards may be subject to forfeiture, and all other
terms and conditions of the awards. The Committee may condition the grant of
Restricted Stock upon the attainment of specified performance goals or such
other factors as the Committee may, in its sole discretion, determine. The
provisions of Restricted Stock awards need not be the same with respect to each
recipient.
C-8
(b) Awards and Certificates.
(i) The prospective recipient of a Restricted Stock award shall not
have any rights with respect to such award unless and until such recipient has
executed an agreement evidencing the award and has delivered a fully executed
copy thereof to the Company, and has otherwise complied with the applicable
terms and conditions of such award.
(ii) The purchase price for shares of Restricted Stock may be equal
to or less than their par value and may be zero.
(iii) Awards of Restricted Stock must be accepted within a period of
60 days (or such shorter period as the Committee may specify at grant) after the
award date, by executing a Restricted Stock Award Agreement and paying the
price, if any, required under Section 7(b)(ii).
(iv) Each participant receiving a Restricted Stock award shall be
issued a stock certificate in respect of such shares of Restricted Stock. Such
certificate shall be registered in the name of such participant, and shall bear
an appropriate legend referring to the terms, conditions, and restrictions
applicable to such award.
(v) The Committee shall require that (A) the stock certificates
evidencing shares of Restricted Stock be held in the custody of the Company
until the restrictions thereon shall have lapsed, and (B) as a condition of any
Restricted Stock award, the participant shall have delivered a stock power,
endorsed in blank, relating to the Restricted Stock covered by such award.
(c) Restrictions and Conditions. The shares of Restricted Stock awarded
pursuant to this Section 7 shall be subject to the following restrictions and
conditions:
(i) Subject to the provisions of the Plan and the award agreement,
during a period set by the Committee commencing with the date of such award (the
"Restriction Period"), the participant shall not be permitted to sell, transfer,
pledge or assign shares of Restricted Stock awarded under the Plan. Within these
limits, the Committee, in its sole discretion, may provide for the lapse of such
restrictions in installments and may accelerate or waive such restrictions in
whole or in part, based on service, performance and/or such other factors or
criteria as the Committee may determine, in its sole discretion.
(ii) Except as provided in this Section 7(c)(ii) and Section 7(c)(i)
of the Plan, the participant shall have, with respect to the shares of
Restricted Stock, all of the rights of a stockholder of the Company, including
the right to vote the shares and the right to receive any regular cash dividends
paid out of current earnings. The Committee, in its sole discretion, as
determined at the time of award, may permit or require the payment of cash
dividends to be deferred and, if the Committee so determines, reinvested,
subject to Section 14(e) of the Plan, in additional Restricted Stock to the
extent shares are available under Section 3 of the Plan, or otherwise
reinvested. Stock dividends, splits and distributions issued with respect to
Restricted Stock shall be treated as additional shares of Restricted Stock that
are subject to the same restrictions and other terms and conditions that apply
to the shares with respect to which such dividends are issued, and the Committee
may require the participant to deliver an additional stock power covering the
shares issuable pursuant to such stock dividend, split or distribution. Any
other dividends or property distributed with regard to Restricted Stock, other
than regular dividends payable and paid out of current earnings, shall be held
by the Company subject to the same restrictions as the Restricted Stock.
(iii) Subject to the applicable provisions of the award agreement
and this Section 7, upon termination of a participant's employment or other
services with the Company and any Subsidiary or Affiliate for any reason during
the Restriction Period, all shares still subject to restriction will vest, or be
forfeited, in accordance with the terms and conditions established by the
Committee at or after grant.
(iv) If and when the Restriction Period expires without a prior
forfeiture of the Restricted Stock subject to such Restriction Period,
certificates for an appropriate number of unrestricted shares, and other
property held by the Company with respect to such Restricted Shares, shall be
delivered to the participant promptly.
C-9
(d) Minimum Value Provisions. In order to better ensure that award
payments actually reflect the performance of the Company and service of the
participant, the Committee may provide, in its sole discretion, for a tandem
Stock Option or performance-based or other award designed to guarantee a minimum
value, payable in cash or Stock to the recipient of a Restricted Stock award,
subject to such performance, future service, deferral and other terms and
conditions as may be specified by the Committee.
