SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
INFORMATION STATEMENT
PURSUANT TO SECTION 14(C) AND SECTION 14F-1
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
SCHEDULE 14C
(RULE 14C-101)
Information Statement Pursuant to Section 14(c) of the Securities Exchange Act
of 1934
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Definitive Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14c-5(d)(2))
ESCAGENETICS CORPORATION.
(Name of Registrant As Specified In Its Charter)
Payment of Filing Fee (Check the Appropriate Box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which the 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):
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(5) Total fee paid:
[ ] Fee paid previously with preliminary materials
[ ] check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
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ESCAGENETICS CORPORATION
5251 DTC Parkway, Suite 1090
Greenwood Village, Colorado 80111
PRELIMINARY INFORMATION STATEMENT
PURSUANT TO SECTION 14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED, AND REGULATION 14C AND SCHEDULE 14C THEREUNDER
WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO SEND US A PROXY
INTRODUCTION
This notice and information statement (the "Information Statement") was mailed
on or about October __, 2003 to the stockholders of record, as of September __,
2003, of ESCAgenetics Corporation, a Delaware corporation (the "Company")
pursuant to: (i) Section 14(f) of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"), and Rule 14f-1 issued thereunder, to inform the
stockholders of the Company of a change in the majority of its board of
directors (the "Board") in connection with the closing of the transactions set
forth in that certain Agreement and Plan of Reorganization dated August 22,
2003, as amended on September 24, 2003 (collectively, the "Agreement"), by and
among the Company, Shecom Acquisition Corp., a Colorado corporation and wholly
owned subsidiary of the Company ("Mergeco") and Shecom Corporation, a Colorado
corporation ("Shecom"), pursuant to which Mergeco will be merged with and into
Shecom (the "Merger"), with Shecom as the surviving corporation of such Merger;
and (ii) Section 14(c) of the Exchange Act to inform the Stockholders that the
majority stockholder of the Company executed a written consent dated September
__, 2003 providing for an amendment to the Company's Certificate of
Incorporation changing its name to Krystal Digital Corporation. This notice and
information statement attached hereto shall be considered the notice required
under Section 228(e) of the Delaware General Corporation Law (the "DGCL").
While approval of the Company's stockholders is not required under the DGCL or
the Agreement to consummate the Merger, we have been informed that the holder of
approximately 93.1% of the outstanding voting stock of the Company has no
objection to our consummating the Merger. Our board of directors has unanimously
approved the Agreement and the Merger. Accordingly, your approval is not
required and is not being sought.
Please read this notice carefully. It describes the essential terms of the
Agreement and contains certain information concerning the Agreement, its parties
and the proposed new directors of the Company. The Agreement is attached to this
Information Statement as Exhibit A. Additional information about the Company is
contained in its periodic reports filed on Forms 10-QSB for its quarterly fiscal
periods and its annual report filed on Form 10-KSB, each as filed with the
United States Securities and Exchange Commission (the "Commission"). These
reports, their accompanying exhibits and other documents filed with the
Commission may be inspected without charge at the Public Reference Section of
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549.
Copies of such material may also be obtained from the Commission at prescribed
rates. The Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding public companies that
file reports with the Commission. Copies of these reports may be obtained from
the Commission's EDGAR archives at http://www.sec.gov/index.htm.
The principal executive office of the Company is located at 5251 DTC Parkway,
Suite 1090, Greenwood Village, Colorado 80111. The Company's telephone number is
(720) 889-0133.
THIS IS NOT A NOTICE OF A MEETING OF STOCKHOLDERS AND NO STOCKHOLDERS'
MEETING WILL BE HELD TO CONSIDER ANY MATTER DESCRIBED HEREIN.
ESCAGENETICS CORPORATION
5251 DTC Parkway, Suite 1090
Greenwood Village, Colorado 80111
PRELIMINARY INFORMATION STATEMENT
PURSUANT TO SECTION 14 OF THE SECURITIES EXCHANGE ACT OF 1934
AND REGULATION 14C AND SCHEDULE 14C THEREUNDER
To our Stockholders:
NOTICE IS HEREBY GIVEN that the following action was taken pursuant to a Written
Consent of the Majority Stockholders of the Company:
1. Immediately following the effective time of the Merger, the change of
the Company's name to Krystal Digital Corporation, to be effective as
of the filing of an amendment to the Company's Certificate of
Incorporation with the Delaware Secretary of State, attached hereto as
Exhibit B.
The Board of Directors has fixed the close of business on September __,
2003, as the Record Date for determining the Stockholders entitled to Notice of
the foregoing.
The Company has asked brokers and other custodians, nominees and
fiduciaries to forward this Information Statement to the beneficial owners of
the Common Stock held of record by such persons and will reimburse such persons
for out-of-pocket expenses incurred in forwarding such material.
This Information Statement will serve as written Notice to stockholders
pursuant to Section 228(e) of the DGCL.
THIS IS NOT A NOTICE OF A MEETING OF STOCKHOLDERS AND NO STOCKHOLDERS' MEETING
WILL BE HELD TO CONSIDER ANY MATTER DESCRIBED HEREIN.
By order of the Board of Directors,
October __, 2003 Kevin R. Keating
President
TABLE OF CONTENTS
Page
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CHANGE IN CONTROL - THE MERGER................................................1
Description of the Merger.....................................................1
Change in Control.............................................................4
Material Terms of the Merger..................................................5
Certain Federal Income Tax Consequences.......................................7
Accounting Treatment of the Merger............................................7
Appraisal Rights..............................................................8
Interest of Certain Persons in the Merger.....................................8
Federal Securities Law Consequences...........................................8
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................9
BUSINESS OF THE COMPANY......................................................10
BUSINESS OF SHECOM...........................................................12
MANAGEMENT OF SHECOM.........................................................21
EXECUTIVE COMENSATION........................................................22
AMENDMENT TO THE CERTIFICATE OF INCORPORATION................................23
GENERAL AND OTHER MATTERS....................................................23
SOLICITATION OF PROXIES......................................................23
STOCKHOLDER PROPOSALS........................................................23
EXHIBIT A - Agreement and Plan of Reorganization, as amended
EXHIBIT B - Amendment to the Certificate of Incorporation
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information included in this Information Statement may contain forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
This information may involve known and unknown risks, uncertainties and other
factors which may cause the Company's and/or Shecom's actual results,
performance or achievements to be materially different from future results,
performance or achievements expressed or implied by any forward-looking
statements. In addition, with respect to the Merger, the following factors,
among others, could cause actual events to differ materially from those
described herein: inability to satisfy various conditions to the closing of the
Merger, the costs related to the Merger; the ability to defend against potential
legal proceedings, if any; the effect of the Merger on creditor, vendor,
supplier, customer or other business relationships; the ability to retain
personnel, including key personnel; and the results and effects of our inability
to pay any amounts under the interim financing.
Forward-looking statements, which involve assumptions and describe the Company's
and Shecom's future plans, strategies and expectations, are generally
identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology. These
forward-looking statements are based on assumptions that may be incorrect, and
there can be no assurance that these projections included in these
forward-looking statements will come to pass. The Company's and Shecom's actual
results could differ materially from those expressed or implied by the
forward-looking statements as a result of various factors. Neither the Company
nor Shecom undertakes an obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
CHANGE IN CONTROL - THE MERGER
Description of the Merger
On August 22, 2003, ESCAgenetics Corporation, Delaware corporation (the
"Company"), Shecom Acquisition Corp., a Colorado corporation and wholly owned
subsidiary of the Company ("Mergeco"), and Shecom Corporation, a Colorado
corporation ("Shecom"), entered into an Agreement and Plan of Reorganization, as
amended on September 24, 2003 (collectively, the "Agreement"). The Agreement, as
amended, was approved by the board of directors of each of the Company and
Mergeco on August 22, 2003 and on September 24, 2003, respectively.
The Agreement provides for a tax-free issuance of securities pursuant to the
provisions of Section 368(a) of the Internal Revenue Code, whereby the Company
will acquire Shecom through the merger of Mergeco with and into Shecom (the
"Merger"), with Shecom as the surviving corporation of such Merger. In
consideration for the Merger, the stockholders of Shecom and the holders of
warrants to purchase common stock of Shecom shall receive that number of shares
of common stock of the Company plus warrants to purchase Company common stock as
shall represent, in the aggregate, 87.5% of the issued and outstanding shares of
common stock of the Company after giving effect to the Merger. There are
currently 21,257,737 shares of Shecom common stock issued and outstanding, plus
an additional 2,200,000 shares of Shecom common stock issuable upon exercise of
certain warrants to purchase Shecom common stock, for a total of 23,457,737,
fully-diluted outstanding Shecom shares. There are currently 1,000,000 shares of
common stock of the Company issued and outstanding and an additional 2,125,000
shares that the Company will issue upon consummation of the Merger for
investment banking and related financial services. Accordingly, it is
anticipated that the Company will issue 0.932558146 shares of its common stock
for each outstanding share of Shecom common stock in the Merger (the "Merger
Shares"), as a result of which the existing stockholders and warrant holders of
Shecom shall be entitled to receive an aggregate of 19,823,438 Merger Shares and
warrants to purchase an additional 2,051,619 shares of our common stock. In
addition, the Agreement provides that, immediately after the effective date of
the Merger, the board of directors of the Company will consist of persons
designated by the existing stockholders of Shecom. Each of these events
undertaken without respect to the other constitutes a "change in control."
