United States Securities and Exchange Commission
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2)).
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Under Rule 14a-12
CERTRON CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
N/A
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid: $891.29
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
PRELIMINARY PROXY MATERIALS
CERTRON CORPORATION
1545 Sawtelle Boulevard
Suite 12
Los Angeles, California 90025
(310) 914-0200
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON _________ __, 2005
To the Shareholders of CERTRON CORPORATION:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of CERTRON
CORPORATION (the "Company"), a California corporation, will be held at the
Company's offices on ______________, at ______________, at
_______________________ for the following purposes:
1. To consider and vote upon the approval of the principal terms of a merger
transaction pursuant to an Agreement and Plan of Merger among the Company,
Certron Acquisition Corp., a wholly owned subsidiary of the Company, and Cybrdi,
Inc. pursuant to which Certron Acquisition Corp. will be merged into Cybrdi,
Inc., with Cybrdi, Inc. being the surviving entity and becoming a wholly-owned
subsidiary of the Company, and the stockholders of Cybrdi, Inc. receiving up to
47,328,263 shares of the Company's Common Stock so that, immediately
post-Merger, the former stockholders of Cybrdi will own approximately 93.8% of
the Company's issued and outstanding Common Stock. Approval of the Merger
transaction also constitutes election of new directors for the Company effective
upon consummation of the Merger (Proposal No. 1). This proposal is conditional
upon the approval of Proposal 2 below.
2. To approve an amendment to the Company's Articles of Incorporation, as
amended, to increase the authorized number of shares of Common Stock, no par
value, from 10,000,000 to 150,000,000 shares (Proposal No. 2).
3. Assuming that Proposal No. 1 is approved, to approve an amendment to the
Company's Articles of Incorporation, as amended, to change the Company's name to
"Cybrdi, Inc."
The Board of Directors has fixed the close of business on _________________ as
the record date for determining the shareholders entitled to notice of, and to
vote at, the meeting or any adjournment thereof. Only holders of record of
Common Stock of the Company at the close of business on the record date will be
entitled to notice of, and to vote at, the meeting and any adjournment thereof.
The Company's Board of Directors has unanimously approved, and recommends a vote
IN FAVOR of, the proposed merger transaction and charter amendments.
All shareholders are cordially invited to attend the Special Meeting in person.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE SIGN AND PROMPTLY
RETURN THE ENCLOSED PROXY CARD, WHICH YOU MAY REVOKE AT ANY TIME PRIOR TO ITS
USE. A prepaid, self-addressed envelope is enclosed for your convenience. Your
shares will be voted at the meeting in accordance with your proxy. If you attend
the meeting, you may revoke your proxy and vote in person.
Sincerely,
Marshall I. Kass,
Chairman of the Board and Chief Executive Officer
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SUMMARY TERM SHEET
The following summarizes the principal terms of the proposed Agreement and Plan
of Merger (the "Merger) of Certron Corporation, a California Company, Certron
Acquisition Corp., a recently formed Maryland corporation and 100% owned
subsidiary of Certron and Cybrdi, Inc., a Maryland corporation. This summary
term sheet does not contain all of the information that may be important for you
to consider when evaluating the merits of the merger. You are encouraged to read
this proxy statement, including the Exhibits attached herein, in its entirety
before voting.
- - You are being asked to approve and adopt an Agreement and Plan of Merger
dated as of November 12, 2004 pursuant to which we will issue to the
Cybrdi shareholders in exchange for all of the issued and outstanding
shares of Cybrdi, approximately 47,328,263 million shares of our common
stock, which upon issuance will represent approximately 93.8% of our
issued and outstanding stock. For a more complete discussion of the
Agreement and Cybrdi's operations, see the description thereof under
"Merger Agreement" and "Cybrdi, Inc." description.
- - We will amend our articles of incorporation to change our name to Cybrdi,
Inc. For a more complete description of the proposed name change see
discussion under "Proposal number 3".
- - We will amend our articles of incorporation and increase the number of
authorized shares from 10 million to 150 million. For a more complete
description of the change in our authorized shares, see the discussion
under "Proposal Number 2".
- - All of our current officers and directors will tender their resignations
and officers and directors nominated by Cybrdi will become officers and
directors of Certron. For a more complete description of who will be our
new directors see the discussion under "Director and Officers".
- - The consent of a majority of our shareholders is required to approve the
Merger.
- - The Merger Agreement provides that the Merger must be approved by the
holders of all of the issued and outstanding shares of common stock of
Cybrdi must approve the transaction. (see the discussion of the "Merger
Agreement" which is contained in this proxy solicitation)
- - The acquisition of all of the issued and outstanding shares of common
stock of Cybrdi and the issuance to the Cybrdi shareholders of
approximately 47.3 million shares of our common stock will be treated as a
tax free exchange under the Internal Revenue Code of 1986, as amended. For
a more complete discussion of the tax consequences of this transaction see
"Certain Federal Income Tax Consequences". If you do not agree with this
transaction, you will have an opportunity to exercise your dissenter
rights, (see "Dissenters Rights").
- - Shareholders exercising their dissenter rights and receiving cash for
their common stock will in most cases be treated as a redemption of your
shares and not a dividend distribution.
- - As indicated in our prior filings with the Securities and Exchange
Commission, we are not able to sustain our current operations. We believe
that the acquisition of all of the issued and outstanding shares of common
stock of Cybrdi will provide shareholders with an opportunity to maximize
shareholder value and as a result, our Board of Directors has unanimously
recommended that the shareholders approve the transaction with Cybrdi.
Copies of prior filings can be viewed at the Securities and Exchange
Commission's website located at www.sec.gov.
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INTRODUCTION
This Proxy Statement, the Notice of Special Meeting and the proxy card are being
furnished to the shareholders of Certron Corporation, a California corporation
(the "Company"), in connection with the solicitation of proxies by the Company's
Board of Directors for use at the Special Meeting of Shareholders (the "Special
Meeting") to be held at the Company's principal executive offices located at
1545 Sawtelle Boulevard, Suite 12, Los Angeles, California 90025 on
_________________ at ________________. The telephone number of the Company at
its principal executive offices is (310) 914-0200.
PURPOSE OF THE MEETING
At the Special Meeting, the Company's shareholders will be asked to consider
three proposals. The first proposal is to consider and vote upon the approval of
the principal terms of a merger transaction (the "Merger") pursuant to an
Agreement and Plan of Merger between the Company, Certron Acquisition Corp., a
wholly owned subsidiary of the Company ("Certron Acquisition Corp."), and
Cybrdi, Inc. ("Cybrdi") pursuant to which Certron Acquisition Corp. will be
merged into Cybrdi, with Cybrdi being the surviving entity, and the stockholders
of Cybrdi receiving up to 47,328,263 shares of the Company's Common Stock so
that, immediately post-Merger, the former stockholders of Cybrdi will own
approximately 93.8% of the Company's issued and outstanding Common Stock.
Approval of the Merger transaction also constitutes election of new directors
for Certron effective upon consummation of the Merger. The second proposal is an
amendment to the Company's Articles of Incorporation, as amended, to increase
the authorized number of shares of the Company's Common Stock from 10,000,000 to
150,000,000 shares. The Merger cannot be consummated without approval of the
second proposal. Assuming the first proposal is approved, the third proposal
will be to consider an amendment to the Company's Articles of Incorporation, as
amended, to change the Company's name to "Cybrdi, Inc."
SOLICITATION OF PROXIES; RECORD DATE; PROXIES
Only holders of shares of the Company's Common Stock on _________ __, 200_, the
record date for the meeting, are entitled to notice of and to vote at the
Special Meeting and any adjournments or postponements thereof. As of the record
date, there were 3,128,306 shares issued and outstanding. These proxy materials
are first being sent the Company's shareholders on or about ____________ __,
200_.
All expenses of the Company associated with this solicitation will be borne by
the Company or, to the extent that the Company has insufficient funds to pay for
the cost of the proxy mailing, Cybrdi has agreed to assist the Company with the
costs associated therewith.
Each of Marshall I. Kass, Michael Kass and Susan Kass, each with full power of
substitution, have been designated by the Board of Directors to vote your proxy.
All properly executed proxies will be voted (except to the extent that authority
to vote has been withheld) and where a choice has been specified by the
shareholder as provided in the proxy card, it will be voted in accordance with
the specification so made. Proxies submitted without specification will be voted
IN FAVOR of each of the three proposals described above.
REVOCATION OF PROXIES
A shareholder may revoke a proxy by written notice to the Secretary of the
Company, by submission of another proxy bearing a later date or by voting in
person at the Special Meeting. Such notice or later proxy will not affect a vote
on any matter taken prior to the receipt thereof by the Company.
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VOTING AT THE MEETING; QUORUM
Each share of the Company's Common Stock outstanding on the record date is
entitled to one vote per share at the Special Meeting. Shares registered in the
names of brokers or other "street name" nominees for which proxies are voted on
some but not all matters will be considered to be voted only as to those matters
actually voted, and will not be considered "shares present" as to the matters
with respect to which a beneficial holder has not provided voting instructions
(commonly referred to as "broker non-votes"). For purposes of determining the
existence of a quorum, abstentions from voting identified as such on the proxy
card and broker non-votes are treated as present at the Special Meeting. There
is no cumulative voting on the matters to be presented at the Special Meeting.
The presence in person or by properly executed proxies of holders of at least a
majority of votes entitled to be cast at the Special Meeting is necessary to
constitute a quorum at the Special Meeting.
REQUIRED VOTE
Each proposal to be voted on at the Special Meeting must be approved by the
affirmative vote of the holders of a majority of the outstanding shares of the
Company's Common Stock entitled to vote at the meeting. Abstentions and broker
non-votes will not be voted for or against any of the proposals at the Special
Meeting but will have the effect of a negative vote because the vote of holders
of a majority of the votes entitled to be cast at the meeting (not a majority of
the votes present at the Special Meeting) is required to approve each proposal.
As of the record date, (a) Louart Corporation beneficially owned 1,205,200
issued and outstanding shares of the Common Stock of the Company, (b) Marshall
I. Kass, Chairman of the Board, Chief Executive Officer and Chief Operating
Officer of the Company, Chairman of the Board, Chief Executive Officer, Chief
Operating Officer and the controlling shareholder of Louart Corporation
beneficially owned (excluding shares held of record by Louart Corporation and
shares subject to options held by him as of that date, which options will
terminate prior to the Effective Time) 276,115 issued and outstanding shares of
the Common Stock of the Company, (c) Michael S. Kass, a Director and the
Executive Vice President of the Company, President and a director of Louart
Corporation and the son of Mr. Marshall I. Kass beneficially owned (excluding
shares held of record by Louart Corporation and shares subject to options held
by him as of that date, which options will terminate prior to the Effective
Time) 23,525 issued and outstanding shares of the Common Stock of the Company
(which includes 22,525 shares owned by his SEP/IRA), (d) Susan E. Kass, a
Director, Secretary and Treasurer of the Company, Vice President and a director
of Louart Corporation and the daughter of Mr. Marshall I. Kass and sister of
Michael S. Kass beneficially owned (excluding shares held of record by Louart
Corporation and shares subject to options held by her as of that date, which
options will terminate prior to the Effective Time) 1,000 issued and outstanding
shares of the Common Stock of the Company, (e) Jonathan F. Kass, the Senior Vice
President and Director of Louart Corporation and the son of Marshall I. Kass and
brother of Michael S. Kass and Susan E. Kass, beneficially owned (excluding
shares held of record by Louart Corporation) 85,197 issued and outstanding
shares of the Common Stock of the Company, and (f) Deanne Kass, the Treasurer
and Director of Louart Corporation and the spouse of Marshall I. Kass and the
mother of Michael S. Kass, Susan E. Kass and Jonathan F. Kass, beneficially
owned (excluding shares held of record by Louart Corporation and the shares
included for Marshall I. Kass described in clause (a) of this sentence) 81,500
issued and outstanding shares of the Common Stock of the Company (as to which
shares Marshall I. Kass disclaims beneficial ownership). As of the record date,
there were 3,128,306 shares of the Company's Common Stock issued and
outstanding. Thus, as of the record date, Louart Corporation and the Kass family
members controlled 1,672,537 shares of the Company's issued and outstanding
Common Stock, representing approximately 53.5% of the Company's issued and
outstanding Common Stock as of that date. Although there is no formalized
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agreement to do so, each of such persons has indicated to the Company that he,
she or it will vote IN FAVOR of each of proposal 1, proposal 2 and proposal 3.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING OF SHAREHOLDERS ARE OF GREAT
IMPORTANCE TO THE COMPANY AND ITS SHAREHOLDERS. ACCORDINGLY, YOU ARE URGED TO
READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY STATEMENT,
AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE
ENCLOSED POSTAGE PREPAID ENVELOPE.
MERGER PROPOSAL
FORWARD LOOKING STATEMENTS
Certain statements included in this Proxy Statement regarding Cybrdi or the
Company that are not historical facts are forward-looking statements, including
the information provided with respect to the future business operations and
anticipated operations after consummation of the Merger. These forward-looking
statements are based on current expectations, estimates, assumptions and beliefs
of management, and words such as "expects," "anticipates," "intends," "plans,"
"believes," "estimates" and similar expressions are intended to identify such
forward-looking statements. These forward-looking statements involve risks and
uncertainties, including, but not limited to, the success of our current or
proposed business activities. Accordingly, actual results may differ materially
from those expressed in the forward-looking statements.
BACKGROUND OF MERGER
Except with respect to the proposed merger between our Company and Cybrdi,
during the past two years there have been no mergers, consolidations,
acquisitions, tender offers or any material agreements of any kind or nature
which were entered into between Certron and Cybrdi and any of its officers or
directors.
On or about August 3, 2004, Cybrdi contacted the Company regarding the possible
acquisition of the Company in response to a blind advertisement placed by the
Company. Following several meetings and conferences primarily between Marshall
Kass on behalf of the Company and the principals of Cybrdi, on August 16, 2004,
the Company announced that the parties had reached an agreement in principle
concerning the possible acquisition by the Company of the outstanding capital
stock of Cybrdi in exchange for shares of the Company's Common Stock that would
aggregate approximately 93.8% of its Common Stock outstanding after the
transaction. A Form 8-k relating thereto was filed by the Company on August 17,
2004. The parties then each conducted due diligence on the other and negotiated
the terms of an Agreement and Plan of Merger. Those negotiations culminated in
the execution of the Merger Agreement as of November 12, 2004.
REASONS FOR THE MERGER; BOARD RECOMMENDATION
As we reported in our previous filings with the Securities and Exchange
Commission, intense competition in the magnetic media field has made it
difficult for us to maintain prices on our magnetic media products which has
resulted in continually reduced margins. We have discontinued sales of certain
magnetic media products and refuse to sell magnetic media products at prices not
resulting in certain minimum margin returns. In addition, the release of the
digital video disk system and other digital products has had a material adverse
impact on the magnetic media sales and on our operations. As a result of intense
price competition and technological changes, we have lost significant customers
and have been unable to compete at a profit in the marketplace.
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We do not have sufficient revenues, reserves or inventory to continue
operations. Your Board of Directors has determined that the only way to sustain
operations and provide value to our shareholders is to be acquired. After
diligent search, we believe that the transaction with Cybrdi represents such an
opportunity.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE IN FAVOR OF THE
PRINCIPAL TERMS OF THE MERGER AGREEMENT.
EFFECTS OF THE MERGER
Immediately following the closing of the Merger, the current shareholders of the
Company will own approximately 6.2% of the issued and outstanding shares of the
Common Stock of the Company,, Louart and the Kass family members will
beneficially own (considered in the aggregates) approximately 3.3% of the issued
and outstanding shares of the Common Stock of the Company post-Merger and none
of the Directors of officers of the Company will own (individually and without
giving effect to their beneficial ownership of shares of the Company's Common
Stock held of record by Louart Corporation), immediately post-Merger, more than
one percent of the issued and outstanding shares of the Common Stock of the
Company. The Company has no commitment to issue any of its current officers or
Directors any shares of the issued and outstanding shares of the Common Stock of
the Company and all of such persons will be required to resign from those
positions effective as of the Effective Time.
Immediately following the closing of the Merger it is anticipated that the
following persons and entities, currently shareholders of Cybrdi, will
beneficially own a minimum of 5% of our outstanding common stock:
Name of Shareholder No. of Shares Percentage of Ownership
- ------------------- ------------- -----------------------
Shaahxi Chaoying Beauty & Cosmetic Group 9,156,394(1) 18.14%
Lei Liu 6,234,764(2) 12.35%
The following table sets forth the anticipated share issuances to those persons
who will become the officers and directors of the Company effective as of the
Effective Time of the Merger
Name of Officer or Director No. of Shares Percentage of ownership
- --------------------------- ------------- -----------------------
Yanbia Bai 9,156,394(1) 18.14%
Lei Liu 6,234,764(2) 12.35%
James Pan 0(3)
Lieping Chen 0(4)
Xue Bu 0
All officers and directors as 15,391,158 30.49% group
(1) Represents shares held by Shaanxi Chaoying Beauty & Cosmetic Group of
which Mr. Bai is the president.
(2) Includes 4,370,460 shares to be issued to Immuno-Oncogenomics, Inc., an
affiliated entity of Lei Liu, and 1,864,304 shares which will be owned
individually by Lei Liu.
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(3) James Pan is a director and shareholder of Immuno-Oncogenomics, Inc. and
as a result thereof will have an opportunity to vote on matters presented
to the Certron shareholders following the Merger. Share ownership of
Immuno-Oncogenomics is attributed to Lei Liu.
(4) Lieping Chen is a director and shareholder of Immuno-Oncogenomics, Inc.
and as a result thereof will have an opportunity to vote on matters
presented to the Certron shareholders following the Merger. Share
ownership of Immuno-Oncogenomics is attributed to Lei Liu.
CONDUCT OF THE COMPANY AFTER THE MERGER
If the Merger is approved, all of our current business activities will cease and
our sole business will be conducted through our wholly owned subsidiary, Cybrdi.
Cybrdi is a biogenetics commercialization company specializing in the rapid
introduction of tissue microarray products and services in both the
international and Chinese markets. (For a more complete description of what our
activities will be following the merger, see the description of business for
Cybrdi set forth below in this Proxy Statement.. At this time, we do not
anticipate that the Company will conduct any activities except for the operation
of Cybrdi.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material anticipated federal income tax
consequences as a result of the Merger. This summary is based upon existing law
which is subject to change by legislation, administrative action and judicial
decision, and is necessarily general. In addition, this summary does not address
any consequences of the merger under any state, local or foreign tax laws.
Accordingly, this summary is not intended as tax advice to any person or entity,
and we advise you to consult with your own tax advisor for more detailed
information relating to your individual tax circumstances.
It is our understanding that the Merger will be treated as a tax free exchange
under applicable federal tax laws and regulations. As a result of such tax
treatment, no gain or loss should be recognized by Certron or its shareholders.
A shareholder's aggregate tax basis will not be affected by the Merger.
REDEMPTION TREATMENT FOR SHAREHOLDERS EXERCISING DISSENTERS RIGHTS
For federal income tax purposes, Certron will be deemed to be the source of cash
consideration for payments in satisfaction of dissenters' rights. Therefore, to
the extent that cash received by a stockholder is from Certron or deemed to be
from Certron, the receipt of cash in exchange for such stockholder's common
stock in the Merger or in satisfaction of dissenters' rights will be treated as
a redemption of common stock taxable for federal income tax purposes as
determined under section 302 of the Internal Revenue Code of 1986, as amended
(the "Code"). Section 302(d) of the Code provides that if the receipt of
redemption payments has the effect of a distribution of property, then cash
distributed will be treated as a dividend taxable under section 301 of the Code
as ordinary income to a stockholder receiving such cash payments, generally to
the extent of the stockholder's share of undistributed accumulated earnings and
profits of the company. The remainder, if any, will be treated first as a
recovery of basis in a stockholder's common stock, and second as capital gain
arising from the sale or exchange of property. The determination of whether or
not the receipt of cash payments has the effect of a distribution of a dividend
will depend on each stockholder's particular circumstances and is made by
applying the dividend equivalency tests of section 302 of the Code.
Under section 302 of the Code, a stockholder receiving a cash payment as a
redemption will not be treated as having received a dividend equivalent
distribution if the transaction:
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- - results in a "complete redemption" of the stockholder's equity interest in
the company;
- - results in a "substantially disproportionate" redemption with respect to
the stockholder; or
- - is "not essentially equivalent to a dividend" with respect to the
stockholder.
If a stockholder receives only cash payments and satisfies any of the section
302 tests described above, the stockholder will be treated as if it sold its
common stock and will recognize capital gain or loss as described above.
REVERSE ACQUISITION
The merger constitutes a reverse acquisition under the Internal Revenue Code. As
such, use of the tax attributes (net operating loss and tax credit carry
forwards as well as accounting and tax elections and methods)
MERGER AGREEMENT
GENERAL
The following description of the Merger Agreement does not purport to be
complete and is qualified in its entirety by reference to the Merger Agreement,
a copy of which is attached to this Proxy Statement as Exhibit A and is
incorporated herein by reference. We urge each of you to read the Merger
Agreement carefully.
THE MERGER
The Merger Agreement provides that, subject to the approval of the principal
terms of the Merger Agreement by the shareholders of the Company and appropriate
stockholder approval by the Cybrdi stockholders, and the satisfaction or waiver
of certain conditions to the closing, Certron Acquisition Corp. will be merged
with and into Cybrdi in accordance with Maryland law. The separate existence of
Certron Acquisition Corp. will cease and Cybrdi will be the surviving entity,
thereby becoming a wholly-owned subsidiary of the Company. At the effective time
of the Merger, the stock conversions described below will become effective and
the articles of incorporation and by-laws of Cybrdi will be the articles of
incorporation and by-laws of the surviving corporation.
EFFECTIVE TIME
If all of the conditions to the Merger have been satisfied or waived, the
parties to the Merger Agreement will cause a Certificate of Merger to be
delivered to the Maryland State Department of Assessments and Taxation (the
"Department") for filing in accordance with Maryland law. The Merger will be
effective upon the acceptance of that filing by the Department (or at such later
time as may be specified in the Certificate of Merger), which effective time is
referred to in this Proxy Statement as the "Effective Time."
CONVERSION AND EXCHANGE OF SHARES
At the Effective Time, each issued and outstanding share of the common stock of
Cybrdi shall be cancelled and converted into the right to receive 1.566641609
shares of the Company's Common Stock, subject to adjustment as herein described.
The maximum number of shares of the Company's Common Stock to be issued to the
Cybrdi stockholders is not to exceed 47,328,263 shares. However, the intent of
the Merger Agreement is that the number of shares issued in the Merger (rounded
to the nearest whole share) are to represent, immediately post-Merger, 93.8% of
the issued and outstanding Common Stock of the Company on a fully-diluted basis.
Thus, the maximum number of shares of the Company's Common Stock to be
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issued in the Merger is to be adjusted either upwards or downwards to the extent
necessary to ensure that the number of shares so issued, when rounded up to the
next whole share, represents 93.8% of the Company's Common Stock immediately
post-Merger.
Any shares held in the treasury of Cybrdi will be cancelled and retired and no
shares of the Company or Certron Acquisition Corp. will be issued with respect
to those shares.
Each outstanding share of the common stock of Certron Acquisition Corp. will be
converted in the Merger into one share of the common stock of Cybrdi.
FRACTIONAL SHARES
If any Cybrdi stockholder is entitled to receive a fractional share of the
Common Stock of the Company pursuant to the Merger (after aggregating all
fractional shares of the Company's Common Stock to be received by a holder),
then such stockholder will be entitled to receive one whole share of the
Company's Common Stock if such holder otherwise would have been entitled to
receive or purchase one-half or more of a share of the Company's Common Stock.
Otherwise, such stockholder shall not be entitled to received or purchase any
additional shares or fractional shares of the Company's Common Stock.
SURRENDER OF SHARES
Each former holder of the common stock of Cybrdi who surrenders the certificates
representing those shares to the Company or its transfer agent for cancellation
will be entitled to receive in exchange therefor, as promptly as practicable
after the Effective Time, certificates representing that stockholder's
proportionate number of shares of the Company's Common Stock for each share of
Cybrdi's common stock surrendered. If the shares of the Company's Common Stock
(or any portion thereof) are to be delivered to any person other than the person
in whose name the certificate or certificates representing former shares of
Cybrdi's common stock surrendered in exchange therefor are registered then in
addition to any other requirements of applicable law, it shall be a condition to
such exchange that the certificate or certificates so surrendered shall be
properly endorsed or otherwise be in proper form for transfer and that the
person requesting such exchange shall pay to the Company or its transfer agent
any transfer or other taxes required by reason of the delivery of such shares to
a person other than the registered holder of the Cybrdi certificate or
certificates surrendered, or shall establish to the satisfaction of the Company
or its transfer agent that such tax has been paid or is not applicable.
Unless and until the certificates representing Cybrdi common stock prior to the
Effective Time are surrendered as described above, any dividends or other
distributions, if any, payable as of any date subsequent to the Effective Time
will not be paid to the holders of such unsurrendered certificates. However,
upon such surrender, there shall be paid to the record holder of the former
Cybrdi common stock, the full amount, without any interest thereon, of the
dividends and any other distributions (including, without limitation, any shares
issued in connection with stock split-ups or other recapitalizations) referred
to above which theretofore became payable with respect to the number of shares
of the Company's Common Stock represented by such surrendered certificate.
Furthermore, upon such surrender, there shall be paid to such record holder, on
the payment date therefor, the amount of any such dividend or other distribution
with respect to such number of shares, if the record date for the determination
of the stockholders entitled to such dividend or other distribution shall be
prior to the date of the surrender of such certificate but the payment date of
such dividend shall be subsequent to the date upon which the certificate is
surrendered.
STOCKHOLDERS OF CYBRDI SHOULD NOT SEND CERTIFICATES REPRESENTING THEIR SHARES TO
THE COMPANY OR ITS TRANSFER AGENT PRIOR TO THE EFFECTIVE TIME OF THE MERGER.
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DIRECTORS AND OFFICERS
Officers and directors of Cybrdi immediately prior to the Merger will become the
officers and directors of Cybrdi as the surviving corporation in the Merger.
Each of such directors shall serve in such capacity from the Effective Time
until the next annual meeting of stockholders and their successors have been
elected and qualified. Each of such officers will hold such office or offices
from the Effective Time until the next annual meeting of directors and until
their successors shave been elected or appointed and qualified.
The Merger Agreement contemplates that each of the current Directors and
officers of the Company will resign effective as of the Effective Time.
Effective as of the Effective Time, the authorized number of directors of the
Company's Board of Directors will remain at six (6) directors and, effective as
of the Effective Time of the Merger, l five of those Board seats will be filled
with one vacancy on the Board. There is no present intent to fill that vacancy.
The following individuals will become the new directors and officers of the
Company and serve in the capacity indicated:
Mr. Yanbiao Bai, Chairman and Chief Executive Officer
Yanbiao Bai, graduated from the Second Military Medical University in 1984,
receiving a legal qualification certificate, is an experienced entrepreneur and
corporate executive. Since 1999 he has served as Chairman of Shaanxi Chaoying
Group, a chain of cosmetic and personal care training schools and franchises
located in China. Since 2000, he has served as Chairman of the Board of
Directors of Cybrdi, Inc. . Long interested in Chinese traditional and modern
medicine, Mr. Bai is working to apply his marketing and management expertise to
the emerging biotech field in China, focusing on rapidly marketable products and
services. Mr. Bai has been awarded one of the Shaanxi Province "Outstanding
Young Industrialist Award," among other titles and honors.
Dr. Lei Liu, President and DIRECTOR
Since 2000, Dr. Lei Liu has served as the president and chief executive officer
of Cybrdi, Dr. Lei Liu enjoys his more than 25 year experiences on medical
research and clinical treatment. He has since 1999 served as president of IOU
USA. Currently a Visiting Professor of the Lombardi Cancer Center, Georgetown
University, Dr. Liu has held previous research positions at the University of
Virginia School of Medicine (Hematology Division), the National Cancer Institute
(Clinical Pharmacology Department), and the Armed Services University of Health
Sciences (Department of Biometrics). He has published numerous scientific
papers, including articles in Cancer Prevention and Treatment, the Journal of
Oncology, the Practical Journal of Cancer, the International Journal of Cancer,
the Journal of Neurochemistry, Clinical Cancer Research, and Biochemical
Pharmacology. His laboratory and clinical work has spanned the fields of
oncology, immunology, protein biochemistry, cell biology, molecular biology and
experimental therapeutics. Dr. Liu received his medical training and degree at
the Second Military Medical University, Shanghai, China. He also received a
Master's degree in Public Health from the Armed Services University, Bethesda,
MD, USA.
Dr. James Pan, PH.D. Director
James Pan has since 2002 worked in various capacities at Affinium
Pharmaceuticals, Inc. located in Toronto, Canada. Since 2003 he has served as
the Director of Preclinical Programs where he oversees and coordinates
preclinical research activities, including secondary assays, pharmacokinetics,
toxicokinetices and efficacy studies for late stage drug molecules. During 2002,
he worked as the Director of Human & Viral Therapeutics at Affinium
Pharmaceuticla where he oversaw 10-15 PhD and MSc scientists and associates and
three research groups; the group provides scientific direction and line
management. From 1998 until 2002 he worked at
9
the research division of Genetech, Inc. located in San Francisco, California.
Dr. Pan gained research grants from Genome Canada Viral Proteomics and CFFTI. He
is co-inventor and co-author of over 100 patents and scientific articles. Dr.
James Pan obtained his Master and Ph. D. at Zhejiang University in Science,
pursuing post-doctoral training at University of Toronto and University of
Michigan.
Dr. Lieping Chen, PH.D. Director
Lieping Chen has since 1997 worked at the Mayo Clinic in Rochester, Minnesota.
He currently holds the position of Associate Professor of Immunology and is a
Senior Associate Consultant to the Department of Immunology. With more than 24
years experience in Immunology field, Currently Professor of Immunology in John
Hopkins University. Prior to JHU, Dr. Chen was Associate Professor of Mayo
Medical School and Senior Associate Consultant of Immunology in Mayo Clinic
which is a charitable, not-for-profit organization based in Rochester. Dr. Chen
received his M.D. from Fujian Medical School and his Ph.D from the Medical
College of Pennsylvania-Hahneman Medical College in Philadelphia, Pennsylvania.
He is member of the American Association of Immunologists and several scientific
committees. Xue Bu, Director, Treasurer & Chief Operating Officer
Ms. Xue Bu obtained her B.S. in 1986 from The Fourth Military Medical University
and MBA degree from Xi'an Jiaotong University. Ms. Bu was the Vice President of
Beijing Chaoying Real Estate Company from 1999 to 2001. Since 2001, she has
served as the Deputy General Manager of Chaoying. Ms. Bu is the wife of Mr. Bai
Yanbiao.
If the Merger is not consummated, the resignations of the existing Directors and
officers of the Company will not be tendered or become effective.
DISSENTERS' RIGHTS
Set forth under the heading "Dissenters' rights" is a description of the
dissenters' rights applicable to the holders o the Company's Common Stock.
Although Maryland law provides for appraisal rights in connection with the
Merger, the Merger Agreement requires that 100% of the stockholders of Cybrdi
vote in favor of the Merger. Assuming 100% approval of the Merger by the Cybrdi
stockholders, no Cybrdi stockholder will be entitled to such rights. However,
should the Company waive the requirement for 100% approval (which waiver is not
contemplated by the Company), the Cybrdi stockholders would have such rights as
and to the extent provided under Maryland law.
COVENANTS, REPRESENTATIONS AND WARRANTIES OF CYBRDI
Among other things, Cybrdi has represented to Certron in the Merger Agreement
that:
- - Cybrdi is a corporation in good standing in the state of Maryland and has
the authority to enter into the merger agreement;
- - it is authorized to issue 35,000,000 shares of common stock of which
30,210,000 are issued and outstanding;
- - it has, or prior to closing, will have all required shareholder consents;
- - the financial statements fairly present the financial condition of the
Company and there has been no material adverse change in the financial
condition since the date of the financial statement;
- - it has paid or provided adequate reserves for all tax liability,
- - it has obtained all required governmental consents to conduct its
activities as now being conducted;
10
- - it is not aware of any pending or threatened litigation;
- - no consents of any governmental agency are required to carry out the
Merger Agreement and the Merger;
- - the entry into the Merger will not violate the terms and conditions of any
other agreement which is binding upon Cybrdi;
- - there has been no material adverse developments in the operation of
Cybrdi, financial or otherwise since the delivery of the Cybrdi financial
statements;
- - it has valid title to all intellectual property which it has developed and
that Cybrdi is not aware of any challenges to any patents or licenses
which have been granted to Cybrdi;
- - it has in place sufficient insurance to cover its assets and operations;
- - it has not received notice from any key employee that the employee intends
to terminate employment with Cybrdi;
- - it has paid or sufficiently reserved for the payment of all taxes which
may become due and owing;
- - it has not cancelled any material agreements; and
- - has not incurred any damage destruction or loss (whether or not covered by
insurance) which would affect the operations of Cybrdi.
COVENANTS, REPRESENTATIONS AND WARRANTIES OF CERTRON
Among other things, we have represented to Cybrdi in the Merger Agreement that:
- - we are a corporation in good standing in the state of California and have
the authority to enter into the merger agreement;
- - we are authorized to issue 10,000,000 shares of common stock of which
3,128,306 are issued and outstanding;
- - we are authorized to issue 500,000 shares of preferred stock, $1.00 par
value none of which are issued and outstanding;
- - the financial statements which we have filed with the Securities and
Exchange Commission fairly present the financial condition of the Company
and there has been no material adverse change in the financial condition
since the date of the financial statements;
- - we have filed all required reports with the Securities and Exchange
Commission since November 2000;
- - we have paid or provided adequate reserves for all tax liability;
- - we are not aware of any pending or threatened litigation;
- - no consents of any governmental agency are required to carry out the
Merger Agreement and the Merger;
- - the entry into the Merger will not violate the terms and conditions of any
other agreement which is binding upon either Certron or its acquisition
subsidiary;
- - there has been no material adverse developments in our operations,
financial or otherwise;
- - we have sufficient insurance in place to cover our assets and operations;
11
- - we are in compliance with all existing employment agreements and employee
benefit programs; and
- - we have paid or sufficiently reserved for the payment of all taxes which
may become due and owing;
CONDITIONS TO CLOSING
Prior to Closing on the Merger, we will require from Cybrdi that:
- - the representations and warranties of Cybrdi will be true and correct in
all material respects;
- - Cybrdi has distributed an Information Statement to its shareholders and
100% of the Cybrdi shareholders have approved the transaction;
- - Cybrdi will have obtained any required government consents;
- - no litigation shall have been initiated against Cybrdi;
- - the officers of Cybrdi provide us with a duly executed certification that
Cybrdi has otherwise complied with all of the terms and conditions set
forth in the Merger;
- - Cybrdi will not have amended its articles of incorporation or sold or
redeemed any shares of its common stock;
- - entered into a material agreement except in the ordinary course of
business;
- - it has complied with any funding requirements should Certron have
insufficient funds for its ongoing operations prior to the Effective Time
of the Merger;
- - it has maintained its current business operations; and
- - there has been no breach on the part of Cybrdi with respect to any of its
obligations under the Merger
Prior to Closing on the Merger, Cybrdi will require from us that:
- - our representations and warranties will be true and correct in all
material respects;
- - our shareholders will have consented to the Merger at a duly called and
noticed special shareholders meeting;
- - we will have obtained any required government consents;
- - no litigation shall have been initiated against us;
- - our officers will provide Cybrdi with a duly executed certification that
we have otherwise complied with all of the terms and conditions set forth
in the Merger; and
- - that there has been no breach on our part with respect to any of our
obligations under the Merger,
TERMINATION OF MERGER AGREEMENT; WAIVERS
The Merger may be terminated prior to closing:
- - By the mutual consent of the parties: or
- - By either party, if conditions precedent to closing have not been
fulfilled by February 28, 2005 or become incapable of fulfillment (except
where the inability to fulfill such condition is the result of that
party's action or inaction).