8. Deferred Stock.
(a) Administration. Deferred Stock may be awarded either alone, in
addition to or in tandem with other awards granted under the Plan and/or cash
awards made outside of the Plan. The Committee shall determine the eligible
persons to whom and the time or times at which Deferred Stock shall be awarded,
the number of shares of Deferred Stock to be awarded to any person, the duration
of the period (the "Deferral Period") during which, and the conditions under
which, receipt of the Stock will be deferred, and the other terms and conditions
of the award in addition to those set forth in Section 8(b). The Committee may
condition the grant of Deferred Stock upon the attainment of specified
performance goals or such other factors or criteria as the Committee shall, in
its sole discretion, determine. The provisions of Deferred Stock awards need not
be the same with respect to each recipient.
(b) Terms and Conditions. The shares of Deferred Stock awarded pursuant to
this Section 8 shall be subject to the following terms and conditions:
(i) Subject to the provisions of the Plan and the award agreement
referred to in Section 8(b)(vi) of the Plan, Deferred Stock awards may not be
sold, assigned, transferred, pledged or otherwise encumbered during the Deferral
Period. At the expiration of the Deferral Period (or the Elective Deferral
Period referred to in Section 8(b)(v) of the Plan, where applicable), share
certificates representing the shares covered by the Deferred Stock award shall
be delivered to the participant or his legal representative.
(ii) Unless otherwise determined by the Committee at grant, amounts
equal to any dividends declared during the Deferral Period with respect to the
number of shares covered by a Deferred Stock award will be paid to the
participant currently, or deferred and deemed to be reinvested in additional
Deferred Stock, or otherwise reinvested, all as determined at or after the time
of the award by the Committee, in its sole discretion.
(iii) Subject to the provisions of the award agreement and this
Section 8, upon termination of a participant's employment with the Company and
any Subsidiary or Affiliate for any reason during the Deferral Period for a
given award, the Deferred Stock in question will vest, or be forfeited, in
accordance with the terms and conditions established by the Committee at or
after grant.
(iv) Based on service, performance and/or such other factors or
criteria as the Committee may determine, the Committee may, at or after grant,
accelerate the vesting of all or any part of any Deferred Stock award and/or
waive the deferral limitations for all or any part of such award.
(v) A participant may elect to further defer receipt of an award (or
an installment of an award) for a specified period or until a specified event
(the "Elective Deferral Period"), subject in each case to the Committee's
approval and to such terms as are determined by the Committee, all in its sole
discretion. Subject to any exceptions adopted by the Committee, such election
must generally be made at least twelve months prior to completion of the
Deferral Period for such Deferred Stock award (or such installment).
(vi) Each award shall be confirmed by, and subject to the terms of,
a Deferred Stock agreement executed by the Company and the participant.
(c) Minimum Value Provisions. In order to better ensure that award
payments actually reflect the performance of the Company and service of the
participant, the Committee may provide, in its sole discretion, for a tandem
Stock Option or performance-based or other award designed to guarantee a minimum
value, payable in cash or Stock to the recipient of a deferred stock award,
subject to such performance, future service, deferral and other terms and
conditions as may be specified by the Committee.
9. Stock Purchase Rights.
(a) Awards and Administration. The Committee may grant eligible
participants Stock Purchase Rights which shall enable such participants to
purchase Stock (including Deferred Stock and Restricted Stock):
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(i) at its Fair Market Value on the date of grant;
(ii) at a percentage of such Fair Market Value on such date, such
percentage to be determined by the Committee in its sole discretion;
(iii) at an amount equal to Book Value on such date; or
(iv) at an amount equal to the par value of such Stock on such date.
The Committee shall also impose such deferral, forfeiture and/or other
terms and conditions as it shall determine, in its sole discretion, on such
Stock Purchase Rights or the exercise thereof. The terms of Stock Purchase
Rights awards need not be the same with respect to each participant. Each Stock
Purchase Right award shall be confirmed by, and be subject to the terms of, a
Stock Purchase Rights Agreement.
(b) Exercisability. Stock Purchase Rights shall generally be exercisable
for such period after grant as is determined by the Committee not to exceed
sixty (60) days. However, the Committee may provide, in its sole discretion,
that the Stock Purchase Rights of persons potentially subject to Section 16(b)
of the Exchange Act shall not become exercisable until six months and one day
after the grant date, and shall then be exercisable for ten trading days at the
purchase price specified by the Committee in accordance with Section 9(a) of the
Plan.