The Agreement provides that the Company's name will be changed to Krystal
Digital Corporation through an amendment to its Certificate of Incorporation
(referred to herein as the "Amendment").
The following are answers to some of the questions about the Merger that you, as
one of our stockholders, may have. We urge you to read this Information
Statement, including the Agreement, attached hereto as Exhibit A, carefully
because the information in this section is not complete.
Has the board of directors approved the Merger?
Yes. On August 24, 2003 our board of directors approved the Agreement and all of
the transactions and developments contemplated thereby (including the change of
our name to "Krystal Digital Corporation").
Why are the two companies proposing to combine?
Formed in 1984, Shecom Corporation is a rapidly growing electronics distributor,
based in Yorba Linda, California, that has evolved from a computer parts
distributor to a company concentrating increasingly on a branded line of
consumer electronic devices. Focusing on the configuration and packaging of
leading-edge consumer electronics devices, such as those employing DVD- and
CD-ROM-based players and recorders, Shecom has created a branded line of
computer peripheral products that it markets as its Ikebana(TM) line. It is also
developing a branded line of state of the art home entertainment electronic
products that it will market as its Azia line. The Ikebana(TM) line is currently
being sold, and it is anticipated that the contemplated Azia line will be sold,
through national retail chains at higher margins than Shecom's distribution of
commodity computer and electronics items. With $362 million in sales in 2002,
Shecom believes that it is the 2nd largest non-franchised electronics
distributor in the US, having advanced from the 8th largest in 2001. Shecom has
increased revenues at a rate of 38% compounded annually over the past four
years, and has been profitable for each of its 18 years of existence.
Formed in 1986, ESCAgenetics was organized to develop and commercialize
high-value, plant derived products for the agricultural and pharmaceutical
markets. We actively conducted our business between 1987 and the early part of
1995. In January 1995, we scaled back our business activities and became largely
a dormant business. Effective as of August 22, 1996, we were reorganized
pursuant to a plan of reorganization that was confirmed by the U.S. Bankruptcy
Court. We have had no revenues from operations since the reorganization date. We
do not plan to continue the business activities that we previously conducted. We
have recently been seeking business opportunities with the intent to acquire or
merge with an operating business.
The board of directors of each of our company and Shecom has determined that a
business combination between the two represents an opportunity for both
companies to achieve long-term strategic and financial benefits.
How will the Merger work?
We will issue shares of our common stock for all of the issued and outstanding
shares of Shecom. It is our mutual intention under the Agreement that we will
issue in the Merger to the existing Shecom stockholders and holders of warrants
to purchase additional shares of Shecom common stock that number of Merger
Shares that shall represent, immediately following the Merger, an aggregate of
87.5% of our fully-diluted outstanding common stock.
There are presently 21,257,737 shares of Shecom common stock issued and
outstanding and Shecom warrants entitling the holders to purchase an additional
2,200,000 shares of Shecom common stock, or an aggregate of 23,457,737 Shecom
shares issuable on a fully-diluted basis, giving effect to the exercise of the
outstanding Shecom warrants. We presently have issued and outstanding an
aggregate of 1,000,000 shares of Company common stock. Immediately prior to the
effectiveness of the Merger, we intend to issue an aggregate of 875,000 shares
of our common stock to Keating Investments LLC, an investment banking firm
located in Greenwood Village, Colorado, for investment banking services rendered
to our company in connection with the Merger, and an additional 1,250,000 shares
of our common stock to two additional persons or their affiliates as a placement
fee.
Accordingly, to enable the existing holders of Shecom common stock and Shecom
warrants to end up with 87.5% of our fully-diluted common stock, at the
effective time of the Merger, we anticipate that we will issue to the Shecom
stockholders an aggregate of 19,823,438 Merger Shares and will issue to holders
of Shecom warrants, our warrants entitling such persons to purchase 2,051,619
additional shares of Company common stock. This means that for each outstanding
share of Shecom common stock and each full share of Shecom common stock that may
be purchased upon exercise of the outstanding Shecom warrants, we will issue
0.932558146 shares of common stock of our Company (the "Exchange Ratio"). Such
Exchange Ratio and the Merger Shares is subject to increase or decrease (as the
case may be) depending upon the actual number of Shecom shares of common stock
and the actual number of our shares of common stock outstanding immediately
prior to the Merger.
Assuming the issuance of an aggregate of 19,823,438 Merger Shares to the Shecom
stockholders, and our reservation of 2,051,619 additional shares of our common
stock upon exercise of warrants issued to Shecom warrant holders, after the
Merger, there will be a total of approximately 22,948,438 shares of our common
stock issued and outstanding and approximately 25,000,057 shares of our common
stock issued and outstanding on a fully-diluted basis.
Under the Agreement, our newly created and wholly owned subsidiary Mergeco will
be merged with and into Shecom, with Shecom as the surviving corporation of the
Merger. As a result of the Merger, Shecom will become a wholly owned subsidiary
of our company, and our only operating business.
We also intend to change the name of our corporation to Krystal Digital
Corporation.
2
Do I have the right to vote on the Merger?
No, you do not. Since our Company is not a constituent entity in the Merger,
Delaware law does not require that the Agreement governing the terms of the
Merger receive the approval of our stockholders.
Do I have the right to vote on the Amendment?
No, you do not. If we were holding a meeting to approve such a proposal, our
stockholders would be entitled to consider and vote upon the Amendment. However,
we are not holding a meeting of our stockholders, nor are we soliciting proxies
in favor of such a proposal. Kevin R. Keating, our controlling stockholder, has
executed a written consent approving the Amendment, so no further approval is
required.
After the closing of the Merger, do I need to exchange or send you my shares of
common stock?
You do not. Since we are not a constituent entity in the merger, you will not be
exchanging or sending us your shares for conversion.
How many shares will I have after the Merger?
The number of shares you own will remain the same. Nonetheless, your ownership
percentage will be diluted. We anticipate issuing an aggregate of 19,823,438
shares of our common stock in the Merger to the existing Shecom stockholders,
warrants to purchase an additional 2,051,619 shares of our common stock in the
Merger to holders of Shecom warrants, and an additional 2,125,000 of our shares
for services rendered in facilitating the Merger. The total number of shares
issued and outstanding will therefore increase to approximately 25,000,057 from
the current 1,000,000 outstanding shares.
Following consummation of the Merger, we intend to engage in a private placement
of our securities to raise additional working capital for our Shecom business.
Such private placement, if consummated, will likely result in the issuance of a
number of additional shares of our common stock or securities convertible or
exercisable for such common stock. Accordingly, at this time, we cannot advise
you as to what your exact percentage ownership will be, or that the private
placement will, in fact, be consummated.
When and where can I trade my shares after the Merger?
Our shares of common stock are currently traded on the NASD Over-the-Counter
Bulletin Board ("OTC BB") under the symbol "ESGE." The Merger will not affect
where our shares are traded.
Will the shares to be issued in the Merger be freely trading?
The shares that will be issued to the current shareholders of Shecom will not be
registered upon issuance. Section 5 of the Securities Act prohibits the sale of
unregistered securities. However, we intend to register for resale under the
Securities Act of 1933, as amended, a total of approximately 2,200,000 of our
shares issuable upon the exercise of certain warrants to be issued in connection
with the Merger.
Even if the shares of common stock are registered, however, other restrictions
will still apply. Certain securities may not be freely traded by affiliates,
generally defined by the Commission as being in a control relationship with the
issuer. None of the foregoing, however, will affect the status of the currently
issued and freely trading shares of our common stock.
3
When do you expect the Merger to be completed?
We hope to complete the Merger as soon as possible, assuming that all of the
conditions to the closing of the Merger as set forth in the Agreement are either
waived or completed to the satisfaction of the parties. The Merger will be
effected through the filing of Articles of Merger in the State of Colorado.
What are the tax consequences of the Merger?
The Merger is intended to qualify as a tax-free reorganization for United States
federal income tax purposes. If the Merger does so qualify, United States
shareholders of Shecom generally would recognize no gain or loss upon receipt of
our shares of common stock in consideration for their share of Shecom common
stock. We believe, but cannot assure you, that there will be no fiscal
consequences whatsoever for holders of our shares. You are urged to consult your
own tax advisor for tax implications related to your particular situation.