12
INDEMNIFICATION OBLIGATIONS; ARBITRATION
The Merger Agreement provides for Cybrdi to reimburse, indemnify and hold
harmless Certron its current officers, employees and/or agents against any and
all damages, losses, deficiencies, any and all damages, losses, deficiencies,
liabilities, costs and expenses incurred or suffered by any of the indemnified
parties that result from, relate to or arise out of any misrepresentation,
breach of warranty or non-fulfillment of any agreement or covenant on the part
of Cybrdi.
Any dispute among the parties to the Merger Agreement will be resolved by
binding arbitration . Any arbitration proceeding will take place in Los Angeles,
California and be governed by the American Arbitration Association.
EXPENSES
Certron will be responsible for all costs incurred through the date of Closing.
These costs will include its normal operating costs together with those costs
and expenses incurred in connection with the closing of the Merger. To the
extent that Certron does not have sufficient revenues or cash available to make
said payments, then Cybrdi has agreed to reimburse us or pay on our behalf said
costs.
DESCRIPTION OF CERTRON COMMON STOCK
Our Articles of Incorporation authorize the issuance of 10,000,000 shares of
common stock, no par value of which 3,128,306 are issued and outstanding. We are
also authorized to issue 500,000 shares of preferred shares, $1.00 par value,
none of which are issued or outstanding.
Each holder of our common stock is entitled to one vote per share of common
stock outstanding in such holder's name on our records on each matter submitted
to a vote of our stockholders, except as otherwise required by law. The holders
of our common stock have cumulative voting rights in the election of directors
as provided under California law.
Holders of our common stock are entitled to equal dividends and distributions,
per share, when, as and if declared by our board of directors from funds legally
available. Holders of our common stock do not have preemptive rights to
subscribe for any of our securities nor are any shares of our common stock
redeemable or convertible into any of our other securities.
DISSENTERS' RIGHTS
The Company's shareholders may be entitled to certain "dissenters' rights" as
provided under California law. The following is a summary of the dissenters'
rights under California law, which summary is qualified in its entirety by
reference to Sections 1300 through 1304 of the California Corporations Code, a
copy of which provisions are attached to this Proxy Statement as Exhibit I.
If the Merger is approved by the required vote of the Company's shareholders and
is not abandoned or terminated, then any Company shareholder entitled to vote on
the Merger may, if he or she strictly complies with California law, require the
Company to purchase for cash at their fair market value the shares owned by that
shareholder. As provided under California law, the fair market value of the
shares will be determined as of November __, 2004, the day before the first
announcement of the terms of the Merger, but will exclude any appreciation or
depreciation in the value of the shares as a result of the proposed Merger.
Any of the Company's shareholders entitled to exercise dissenters' rights who
wish to exercise such rights and require the Company to purchase his or her
shares must:
- - Not vote any of his or her shares entitled to vote on the Merger in favor
of the Merger.
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- - Make a written demand on the Company to purchase his or her shares at
their fair market value. The demand must be received by the Company or its
transfer agent within 30 days after the date on which the notice of
approval of the Merger by the Company's shareholders (described below) is
mailed to that shareholder. In that demand, the shareholder must state the
number of shares held of record by the shareholder that the shareholder
demands the Company purchase and the fair market value of the shares as
claimed by the shareholder (based on the criterion described above).
- - Submit to the Company, within that same 30 day period, at its principal
executive office located at 1545 Sawtelle Boulevard, Suite 12, Los
Angeles, California 90025 or to American Stock Transfer and Trust Company,
our transfer agent located at 50 Maiden Lane, New York, NY 10007, the
stock certificates representing the shares which the shareholder is
demanding that the Company purchase. The Company will then stamp or
endorse the share certificates with a statement that the shares are
dissenting shares or will exchange them for certificates of appropriate
denominations so stamped or endorsed.
Within ten days after the date of approval of the Merger, the Company will mail
to each shareholder of the Company who did not vote in favor of the Merger a
notice of the approval of the Merger by the Company's shareholders. That notice
will be accompanied by with a copy of certain sections of the California
Corporations Code (as required by law), a statement of the price determined by
the Company to represent the fair market value of the dissenting shares and a
brief description of the procedure to be followed if the shareholder desires to
exercise his or her dissenters' rights. The statement of price will be an offer
by the Company to purchase at that price any dissenting shares unless those
shares lose their status as dissenting shares as provided under California law.
If the Company and a dissenting shareholder agree that the shares are dissenting
shares and agree to a price for the shares, then the shareholder will be
entitled to the agreed price plus interest at the rate specified by law from the
date of their agreement. Any agreement fixing the fair market value of any
dissenting shares as between the Company and the holders thereof must be filed
with the Company's Secretary. Subject to certain provisions of California law,
the Company will pay the purchase price for the shares within 30 days of the
date of that agreement (or within 30 days after any contractual or statutory
conditions to the Merger, if any, are satisfied) subject to surrender for
endorsement of the certificates representing the dissenting shares.
If the Company denies that the shares are entitled to the status of dissenting
shares or the Company and the shareholder fail to agree upon the fair market
value of the shares, then, within six months after the date on which the notice
of approval was mailed to the shareholder (but not thereafter), the shareholder
may file a complaint with the Superior Court of Los Angeles County to seek a
determination as to whether the shares are dissenting shares or of the fair
market value of the shares (or both) or the shareholder may join in any pending
action on such a complaint. Two or more shareholders may join as plaintiffs or
may be joined as defendants in any such action.
Shareholders should be aware that:
- - They cannot withdraw their demand for payment once made unless the Company
consents to that withdrawal.
- - Shares may lose their status as dissenting shares (and the shareholders
will thus lose their status as dissenting shareholders and their right to
require payment for their shares under the dissenters' rights rules) if
(a) the Company abandons the Merger, or (b) the shares are transferred
prior to submission for endorsement as described above, or (c) the
shareholder and the Company do not agree on the status of the shares or
the
14
fair market value thereof and neither files a complaint or intervenes in a
pending action within the six month period described above, or (d) the
shareholder, with the consent of the Company, withdraws his or her demand
for purchase of the shares.
A SHAREHOLDER WHO MAY WISH TO EXERCISE HIS OR HER DISSENTERS' RIGHTS UNDER
CALIFORNIA LAW MUST ADHERE STRICTLY TO THE REQUIREMENTS SET FORTH IN SECTIONS
1300 THROUGH 1313 OF THE CALIFORNIA CORPORATIONS CODE. THE COMPANY STRONGLY
URGES ANY SUCH SHAREHOLDER TO CONSULT WITH HIS OR HER OWN ATTORNEY OR OTHER
LEGAL ADVISER TO BE SURE THAT THE SHAREHOLDER COMPLIES WITH THE APPLICABLE LAW
AND DOES NOT INADVERTENTLY LOSE HIS OR HER RIGHTS.
CERTRON CORPORATION
BUSINESS
Certron was incorporated under the laws of the State of California in 1966. The
Company's business in fiscal 2003 and fiscal 2004 consisted primarily of the
distribution of magnetic media products, primarily blank audio and video
cassettes. Intense competition in that industry has made it difficult for us to
maintain prices on our magnetic media products which has resulted in continually
reduced margins. We have discontinued sales of certain magnetic media products
and refuse to sell magnetic media products at prices not resulting in certain
minimum margin returns. In addition, the release of the digital video disk
system and other digital products has had a material adverse impact on the
magnetic media sales and on our operations. As a result of intense price
competition and technological changes, we have lost significant customers and
have been unable to compete at a profit in the marketplace. We do not have
sufficient revenues, reserves or inventory to continue operations.
MARKET PRICE FOR STOCK
The Common Stock of the Company is traded in the NASDAQ Bulletin Board under the
symbol CRTN. The following table shows the high and low bid quotations for such
stock for each fiscal quarter during the fiscal years ended October 31, 2003 and
October 31, 2004 as furnished by Bloomberg. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.
October 2003 High Low
- ------------ ---- ---
First Quarter $.12 $.12
Second Quarter $.11 $.11
Third Quarter $.12 $.12
Fourth Quarter $.11 $.11
October 2004 High Low
- ------------ ---- ---
First Quarter $.45 $.11
Second Quarter $.40 $.11
Third Quarter $.30 $.12
Fourth Quarter $.30 $.12
As of ____________ __, 200_, the approximate number of holders of record of the
Company's Common Stock was ____. The Company has never paid a cash dividend on
its
15
Common Stock. The high and the low bid price of the Company's Common Stock on
____________ __, 200_ was $0.__.
FINANCIAL STATEMENTS
Our audited financial statements are contained in Exhibit C. You are urged to
carefully review our audited financial statements before making your decision on
any matters being solicited in this proxy.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Fiscal Years Ended October 31, 2003
As described below under "Results of Operations," during fiscal 2003, due to
continuing intense price competition and technological changes in the
marketplace for its products, the Company lost its remaining significant
customers and disposed of or wrote off its remaining inventory. As a result of
these occurrences, the Company concluded that its audio and videotape businesses
were no longer viable and some of its product lines were obsolete and placed its
emphasis on attempting to find a Buyer for the Company.
LIQUIDITY AND CAPITAL RESOURCES
As demonstrated by the following chart, the Company's working capital decreased
at October 31, 2003 as compared to that at October 31, 2002, which was primarily
due to a decline in sales and increased reserves against inventory. Cash
decreased by $ 310,000; accounts receivable decreased by $ 45,000; inventories
decreased by $ 252,000; prepaid expenses decreased by $ 42,000; and other
current assets decreased by $ 4,000. Current liabilities increased by $ 52,000.
During the fourth quarter of fiscal 2003, the Company increased its cash
position by surrendering for its cash value of $162,000 life insurance policy on
the life of Marshall Kass, Chairman and Chief Executive Officer of the Company.
2003 2002 2001
-------- -------- ----------
Working Capital $357,000 $911,000 $1,831,000
Current Ratio 3.41 to 1 7.6 to 1 9.89 to 1
Cash Used in Operations $210,000) ($423,000) ($516,000)
RESULTS OF OPERATIONS
For a considerable number of years, intense price competition in the magnetic
media field has made it difficult for the Company to maintain prices of its
magnetic media products and has continually reduced the Company's margins on
these products. As a result, the Company discontinued sales of certain magnetic
media products and refused to sell magnetic media products at prices not
resulting in certain minimum margin returns. More recently, the introduction of
digital products and the substantial reduction in the cost of DVD players have
rendered some of the Company's products noncompetitive or obsolete and had a
material adverse impact on the Company's magnetic media operations and sales.
Digital answering devices have substantially replaced telephone answering
devices using magnetic tape cassettes, substantially reducing the Company's
sales of microcassettes. The sale of DVD players at substantially reduced prices
has curtailed sales of VHS T120s and T160s recording tapes used in VCRs. As a
result of the intense price competition and the technological changes, Certron
has been unable to compete at a profit in this marketplace.
During the last two fiscal years the Company has lost three significant
customers who accounted in the aggregate for approximately 77% of Certron's
sales during fiscal 2002 and
16
41% of Certron's sales during fiscal 2003. In the fourth quarter of fiscal 2002,
one of these customers informed the Company of its intent to cease ordering
products from the Company by the end of the third quarter of fiscal 2003. In the
fourth quarter of fiscal 2003, another one of these customers who was the
Company's then largest customer informed the Company that due to technological
changes it could no longer commit to purchase the quantities of private-label
products needed by Certron to make the business worthwhile and would no longer
use Certron as a resource. The third of these customers who was the Company's
second largest customer during fiscal 2003 was a private-label customer for VHS
T120 products. Due to the substantial reduction in VHS tape sales and the fact
that the Company had to carry a substantial inventory of VHS tapes for this
customer, the profit margin on this product for Certron diminished to such an
extent that Certron chose to cease fulfilling this customer's orders. As a
result of these occurrences, the Company concluded that its audio and videotape
businesses were no longer viable and some of its product lines were obsolete.
Since concluding that primarily due to price competition, there was no
meaningful opportunities for it to substantially increase sales and operating
profit of its magnetic media products through traditional outlets, the Company
attempted without success to acquire other businesses or product lines. In the
last several years it has also attempted to maximize shareholder value through
the sale of the Company.
In December, 2003, the Company announced that it was having discussions with a
privately-held foreign corporation concerning the possible acquisition by
Certron of the foreign corporation in exchange for shares of common stock of
Certron that would aggregate approximately 90% of the shares of common stock of
Certron outstanding after the transaction. The foreign corporation is a
development company specializing in high tech medical products. The parties have
exchanged information but no definitive agreements have been signed. Discussions
which are continuing are still at a preliminary stage and the foreign
corporation has indicated that it will not proceed unless it obtains additional
financing. No assurance can be given that the transaction will be consummated.
If this transaction is not consummated, Certron will continue to search for a
buyer of the Company.
The Company expects that it will continue during fiscal 2004 to sell a small
amount of magnetic media products. It is presently estimating that the amount of
sales for the 2004 fiscal year will be between $50,000 to $100,000. The Company
does not intend to maintain any additional inventory, and it is liquidating its
holdings of marketable securities. Most of the Company's products which are
purchased from the Far East are available from multiple sources. As a result of
the expected lack of revenue during fiscal 2004, the cost of maintaining a
minimal number of employees and the accounting, legal and other costs of
remaining a public company, the Company expects to have a negative cash flow
during 2004. The Company is unable to predict how long it will be able to have a
sufficient amount of cash to continue as a viable entity.
FISCAL 2003 COMPARED TO FISCAL 2002
During fiscal 2003, the Company had an operating loss of $724,000 and a net loss
of $705,000 on sales of $300,000 as compared to an operating loss of $963,000
and a net loss from continuing operations of $945,000 on sales of $750,000 for
fiscal 2002. Gross profit increased by $ 59,000 between fiscal 2003 and fiscal
2002. Inventory holding loss increased by $74,000; selling, general and
administrative expenses decreased by $ 96,000; depreciation and amortization
expense increased by $ 5,000; interest income decreased by $ 11,000, realized
gain on marketable securities increased by $ 12,000 and the surrender of an
executive life insurance policy for its cash value resulted in an offset to
expense of approximately $162,000.
Sales of magnetic media products were $300,000 in fiscal 2003 as compared to
$750,000 in fiscal 2002. The decrease of 60% represents a decrease in sales of
micro cassettes of
17
$128,000, a decrease in sales of video cassettes of $84,000, and a decrease in
sales of audio cassettes and other office products of $238,000 as a result of
price competition and technological changes.
Total gross margin as a percentage of net sales was 44% in fiscal 2003 and 10%
in fiscal 2002. Margins increased from $78,000 in fiscal 2002 to $137,000 in
fiscal 2003 due primarily to a decrease in sales of low margin magnetic media.
For the fourth quarter of fiscal 2003, the Company incurred a loss from
continuing operations of $8,000. The amount of the loss was reduced by
approximately $162,000 in reduction of expenses as a result of the surrender of
an executive life insurance policy for payment of its cash value. Due to the
Company's declining sales and the loss of customers, during the fourth quarter
of fiscal 2003, the Company established a reserve reducing the value of its
inventory. Primarily as a result of this reserve, inventory holding loss
increased from $ 250,000 in fiscal 2002 to $ 332,000 in fiscal 2003.
Selling, general and administrative expense decreased by $ 94,000 during fiscal
2003. The decrease from $ 766,000 in 2002 to $ 670,000 in 2003 was due primarily
decrease in personnel expenses of $143,000 that was offset by an increase in
other selling, general and administrative expenses of $42,000.
During fiscal 2003, the Company invested cash not needed in operations, in
publicly traded common stocks of other companies. Investments in common stocks
are subject to risks of the market, and market prices may fluctuate and be
adversely affected by the operating results of the issuer, as well as general
economic, political and market conditions. As of October 31, 2003, the Company
held common stocks which had a cost of approximately $134,000 and market value
of approximately $58,000.
In accordance with generally accepted accounting principles, the Company has
recorded the value of its investments in marketable securities on its balance
sheet at market value and the difference of approximately $76,000 between cost
and market value is recorded as an unrealized holding loss, a separate component
of equity (see Notes 1 and 3 of Notes to Consolidated Financial Statements).
Upon the expected sale of these securities, the Company will recognize a loss in
its statement of operations equal to the amount of the unrealized holding loss,
reduced by any increase in market value since October 31, 2003 and increased by
any decrease in market value since October 31, 2003.
FISCAL 2002 COMPARED TO FISCAL 2001
During fiscal 2002, the Company had an operating loss of $963,000 and a net loss
from continuing operations of $945,000 on sales of $750,000 as compared to an
operating loss of $528,000 and a net loss from continuing operations of $451,000
for fiscal 2001 on sales of $1,475,000. Gross profit decreased by $266,000
between fiscal 2002 and fiscal 2001. Inventory holding loss increased by
$229,000; selling, general and administrative expenses decreased by $33,000;
depreciation and amortization expense decreased by $27,000; interest income
decreased by $54,000 and realized gain on marketable securities decreased by
$5,000.
Sales of magnetic media products were $750,000 in fiscal 2002 as compared to
$1,475,000 in fiscal 2001. The decrease of 49% was primarily the result of the
decrease in sales of micro cassettes of $128,000, decrease in sales of video
cassettes of $186,000, and decrease in sales of audio cassettes and other office
products of $411,000.
Total gross margin as a percentage of net sales was 10% in fiscal 2002 and 23%
in fiscal 2001. Margins decreased from $266,000 in fiscal 2001 to $78,000 in
fiscal 2002 due primarily to a decrease in the sales of magnetic media.
For the fourth quarter of fiscal 2002, the Company incurred a loss from
continuing operations of $403,000 of which approximately $222,000 was
represented by a write-down of finished
18
goods inventory. Due to the Company's declining sales and excess inventory,
during the fourth quarter of fiscal 2002, the Company established reserve
reducing the value of its inventory to market value. Primarily as a result of
this reserve, inventory holding loss increased from $29,000 in fiscal 2001 to
$250,000 in fiscal 2002.
Selling, general and administrative expense decreased by $33,000 during fiscal
2002. The decrease from $799,000 in 2001 to $766,000 in 2002 was due primarily
to a decrease in personnel expenses of $74,000 that was offset by an increase in
other selling, general and administrative expenses of $41,000.
During fiscal 2002, the Company invested cash not needed in operations, in
publicly traded common stocks of other companies and may purchase additional
common stocks in the future. Investments in common stocks are subject to risks
of the market, and market prices may fluctuate and be adversely affected by the
operating results of the issuer, as well as general economic, political and
market conditions. As of October 31, 2002, the Company held common stocks which
had a cost of approximately $210,000 and market value of approximately $119,000.
In accordance with generally accepted accounting principles, the Company has
recorded the value of its investments in marketable securities on its balance
sheet at market value and the difference of approximately $91,000 between cost
and market value as of October 31, 2002 is recorded as an unrealized holding
loss, a separate component of equity (see Notes 1 and 3 of Notes to Consolidated
Financial Statements). If the Company sells these securities, the Company would
recognize such loss in its statement of operations.
In fiscal 2002, the Company was advised that its largest customer would no
longer be using the Company as a primary vendor. Although the customer continued
to place orders with the Company during fiscal 2002, the Company expects that it
will not receive significant orders from this customer after January 31, 2003.
FISCAL QUARTER ENDED JULY 31, 2004
Liquidity and Capital Resources
As set forth in the following chart, the Company's current ratio was 2.31 to 1
at July 31, 2004.
07/31/04 10/31/03
-------- --------
Working Capital $170,000 $357,000
Current Ratio 2.31 to 1 3.41 to 1
The Company's liquidity has been supplied from internally generated funds. As a
result of substantially reduced sales, maintaining a minimal number of employees
and the legal, accounting and other costs of remaining a public company, the
Company expects that its cash flow will remain negative. The Company is unable
to predict how long it will have a sufficient amount of cash to continue as a
viable entity.
Intense competition in the magnetic media field has made it difficult for the
Company to maintain prices on its magnetic media products and has continually
reduced the Company's margins on these products. As a result, the Company has
discontinued sales of certain magnetic media products and refused to sell
magnetic media products at prices not resulting in certain minimum margin
returns. In addition, the release of the digital video disk system and other
digital products had a material adverse impact on the Company's magnetic media
sales and on the Company's operations. As a result of the intense price
competition and technological changes, the Company has lost its significant
customers and has been unable to compete at a profit in its marketplace.
19
Over the past several years, in an attempt to increase its sales and operating
profits the Company has attempted without success to acquire other businesses or
product lines. More recently, the Company has attempted to maximize shareholder
value through the sale of the Company.
Results of Operations
Third Quarter Fiscal 2004 compared to Third Quarter Fiscal 2003
As discussed above and in the Company's Annual Report on Form 10-K for the year
ended October 31, 2003, due to continuing intense price competition and
technological changes in the marketplace for its products, during the year ended
October 31, 2003 the Company lost its remaining significant customers and fully
reserved remaining inventory. As a result of these occurrences, the Company
concluded that its audio tape businesses were no longer viable and some of its
product lines were obsolete and the Company placed its emphasis on attempting to
find a buyer for the Company. The Company's major emphasis has been attempting
to sell the Company.
On August 16, 2004, the Company reached an agreement in principle with Cybrdi, a
privately-held corporation, concerning the possible acquisition by the Company
of Cybrdi in exchange for shares of common stock of the Company that would
aggregate approximately 93.8% of the Company's common shares outstanding after
the transaction. Cybrdi manufactures both human and animal tissue micro-arrays
for a wide variety of scientific uses, such as drug discovery and development.
The transaction is subject to, among other things, satisfactory completion of
due diligence, the execution and delivery of mutually acceptable definitive
agreements, approval by the shareholders of the Company and approval by the
shareholders of Cybrdi. No assurances can be given that these conditions will be
satisfied and the transaction will be consummated.
During the third quarter of fiscal 2004, the Company had a net loss of $16,000
as compared to a net loss of $164,000 during the third quarter of fiscal 2003.
The decrease in net loss for the third quarter of 2004 compared to the net loss
in the third quarter of 2003 was due to a decrease in operating expenses in the
third quarter of 2004, the inventory being fully reserved as of October 31, 2003
and a gain of almost $70,000 from surrendering an insurance policy.
Net sales were $17,000 for the third quarter of 2004 as compared to net sales of
$39,000 in the third quarter of 2003. The Company expects the sales in the
fourth quarter of fiscal 2004 to be approximately the same or less than the
sales in the third quarter of fiscal 2004.
Gross margins increased by $36,000 for the quarter ended July 31, 2004, from
($19,000) in the third quarter of fiscal 2003 to $17,000 in the third quarter of
fiscal 2004. The primary reason for the increase is due to inventory being fully
reserved as of October 31, 2003.
The Company has not recorded a provision for federal income tax for the third
quarter of 2004 due to the net operating loss carry forward. The Company fully
reserves the deferred tax benefit of the loss carry forward due to doubtful
utilization.
The Company has from time to time invested cash, not needed in operations, in
commercial paper and in publicly traded common stocks of other companies.
Investments in common stocks are subject to risks of the market, and market
prices may fluctuate and be adversely affected by the operating results of the
issuer, as well as general economic, political and market conditions. As of July
31, 2004, the Company did not have any investment in common stocks.
In accordance with Generally Accepted Accounting Principles, the Company has
recorded the value of its investments in marketable securities on its Balance
Sheet at market value. At the beginning of the second quarter of fiscal 2004,
the Company sold all of the common stocks held.
20
Nine Months Fiscal 2004 compared to Nine Months Fiscal 2003
For the first nine months of fiscal 2004, the Company had a net loss of $322,000
as compared to a net loss of $623,000 for the first nine months of 2003. The
decrease in net loss for the first nine months of fiscal 2004 compared to the
net loss in the first nine months of fiscal 2003 was due to a decrease in
operating expenses in the first nine months of fiscal 2004, the inventory being
fully reserved as of October 31, 2003 and the gain of over $100,000 in sales of
assets and surrendering of insurance policy.
Net sales were $51,000 for the first nine months of fiscal 2004 as compared to
net sales of $246,000 for the first nine months of fiscal 2003.
As discussed above and in the Company's Annual Report on Form 10-K for the year
ended October 31, 2003, due to continuing intense price competition and
technological changes in the marketplace for its products, during the year ended
October 31, 2003 the Company lost its remaining significant customers and fully
reserved remaining inventory. As a result of these occurrences, the Company
concluded that its audio tape businesses were no longer viable and some of its
product lines were obsolete and the Company placed its emphasis on attempting to
find a buyer for the Company. The Company's major emphasis has been attempting
to sell the Company.
Gross margins increased by $56,000 for the first nine months of fiscal 2004,
from ($5,000) in the first nine months of fiscal 2003 to $51,000 in the first
nine months of fiscal 2004. The primary reason for the increase is due to the
inventory being fully reserved as of October 31, 2003.
The Company has not recorded a provision for federal income tax for the first
nine months of fiscal 2004 due to the net operating loss carry forward. The
Company fully reserves the deferred tax benefit of the loss carry forward due to
doubtful utilization.
The Company has from time to time invested cash, not needed in operations, in
commercial paper and in publicly traded common stocks of other companies.
Investments in common stocks are subject to risks of the market, and market
prices may fluctuate and be adversely affected by the operating results of the
issuer, as well as general economic, political and market conditions. As of July
31, 2004, the Company did not have any investment in common stocks.
In accordance with Generally Accepted Accounting Principles, the Company has
recorded the value of its investments in marketable securities on its Balance
Sheet at market value. At the beginning of the second quarter of fiscal 2004,
the Company sold all of the common stocks held.
A COPY OF OUR FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED JULY 31, 2004 IS
ATTACHED HERETO AS EXHIBIT D.
21
CYBRDI, INC.
BUSINESS
CYBRDI ( Chao Ying Biotechnology Research & Development Incorporated ) is a
biogenetics commercialization company specializing in the rapid introduction of
tissue microarray products and services in both the international and Chinese
markets. Cybrdi is a Maryland corporation with its principal operations located
in China. Cybrdi aims to take advantage of China's abundant scientific talent,
low wage rates, less stringent biogenetic regulation, and huge genetic
population as it introduces its growing list of tissue microarray products.
Cybrdi is located at 20 Firstfield Road, Suite 190A Gaithersburg, MD 20878
Cybrdi telephone number is: 301-987-1137
Telefax: 240-465-8877
Their website can be found at: www.cybrdi.com
E mail can be sent to: sales@cybrdi.com
Most of Cybrdi's activities are conducted through its 80% equity ownership in
China Shaanxi Chaoying Bio-technology Co., Ltd. ("Chaoying Biotech") a
sino-foreign equity joint venture established in July 2000 in the People's
Republic of China. Cybrdi became affiliated with Chaoying Biotech in March 2003.
The Chaoying Biotech joint venture agreement provides that the joint venture is
to be terminated 15 years following its formation. The joint venture may be
extended upon the mutual consent of the parties. Alternatively, subject to
tax-related and other foreign incentives in China, the joint venture may become
a subsidiary of Cybrdi.
Chaoying Biotech Co., Ltd. is located at No. 29 South Road Chang An, Xi'an,
People's Republic of China
Its telephone number is: 8629 85236755
Telefax: 8629 85212721
Their website can be found at: www.cybrdi.cn
E mail can be sent to: job@cybrdi.cn
CYBRDI'S BUSINESS
Cybrdi is an international company providing research development and the
marketing of biogenetics products with an established presence in both the China
and North America. Cybrdi is focused on rapid commercialization of tissue
microarrays (TMA).
TISSUE CHIP TECHNOLOGY
Tissue chips, also called microtissue arrays, represent a newly developed
technology providing high-throughput molecular profiling and parallel analysis
of biological and molecular characteristics for hundreds of pathologically
controlled tissue specimens. Tissue arrays can provide for the rapid and
cost-effective localization and evaluation of proteins, RNA, or DNA molecules,
which is particularly useful for functioning genomic studies.
22
Microtissue array experiments can also be successfully combined with
high-throughput DNA microarray surveys. Where DNA microarrays enable analysis of
thousands of genes from a single tissue specimen in a single experiment, tissue
arrays enable the analysis of hundreds or thousands of tissue specimens in a
single experiment using a single gene or protein probe. Together the DNA and
tissue array technologies provide a comprehensive analytical vantage point for
markers associated with disease diagnosis, prognosis and therapeutics in the
post-genomic era.
CYBRDI TISSUE MICROARRAYS (TMAS)
CYBRDI manufactures both human and animal tissue microarrays for a wide variety
of scientific uses, including drug discovery and development purposes. TMA
technology can survey hundreds or even thousands of clinical specimens in a
single experiment utilizing common probes, including DNA, RNA, peptide, protein
and antibody probes. This is an efficient, in vivo approach for the validation
of gene discoveries and identification of potential molecules for diagnosis and
therapy.
CHAOYING BIOTECH
China Shaanxi Chaoying Bio-technology Co., Ltd (hereafter refers to as Chaoying
Biotech) is a sino-foreign equity joint venture ("JV") established in the
People's Republic of China (the "PRC") between Shaanxi Chao Ying Personal Care
Group Ltd. (the "Chinese Partner") and Immuno-OncoGenomics Inc. (the "Foreign
Partner") in July 17, 2000. In 2003, Cybrdi acquired an 80% equity of Chaoying
Biotech. The Joint Venture will terminate in 15 years unless extended by the
parties.
CHINA BIOTECH TRENDS
Biotechnology has long been supported by the Chinese government, becoming a
designated key industry in China's scientific development plan in 1986. Yet to
date most biotech investment has been directed towards basic research in
government funded laboratories or government linked companies focused on major
scientific discoveries in gene function, identification and validation. This, in
combination with a hierarchical government and academic personnel system, has
meant that little of China's biotech investment has yet been directed toward
commercial applications of existing technical knowledge. In this respect, CYBRDI
is one of the rare scientifically knowledgeable firms operating in China with a
short-term commercial and marketing focus.
CHINA MARKET OPPORTUNITIES: DIAGNOSTIC KITS
While aggregate medical expenditure is on the increase, it will be several more
decades of sustained economic growth and reform before China's typical medical
consumer, insured or otherwise, can afford world market prices for innovative
new medical tests and interventions. This means there are opportunities for
firms providing new healthcare products and services priced within reach of
Chinese hospital budgets, insurance plans and consumer wallets.
Leveraging existing technology and data, CYBRDI has identified and initiated
research upon one such promising area for China market introduction --
diagnostic kits for high-incidence diseases such as diabetes and cancer. Because
of the numerous genes contributing to these diseases, enormous amounts of
information are required for the design of accurate tests. This is information
can be collected and analyzed within the vTMBA database.
23
TECHNOLOGY STRATEGY
In terms of technology, CYBRDI's strategy is to incrementally advance from its
current technological base into complementary, rapidly commercialized products
and services. The foundation for this expansion is TMA tissue microarrays and
technical services, including the vTMA database, as expressed by the diagram
above.
New product development can represent an expansion of existing TMA technical
knowledge or a new commercial application of current knowledge. In the short to
medium term (1 to 3 years), a logical expansion of TMA knowledge is in the
development of diagnostic kits for the institutional medical market, including
hospitals, clinics and medical professionals. Currently, CYBRDI is actively
testing a diabetes diagnostic kit for which a China market patent has already
been applied. Pending the success of the diabetes kit, similar principles can be
applied to cancer and auto-antibody detection kits. In the medium to long term
(2 to 4 years), continued expansion of the vTMA database provides a platform to
move beyond diagnostic kits into applied medical interventions.
TECHNOLOGY AND MARKETING STRATEGY
CYBRDI had identified numerous downstream applications of existing technical
knowledge. Currently, CYBRDI is testing both psoriasis and skin acne medications
informed by TMA statistical findings. However, CYBRDI recognizes that the jump
from the institutional to personal care market is a substantial one, requiring
greater marketing, advertising, logistics and fulfillment capacity. Therefore
CYBRDI will leverage the marketing channels of its strategic shareholder,
Shaanxi ChaoYing, in moving into the retail medical care marketplace.
From a marketing perspective, CYBRDI is currently deploying a two-pronged market
expansion strategy. First, CYBRDI is expanding international distribution
channels in primarily the North American and European research markets to meet
untapped demand for TMA products and services. At the same time, CYBRDI will be
leveraging existing hospital relationships and Shaanxi ChaoYing marketing
channels in the marketing of diagnostic and medical care products within the
China market.
CYBRDI is actively expanding international distribution channels in the North
American and European research markets to meet untapped demand for TMA products
and services. In the medium term (2 to 3 years), CYBRDI will also leverage
existing hospital relationships and other established marketing channels in
introducing biogenetic diagnostic and medical care products customized for China
and other large developing markets.
PRINCIPAL CUSTOMERS
The main customers and copartners of Chaoying Biotech in China are Peking
University Human Disease Gene Research Center, the Tumor Research Institute of
the Chinese Academy of Sciences, the Shanghai Research Institute of the Chinese
Academy of Life Science, the Shanghai Tumor Research institute of the Chinese
Academy of Sciences and Shanghai Tongji University, Guangzhou College of
Medicine, the Huaxi University of Medicine, the Chongqing University of 3rd of
Medicine, the Nanjing Total Hospital of Military Region, Tianjin Medical
University, Tianjin Tumor Hospital, Lanzhou College of Medicine, Shandong
University of Medicine College and 4th Medicine University etc.
TECHNICAL SERVICES
Complementing the production and marketing of tissue chips, CYBRDI has launched
an in-house technical services platform to perform customized research according
to
24
customer specifications. By outsourcing experimentation to CYBRDI, international
research labs, (particularly those in high labor and material cost markets) can
incur substantial cost savings. Frequently requested services include the
standard immunohistochemistry (IHC) and in-situ-hybridization (ISH) services
needed to locate proteins or genes of interest using customer-supplied probes.
These probes are applied to select normal, diseased and marginal tissue from the
CYBRDI tissue array bank. The results are presented as publishable, detailed
pathology reports including high resolution digital photographs. Through virtual
cybernetic bio-services (vCBS), these results can be sent via the Internet to
the customer the day after the probe is received by CYBRDI labs.
CYBRDI COMPETITION
CYBRDI's TMA products have gained substantial market share from both high and
low end producers of competing products. Because of the high costs and strict
patient information protocol associated with tissue collection in most developed
economies, competing products of similar quality have priced 50% to 100% higher
than CYBRDI. Furthermore, established genomics firms such as Ambion and
Clinomics outsource virtually all TMA production yet are unable to offer the
wide product series variety demanded by the global research community. This
presents substantial growth opportunities for CYBRDI under either in-house
and/or OEM programs.