10. Other Stock-Based Awards.
(a) Administration.
(i) Other awards of Stock and other awards that are valued in whole
or in part by reference to, or are otherwise based on, Stock ("Other Stock-Based
Awards"), including, without limitation, performance shares, convertible
preferred stock (to the extent a series of preferred stock has been or may be
created by, or in accordance with a procedure set forth in, the Company's
certificate of incorporation), convertible debentures, warrants, exchangeable
securities and Stock awards or options valued by reference to Fair Market Value,
Book Value or performance of the Company or any Subsidiary, Affiliate or
division, may be granted either alone or in addition to or in tandem with Stock
Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock or Stock
Purchase Rights granted under the Plan and/or cash awards made outside of the
Plan.
(ii) Subject to the provisions of the Plan, the Committee shall have
authority to determine the persons to whom and the time or times at which such
award shall be made, the number of shares of Stock to be awarded pursuant to
such awards, and all other conditions of the awards. The Committee may also
provide for the grant of Stock upon the completion of a specified performance
period. The provisions of Other Stock-Based Awards need not be the same with
respect to each recipient.
(b) Terms and Conditions. Other Stock-Based Awards made pursuant to this
Section 10 shall be subject to the following terms and conditions:
(i) Subject to the provisions of the Plan and the award agreement
referred to in Section 10(b)(v) of the Plan, shares of Stock subject to awards
made under this Section 10 may not be sold, assigned, transferred, pledged or
otherwise encumbered prior to the date on which the shares are issued, or, if
later, the date on which any applicable restriction, performance or deferral
period lapses.
(ii) Subject to the provisions of the Plan and the award agreement
and unless otherwise determined by the Committee at grant, the recipient of an
award under this Section 10 shall be entitled to receive, currently or on a
deferred basis, interest or dividends or interest or dividend equivalents with
respect to the number of shares covered by the award, as determined at the time
of the award by the Committee, in its sole discretion, and the Committee may
provide that such amounts (if any) shall be deemed to have been reinvested in
additional Stock or otherwise reinvested.
(iii) Any award under Section 10 and any Stock covered by any such
award shall vest or be forfeited to the extent so provided in the award
agreement, as determined by the Committee, in its sole discretion.
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(iv) In the event of the participant's Retirement, Disability or
death, or in cases of special circumstances, the Committee may, in its sole
discretion, waive in whole or in part any or all of the remaining limitations
(if any) imposed with respect to any or all of an award pursuant to this Section
10.
(v) Each award under this Section 10 shall be confirmed by, and
subject to the terms of, an agreement or other instrument by the Company and by
the participant.
(vi) Stock (including securities convertible into Stock) issued on a
bonus basis under this Section 10 may be issued for no cash consideration.
11. Change in Control Provisions.
(a) Impact of Event. In the event of a "Change in Control," as defined in
Section 11(b) of the Plan, or a "Potential Change in Control," as defined in
Section 11(c) of the Plan, except to the extent otherwise determined by the
Committee or the Board at or after grant (subject to any right of approval
expressly reserved by the Committee or the Board at the time of such
determination), the following acceleration and valuation provisions shall apply:
(i) Any Stock Appreciation Rights outstanding for at least six
months and any Stock Options awarded under the Plan not previously exercisable
and vested shall become fully exercisable and vested and any Incentive Stock
Options may, with the consent of the holders thereof, be treated as
Non-Qualified Stock Options.
(ii) The restrictions and deferral limitations applicable to any
Restricted Stock, Deferred Stock, Stock Purchase rights and Other Stock-Based
Awards, in each case to the extent not already vested under the Plan, shall
lapse and such shares and awards shall be deemed fully vested.
(iii) The value of all outstanding Stock Options, Stock Appreciation
Rights, Restricted Stock, Deferred Stock, Stock Purchase Rights and Other
Stock-Based Awards, in each case to the extent vested (including such rights
which shall have become vested pursuant to Sections 11(a)(i) and (ii) of the
Plan), shall be purchased by the Company ("cashout") in a manner determined by
the Committee, in its sole discretion, on the basis of the "Change in Control
Price" as defined in Section 11(d) of the Plan as of the date such Change in
Control or such Potential Change in Control is determined to have occurred or
such other date as the Committee may determine prior to the Change in Control,
unless the Committee shall, contemporaneously with or prior to any particular
Change of Control or Potential Change of Control, determine that this Section
11(a)(iii) shall not be applicable to such Change in Control or Potential Change
in Control.