Who can help answer my questions?
If you have any questions about the Merger or the business of Shecom, you should
contact Philip Trad, President at:
Shecom Corporation
22961 La Palma Avenue
Yorba Linda, CA 92887
Telephone No. (714) 692-7090
If you have questions about our business, you should contact Kevin R. Keating,
President, at:
ESCAgenetics Corporation
5251DTC Parkway, Suite 1090
Greenwood Village, Colorado 80111
Telephone No.: (720) 889-0133
Change in Control
The change in the majority of the directors of the Company will occur by virtue
of the closing of the Agreement (the "Closing"). The Company's board of
directors currently consists of Kevin R. Keating and Margie L. Blackwell (the
"Board"). Each member of the Board has submitted a letter of resignation from
the Board to take effect contemporaneously with the Closing. The members of the
Board and Mr. Keating in his capacity of the Company's controlling stockholder,
have also executed written consents to appoint Messrs. Raju Shewa and Phillip
Trad, currently the Chairman and President of Shecom, respectively, and three
additional persons designated by Messrs. Shewa and Trad (collectively, the
"Shecom Designees") to fill the vacancies on Board to be created by the
foregoing resignations.
The approval by the Company's board of directors to the Agreement and the Merger
contemplated thereby constitutes the requisite approvals under the DGCL and the
Company's bylaws to approve the Merger, and approval by the Company's
stockholders is not required. The amendment to the Company's certificate of
incorporation changing the name of the Company from ESCAgenetics Corporation to
Krystal Digital Corporation has been approved by the Company's board of
directors and consented to by Kevin R. Keating, the owner of 93.1% of the
outstanding Company common stock. Accordingly, none of the actions described in
this Information Statement will be submitted for a vote to the stockholders of
the Company.
The Company prepared this notice on its own behalf, except that the Shecom
Designees provided all the information herein regarding themselves. Shecom and
the Shecom Designees assume no responsibility for the accuracy or completeness
of the information prepared by the Company, except that they agree with the
description provided herein of the Agreement and the Merger.
4
Material Terms of the Merger
On August 22, 2003, ESCAgenetics Corporation, a Delaware corporation (the
"Company"), Shecom Acquisition Corp., a Colorado corporation and wholly owned
subsidiary of the Company ("Mergeco"), and Shecom Corporation, a Colorado
corporation ("Shecom"), entered into an Agreement and Plan of Reorganization, as
amended on September 24, 2003 (the "Agreement"). The Agreement was approved by
the board of directors of each of the Company and Mergeco on August 22, 2003 and
on September 24, 2003, and will become effective within one (1) business day
following the satisfaction or waiver of the conditions precedent set forth in
the Agreement or at such other date as the Company and Shecom shall agree (the
"Closing"), but in no event shall the Closing occur earlier than twenty (20)
days before this Information Statement shall have been mailed to the Company's
stockholders of record on the record date established therefor.
Upon the terms and subject to the conditions set forth in the Agreement and in
accordance with Colorado Law, Mergeco will be merged with and into Shecom (the
"Merger"), with Shecom as the surviving corporation of the Merger. As a result
of the Merger, the outstanding shares of capital stock of each of Mergeco and
Shecom will be converted or canceled in the manner provided by the Agreement,
the separate corporate existence of Mergeco shall cease, and Shecom shall
continue unimpaired as the surviving corporation in the Merger as a wholly owned
subsidiary of the Company.
Prior to the Merger, Kevin R. Keating, the Controlling Stockholder, owned
approximately 93.1% of the shares of the Company's common stock. In connection
with the Merger, the Company will issue to the current shareholders of Shecom
(the "Shecom Shareholders") and the holders of warrants to purchase additional
shares of Shecom common stock, that number of shares of common stock of the
Company and warrants to purchase additional shares of Company common stock as
shall represent (assuming full exercise of such warrants) 87.5% of the issued
and outstanding shares of common stock of the Company on a fully-diluted basis,
after giving effect to the Merger (the "Merger Shares").
There are currently 21,257,737 shares of Shecom common stock issued and
outstanding, plus an additional 2,200,000 shares of Shecom common stock issuable
upon exercise of certain warrants to purchase Shecom common stock, for a total
of 23,457,000, fully-diluted outstanding Shecom shares. There are currently
1,000,000 shares of common stock of the Company issued and outstanding and an
additional 2,125,000 shares that the Company will issue upon consummation of the
Merger for investment banking and related financial services. Accordingly, to
entitle the existing holders of Shecom common stock and Shecom warrants to own
87.5% of the fully-diluted Company shares, it is anticipated that the Company
will issue 0.932558146 shares of common stock of the Company and warrants to
purchase0.932558146 shares of common stock of the Company in the Merger for each
outstanding share of Shecom common stock and each outstanding Shecom warrant, as
a result of which the existing holders of Shecom equity securities shall be
entitled to receive an aggregate of 19,823,438 Merger Shares and warrants to
purchase an additional 2,051,619 shares of our common stock, resulting in the
Shecom Shareholders acquiring voting and dispositive control of the Company's
shares of common stock.
Kevin R. Keating, is the controlling stockholder of the Company and the owner of
931,000 of the 1,000,000 outstanding shares of common stock (representing
approximately 93.1% of such outstanding shares) has, in connection with the
transactions and developments contemplated by the Agreement, executed a written
consent to approve and adopt a resolution authorizing an amendment to the
Company's Certificate of Incorporation changing its name to Shecom Corporation.
Pursuant to the DGCL, the Company is hereby notifying its stockholders of the
approval of the name change to be effectuated upon Closing and, pursuant to the
Exchange Act, filing this Information Statement on Schedule 14C which will be
mailed to all stockholders of record as of the record date established therefor.
5
The terms of the Agreement are more fully described below.
Terms of the Agreement
The following discussion summarizes the material terms of the Agreement, a copy
of which is attached to this Information Statement as Exhibit A and incorporated
herein by reference and made an integral part hereof. Stockholders of the
Company are urged to read the Agreement carefully as it is the legal document
that governs the Merger.
The Merger. Subject to the terms and conditions of the Agreement, all
of the Shecom stockholders and all holders of Shecom warrants will convey all of
their shares of common stock of Shecom and all warrants to purchase Shecom
common stock to the exchange agent appointed by the Company, in consideration
for the right to receive the Merger Shares of the Company and identical warrants
to purchase Company common stock.
Following the Merger, the Company will change its corporate name to
"Krystal Digital Corporation."
Closing. The Closing will take place at a mutually agreed upon time
after the satisfaction or waiver of the conditions set forth in the Agreement.
Effective Date. The effective date of the Merger.
Certificate of Incorporation and Bylaws of the Company Following the
Merger. The Certificate of Incorporation and Bylaws of the Company, as in effect
at the Effective Time and except as amended as described in this Information
Statement, will be the Certificate of Incorporation and Bylaws, respectively, of
the Company following the Merger.
Directors and Officers of the Company Following the Merger. The
Agreement provides that the directors and officers of the Company shall be
replaced by the Shecom Designees at Closing.
Representations and Warranties. The Agreement contains various
representations and warranties of the Company and Shecom. The Company represents
and warrants to Shecom as to, among other things: (i) capital structure; (ii)
financial statements; (iii) absence of certain adverse changes; (iv) no
liabilities or debts; (v) litigation; (vi) recent business operations; and (vii)
issuance of securities prior to Closing. Shecom represents and warrants to the
Company as to, among other things: (i) financial statements; (ii) absence of
certain adverse changes; (iii) absence of litigation; (iv) material contracts,
and (v) no liabilities or claims. All representations and warranties in the
Agreement shall survive the Closing for a period of two (2) years from the
Effective Date.
Certain Covenants of the Parties. Pursuant to the Agreement, the
Company has agreed, among other things, that (i) at the time of the Closing its
outstanding capitalization shall consist of 1,000,000 shares of common stock;
(ii) immediately prior to the Closing, except for certain permitted loans set
forth in the Agreement, the Company shall have no liabilities or debts
whatsoever; and (iv) it shall have fulfilled its filing obligations with the
Commission in a timely manner.
Indemnification. In addition, the ESCAgenetics principal Shareholder
has agreed to indemnify Shecom and its officers, directors and employees from
any losses, claims, damages or expenses incurred as a result of the Company's
operations prior to the Effective Date, including any breaches of the Agreement
by the Company (which indemnification shall survive the Merger Closing).
Similarly, Shecom and the Shecom shareholders have agreed to indemnify
ESCAgenetics and its officers, directors and employees from any losses, claims,
damages or expenses incurred as a result of Shecom's operations prior to the
Effective Date, including any breaches of the Agreement by Shecom (which
indemnification shall survive the Merger Closing). The mutual indemnification
obligations of each of the respective parties is limited to $100,000, in the
aggregate.