HIGH-END COMPETITORS
Company Manufacturer Products series Price Range* Database Dedicated web Pathology pictures
------- ------------ --------------- ------------ -------- ------------- ------------------
Ambion No 14 $315 to $950 No No No
Clinomics No 43 $440 to $840 Yes No No
CYBRDI Yes More than 200 $195 to $629 Yes Yes Yes
* for comparable products
At the other end of the price spectrum, low-priced tissue chips have had either
insufficient quality or inadequate density. The production of qualified TMAs
requires expertise in several scientific areas (pathology, immunology, molecular
biology) as well as in hygienic standards, quality controls, and special
materials processing and shipping. Because of the high cost of reliable
commercial TMAs, and, conversely, the low quality of low cost TMAs, many
research institutions had previously established their own production teams for
in-house research needs prior to the introduction of CYBRDI TMAs.
PROPERTY
Our operations in the United States are located at 20 Firstfield Road,
Gaithersburg, MD 20878 where we lease approximately 1,650 square feet of space
pursuant to a sublease agreement with Artesian Therapeutics, Inc., a
non-affiliated party. Our annual rental payment is $45,856.50 payable in monthly
increments of $3,823.88. The sublease expires on December 31, 2004. However, it
can be extended on the mutual consent of the parties. If we are unable to extend
this lease, we do not anticipate any problems in locating office space to meet
our operational needs.
Our operations in the Peoples's Republic of China are located at the Chaoying
Workshop, Third Floor, Changyanbu, Private-owned industrial zone where we lease
approximately 2,000 square meters of space_ pursuant to a rental agreement we
have entered into with Shaanxi Chaoying Beauty & Cosmetics Group Co., Inc., a
company affiliated with our
25
president. Our lease is for a term of ten years expiring April 27, 2013. We pay
approximately $240 (U.S. ) per month in rent. (The rental agreement calls for
payment of Rmb1 yuan per square meter per month. Each yuan is equal to
approximately $0.12). We believe that this rental payment is comparable to what
we would pay had we leased similar space from a non-affiliated entity. The
facility is sufficient for our current operations. Should our operations expand
and we need to locate additional rental properties, we do not anticipate any
problems in securing additional leased space.
MARKET PRICE AND INFORMATION
There is no public market for shares of Cybrdi common stock. No market exists
for its securities and there is no assurance that a regular market will develop
or if developed will be sustained. All of Cybrdi's issued and outstanding shares
of common stock are restricted for sale under Rule 144. Restricted securities
may not be sold except pursuant to an effective registration statement or an
applicable exemption from registration.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
audited financial statements for the year ended December 31, 2003 and our
unaudited statements for the nine months ended September 30, 2004 which are
included herewith as Exhibits E and F respectively.
($IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS YEARS ENDED
ENDED ------------------------
9/30/2004 12/31/2003 12/31/2002
--------- ---------- ----------
Results of operations:
Net sales 1,127 1,227 7
Income (loss) from operations 601 315 (115)
Net income (loss) 581 260 (115)
Net cash provided by (used in):
Operating activities 1,136 540 (94)
Investing activities (6) 485 (4)
Financing activities (221) 1,023 115
Income (loss) from operations per common share:
Basic 0.02 0.01 (3.97)
Diluted 0.02 0.01 (3.97)
Net Income (loss) per common share:
Basic 0.02 0.01 (3.98)
Diluted 0.02 0.01 (3.98)
Cash dividends declared per common share as of
9/30/04, 12/31/03 and 12/31/02 respectively None None None
Total Asset 5,284 4,745 210
Long-term debt, net of current maturities -- -- --
FINANCIAL STATEMENTS
Investors are urged to review the pro forma financial statements which are
included herewith as Exhibit B, the audited financial statement which are
included herewith as Exhibit E and the comparative financial statements for the
nine months ended September
26
30, 2004 which are included herewith as Exhibit F before making any decision on
how to vote either in person or via proxy.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
Cybrdi was formed in 2001 and, at present, owns a 80% of the equity of Shannxi
Chaoying Biotech Co., Ltd., which is a sino-foreign equity joint venture ("JV")
established in the People's Republic of China (the "PRC") .
Cybrdi is a leading provider of tissue microarray products and related services.
It has established a comprehensive and integrated system to collect and track
various normal and diseased human and animal tissues, and to manufacture
hundreds of thousands of tissue microarrays ("TMA"). Its goal is to build a TMA
data bank and become one of the leading TMA product and service provider in the
world. To accomplish this, the company's strategy is to incrementally advance
from its current technological base into complementary, rapidly commercialized
products and services. In financing this growth strategy, the Company will
likely rely on incremental funding infusions of debt or equity capital, of which
there can be no assurance.
Cybrdi's focus is the international market. It is the operating, international
marketing and information and technology center. Shannxi Chaoying is focused on
production, development, technology and service. Shannxi Chaoying deals mainly
with the Chinese market, where it can fully take advantage of abundant
scientific talent, lower operating costs, less stringent biogenetic regulation,
and a large population base.
Cybrdi derives its revenues from the business of tissue microarray products and
related services. Revenues and profits are expected to continue to increase as
demand for TMA increases.
The following discussion addresses the financial performance of Cybrdi for the
financial years ended December 31, 2002, 2003 and for the nine month period
ended September 30, 2004. All the amounts reflected in the discussion are
denominated in US dollars.
Liquidity (All figures in U.S. Dollars)
As at September 30
As at Dec 31 As of Dec 31 (Unaudited)
2002 2003 2004
------------ ------------ ------------------
Cash on hand 17,782 2,065,586 2,974,841
Working capital (116,314) 2,165,429 2,901,195
Cash on hand as at September 30, 2004 totaled $2,974,8414, representing a 44%
increase from its cash as of December 31, 2003 of $2,065,586. This was mainly
attributable to increased revenues and profitability. Cybrdi did not operate
profitably until 2003. Cybrdi was profitable for 2003 and remains profitable for
this year. The cash balance as at December 31, 2003 represented an increase of
more than 1,000% on the December 31, 2002 cash balance of $17,782. This was
principally because in year 2003, Cybrdi acquired its 80% equity interest in
Shannxi Chaoying. The shareholders of Shannxi Chaoying were issued shares of
common stock of Cybrdi representing 99% of Cybrdi's outstanding common stock in
exchange for the Shannxi Chaoying common stock in the Subsidiary. At the time of
the acquisition, Shannxi Chaoying had a cash balance of $1,627,134, which has
increased to $2,027,480 at December 31, 2003.
27
Working capital as at September 30, 2004 was $2,901,195, representing a
percentage increase in working capital of approximately 34% from December 31,
2003 of $2,165,429. This increase was mainly due to the increase of cash on hand
due to the acquisition of Shannxi Chaoying. Accounts payables increased because
Cybrdi was able to obtain better payment terms from its suppliers as its
operations continued to expand.
Except with respect to costs incurred in connection with the Merger, Cybrdi is
not aware of any commitments, events or uncertainties that are likely to result
in any decrease in its liquidity.
Cybrdi had a negative working capital as of December 31, 2002. However, as of
December 31, 2003, Cybrdi had a positive working capital balance of $2,165,429.
Again, the acquisition by Cybrdi of its 80% equity interest in Shannxi Chaoying,
greatly improved Cybrdi's liquidity. At the time of the acquisition of Shannxi
Chaoying, Shannxi Chaoying had a working capital balance of $2,446,708, which
has since increased to $2,586,904 at December 31, 2003.
Cybrdi believes it has sufficient liquidity with cash on hand of $ $2,974,841 at
September 30, 2004. In fact, due to the improvement of liquidity, especially of
cash on hand, Cybrdi was able to declare a distribution to its shareholders for
the first time since its inception. Management believes that Cybrdi is very
sound in terms of financial standing.
CASH FLOWS
As at December 31 2002 2003
- -------------------------------------------- -------- ---------
Cash provided by Operating activities $(93,604) $ 539,783
Cash provided by Investing activities (4,000) 485,142
Cash provided by Financing activities 115,386 1,022,689
There was a positive net cash flow of $539,783 generated from operating
activities for the year ended December 31, 2003, compared with only $93,604 for
the previous year. During this period, Cybrdi acquired its equity interest in
Shannxi Chaoying, thus greatly improving its business scope and scale.
Management believes that Shannxi Chaoying will continue to grow at a profitable
rate and could obtain enough net cash inflow from operating activities to
finance current and planned expansion. In fact, the increased profitability and
cash flows generated enabled Cybrdi to pay its first dividend to its
shareholders. Future profits will likely be reinvested in Cybrdi and it is
unlikely that Cybrdi will declare a cash dividend at any time in the near
future.
There was a positive net cash flow of $485,142 provided by investing activities
for the year ended December 31, 2003. In the previous year, the cash flow
provided by the same activities was a negative figure of $4,000. This change was
due to the acquisition of Shannxi Chaoying. Cash received from the acquisition
amounted to $690,816, part of which was consumed on the purchase of property and
equipment.
There was a positive net cash flow of $1,022,689 provided by financing
activities for the year ended December 31, 2003 while this figure was $115,386
for the year ended December 31, 2002. The increase in net capital flow is
attributable primarily to capital contributions and proceeds advanced from
shareholders, which then were used to repay short-term loan and related company
loan and serve as working capital for the remaining after repayment . After the
acquisition, Cybrdi's new shareholders provided strong financial support to
Cybrdi.
28
CAPITAL RESOURCES
In the past, Cybrdi mainly relied on cash flow from operations and proceeds from
shareholders to maintain and expand operations. Cybrdi does not believe that
this will be sufficient to support the growth it hopes to see in the coming
years. Although Cybrdi had a cash balance of $2,065,586 at December 31, 2003,,
it could not meet operating needs and capital expenditure for further
development, especially in the developing China market. Cybrdi must be able to
secure either debt or equity financing to fund its ongoing growth, otherwise
growth will remain stagnant.
If Cybrdi is successful in securing funding, of which there can be no assurance,
capital derived from this funding will have two primary applications;
1. the continued research and development of diagnostic kit products for
genetically based diseases (such as diabetes), as well as for
biogenetically enhanced medicines (such as dermatological conditions);
2. expand global marketing and domestic production of tissue chip products
and services, along with associated working capital costs.
These products leverage existing technical knowledge and will initially be
introduced into the underserved but fast growing China healthcare market.
RESULTS OF OPERATIONS
Revenue
AS OF
SEPTEMBER 30,
2004
AS AT DECEMBER 31 (UNAUDITED)
2002 2003 2004
------ ---------- -------------
Revenue $7,290 $1,227,394 $1,127,115
Cybrdi generates revenues from two separate but related activities: sales of
product and sales of service. Before 2003, revenue mainly came from sales of
product. After 2003, the proportion of sales of service has gradually risen
Among all the revenues, sales from tissue chip accounted for 12%, diabetes
detection biological chip 24%, self antibody detection organization chip 21%,
antibody chip 16%, technical transfer 8%, medicine 19%.
Revenue for the year ended December 31, 2003 was $1,227,394 which represented a
16,737% increase on the 2002 figure of $7,290. This was mainly due to the
increase in operations and business activities brought about by the acquisition
of the Subsidiary which makes comparisons to the prior year difficult,
29
Revenue for the nine months ended September 30, 2004 was $1,127,115 representing
92% of the revenue for the entire twelve month period ended December 31, 2003.
Gross Profit
AS OF
SEPTEMBER 30,
2004
AS AT DECEMBER 31 (UNAUDITED)
----------------- -------------
2002 2003 2004
------- -------- -------------
Gross Profit $3,3990 $930,518 $930,518
Gross Profit Margin 55% 76% 91%
Gross profit increased from $3,990 in the year ended December 31, 2002 to
$930,518 in the year ended December 31, 2003, an increase of 23,221%. Gross
profit margin increased from 55% to 76%. The acquisition of Shannxi Chaoying
improved the profitability of Cybrdi.
Gross profit was $1,029,720 for the nine months ended September 30, 2004. Gross
profit margins continue to improve increasing from 55% in 2002, 76% in 2003 and
91% for the nine month period ended September 30, 2004. This increase is due
primarily to increased operating efficiencies and better prices from suppliers.
Operating Expenses
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, 2004
FOR THE YEAR ENDED DECEMBER 31 (UNAUDITED)
------------------------------ ------------------
2002 2003 2004
-------- ------- ------------------
Amount
Selling & distribution exp. $9,550 $66,398 $31,978
General & administrative exp. $109,395 548,896 396,305
TOTAL 118,945 615,294 428,283
OPERATING EXPENSES AS A PERCENTAGE OF REVENUE
Selling and distribution 131% 5.41% 2.83%
General and administrative exp. 1,501% 45% 35%
TOTAL 1,632% 50% 37.83%
Operating expenses were $118,945 or 1,632% of the revenue in year 2002. This
abnormally high percentage reflected a disproportionately higher level of fixed
overheads in relation to revenue as 2002 did not include the operations of
Subsidiary.
30
In year 2003, selling and distribution expenses increased to $66,398 while its
percentage as of revenue lowered down sharply from 131% in year 2002 to 5.41%.
For the nine months ended September 30, 2004,, this amount was $31,978 or 35% of
revenues.. The ratio of selling and distribution expenses to revenue further
decreased to 2.83%. This was because at the star-up stage, the company had to
invest heavily in marketing and promotion since both Cybrdi and its products
were new to the market. With the expansion of Cybrdi, its customers became more
familiar with its products and services. Cybrdi is now able to keep its
customers at a relatively low cost and increase sales without corresponding
increase in costs. In fact, two major customers accounted for approximately 20%
of total revenue in 2003.
General and administrative expenses were $548,896 in year 2003 due to the
greatly increased scope of Cybrdi'ss operations. For the nine months ended
September 30, 2004, this figure was $396,305, approximately 11% higher than the
general and administrative expenses we incurred for the nine months ended
September 30, 2003. The ratio of general and administrative expenses to revenues
declined from 131% to 5.41% for the twelve months ended December 31, 2002 and
2003 and further declined to 2.83% for the nine months ended September 30, 2004.
This was partly because Cybrdi had to keep on investing on human resources and
productivity to occupy the market and reach the scale economy as soon as
possible, partly because of the reduction of revenue. The principal components
of general and administrative expenses include salaries, wages, commissions and
other compensation, travel, entertainment, insurance, office rent and so on.
Net Income
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, 2004
FOR THE YEAR ENDED DECEMBER 31 (UNAUDITED)
------------------------------ ------------------
2002 2003 2004
---------- -------- ------------------
Net Income $(115,114) $260,350 $581,149
Net Income/Revenue -1,579% 21% 51%
Before the acquisition of the Subsidiary, Cybrdi had incurred losses since its
formation in the United States in 2001. Net income in the year 2003 was
$260,350, which was Cybrdi's first profitable year, compared with a loss of
$115,114 in the year ended December 31, 2002. Net income for the nine months
ended September 30, 2004 was $581,149, already exceeding the net income reported
by Cybrdi for the fiscal year ended December 31, 2003. Ratio of net income to
revenue increased from 21% in the year of 2003 to 51%for the nine months ended
September 30, 2004. Improved margins resulted from an increase in profit margins
although there was an increase of operating expense levels as well.
Profitability was increased by changing its product/service ratios and will
continue to evolve depending upon market forces.
TAX
Corporation Income Tax ("CIT") of Cybrdi
Cybrdi has had operational losses since inception. Net operating loss carried
forward as of December 31, 2003 was approximately $244,000. Possible future
deferred tax benefit was fully offset by a full valuation allowance.
31
Corporation Income Tax ("CIT") of Shannxi Chaoying
In accordance with the relevant tax laws and regulations of the People's
Republic of China, the Subsidiary is entitled to full exemption from CIT for the
first two years and a 50% reduction in CIT for the next three years, commencing
from the first profitable year after offsetting all tax losses carried forward
from the previous five years. As 2003 was Cybrdi's first profitable year, Cybrdi
is entitled to a full exemption from CIT.
RISK
Currency control
Production, development and services are mainly provided in China. Until
recently, China's currency, the RenMinBi ("RMB") could not be freely converted
into foreign exchange. This policy is becoming much more liberal. However,
Cybrdi will have to apply for permission to remit profit out of China.
ACCOUNTANTS
In order to comply with auditing requirements as promulgated by the Securities
and Exchange Commission, Cybrdi was required to retain an accounting firm who is
a member of the Public Company Accounting Oversight Board. In furtherance
thereof, Cybrdi retained the accounting firm of Weinberg & Company, PA as our
independent accountants. There was no disagreement with our prior accountants in
connection with any accounting or financial disclosure matters.
QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
In the normal course of its operations, Cybrdi is exposed to market risk,
including foreign currency, interest, liquidity and credit risks. Cybrdi does
not enter into any type of hedging transactions to limit these types of risks.
Cybrdi transacts business in China in their currency, the RenMinBi ("RMB").
Cybrdi may not be able to freely convert these funds to U.S. dollars and remit
these funds to the United States without prior approval by the Chinese
government. If Cybrdi converts these funds to U.S. dollars, Cybrdi will be
exposed to risks associated with fluctuations in the RMB/Dollar exchange rate.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
You are urged to review the pro forma financial statements contained in Exhibit
B before making any decision with respect to the proposals to be voted upon at
this Special Meeting of shareholders.
COMPARATIVE FINANCIAL INFORMATION
You are urged to review the comparative financial statements contained in
Exhibit D before making any decision with respect to the proposals to be voted
upon at this Special Meeting of shareholders.
PROPOSAL NO. 2:
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES FROM
10,000,000 TO 150,000,000 SHARES OF COMMON STOCK
The Board of Directors of the Company proposes that the shareholders approve an
amendment to the Company's Articles of Incorporation, as amended, to increase
the
32
number of shares of common stock authorized for issuance from 10,000,000 to
150,000,000 shares of Common Stock, no par value. An increase in the number of
authorized shares will be required to complete the Merger transaction with
Cybrdi. In addition, the Board of Directors believes that, regardless of whether
or not the Merger is consummated, the increase in authorized capital stock is
appropriate to provide sufficient flexibility in furtherance of the Company's
general corporate purposes. An increase in the number of authorized shares will
permit the Company to issue unauthorized shares of Common Stock to finance the
possible acquisition of other or additional companies. If the Merger is
consummated, it will permit the Company's new Board of Directors the opportunity
to establish an employee compensation plan to retain key personnel. If proposal
2 is approved but the Merger is not approved or not consummated, the Board of
Directors of the Company will have the right to determine whether or not to
effectuate such charter amendment, which charter amendment would be effectuated,
if at all, within twelve months from the date of the Special Meeting.
Aside from the agreement with Cybrdi, we are not presently engaged in any
regular negotiations, nor do we have any present plans, proposals or
understandings to issue any shares of our Common Stock as part of a capital
raising transaction or otherwise.
If approved, the amendment to increase the authorized number of shares of Common
stock will be effected, if at all, by the filing of a Certificate of Amendment
with the Secretary of State of the State of California. The charter amendment
will be effective on the effective date of the filing of the Certificate of
Amendment. If our shareholders approve the Merger and this amendment, we
anticipate that we will file the Certificate of Amendment with the Secretary of
State of the State of California promptly following the Special Meeting and
prior to the Merger becoming effective.
A copy of the proposed amendment to our Articles of Incorporation is attached
hereto and marked Exhibit G.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE PROPOSED AMENDMENT TO
THE COMPANY'S ARTICLES OF INCORPORATION, AS AMENDED, TO INCREASE THE AUTHORIZED
SHARES.
PROPOSAL NO. 3:
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION
TO CHANGE OUR CORPORATE NAME TO CYBRDI, INC.
The Board of Directors is proposing to amend the Company's Articles of
Incorporation, as amended, in order to change our corporate name to "Cybrdi,
Inc." The Board of Directors believes that, if the Merger is consummated, it
will be in the Company's best interests to use Cybrdi's name as the new name of
the Company. Cybrdi has requested the name change based on its belief that the
name change is necessary to more align the Company's name to the nature of the
business and operations of the Company following the Merger. This amendment is
conditional upon consummation of the Merger. If the Merger is not consummated,
the Articles of Incorporation will not be amended to change our corporate name
to "Cybrdi, Inc." If the Merger is effectuated, it is anticipated that the name
change will be effectuated promptly thereafter. The Board of Directors reserves
the right not to change the corporate name even if the Merger is effectuated and
this proposal is approved, if the Board of Directors believes that such name is
not available or is not then in the best interests of the Company.
If approved, the amendment to change our corporate name to "Cybrdi, Inc." will
be effected, if at all, by the filing of a Certificate of Amendment with the
Secretary of State
33
of the State of California. The charter amendment will be effective on the
effective date of the filing of the Certificate of Amendment. A copy of the
proposed amendment to our Articles of Incorporation is attached hereto and
marked Exhibit H.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE PROPOSED AMENDMENT TO
THE COMPANY'S ARTICLES OF INCORPORATION, AS AMENDED, TO CHANGE OUR CORPORATE
NAME TO CYBRDI, INC.
34
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 1, 2004, the beneficial ownership
of equity securities of the Company by each person known by the Company to own
more than 5% of any class of the Company's voting securities, each Director and
Executive Officer and all Directors and Executive Officers as a group:
BENEFICIAL OWNERSHIP OF EQUITY SECURITIES
OF COMPANY ON JANUARY 31, 2003 (1)
--------------------------------------------------
NAME COMMON STOCK HELD PERCENT OF CLASS
---- ----------------- ----------------
Louart Corporation 1,672,537(2) 53.5%
1545 Sawtelle
Suite 12
Los Angeles, CA 90025
Marshall I. Kass 1,481,315(3) 47.4%(3)
Michael S. Kass 1,228,725(3) 39.3%(3)
Susan E. Kass 1,206,200(3) 38.6%(3)
Ivalee E. Francia 0 0%
Directors and Officers as
a Group (4 persons) 1,505,640(3) 48.1%(3)
(1) Except as otherwise indicated, nature of beneficial ownership is
possession of sole voting and investment power. The address for each of the
Directors and Executive Officers is 1545 Sawtelle Boulevard, Suite 12, Los
Angeles, California 90025.
(2) Includes 1,205,200 shares owned directly by Louart Corporation, as
reported in its Schedule 13D, dated January 1994 and filed with the Securities
and Exchange Commission. Such Schedule 13D indicates that Louart Corporation has
sole voting and dispositive power of such shares. Also includes 467,337 shares
beneficially owned by officers and directors of Louart Corporation.
(3) Includes 1,205,200 shares owned by Louart Corporation. Messrs. Marshall
and Michael Kass and Ms. Susan Kass, directors and executive officers of the
Company, own shares of the capital stock of Louart Corporation representing a
majority of the voting power of the outstanding capital stock thereof. Includes
for Marshall I. Kass 276,115 shares owned by him, for Michael S. Kass 1,000
shares owned by him and 22,525 shares owned by his SEP/IRA, and for Susan E.
Kass 1,000 shares owned by her. Excludes for Marshall I. Kass 81,500 shares
owned by his wife, of which shares Marshall I. Kass disclaims beneficial
ownership.
35
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information about each of the Directors and executive
officer of the Company as of November 1, 2004:
NAME AND PRESENT POSITION FIRST ELECTED
WITH COMPANY OR PRINCIPAL OCCUPATION AGE AS DIRECTOR
------------------------------------ --- -------------
Marshall I Kass 75 1988
Chairman of the Board, Chief Executive Officer and Chief Operating Officer
of the Company and Chairman of the Board, Chief Executive Officer and
Chief Operating Officer of Louart Corporation, an investment company
Michael S. Kass 80 1988
Executive Vice President of the Company and President and Director of
Louart Corporation, an investment company
Susan E. Kass 48 1988
Secretary and Treasurer of the Company and Vice President, Secretary and
Director of Louart Corporation, an investment company
Ivalee E. Francia 40 2003
Director of the Company and Accounting Manager of Louart Corporation, an
investment company
Officers serve at the discretion of the Company's Board of Directors.
If the agreement with Cybrdi is approved, all of our current officers and
Directors will resign their respective position with the Company, effective as
of the Effective Time.
36
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION
We are required to file annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any document we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. and at its offices in New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-0330 for more information on the
operation of the public reference rooms. Copies of our SEC filings are also
available to the public from the SEC's web site at www.sec.gov.
Certron Corporation
By the Order of the Board of Directors:
/s/ Marshall Kass
Chairman of the Board and Chief Executive Officer
Dated: _______________________
37
SCHEDULE OF EXHIBITS
EXHIBIT A: Agreement and Plan of Merger Among Certron Corporation,
Certron Acquisition Corp. and Cybrdi, Inc.
EXHIBIT B: Pro Forma Financial Information for Cybrdi, Inc.
EXHIBIT C: Consolidated Audited Financial Statements of Certron
Corporation and Subsidiary
EXHIBIT D: Consolidated unaudited Financial Statements of Certron
Corporation and Subsidiary for the nine month ended July 31,
2004.
EXHIBIT E: Audited Financial Statement for Cybrdi, Inc.
EXHIBIT F: Comparative Financial Statements for Cybrdi for the nine
months ended September 30, 2004 (unaudited)
EXHIBIT G: Amendment to the Articles of Incorporation of Certron
Corporation
EXHIBIT H: Amendment to the Articles of Incorporation of Certron
Corporation
EXHIBIT I Dissenters Rights Provisions under California General
Corporation Law
38
AGREEMENT AND PLAN OF MERGER
AMONG
CERTRON CORPORATION
A California corporation incorporated on February 21, 1966 with a principal
place of business located at 1545 Sawtelle Boulevard, Suite 12, Los Angeles,
California 90025.
CERTRON ACQUISITION CORP.
A Maryland corporation incorporated on November 10, 2004 with a principal place
of business located at 20 Firstfield Road, Suite 190A Gaithersburg, Maryland
20874.
AND
CYBRDI, INC.
A Maryland corporation, incorporated on October 16, 2001 with a principal place
of business located at 20 Firstfield Road, Suite 190A Gaithersburg, Maryland
20874
DATED AS OF NOVEMBER 12, 2004
1
AGREEMENT AND PLAN OF MERGER dated as of November 12, 2004 (the
"Agreement") by and among CERTRON CORPORATION , a California corporation
("Purchaser"), CERTRON ACQUISITION CORP., a Maryland corporation and a
wholly-owned subsidiary of Purchaser ("Acquisition Sub"), and CYBRDI, INC., a
Maryland corporation ("Target"), and Purchaser, Acquisition Sub and Target are
sometimes collectively referred to as the "Parties" and individually as a
"Party".
RECITALS:
Purchaser is a publicly traded company which currently has its
securities traded on the OTC Bulletin Board. Purchaser currently has no
operations.
Target is a leading provider of tissue microarray products and related
services which has established a comprehensive and integrated system to collect
and track various normal and diseased human and animal tissues, and to
manufacture hundreds of thousands of tissue microarrays (the "Business").
Subject to the terms and conditions hereof, Purchaser, Acquisition Sub
and Target deem it desirable and in the best interests of their respective
corporations and shareholders that Acquisition Sub merge with and into Target
(the "Merger") in a statutory merger in accordance with the laws of the State of
Maryland (the "Maryland Statute").
NOW, THEREFORE, in consideration of the mutual benefits to be derived
hereby and the representations, warranties, covenants and agreements herein
contained, the Parties agree as follows:
ARTICLE I
DEFINED TERMS; SCHEDULES
1.1 DEFINED TERMS. Capitalized terms used in this Agreement will have the
meanings given such terms in Article XIV hereof or elsewhere in the text of this
Agreement, and variants and derivatives of such terms shall have correlative
meanings.
1.2 SCHEDULES. References to a Schedule will include any applicable disclosure
expressly set forth on the face of any other Schedule if specifically
cross-referenced to such other Schedule or if it is clear from reading such
disclosure that such disclosure is applicable to the referenced schedules. Each
Schedule and the information, agreements and documents expressly listed in each
Schedule will be considered a part of this Agreement as if set forth herein in
full and will be deemed to constitute representations and warranties under this
Agreement, limited as set forth in the applicable provision of this Agreement
under which such Schedule is delivered or on the face of such Schedule or any
other provision if it is clear from reading such disclosure that such
1
disclosure is applicable to such provision; provided, however, that the
representations and warranties set forth in this Agreement shall not be affected
or deemed qualified, modified or limited in any respect by the information
provided in the Schedules except to the extent that any qualification,
modification or limitation to any representation and warranty is expressly and
conspicuously set forth on the face of such particular Schedule.
ARTICLE II
MERGER
2.1 MERGER AND SURVIVING CORPORATION.
(a) Pursuant to the Maryland Statute, Acquisition Sub shall merge with
and into Target, and Target shall be the surviving corporation after the Merger
(the "Surviving Corporation") and shall continue to exist as a corporation
created and governed by the laws of Maryland.
(b) The Articles of Incorporation of the Surviving Corporation, from
and after the Effective Time, shall be the Articles of Incorporation of Target.
(c) The By-Laws of the Surviving Corporation, from and after the
Effective Time, shall be the By-Laws of Target.
2.2 EFFECTIVENESS OF MERGER. If all of the conditions precedent to the
obligation of each of the Parties hereto as hereinafter set forth shall have
been satisfied or shall have been waived, then as soon as practicable after the
Closing a Certificate of Amendment to Purchaser's Articles of Incorporation
increasing its authorized shares of Common Stock as herein contemplated shall be
filed with the Secretary of State of the State of California and immediately
thereafter articles of merger and/or such other documents as required by the
Maryland Statute to effectuate the Merger (the "Certificate of Merger") shall be
delivered to the State Department of Assessments and Taxation of the State of
Maryland for filing in accordance with the Maryland Statute. The Merger shall
become effective upon the acceptance of such filing by the State Department of
Assessments and Taxation of the State of Maryland or at such later time as is
specified in the Certificate of Merger, which effective time shall be the
"Effective Time" of the Merger.
2.3 SHARES OF THE CONSTITUENT AND SURVIVING CORPORATIONS. The manner and basis
of converting and exchanging the securities of Target and the status of
Acquisition Sub's securities shall be as follows:
(a) Subject to the provisions of this Agreement, each share of Common
Stock, $.001 par value, of Target (the "Target Common Stock") issued and
outstanding immediately prior to the Effective Time (other than Target Common
Stock to be canceled pursuant to Section 2.3(e) hereof, if any) shall, by virtue
of the Merger and without any action on the part of the holder thereof, be
canceled and extinguished and converted into the right to receive, in accordance
with
2
Section 2.3(b) hereof, shares of Common Stock, no par value, of Purchaser (the
"Purchaser Common Stock").
(b) The number of shares of Purchaser Common Stock to be issued
pursuant to Section 2.3(a) hereof for each share of Target Common Stock issued
and outstanding immediately prior to the Effective Time shall be 1.566641609
shares of Purchaser Common Stock for a maximum of 47,328,263 shares of Purchaser
Common Stock; provided, however, that it is the intent of the parties that the
number of shares of Purchaser Common Stock to be issued to Target Shareholders
in the Merger (rounded to the next whole share) represent, immediately
post-Merger, 93.8% of the issued and outstanding Purchaser Common Stock on a
fully-diluted basis and thus the maximum number shares to be issued in the
Merger as set forth in this sentence shall be adjusted either upwards or
downwards in connection with the Merger if and only to the extent necessary to
ensure that the Target Shareholders hold, immediately post-Merger, a number of
shares of Purchaser Common Stock that, when rounded up the next whole share,
represents 93.8% of the issued and outstanding shares of the Purchaser Common
Stock. If and to the extent of any share adjustment as provided in the
immediately preceding sentence, the exchange rate in the Merger shall be
proportionately adjusted.
(c) [intentionally omitted]
(d) If any holder of Target Common Stock is entitled to receive a
fractional share of Purchaser Common Stock pursuant to the Merger (after
aggregating all fractional shares of Purchaser Common Stock to be received by
such holder), such holder instead will be entitled to receive (i) one whole
share of Purchaser Common Stock in lieu of such fractional share if such holder
would have otherwise been entitled to receive or purchase one-half or more of a
share of Purchaser Common Stock; and (ii) otherwise such holder shall not be
entitled to receive or purchase any additional shares or fractional shares.
(e) Any share of Target Common Stock held in the treasury of Target at
the Effective Time shall be canceled and retired, and no shares or other
securities of Purchaser or Acquisition Sub shall be issuable with respect
thereto.
(f) Each issued and outstanding share of Common Stock, par value
[$.001] per share, of Acquisition Sub (the "Acquisition Sub Common Stock") shall
be converted into and become one (1) validly issued, fully paid and
non-assessable share of Target Common Stock.
(g) Subject to the provisions hereof, each holder of an outstanding
certificate or certificates theretofore representing shares of Target Common
Stock, and theretofore surrendered by such holder to Purchaser or its transfer
agent for cancellation, shall be entitled to receive in exchange therefor (i) as
promptly as practicable after the Effective Time, certificates representing that
holder's proportionate number of shares of Purchaser Common Stock for each share
of Target Common Stock surrendered, as is specified in Section 2.3(b) hereof. If
the shares of Purchaser Common Stock (or any portion thereof) are to be
delivered to any person other than the person in whose name the certificate or
certificates representing the Target Common Stock surrendered in exchange
therefor are registered, in addition to any other
3
requirements of applicable law, it shall be a condition to such exchange that
the certificate or certificates so surrendered shall be properly endorsed or
otherwise be in proper form for transfer and that the person requesting such
exchange shall pay to Purchaser or its transfer agent any transfer or other
taxes required by reason of the delivery of the Purchaser Common Stock to a
person other than the registered holder of the certificate or certificates
surrendered, or shall establish to the satisfaction of Purchaser or its transfer
agent that such tax has been paid or is not applicable.
(h) The Purchaser Common Stock is being issued hereunder in a private
transaction exempt from registration under Section 5 of the Securities Act,
pursuant to (i) Regulation D promulgated under the Securities Act or (ii)
Section 4(2) of the Securities Act, and accordingly such shares of Purchaser's
Common Stock may not be sold or otherwise transferred or disposed of by the
holders thereof unless they are registered under the Securities Act or unless an
exemption from such registration is available. Accordingly, a restrictive legend
will be placed on any instruments, certificates or other documents evidencing
such shares of Purchaser Common Stock in, or substantially in, the following
form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933. These securities
have been acquired for investment and not for distribution or
resale. They may not be sold, assigned, mortgaged, pledged,
hypothecated or otherwise transferred or disposed of without
an effective registration statement for such securities under
the Securities Act of 1933 or an opinion of counsel to the
Company that registration is not required under such Act."
(i) Unless and until outstanding certificates representing shares of
Target Common Stock prior to the Effective Time shall be surrendered as provided
in Section 2.3(g) hereof, dividends and other distributions, if any (including,
without limitation, any shares issuable in connection with stock split-ups or
other recapitalizations), payable as of any date subsequent to the Effective
Time to the holders of record of shares of Purchaser Common Stock shall not be
paid to the holders of such certificates, but in the case of each such
certificate which shall be so surrendered: (i) there shall be paid, upon such
surrender, to the record holder of the certificate for shares of Purchaser
Common Stock issued in exchange therefor, the full amount, without any interest
thereon, of the dividends and any other distributions (including, without
limitation, any shares issued in connection with stock split-ups or other
recapitalizations) referred to above which theretofore became payable with
respect to the number of shares of Purchaser Common Stock represented by such
certificate; and (ii) there shall be paid to such record holder, on the payment
date therefor, the amount of any such dividend or other distribution with
respect to such number of shares, if the record date for the determination of
the stockholders entitled to such dividend or other distribution shall be prior
to the surrender of such certificate but the payment date of such dividend shall
be subsequent to such surrender.