(b) Definition of "Change in Control." For purposes of Section 11(a) of
the Plan, a "Change in Control" means the happening of any of the following
after the completion of the acquisition of Plaza Consulting Group, Inc., a
Puerto Rico corporation (the "Acquisition Effective Date"):
(i) When any "person" (as defined in Section 3(a)(9) of the Exchange
Act and as used in Sections 13(d) and 14(d) of the Exchange Act, including a
"group" as defined in Section 13(d) of the Exchange Act, but excluding the
Company and any Subsidiary and any employee benefit plan sponsored or maintained
by the Company or any Subsidiary and any trustee of such plan acting as trustee)
directly or indirectly becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act, as amended from time to time), of securities of the
Company representing thirty percent (30%) or more of the combined voting power
of the Company's then outstanding securities; provided, however, that a Change
of Control shall not arise if such acquisition is approved by the board of
directors or if the board of directors or the Committee determines that such
acquisition is not a Change of Control or if the board of directors authorizes
the issuance of the shares of Stock (or securities convertible into Stock or
upon the exercise of which shares of Stock may be issued) to such persons; or
(ii) When, during any period of twenty-four consecutive months
during the existence of the Plan, the individuals who, at the beginning of such
period, constitute the Board (the "Incumbent Directors") cease for any reason
other than death, Disability or Retirement to constitute at least a majority
thereof, provided, however, that a director who was not a director at the
beginning of such 24-month period shall be deemed to have satisfied such
24-month requirement (and be an Incumbent Director) if such director was elected
by, or on the recommendation of, or with the approval of, at least two-thirds of
the directors who then qualified as Incumbent Directors either actually (because
they were directors at the beginning of such 24-month period) or by prior
operation of this Section 11(b)(ii); provided, however, that all directors who
are elected to the board not later than six months after the Acquisition
Effective Date shall be deemed to be an Incumbent Director and shall be deemed
to have satisfied the 24-month requirement set forth in this Section 11(b)(ii);
or
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(iii) The occurrence of a transaction requiring stockholder approval
for the acquisition of the Company by an entity other than the Company or a
Subsidiary through purchase of assets, or by merger, or otherwise unless
approved by a majority of Incumbent Directors.
(c) Definition of Potential Change in Control. For purposes of Section
11(a) of the Plan, a "Potential Change in Control" means the happening of any
one of the following:
(i) The approval by stockholders of an agreement by the Company, the
consummation of which would result in a Change in Control of the Company as
defined in Section 11(b) of the Plan; or
(ii) The acquisition of beneficial ownership, directly or
indirectly, by any entity, person or group (other than the Company or a
Subsidiary or any Company employee benefit plan or any trustee of such plan
acting as such trustee) of securities of the Company representing five percent
or more of the combined voting power of the Company's outstanding securities and
the adoption by the Board of Directors of a resolution to the effect that a
Potential Change in Control of the Company has occurred for purposes of the
Plan.
(d) Change in Control Price. For purposes of this Section 11, "Change in
Control Price" means the highest price per share paid in any transaction
reported on the principal stock exchange on which the Stock is traded or the
average of the highest bid and asked prices as reported by the principal stock
exchange or market on which the Stock is traded, or paid or offered in any bona
fide transaction related to a Potential or actual Change in Control of the
Company at any time during the sixty-day period immediately preceding the
occurrence of the Change in Control (or, where applicable, the occurrence of the
Potential Change in Control event), in each case as determined by the Committee
except that, in the case of Incentive Stock Options and Stock Appreciation
Rights relating to Incentive Stock Options, such price shall be based only on
transactions reported for the date on which the optionee exercises such Stock
Appreciation Rights, Incentive Stock Options or, where applicable, the date on
which a cashout occurs under Section 11(a)(iii).
12. Amendments and Termination.
(a) The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made which would impair the rights of an
optionee or participant under a Stock Option, Stock Appreciation Right,
Restricted or Deferred Stock award, Stock Purchase Right or Other Stock-Based
Award theretofore granted, without the optionee's or participant's consent, and
no amendment will be made without approval of the stockholders if such amendment
requires stockholder approval under state law or if stockholder approval is
necessary in order that the Plan comply with Rule 16b-3 of the Commission under
the Exchange Act or any substitute or successor rule or if stockholder approval
is necessary in order to enable the grant pursuant to the Plan of options or
other awards intended to confer tax benefits upon the recipients thereof.