6
All the parties to the Agreement have agreed that, upon the occurrence of
certain events related to (i) the cessation of business of Shecom or (ii) the
commencement of proceedings instituted against it with the purpose of obtaining
an adjudication of bankruptcy, seeking liquidation or securing other such relief
(each as more fully set forth in the Agreement), then, and in each case upon
certain terms and subject to certain conditions, the Merger and the other
transactions and developments contemplated by the Agreement shall, to the extent
feasible, be unwound.
In addition, subject to the terms and conditions of the Agreement, each of the
parties has agreed (i) to keep confidential all information furnished in
connection with the Merger, (ii) to promptly inform the other parties of the
occurrence of certain events, (iii) to use reasonable best efforts to effectuate
the Merger, and (iv) to consult each other before issuing any press release with
respect to the Merger.
Conditions to the Merger. The obligations of the Company and Shecom to
effect the Merger are subject to the satisfaction or waiver on or prior to the
Closing Date of a number of conditions, including but not limited to the
following:
(a) Each of the representations and warranties of the Company
and Shecom, as applicable, set forth in the Agreement shall
have been true and correct in all material respects as of the
date of the Agreement and as of the Closing Date, except where
the failure to be so true and correct would not have a
material adverse effect on the party making such
representation or warranty; and
(b) The Company and Shecom, as applicable, shall have
performed in all material respects all obligations required to
be performed by it under the Agreement at or prior to the
Closing Date.
Termination. In the event the Closing of this Agreement shall not take
place due to breach of or failure to meet any condition, then any party shall
have the right to terminate this Agreement, in which event no party shall have
any further right or obligation as against any other.
If Shecom shall fail to close for any reason other than breach of or failure to
meet any condition of Closing required to be performed on the part of the
Company or Mergeco, then Shecom shall pay to the Company a break-up fee of
$250,000 in cash. Notwithstanding the foregoing, Shecom shall not be liable to
the Company for a break-up fee if it has terminated the Agreement. If the
Company or Shecom shall fail to close for any reason other than breach of or
failure to meet any condition of Closing required to be performed on the part of
Shecom, then the Company shall pay to Shecom a break-up fee of $250,000 in cash.
Notwithstanding the foregoing, the Company shall not be liable to Shecom for a
break-up fee if it has terminated the Agreement.
Abandonment. In the event of abandonment of the Agreement, the
Agreement will become void and there will be no liability or obligation on the
part of the parties.
Certain Federal Income Tax Consequences
Since no action is being taken in connection with the currently outstanding
shares of the Company's common stock, no gain or loss is anticipated to be
recognized by the Company's stockholders in connection with the Merger.
It is expected that the issuance of the Merger Shares to the Shecom Shareholders
will be tax-free to such Shecom Shareholders. Accordingly, the aggregate tax
basis of Shecom's assets after the Merger will equal the aggregate tax basis of
the shares of Shecom common stock in the hands of the Shecom Shareholders
immediately prior to the Merger.
Accounting Treatment of the Merger
The transaction is expected to be accounted for as a reverse acquisition in
which Shecom is the accounting acquiror and the Company is the legal acquiror.
The management of Shecom will be the management of Shecom. Since the Merger is
expected to be accounted for as a reverse acquisition and not a business
combination, no goodwill is expected to be recorded in connection therewith and
the costs incurred in connection with the Merger are expected to be accounted
for as a reduction of additional paid-in capital.
7
Appraisal Rights
Under Delaware law, the state in which the Company is incorporated, the Company
is not required to provide its stockholders with a right of appraisal in any
matter to which this Information Statement relates and stockholders are
accordingly not provided with such right. Stockholders of the Company have no
right to dissent from the actions to be taken pursuant to the Majority Written
Consent.
Interests of Certain Persons in the Merger
No director, executive officer, associate of any director or executive officer,
or any other person has any substantial interest, direct or indirect, by
security holdings or otherwise, resulting from the amendment to the Company's
Certificate of Incorporation set forth herein, which is not shared by all other
stockholders of the Company pro rata, and in accordance with their respective
interests.
Federal Securities Law Consequences
The Merger Shares to be issued to the owners of Shecom in consideration for the
cancellation and conversion of their shares of common stock of Shecom pursuant
to the Merger will not be registered under the Securities Act. It is intended
that such shares will be issued pursuant to the private placement exemption
under Section 4(2) and Regulation D of the Securities Act.
The Merger Shares are deemed "restricted stock" and will bear a legend
indicating that the resale of such shares may be made only pursuant to
registration under the Securities Act or pursuant to an available exemption from
such registration.
Certain Relationships and Related Transactions
Kevin R. Keating, the President, a director and controlling stockholder of the
Company is the father of the principal stockholder of Keating Investments, LLC,
the investment banking firm that has rendered services to the Company in
connection with the Merger. Keating Investments LLC will be receiving an
aggregate of 875,000 shares of Company common stock as compensation for its
services in connection the negotiation and consummation of the Merger. Mr.
Keating is not affiliated with and has no equity interest in Keating
Investments, LLC and disclaims any beneficial interest in the Company common
stock to be issued to Keating Investments, LLC. Similarly, Keating Investments,
LLC disclaims any beneficial interest in the shares of Company common stock
currently owned by Kevin R. Keating.
Under a proposed strategic alliance and distribution arrangement, it is
contemplated that Messrs. Raju Shewa, Phillip G. Trad and Fred Anavim, three of
the principal stockholders and the senior executive officers of Shecom, will own
approximately 25% of the capital stock of Azia Digital Corporation, a Delaware
corporation ("ADC"). ADC has been organized to purchase a line of digital
televisions, flat screen computer monitors, DVDs and other home entertainment
consumer electronic products from an unaffiliated manufacturer of such products
located in mainland China. It is contemplated that ADC will finance the purchase
of such products and resell them to Shecom at a profit of between 10% and 20% of
ADC's cost under a proposed distribution agreement with Shecom. An affiliate of
the Chinese manufacturer will own the remaining 75% equity interest in ADC.
Shecom believes that this arrangement will enable it to establish, without
significant financing costs, a strategic alliance with a substantial
manufacturer that provides private label home entertainment consumer electronic
products to major OEMs and distributors, and become the exclusive distributor of
these products in North America.
8
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth ownership information as of the Record Date and
immediately following the Merger Closing, with respect to (i) each current
director or executive officer of the Company, (ii) each current director and
executive officer of Shecom, (iii) all directors and executive officers of the
Company and Shecom as a group and (iii) each person known to the Company to be a
beneficial owner of more than 5% of the outstanding voting securities of the
Company. As of the Record Date, there were 1,000,000 shares of common stock and
no shares of preferred stock outstanding. Each share of common stock is entitled
to one vote. Unless otherwise noted, the address of each of the individuals
listed below is c/o Shecom Corporation, 22951 La Palma Avenue, Yorba Linda,
California 92887.
Number of Shares Percentage of Shares Number of Shares Percentage of
Beneficially Owned as Owned as of the Beneficially Owned Shares Owned After
Name of the Record Date (1) Record Date(2) After the Merger(3) the Merger(4)
---- ------------------- ----------- ------------------- ------
Raju Shewa, Chairman of
the Board and Chief
Executive Officer -0- -- 10,000,000 40.0%
Phillip G. Trad, President
and Director -0- -- 2,000,000 8.0%
Fred Anavim, Chief
Financial Officer and
Director -0- -- 2,000,000 8.0%
Vincent J. Franzone,
Director -0- -- 625,000 (5) 2.5%
Robert T. Roever,
Director -0- -- 625,000 (5) 2.5%
Michael Khorandi -0- -- 5,000,000 25.0%
Kevin R. Keating 931,000 93.1% 931,000 3.7%
All directors and
executive officers as a
group 931,000 93.1% 21,281,000 84.7%
---------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the Rule 13d-3(a)
of the Exchange Act, and generally includes voting or investment power
with respect to securities. Pursuant to the rules and regulations of
the Commission, shares of common stock that an individual or group has
a right to acquire within 60 days pursuant to the exercise of options
or warrants are deemed to be outstanding for the purposes of computing
the percentage ownership of such individual or group, but are not
deemed to be outstanding for the purposes of computing the percentage
ownership of any other person shown in the table. Except as subject to
community property laws, where applicable, the person named above has
sole voting and investment power with respect to all shares of the
Company's common stock shown as beneficially owned by him.
9
(2) Based on 1,000,000 shares of the Company's common stock outstanding.
Excludes all outstanding warrants.
(3) The table presumes that 21,257,737 Merger Shares and warrants to
purchase an additional 24,000,000 shares of Company common stock will
be issued to the shareholders of Shecom and holders of Shecom warrants,
respectively.