4
(j) Promptly after the Effective Time, Purchaser's transfer agent shall
mail to each holder of certificates that immediately prior to the Effective Time
represented Target Common Stock a form of letter of transmittal and instructions
for use in surrendering such certificates and receiving the Purchaser Common
Stock in exchange therefor.
(k) No holder of Target Common Stock shall have any of the rights of a
stockholder of Purchaser with respect to the Purchaser Common Stock to be issued
in the Merger until the Effective Time.
2.4 EFFECT OF MERGER.
(a) Except as herein otherwise specifically set forth, the identity,
existence, purposes, powers, franchises, rights and immunities of Target shall
continue unaffected and unimpaired by the Merger, and the corporate identity,
existence, purposes, powers, franchises and immunities of Acquisition Sub shall
be merged into Target, and Target, as the Surviving Corporation and a
wholly-owned subsidiary of Purchaser, shall be fully vested therewith. The
separate existence and corporate organization of Acquisition Sub (except insofar
as they may be continued by statute) shall cease as of the Effective Time.
(b) At the Effective Time:
(i) All rights, privileges, goodwill, franchises and property,
real, personal and mixed, and all debts due on whatever account and all other
things in action, belonging to Acquisition Sub shall be, and they hereby are,
bargained, conveyed, granted, confirmed, transferred, assigned and set over to
and vested in Target as the Surviving Corporation by operation of law and
without further act or deed, and all property and rights, and all and every
other interest of Acquisition Sub shall be the property, rights and interests of
Target as the Surviving Corporation as they were of Acquisition Sub;
(ii) No action or proceeding, whether civil or criminal,
pending at the Effective Time by or against either Acquisition Sub or Target, or
any shareholder, officer or director thereof, shall abate or be discontinued by
the Merger, but may be enforced, prosecuted, settled or compromised as if the
Merger had not occurred, or the Surviving Corporation may be substituted in such
action or proceeding in place of Acquisition Sub; and
(iii) All rights of employees and creditors and all Liens upon
the property of Acquisition Sub shall be preserved unimpaired, limited to the
property affected by such Liens at the Effective Time, and all the debts,
liabilities and duties of Acquisition Sub shall attach to Target as the
Surviving Corporation and shall be enforceable against the Surviving Corporation
to the same extent as if all such debts, liabilities and duties had been
incurred or contracted by it.
2.5 FURTHER ASSURANCES. Acquisition Sub agrees that, from time to time, after
the Closing, as and when requested by the Surviving Corporation or by its
successors and assigns, officers of the Surviving Corporation shall, in the name
of Acquisition Sub, execute and deliver, or cause to
5
be executed and delivered, at the sole expense of the Surviving Corporation, all
deeds, assignments and other instruments and shall take or cause to be taken all
such other and further actions as the Surviving Corporation may deem necessary
or appropriate in order more fully to vest in and confirm to the Surviving
Corporation title to and possession of all the property, rights, privileges,
immunities, powers, purposes, franchises and all and every other interest of
Acquisition Sub referred to in Section 2.4 hereof, and otherwise to carry out
the intent and purposes of this Agreement.
2.6 DIRECTORS OF SURVIVING CORPORATION. The persons comprising the Board of
Directors of the Surviving Corporation, who shall hold office from the Effective
Time in accordance with its By-Laws until the next annual meeting of
shareholders and until their respective successors shall have been elected and
shall have qualified, shall be the directors of Target immediately prior to the
Effective Time, subject to the terms hereof.
2.7 OFFICERS OF SURVIVING CORPORATION. The officers of the Surviving
Corporation, who shall hold office from the Effective Time in accordance with
its By-Laws until the next annual meeting of directors and until their
respective successors shall have been elected or appointed and shall have
qualified, shall be the officers of Target immediately prior to the Effective
Time, subject to the terms hereof.
2.8 DISSENTERS RIGHTS. Notwithstanding anything in this Agreement to the
contrary, holders of shares of Common Stock of the Purchaser which are
dissenting shares ("Dissenting Shares") if any (as defined in Section 1300(b) of
the California Corporations Code), shall be entitled to such rights as are
granted by the California Corporations Code for dissenting shares. Each holder
of Dissenting Shares who becomes entitled to payment therefor pursuant to the
California Corporations Code shall receive payment therefore in accordance with
the California Corporations Code; provided however, that (i) if any holder of
Dissenting Shares shall have failed to establish such holder's entitlement to
dissenter rights as provided in the California Corporations Code, (ii) if any
such holder of Dissenting Shares shall have effectively withdrawn such holder's
demand for appraisal thereof or lost such holder's right to appraisal and
payment therefor under the California Corporations Code, or (iii) if neither any
holder of Dissenting Shares nor the Surviving Corporation shall have filed a
petition demanding a determination of the value of all Dissenting Shares within
the time provided in the California Corporations Code, such holder or holders
(as the case may be) shall forfeit the right to appraisal of such shares of
Common Stock of the Purchaser and such shares of Common Stock of the Purchaser
shall thereupon not be dissenting shares as defined in the California
Corporations Code.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TARGET
Target makes the following representations and warranties to Purchaser,
each of which shall apply to Target and to each subsidiary of Target, including
without limitation Chaoying
6
Biotech (the "Joint Venture"). For the purposes of this Article III, each
reference to Target shall be deemed to be a reference to Target and each of its
Subsidiaries (including without limitation the Joint Venture) unless the context
clearly connotes otherwise. Each of the following representations and warranties
shall be deemed material, and Purchaser, in executing, delivering and
consummating this Agreement, has relied upon the correctness and completeness,
in all material respects, of each of such representations and warranties:
3.1 VALID EXISTENCE; QUALIFICATION. Target is a corporation duly organized,
validly existing and. in good standing under the laws of the State of Maryland.
Target has the power to carry on its business as now conducted and to own its
assets. Target is not qualified to do business as a foreign corporation in any
state, , and is not required to be so qualified in any other jurisdiction in
order to own its assets or carry on its business as now conducted, and there has
not been any claim by any other jurisdiction to the effect that Target is
required to qualify or otherwise be authorized to do business as a foreign
corporation therein. The copies of Target's Articles of Incorporation, as
amended to date, certified by the State Department of Assessments and Taxation
of the State of Maryland, and By-Laws, as amended to date (certified by the
Secretary of Target), which have been delivered to Purchaser, are true and
complete copies of those documents as in effect on the date hereof.
3.2 CAPITALIZATION.
(a) The authorized capital stock of Target consists of thirty five
million (35,000,000) shares of Common Stock, $.10 par value per share, of which
as of the date hereof and at the Effective Time thirty million two hundred ten
thousand (30,210,000 shares are and will be issued and outstanding. No shares of
preferred shares have been authorized and none will be authorized, issued or
outstanding as of the Closing. All of such issued and outstanding shares of
Target Common Stock, as of the date hereof are, and as of the Effective Time
shall be, duly authorized, validly issued, fully paid and nonassessable. There
are, and as of the Effective Time there will be, no outstanding Derivative
Securities of Target that are convertible into or exchangeable for any
securities of Target, and there are, and as of the Effective Time there will be,
no outstanding subscriptions, options, warrants, rights, calls or other
commitments or agreements to which Target is a party or by which it is bound
calling for the issuance, transfer, sale or disposition of any securities of
Target or Derivative Securities.
(b) Except as set forth on Schedule 3.2(b) attached hereto, Target has
not made any investments in, and does not own, any of the capital stock of, or
any other equity interest in, any other Person.
(c) Attached hereto is a true, complete and accurate list of all of the
security holders of Target, which list sets forth the name of each security
holder (indicating each security holder that is an "accredited investor," as
that term is defined in Rule 501(a) of Regulation D promulgated under the
Securities Act) and the type and number of securities of Target held by such
security holder as of the date hereof and indicates whether any of the security
holders of
7
Target are a relative, spouse or relative of a spouse of any of the other
security holders of Target and, if so, if such persons have the same principal
residence. None of the security holders of Target was or has been organized or
formed or issued any equity securities for the specific purpose of acquiring the
securities of Purchaser to be issued in the Merger. Each of the security holders
of Target who is not an "accredited investor" as so defined, either alone or
with such security holder's purchaser representative, has such knowledge and
experience in business and financial and business matters that such security
holder is capable of evaluating the merits and risks of the Merger and the
transactions contemplated hereby. All of the issued and outstanding shares of
the capital stock of Target have been issued in compliance with appropriate
exemptions from the registration requirements under the Securities Act and from
the registration and/or qualification requirements under applicable state
securities laws.
(d) Target has set forth on Schedule 3.2(d) hereto a true, complete and
correct list of all persons and entities who are, in Target's best judgment,
"affiliates" of Target within the meaning of Rule 145 promulgated under the
Securities Act (the "Target Affiliates").
3.3 CONSENTS. Except as set forth on Schedule 3.3 attached hereto, no consent of
any Body or other Person is required to be received by or on the part of Target
to enable Target to enter into and carry out this Agreement and the Transaction.
3.4 AUTHORITY; BINDING NATURE OF AGREEMENT.
(a) Target has the corporate power and authority to enter into this
Agreement and carry out its obligations hereunder. The execution and delivery of
this Agreement and the consummation of the Transaction have been duly authorized
by the directors of Target, and no other corporate proceedings on the part of
Target are necessary to authorize the execution and delivery of this Agreement
and the consummation of the Transaction.
(b) This Agreement constitutes the valid and binding obligation of
Target and is enforceable against it in accordance with its terms.
3.5 FINANCIAL STATEMENTS. The Target Financial Statements, a copy of which is
set forth in Schedule 3.5, (i) are true and complete, (ii) are in accordance
with the Books and Records of Target, (iii) fairly present the financial
position of Target as of the Target Balance Sheet Date and the results of their
operations for the year ended [December 31, 2003] and the interim period ended
[June 30, 2004], and (iv) were prepared in conformity with United States
generally accepted accounting principles consistently applied throughout the
periods covered thereby.
3.6 LIABILITIES. As at the Target Balance Sheet Date, Target had no Liabilities,
other than those Liabilities reflected or reserved against in the Target Balance
Sheet, and there was no basis for the assertion against Target of any Liability
not so reflected or reserved against therein.
3.7 ACTIONS SINCE THE TARGET BALANCE SHEET DATE. Except as otherwise expressly
provided or set forth in, or required by, this Agreement, or as set forth in
Schedule 3.7 attached hereto, since the Target Balance Sheet Date, Target has
not (i) incurred any material Liability or other Liability not in the ordinary
and usual course of business and consistent with past practice, (ii)
8
made any wage or salary increases or granted any bonuses; (iii) mortgaged,
pledged or subjected to any Lien any of its assets, or permitted any of its
assets to be subjected to any Lien; (iv) sold, assigned or transferred any of
its assets, except in the ordinary and usual course of business consistent with
past practice; (v) changed its accounting methods, principles or practices; (vi)
revalued any of its assets, including, without limitation, writing down the
value of inventory or writing off notes or accounts receivable; (vii) incurred
any damage, destruction or loss (whether or not covered by insurance) adversely
affecting its assets or business which has had or could be reasonably expected
to have a Material Adverse Effect; (viii) canceled any material indebtedness or
waived or released any right or claim; (ix) incurred any Material Adverse Change
in employee relations; (x) amended, canceled or terminated any material Contract
or Permit or entered into any material Contract or Permit which was not in the
ordinary and usual course of business consistent with past practice; (xi)
increased or changed its assumptions underlying, or methods of calculating, any
doubtful account contingency or other reserves; (xii) paid, discharged or
satisfied any Liabilities other than the payment, discharge or satisfaction in
the ordinary and usual course of business of Liabilities set forth or reserved
for on the Target Balance Sheet, as the case may be, or thereafter incurred in
the ordinary and usual course of business consistent with past practice; (xiii)
made any capital expenditure, entered into any lease or incurred any obligation
to make any capital expenditure, except in the ordinary and usual course of
business consistent with past practice; (xiv) failed to pay or satisfy when due
any material liability; (xv) failed to carry on its business in the ordinary and
usual course, consistent with the past practice, so as to reasonably keep
available the services of its employees, and to preserve its assets and business
and the goodwill of its suppliers, customers, distributors and others having
business relations with it; (xvi) disposed of or allowed the lapse of any
Proprietary Rights or disclosed to any Person any Proprietary Rights not
theretofore a matter of public knowledge; (xvii) made any loans or advances to
any Person, or assumed, guaranteed, endorsed or otherwise became responsible for
the obligations of any Person; (xviii) other than this Agreement or the
Transaction contemplated hereby, entered into any transaction or course of
conduct not in the ordinary and usual course of business and consistent with
past practice.
3.8 ADVERSE DEVELOPMENTS. Since the Target Balance Sheet Date there has been no
Material Adverse Change in the assets, business, operations (financial or
otherwise), or prospects of Target, there has been no act or omission on the
part of Target or others which would form the basis for the assertion against
Target of any material Liability, no other event has occurred which could be
reasonably expected to have a Material Adverse Effect, and Target does not know
of any development or threatened development of a nature which could be
reasonably expected to have a Material Adverse Effect.
3.9 TAXES. All taxes, including, without limitation, income, property, sales,
use, utility, franchise, capital stock, excise, value added, employees'
withholding, social security and unemployment taxes imposed by the United
States, any state, locality or any foreign country and any and all political
subdivisions thereof and localities therein, or by any other taxing authority,
which have or may become due or payable by Target and all interest and penalties
thereon, whether disputed or not, have been paid in full or adequately provided
for by reserves shown in the Books and Records; all deposits required by law to
be made by Target with respect to
9
estimated income, franchise and employees' withholding taxes have been duly
made; and all tax returns, including estimated tax returns, required to be filed
have been duly and timely filed. No extension of time for the assessment of
deficiencies for any year is in effect. No deficiency notice is proposed, or, to
the knowledge of Target, threatened against Target. The tax returns of Target
have never been audited.
3.10 OWNERSHIP OF ASSETS; TRADEMARKS, PATENTS, ETC.
3.10.1 ASSETS GENERALLY.
(a) Target owns outright, and has good and marketable title
to, all of its assets including without limitation, subject to changes in the
ordinary course of business since the Target Balance Sheet Date, those assets
set forth on the Target Balance Sheet,(the "Assets"), free and clear of all
Liens. The Assets are sufficient to permit Target to conduct its Business as now
conducted. None of the Assets are subject to any restriction with regard to
transferability.
(b) There are no agreements, options, commitments or
understandings with, of or to any person to acquire any of the Assets or any
rights or interest therein, except for this Transaction.
3.10.2 TRADEMARKS, PATENTS, ETC. Schedule 3.10.2 sets forth a true and
complete list of (including, without limitation, each application number, serial
number or registration number, the class of goods or services covered and the
expiration date for each country in which a Proprietary Right has been
registered) and a brief description of all any and all registered trademarks,
registered service marks, trademark and service mark applications and
unregistered trademarks and service marks included in, or related to, the Assets
(collectively, the "Trademarks"), patents and copyrights (including, without
limitation, all registrations, licenses and applications pertaining thereto),
patent license rights, trade secrets, franchises, inventions, processes,
designs, specifications, plans, drawings, system documentation, programming,
databases, know-how, confidential information, shop rights, licenses, internet
domain names, world wide web addresses and all other proprietary information,
processes and formulae owned by the Target (the "Other Intellectual Property")
and all other intellectual property rights related thereto (collectively, with
the Trademarks and the Other Intellectual Property, the "Proprietary Rights").
No other person, firm or corporation has any proprietary or other interest in
any such Proprietary Rights and Target is not a party to or bound by any
contract requiring the payment to any person, firm or corporation of any
royalty. The Target is not infringing upon any Proprietary Rights or otherwise
violating the rights of any third party with respect thereto, and no proceedings
have been instituted, and no claim has been received by Target, and the Target
is not aware of any claim, alleging any such violation. There are no pending
applications with regard to any Proprietary Right. Target has taken all
reasonable and prudent steps to protect the Proprietary Rights from infringement
by any other person. No other person, (i) has the right to use any of Target's
Trademarks on the goods on, or in connection with the services for, which they
are now being used, either in identical form or, to the best of Target's
knowledge, in such near resemblance thereto as to be likely, when applied to the
goods or services of any such
10
person, to cause confusion with such Trademarks or to cause a mistake or to
deceive, (ii) has a license or the right to use any Proprietary Right of Target,
whether by license, sublicense or other rights (iii) has notified Target that it
is claiming any ownership of or right to use such Proprietary Rights, or (iv) to
the best of Target's knowledge, is infringing upon any such Proprietary Rights
in any way.
3.11 INSURANCE. Schedule 3.11 attached hereto sets forth a true and complete
list and brief description of all policies of fire, liability, political and
other forms of insurance held by Target and the names and addresses of the
insurers which are the issuers of such insurance policies. Except as set forth
in Schedule 3.11, such policies are valid, outstanding and enforceable policies,
as to which premiums have been paid currently. To the knowledge of Target, there
exists no state of facts, and no event has occurred, which reasonably may be
expected to (i) form the basis for any claim against Target not fully covered by
insurance for liability on account of any express or implied warranty or
tortious omission or commission, or (ii) result in any material increase in
insurance premiums.
3.12 LITIGATION; COMPLIANCE WITH LAW. There are no Actions relating to Target or
any of its assets or the Business pending or, to the knowledge of Target,
threatened, or any order, injunction, award or decree outstanding, against
Target or against or relating to any of its assets or the Business; and there
exists no basis for any such Action. Target is not in violation of any law,
regulation, ordinance, order, injunction, decree, award, or other requirement of
any governmental or other regulatory Body, court or arbitrator relating to its
assets or the Business.
3.13 REAL PROPERTY. Except as set forth on Schedule 3.13 attached hereto, Target
does not own or lease, or use under license or the like, any real property. The
leases for each of Target's offices are listed on Schedule 3.13.
3.14 AGREEMENTS AND OBLIGATIONS; PERFORMANCE. Except for the Contracts listed
and briefly described in Schedule 3.14 attached hereto (the "Target Listed
Agreements"), Target is not a party to, or bound by, any: (i) Contract which
involves aggregate payments or receipts in excess of $20,000 that cannot be
terminated at will without penalty or premium or any continuing Liability; (ii)
Contract of any kind with any officer, director, employee or shareholder of
Target; (iii) Contract which is in violation of applicable law; (iv) Contract
for the purchase, sale or lease of any materials, products, supplies or services
which contains, or which commits or will commit it for, a fixed term; (v)
Contract of employment not terminable at will without penalty or premium or any
continuing Liability; (vi) deferred compensation, bonus or incentive plan or
Contract not cancelable at will without penalty or premium or any continuing
obligation or Liability; (vii) management or consulting Contract not terminable
at will without penalty or premium or any continuing obligation or Liability;
(viii) license or royalty Contract; (ix) Contract relating to indebtedness for
borrowed money; (x) union or other collective bargaining Contract; (xi) Contract
which, by its terms, requires the consent of any party thereto to the
consummation of the Transaction; (xii) Contract containing covenants limiting
the freedom of Target, or any shareholder, director, officer or employee
thereof, to engage or compete in any line of business, or with any Person, in
any geographical area; (xiii) Contract or option relating to
11
the acquisition or sale of any business; (xiv) voting agreement or similar
Contract; (xv) option for the purchase of any asset, tangible or intangible;
(xvi) franchise, license or advertising Contract; (xvii) Contract with the
United States government, any state, local or foreign government, or any
political subdivision, agency or department thereof; or (xviii) other Contract
which materially affects any of assets or the Business whether directly or
indirectly, or which was entered into other than in the ordinary and usual
course of business consistent with past practice. A true and correct copy of
each of the written Target Listed Agreements has been delivered, or made
available, to Purchaser. The Target Listed Agreements are valid, in full force
and effect and are enforceable by Target, as the case may be, in accordance with
the terms thereof. Target has in all material respects performed all obligations
required to be performed by it to date under all of the Target Listed
Agreements, is not in Default under any of the Target Listed Agreements and has
received no notice of any dispute, Default or alleged Default thereunder which
has not heretofore been cured or which notice has not heretofore been withdrawn.
Target does not know of any Default under any of the Target Listed Agreements by
any other party thereto or by any other Person bound thereunder.
3.15 CONDITION OF ASSETS. All of the tangible personal property Assets owned by
Target operate according to their respective current specifications and
purposes.
3.16 PERMITS AND LICENSES. Target has all Permits from all Bodies required to
carry on the Business as presently conducted; all such Permits are in full force
and effect, and, to the knowledge of Target, no suspension or cancellation of
any of such Permits is threatened and Target is in compliance in all material
respects with all requirements, standards and procedures of the Bodies which
have issued such Permits. Schedule 3.16 attached hereto and made a part hereof
sets forth a true and complete list of all Permits from all Bodies held by
Target.
3.17 OCCUPATIONAL HEATH AND SAFETY AND ENVIRONMENTAL MATTERS. The operations of
the Business do not, and will not, require, and Target does not have any,
Permits from any Bodies relating to occupational health and safety or
environmental matters to lawfully conduct the Business. There is no litigation,
investigation or other proceeding pending or, to the knowledge of Target,
threatened or known to be contemplated by any Body in respect of or relating to
the Business of Target with respect to occupational health and safety or
environmental matters. To Target's knowledge, all operations of the Business
have been conducted in compliance with all, and Target is not liable in any
respect for any violation of any, applicable United States federal, state, local
or foreign laws or regulations, pertaining to occupational health and safety and
environmental matters, including, without limitation, those relating to the
emission, discharge, storage, release or disposal of Materials of Environmental
Concern into ambient air, surface water, ground water or land surface or
sub-surface strata or otherwise relating to the manufacture, processing,
distribution, use, handling, disposal or transport of Materials of Environmental
Concern. Target has not received any notice of a possible claim or citation
against or in respect of any real property leased by Target, or with regard to
their respective assets or the Business, relating to occupational health and
safety or environmental matters, and Target is not aware of any basis for any
such Action.
12
3.18 [Intentionally omitted.]
3.19 [Intentionally omitted.]
3.20 EMPLOYMENT RELATIONS. Schedule 3.20 contains a true and complete list of
all current employees and independent contractors of the Target. No employees
who are Material to the future operation of the Business have expressed
intention to leave the Target. Target has not made any promises of increases in
wages, salary, compensation, payments, benefits or otherwise. In the past, to
the knowledge of Target, Target has complied with all United States federal,
state, local, foreign, and other applicable laws, rules and regulations
respecting employment and employment practices, terms and conditions of
employment and wages and hours, and has not engaged in any unfair labor practice
which, in any of the foregoing cases, could have a Material Adverse Effect.
There is not pending, or, to the knowledge of Target threatened, any unfair
labor practice charge or complaint against Target by or before the United States
Federal National Labor Relations Board or any comparable state, local or foreign
agency or authority. No litigation, arbitration, administrative proceeding or
governmental investigation is now pending, and, to the knowledge of Target, no
current, former or prospective employee has made any claim or has threatened
litigation, arbitration, administrative proceeding or governmental
investigation, against Target arising out of any law relating to discrimination
against employees or employment practices.
3.21 [intentionally omitted]
3.22 NO BREACH. Neither the execution and delivery of this Agreement nor
compliance by Target with any of the provisions hereof nor the consummation of
the Transaction will:
(a) violate or conflict with any provision of the Articles of
Incorporation, By-Laws or other organizational document of Target;
(b) violate or conflict with or, alone or with notice or the passage of
time, or both, result in the breach or termination of, or otherwise give any
party the right to terminate, or declare a Default under, the terms of any
Contract to which Target is a party or by which any of them may be bound, or
otherwise violate or conflict with any Permit of any Body;
(c) result in the creation of any Lien upon any of the assets of
Target;
(d) violate any judgment, order, injunction, decree or award against,
or binding upon Target or upon any of the assets of Target; or
(e) violate any law or regulation of any jurisdiction relating to
Target or the Business.
3.23 BROKERS. Target has not engaged, consented to, or authorized any broker,
finder, investment banker or other third party to act on its behalf, directly or
indirectly, as a broker or finder in connection with the Transaction.
13
3.24 PRIOR NAMES AND ADDRESSES. Since inception, Target has not used any
business name or had any business address other than its current name and
business address.
3.25 BOOKS AND RECORDS. Target has made and kept (and given Purchaser access to)
its Books and Records and accounts, which, in reasonable detail, accurately and
fairly reflect the activities of Target and the Business. Target has not engaged
in any material transaction, maintained any bank account or used any corporate
or company funds except for transactions, bank accounts and funds which have
been and are reflected in the normally maintained Books and Records of Target.
3.26 PAYMENTS. Target has not, directly or indirectly paid or delivered any fee,
commission or other sum of money or item or property, however characterized, to
any finder, agent, client, customer, supplier, government official or other
Person, in the United States or any other country, which is illegal under any
federal, state or local laws of the United States (including, without
limitation, the U.S. Foreign Corrupt Practices Act) or such other country.
3.27 SALES OF SECURITIES. No communication made by Target in connection with the
sale of its securities to investors contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
made not misleading.
3.28 UNTRUE OR OMITTED FACTS. No representation, warranty or statement by Target
in this Agreement contains any untrue statement of a material fact, or omits to
state a material fact necessary in order to make such representations,
warranties or statements not misleading. Without limiting the generality of the
foregoing, there is no fact known to Target that has had, or which may be
reasonably expected to have, a Material Adverse Effect that has not been
disclosed in this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser makes the following representations and warranties to Target
each of which shall be deemed material, and Target in executing, delivering and
consummating this Agreement, has relied upon the correctness and completeness,
in all material respects, of each of such representations and warranties:
4.1 VALID EXISTENCE; QUALIFICATION. Each of Purchaser and Acquisition Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporation. Each of Purchaser and Acquisition Sub has the
power to carry on its business as now conducted and to own its assets. Purchaser
is a corporation incorporated in the state of California and is not required to
be so qualified in any other jurisdiction in order to own its assets or carry on
its business as now conducted, and there has not been any claim by any other
14
jurisdiction to the effect that Purchaser is required to qualify or otherwise be
authorized to do business as a foreign corporation therein. The copies of
Purchaser's Articles of Incorporation and Acquisition Sub's Articles of
Incorporation, as amended to date, certified by the appropriate regulatory Body
in their respective state of incorporation, and their respective By-Laws, as
amended to date (certified by the Secretary of Purchaser and Acquisition Sub,
respectively), which have been delivered to Target, are true and complete copies
of those documents as in effect on the date hereof.
4.2 CAPITALIZATION.
(a) The authorized capital stock of Purchaser consists of Ten Million
shares of Common Stock, no par value per share, of which 3,128,306 shares are
issued and outstanding, and five hundred thousand (500,000) shares of Preferred
Stock, $1.00 par value per share, none of which are issued and outstanding. All
of such issued and outstanding shares of Purchaser Common Stock are duly
authorized, validly issued, fully paid and nonassessable. As of the Closing date
there will be no outstanding Derivative Securities of Purchaser that are
convertible into or exchangeable for any securities of Purchaser and there will
be no outstanding subscriptions, options, warrants, rights, calls or other
commitment or agreements to which Purchaser is a party or by which it is bound
calling for the issuance, transfer, sale or disposition of any securities of
Purchaser or Derivative Securities.
(b) The authorized capital stock of Acquisition Sub consists of one
thousand shares of Common Stock, $.001 par value per share, of which one hundred
shares are issued outstanding and owned by the Purchaser. All such issued and
outstanding shares of Common Stock of Acquisition Sub are duly authorized,
validly issued, fully paid and nonassessable. There are no outstanding
Derivative Securities of Acquisition Sub that are convertible into or
exchangeable for any securities of Acquisition Sub and there are no outstanding
subscriptions, options, warrants, rights, calls or other commitment or
agreements to which Acquisition Sub is a party or by which it is bound calling
for the issuance, transfer, sale or disposition of any securities of Acquisition
Sub or Derivative Securities.
(c) Except as set forth in Schedule 4.2(c), neither Purchaser nor
Acquisition Sub has made any investments in, and does not own, any of the
capital stock of, or any other equity interest in, any other Person.
4.3 CONSENTS. Except as set forth on Schedule 4.3 attached hereto, or as
specifically set forth in this Agreement, no consent of any Body or other Person
is required to be received by or on the part of Purchaser or Acquisition Sub to
enable Purchaser or Acquisition Sub to enter into and carry out this Agreement
and the Transaction. Purchaser, as the holder of 100% of the issued and
outstanding shares of common stock of the Acquisition Sub, has approved this
Agreement.
4.4 AUTHORITY; BINDING NATURE OF AGREEMENT.
15
(a) Each of Purchaser and Acquisition Sub respectively has the
corporate power and authority to enter into this Agreement and carry out its
obligations hereunder. The execution and delivery of this Agreement and the
consummation of the Transaction have been duly authorized by the boards of
directors of Purchaser and Acquisition Sub, and by Purchaser as the sole
shareholder of Acquisition Sub, and, except for the approvals by the holders of
a majority of the issued and outstanding common stock of Purchaser, no other
corporate proceedings on the part of Purchaser or Acquisition Sub are necessary
to authorize the execution and delivery of this Agreement and the consummation
of the Transaction.
(b) This Agreement constitutes the valid and binding obligation of each
of Purchaser and Acquisition Sub and is enforceable against it in accordance
with its terms.
16
4.5 FINANCIAL STATEMENTS. The Purchaser Financial Statements included in
Purchaser's Annual Report on Form 10-K for the fiscal year ended October 31,
2003 and its Quarterly Reports on Form 10-Q for the period ended July 31, 2004
(i) are true and complete, (ii) are in accordance with the Books and Records of
Purchaser, (iii) fairly present the financial position of Purchaser as of the
Purchaser Balance Sheet Date and the results of its operations for the year
ended October 31, 2003 and for the nine months ended July 31, 2004 and (iv) are
prepared in conformity with generally accepted accounting principles, ("GAAP")
consistently applied, and with Regulation S-X or Regulation S-B Item 310, as
applicable, promulgated under the Securities Act, throughout the periods covered
thereby.
4.6 LIABILITIES. Except as set forth in Schedule 4.6(a) attached hereto, as of
the Purchaser Balance Sheet Date, Purchaser had no Liabilities required to be
reflected or reserved against in a balance sheet according to GAAP, other than
those Liabilities reflected or reserved against in the Purchaser Balance Sheet
or Liabilities which do not or will not have a Material Adverse Effect on
Purchaser, and to the knowledge of Purchaser, there was no basis for the
assertion against Purchaser of any Liability not so reflected or reserved
against in the Purchaser Balance Sheet other than a Liability which does not and
is not expected to have a Material Adverse Effect on Purchaser. If any liability
is due and owing any creditor in excess of $5,000, Purchaser shall supply the
Company on a supplemental basis with a list of all creditors due and owing in
excess of $5,000. The Company shall have the right to confirm any outstanding
liabilities with third party creditors in excess of $10,000. As of the Closing,
there will be no outstanding payments due any officer, director or employee for
unpaid compensation, vacation time or loans other than unpaid compensation and
accrued vacation for the payroll period during which the Closing occurs.
4.7 ACTIONS SINCE THE PURCHASER BALANCE SHEET DATE. Except as otherwise
expressly provided or set forth in, or required by, this Agreement, or as set
forth in Schedule 4.7 attached hereto, or for sales from inventory in the
ordinary course of business, since the Purchaser Balance Sheet Date, Purchaser
has not (i) incurred any material Liability; (ii) made any wage or salary
increases or granted any bonuses; (iii) mortgaged, pledged or subjected to any
Lien any of its assets, or permitted any of its assets to be subjected to any
Lien; (iv) sold, assigned or transferred any of its assets other than the sale
of the inventory on hand; (v) changed its accounting methods, principles or
practices; (vi) revalued any of its assets, including, without limitation,
writing down the value of inventory or writing off notes or accounts receivable;
(vii) incurred any damage, destruction or loss (whether or not covered by
insurance) adversely affecting its assets or business which has had or could be
reasonably expected to have a Material Adverse Effect (viii) canceled any
material indebtedness or waived or released any material right or claim; (ix)
incurred any Material Adverse Change in employee relations; (x) amended,
canceled or terminated any Contract or Permit or entered into any Contract or
Permit; (xi) increased or changed its assumptions underlying, or methods of
calculating, any doubtful account contingency or other reserves; ( (xii) made
any material capital expenditure, entered into any lease or incurred any
obligation to make any material capital expenditure; (xiii) failed to pay or
satisfy when due any Liability, (xi) issued or sold, or agreed to issue or sell,
any of its capital stock, options, warrants, rights or calls to purchase such
stock, any securities convertible into or exchangeable for such capital stock or
other corporate securities, or effected any subdivision or other
recapitalization affecting its capital stock; (xv) declared, paid or set aside
any dividends or
17
other distributions or payments on its capital stock, or redeemed or
repurchased, or agreed to redeem or repurchase, any shares of its capital stock;
(xvi) made any loans or advances to any Person, or assumed, guaranteed, endorsed
or otherwise became responsible for the obligations of any Person (except as a
result of endorsement, for collection or deposit, of negotiable instruments,
received in the ordinary course of business) ; (xvii) incurred any indebtedness
for borrowed money (except as a result of its endorsement, for collection or
deposit, of negotiable instruments received in the ordinary and usual course of
business); or (xiii) entered into any transaction other than in the ordinary
course of business.
4.8 ADVERSE DEVELOPMENTS. Except as set forth on Schedule 4.8, the continuing
losses by Purchaser and the incurrence of expenses as contemplated hereby, since
the Purchaser Balance Sheet Date, there has been no Material Adverse Change in
the liabilities or condition (financial or otherwise), of Purchaser, there has
been no act or omission on the part of Purchaser or others which would
reasonably be expected to form the basis for the assertion against Purchaser of
any material Liability, no other event has occurred which could be reasonably
expected to have a Material Adverse Effect, and Purchaser does not know of any
development or threatened development of a nature which could be reasonably
expected to have a Material Adverse Effect
4.9 TAXES. All taxes, including, without limitation, income, property, sales,
use, utility, franchise, capital stock, excise, value added, employees'
withholding, social security and unemployment taxes imposed by the United
States, any state, locality or any foreign country, or by any other taxing
authority, which have or may become due or payable by Purchaser and all interest
and penalties thereon, whether disputed or not, have been paid in full or if not
paid, disclosed in the Books and Records; all deposits required by law to be
made by Purchaser with respect to estimated income, franchise and employees'
withholding taxes have been duly made; and all tax returns, including estimated
tax returns, required to be filed have been duly and timely filed. Except as set
forth on Schedule 4.9 attached hereto, no extension of time for the assessment
of deficiencies for any year is in effect. No deficiency notice is proposed, or,
to the knowledge of Purchaser, threatened against Purchaser. The federal income
tax returns of Purchaser have not been audited since October 31, 1998.
4.10 OWNERSHIP OF ASSETS. Purchaser does not warrant that it owns any particular
assets.