(b) The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but no such amendment shall
impair the rights or any holder without the holder's consent. The Committee may
also substitute new Stock Options for previously granted Stock Options (on a one
for one or other basis), including previously granted Stock Options having
higher option exercise prices.
(c) Subject to the provisions of Sections 12(a) and (b) of the Plan, the
Board shall have broad authority to amend the Plan to take into account changes
in applicable securities and tax laws and accounting rules, as well as other
developments, and, in particular, without limiting in any way the generality of
the foregoing, to eliminate any provisions which are not required to included as
a result of any amendment to Rule 16b-3 of the Commission pursuant to the
Exchange Act.
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13. Unfunded Status of Plan.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained in this Plan shall
give any such participant or optionee any rights that are greater than those of
a general creditor of the Company. In its sole discretion, the Committee may
authorize the creation of trusts or other arrangements to meet the obligations
created under the Plan to deliver Stock or payments in lieu of or with respect
to awards under this Plan; provided, however, that, unless the Committee
otherwise determines with the consent of the affected participant, the existence
of such trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan.
14. General Provisions.
(a) The Committee may require each person purchasing shares pursuant to a
Stock Option or other award under the Plan to represent to and agree with the
Company in writing that the optionee or participant is acquiring the shares
without a view to distribution thereof. The certificates for such shares may
include any legend which the Committee deems appropriate to reflect any
restrictions on transfer. All certificates or shares of Stock or other
securities delivered under the Plan shall be subject to such stock-transfer
orders and other restrictions as the Committee may deem advisable under the
rules, regulations, and other requirements of the Commission, any stock exchange
upon which the Stock is then listed, and any applicable Federal or state
securities law, and the Committee may cause a legend or legends to be put on any
such certificates to make appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to stockholder approval
if such approval is required; and such arrangements may be either generally
applicable or applicable only in specific cases.
(c) Neither the adoption of the Plan nor the grant of any award pursuant
to the Plan shall confer upon any employee of the Company or any Subsidiary or
Affiliate any right to continued employment with the Company or a Subsidiary or
Affiliate, as the case may be, nor shall it interfere in any way with the right
of the Company or a Subsidiary or Affiliate to terminate the employment of any
of its employees at any time.
(d) No later than the date as of which an amount first becomes includible
in the gross income of the participant for Federal income tax purposes with
respect to any award under the Plan, the participant shall pay to the Company,
or make arrangements satisfactory to the Committee regarding the payment of, any
Federal, state, or local taxes of any kind required by law to be withheld with
respect to such amount. Unless otherwise determined by the Committee,
withholding obligations may be settled with Stock, including Stock that is part
of the award that gives rise to the withholding requirement. The obligations of
the Company under the Plan shall be conditional on such payment or arrangements
and the Company and its Subsidiaries or Affiliates shall, to the extent
permitted by law, have the right to deduct any such taxes from any payment of
any kind otherwise due to the participant.
(e) The actual or deemed reinvestment of dividends or dividend equivalents
in additional Restricted Stock (or in Deferred Stock or other types of Plan
awards) at the time of any dividend payment shall only be permissible if
sufficient shares of Stock are available under Section 3 of the Plan for such
reinvestment (taking into account then outstanding Stock Options, Stock Purchase
Rights and other Plan awards).
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15. Effective Date of Plan.
The Plan shall be effective as of the date the Plan is approved by the
Board, subject to the approval of the Plan by a majority of the votes cast by
the holders of the Company's Stock at the next annual or special meeting of
stockholders. Any grants made under the Plan prior to such approval shall be
effective when made (unless otherwise specified by the Committee at the time of
grant), but shall be conditioned on, and subject to, such approval of the Plan
by such stockholders.
16. Term of Plan.
Stock Option, Stock Appreciation Right, Restricted Stock award, Deferred
Stock award, Stock Purchase Right or Other Stock-Based Award may be granted
pursuant to the Plan, until ten (10) years from the date the Plan was approved
by the Board, unless the Plan shall be terminated by the Board, in its
discretion, prior to such date, but awards granted prior to such termination may
extend beyond that date.
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