(4) Based on 25,000,057 shares of the Company's common stock outstanding.
(5) Upon completion of the Merger, an aggregate of 1,250,000 shares of
Company common stock will be issued to Mr. Franzone and Mr. Roever in
equal amounts in connection with their introduction of the Company to
Shecom and its investment bankers.
Messrs. Shewa, Trad, Anavim, Franzone and Roever are designees of Shecom and
will become members of the board of directors of the Company upon consummation
of the Merger. Immediately following the Merger, Kevin R. Keating and Margie L.
Blackwell, the two existing directors of the Company, will resign as officers
and directors of the Company.
BUSINESS OF THE COMPANY
General
Formed in 1986, the Company was organized to develop and commercialize
high-value, plant derived products for the agricultural and pharmaceutical
markets. The Company actively conducted its business between 1987 and the early
part of 1995. In January 1995, the Company scaled back its business activities
and became largely a dormant business. In January 1996, the Company filed a
bankruptcy petition for protection under Chapter 11 of the U.S. Bankruptcy Code.
The Company's amended plan of reorganization became effective on August 22,
1996. Under the amended plan of reorganization, GFL Ultra Fund, Ltd., the
Company's largest debt holder, received 25% of the cash available to unsecured
creditors and 90% of the Company's common stock. The remaining cash was
distributed proportionately to the remaining unsecured creditors and the
remaining 10% of the Company's common stock was retained by its other
stockholders. The bankruptcy proceeding was officially closed effective March
31, 1997. In July, 1998 Genesee Holdings, Inc. acquired all the assets of the
GFL Ultra Fund in a merger.
By the end of 1996, the Company sold or disposed of all of its assets other than
cash on hand and the stock of PHYTOpharmaceuticals, Inc. (an inactive majority
owned subsidiary) and SRE ESCAgenetics Corporation (an inactive wholly owned
subsidiary).
The Company has had no revenues from operations, nor any employees, since the
reorganization date. The Company does not plan to continue the business
activities that it conducted prior to its reorganization. Instead, it has
concentrated on finding a suitable acquisition candidate. The Company believes
that it has found a suitable candidate in Shecom.
Market for Common Equity and Related Stockholder Matters
The shares of the Company's common stock are quoted on the Over-the-Counter
Bulletin Board ("OTC BB") under the ticker symbol "ESGE." The following table
sets forth, for the periods indicated, the range of the high and low bid
quotations for the shares of common stock as quoted on the OTC BB. The reported
bid quotations reflect inter-dealer prices, without retail markup, markdown or
commissions. Since the figures are adjusted for the 1 for 140 reverse split
effectuated during April, 2003, they do not necessarily represent actual
transactions. As of the Record Date, there were 1,000,000 shares of the Company'
common stock outstanding.
10
Common Stock
Fiscal 2001 High Low
First Quarter $4.34 $1.54
Second Quarter 2.80 1.54
Third Quarter 3.08 2.10
Fourth Quarter 2.0 1.40
Fiscal 2002
First Quarter $2.10 $0.98
Second Quarter 1.26 0.84
Third Quarter 0.84 0.70
Fourth Quarter 0.70 0.70
Fiscal 2003
First Quarter $0.84 $0.15
Second Quarter 0.18 0.15
Third Quarter 4.90 0.18
Fourth Quarter through September 13, 2003 2.00 1.01
On September __, 2003, there were approximately 333 holders of record of the
Company's 1,000,000 outstanding shares of Common Stock.
The Company has never paid or declared a dividend on its common stock. The
Company intends, for the foreseeable future, to retain all future earnings for
use in its business. The amount of dividends the Company pays in the future, if
any, will be in the discretion of the Board and will depend upon the Company's
earnings, capital requirements, financial condition and other relevant factors.
11
BUSINESS OF SHECOM
Overview
Shecom is a leading independent, non-franchised information technology, ("IT")
distributor that sells a full range of computer peripherals, memory components,
software and other computer products. Such products include a branded line of
computer peripheral and consumer electronic devices, marketed under its
Ikebana(TM) brand, which consists of cutting-edge electronics such as DVD
recorders, CD-RW recorders and players and other multi-media products.
Shecom's customer base is comprised of a global network of corporate resellers,
value-added resellers (VARs), direct marketers, other major distributors,
Internet resellers, and large national retailers. Shecom's largest customers
include major IT distributors such as A.C. & D.C., Total Micro, and New Elco and
national retail chains such as Fry's Electronics. By constantly striving to
provide superior customer service, Shecom believes that it has cultivated
long-term relationships with many of its clients. Shecom continuously seeks to
set itself apart from other competitors based on its value added customer
service, which includes product availability, pricing, timely delivery, and
overall follow-up service.
Initially founded as a specialty IT distributor of hard-drives and memory
components, Shecom has evolved into a competitive distributor offering a broad
selection of computer related products. In 1998, Shecom embarked on a growth
strategy that involved diversifying its product offering to include monitors,
CPUs and CD drives and shifting its sales and marketing efforts from
distribution companies to large national retailers. In November 2001, Shecom
launched its Ikebana(TM) product line which has been featured in and has
received favorable reviews by a number of electronic and computer publications,
such as PCWorld, Computer Shopper, MacWorld and Cnet, among others. A measure of
the Company's relative success is that EBN, a leading newsweekly for procurement
and business management in the electronics industry, ranked Shecom as the 2nd
largest non-franchised independent distributor in 2002, a significant
improvement from 8th place in 2001. By enhancing product selection and securing
large retail chain customers, such as Fry's Electronics, Shecom sold a greater
amount of products through larger distribution channels resulting in a
significant increase in annual revenues from 1999 to 2002.
Shecom's principal growth initiative involves the establishment of strategic
partnerships with one or more Asian manufacturers to provide Shecom with
exclusive distribution in the United States of finished home entertainment
consumer electronic products, such as DVDs, digital and liquid crystal flat
screen televisions, and other state-of-the art consumer electronics that Shecom
believes will generate significantly higher profit margins than commodity IT
products.
From 1999 to 2002, Shecom increased sales from $139 million to $362 million,
representing a compounded annual growth rate ("CAGR") of 38%. Shecom's growth
initiatives during this period was facilitated by access to an increased line of
credit that enabled it to purchase and sell a large volume of IT products as
well as provide value added service to its customers. For the six months ended
June 30, 2003, sales revenues were approximately $130 million, as compared to
approximately $195.0 million for the comparable six month period ended June 30,
2002. In addition, Shecom anticipates a decline in annual revenues of 23.2% to
approximately $278 million for fiscal year ending December 31, 2003.
12
Products
Shecom sells IT products manufactured by leading technology manufacturers such
as Sony, NEC, Hewlett Packard and Micron and purchases these products in high
volumes directly from a vendor network of over 20 suppliers, many of which have
direct vendor agreements with manufacturers and software companies. Shecom
sources components, such as disc drives, power supplies, software and casings
from third parties, and completes final assembly, packaging and printing at its
Yorba Linda, California facilities. Some of Shecom's largest vendors include
Ingram Micro, Tech Data, and R&R Electronic. Shecom works closely with its
vendors to ensure that the most recent technology products are available to
customers and quickly replaced as product demands change.
Sales of commodity products, which consist of memory components, CPUs, storage
devices and other non-branded computer products, accounted for 94% of total
revenue in 2002, or $341.7 million and are expected to generate in excess of 75%
of total revenues in 2003. The Ikebana(TM) line, which was launched in late
2001, accounted for a relatively small percentage of overall sales, but
generated higher margins for Shemcom, averaging gross profit margins of 10%. The
following table shows sales for each of the Company's product categories during
fiscal year ended December 31, 2002 and for the six months ended June 30, 2003.
Sales by Product Category
($ in Millions)
2002 YTD 6/30/2003
----------------------- -----------------------
Sales % of Total Sales % of Total
Memory $ 84 23% $ 40 31%
CPU 109 30% 35 27%
Storage 127 35% 32 25%
Others 22 6% 14 11%
Ikebana 20 6% 9 7%
----------------------- -----------------------
Total $362 100% $130 100%
Recognizing the need to further diversify its product mix to achieve greater
revenue growth and increased profitability, Shecom is in the process of
developing consumer electronics such as MP3 devices, which are currently being
marketed under the Ikebana(TM) brand, as well as DVD players, flat screen and
digital quality TVs, digital cameras and other consumer electronics that are
currently in high demand. Given the projected growth of consumer products over
the next three to five years and its customer base, Shecom believes that it is
well-positioned to realize considerable growth in the consumer electronics
market.