4.11 INSURANCE. Schedule 4.11 attached hereto sets forth a true and complete
list and brief description of all policies of fire, liability, political and
other forms of insurance held by Purchaser and the names and addresses of the
insurers which are the issuers of such insurance policies. Except as set forth
in Schedule 4.11, such policies are valid, outstanding and enforceable policies,
as to which premiums have been paid currently. To the knowledge of Purchaser,
there exists no state of facts, and no event has occurred, which reasonably may
be expected to (i) form the basis for any claim against Purchaser not fully
covered by insurance for liability on account of any express or implied warranty
or tortious omission or commission, or (ii) result in any material increase in
insurance premiums.
4.12 LITIGATION; COMPLIANCE WITH LAW. Except as set forth on Schedule 4.12
attached hereto, as of the date of this Agreement there are no Actions relating
to Purchaser or any of its
18
assets or business, pending or, to the knowledge of Purchaser, threatened, or
any order, injunction, award or decree outstanding against Purchaser or against
or relating to any of its assets or business; and to the knowledge of Purchaser,
there exists no basis that reasonably is expected to give rise to any such
Action. Purchaser is not in violation in any material respect of any law,
regulation, ordinance, order, injunction, decree, award, or other requirement of
any governmental or other regulatory Body, court or arbitrator relating to its
assets. Notwithstanding the foregoing, Purchaser shall have an affirmative
obligation to disclose to Target any changes in the foregoing should said event
arise between the date of execution of this Agreement and the date of Closing.
4.13 REAL PROPERTY. Except as set forth on Schedule 4.13 attached hereto,
Purchaser does not own or lease, or use under license or the like, any real
property.
4.14 AGREEMENTS AND OBLIGATIONS; PERFORMANCE. Except for the Contracts listed
and briefly described in Schedule 4.14 attached hereto (the "Purchaser Listed
Agreements"), this Agreement or for sales of inventory on hand, Purchaser is not
a party to, or is not bound by, any: (i) Contract which involves aggregate
payments or receipts in excess of $2,000 that cannot be terminated at will
without penalty or premium or any continuing Liability; (ii) Contract of any
kind with any officer, shareholder, director, or employee of the Purchaser;
(iii) Contract which is in violation of applicable law; (iv) Contract for the
purchase, sale or lease of any materials, products, supplies or services which
contains, or which commits or will commit it for, a fixed term; (v) Contract of
employment not terminable at will without penalty or premium or any continuing
Liability; (vi) deferred compensation, bonus or incentive plan or Contract not
cancelable at will without penalty or premium or any continuing obligation or
Liability; (vii) management or consulting Contract not terminable at will
without penalty or premium or any continuing Liability; (viii) license or
royalty Contract; (ix) Contract relating to indebtedness for borrowed money; (x)
union or other collective bargaining Contract; (xi) Contract which, by its
terms, requires the consent of any party thereto to the consummation of the
Transaction contemplated hereby; (xii) Contract containing covenants limiting
the freedom of Purchaser, or any officer or employee thereof, to engage or
compete in any line of business, or with any Person, in any geographical area;
(xiii) Contract or option relating to the acquisition or sale of any business;
(xiv) voting agreement or similar Contract; (xv) option for the purchase of any
asset, tangible or intangible; (xvi) franchise, license or advertising Contract;
(xvii) Contract with the United States government, any state, local or foreign
government, or (xviii) other Contract which materially affects any of its
assets, whether directly or indirectly, or which was entered into other than in
the ordinary and usual course of business. A true and correct copy of each of
the written Purchaser Listed Agreement has been delivered, or made available, to
Target. Except as is described in Schedule 4.14 attached hereto, the Purchaser
Listed Agreements are valid, in full force and effect and are enforceable by
Purchaser in accordance with the terms thereof. Purchaser has in all material
respects performed all obligations required to be performed by it to date under
all of the Purchaser Listed Agreements, is not in Default under any of the
Purchaser Listed Agreements and has received no notice of any dispute, Default
or alleged Default thereunder which has not heretofore been cured or which
notice has not heretofore been withdrawn. Except as is described in Schedule
4.14, Purchaser knows of no Default under any of the Purchaser Listed Agreements
by any other party thereto or by any other Person bound thereunder.
19
4.15 OCCUPATIONAL HEATH AND SAFETY AND ENVIRONMENTAL MATTERS. Purchaser has no
significant operations as of the date hereof. Except as set forth in Schedule
4.15, there is no litigation, investigation or other proceeding pending or, to
the knowledge of Purchaser, threatened or known to be contemplated by any Body
in respect of or relating to the most recent operations of Purchaser (the
"Purchaser Business") with respect to occupational health and safety or
environmental matters. To Purchaser's knowledge, all previous operations of the
Purchaser since November 1, 1997 were conducted in compliance in all material
respects with all, and to the knowledge of Purchaser is not liable in any
respect for any violation of any, applicable United States federal, state, local
or foreign laws or regulations, pertaining to occupational health and safety and
environmental matters, including, without limitation, those relating to the
emission, discharge, storage, release or disposal of Materials of Environmental
Concern into ambient air, surface water, ground water or land surface or
sub-surface strata or otherwise relating to the manufacture, processing,
distribution, use, handling, disposal or transport of Materials of Environmental
Concern. Except as set forth in Schedule 4.15, Purchaser has not received any
notice of a possible claim or citation against or in respect of any real
property leased by Purchaser, or with regard to assets or the Purchaser
Business, relating to occupational health and safety or environmental matters
and Purchaser is not aware of any basis for any such Action.
4.16 [Intentionally Omitted]
4.17 EMPLOYEE BENEFIT PLANS. Other than medical insurance plans , Purchaser does
not maintain nor does Purchaser make or have any obligations to make employer
contributions with respect to its employees to, any "pension" or "welfare"
benefit plans (within the respective meanings of sections 3(2) and 3(1) of
ERISA, and Purchaser has no Liability in connection therewith or with regard
thereto. Any medical insurance plan can be terminated as of the end of the
calendar month by the Board of Directors on 10 ten days notice to any medical
plan participants, subject to COBRA requirements and/or other applicable law.
4.18 NO BREACH. Neither the execution and delivery of this Agreement nor
compliance by Purchaser or Acquisition Sub respectively with any of the
provisions hereof, nor the consummation of the Transaction, will:
(a) violate or conflict with any provision of the Articles of
Incorporation or By-Laws of Purchaser or Acquisition Sub;
(b) violate or conflict with, or alone or with notice or the passage of
time, or both, result in the breach or termination of, or otherwise give any
party the right to terminate, or declare a Default under, the terms of any
Contract to which Purchaser is a party or by which it may be bound;
(c) result in the creation of any Lien upon any of the assets of
Purchaser;
(d) violate any judgment, order, injunction, decree or award against,
or binding upon, Purchaser or upon any of its assets; or
20
(e) violate any law or regulation of any jurisdiction relating to
Purchaser or Acquisition Sub.
4.19 BROKERS. Purchaser has not engaged, consented to, or authorized any broker,
finder, investment banker or other third party to act on its behalf, directly or
indirectly, as a broker or finder in connection with the Transaction.
4.20 EMPLOYMENT RELATIONS. Purchaser has no employees other than those set forth
on Schedule 4.20 attached hereto. Since November 1, 1997, to the knowledge of
Purchaser, Purchaser has complied, in all material respects, with all United
States federal, state, local, foreign, and other applicable laws, rules and
regulations respecting employment and employment practices, terms and conditions
of employment and wages and hours, and has not engaged in any unfair labor
practice which, in any of the foregoing cases, could have a Material Adverse
Effect. There is not pending, or, to the knowledge of Purchaser threatened, any
unfair labor practice charge or complaint against Purchaser by or before the
United States Federal National Labor Relations Board or any comparable state,
local or foreign agency or authority. No litigation, arbitration, administrative
proceeding or governmental investigation is now pending, and, to the knowledge
of Purchaser no Person has made any claim or has threatened litigation,
arbitration, administrative proceeding or governmental investigation against
Purchaser, arising out of any law relating to discrimination against employees
or employment practices.
4.21 PRIOR NAMES AND ADDRESSES. Since October 31, 1994, Purchaser has not used
any business name or had any business address other than its current name and
business address except as set forth on Schedule 4.21 attached hereto.
4.22 PAYMENTS. Purchaser has not directly or indirectly paid or delivered any
fee, commission or other sum of money or item or property, however
characterized, to any finder, agent, client, customer, supplier, government
official or other Person, in the United States or any other country, which is
illegal under any federal, state or local laws of the United States (including,
without limitation, the U.S. Foreign Corrupt Practices Act) or such other
country.
4.23 BOOKS AND RECORDS. Purchaser has made and kept (and given Target access to)
its Books and Records and accounts, which, in reasonable detail, accurately and
fairly reflect the activities of Purchaser. Purchaser has not engaged in any
material transaction, maintained any bank account or used any corporate or
company funds in connection with its business except for transactions, bank
accounts and funds which have been and are reflected in the normally maintained
Books and Records of Purchaser.
4.24 SEC REPORTS. Since November 2000, Purchaser has filed with the SEC via the
EDGAR System all reports, proxies and information statements and all schedules
and exhibits thereto (the "SEC Reports"), required to be filed by it pursuant to
the Exchange Act, except as set forth on Schedule 4.24 attached hereto. Each of
the SEC Reports, as of its respective date, did not contain any untrue statement
of material fact or fail to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
Notwithstanding the foregoing, Purchaser does not represent the accuracy of any
SEC report filed by the Purchaser to the extent that it contains any information
supplied by or on behalf of Target.
21
4.25 UNTRUE OR OMITTED FACTS. No representation, warranty or statement by
Purchaser in this Agreement contains any untrue statement of a material fact, or
omits to state a material fact necessary in order to make such representations,
warranties or statements not misleading. Without limiting the generality of the
foregoing, there is no fact known to Purchaser that has had, or which may be
reasonably expected to have, a Material Adverse Effect that has not been
disclosed in this Agreement.
ARTICLE V
PRE-CLOSING COVENANTS
5.1 TARGET COVENANTS. Target hereby covenants that, from and after the date
hereof and until the Closing or earlier termination of this Agreement:
(a) ACCESS. Target shall afford to the officers, attorneys, accountants
and other authorized representatives of Purchaser free and full access, during
regular business hours and upon reasonable notice, to all of their Books and
Records, personnel and properties so that Purchaser, at its own expense, except
for the Purchaser Expenses as set forth in Section 13.1 hereof which shall be
borne by Target, may have full opportunity to make such review, examination and
investigation as Purchaser may desire of Target. Target shall cause the
employees, accountants, attorneys and other agents and representatives of Target
to cooperate fully with said review, examination and investigation and to make
full disclosure to Purchaser and its representatives of all material facts
affecting Target. Target acknowledges and agrees that no review, examination or
investigation heretofore or hereafter undertaken by Purchaser or its
representatives shall limit or affect any representation or warranty made by
Target or otherwise relieve Target from any liability under this Agreement, or
the obligation to consummate the Transaction.
(b) ACTIONS PRIOR TO CLOSING. Prior to the Closing, Target will not,
without the prior written consent of Purchaser:
(i) amend its Articles of Incorporation or By-Laws.
(ii) sell, lease or dispose of any of its Assets except for
inventory in the ordinary course of business;
(iii) acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation, partnership, limited liability company or other
business organization or division thereof or any material interest therein;
(iv) issue, sell or redeem any capital stock or otherwise
change the capitalization of Target;
(v) acquire, sell, lease or dispose of any of the Assets or
subject the Assets to any Lien except in the ordinary course of business;
22
(vi) enter into any material transaction not in the ordinary
and usual course of business consistent with past practice;
(vii) take any other action outside the ordinary course of
business consistent with past practice;
(viii) adopt any resolution, or enter into or amend any
Contract, with respect to any of the foregoing.
(c) [intentionally omitted]
(d) PRESERVATION OF BUSINESS. Target shall use its best efforts to keep
available the services of its present officers, managers, employees and
consultants and to maintain and preserve intact good relationships with
customers and lenders, preserve its goodwill.
(e) NO BREACH. The limitations and qualifications set forth in Section
5.1(b), (c) and (d) shall likewise apply to each of Target's Subsidiaries.
(i) Target will (A) use its commercially reasonable efforts to
assure that all of its representations and warranties contained herein are true
and correct as of the Closing as if repeated at and as of such time, that no
Default shall occur with respect to any of its covenants, representations or
warranties contained herein that has not been cured by the Closing and that all
conditions to the obligation of Purchaser to consummate the Transaction are
satisfied in a timely manner; (B) not knowingly and voluntarily take any action
or do anything which will cause a Default respecting such covenants,
representations or warranties or would impede the satisfaction of such
conditions; and (C) promptly notify Purchaser of any event or fact which
represents or is likely to cause such a Default or result in such an impediment.
(ii) Without limiting the generality of the foregoing, Target
agrees to use its commercially reasonable efforts to take, or cause to be taken,
all actions, and to do, or cause to be done, all things reasonably necessary,
proper or advisable under applicable laws and regulations to consummate and
effectuate the Transaction.
(f) CONSENTS. Promptly following the execution of this Agreement,
Target will use commercially reasonable efforts to obtain consents of all Bodies
and other Persons necessary for the consummation of the transactions
contemplated by this Agreement, including without limitation, approval by
Target's shareholders of this Agreement and the Transaction.
(g) AFFILIATE LETTER. Target shall provide Purchaser with such
information and documents as Purchaser may reasonably request for use in
Purchaser's review of the status of the persons and entities listed on Schedule
3.2(d) hereto as Target Affiliates. Target covenants that there shall be no
change in the identity of the Target Affiliates between the date hereof and the
Closing. Target shall deliver to Purchaser, at least two business days prior to
the Closing Date, a letter, substantially in the form of Exhibit 5.1(g) hereto,
executed by each of the Target Affiliates pursuant to which each such Target
Affiliate shall acknowledge his, her or its responsibilities as
23
an "affiliate" within the meaning of Rule 145 promulgated under the Securities
Act and containing representations as to such Target Affiliate's status as such
an affiliate.
(h) SECURITY HOLDER LETTERS. Target shall obtain representation letters
and accredited investor certifications from all of its shareholders in
substantially the form attached hereto as Exhibit 5.1(h), containing customary
private placement representations, warranties and covenants.
(i) APPROVAL OF COUNSEL. All actions, proceedings, instruments and
documents required to carry out this Agreement, or incidental thereto, and all
other related legal matters, shall be approved as to form and substance by
counsel to Target, which approval shall not be unreasonably withheld or delayed.
(j) TARGET SHAREHOLDER APPROVAL. After distribution of the information
statement described in Section 5.1(m) hereof to Target's shareholders, Target
shall secure an agreement from its shareholders owning in the aggregate 100% of
its voting stock (which percentage is sufficient under the Maryland Statute,
Target's Articles of Incorporation and By-Laws, and contractually and otherwise,
to approve this Agreement and the Transaction) to vote their respective shares
of Target Common Stock to approve this Agreement and the Transaction.
(K) INFORMATION FOR PURCHASER PROXY STATEMENT. Promptly following the
execution of this Agreement, Target shall prepare or cause to be prepared, at
its sole cost and expense, except for legal fees incurred by Purchaser through
October 31, 2004, a proxy statement complying with Regulation 14(A) promulgated
under the Securities Exchange Act of 1934 and all amendments thereto to be filed
with the SEC and to be employed in seeking the approval by the shareholders of
Purchaser of the transaction contemplated hereby, a change in the Purchaser's
name, and an increase in the authorized number of shares of Common Stock of the
Purchaser (the "Proxy Statement") and shall promptly furnish to Purchaser and
its counsel such information as they may request in connection therewith. The
Proxy Statement shall be subject to comment by Purchaser and its counsel and
shall be satisfactory to Purchaser and its counsel in their sole and absolute
discretion. Provided that Purchaser is satisfied therewith, Purchaser shall
cause the Proxy Statement to be filed with the SEC in preliminary form as soon
as reasonably practicable after the preparation thereof by Target. None of the
information or material supplied or to be supplied by Target for inclusion in
the Proxy Statement of Purchaser will contain any untrue statement of a material
fact or omit to state any material facts required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. Further, Target shall indemnify and
hold harmless Purchaser and each of its existing officers and directors and its
principal shareholders harmless from any claim, liability or expense (including
reasonable attorneys fees) incurred by any of them by virtue of an alleged
breach or breach of the covenant contained in the immediately preceding
sentence. This indemnification shall survive for an indefinite duration (subject
to applicable statute of limitations) following the termination of this
Agreement or the consummation of the transaction contemplated hereby.
(l) FUNDING OF PURCHASER OPERATING EXPENSES. Subject to Section 13.1
hereof and this Section 5.1(l), Purchaser shall be required to fund its "normal
operating expenses"
24
through the date of Closing, including any audit fees incurred for the Company's
2004 year end audit, the preparation of the Company's annual report for the year
ended October 31, 2004 and all costs and expenses relating to this Agreement and
the consummation of the Transaction. If Purchaser believes that it does not have
sufficient funds to fund any of those expenses or has no further funds, then
Purchaser shall give written notice thereof to Target (specifying therein the
funds required by Purchaser to fund such expenses) and Target shall, within five
business days of the date of the giving of such written notice to Target,
deliver to Purchaser in immediately available funds a sum sufficient to pay in
full the amounts specified in such notice from Purchaser to Target, which
obligation shall survive termination of this Agreement (provided, however, that
Target shall have no obligation to deliver any further funds under the
circumstances set forth in the last sentence of Section 13.1 hereof).
(m) INFORMATION STATEMENT. Promptly following the execution of this
Agreement, Target shall prepare or cause to be prepared, at Target's sole cost
and expense, an information statement or similar disclosure document for
distribution to its security holders in connection with the consideration of the
transactions contemplated by this Agreement, which statement or document shall
provide sufficient disclosure to meet the disclosure requirements of Rules 502
and 506 of Regulation D promulgated under the Securities Act as may be
applicable to the security holders of Target and other applicable federal and
state laws. Purchaser shall be given sufficient time to review such disclosure
document and to approve same in its sole and absolute discretion prior to the
distribution thereof to Target's security holders. Target shall use its best
efforts to send out such disclosure statement promptly following approval
thereof by Purchaser. Target covenants, represents and warrants to Purchaser
that none of the information in such disclosure document will, at the date that
it is first mailed to the security holders of Target or at the time of the
approval of the Merger by Target's security holders, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Target shall
indemnify and hold harmless Purchaser and each of its existing officers and
directors and its principal shareholders harmless from any claim, liability or
expense (including reasonable attorneys fees) incurred by any of them by virtue
of an alleged breach or breach of the covenant contained in the immediately
preceding sentence. This indemnification shall survive for an indefinite
duration (subject to applicable statute of limitations) following the
termination of this Agreement or the consummation of the transaction
contemplated hereby. Target has engaged Sun, Hong to serve as the purchaser
representative for the security holders of Target who are not "accredited
investors" (as defined in Rule 501(a) of said Regulation D), which purchaser
representative meets all of the conditions therefor set forth in Rule 501(h) of
said Regulation D.
5.2 PURCHASER COVENANTS. Purchaser hereby covenants that, from and after the
date hereof and until the Closing or earlier termination of this Agreement:
(a) ACCESS. Purchaser shall afford to the managers, officers,
attorneys, accountants and other authorized representatives of Target free and
full access, during regular business hours and upon reasonable notice, to all of
its Books and Records, personnel and properties so that Target, at Target's
expense, may have full opportunity to make such review, examination and
investigation as it may desire of Purchaser and its business. Purchaser will
cause its employees,
25
accountants, attorneys and other agents and representatives to cooperate fully
with said review, examination and investigation and to make full disclosure to
Target and its representatives of all material facts affecting its business.
Except as provided in Section 8.2 hereof, Purchaser acknowledges and agrees that
no review, examination or investigation heretofore or hereafter undertaken by
Target or its representatives shall limit or affect any representation or
warranty made by Purchaser in, or otherwise relieve Purchaser from any Liability
under this Agreement, or the obligation to consummate the Transaction.
(b) ACTIONS PRIOR TO CLOSING. Purchaser currently has no significant
operations, and will not conduct any operations, except for necessary regulatory
compliance activities, and sale of inventory on hand, without the prior written
consent of Target, and as otherwise provided in this Agreement. Without limiting
the generality of the foregoing, and except as otherwise expressly provided in
this Agreement or in Schedule 5.2(b) attached hereto, prior to the Closing,
Purchaser will not, without the prior written consent of Target:
(i) amend its Articles of Incorporation and/or its By-Laws
(except for an amendment to its Articles of Incorporation to increase the number
of authorized shares of common stock to one hundred fifty million (150,000,000)
shares and to change its name to "Cybrdi, Inc." as contemplated hereby.
(ii) enter into, adopt or amend any bonus, profit sharing,
compensation, severance, termination, stock option, stock appreciation right,
restricted stock, performance unit, stock equivalent, stock purchase, pension,
retirement, deferred compensation, employment, severance or other employee
benefit Contract, trust, plan, fund or other arrangement for the benefit or
welfare of any director, officer or employee, increase in any manner the
compensation or fringe benefits of any director, officer or employee or pay any
benefit not required by any plan, contract or arrangement as in effect as of the
date hereof (other than terminate issued and outstanding options to acquire
shares of common stock of Purchaser);
(iii) acquire, sell, lease or dispose of any assets except for
the sale or other disposition of inventory on hand;
(iv) acquire (by merger, consolidation, or acquisition of
stock or assets) any corporation, partnership or other business organization or
division thereof; or
(v) adopt any resolution, or enter into or amend any Contract,
with respect to any of the foregoing.
(c) [Intentionally Deleted.]
26
(d) NO BREACH. (i) Purchaser will (A) use its commercially reasonable
efforts to assure that all of its representations and warranties contained
herein are true and correct as of the Closing as if repeated at and as of such
time, that no Default shall occur with respect to any of its covenants,
representations or warranties contained herein that has not been cured by the
Closing and that all conditions to the obligation of Target to consummate the
Transaction are satisfied in a timely manner; (B) not knowingly and voluntarily
take any action or do anything which will cause a Default respecting such
covenants, representations or warranties or would impede the satisfaction of
such conditions; and (C) promptly notify Target of any event or fact which
represents or is likely to cause such a Default or result in such an impediment.
(ii) Without limiting the generality of the foregoing, subject
to the satisfaction of applicable conditions, Purchaser agrees to use
commercially reasonable efforts to take, or cause to be taken, all actions, and
to do, or cause to be done, all things reasonably necessary, proper or advisable
under applicable laws and regulations to consummate and effectuate the
Transaction.
(e) CONSENTS. Promptly following the execution of this Agreement,
Purchaser will use commercially reasonable efforts to obtain consents of all
Bodies and other Persons necessary for the consummation by Purchaser and
Acquisition Sub of the Transaction. Such consents are listed on Schedule 4.3.
(f) PURCHASER BOARD OF DIRECTORS AND OFFICERS. At or prior to the
Closing, effective as of the Effective Time, Purchaser shall cause (i) all of
Purchaser's directors (the "Resigned Purchaser Directors") and Officers to
resign and (ii) Purchaser's board of directors to be expanded to six (6)
directors and the individuals listed on Schedule 10.4 hereof will be named as
the new directors of Purchaser and the officers to be named are set forth on
Schedule 10.4 as well .
(g) APPROVAL OF COUNSEL. All actions, proceedings, instruments and
documents required to carry out this Agreement, or incidental thereto, and all
other related legal matters, shall have been approved as to form and substance
by counsel to Purchaser, which approval shall not be unreasonably withheld or
delayed.
ARTICLE VI
CONDITIONS PRECEDENT TO THE
OBLIGATION OF PURCHASER TO CLOSE
The obligation of Purchaser to consummate the Transaction is subject to
the fulfillment, prior to or at the Closing, of each of the following
conditions, any one or more of which may be waived by Purchaser (except when the
fulfillment of such condition is a requirement of law):
6.1 REPRESENTATIONS AND WARRANTIES. All representations and warranties of Target
contained in this Agreement and in any written statement (including financial
statements), exhibit, certificate, schedule or other document delivered pursuant
hereto shall be true and correct in all material respects (except to the extent
that any such representation and warranty is
27
already qualified as to materiality, in which case such representation and
warranty shall be true and correct without further qualification) as at the
Closing Date, as if made at the Closing and as of the Closing Date.
6.2 SHAREHOLDER APPROVAL. The holders of a majority of the issued and
outstanding common stock of Purchaser at a meeting of the Shareholders have
approved the change of the Purchaser's name, an increase in the number of shares
of authorized common stock and the transaction contemplated by this Agreement.
In furtherance thereof, the parties will prepare a Proxy Statement addressing
the foregoing matters. Target will supply all necessary or required information
for the Proxy Statement relating to it, its business and operations, financial
statements, management and the persons to be elected directors and officers of
Purchaser upon consummation of the transaction.
6.3 COVENANTS. Target shall have performed and complied in all material respects
with all covenants and agreements required by this Agreement to be performed or
complied with by it prior to or at the Closing.
6.4 CERTIFICATE. Purchaser shall have received a certificate, dated the Closing
Date, signed by the Secretary of Target, as to the satisfaction of the
conditions contained in Sections 6.1 and 6.3 hereof.
6.5 NO ACTIONS. No Action shall have been instituted by a Person other than a
Party, directly or indirectly, and be continuing before a court or before or by
any Body, or shall have been threatened and be unresolved, to restrain or
prevent, or obtain any material amount of damages in respect of, the carrying
out of the Transaction, or which might have a Material Adverse Effect thereon.
6.6 CONSENTS; PERMITS. Target and Purchaser shall have obtained all consents,
approvals, licenses and other Permits of Bodies and other Persons necessary for
the performance by each of them of all of their respective obligations under
this Agreement, and such other consents, if any, to prevent the occurrence of a
Default under any Contract to which Target is a party or is otherwise bound, as
set forth on Schedule 3.3.
6.7 CORPORATE ACTIONS. All actions necessary to authorize the execution,
delivery and performance of this Agreement by Target and the consummation of the
Transaction shall have been duly and validly taken (including, without
limitation, approval of the Transaction by Target's shareholders), and Target
shall have full power and right to consummate the Transaction.
6.8 EXEMPTION FROM REGISTRATION. The offer and issuance of the Purchaser Common
Stock shall comply in all respects with Regulation D of the Securities Act of
1933, as amended or such other exemption from registration that is applicable
thereto and, to that end, Purchaser shall have received from each of the
security holders of Target a completed and signed copy of the security holder's
representation letter and accredited investor certifications as set forth in
Section 5.1(h).
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6.9 APPROVAL OF COUNSEL. All actions, proceedings, instruments and documents
required to carry out this Agreement or incidental thereto, and all other
related legal matters, shall have been approved as to legal form only by counsel
to Purchaser, which approval shall not be unreasonably withheld or delayed.
6.10 ADDITIONAL DOCUMENTS. Target shall have delivered to Purchaser each of the
affiliate letters contemplated by Section 5.1(g) hereof and all other such
certified resolutions, certificates and documents with respect to Target and the
Transaction as Purchaser or its counsel may have reasonably requested.
6.11 APPROVAL BY SHAREHOLDERS OF TARGET. The transactions contemplated by this
Agreement for which the vote or consent of the shareholders of Target is
required shall be approved by the unanimous vote or written consent (as
permitted by applicable law) of the shareholders of Target.
ARTICLE VII
CONDITIONS PRECEDENT TO THE OBLIGATION
OF TARGET TO CLOSE
The obligation of Target to consummate the Transaction is subject to
the fulfillment, prior to or at the Closing, of each of the following
conditions, any one or more of which may be waived by Target (except when the
fulfillment of such condition is a requirement of law):
7.1 REPRESENTATIONS AND WARRANTIES. All representations and warranties of
Purchaser contained in this Agreement and in any written statement (including
financial statements), exhibit, certificate, schedule or other document
delivered pursuant hereto shall be true and correct in all material respects
(except to the extent that any such representation and warranty is already
qualified as to materiality, in which case such representation and warranty
shall be true and correct without further qualification) as at the Closing Date,
as if made at the Closing and as of the Closing Date.
7.2 COVENANTS. Purchaser shall have performed and complied in all material
respects with all covenants and agreements required by this Agreement to be
performed or complied with by it prior to or at the Closing.
7.3 CERTIFICATE. Target shall have received a certificate, dated the Closing
Date, signed by the Chief Executive Officer of Purchaser, as to the satisfaction
of the conditions contained in Sections 7.1 and 7.2 hereof.
7.4 [Intentionally Deleted.]
7.5 NO ACTIONS. No Action shall have been instituted by a Person other than a
Party, directly or indirectly, and be continuing before a court or before or by
a Body, or shall have been threatened and be unresolved, to restrain or prevent,
or obtain any material amount of damages in
29
respect of, the carrying out of the Transaction.
7.6 CONSENTS; PERMITS. Purchaser shall have obtained all consents, licenses and
other Permits of Bodies and other Persons necessary for the performance by
Purchaser of all of its obligations under this Agreement, and such other
consents, if any, to prevent the occurrence of a Default under any Contract to
which Purchaser is a party or otherwise bound, as set forth on Schedule 4.3.
7.7 CORPORATE ACTIONS. All actions necessary to authorize the execution,
delivery and performance of this Agreement by Purchaser and the consummation of
the Transaction and the increase in the authorized number of Purchaser common
stock shall have been duly and validly taken (including, without limitation,
shareholders' approval), and Purchaser shall have full power and right to
consummate the Transaction.
7.8 DIRECTORS. Effective as of the Effective Time, all of the Resigned Purchaser
Directors and Officers shall have resigned and the Purchaser's board of
directors shall have been expanded to six (6) directors and all of Target's
designated directors set forth on Schedule 10.4 shall have been elected.
7.9 APPROVAL OF COUNSEL. All actions, proceedings, instruments and documents
required to carry out this Agreement or incidental thereto, and all other
related legal matters, shall have been approved as to form and substance by
counsel to Target, which approval shall not be unreasonably withheld or delayed.
7.10 ADDITIONAL DOCUMENTS. Purchaser shall have delivered all such certified
resolutions, certificates and documents with respect to Purchaser and the
Transaction as Target or its counsel may have reasonably requested.
ARTICLE VIII
TERMINATION AND WAIVER
8.1 TERMINATION. Anything herein or elsewhere to the contrary notwithstanding,
this Agreement may be terminated and the Transaction may be abandoned at any
time prior to the Closing:
(a) By mutual written consent of Purchaser and Target;
(b) By Purchaser if any of the conditions set forth in Article VI
hereof shall not have been fulfilled on or prior to February 28, 2005, or shall
become incapable of fulfillment, in each case except as such shall have been the
result, directly or indirectly, of any action or inaction by Purchaser, and
shall not have been waived; or
(c) By Target if any of the conditions set forth in Article VII hereof
shall not have been fulfilled on or prior to February 28, 2005, or shall have
become incapable of fulfillment in
30
each case except as such shall have been the result, directly or indirectly, of
any action or inaction by Target, and shall not have been waived.
If this Agreement is terminated as described above, this Agreement
shall be of no further force and effect, without any liability or obligation on
the part of any of the parties except for any liability which may arise pursuant
to Sections 13.1 and 13.2 hereof or as a result of any breach of any
representation, warranty or covenant or agreement herein.
8.2 WAIVER. Any condition to the performance of the Parties which legally may be
waived on or prior to the Closing Date may be waived at any time by the Party
entitled to the benefit thereof by action taken or authorized by an instrument
in writing executed by the relevant Party or Parties. Each party agrees to
notify the other Party of any fact discovered in the course of its due diligence
investigation that such Party believes constitutes or will constitute a breach
of any representation, warranty or covenant contained in this Agreement, and in
the absence of such notice, such breach shall be deemed waived. Otherwise, the
failure of any Party at any time or times to require performance of any
provision hereof shall in no manner affect the right of such Party at a later
time to enforce the same. Except for waivers made in writing pursuant to the
first sentence of this Section 8.2, or by failure to give notice pursuant to the
second sentence of this Section 8.2, no waiver by any Party of the breach of any
term, covenant, representation or warranty contained in this Agreement as a
condition to such Party's obligations hereunder shall release or affect any
liability resulting from such breach. No waiver of any nature, whether by
conduct or otherwise, in any one or more instances, shall be deemed to be or
construed as a further or continuing waiver of any such condition or of any
breach of any other term, covenant, representation or warranty of this
Agreement.
ARTICLE IX
CLOSING
9.1 LOCATION; DATE. The closing of the Transaction (the "Closing") shall take
place at the offices of Target Counsel's in Boca Raton, Florida at 10:00 a.m.
(local time in New York) on the third business day that all closing conditions
have been satisfied or waived by each of the Parties hereto but in no event
later than February 28, 2005, or at such other time and place as may be mutually
agreed to by the Parties; provided, however, that in no event shall the Closing
take place earlier than the date of (and not later than the date which is ten
(10) days following) the approval of the Transaction by the Purchaser's
shareholders. The date of the Closing is referred to in this Agreement as the
"Closing Date."
9.2 ITEMS TO BE DELIVERED TO PURCHASER. At, or prior to, the Closing, Target
will deliver or cause to be delivered to Purchaser:
(a) the Certificate of Merger required by Section 2.2 hereof;
(b) the certificate required by Section 6.4 hereof;
(c) certified copies of all corporate actions required by Section 6.7
hereof; and
31
(d) the affiliate letters contemplated by Section 5.1(g) hereof and the
security holder letters required by Section 5.1(h) hereof.
(e) such other certified resolutions, documents and certificates as are
required to be delivered to Purchaser pursuant to the provisions of this
Agreement or which otherwise confirm that all of the conditions precedent to the
obligation of Purchaser to close have been satisfied.
9.3 ITEMS TO BE DELIVERED TO TARGET. At, or prior to, the Closing, Purchaser
will deliver or cause to be delivered to Target:
(a) the Certificate of Merger required by Section 2.2 hereof;
(b) the certificate required by Section 7.3 hereof;
(c) certified copies of all corporate action required by Section 7.7
hereof; and
(d) such other certified resolutions, documents and certificates as are
required to be delivered to Target pursuant to the provisions of this Agreement
or which otherwise confirm that all of the conditions precedent to the
obligation of Target to close have been satisfied.
ARTICLE X
POST-CLOSING MATTERS
10.1 FURTHER ASSURANCES. On and after the Closing Date, the Parties shall take
all such further actions and execute and deliver all such further instruments
and documents as may be necessary or appropriate to carry out the Transaction.
10.2 [Intentionally Deleted.]
10.3 CONTINUATION OF TARGET'S BUSINESS DEVELOPMENT. As an inducement to
Purchaser to acquire Target, Target has represented that it shall, and Target
shall, develop and continue its business development, as a wholly owned
subsidiary of Purchaser, unless otherwise determined by the Board of Directors
of Purchaser in accordance with the Board of Directors' fiduciary duties to the
shareholders of Purchaser.
10.4 VACANCIES ON PURCHASER'S BOARD OF DIRECTORS. Immediately after the
Effective Time, the vacancies on Purchaser's board of directors created by the
Resigned Purchaser Directors and the expansion of the Purchaser's board of
directors as set forth in Section 7.8 hereof shall be filled by those
individuals nominated by the Target forth on Schedule 10.4 attached hereto and
the individuals set forth on Schedule 10.4 attached hereof shall be selected
officers of Purchaser.
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ARTICLE XI
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
11.1 SURVIVAL. The parties agree that their respective representations and
warranties contained in this Agreement shall survive the Closing for a period of
two (2) years, except that the representations and warranties set forth in
Sections 3.1 through 3.4, 3.28 (with respect to the foregoing Article III
representations and warranties) and 4.1 through 4.4 and 4.25 (with respect to
the foregoing Article IV representations and warranties) shall continue for an
indefinite duration, subject to applicable statutes of limitation.
11.2 INDEMNIFICATION.
11.2.1 GENERAL INDEMNIFICATION OBLIGATION OF TARGET. From and after the
Closing, Target will reimburse, indemnify and hold harmless Purchaser, its
current and former directors, officers, employees and/or agents (collectively
the "Purchaser Indemnified Parties") against and in respect of:
(a) any and all damages, losses, deficiencies, liabilities, costs and
expenses incurred or suffered by any Purchaser Indemnified Party that result
from, relate to or arise out of any misrepresentation, breach of warranty or
non-fulfillment of any agreement or covenant on the part of Target under this
Agreement, or from any misrepresentation in or omission from any certificate,
schedule, statement, document or instrument furnished to Purchaser pursuant
hereto; and
(b) any and all Actions, assessments, audits, fines, judgments, costs
and other expenses (including, without limitation, reasonable legal fees and
expenses) incident to any of the foregoing or to the enforcement of this Section
11.2.1.
11.2.2 GENERAL INDEMNIFICATION OBLIGATION OF PURCHASER. From and after
the Closing, Purchaser will reimburse, indemnify and hold harmless Target, its
current and former directors, officers, employees and/or agents (collectively
the "Target Indemnified Parties") against and in respect of:
(a) any and all damages, losses, deficiencies, liabilities, costs and
expenses incurred or suffered by any Target Indemnified Party that result from,
relate to or arise out of any misrepresentation, breach of warranty or
non-fulfillment of any agreement or covenant on the part of Purchaser under this
Agreement, or from any misrepresentation in or omission from any certificate,
schedule, statement, document or instrument furnished to Target pursuant hereto;
and
(b) any and all Actions, assessments, audits, fines, judgments, costs
and other expenses (including, without limitation, reasonable legal fees and
expenses) incident to any of the foregoing or to the enforcement of this Section
11.2.2.
11.2.3 METHOD OF ASSERTING CLAIMS, ETC.
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(a) In the event that any claim or demand for which Target would be
liable to any Purchaser Indemnified Party(ies) hereunder is asserted against or
sought to be collected from any such Purchaser Indemnified Parties by a third
party, the Purchaser Indemnified Party(ies) shall notify Target of such claim or
demand, specifying the nature of such claim or demand and the amount or the
estimated amount thereof to the extent then feasible (which estimate shall not
be conclusive of the final amount of such claim and demand) (the "Claim
Notice"). Target shall thereupon, at its sole cost and expense, defend the
Purchaser Indemnified Party(ies) against such claim or demand with counsel
reasonably satisfactory to the Purchaser Indemnified Party(ies).
(b) Target shall not, without the prior written consent of the
Purchaser Indemnified Party(ies), consent to the entry of any judgment against
the Purchaser Indemnified Party(ies) or enter into any settlement or compromise
which does not include, as an unconditional term thereof (i.e., there being no
requirement that the Purchaser Indemnified Party(ies) pay any amount of money or
give any other consideration), the giving by the claimant or plaintiff to the
Purchaser Indemnified Party(ies) of a release, in form and substance
satisfactory to the Purchaser Indemnified Party(ies), from all liability in
respect of such claim or litigation. If the Purchaser Indemnified Party(ies)
desire to participate in, but not control, any such defense or settlement, it or
they may do so at its or their sole cost and expense. If, in the reasonable
opinion of the Purchaser Indemnified Party(ies), any such claim or demand or the
litigation or resolution of any such claim or demand involves an issue or matter
which could have a Material Adverse Effect on the business, operations, assets,
properties or prospects of the Purchaser Indemnified Party(ies) or its
affiliates, then the Purchaser Indemnified Party(ies) shall have the right to
control the defense or settlement of any such claim or demand and its costs and
expenses shall be included as part of the indemnification obligation of Target
hereunder; provided, however, that the Purchaser Indemnified Party(ies) shall
not settle any such claim or demand without the prior written consent of Target,
which consent shall not be unreasonably withheld or delayed. If the Purchaser
Indemnified Party(ies) should elect to exercise such right, Target shall have
the right to participate in, but not control, the defense or settlement of such
claim or demand at its sole cost and expense.
(c) Notwithstanding anything hereinabove to the contrary, the Purchaser
Indemnified Party(ies) shall have the right to employ separate counsel
(including local counsel), and Target shall bear the reasonable fees, costs and
expenses of one (1) such separate counsel (and local counsel) if (i) the use of
counsel chosen by Target to represent the Purchaser Indemnified Party(ies) would
present such counsel with a conflict of interest, (ii) the actual or potential
defendants in, or targets of, any such action include both the Purchaser
Indemnified Party(ies) and Target, and Target on the one hand, and the Purchaser
Indemnified Party(ies) on the other hand, shall have reasonably concluded that
there may be legal defenses available to the Purchaser Indemnified Party(ies)
which are different from or additional to those available to Target, (iii)
Target shall not have employed counsel reasonably satisfactory to the Purchaser
Indemnified Party(ies) to represent the Purchaser Indemnified Party(ies) within
a reasonable time after notice of the institution of such Action or (iv) Target
shall authorize the Purchaser Indemnified Party(ies) to employ one (1) separate
counsel at the expense of Target.
(d) In the event the Purchaser Indemnified Party(ies) should have a
claim against Target hereunder that does not involve a claim or demand being
asserted against or sought to be
34
collected from it by a third party, the Purchaser Indemnified Party(ies) shall
send a Claim Notice with respect to such claim to Target. If Target disputes its
liability with respect to such claim or demand, such dispute shall be resolved
in accordance with Section 11.3 hereof; if Target does not notify the Purchaser
Indemnified Party(ies), within twenty (20) days from receipt of notice of such a
claim, that it disputes such claim or demand, the amount of such claim or demand
shall be conclusively deemed a liability of Target hereunder.
(e) All claims for indemnification by any Target Indemnified Party(ies)
under this Agreement shall be asserted and resolved under the procedures set
forth hereinabove by substituting in the appropriate place "Target" for
"Purchaser" and "Target Indemnified Party(ies)" for "Purchaser Indemnified
Party(ies)."
11.3 ARBITRATION.
(a) All disputes under this Agreement shall be settled by binding
arbitration pursuant to the rules of the American Arbitration Association.
Arbitration may be commenced at any time by any Party hereto giving written
notice to each other Party to a dispute of its demand for arbitration, which
demand shall set forth the name and address of its arbitrator. Within twenty
(20) days of such notice, the other Party shall select its arbitrator and so
notify the demanding Party. Within twenty (20) days thereafter, the two
arbitrators so selected shall select the third arbitrator. In default of either
side naming its arbitrator as aforesaid or in default of the selection of the
third arbitrator as aforesaid, the American Arbitration Association shall
designate such arbitrator upon the application of either party. The parties
agree that the exclusive jurisdiction for any dispute shall be in Los Angeles,
California or such other location as agreed by the Parties.. The dispute shall
be heard by the arbitrators within thirty (30) days after selection of the third
arbitrator. The decision of the arbitrators shall be rendered within thirty (30)
days after the hearing. Each Party shall pay its own expenses of arbitration and
the expenses of the arbitrators shall be equally shared; provided, however, that
if, in the opinion of the majority of the arbitrators, any claim for
indemnification or any defense or objection thereto was unreasonable, the
arbitrators may assess, as part of their award, all or any part of the
arbitration expenses of the other Party (including reasonable attorneys= fees)
and of the arbitrators against the Party raising such unreasonable claim,
defense or objection.
(b) To the extent that arbitration may not be legally permitted
hereunder or contractually permitted under any insurance policy providing
coverage, and the parties to any dispute hereunder may not at the time of such
dispute mutually agree to submit such dispute to arbitration, any party may
commence a civil Action in a court of appropriate jurisdiction to resolve
disputes hereunder.
(c) The decision of a majority of the arbitrators shall be final,
binding and conclusive, shall be specifically enforceable, and judgment may be
entered upon it in accordance with applicable law in the appropriate court in
the States of Florida, California and Maryland with no right of appeal
therefrom.
11.4 EXCLUSIVE REMEDY
35
If the merger contemplated hereby is consummated, this Article XI shall
be the exclusive remedy for a breach of representations and warranties contained
in Article III and IV or, except as provided in Sections 5.1(k) or 5.1(m), a
breach or default under any of the covenants contained in Article V.
ARTICLE XII
[INTENTIONALLY OMITTED]
ARTICLE XIII
MISCELLANEOUS PROVISIONS
13.1 EXPENSES. Except as provided in Section 5.1(l) hereof and this Section
13.1, each of the Parties shall bear its own expenses in connection herewith
except that if Purchaser shall not have sufficient funds to pay for all expenses
related to this acquisition, Target will pay all of Purchaser's expenses as
provided in Section 5.1(l) and this Section 13.1. The Parties acknowledge and
agree that, if any Party (the "Breaching Party") either fails to consummate the
Transaction notwithstanding that all conditions to such Party's obligation to
close are fulfilled, or otherwise breaches this Agreement prior to Closing which
breach causes any of the non-Breaching Party's conditions to closing set forth
in Article VI or Article VII, as the case may be, not to be fulfilled, and the
Closing does not occur because the non-Breaching Party terminates this Agreement
as a result thereof pursuant to Section 8.1(b) or 8.1(c), as the case may be, as
liquidated damages and as the sole and exclusive remedy of the non-Breaching
Party the Breaching Party shall reimburse each non-Breaching Party for all
out-of-pocket expenses incurred directly in connection with the negotiation,
execution and performance of this Agreement, including, without limitation, fees
and expenses payable to attorneys and, accountants. Fees and expenses of
consultants, advisors and investment bankers shall not be reimbursable.
Notwithstanding anything in this Agreement to the contrary, Purchaser shall not
be required to repay or reimburse Target for any funds advanced pursuant to
Section 5.1(l) hereof unless and only in the event that Purchaser breaches this
Agreement prior to Closing which breach causes Target's conditions to Closing to
not occur and Target terminates this Agreement as a result thereof pursuant to
Section 8.1(c).
13.2 CONFIDENTIAL INFORMATION. All information that a disclosing party furnishes
in connection with the Transaction (the "Information") will be kept
confidential, will be used solely in connection with the Transaction and will
not, without prior written consent of the disclosing party, be used or
disclosed, directly or indirectly, in any manner whatsoever, in whole or in
part.
Notwithstanding anything hereinabove to the contrary, the obligations
imposed upon the parties herein shall not apply to Information:
(a) which is publicly available prior to the date hereof; or
(b) which hereafter becomes available to the public through no wrongful
act of the
36
receiving party; or
(c) which was in the possession of the receiving party prior to the
commencement of negotiations between the parties with regard to the Transaction
and not subject to an existing agreement of confidence between the parties; or
(d) which is received from a third party without restriction, not in
violation of an agreement of confidence and without breach of this Agreement; or
(e) which is independently developed by the receiving party; or
(f) which is disclosed pursuant to a requirement or request of a
government agency, arbitrator or court, or pursuant to a requirement under
applicable laws, rules or regulations.
Upon the request of a disclosing party made at any time following any
termination of this Agreement in accordance with the terms hereof, the receiving
party will redeliver to the disclosing party any and all written Information
furnished to the receiving party and will not retain any copies thereof.
13.3 EQUITABLE RELIEF. The parties agree that the remedy at law for any breach
or threatened breach of the provisions of Section 13.2 will be inadequate and
the aggrieved party shall be entitled to injunctive relief to compel the
breaching party to perform or refrain from action required or prohibited
thereunder.
13.4 PUBLICITY. Neither Purchaser nor Target will issue any report, statement,
release or other public announcement pertaining to the matters contemplated by
this Agreement without the prior written consent of the other unless required by
law, rule or regulation.
13.5 ENTIRE AGREEMENT. This Agreement, including the schedules and exhibits
attached hereto, which are a part hereof, constitutes the entire agreement of
the Parties with respect to the subject matter hereof. The representations,
warranties, covenants and agreements set forth in this Agreement and in the
financial statements, schedules or exhibits delivered pursuant hereto constitute
all the representations, warranties, covenants and agreements of the Parties and
upon which the Parties have relied, shall not be deemed waived or otherwise
affected by any investigation made by any party hereto and, except as may be
specifically provided herein, no change, modification, amendment, addition or
termination of this Agreement or any part thereof shall be valid unless in
writing and signed by or on behalf of the party to be charged therewith.
13.6 NOTICES. Any and all notices or other communications or deliveries required
or permitted to be given or made pursuant to any of the provisions of this
Agreement shall be deemed to have been duly given or made for all purposes when
in writing and hand delivered or sent by certified or registered mail, return
receipt requested and postage prepaid, overnight mail, nationally recognized
overnight courier or telecopier as follows:
If to Purchaser, at:
37
Certron Corporation
1545 Sawtelle Blvd.
Suite 12
Los Angeles, CA 90025
Attention: Chief Executive Officer
Telecopier Number: (310) 914-0310
With a copy to:
Reed Smith LLP
1901 Avenue of the Stars
Suite 700
Los Angeles, California 90067
Attention: Irwin G. Barnet, Esq.
Telecopier Number: (310) 734-5299
If to Target at:
20 Firstfield Road
Suite 190A
Gaithersburg, Maryland 20874
Attention: Chief Executive Officer
Telecopier Number: 240-465-8877
With a copy to:
Newman, Pollock & Klein
2600 North Military Trail
Suite 270
Boca Raton, Florida 33431
Attention: Jeffrey Klein, Esq.
Telecopier Number (561) 241-4943
or at such other address as any party may specify by notice given to the other
party in accordance with this Section 13.6.
13.7 CHOICE OF LAW; SEVERABILITY. This Agreement shall be governed by, and
interpreted and construed in accordance with, the laws of the State of Maryland,
excluding choice-of-law principles thereof. In the event any clause, section or
part of this Agreement shall be held or declared to be void, illegal or invalid
for any reason, all other clauses, sections or parts of this Agreement which can
be effected without such void, illegal or invalid clause, section or part shall
nevertheless continue in full force and effect.
13.8 SUCCESSORS AND ASSIGNS; NO ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
assigns; provided, however, that neither Target nor Purchaser may assign any of
its respective rights or delegate any of its respective duties under this
Agreement without the prior written consent of the other. Except as
38
provided in Sections 5.1(k), 5.1(m) and 11.2 hereof, nothing contained in this
Agreement, express or implied, is intended to confer upon any other person any
rights, benefits or remedies of any nature whatsoever under or by reason of this
Agreement.
13.9 COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, and all of which taken together shall
constitute one and the same instrument.
13.10 FACSIMILE SIGNATURES. Signatures hereon which are transmitted via
facsimile shall be deemed original signatures.
13.11 REPRESENTATION BY COUNSEL; INTERPRETATION. Each Party acknowledges that it
has been represented by counsel in connection with this Agreement and the
Transaction. Accordingly, any rule or law or any legal decision that would
require the interpretation of any claimed ambiguities in this Agreement against
the party that drafted it has no application and is expressly waived by each
Party. The provisions of this Agreement shall be interpreted in a reasonable
manner to give effect to the intent of the parties hereto.
13.12 HEADINGS; GENDER. The headings, captions and/or use of a particular gender
or neuter under sections of this Agreement are for convenience of reference only
and do not in any way modify, interpret or construe the intent of the parties or
affect any of the provisions of this Agreement.
ARTICLE XIV
DEFINITIONS
14.1 DEFINED TERMS. As used herein, the terms below shall have the following
meanings. Any of such terms, unless the context otherwise requires, may be used
in the singular or plural, depending upon the reference.
"ACQUISITION SUB" shall have the meaning ascribed to it in the heading
of this Agreement.
"ACQUISITION SUB COMMON STOCK" shall have the meaning ascribed to it in
Section 2.3(f) hereof.
"ACTION" shall mean any action, claim, suit, demand, litigation,
governmental or other proceeding, labor dispute, arbitral action, governmental
audit, inquiry, investigation, criminal prosecution, investigation or unfair
labor practice charge or complaint.
"AGREEMENT" shall mean this Agreement and Plan of Merger dated as of
November __, 2004, among Purchaser, Acquisition Sub, and Target.
"ASSETS" shall have the meaning ascribed to it in Section 3.10.1(a)
hereof.
39
"BODY" shall mean a federal, state, local, and foreign governmental
body, political subdivision of such foreign governmental body, or other
regulatory body.
"BOOKS AND RECORDS" shall mean all books, ledgers, files, reports,
plans, drawings, records and lists, including, without limitation, all computer
programs and other software, of every kind relating to an entity's business,
operations, assets, liabilities, personnel, customers and suppliers.
"BREACHING PARTY" shall have the meaning ascribed to it in Section 13.1
hereof.
"BUSINESS" shall have the meaning ascribed to it in the Recitals of
this Agreement.
"CERTIFICATE OF MERGER" shall have the meaning ascribed to it in
Section 2.2 hereof.
"CLAIM NOTICE" shall have the meaning ascribed to it in Section
11.2.3(a) hereof.
"CLOSING" shall have the meaning ascribed to it in Section 9.1 hereof.
"CLOSING DATE" shall have the meaning ascribed to it in Section 9.1
hereof.
"CONTRACT" shall mean any agreement, contract, note, lease, evidence of
indebtedness, purchase order, letter of credit, indenture, security or pledge
agreement, franchise agreement, undertaking, covenant not to compete, employment
agreement, license, instrument, obligation, commitment, course of dealing or
practice, understanding or arrangement, whether written or oral, to which a
particular Person is a party or is otherwise bound.
"COPYRIGHTS" shall mean registered copyrights, copyright applications
and unregistered copyrights.
"DEFAULT" shall mean any breach, default and/or other violation, and/or
the occurrence of any event that with or without the passage of time or the
giving of notice or both would constitute a breach, default or other violation,
under, or give any Person the right to accelerate, terminate or renegotiate, any
Contract.
"DERIVATIVE SECURITIES" shall mean warrants, options, rights, shares of
capital stock, evidences of indebtedness, or other securities, which are
convertible, exercisable or exchangeable into shares of common stock.
"EFFECTIVE TIME" shall have the meaning ascribed to it in Section 2.2
hereof.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"INFORMATION" shall have the meaning ascribed to it in Section 13.2
hereof.
"INVESTMENT REPRESENTATION LETTERS" shall mean the investment
representation letters in, or substantially in, the forms attached to this
Agreement as Exhibits 5.1(k)(a) and 5.1(k)(b).
40
"LIABILITY" shall mean any direct or indirect liability, obligation,
indebtedness, commitment, expense, claim, deficiency, guaranty or endorsement of
or by any Person of any type, whether accrued, absolute, contingent, matured,
unmatured or otherwise except that any obligation to pay for Dissenting Shares
shall not be deemed a liability for any purpose.
"LIEN" shall mean any claim, lien, pledge, option, charge, restriction,
easement, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, conditional sales agreement,
encumbrance or other right of third parties, whether voluntarily incurred or
arising by operation of law, and includes, without limitation, any agreement to
give any of the foregoing in the future, and any contingent sale or other title
retention agreement or lease in the nature thereof.
"MARYLAND STATUTE" shall have the meaning ascribed to it in the
Recitals of this Agreement.
"MATERIAL ADVERSE CHANGE" shall mean a change that creates a Material
Adverse Effect.
"MATERIAL ADVERSE EFFECT" shall mean in the case of the Target any
material adverse effect on the business, properties, operations, assets,
liabilities, condition (financial or otherwise), or prospects of Target or in
the case of Purchaser, any material adverse effect on the liabilities or
condition (financial or otherwise) of Purchaser but shall not include continuing
loses incurred by Purchaser.
"MATERIALS OF ENVIRONMENTAL CONCERN" shall mean pollutants,
contaminants, hazardous or noxious or toxic materials or wastes.
"MERGER" shall have the meaning ascribed to it in the Recitals of this
Agreement.
"OTHER INTELLECTUAL PROPERTY" shall have the meaning ascribed to it in
Section 3.10.2 hereof.
"PARTY" and "PARTIES" shall have the meanings ascribed to them in the
heading of this Agreement.
"PATENTS" shall mean all patents, patent applications, registered
designs and registered design applications.
"PERMITS" shall mean all licenses, permits, franchises, approvals,
authorizations, consents, decrees or orders of, or filings with, any and all
Bodies.
"PERSON" shall mean and include an individual, a partnership, a joint
venture, a corporation, a limited liability company, a limited liability
partnership, a trust, an unincorporated organization, any other business
organization and a government or other department or agency thereof.
"PROPRIETARY RIGHTS" shall mean Copyrights, Patents, Trademarks, other
technology
41
rights and licenses, computer software (including, without limitation, any
source or object codes thereof or documentation relating thereto), trade
secrets, franchises, inventions, designs, specifications, plans, drawings, data
bases, know-how, domain names, world wide web addresses and other intellectual
property rights used or under development.
"PURCHASER" shall have the meaning ascribed to it in the heading of
this Agreement.
"PURCHASER BALANCE SHEET" shall mean the balance sheet of Purchaser as
of the Purchaser Balance Sheet Date which is included as part of the Purchaser
Financial Statements.
"PURCHASER BALANCE SHEET DATE" shall mean July 31, 2004
"PURCHASER COMMON STOCK" shall have the meaning ascribed to it in
Section 2.3(a) hereof.
"PURCHASER FINANCIAL STATEMENTS" shall mean the financial statements of
Purchaser as of the Purchaser Balance Sheet Date and for the year ended October
31, 2003, and as of and for the nine months ended July 31, 2004 consistent with
those presented in the SEC Reports.
"PURCHASER INDEMNIFIED PARTIES" shall have the meaning ascribed to it
in Section 11.2.1. hereof.
"PURCHASER LISTED AGREEMENTS" shall have the meaning ascribed to it in
Section 4.14 hereof.
"RESIGNED PURCHASER DIRECTORS" shall have the meaning ascribed to it in
Section 5.2(f) hereof.
"SEC" shall mean the United States Securities and Exchange Commission.
"SEC REPORTS" shall have the meaning ascribed to it in Section 4.24
hereof.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SURVIVING CORPORATION" shall have the meaning ascribed to it in
Section 2.1(a) hereof.
"TARGET" shall have the meaning ascribed to it in the heading of this
Agreement.
"TARGET BALANCE SHEET" shall mean the balance sheet of Target as of the
Target Balance Sheet Date which is included as part of the Target Financial
Statements.
"TARGET BALANCE SHEET DATE" shall mean December 31, 2003.
"TARGET COMMON STOCK" shall have the meaning ascribed to it in Section
2.3(a) hereof.
"TARGET FINANCIAL STATEMENTS" shall mean the financial statements of
Target as of the
42
Target Balance Sheet Date and for the year ended December 31, 2003 and as of and
for the six months ended June 30, 2004..
"TARGET INDEMNIFIED PARTIES" shall have the meaning ascribed to it in
Section 11.2.2 hereof.
"TARGET LISTED AGREEMENTS" shall have the meaning ascribed to it in
Section 3.14 hereof.
"TRADEMARKS" shall have the meaning ascribed to it in Section 3.10.2.
"TRANSACTION" shall mean the Merger, the manner of the conversion and
exchange of the Target Common Stock and Acquisition Sub Common Stock pursuant to
the Merger, and all other transactions contemplated by the Agreement.
43
WITNESS the execution and delivery of this Agreement on the date first
above written.
CERTRON CORPORATION
By: /s/ MARSHALL KASS
------------------------------------
Name: Marshall Kass
Title: Chairman of the Board and CEO
CERTRON ACQUISITION CORP.
By: /s/ MARSHALL KASS
------------------------------------
Name: Marshall Kass
Title: President
CYBRDI, INC.
By: /s/ YANBIAO BAI
------------------------------------
Name: Yanbiao Bai
Title: Board Chairman
44
EXHIBIT B
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF CYBRDI
The accompanying unaudited pro forma consolidated financial statements of Cybrdi
Inc. ("Cybrdi") have been prepared by management to give effect to the proposed
acquisition by Certron Corporation ("Certron") of the outstanding capital stock
of Cybrdi in exchange for shares of common stock of Certron that would aggregate
approximately 93.8% of the Certron common shares outstanding after the
transaction
The Pro Forma Statements included herein reflect the use of the purchase method
of accounting for the above transaction. The acquisition was accounted for as a
reverse acquisition as the former stockholders of Cybrdi will control the voting
common shares of Certron immediately after the acquisition. Such financial
information has been prepared from, should be read in conjunction with the
following financial statements:
(a) the unaudited financial statements of Cybrdi as of September 30,
2004 included in this proxy,
(b) the audited financial statements of Cybrdi as of December 31, 2003
included in this proxy,
(c) the unaudited financial statements of Certron as of July 31, 2004
included in Certron's quarterly report on Form 10-Q filed with SEC
on August 20, 2004, and
(d) the audited financial statements of Certron as of October 31, 2003
included in Certron's annual report on Form 10-K/A filed with SEC on
February 23, 2004.
The pro forma consolidated financial statements are not intended to reflect the
actual results of operations or the financial position of Cybrdi, which would
have actually resulted had the acquisition and related pro forma adjustments
been effected on the date indicated. Further, the pro forma consolidated
financial statements are not necessarily indicative of the results of operations
or the financial position that may be obtained in the future.
1
Cybrdi, Inc.
(formerly Certron Corporation)
Unaudited Pro Forma Balance Sheet
($ in thousand)
Cybrdi, Inc. Certron Corp Pro-forma
9/30/2004 7/31/2004 Adjustments Balance
------------ ------------ ----------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,975 $ 283 $ 1,000(a) $ 4,258
Accounts receivable 262 6 268
Inventories 270 270
Other receivables and prepaid expenses 14 11 25
------------ ------------ ----------- ---------
TOTAL CURRENT ASSETS 3,520 300 1,000 4,820
PROPERTY, PLANT AND EQUIPMENT, NET 617 617
DEFERRED PRIVATE PLACEMENT COSTS 444 444
INTANGIBLE ASSETS 664 664
DEFERRED TAX ASSETS 40 40
------------ ------------ ----------- ---------
TOTAL ASSETS $ 5,284 $ 300 $ 1,000 $ 6,584
============ ============ =========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1 $ -- $ -- $ 1
Other payables and accrued expenses 51 130 181
Customer deposits 7 7
Amount due to shareholders 560 560
Deferred revenue -- --
------------ ------------ ----------- ---------
TOTAL CURRENT LIABILITITES 619 130 749
MINORITY INTERESTS 990 -- 990
------------ ------------ ----------- ---------
TOTAL LIABILITIES 1,609 130 1,739
------------ ------------ ----------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock 2,462 3,128 559(a)
41,179(b) 47,328
Additional paid-in capital 614 1,824 441(a)
(45,911)(b) (43,032)
Reserve funds 118 118
Accumulated profit/(deficit) 480 (4,782) 4,782(b)
(50)(c) 430
Accumulated other comprehensive income 0 0
------------ ------------ ----------- ---------
TOTAL SHAREHOLDERS' EQUITY 3,675 170 1,000 4,845
------------ ------------ ----------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,284 $ 300 $ 1,000 $ 6,584
============ ============ =========== =========
2
(formerly Certron Corporation)
Unaudited Pro Forma Statement of Operations
($ in thousand, except for share and per share information)
Cybrdi, Inc. Certron Corp
For the nine For the nine
Months ended months ended Pro-forma
9/30/2004 7/31/2004 Adjustments Balance
------------ ------------ ----------- ---------
REVENUE 1,127 51 1,178
COST OF GOODS SOLD 97 -- 97
------------ ------------ ----------- ---------
GROSS PROFIT 1,030 51 1,081
OPERATING EXPENSES:
Selling, general & administrative 428 411 50(c) 889
------------ ------------ ----------- ---------
Total operating expenses 428 411 50 889
------------ ------------ ----------- ---------
INCOME/(LOSS) FROM OPERATIONS 601 (360) (50) 191
OTHER INCOME
Interest income 11 2 13
Other income, net 85 36 121
------------ ------------ ----------- ---------
Total other income 96 38 134
------------ ------------ ----------- ---------
INCOME BEFORE INCOME TAXES 697 (322) (50) 325
INCOME TAXES -- -- --
------------ ------------ ----------- ---------
INCOME BEFORE MINORITY INTEREST 697 (322) (50) 325
MINORITY INTEREST 116 -- 116
------------ ------------ ----------- ---------
NET INCOME/(LOSS) 581 (322) (50) 209
============ ============ =========== =========
OTHER COMPREHENSIVE INCOME:
Foreign currency translation gain/(loss) 0 -- 0
------------ ------------ ----------- ---------
COMPREHENSIVE INCOME/(LOSS) 581 (322) (50) 209
============ ============ =========== =========
EARNINGS PER SHARE $ 0.02 $ (0.10) $ 0.00
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 24,619,355 3,128,000 47,328,263
3
Cybrdi, Inc.
(formerly Certron Corporation)
Unaudited Pro Forma Statement of Operations
($ in thousand, except for share and per share information)
Cybrdi, Inc. Certron Corp
For the twelve For the twelve
Months ended months ended Pro-forma
12/31/2003 10/31/2004 Adjustments Balance
-------------- -------------- ----------- ---------
REVENUE 1,227 300 1,527
COST OF GOODS SOLD 297 523 820
-------------- -------------- ----------- ---------
GROSS PROFIT 931 (223) 708
OPERATING EXPENSES:
Selling, general & administrative 615 621 50(c) 1,286
-------------- -------------- ----------- ---------
Total operating expenses 615 621 50 1,286
-------------- -------------- ----------- ---------
INCOME/(LOSS) FROM OPERATIONS 315 (844) (50) (579)
OTHER INCOME
Interest income 7 8 15
Other income, net 37 173 210
-------------- -------------- ----------- ---------
Total other income 44 181 225
-------------- -------------- ----------- ---------
INCOME BEFORE INCOME TAXES 359 (663) (50) (354)
INCOME TAXES (40) 1 (39)
-------------- -------------- ----------- ---------
INCOME BEFORE MINORITY INTEREST 399 (664) (50) (315)
MINORITY INTEREST 139 -- 139
-------------- -------------- ----------- ---------
NET INCOME/(LOSS) 260 (664) (50) (454)
============== ============== =========== =========
OTHER COMPREHENSIVE INCOME:
Foreign currency translation gain/(loss) 0 -- 0
-------------- -------------- ----------- ---------
COMPREHENSIVE INCOME/(LOSS) 261 (664) (50) (453)
============== ============== =========== =========
EARNINGS PER SHARE $ 0.01 $ (0.21) $ (0.01)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 24,619,355 3,128,000 47,328,263
4
Note a
To reflect a private placement and the issuance of 5,590,640 Cybrdi Inc. $0.1
par value common stock for cash totaling $1,000,000 in October 2004.
Note b
To reflect the issuance of 41,179,263 shares in conjunction with the acquisition
and elimination of accumulated deficit of Certron.
Note c
To reflect an additional $50,000 in accounting and legal expenses related to the
proxy statement and shareholder meeting.
AUDITED FINANCIAL STATEMENT
You are urged to review the audited financial statements of Cybrdi, Inc.
contained in Exhibit C before making any decision with respect to the proposals
to be voted upon at this Special Meeting of shareholders.
5
EXHIBIT C
CONSOLIDATED AUDITED FINANCIAL STATEMENTS OF CERTRON
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
Board of Directors
Certron Corporation
We have audited the accompanying balance sheet of Certron Corporation as of
October 31, 2003, and the related statements of operations, changes in
shareholders' equity (deficit) and cash flows for the year then ended. In
connection with our audit of the financial statements, we have also audited the
accompanying schedule of valuation and qualifying accounts. These financial
statements and financial schedule are the responsibility of Certron
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Certron Corporation as of
October 31, 2003, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United State of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 12 to the
financial statements, the Company disposed of its assembly operations and has
suffered recurring losses from operations at October 31, 2003. These matters
raise substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Hurley & Company
Granada Hills, CA
February 12, 2004
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Certron Corporation
Los Angeles, California
We have audited the accompanying balance sheet of Certron Corporation as of
October 31, 2002 and the related statements of operations and comprehensive
income, stockholders' equity, and cash flows for the years ended October 31,
2002 and 2001. In connection with our audit of the financial statements, we have
also audited the accompanying financial statement schedule. These financial
statements and financial schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Certron Corporation as of
October 31, 2002, and the results of its operations and its cash flows for the
years ended October 31, 2002 and 2001 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
s/BECKMAN, KIRKLAND & WHITNEY
Agoura Hills, California
January 3, 2003
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31,
--------------------------
2003 2002
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, Note 1 $ 432,000 $ 642,000
Accounts receivable, less allowance for doubtful accounts of
$15,000 in 2003 and $7,000 in 2002 25,000 73,000
Inventories:
Finished products, less allowance for obsolescence of $177,000
in 2003 and $8,000 in 2002 -- 252,000
Prepaid expenses 48,000 49,000
Other current assets -- 33,000
----------- -----------
Total current assets 505,000 1,049,000
----------- -----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, AT COST:
Machinery and equipment 17,000 55,000
Dies and molds -- 314,000
Furniture, fixtures and leasehold improvements 142,000 152,000
----------- -----------
159,000 521,000
Less accumulated depreciation and amortization (159,000) (500,000)
----------- -----------
Net Equipment and Leasehold Improvements -- 21,000
----------- -----------
MARKETABLE SECURITIES 58,000 119,000
OTHER ASSETS -- 14,000
----------- -----------
Total Assets $ 563,000 $ 1,203,000
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued advertising $ -- $ 13,000
Accrued professional fees 49,000 32,000
Accrued payroll and related items 27,000 26,000
Other accrued expenses 72,000 67,000
----------- -----------
Total current liabilities 148,000 138,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $1.00 par value, authorized 500,000 shares, no shares
issued and outstanding Common stock, no par value; stated value $1 per
share; authorized 10,000,000 shares; issued and
outstanding, 3,128,000 shares (2002 and 2001) 3,128,000 3,128,000
Additional paid-in capital 1,824,000 1,824,000
Net unrealized loss on marketable equity securities (77,000) (91,000)
Accumulated deficit (4,460,000) (3,796,000)
----------- -----------
Total Stockholders' Equity 415,000 1,065,000
----------- -----------
Total Liabilities and Stockholders' Equity $ 563,000 $ 1,203,000
----------- -----------
The accompanying notes are an integral part of these financial statements.