Warehousing and Distribution
Shecom leases a 31,000 square foot facility in Southern California from which it
manages all of its inventory receipts and shipments. Its inventory reporting
system, which involves producing and disseminating daily inventory reports to
key management, ensures the timely movement of all inventories, thereby
minimizing inventory obsolescence and insuring that Shecom has the required
products on hand to meet customer orders.
Growth Strategy
To effectively compete and survive in a quickly evolving industry, maintain
market share, and expand worldwide presence, Shecom has identified three primary
growth opportunities that it plans to pursue over the next three years and that
it believes will result in increased revenue and profitability.
13
o Partnerships with Overseas Manufacturers. Shecom is currently in the
process of establishing a strategic alliance with a Chinese manufacturer
of both proprietary and brand label state-of-the-art IT and home
entertainment and consumer electronics products, including flat screen
computers and liquid crystal and digital flat screen televisions. Shecom
believes that such manufacturer generated sales of approximately $80
million in North America in 2002. Through this proposed alliance, Shecom
will assume all of the Chinese manufacturer's current North American sales
and seek to expand sales through Shecom's installed customer base. To
finance the purchase of inventory and product logistics, including receipt
of all products, warehousing and distribution of products to Shecom
customers, it his contemplated that the Chinese manufacturer will enter
into a long term distribution agreement with Azia Digital Corporation, a
newly formed corporation located in Southern California and 25% owned by
affiliates of Shecom. It is expected that ADC will enter into a long-term
exclusive North American distribution agreement with Shecom under which it
will resell products to Shecom at markups ranging between 10% and 20% of
ADCs cost. See "Related Party Transactions." These alliance is expected to
be finalized in the last calendar quarter of 2003.
Although Shecom believes that such proposed relationship will
significantly increase its sales revenue and provide substantially higher
profit margins than its existing distribution arrangements, to date,
neither ADC nor Shecom has entered into a definitive agreement with the
Chinese manufacturer. There can be no assurance that such proposed
arrangements will be entered into and, even if completed, that it will
provide the revenues and profit margins anticipated by Shecom.
o Focus on Marketing Technologically Advanced Consumer Products. In order to
increase profits and achieve greater sales growth, Shecom recognizes the
need to change its product mix to include a broader selection of
technologically advanced consumer electronics, one of the fastest growing
segments of the IT market. Shecom recently established a vendor agreement
with Sharp Electronics, a leading consumer products manufacturer, whereby
Sharp commits to allocating a portion of its thin film transistors
("TFTs") to Shecom for the production and assembly of flat computer
monitors and flat screen TVs. Assembly of these products will be completed
through one of Shecom Asian manufacturers, which it is believed will
result in higher profit margins.
By forging partnerships with manufacturers that have both manufacturing
and research and development capabilities, management believes that it can
competently develop new technology concepts. With its experience in
understanding of market trends and opportunities within the consumer
electronics marketplace, Shecom believes it can remain at the forefront of
the consumer IT market. Furthermore, by outsourcing research and
development and manufacturing, Shecom would avoid incurring increased
overhead expenses and solely focus its efforts on marketing and sales of
new products.
o Selective Acquisitions. Recognizing that economies of scale and access to
global markets create competitive advantages in the IT distribution
industry, subject to its liquidity and capital resources, Shecom plans to
pursue an acquisition strategy that will move it into broader markets both
in the U.S. and abroad. By acquiring well-positioned niche distribution
companies both in the U.S. and Europe, Shecome believes it will be able to
increase its distribution channels and diversify its geographic presence.
Industry Analysis
IT Distribution
The $60 billion United States IT distribution market is comprised of electronic
component distributors and broadline distributors. Electronic component
distributors are situated at the back-end of the supply chain and account of
approximately 35% of the overall market. Broadline distributors, which account
for approximately 65%, are considered two tier distributors, supplying a broad
range of electronic products to resellers who in turn sell to end-market
consumers. Shecom competes within the broadline segment of the IT distribution
market.
14
From 1994 to 2001, broadline IT distributors grew at a CAGR of 19%, outgrowing
IT spending. According to a recent survey of the technology supply chain
conducted by SWS Securities, distribution sales in May 2003 increased 5% on a
year-over-year basis, indicating that the sales decline in the technology supply
chain has bottomed and that the industry is beginning a slow recovery. Broadline
IT distributors are expected to realize organic growth of approximately 2% to
4%, with higher increases in revenue stemming from acquisitions during 2004. IT
spending, the largest indicator of revenue generation for IT distributors, is
expected to return to normalized levels of 8% in the next few years.
The IT distribution market experienced significant changes from 1998 to 2000,
which was followed by a sharp decline in IT spending. During this period, many
weaker competitors were acquired or exited the industry and a few larger
distributors emerged as leaders. Based on 2001 figures, Ingram Micro and Tech
Data, both broadline distributors, controlled 23% and 15%, respectively, of the
U.S. market, and 27% and 15%, respectively, of the worldwide market. Of the
overall $60 billion North American IT distribution market, less than eight
companies control 55% of the market. The remaining 45% is comprised of other
specialty distributors that have a market share of less than 2% each.
In an industry characterized by thin margins and high working capital needs,
companies in today's IT market need to have franchise rights on product lines
and have enough scale to support operating overhead. Equally important,
companies must be able to scale their operations to address changes in the
dynamic IT environment.
Given the rapid consolidation that took place in the U.S., revenue growth over
the last few years stems from acquisitions of smaller players. While growth
through acquisition in the U.S. is limited, the $70 billion (based on 2001
figures) European IT products distribution market is more fragmented and holds
more promise for growth for U.S. distributors. A number of national and regional
distributors who have local reseller relationships would be attractive
acquisition candidates for a distributor looking to establish a presence in
Europe.
The Consumer Electronics Market
According to a survey conducted by eBrain.org in the fall of 2000, total factory
sales of consumer electronics in the U.S. was estimated at $88.5 billion in 2000
and projected to reach $111 billion by 2004, representing an estimated CAGR of
5.8%. For most of the 1990s, the consumer electronics market experienced
explosive growth fueled by the large growth in the PC market and a robust US
economy. However since the downturn in IT spending, sales of consumer
electronics have slowed down slightly.
The U.S. market for multimedia systems and hardware grew 11.7% from a volume of
92.7 million units in 2000 to 103 million units in 2001. The CD ROM/DVD ROM
sector was the market's most dynamic sector in 2001, with a volume of 66.1
million units, an increase of 146% from 26.9 units in 1997, and accounting for
64% of the total market. The second largest segment of the market was sound
boards/cards, which accounted for 22.8% of total market volume in 2001 and
totaled 23.3 million units. Video boards/cards accounted for 9.7% of volume in
2001, selling approximately 10 million units.
The multimedia systems and hardware segment of the IT industry is projected to
grow 37.4% from a volume of 111.9 million units in 2002 to 153.8 million units
in 2006, representing a projected unit CAGR of 8.3%. The sector of the
multi-media market that will experience the most growth remains the CD-RWs and
DVD ROMs, which are expected to reach unit sales of 105.8 million by 2006 and
account for 69% of the market. This growth stems from the continued upgrades
expected of existing CD ROM drives. The other sector expected to achieve notable
growth is MP3 devices, which are expected to take off after 2003.
Major Competitors
The IT distribution market is fiercely competitive, based on such factors as
product availability, credit availability, price, delivery and value-added
services provided by the distributor to the customer. With the exception of the
limited number of large broadline IT distributors, such as Tech Data and Ingram
Micro, the market consists of smaller broadline and specialty distributors with
whom Shecom directly competes.
15
Top Global Non-Franchised Distributors
------------------------------------------------------------
Company 2002 Sales
------------------------------------------------------------
Ace Consumer Electronic A.G. $340MM
Converge Inc. $304MM
ACG $302MM
N.F. Smith & Assoc. $295MM
Classic Components Corp. $262MM
Advanced MP Technology* $225MM
America II Electronics Inc. $182MM
Resilien $179MM
------------------------------------------------------------
Source: EBN, "The 2003 Top 10 Independent Non-franchised Distributors" May 2003
Summary Financial Data
For the three fiscal years ended December 31, 2000, 2001 and 2002, Shecom earned
approximately $517,463, $492,754 and $1.2 million after taxes, respectively, on
total revenues in such years of approximately $179.0 million, $310.0 million and
$362.0 million, respectively. For the six months ended June 30, 2003 unaudited
net income and total revenues were approximately $520,000 and $130.0 million,
respectively, as compared to unaudited net income and total revenues of
approximately $817,000 and $195.0 million for the comparable six months period
ended June 30, 2002.
Management Discussion and Analysis of Financial Condition and Results of
Operations
Recent Adverse Events
Like most IT distributors, Shecom has experienced significant challenges over
the past three years due to the continued slowdown of the IT industry, declining
margins and competitive market conditions. Shecom was able to weather much of
the downturn that took place between 1998 and 2000 by sustaining revenue levels
and controlling expenses to adjust to the declining demand environment. Over the
last 10 months, Shecom has faced considerable capital constraints, which has
made it difficult for Shecom to procure product inventory and consistently
supply customers in a timely manner.
For the six months ended June 30, 2003, sales revenues were approximately $130
million, as compared to approximately $195.0 million for the comparable six
month period ended June 30, 2002. In addition, Shecom anticipates a decline in
annual revenues of 23.2% to approximately $278 million for fiscal year ending
December 31, 2003. The actual and projected decline in revenue is due to three
main factors:
o the loss of a major customer that was anticipated to generate $30
million in sales revenues during 2003;
o continued pricing pressures on commodity products and the current
economic environment adversely affecting the IT industry in general;
and
o a reduction in Shecom's available credit line which has made it
increasingly difficult for Shecom to procure the volume of inventory
needed to effectively service its existing customers.
As of June 30, 2003, borrowings outstanding on Shecom's maximum $35.0 million
line of credit with its principal senior lender were approximately $34.8
million. The line of credit contains covenants that must be complied with on a
continuous basis, including the maintenance of certain financial ratios. The
ability to draw funds under this credit facility is dependent upon sufficient
collateral based on accounts receivable availability. Shecom's senior lender has
not agreed to increase Shecom's line of credit. As a result, throughout fiscal
2003, Shecom has been cash constrained and has had to rely on borrowings from
its principal shareholder to fund operations. Shecom's principal senior lender
has agreed to extend the maturity date of its line of credit to December 31,
2003, but has advised that it does not intend to renew such line of credit and
has requested that Shecom seek and obtain alternative assert based financing.
Shecom is currently in discussions with several banks to take over the existing
line of credit and is attempting to obtain a larger line with better terms.
However, there can be no assurance that Shecom will be able to timely refinance
its senior credit facility on more favorable terms, if at all.
16
Shecom's capital constraints have further been exacerbated by payment delays by
customers, resulting in a lengthening of accounts receivable days from
approximately 40 days to approximately 66 days for the six months ended June 30,
2002 and 2003, respectively. The lengthening of accounts receivable days is due
to one of Shecom's primary customers going out of business and the growing
number of retail customers, who require, because of the number of retail
outlets, a greater amount of product but typically take longer to pay suppliers.
While accounts payable days increased from 15 days to 25 days for the six months
ended June 30, 2002 and 2003, respectively, a number of key overseas suppliers
initiated more stringent payment terms resulting in difficulty and delays in
obtaining inventory. Inventory days on hand increased from 17 days to 28 days in
2002 and 2003, respectively.
In August 2003, Shecom issued $2.0 million of subordinated debentures and
warrants to purchase 2,000,000 shares of Shecom common stock. In addition,
another 200,000 warrants were issued to the placement agent in the offering. The
debentures, which bear interest of 10% per annum, will be repaid on a date which
shall be the earliest to occur of (i) December 31, 2003; (ii) the consummation
of a private placement or public offering of subordinated debt, preferred stock,
common stock and/or other class of equity type securities of Shecom; and (iii)
the merger of Shecom with or consolidation into any other corporation or other
entity, or the sale, lease or other transfer by Shecom of all or substantially
of its business properties or assets. For each $50,000 debenture purchased, the
debenture holder received a 5-year Warrant to purchase 50,000 shares of common
stock of Shecom at an exercise price equal to (i) the lesser of eighty percent
(80%) of either (A) the per share price at which Shecom shall sell any shares of
its common stock (other than shares of common stock issuable upon the exercise
of options or convertible securities outstanding on June 23, 2003), or (B) the
exercise price or conversion price per share of any options or convertible
securities which shall be issued by Shecom, in each case to the extent such sale
or issuance occurs subsequent to the issuance date of the Warrants and prior to
June 19, 2004, or (ii) to the extent clause (i) is not applicable, $0.60 per
share.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
For the six months ended June 30, 2003, Shecom suffered a decline in revenue of
33.2% from $194.8 million in 2002 during the same period to $130.1 million.
Shecom Distribution sales, which accounted for 93% of total revenue or $121.0
million in 2003, realized a decline of 33.7%. Ikebana sales, accounting for 7.0%
of total sales, realized a decline of 25.5% in 2003. The decline in total
revenue stems from continued pricing pressures and slowing of the IT market and
capital constraints prohibiting Shecom from maintaining inventory levels needed
to properly service its existing customer base.
Gross profit decreased 11.4% from $4.7 million in 2002 to $4.1 million in 2003.
As a percentage of sales, Shecom saw an improvement in profitability, increasing
its profit margin by .8 percentage points, from 2.4% in 2002 to 3.2% in 2003.
The increase in profit margin stems from improved profit margin on commodity
products, increasing from 1.7% during the first six months of 2002 to 2.6%
during the same period in 2003.
Operating expenses decreased 5.21 to $2.5 million in 2003. As a percentage of
sales, operating expenses increased 0.5 percentage points, from 1.4% for the six
months ended June 30, 2002 to 1.9% in 2003 for the same period. This increase is
largely due to professional fees and other incurred expenses in preparation of
obtaining funding.
17
EBITDA declined 19% to $1.7 million in 2003, compared to EBITDA of $2.1 million
in 2002 for the same period. As a percentage of sales, overall profitability
improved .2 percentage points to 1.3% in 2003.
As of June 30, 2003, borrowings outstanding on Shecom's maximum $35.0 million
line of credit with its principal senior lender were approximately $34.8
million. The line of credit contains covenants that must be complied with on a
continuous basis, including the maintenance of certain financial ratios. The
ability to draw funds under this credit facility is dependent upon sufficient
collateral based on accounts receivable availability. Shecom's senior lender has
not agreed to increase Shecom's line of credit. As a result, throughout fiscal
2003, Shecom has been cash constrained and has had to rely on borrowings from
its principal shareholder to fund operations. Shecom's principal senior lender
has agreed to extend the maturity date of its line of credit to December 31,
2003, but has advised that it does not intend to renew such line of credit and
has requested that Shecom seek and obtain alternative assert based financing.
Shecom is currently in discussions with several banks to take over the existing
line of credit and is attempting to obtain a larger line with better terms.
However, there can be no assurance that Shecom will be able to timely refinance
its senior credit facility on more favorable terms, if at all.
Fiscal Year 2001 Compared to Fiscal Year 2002
Shecom realized a growth in revenue of 16.8%, increasing from $309.7 million in
2001 to $361.8 million in 2002. The increase in revenue was driven by three
major events in the IT industry: (i) the release of Pentium IV, (ii) growing
demand for hard drives and (iii) the proliferation of DVDs. The Company also
rolled out the Ikebana(TM) product line, which contributed $20.2 million and
accounted for 5.6% of total sales in 2002. Non-branded Shecom distribution
revenues totaled $341.7 million in 2002, increasing 10.3% over 2001. Shecom was
not able to sustain greater growth rates as it achieved the prior year due to
capital constraints, which in turn restricted Shecom from purchasing and
maintaining greater inventory volumes.
Gross profit increased from $7.0 million 2001 to $9.7 million in 2002,
representing a gross margin increase of 0.4 percentage points from 2.3% in 2001
to 2.7% in 2002. The increase in gross profit margin is a result of an increase
in sales of Ikebana products, which in 2002 contributed 10.7% of profit versus
2.2% profit margins on Shecom Distribution sales. The slight decline in profit
margin on non-branded Shecom distribution product sales was as a result of the
continued pricing pressures on IT commodity goods in the IT industry.
Operating expenses increased $1.3 million, from approximately $4.3 million in
2001 to $5.6 million in 2002. As a percentage of sales, operating expenses
increased .1 percentage points, from 1.4% to 1.5%. In 2002, Shecom moved its
headquarters and warehouse into a larger facility to support greater product
flows. An increase in rent and overhead expenses contributed to the increase in
operating expenses.
EBITDA increased 46.7% to $4.1 million in 2002. As a percentage of revenue,
EBITDA improved by approximately 0.2 percentage points, increasing from 0.9% in
2001 to 1.1% in 2001.
Net cash used by operating activities of $7.1 million in 2002, representing a
decrease of 59% compared to 2001, was used to further build inventory in order
to meet customer demands. In 2002, Shecom improved its collections process,
reducing accounts receivable days from 49 in 2001 to 46 in 2002. Inventory days
of 14 in 2001 remained the same in 2002. Days of inventory on hand increased
from 11 days in 2001 to 17 days in 2002.
Net cash provided by investing activities in 2002 totaling $594,000 represents
proceeds received from the sale of property and equipment.
Net cash provided by financing activities of $6.6 million reflects net increases
in the line of credit of $4.7 million and principal borrowings of long-term debt
of approximately $4.0 million. These funds were used to purchase inventory and
settle overdue accounts payable.