C-1
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEAR ENDED OCTOBER 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
NET SALES $ 300,000 $ 750,000 $ 1,475,000
COST OF PRODUCTS SOLD 353,000 672,000 1,131,000
----------- ----------- -----------
GROSS PROFIT (53,000) 78,000 344,000
----------- ----------- -----------
COSTS AND EXPENSES:
Inventory holding loss(Note 4) 170,000 258,000 29,000
Selling, general and administrative 600,000 766,000 799,000
Depreciation and amortization 21,000 17,000 44,000
----------- ----------- -----------
791,000 1,041,000 872,000
----------- ----------- -----------
OPERATING LOSS (844,000) (963,000) (528,000)
OTHER INCOME
Realized gain on marketable equity
securities and other assets 12,000 -- 5,000
Interest Income (net) 8,000 19,000 73,000
Other Income (Note 7) 161,000 -- --
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS, BEFORE TAX (663,000) (944,000) (450,000)
PROVISIONS FOR TAXES 1,000 1,000 1,000
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS (664,000) (945,000) (451,000)
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of
tax -- -- (10,000)
Loss on disposal of discontinued
operations, net of tax -- -- (20,000)
----------- ----------- -----------
NET LOSS ($ 664,000) ($ 945,000) ($ 481,000)
----------- ----------- -----------
NET LOSS PER SHARE
Continuing operations ($ 0.21) ($ 0.30) ($ 0.14)
Discontinued operations, net of tax -- -- (0.01)
----------- ----------- -----------
Net loss per share ($ 0.21) ($ 0.30) ($ 0.15)
----------- ----------- -----------
Weighted average common shares outstanding 3,128,000 3,128,000 3,128,000
----------- ----------- -----------
COMPREHENSIVE LOSS
Unrealized (loss)/gain on marketable
equity securities $ 14,000 ($ 4,000) ($ 55,000)
Net loss (664,000) (945,000) (481,000)
----------- ----------- -----------
$ (650,000) $ (949,000) $ (536,000)
The accompanying notes are an integral part of these Financial Statements.
C-2
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NET
UNREALIZED
(LOSS)
GAIN ON
COMMON STOCK ADDITIONAL MARKETABLE
-------------------------- PAID-IN EQUITY ACCUMULATED
SHARES AMOUNT CAPITAL SECURITIES DEFICIT TOTAL
----------- ----------- ----------- ----------- ----------- -----------
BALANCE
October 31, 2000 3,128,000 $ 3,128,000 $ 1,824,000 ($ 32,000) ($2,370,000) $ 2,550,000
Unrealized Loss
on Marketable
Securities (55,000) (55,000)
Net Loss (481,000) (481,000)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE
October 31, 2001 3,128,000 $ 3,128,000 $ 1,824,000 ($ 87,000) ($2,851,000) $ 2,014,000
Unrealized Loss
on Marketable
Securities (4,000) (4,000)
Net Loss (945,000) (945,000)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE
October 31, 2002 3,128,000 $ 3,128,000 $ 1,824,000 ($ 91,000) ($3,796,000) $ 1,065,000
Unrealized Loss
on Marketable
Securities $ 14,000 ($ 14,000)
Net Loss (664,000) (664,000)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE
October 31, 2003 3,128,000 $ 3,128,000 $ 1,824,000 ($ 77,000) ($4,460,000) $ 415,000
The accompanying notes are an integral part of these Financial Statements.
C-3
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 664,000) ($ 945,000) ($ 481,000)
Adjustments to reconcile net (loss) income to net cash (used
in) provided by operating activities:
Depreciation and amortization 22,000 17,000 64,000
Loss from discontinued operations, net -- -- 10,000
Loss on disposal of discontinued operations, net -- -- 20,000
Decrease (Increase) in net assets of discontinued operations -- 12,000 (17,000)
Changes in operating assets and liabilities:
Decrease(Increase)in notes receivable -- 99,000 (99,000)
Decrease(Increase) in trade accounts receivable 48,000 56,000 175,000
Decrease in inventories 252,000 401,000 138,000
Decrease (Increase) in prepaid expenses 1,000 16,000 (30,000)
Decrease (Increase) in other assets 47,000 (11,000) 45,000
(Decrease) Increase in current liabilities 10,000 (68,000) (328,000)
----------- ----------- -----------
Net cash used in continuing operations (284,000) (423,000) (503,000)
Net cash used in discontinued operations -- -- (13,000)
----------- ----------- -----------
Net cash used in operating activities (284,000) (423,000) (516,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities 275,000 85,000 224,000
Purchase of marketable securities (201,000) (95,000) (192,000)
----------- ----------- -----------
Net cash (used in) provided by investing activities 74,000 (10,000) 32,000
----------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (210,000) (433,000) (484,000)
CASH AND CASH EQUIVALENTS, beginning of year 642,000 1,075,000 1,559,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 432,000 $ 642,000 $ 1,075,000
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the year for:
Interest $ -- $ -- $ --
Income Taxes $ 1,000 $ 1,000 $ 1,000
C-4
CERTRON CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
Note 1 - Summary of Significant Accounting Policies
Nature of Operations
The Company's business consists primarily of the distribution of magnetic
media products.
Principles of Consolidation
The consolidated financial statements include the accounts of Certron
Corporation and its wholly owned subsidiary, Certron Audio, S.A.
(collectively the "Company"). Certron Audio ceased operating on September
7, 2001. All material intercompany profits, transactions and balances have
been eliminated.
Translation of Foreign Currencies
All balance sheet accounts of foreign operations are translated into US
dollars at the year-end rate of exchange, and statement of operations
items are translated at the weighted average exchange rates for the year.
Significant foreign operations ceased in 2001.
Cash and Cash Equivalents
The Company considers all cash on hand and on deposit, and securities with
original purchased maturities of less than three months to be cash and
cash equivalents.
Accounts Receivable
The Company has recorded an allowance for doubtful accounts to cover the
difference between recorded receivables and collections from customers.
The allowance for bad debts is adjusted periodically based upon the
Company's evaluation of historical collection experiences, industry trends
and other relevant factors.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method)
or market. At October 31, 2003 the inventory was fully reserved.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost and are
depreciated or amortized using the straight-line method over the lesser of
the estimated useful lives of the assets (generally five years) or the
applicable lease terms. At October 31, 2003 all equipment and leasehold
improvements were fully reserved.
Marketable Equity Securities
Management determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates such
determination at each balance sheet date. Securities available for sale
are carried at market value, with the unrealized gains and losses, net of
tax, reported in a separate component of stockholders' equity. The Company
does not have investments that qualify as trading or held to maturity
securities. Marketable equity securities are valued based on quoted market
prices. The cost of securities sold is determined by the specific
identification of cost method.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment.
Advertising and Promotion Costs
Advertising and promotion costs, which totaled $0 in 2003 and 2002, are
expensed as incurred.
Taxes on Income
The Company files tax returns excluding its subsidiary for United States
federal tax purposes and combined returns with its subsidiary for state
purposes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the year in
which those temporary differences are expected to be recovered or settled.
Reserves for deferred tax assets are recorded when ultimate recovery of
such assets is deemed uncertain.
Income (Loss) Per Common Share
Income (loss) per common share is based on the weighted average number of
common shares outstanding during the year and the effect of common stock
equivalents, if dilutive.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" related
C-5
interpretations in accounting for its employee stock options. Under APB
25, no compensation expense is recorded when the exercise price of the
option equals the market price of the underlying stock on the date of the
grant. The Company has adopted the disclosure only provisions of Statement
of Financial Accounting Standards No. 148, 148 "Accounting for Stock Based
Compensation".
Estimates
In preparing consolidated financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
consolidated financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Comprehensive Income
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which
are excluded from net income, include foreign currency translation
adjustments and unrealized gains and losses on available-for-sale
securities.
Segment Reporting
The Company accounts for segments in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
which requires that companies disclose "operating segments" based on the
way management desegregates the Company for internal operating decisions.
See Note 9 for further information about the Company's segments. The
Company's Mexicali operation and the contract assembly segment of its
business was closed September 2001.
Recently Issued Accounting Pronouncement
In April 2002, the Financial Standards Board (the "FASB") issued SFAS No.
145, "Rescission of SFAS No. 4, 44, and 64, Amendment of the FASB
Statement No. 13, and Technical Corrections," effective for financial
statements issued after May 25, 2002, which effectively amends SFAS No.
13, "Accounting for Leases," to eliminate an inconsistency involving
sale-leaseback transactions and also gives clarity to other existing
authoritative pronouncements. The adoption of SFAS 145 did not have a
material impact on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," effective for exit or
disposal activities after December 15, 2002, which addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issues No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit and Activity (Including Certain Costs Incurred in a
Restructuring.)" The adoption of the provisions of this SFAS did not have
a material impact on the Company's financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9," application for acquisitions on or after
October 1, 2002, which generally removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions to be accounted for in accordance with
FASB Statement No. 141, "Business Combinations," and No. 142, "Goodwill
and Other Intangible Assets," and emends FASB Statement No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets," to
include in its scope certain long term customer-relationship intangible
assets of financial institutions. The adoption of SFAS 147 did not have a
material impact on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of
FASB Statement No. 123," effective for fiscal years ending after December
15, 2002, which provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-base
employee compensation. The adoption of SFAS No. 148 did not have a
material effect on the Company's financial statements, as the adoption of
this standard did not require the Company to change, and the Company did
not change, to the fair value based method of accounting for stock-based
compensation.
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities." FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," and applies immediately to any variable interest
entities created after January 31, 2003 and to variable interest entities
in which an interest is obtained after January 31, 2003. The Company holds
no interest in variable interest entities.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS 149 clarifies the
accounting and reporting for derivative instruments, including certain
derivative instruments imbedded in other contracts and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." In particular, SFAS No. 149 clarifies under what
circumstances a contract with an initial net investment meets the
characteristic of a derivative as described in SFAS No. 133. SFAS No. 149
also clarifies when a derivative contains a financing component. SFAS No.
149 is generally effective for derivative instruments entered into or
modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The company holds no derivative instruments and does
not engage in hedging activities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 requires certain financial instruments that have
both equity and liability characteristics to be classified as a liability
on the balance sheet. SFAS No. 150 is effective for the first interim
period beginning after June 15, 2003. The adoptions of SFAS 150 did not
have a material impact on the Company's financial statements.
Reclassifications
Certain prior year amounts in the accompanying consolidated financial
statements have been reclassified to conform to the current year's
presentation.
C-6
Note 2 - Discontinued Operation
On September 7, 2001, the Company closed its Mexicali, Mexico plant and
its contract assembly operations that were conducted at that facility.
This closure was in response to a decline in market for micro cassettes
which also had a been assembled at the Mexicali, Mexico facility, the loss
of an existing customer and the negative outlook for the retention of its
then sole remaining contract assembly customer and additional contract
assembly business. In the opinion of management, all expenses associated
with the closing of Mexico operations were either paid or fully accrued in
fiscal 2001. The assets in the Mexicali, Mexico facility consists
primarily of accounts receivable and fixed assets.
The estimated loss on the disposal of the discontinued operation of
$30,000(net of income tax benefit of $0), represents the estimated loss on
the disposal of the assets of the segment and a provision for expected
operating losses during the phase-out period from September 7, 2001
through October 31, 2001.
Disposition of the Mexicali facility, represents the disposal of a
business segment under Accounting Principles Board ("APB") Opinion No.30.
Accordingly, results of this operation have been classified as
discontinued, and prior periods have been restated. Operating results of
the Mexicali facility for the period of November 1, 1999 through September
7, 2001 are shown separately in the accompanying statement of operations.
Net sales and income from the discontinued operation are as follows:
2003 2002 2001
---- ---- --------
Net Sales -- -- $603,000
Loss from discontinued operation -- -- 10,000
Loss on disposal of discontinued operation -- -- 20,000
Income tax benefit (expense) -- -- --
Net loss from discontinued operation -- -- 30,000
Note 3 - Marketable Securities
The Company has investments in marketable equity securities, which have
been classified as non-current, available-for-sale, at October 31, 2003
and 2002. The market value of these securities is shown as a non-current
asset while the change in market value since the acquisition of these
securities is shown as an unrealized holding loss in the shareholders'
equity section of the balance sheet. The investments in equity securities
at October 31, 2003 have an original cost of $135,000 and a fair value of
$58,000, resulting from gross unrealized losses of $82,000 and gross
unrealized gains of $5,000, respectively. The investments in equity
securities at October 31, 2002 had an original cost of $210,000 and a fair
value of $119,000, resulting from gross unrealized losses of $110,000 and
gross unrealized gains of $12,000 respectively.
Realized gains from the sale of marketable securities were $11,000, $0,
and $5,000 for the years ended October 31, 2003, 2002 and 2001,
respectively. Gross proceeds from the sale of securities were $275,000,
$85,000 and $224,000 for the years ended October 31, 2003, 2002 and 2001,
respectively.
Note 4 - Inventory
Due to the apparent loss of three of the Company's largest customers, as
described in Item 1, declining sales, and excess inventory, the Company
has established a reserve to reduce the value of its inventory to net
realizable value taking into account the cost of handling and sales.
Note 5 - Options
The Company's Executive Stock Option Plan (the "Executive Plan") was
approved by shareholders in March 1989. In January 1995, the Board of
Directors adopted an amendment to the Executive Plan changing its name to
the Executive Stock Option Plan, increasing the number of shares of Common
Stock covered thereby from
150,000 to 300,000 and extending the expiration date of the Executive Plan
from January 1999 to January 2005. The increase in the number of shares
and the extension of the expiration date of the plan were approved by
shareholders in March 1995. In January 2001, the Board of Directors
adopted a further amendment to the Executive Plan increasing the number of
shares of Common Stock covered thereby to 600,000 shares and extending the
expiration date of the Executive Plan to January 24, 2011. This amendment
was approved by shareholders in March 2001. Options under the plan have
been reserved for issuance to officers, directors and key employees.
C-7
Options under the Plan may be exercised in various installments, may not
be exercised beyond ten years and the option price may not be less than
the market value of the common stock on the date the option is granted.
OPTIONS OPTIONS
AVAILABLE GRANTED AND PRICE
EXECUTIVE STOCK OPTION PLAN FOR GRANT OUTSTANDING RANGE
Balance, October 31, 1999 181,500 118,500 $1.000
Granted (62,000) 62,000 $1.000
Balance, October 31, 2000 119,500 180,500 $1.000
Increase 300,000 $1.000
Canceled 75,500 (75,500) $1.000
Balance October 31, 2001 495,000 105,000 $1.000
Canceled 67,000 (67,000) $1.000
Balance October 31, 2002 562,000 38,000 $1.000
Canceled 3,000 (3,000) $1.000
Balance October 31, 2003 565,000 35,000 $1.000
=========== ============
The Company has adopted only the disclosure provisions of SFAS No. 148,
"Accounting for Stock-Based Compensation." It applies Accounting
Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for its plans and
does not recognize compensation expense for its stock-based compensation
plans other than for restricted stock and options/warrants issued to
outside third parties. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for
awards under these plans consistent with the methodology prescribed by
SFAS 148, the Company's net income and earnings per share prescribed by
SFAS 148, the Company's net income and earnings per share would be reduced
to the pro forma amounts indicated below:
OCTOBER
31, 2003
------------------
Net Loss as reported ($664,000)
Loss, pro forma (664,000)
Loss per share as reported (.21)
Loss per share, pro forma (.21)
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense
related to grants made before 1997.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in:
2003
------------------
Risk free interest rate 5.8%
Expected lives (years) 5
Expected volatility 26.0%
Expected dividends 0
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a single measure of the fair
value of its employee stock options.
At October 31, 2003, there were 35,000 options granted and outstanding, of
which 35,000 were exercisable. These options had a weighted average
remaining contractual life of three years. The weighted average exercise
price of the options outstanding and exercisable was $1.00.
Incremental common shares (not included in the denominator of diluted
earnings per share because of their anti-dilutive nature):
2003 2002
Employee options 35,000 38,000
Warrants 0 0
Potential common equivalents 35,000 38,000
If all currently outstanding potential common equivalents are exercised,
the Company would receive proceeds of approximately $35,000.
Note 6 - Taxes on Income
The provision for taxes on income is comprised of the minimum state income
taxes of $1,000.
C-8
A reconciliation of the federal statutory rates to the effective rates is
summarized as follows:
YEAR ENDED OCTOBER 31,
----------------------------
2003 2002 2001
------ ------ ------
Statutory rate 34% 34.0% 34.0%
State taxes, net of federal benefit 0% 0% 0.2%
Unrecognized benefit of net operating losses (34%) (34.0%) (34.0%)
------ ------ ------
Effective tax rate 0% 0% 0.2%
------ ------ ------
For federal income tax return purposes, net operating losses of
approximately $5,600,000 expire beginning October 31, 2005. For state
income tax purposes, net operating losses of approximately $2,400,000
expire beginning October 31, 2003.
Significant components of the Company's deferred tax asset consist of the
following:
OCTOBER 31, OCTOBER 31,
2003 2002
----------- ------------
Net operating loss carry forward $ 2,129,000 $ 1,913,900
State Taxes 90,000 71,900
Vacation and severance accruals 12,000 8,600
Allowance for bad debts 7,000 6,500
Inventory 76,000 3,400
Depreciation (2,000) 25,700
Close Out Reserves 22,000 21,500
Loss on marketable equity Securities 146,000 146,300
----------- ------------
General business credit -- --
----------- ------------
Total deferred tax assets 2,480,000 2,197,800
Valuation allowance for deferred tax assets (2,480,000) (2,197,800)
----------- ------------
$ -- $ --
----------- ------------
The deferred tax assets have been offset in their entirety by a valuation
allowance due to the uncertainty of their realization.
Note 7 - Other Income
During the year ended October 31, 2003, the Company received $161,000 from
the surrendering of a life insurance policy held on a director of the
Company. The income from this transaction is reported as other income in
the statement of operations.
Note 8 - Commitments and Contingencies
Operating Leases -
The Company leases office and warehouse facilities under long-term
operating leases. The minimum net lease payments under non-cancelable
operating leases are as follows:
Year Ending October 31 2004 $28,636
Thereafter 0
Total rental expense charged to operations amounted to $113,000, $129,000,
and $197,000, for the years ended October 31, 2003, 2002, and 2001
respectively.
Some leases contain renewal options, inflation escalation clauses and
under some leasing arrangements, the Company pays maintenance, insurance,
taxes and other expenses in addition to the above minimum annual rentals.
The Company as of December 2, 2003 moved out of the Corona property. The
Company now leases a storage area at a facility owned by Louart
Corporation on a month to month basis.
Employment Contract -
On November 1, 1993, the Company entered into an employment agreement with
its Chairman/Chief Executive Officer under which the Company is committed
to annual salary payments to the officer in the amount of $200,000 through
fiscal
1998. During the fiscal year ended October 31, 1999, the Chairman and CEO
voluntarily reduced his compensation to $153,000, in fiscal year ended
October 31, 2000 to $139,000, in fiscal year ended October 31, 2001 to
$117,000, in fiscal year ended October 31, 2002 to $113,000 and in fiscal
year 2003 to $104,000. In 1998 the Employment Agreement was amended to
extend the term thereof through October 31, 2001 and in November 2001 the
Agreement was amended to extend the term thereof through October 31, 2004.
C-9
Contingencies -
The Company was notified by a letter dated June 2, 2000 received June 6,
2000 that the Company may have a potential liability from waste disposal
in the Casmalia Disposal Site at Santa Barbara County, California. The
Company was given a choice of either signing an agreement that would toll
the statute of limitations for eighteen (18) months in order to allow the
Company to resolve any liability with the government without incurring
costs associated with being named a defendant in a lawsuit, or becoming an
immediate defendant in a lawsuit. The Company signed the tolling
agreement. On November 20, 2001, the tolling agreement was extended for an
additional 18 months and on May 20, 2003, the tolling agreement was again
extended for an additional 18 months. While the amount which will be
required to settle this matter is not expected to be material, Certron is
unable to estimate the amount that may be required to settle this matter.
The company is waiting for communication from the government concerning
settlement of this claim.
Note 9 - Industry Segment Information
In fiscal 2003 and 2002, the Company operated solely in the segment of
distributing magnetic media products.
In fiscal 2001, the Company operated principally in two segments: magnetic
media products and contract assembly. Operations in magnetic media
products primarily involve the sale of blank magnetic media and related
products. On September 7, 2001, the contract assembly segment was closed
and as set forth in the financial information by industry segment as
discontinued operations. See Note 2 for further information on this
discontinued operation.
Identifiable assets by industry segment are those that are used in the
Company's operation in each industry. Corporate assets are principally
cash and other assets.
Financial information for 2003, 2002 and 2001 by industry segment, is
summarized as follows:
2003 2002 2001
----------- ----------- -----------
Net sales to unaffiliated customers:
Magnetic media products $ 300,000 $ 750,000 $ 1,475,000
Discontinued operations -- -- 603,000
----------- ----------- -----------
Combined $ 300,000 $ 750,000 $ 2,078,000
----------- ----------- -----------
Gross profit/(loss):
Magnetic media products ($ 53,000) $ 78,000 $ 131,000
----------- ----------- -----------
Discontinued operations -- 158,000
($ 53,000) 78,000 289,000
General corporate expenses (791,000) (1,041,000) (847,000)
Realized gain & loss on marketable
securities 12,000 -- 5,000
Interest income 8,000 19,000 73,000
Other income 161,000 -- --
----------- ----------- -----------
Loss from continuing operations, before tax ($ 663,000) ($ 944,000) ($ 450,000)
----------- ----------- -----------
Loss from continuing operations ($ 664,000) ($ 945,000) ($ 451,000)
----------- ----------- -----------
Loss from discontinued operations, net of tax -- -- ($ 30,000)
Net Loss ($ 664,000) ($ 945,000) ($ 481,000)
Basic and diluted net loss per share ($ 0.21) ($ 0.30) ($ 0.15)
Identifiable assets:
Magnetic media products 25,000 428,000 $ 918,000
Discontinued operations -- 11,000
----------- ----------- -----------
Total identifiable asset 25,000 428,000 929,000
General corporate assets 538,000 775,000 1,291,000
----------- ----------- -----------
Total assets $ 563,000 $ 1,203,000 $ 2,220,000
----------- ----------- -----------
Depreciation and amortization:
Magnetic media products $ 25,000 $ 17,000 $ 64,000
Discontinued operations -- -- --
----------- ----------- -----------
Total depreciation and amortization $ 21,000 $ 17,000 $ 64,000
----------- ----------- -----------
Capital expenditures:
Magnetic media products $ -- -- --
Discontinued operations -- -- --
----------- ----------- -----------
Total capital expenditures $ -- $ -- $ --
----------- ----------- -----------
Note 10 - Related Party Transactions
The Company made payments to Louart, a stockholder of the Company, for
rent of warehouse and office space, secretarial and administrative
services, consulting services, and an automobile. These fees are included
in selling, general and administrative expenses.
C-10
The payments made to Louart for these items for the years ended October 31
are as follows:
2003 $190,000
2002 $190,000
2001 $192,000
Note 11 - Concentrations
For fiscal year ended October 31, 2003, the Company's ten largest
customers of magnetic media products accounted in the aggregate for
approximately 93% of the Company's total net sales of magnetic media
products. During fiscal 2003, the two largest single magnetic media
customers accounted for $ 67,000 or 22% and $33,000 or 11% of the
Company's total magnetic media sales, respectively. The Company's largest
customer has informed the Company of their intent to cease ordering from
the Company, despite their continued placement of orders. The loss of the
Company's three largest customers has had a material negative effect on
the Company's earnings and sales.
The Company maintains cash deposits at several banks located in
California. Deposits at each bank are insured by the Federal Deposit
Insurance Corporation up to $100,000. As of October 31, 2003, uninsured
portions of balances held at those banks aggregated to $312,000.
Accounts receivable from the Company's largest customer accounted for
$17,600 or 70% of accounts receivable as of October 31, 2003.
Note 12. Basis of Presentation
During the three years ended October 31, 2003, 2002 and 2001, the Company
had recurring losses due to continuing intense price competition and
technological changes in the marketplace for its products. The Company
concluded that its audio and videotape businesses were no longer viable
and that raises substantial doubt as to the ability of the Company to
continue as a going concern.
Management's plans for the Company include finding a buyer for the
Company.
It is not possible to predict the success of management's efforts. If
management is unable to achieve its goals, the Company may find it
necessary to undertake other actions as may be appropriate to meet its
commitments.
The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of the recorded asset
amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
C-11
EXHIBIT D
CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS OF CERTRON CORPORATION AND
SUBSIDIARY FOR THE NINE MONTHS ENDED JULY 31, 2004
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
($ in Thousands)
JULY 31, OCTOBER 31,
2004 2003
------------- --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 283 $ 432
Trade accounts receivable, net 6 25
Prepaid Expenses 11 48
------------- --------------
Total Current Assets 300 505
------------- --------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Machinery and equipment -- 17
Furniture, fixtures and leasehold improvements 80 142
------------- --------------
80 159
Less accumulated depreciation and amortization (80) (159)
------------- --------------
Net equipment and leasehold improvements -- --
MARKETABLE SECURITIES -- 58
TOTAL ASSETS $ 300 $ 563
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued professional fees 41 49
Accrued payroll and related items 9 27
Other accrued expenses 80 72
------------- --------------
Total Current Liabilities 130 148
------------- --------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $1.00 par value, authorized 500,000 shares, no shares issued
and outstanding Common Stock, no par value; stated value $1.00 per share,
authorized 10,000,000
shares; issued and outstanding 3,128,000 3,128 3,128
Additional paid-in capital 1,824 1,824
Net unrealized loss on marketable equity securities -- (77)
Accumulated deficit (4,782) (4,460)
------------- --------------
Total Stockholders' Equity 170 415
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 300 $ 563
------------- --------------
The accompanying notes are an integral part of these financial statements.
D-1
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in Thousands except Per Share Information)
(Unaudited)
THREE MONTHS ENDED JULY 31, NINE MONTHS ENDED JULY 31,
--------------------------- --------------------------
2004 2003 2004 2003
---------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
NET SALES $ 17 $ 39 $ 51 $ 246
COST OF PRODUCTS SOLD -- 58 -- 251
---------- ----------- ---------- ----------
GROSS PROFIT 17 (19) 51 (5)
COST AND EXPENSES
Reserve for inventory write down -- (20) -- 141
Selling, general & administrative 112 160 411 469
Depreciation and amortization -- 4 -- 13
---------- ----------- ---------- ----------
Total Costs and Expenses 112 144 411 623
---------- ----------- ---------- ----------
Loss before other income and expenses (95) (163) (360) (628)
Interest (net) 1 2 2 7
Gain (Loss) on sale of stock 8 (2) (66) (1
Gain on sale of equipment -- -- 12 --
Other income 70 -- 90 --
---------- ----------- ---------- ----------
Net loss before provision for taxes (16) (163) (322) (622)
Provision for taxes -- 1 -- 1
Net Loss (16) (164) (322) (623)
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gain (loss) on marketable securities -- (9) -- 8
---------- ----------- ---------- ----------
Comprehensive Loss $ (16) $ (173) $ (322) $ (615)
---------- -----------
PER SHARE INFORMATION:
Basic loss per share $ (0.005) $ (0.05) $ (0.10) $ (0.20)
---------- ----------- ---------- ----------
Diluted loss per share $ (0.005) $ (0.05) $ (0.10) $ (0.20)
---------- ----------- ---------- ----------
Average number of common shares outstanding 3,128,000 3,128,000 3,128,000 3,128,000
---------- ----------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
D-2
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in Thousands)
(Unaudited)
NINE MONTHS ENDED JULY 31,
---------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (322) $ (623)
----------- -----------
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization -- 13
Changes in operating assets and liabilities:
Decrease in trade accounts receivable 20 61
Decrease in inventories -- 216
(Increase) Decrease in other assets 9 (21)
Decrease in other current assets 84 46
Decrease in current liabilities (17) (22)
----------- -----------
Net cash used in operating activities (226) (330)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities 77 225
Purchase of marketable securities -- (170)
----------- -----------
Net cash provided by investing activities 77 55
Net decrease in cash and cash equivalents (149) (275)
Cash and cash equivalents, beginning of period 432 642
----------- -----------
Cash and Cash equivalents, end of period $ 283 $ 367
----------- -----------
The accompanying notes are an integral part of these financial statements.
D-3
CERTRON CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended July 31, 2004
(Unaudited)
NOTE A-- BASIS OF PRESENTATION
The accompanying financial statements and footnotes have been condensed and
therefore do not contain all disclosures required by generally accepted
accounting principles. The interim financial statements are unaudited; however,
in the opinion of Certron Corporation (the Company), the interim financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods. Results for interim periods are not necessarily indicative of those to
be expected for the full year.
NOTE B-- MARKETABLE EQUITY SECURITIES
Management determines the appropriate classification of its investments in debt
and equity securities at the time of purchase and reevaluates such determination
at each balance sheet date. Securities available for sale are carried at fair
value, with the unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. At July 31, 2004 the Company had no
investments that qualified as trading or held to maturity.
Marketable equity securities are valued based on quoted market prices. The cost
of securities sold is determined by the specific identification of cost method.
NOTE C-- LOSS OF A MAJOR CUSTOMER
As discussed in the Company's Annual Report on Form 10-K for the year ended
October 31, 2003, the Company expected to lose the business of its largest
customer. The loss of the largest customer was confirmed in the first quarter of
fiscal 2004. Future orders are expected to be nominal.
NOTE E-- LEGAL PROCEEDINGS
The Company was notified by a letter dated June 2, 2000 received June 6, 2000
that the Company may have a potential liability from waste disposal in the
Casmalia Disposal Site at Santa Barbara County, California. The Company was
given a choice of either signing an agreement that would toll the statute of
limitations for eighteen (18) months in order to allow the Company to resolve
any liability with the government without incurring costs associated with being
named a defendant in a lawsuit, or becoming an immediate defendant in a lawsuit.
The Company signed the tolling agreement. On November 20, 2001, the tolling
agreement was extended for an additional 18 months and on May 20, 2003, the
tolling agreement was again extended for an additional 18 months. On June 29,
2004, the company received a proposed settlement from the EPA in the amount of
$21,131. The Company is waiting for communication from the government concerning
payment of the proposed settlement. As of July 31, 2004, the Company has accrued
sufficient amount to cover any potential liabilities from this matter.
The Company received a judgment against a former client of Certron Mexicali
operation on February 9, 2004 in the amount of $19,300. The judgment is being
paid over a course of six months and the company has received $16,600 as of July
31, 2004.
D-4
EXHIBIT E
CYBRDI INC. AND SUBSIDIARY
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
CYBRDI INC. AND SUBSIDIARY
CONTENTS
PAGE 1 INDEPENDENT AUDITORS' REPORT
PAGE 2 BALANCE SHEETS AS OF DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
PAGE 3 STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS) FOR THE YEARS ENDED DECEMBER 31,
2003 (CONSOLIDATED) AND 2002
PAGE 4 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY) FOR THE YEARS ENDED DECEMBER
31, 2003 (CONSOLIDATED) AND 2002
PAGE 5 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
PAGE 6 - 26 NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
[WEINBERG & COMPANY, P.A. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Cybrdi Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Cybrdi Inc. and
Subsidiary (the "Company''), as of December 31, 2003 and 2002 and the related
statements of operations and comprehensive income (loss), changes in
shareholders' equity (deficiency) and cash flows for the years then ended. These
financial consolidated statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the financial position of Cybrdi Inc. and
Subsidiary as of December 31, 2003 and 2002, and the results of their operations
and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ WEINBERG & COMPANY, P.A.
- --------------------------------
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
April 9, 2004
CYBRDI INC. AND SUBSIDIARY
BALANCE SHEETS
AS OF DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
ASSETS
2003 2002
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 2,065,586 $ 17,782
Accounts receivable 350,024 --
Inventories 215,623 188,680
Other receivables and prepaid expenses 311,113 --
Accrued interest receivable 7,045 --
----------- -----------
TOTAL CURRENT ASSETS 2,949,391 206,462
PROPERTY, PLANT AND EQUIPMENT, NET 722,306 3,200
DEFERRED PRIVATE PLACEMENT COSTS 311,663 --
INTANGIBLE ASSETS 721,705 --
DEFERRED TAX ASSETS 40,171 --
----------- -----------
TOTAL ASSETS $ 4,745,236 $ 209,662
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable $ 2,899 $ 140,190
Other payables 26,230 69,200
Customer deposits 6,197 --
Dividends payable 157,651 --
Amount due to shareholders 491,670 113,386
Deferred revenue 99,315 --
----------- -----------
TOTAL CURRENT LIABILITIES 783,962 322,776
MINORITY INTERESTS 873,934 --
----------- -----------
TOTAL LIABILITIES 1,657,896 322,776
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY/(DEFICIENCY)
Common Stock, $.10 par value, 35,000,000 shares in 2003 and
5,000,000 shares in 2002 authorized, 24,619,355 shares in 2003
and 28,959 shares issued and outstanding 2,461,936 2,896
Additional paid-in capital 607,876 (896)
Reserve funds 118,234 --
Accumulated deficit (100,894) (115,114)
Accumulated other comprehensive income 188 --
----------- -----------
TOTAL SHAREHOLDERS' EQUITY/(DEFICIENCY) 3,087,340 (113,114)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY) $ 4,745,236 $ 209,662
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
- 2 -
CYBRDI INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
2003 2002
---------- ----------
REVENUE $1,227,394 $ 7,290
COST OF GOODS SOLD 296,876 3,300
---------- ----------
GROSS PROFIT 930,518 3,990
---------- ----------
OPERATING EXPENSES:
Selling and distribution expenses 66,398 9,550
General and administrative expenses 548,896 109,395
---------- ----------
Total operating expenses 615,294 118,945
---------- ----------
INCOME/(LOSS) FROM OPERATIONS 315,224 (114,955)
OTHER INCOME/(EXPENSE)
Interest income 7,150 --
Interest expense -- (159)
Other income, net 36,718 --
---------- ----------
Total other income / (expense) 43,868 (159)
---------- ----------
INCOME/(LOSS) BEFORE INCOME TAXES 359,092 (115,114)
INCOME TAXES 40,170 --
---------- ----------
INCOME/(LOSS) BEFORE MINORITY INTEREST 399,262 (115,114)
MINORITY INTEREST 138,912 --
---------- ----------
NET INCOME 260,350 (115,114)
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY TRANSLATION GAIN 188 --
---------- ----------
COMPREHENSIVE INCOME/(LOSS) $ 260,162 $ (115,114)
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
- 3 -
CYBRDI INC. AND SUBSIDIARY
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
Retained Accumulated
Additional earnings / other
Common Stock paid-in Reserve accumulated comprehensive
Shares Amount capital fund deficit income Total
------------ ----------- ----------- ----------- ----------- ----------- -----------
Balance as of
January 1, 2002 28,959 $ 2,896 $ (896) $ -- $ -- $ -- $ 2,000
Net loss -- -- -- -- (115,114) -- (115,114)
------------ ----------- ----------- ----------- ----------- ----------- -----------
Balance as of
December 31, 2002 28,959 2,896 (896) -- (115,114) -- (113,114)
Capital contribution 24,590,396 2,459,040 600,072 -- -- -- 3,059,112
Imputed rent expenses -- -- 8,700 -- -- -- 8,700
Net income -- -- -- -- 260,350 -- 260,350
Appropriation of
reserve funds -- -- -- 118,234 (118,234) -- --
Dividends payable
- - subsidiary -- -- -- -- (127,896) -- (127,896)
Foreign currency
translation gain -- -- -- -- -- 188 188
------------ ----------- ----------- ----------- ----------- ----------- -----------
Balance as of
December 31, 2003 24,619,355 $ 2,461,936 $ 607,876 $ 118,234 $ (100,894) $ 188 $ 3,087,340
=========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
- 4 -
CYBRDI INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 260,350 $ (115,114)
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation and amortization 191,738 800
Minority interest's share of net income 138,912 --
Imputed rental income 8,700 --
Changes in operating assets and liabilities:
Deferred tax assets (40,171) --
Deferred revenue 99,315 --
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable, net (88,199) --
Inventories 12,561 (188,680)
Other receivable and prepaid expenses 152,518 --
Accounts payable and accrued expenses (139,666) 140,190
Other payables and liabilities (57,472) 69,200
Customer Deposit 1,197 --
----------- -----------
Net cash provided by operating activities 539,783 (93,604)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received from the acquisition 690,816 --
Purchase of property, plant and equipment (205,674) (4,000)
----------- -----------
Net cash provided by / (used in) investing activities 485,142 (4,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds advanced from shareholders 378,284 113,386
Payment on short-term loan (181,223) --
Payment on related company loan (16,673) --
Proceeds from capital contribution 1,000,648 2,000
Payment for private placement costs (158,347) --
----------- -----------
Net cash provided by financing activities 1,022,689 115,386
----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 2,047,614 17,782
Effect of exchange rate changes on cash 190 --
Cash and cash equivalents, at beginning of year 17,782 --
----------- -----------
CASH AND CASH EQUIVALENTS, AT END OF YEAR $ 2,065,586 $ 17,782
=========== ===========
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid $ 2,500 $ --
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
- 5 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Cybrdi Inc. (the "Company") is a company established in the United
States of America in December 2001 with an authorized common stock of
35,000,000 shares as of September 2003 and 5,000,000 shares from
inception to September 2003.
On March 5, 2003, the Company acquired 80% interest of the Shaanxi Chao
Ying Biotechnology Co., Ltd. (the "Subsidiary") (formerly known as
Shaanxi Chao Ying Biomedicine Co. Ltd.) by exchange of 99% of the
Company's shares (16,980,000 pre-split, 24,590,396 post-split, see Note
12) to the existing shareholders of the Subsidiary by increasing its
common stock from 20,000 shares to 17,000,000 shares (pre-split) (from
28,959 to 24,590,396 post-split). (See Note 16 "Business Combination").
The Subsidiary is a sino-foreign equity joint venture ("JV")
established in the People's Republic of China (the "PRC") between
Shaanxi Chao Ying Personal Care Group Ltd. (the "Chinese Partner") and
Immuno-OncoGenomics Inc. (the "Foreign Partner"), a limited - liability
company incorporated in the United States of America on July 17, 2000.
The Subsidiary was initially registered with a registered capital of
$1,812,251 for an operating period of 15 years. The registered capital
of the Subsidiary increased to $3,866,175 by further injection of
capital by the existing shareholders and by admission of a new
shareholder, Shaanxi Yanfeng Real Estate Development Co., Ltd, a
limited liability company established in the PRC. The principal
activities of the Subsidiary are research, manufacture and sale of
various high-quality tissue arrays and the related services in the PRC.
The consolidated financial statements include the accounts of the
Company and its subsidiary. Material intercompany balances and
transactions have been eliminated on consolidation.
- 6 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United
States of America ("US GAAP"). This basis of accounting differs from
that used in the statutory accounts of the Subsidiary, which were
prepared in accordance with the accounting principles and relevant
financial regulations applicable to enterprises with foreign investment
in the PRC ("PRC GAAP").
Certain accounting principles, which are stipulated by US GAAP, are not
applicable in the PRC. The difference between PRC GAAP accounts of the
Company and its US GAAP financial statements was immaterial.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Economic and political risks
The Subsidiary faces a number of risks and challenges since
its operation is in the PRC and its primary market is in the
PRC, except for sales that are made to the Company in the
United States of America .
(b) Inventories
Inventories are stated at the lower of cost or market. Cost of
raw materials is determined on the basis of first in first out
method ("FIFO"). Finished goods are determined on the weighted
average basis and comprise of direct materials, direct labor
and an appropriate proportion of overhead.
- 7 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(c) Property, plant and equipment
Property, plant and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation on
property, plant and equipment is calculated on the
straight-line basis to write off the cost of assets over their
respective estimated useful lives. Leasehold improvements are
amortized over the estimated useful life of the improvement or
the lease term, whichever is shorter. Estimated useful lives
of the property, plant and equipment are as follows:
Buildings 20 years
Plant and machinery 10 years
Motor vehicles 10 years
Office equipment 5 years
Leasehold improvement Lower of term of lease or 5 years
Software - website 3 years
The cost and related accumulated depreciation of assets sold
or otherwise retired are eliminated from the accounts and any
gain or loss is included in the statement of operation. The
cost of maintenance and repairs is charged to income as
incurred, whereas significant renewals and betterments are
capitalized.
Long-term assets of the Company are reviewed annually as to
whether their carrying value has become impaired, pursuant to
the guidelines established in Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The Company also
re-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates
of useful lives.
- 8 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) Accounts and other receivables
Accounts and other receivables are recognized and carried at
original invoice amount less an allowance for any
uncollectible amounts. An estimate for doubtful accounts is
made when collection of the full amount is no longer probable.
As of December 31, 2003 and 2002, the company has not recorded
an allowance for uncollectible accounts.
(e) Cash and cash equivalents
For financial reporting purpose, the Company considers all
highly liquid investment purchased with an original maturity
of three months or less to be cash equivalents.
(f) Research and development costs
Research and development costs are charged to operations when
incurred and are included in operating expenses. The amounts
charged in 2003 and 2002 were $0 and $36,031, respectively.
(g) Fair value of financial instruments
The carrying amounts of cash and cash equivalents, accounts
receivable, other receivables, accounts payable, other
payables, customer deposits, dividends payable and amounts due
to shareholders approximate fair value due to the short-term
maturities of the assets and liabilities.
- 9 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h) Bank loans
All bank loans are initially recognized at cost, being the
fair value of the consideration received and including
acquisition charges associated with the bank loans.
If a bank loan is settled before maturity, any differences
between the amount repaid and the carrying amount are
recognized immediately in the statement of operation.
(i) Website development expenses
The Company follows the Emerging Issues Task Force Issue 00-2
"Accounting for Web Site Development Costs" in accounting for
its website development expenses. Accordingly, costs that
involve design for the web page and do not change the content
are capitalized and amortized over their estimated useful
life.
Costs incurred in operating a website that have no future
benefits are expensed in the current period. Costs incurred in
operating the website which have a future benefit are
capitalized in accordance with the AICPA's Statement of
Position 98-1 and amortized over the respective future periods
which are expected to benefit from the changes.
(j) Revenue recognition and customer deposits
Revenue represents the invoiced value of goods sold recognized
upon the delivery of goods to customers and service income is
recognized when services are provided.
- 10 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(j) Revenue recognition and customer deposits (Continued)
Deferred revenue represents the undelivered portion of
invoiced value of goods sold to customers.
Sales transactions not meeting all the conditions of the full
accrual method are accounted for using the deposit method of
accounting. Under the deposit method, all costs are
capitalized as incurred, and payments received from the buyer
are recorded as a customer deposits.
(k) Retirement benefits
Retirement benefits in the form of contributions under defined
contribution retirement plans to the relevant authorities are
charged to the statement of operations as incurred.
(l) Foreign currency translation
The accompanying consolidated financial statements are
presented in United States dollars. The functional currency of
the Subsidiary is the Renminbi (RMB). The financial statements
are translated into United States dollars from RMB at year-end
exchange rates as to assets and liabilities and weighted
average exchange rates as to revenues and expenses. Capital
accounts are translated at their historical exchange rates
when the capital transactions occurred.
2003
----
Year end RMB : US$ exchange rate 8.2767
Average yearly RMB : US$ exchange rate 8.2770
- 11 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) Foreign currency translation (continued)
The RMB is not freely convertible into foreign currency and
all foreign exchange transactions must take place through
authorized institutions. No representation is made that the
Rmb amounts could have been, or could be, converted into US$
at the rates used in translation.
(m) Income Taxes
The Company accounts for income tax using SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires an asset
and allows recognition of tax benefits in future years. Under
the asset and liability approach, deferred taxes are provided
for the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax
purposes. A valuation allowance is provided for deferred tax
assets if it is more likely than not these items will either
expire before the Company is able to realize their benefits,
or that future deductibility is uncertain.
(n) Deferred private placement costs
In connection with the private placement, the Company incurred
certain costs associated with the private placement amounting
to $311,663 during 2003. Before the acquisition of the
Subsidiary in March 2003, the Subsidiary had already incurred
$153,316 of these costs. These costs were deferred and are
reflected in the accompanying 2003 balance sheet as deferred
private placement costs and will be offset against the
subsequent proceeds from the placement, which occurred in
2004. (See also Note 17 "SUBSEQUENT EVENT")
- 12 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(o) In-kind contribution
From inception through December 2003, a related party provided
office space and utilities to the Subsidiary. The Subsidiary
was not required to pay for its use of the facilities.
Accordingly, the Subsidiary recognized $8,700 of expenses
during 2003, for these contributed items with an offsetting
increase in additional paid-in capital. Management estimated
the value of the contributed items.
(p) Use of estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles in the United Stated
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statement and the
reported amounts of revenues and expenses during the reporting
periods. Management makes these estimates using the best
information available at the time the estimates are made;
however actual results could differ materially from those
estimates.
- 13 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(q) Comprehensive income (loss)
SFAS No. 130, "Reporting Comprehensive Income", established
standards for the reporting and display of comprehensive
income, its components and accumulated balances in a full set
of general purpose financial statements. SFAS No. 130 defines
comprehensive income to include all changes in equity except
those resulting from investments by owners and distributions
to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current
accounting standards as components of comprehensive income be
reported in a financial statement that is presented with the
same prominence as other financial statements. The Company's
only current component of comprehensive income is the foreign
currency translation adjustment.
(r) Intangible assets
Intangible assets include a patent. Effective January 1, 2002,
with the adoption of SFAS No. 142, intangible assets with a
definite life are amortized on a straight-line basis. The
patent is being amortized over its estimated life of 10 years.
Intangible assets with a definite life are tested for
impairment whenever events or circumstances indicate that a
carrying amount of an asset (asset group) may not be
recoverable. An impairment loss would be recognized when the
carrying amount of an asset exceeds the estimated undiscounted
cash flows used in determining the fair value of the asset.
The amount of the impairment loss to be recorded is calculated
by the excess of the asset's carrying value over its fair
value. Fair value is generally determined using a discounted
cash flow analysis. Costs related to internally developed
intangible assets are expensed as incurred.
- 14 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(s) Recent Accounting Pronouncements
In January 2003, (as revised in December 2003) The Financial
Accounting Standards Board ("FASB") issued Interpretation No.
46, "Consolidation of Variable Interest Entities", an
interpretation of Accounting Research Bulletin ("ARB") No. 51,
"Consolidated Financial Statements". Interpretation No. 46
addresses consolidation by business enterprises of variable
interest entities, which have one or both of the following
characteristics: (i) the equity investment at risk is not
sufficient to permit the entity to finance its activities
without additional subordinated support from other parties,
which is provided through other interest that will absorb some
or all of the expected losses of the entity; (ii) the equity
investors lack one or more of the following essential
characteristics of a controlling financial interest: the
direct or indirect ability to make decisions about the
entities activities through voting rights or similar rights;
or the obligation to absorb the expected losses of the entity
if they occur, which makes it possible for the entity to
finance its activities; the right to receive the expected
residual returns of the entity if they occur, which is the
compensation for the risk of absorbing the expected losses.
Interpretation No. 46, as revised, also requires expanded
disclosures by the primary beneficiary (as defined) of a
variable interest entity and by an enterprise that holds a
significant variable interest in a variable interest entity
but is not the primary beneficiary.
- 15 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(s) Recent Accounting Pronouncements (Continued)
Interpretation No. 46, as revised, applies to small business
issuers no later than the end of the first reporting period
that ends after December 15, 2004. This effective date
includes those entities to which Interpretation 46 had
previously been applied. However, prior to the required
application of Interpretation No. 46, a public entity that is
a small business issuer shall apply Interpretation 46 or this
Interpretation to those entities that are considered to be
special-purpose entities no later than as of the end of the
first reporting period that ends after December 15, 2003.
Interpretation No. 46 may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial
statements for one or more years with a cumulative-effect
adjustment as of the beginning of the first year restated.
The implementation of the provisions of Interpretation No. 46
is not expected to have a significant effect on the Company's
consolidated financial statement presentation or disclosure.
In May 2003, the FASB issued SFAS No. 150, "Accounting For
Certain Financial Instruments with Characteristics of both
Liabilities and Equity". SFAS No. 150 changes the accounting
for certain financial instruments with characteristics of both
liabilities and equity that, under previous pronouncements,
issuers could account for as equity. The new accounting
guidance contained in SFAS No. 150 requires that those
instruments be classified as liabilities in the balance sheet.
- 16 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(s) Recent Accounting Pronouncements (Continued)
SFAS No. 150 affects the issuer's accounting for three types
of freestanding financial instruments. One type is mandatorily
redeemable shares, which the issuing company is obligated to
buy back in exchange for cash or other assets. A second type
includes put options and forward purchase contracts, which
involves instruments that do or may require the issuer to buy
back some of its shares in exchange for cash or other assets.
The third type of instruments that are liabilities under this
Statement is obligations that can be settled with shares, the
monetary value of which is fixed, tied solely or predominantly
to a variable such as a market index, or varies inversely with
the value of the issuers' shares. SFAS No. 150 does not apply
to features embedded in a financial instrument that is not a
derivative in its entirety.
Most of the provisions of SFAS No. 150 are consistent with the
existing definition of liabilities in FASB Concepts Statement
No. 6, "Elements of Financial Statements". The remaining
provisions of this Statement are consistent with the FASB's
proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by
issuing its own shares. This Statement shall be effective for
financial instruments entered into or modified after May 31,
2003 and otherwise shall be effective at the beginning of the
first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of a non-public
entity, as to which the effective date is for fiscal periods
beginning after December 15, 2004. The Company does not
believe the adoption of this pronouncement will have a
material effect on the Company's financial position or results
of operations.
- 17 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
4. TAXATION
(a) Corporation Income Tax ("CIT") of Chinese Subsidiary
In accordance with the relevant tax laws and regulations of
the People's Republic of China, the Subsidiary is entitled to
full exemption from CIT for the first two years and a 50%
reduction in CIT for the next three years, commencing from the
first profitable year after offsetting all tax losses carried
forward from the previous five years. As 2003 was the
Company's first profitable year, the Company is entitled to a
full exemption from CIT.
For the years ended December 31, 2003 and 2002, income tax
expense for the years ended December 31, 2003 and 2002 is
summarized as follows:
2003 2002
------------------ -----------------
Current:
CIT $ -- $ --
Deferred:
CIT -- --
------------------ -----------------
Income tax expense $ -- $ --
================== =================
The Company's tax expense differs from the "expected" tax
expense for the years ended December 31, 2003 and 2002
(computed by applying the CIT rate of 24 percent and 33
percent in 2002 to net income) as follows:
2003 2002
------------------ -----------------
Computed "expected" expense $ 209,759 $ --
Effect of unused net operating
loss carry forward (40,810) --
CIT exemption (168,949) --
------------------ -----------------
Income tax expense $ -- $ --
================== =================
- 18 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
4. TAXATION (CONTINUED)
(a) Corporation Income Tax ("CIT") OF Chinese Subsidiary
(Continued)
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets are as follows at
December 31:
2003 2002
------------------ -----------------
Deferred tax assets:
Depreciation $ 34,620 $ --
Provision for bad debts (530) --
Provision for inventory -- --
Others 6,080 --
Net operating loss carry forward -- --
------------------ -----------------
Total gross deferred tax assets 40,170 --
Less: valuation allowance -- --
------------------ -----------------
Net deferred tax assets $ 40,170 $ --
================== =================
The valuation allowance as of December 31, 2003 and 2002 was
$0.
(b) Business Tax ("BT") of Chinese Subsidiary
The Subsidiary is subject to Business Tax, which is charged on
the service income at a general rate of 5% in accordance with
the tax law applicable for the property developers.
- 19 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
4. TAXATION (CONTINUED)
(c) Value Added Tax ("VAT") OF Chinese Subsidiary
The Subsidiary is subject to VAT, which is charged on the
selling price at a general rate of 6%.
(d) Corporation Income Tax of U.S. Parent
The operations in the United States of America has had
operational losses since inception. The net operating loss
carryforward as of December 31, 2003 is approximately $244,000
and the possible future deferred tax benefit has been fully
offset by a full valuation allowance.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of December
31 :
2003 2002
------------------ -----------------
At cost:-
Buildings $ 51,061 $ --
Plant and machinery 384,732 --
Motor vehicles 234,335 --
Office equipments 93,551 4,000
Leasehold improvement 220,917 --
Software - website 55,578 --
------------------ -----------------
1,040,174 4,000
------------------ -----------------
Less: Accumulated depreciation and amortization:-
Buildings 426 --
Plant and machinery 71,381 --
Motor vehicles 22,270 --
Office equipments 35,612 800
Leasehold improvement 166,073 --
Software - website 22,106 --
------------------ -----------------
317,868 800
------------------ -----------------
Net book value $ 722,306 $ 3,200
================== =================
Depreciation and amortization expense for the years ended December 31,
2003 and 2002 was $140,216 and $800, respectively.
- 20 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
6. INVENTORIES
Inventories consist of the following as of December 31:
2003 2002
------------------ -----------------
RAW MATERIALS $ 29,163 $ --
FINISHED GOODS 186,460 188,680
------------------ -----------------
$ 215,623 $ 188,680
================== =================
7. INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31:
2003 2002
------------------ -----------------
PATENT $ 773,227 $ --
LESS : ACCUMULATED AMORTIZATION 51,522 --
------------------ -----------------
$ 721,705 $ --
================== =================
Expected amortization expense in the next five years is as follows:
2004 $ 77,285
2005 77,285
2006 77,285
2007 77,285
2008 77,285
- 21 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
8. RELATED PARTY TRANSACTIONS
NATURE OF
NAME OF COMPANIES TRANSACTIONS 2003 2002
------------------------------- --------------------------- ------------------ -----------------
Immuno-OncoGenomics inc. Refund of deposit (300,017) --
Shaanxi Chao Ying Personal
Care Group Co., Ltd. Paid On behalf 311,663 --
In 2003, Immuno-Oncogenomics Inc. and Shaanxi Chao Ying Personal Care
Group Co., Ltd transferred a patent in the amount of $773,227 to the
Subsidiary as injection of registered capital in kind.
Apart from the above, the Subsidiary paid a deposit for a patent in the
amount of $300,017 to the Foreign Partner, Immuno-Onco Genomics Inc,
during the year 2002. During 2003, this deposit was returned to the
Company and the patent was never transferred to the Company.
See Notes 9 and 10 for additional Related Party Transactions.
9. AMOUNT DUE TO RELATED PARTY
During the years ended December 31, 2003 and 2002, an officer of the
Company made advances to the Company to assist with operations. These
advances were non-interest bearing and have no set repayment terms. As
of December 31, 2003 and 2002, the Company owed the officer $491,670
and $113,386, respectively.
- 22 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
10. COMMITMENTS AND CONTINGENCIES
For the years ended December 31, 2003 the Company recognized rent
expense for the rental space in the amount of $8,700 from a Related
Party (see Note 3).
11. GOVERNMENT GRANT
In 2000, the PRC Government launched the "Western Development Project"
which part of the project included the development of 15 specifically
named technologies and has allocated government grants to encourage the
development of these technologies. In 2003 and 2002, the subsidiary has
successfully applied and received the government grants under the
Western Development Project amounting to $33,324 and $38,660 for the
years ended December 31, 2003 and 2002, respectively. The government
grant has been included in Other Income, net in the accompanying
statements of operations and comprehensive income/(loss).
12. SHAREHOLDERS' EQUITY
On September 30, 2003, the Company approved a forward stock split of
1.448 to 1. Accordingly, all share information has been retroactively
adjusted to reflect the forward stock split.
The common stock ownership of the Company is as follows as of December
31:
2003 2002
----------------------- ----------------------
Shaanxi Chao Ying Personal Care
Group Co., Ltd. 11,324,903 46% - -
Immuno - OncoGenomics Inc. 5,908,645 24% - -
Shaanxi Yanfeng Real Estate Co. 5,170,065 21% - -
Larry Liu 2,215,742 9% 28,959 100%
--------- - ------ ---
Total 24,619,355 100% 28,959 100%
========== === ====== ===
- 23 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
13. RESERVE FUNDS
The Subsidiary is required to maintain certain statutory reserves by
appropriating from the profit after taxation in accordance with the
relevant laws and regulations in the PRC and articles of association of
the Subsidiary before declaration or payment of dividends. The reserves
form part of the equity of the Company.
The appropriation to the statutory reserve and enterprise development
reserve represent 10 percent and 5 percent of the profits after
taxation of the Company, respectively. In accordance with the laws and
regulations in the PRC, the appropriation to statutory reserve ceased
when the balances of the reserve reach 50 percent of the registered
capital of the Company.
The reserve funds consist of the following as of December 31:
2003 2002
----------------------- ----------------------
Statutory reserve $ 78,823 $ -
Enterprise development reserve 39,411 -
----------------------- ----------------------
$ 118,234 $ -
======================= =====================
14. MAJOR CUSTOMERS
For the years ended December 31, 2003, the Company has two major
customers accounted for approximately 20% of total revenue.
Approximately 70% of accounts receivable was due from these two
customers as of December 31, 2003.
- 24 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
15. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During 2003, the Company completed its acquisition of its subsidiary.
In connection with the acquisition, the Company acquired the following
assets at fair value and assumed the following liabilities in exchange
for 99% of the Company's common stock:
Assets
Accounts receivable $261,825
Inventories 39,504
Other receivables and prepaid expenses 465,389
Accrued interest receivable 5,287
Fixed assets 603,927
Deferred private placement costs 153,316
Amount due from a director 49,717
Liabilities
Short-term loan payable 181,223
Accounts payable 2,375
Other payables 14,502
Customer deposits 5,000
Amounts due to related parties 16,673
During 2003, the Company received a patent with a value of $773,227 as
an in-kind contribution for the Company's common stock.
16. BUSINESS COMBINATION
The Company accounted for its acquisition of its Subsidiary in
accordance with SFAS No. 141 "Business Combinations" as discussed in
Note 1. The Company allocated the purchase price according to the fair
market value of the assets acquired. The purchase price did not exceed
the fair market value of the assets acquired and therefore the Company
did not record any goodwill.
- 25 -
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 (CONSOLIDATED) AND 2002
16. BUSINESS COMBINATION (CONTINUED)
The unaudited pro forma consolidated results of operations listed below
include the effects of the purchase discussed above assuming the
acquisition had occurred at the beginning of the year in which the
company was acquired. The unaudited pro forma amounts are not
necessarily indicative of what actually would have occurred if the
acquisition had been in effect for the entire period presented. In
addition, they are not intended to be projections of future results and
do not reflect any synergies that might be achieved from combined
operations.
(unaudited) 2003
-------------
Revenue $ 1,525,821
Income from operations 494,424
Net income 437,657
17. SUBSEQUENT EVENT
Subsequent to December 31, 2003, the Company completed a private
placement arrangement. In this connection, the Company has issued
2,070,000 ordinary shares for approximately $1,000,000.
- 26 -
EXHIBIT F
CYBRDI INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2004 AND 2003
CYBRDI INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2004 December 31, 2003
(unaudited)
------------------ -----------------
CURRENT ASSETS
Cash and cash equivalents $ 2,974,841 $ 2,065,586
Accounts receivable 261,948 350,024
Inventories 269,753 215,623
Other receivables and prepaid expenses 13,676 311,113
Accrued interest receivable -- 7,045
----------- -----------
TOTAL CURRENT ASSETS 3,520,218 2,949,391
PROPERTY, PLANT AND EQUIPMENT, NET 616,502 722,306
DEFERRED PRIVATE PLACEMENT COSTS 443,687 311,663
INTANGIBLE ASSETS 663,719 721,705
DEFERRED TAX ASSETS 40,171 40,171
----------- -----------
TOTAL ASSETS $ 5,284,297 $ 4,745,236
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 624 $ 2,899
Other payables 51,008 26,230
Customer deposits 7,478 6,197
Dividends payable -- 157,651
Amount due to shareholders 559,913 491,670
Deferred revenue -- 99,315
----------- -----------
TOTAL CURRENT LIABILITIES 619,023 783,962
MINORITY INTERESTS 990,219 873,934
----------- -----------
TOTAL LIABILITIES 1,609,242 1,657,896
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $.10 par value, 35,000,000 shares
authorized, 24,619,355 shares in 2003 issued and outstanding 2,461,936 2,461,936
Additional paid-in capital 614,371 607,876
Reserve funds 118,234 118,234
Accumulated profit/(deficit) 480,255 (100,894)
Accumulated other comprehensive income 259 188
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 3,675,055 3,087,340
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$ 5,284,297 $ 4,745,236
=========== ===========
CYBRDI INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
---------- ----------
REVENUE $1,127,115 $ 606,309
COST OF GOODS SOLD 97,395 254,032
---------- ----------
GROSS PROFIT 1,029,720 352,277
---------- ----------
OPERATING EXPENSES:
Selling and distribution expenses 31,978 5,188
General and administrative expenses 396,305 354,836
---------- ----------
Total operating expenses 428,283 360,024
---------- ----------
INCOME/(LOSS) FROM OPERATIONS 601,437 (7,747)
OTHER INCOME
Interest income 11,017 4,644
Other income, net 84,981 27,487
---------- ----------
Total other income 95,998 32,131
---------- ----------
INCOME BEFORE INCOME TAXES 697,435 24,384
INCOME TAXES -- --
---------- ----------
INCOME BEFORE MINORITY INTEREST 697,435 24,384
MINORITY INTEREST 116,286 71,411
---------- ----------
NET INCOME/(LOSS) 581,149 (47,027)
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY TRANSLATION GAIN/(LOSS) 71 (133)
---------- ----------
COMPREHENSIVE INCOME/(LOSS) $ 581,220 $ (47,160)
========== ==========
- 3 -
CYBRDI INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD ENDED SEPTEMBER 30, 2004
(UNAUDITED)
Retained Accumulated
Additional earnings/ other
Common Stock paid-in Reserve accumulated comprehensive
Shares Amount capital fund deficit income Total
---------- ---------- ---------- ---------- ----------- ------------- ----------
Balance as of
January 1, 2004 24,619,355 2,461,936 607,876 118,234 (100,894) 188 3,087,340
Imputed rent expenses -- -- 6,495 -- -- -- 6,495
Net income -- -- -- -- 581,149 -- 581,149
Foreign currency
translation gain -- -- -- -- -- 71 71
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance as of
September 30, 2004 24,619,355 $2,461,936 $ 614,371 $ 118,234 $ 480,255 $ 259 $3,675,055
========== ========== ========== ========== ========== ========== ==========
- 4 -
CYBRDI INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 581,149 $ (47,027)
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation and amortization 111,472 94,841
Minority interest's share of net income 116,285 109,163
Changes in operating assets and liabilities:
Other intangible assets 57,986 (773,190)
Deferred tax assets -- --
Deferred revenue (99,315) --
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable, net 88,076 238,962
Inventories (54,130) (8,411)
Other receivable and prepaid expenses 310,977 149,371
Accounts payable and accrued expenses (2,275) (141,735)
Other payables and liabilities 24,778 (70,954)
Customer Deposit 1,281 --
----------- -----------
Net cash provided by/( used in) operating activities 1,136,284 (448,980)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received from the acquisition -- 690,816
Purchase of property, plant and equipment (5,668) (18,449)
----------- -----------
Net cash provided by / (used in) investing activities (5,668) 672,367
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds advanced from shareholders 68,243 303,662
Payment on short-term loan -- (181,223)
Payment on related company loan -- (16,673)
Proceeds from capital contribution -- 1,015,627
Proceeds from minority interest -- 727,018
Distribution of profit (157,651) --
Payment for private placement costs (132,024) (131,465)
----------- -----------
Net cash provided/(used in) by financing activities (221,432) 1,716,946
----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 909,184 1,940,333
Effect of exchange rate changes on cash 71 (135)
Cash and cash equivalents, at beginning of year 2,065,586 17,782
----------- -----------
CASH AND CASH EQUIVALENTS, AT END OF YEAR $ 2,974,841 $ 1,957,980
=========== ===========
- 5 -
EXHIBIT G
AMENDMENT TO ARTICLES OF INCORPORATION
OF CERTRON CORPORATION, AS AMENDED,
TO CHANGE THE COMPANY NAME
Article I of the Articles of Incorporation of Certron Corporation, as
amended, is hereby amended to read in its entirety as follows:
"The name of this corporation is Cybrdi, Inc."
EXHIBIT H
AMENDMENT TO ARTICLES OF INCORPORATION
OF CERTRON CORPORATION, AS AMENDED
MENDED,
TO INCREASE AUTHORIZED NUMBER OF SHARES
The provision of Article V of the Articles of Incorporation of Certron
Corporation, as amended, which now reads:
"The total number of shares of stock which this corporation shall
have authority to issue is 10,500,000 shares. The aggregate par
value of all shares that are to have par value is Five Hundred
Thousand Dollars ($500,000). The number of shares of Preferred Stock
authorized is 500,000 shares, and the par value of each of such
shares is one dollar ($1.00). The number of shares of Common Stock
authorized is 10,000,000 shares, and each such common share shall be
without par value."
is hereby amended to read in its entirety as follows:
"The total number of shares of stock which this corporation shall
have authority to issue is 150,500,000 shares. The aggregate par
value of all shares that are to have par value is Five Hundred
Thousand Dollars ($500,000). The number of shares of Preferred Stock
authorized is 500,000 shares, and the par value of each of such
shares is one dollar ($1.00). The number of shares of Common Stock
authorized is 150,000,000 shares, and each such common share shall
be without par value."
EXHIBIT I
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13 -- DISSENTERS' RIGHTS
Section 1300. Right to Require Purchase -- "Dissenting Shares" and
"Dissenting Shareholder" Defined.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split or share divide and which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which
come within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of Section
25100 or (B) listed on the National Market System of the NASDAQ Stock Market,
and the notice of meeting of shareholders to act upon the reorganization
summarizes this section and Sections 1301, 1302, 1303 and 1304; provided,
however, that this provision does not apply to any shares with respect to which
there exists any restriction on transfer imposed by the corporation or by any
law or regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for payment
are filed with respect to 5 percent or more of the outstanding shares of that
class.
(2) Which were outstanding on the date for the determination
of shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were voted
against the reorganization, or which were held of record on the effective date
of a short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value, in accordance with Section
1301.
I-1
(4) Which the dissenting shareholder has submitted for
endorsement, in accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
Section 1301. Demand for Purchase.
(a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision (b)
of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to
purchase the shareholder's shares for cash under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who
desires the corporation to purchase such shares shall make written demand upon
the corporation for the purchase of such shares and payment to the shareholder
in cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in the
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held
of record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
Section 1302. Endorsement of Shares. Within 30 days after the date on
which notice of the approval by the outstanding shares or the notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder, the shareholder
shall submit to the corporation at its principal office or at the office of any
transfer agent thereof, (a) if the shares are certificated securities, the
shareholder's certificates representing any shares which the shareholder demands
that the corporation purchase, to be stamped or endorsed with a
I-2
statement that the shares are dissenting shares or to be exchanged for
certificates of appropriate denomination so stamped or endorsed or (b) if the
shares are uncertificated securities, written notice of the number of shares
which the shareholder demands that the corporation purchase. Upon subsequent
transfers of the dissenting shares on the books of the corporation, the new
certificates, initial transaction statement, and other written statements issued
therefor shall bear a like statement, together with the name of the original
dissenting holder of the shares.
Section 1303. Agreed Price--Time for Payment.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair
market value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certified securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
Section 1304. Dissenter's Action to Enforce Payment.
(a) If the corporation denies that the shares are dissenting shares,
or the corporation and the shareholder fail to agree upon the fair market value
of the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152) or
notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the
issues. If the status of the shares as dissenting shares is an issue, the court
shall first determine that issue. If the fair market value of the dissenting
shares is in issue, the court shall determine, or shall appoint one or more
impartial appraisers to determine, the fair market value of the shares.
I-3
PROXY
CERTRON CORPORATION
PROXY CARD
SPECIAL MEETING OF SHAREHOLDERS
--------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
CERTRON CORPORATION
The undersigned shareholder of record of Certron Corporation, a California
corporation (the "Company"), hereby appoints each of Marshall I. Kass, Michael
S. Kass and Susan E. Kass, each with full power of substitution, as proxy to
cast all votes which the undersigned shareholder is entitled to cast at the
Special Meeting of Shareholders to be held at the Company's offices on
___________________, at __________ Pacific Coast Time at __________________, or
any adjournments or postponements thereof upon the matters listed herein and in
their discretion upon such other matters as may properly come before the
meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. UNLESS DIRECTION IS
GIVEN, THIS PROXY WILL BE VOTED "FOR" THE APPROVAL OF THE PRINCIPAL
TERMS OF THE MERGER AGREEMENT WITH CYBRDI, INC., "FOR" THE APPROVAL
OF THE PROPOSAL TO AMEND THE COMPANY'S ARTICLES OF INCORPORATION, AS
AMENDED, TO INCREASE THE AUTHORIZED SHARES FROM 10,000,000 TO
150,000,000 SHARES; AND "FOR" THE APPROVAL OF THE PROPOSAL TO AMEND
THE COMPANY'S ARTICLES OF INCORPORATION, AS AMENDED, TO CHANGE THE
COMPANY'S NAME TO "CYBRDI, INC." THE UNDERSIGNED HEREBY ACKNOWLEDGES
RECEIPT OF THE COMPANY'S PROXY STATEMENT AND HEREBY REVOKES ANY
PROXY OR PROXIES PREVIOUSLY GIVEN. PLEASE SIGN, DATE AND RETURN THIS
PROXY CARD TODAY IN THE ENCLOSED PRE-ADDRESSED ENVELOPE.
CERTRON CORPORATION
Proxy for Special Meeting of Shareholders to be Held
-------------------
PROPOSAL NO. 1
To consider and vote upon the approval of the principal terms of a merger
transaction pursuant to an Agreement and Plan of Merger among the Company,
Certron Acquisition Corp., a wholly owned subsidiary of the Company, and Cybrdi,
Inc. pursuant to which Certron Acquisition Corp. will be merged into Cybrdi,
Inc., with Cybrdi, Inc. being the surviving entity and becoming a wholly-owned
subsidiary of the Company, and the stockholders of Cybrdi, Inc. receiving up to
47,328,263 shares of the Company's Common Stock so that, immediately
post-Merger, the former stockholders of Cybrdi will own approximately 93.8% of
the Company's issued and outstanding Common Stock. Approval of the Merger
transaction also constitutes election of new directors for the Company effective
upon consummation of the Merger
FOR AGAINST ABSTAIN
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PROPOSAL NO. 2
To approve an amendment to the Company's Articles of Incorporation, as amended,
to increase the authorized number of shares of Common Stock, no par value, from
10,000,000 to 150,000,000 shares
FOR AGAINST ABSTAIN
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PROPOSAL NO. 3
To approve an amendment to the Company's Articles of Incorporation, as amended,
to change the Company's name to "Cybrdi, Inc."
FOR AGAINST ABSTAIN
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Signature(s) Date:
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Please sign above exactly as your name appears on the Proxy Card. If shares are
registered in more than one name, all such persons should sign. A corporation
should sign in its full corporate name by a duly authorized officer, stating
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accompanying envelope. Please return promptly in the enclosed envelope which
requires no postage if mailed in the U.S.A.