At December 31, 2002, borrowings outstanding on the line of credit were $34
million. The line of credit contains covenants that must be complied with on a
continuous basis, including the maintenance of certain financial ratios. The
ability to draw funds under this credit facility is dependent upon sufficient
collateral based on accounts receivable availability. During 2002, the bank with
which Shecom has the line of credit started would not increase the available
borrowings under Shecom's line of credit. As a result, Shecom was cash
constrained and had to rely on borrowings through its principal shareholder to
fund operations.
18
Fiscal Year 2000 Compared to Fiscal Year 2001
Revenue increased from $178.6 million in 2000 to $309.7 million in 2001,
representing a 73.4% increase. Shecom's increased credit availability during
2001 enabled it to purchase and sell a broader range of computer products in
larger quantities. By expanding its product offering beyond memory components,
Shecom was better able to service its existing clients' product needs expand its
client base. Likewise, the addition of large national retailers allowed Shecom
to sell more products than it had done historically to small to medium size
businesses.
Shecom's gross profit increased by approximately $1.7 million to $7.0 million in
2001, representing an increase of 32.8%. Gross profit, as a percentage of net
sales, declined .7 percentage points, from 3% in 2000 to 2.3% in 2001. This
decline in profitability is attributed to the continued pressure on gross
margins caused by the downturn in IT spending in the IT industry that lasted
through 2000.
Operating expenses increased 47.5% from approximately $2.9 million in 2000 to
$4.3 million in 2001. This increase was largely due to an increase in personnel
to support projected higher sales levels. Operating expenses as a percentage of
sales decreased .2 percentage points in 2001 as a result of Shecom's success in
managing its cost structure to maintain profitability during a downturn in the
market.
EBITDA increased 15.8% to $2.8 million in 2001. As a percentage of revenue,
EBITDA declined approximately .5 percentage points from 1.4% in 2000 to 0.9% in
2001.
Net cash used by operating activities of $17.4 million in 2001 was attributed to
increases in inventory and accounts receivable as Shecom built out its product
lines and increased its number of overall customers. Shecom's inventory days on
hand was 11 days during 2000 and increased to 14 days in 2001. Accounts
receivable increased 107.2% in 2001, driven mostly by the addition of national
retail customers. Accounts receivable days increased from 41 to 49 days between
2000 and 2001, again primarily due to national retail chains, which historically
pay more slowly.
Net cash provided by investing activities of $1.6 million in 2001 represented
proceeds from the sale of property and equipment, and the sale of investments,
which contributed approximately $1.3 million of cash to Shecom.
Net cash provided by financing activities of $15.8 million was the result of an
increase in Shecom's line of credit from $20 million in 2000 to $35 million in
2001. The sizeable increase in Shecom's available capital, from $5.4 million in
2000 to $15 million in 2001, enabled Shecom to double its inventory. In addition
to the larger line of credit, Shecom issued a note payable to Raju Shewa
totaling approximately $1.2 million.
Shecom Risk Factors
Stockholders of the Company should carefully consider the following risks
applicable to Shecom's current financial condition and business.
Risk of potential loss of Shecom's credit facility. Shecom requires significant
levels of capital to finance its accounts receivable and inventory. During
portions of 2002 and through June 30, 2003, Shecom had little if any borrowing
availability under its $35.0 million line of credit, and has been forced to
borrow funds from its principal stockholder, Raju Shewa and outside investors to
support its operations. Shecom's principal senior lender has agreed to extend
the maturity date of its line of credit to December 31, 2003, but has advised
that it does not intend to renew such line of credit and has requested that
Shecom seek and obtain alternative assert based financing. Shecom is currently
in discussions with several banks to take over the existing line of credit and
is attempting to obtain a larger line on improved better terms. However, there
can be no assurance that Shecom will be able to timely refinance its senior
credit facility on more favorable terms, if at all. If Shecom is unable to
timely obtain an alternate senior credit facility, its existing lender could
elect to reduce its financial exposure by collecting all existing accounts
receivable and cease providing further financing for Shecom's new accounts
receivable and inventory, or otherwise elect to foreclose on its collateral. In
either such event, absent external financing from other sources, Shecom might
not be able to continue its business as presently conducted, if at all.
19
Shecom faces significant cash flow and liquidity issues. Shecom's capital
constraints have further been exacerbated by payment delays by customers,
resulting in a lengthening of accounts receivable days from approximately 40
days to approximately 66 days for the six months ended June 30, 2002 and 2003,
respectively. The lengthening of accounts receivable days is due to one of
Shecom's primary customers going out of business and the growing number of
retail customers, who require, because of the number of retail outlets, a
greater amount of product but typically take longer to pay suppliers. The loss
of such customer, which was expected to account for approximately $30.0 million
in fiscal 2003 revenues, resulted in the potential write-off of accounts
receivable of approximately $3.0 million. As a result of its liquidity issues,
Shecom's accounts payable days increased from 15 days to 25 days for the six
months ended June 30, 2002 and 2003, respectively, and a number of key overseas
suppliers initiated more stringent payment terms resulting in difficulty and
delays in obtaining inventory. Inventory days on hand increased from 17 days to
28 days in 2002 and 2003, respectively.
Shecom has incurred a high degree of leverage. In addition to its $34.8 million
of outstanding senior secured indebtedness, at June 30, 2003, Shecom had
approximately $8.9 million of outstanding subordinated debt, of which
approximately $5.9 million was owned to Raju Shewa, its Chairman and principal
stockholder. With stockholders equity of $4.9 million at June 30, 2003, Shecom's
long-term debt to equity ratio was approximately 1.8x. Although, promptly
following the Merger, the Company intends to undertake a private placement of
equity securities of approximately $5.0 million, there can be no assurance that
such offering will be completed on financially attractive terms, if at all. The
inability of the Company to raise additional near-term equity would have a
material adverse effect on its future consolidated results of operations,
financial condition and future prospects.
Low profit margins and industry and liquidity pressures threaten profitability.
Sales of commodity products, which consist of memory components, CPUs, storage
devices and other non-branded computer products, accounted for 94% of Shecom's
total revenue in 2002, or $341.7 million and generated 93% of its total revenues
for the six months ended June 30, 2003. Such products produced a gross profit
margin in fiscal 2003 and for the six months ended June 30, 2003 of 2.2% and
2.6%, respectively. The Ikebana(TM) line, which launched in November of 2001,
accounted for only 5.6% of total revenues in 2002 and 7.0% of total revenues for
the six months ended June 30, 2003, while averaging gross profit margins on
revenues generated of 10.7% and 11.1% for such periods, respectively. Unless
Shecom is able to significantly increase the revenue and profit margin
contributions from its branded Ikebana(TM) line of products and from its
proposed Azia (name pending registry) line of home entertainment consumer
electronic products, it is probable that it will not be able to sustain
profitability in the future in the face of both intense competition and pricing
pressures in connection with the sale of commodity products, and Shecom's
limited capital resources. There can be no assurance that Shecom's business
goals and the proposed strategic alliance with a Chinese manufacturer of home
entertainment consumer electronic products will be successfully consummated.
Shecom faces intense competition and a consolidating industry. The IT
distribution market is fiercely competitive, based on such factors as product
availability, credit availability, price, delivery and value-added services
provided by the distributor to the customer. With the exception of the limited
number of large broadline IT distributors, such as Tech Data and Ingram Micro,
the market consists of smaller broadline and specialty distributors with whom
Shecom directly competes. Both Tech Data and Ingram Micro have significantly
greater infrastructure and financial resources than Shecom.
Shecom needs to enhance its management team. Shecom is led by a relatively small
senior management team that has nonetheless managed to successfully position
Shecom as one of the leading non-franchised electronics distributors. While the
current management team has done an excellent job in anticipating market changes
and maintaining profitability during downturns in the IT market, in order to
achieve its business objectives to improve revenue and profitability growth,
Shecom must make significant investments in management. Unless Shecom is able to
obtain the capital resources necessary to invest in additional management, its
business and future prospects may be materially and adversely affected.
20
Shecom is relying heavily on its home entertainment and consumer electronic
product initiative. Shecom's strategic growth plans rely heavily on consummating
partnerships with Asian manufacturer of state-of-the-art home entertainment and
consumer electronic products, such as flat screen computers, and digital and
liquid crystal flat screen televisions. Although Shecom is in negotiations to
conclude such arrangements, it has not down so as yet, and there can be no
assurance that Shecom will consummate a successful partnership, if at all.
Shecom's failure to consummate such transaction could have a material adverse
effect on its future profitability, cash flow and business prospects.
MANAGEMENT
The following table sets forth certain information concerning the
current directors and executive officers of Shecom, who will become the
directors and executive officers of the Company upon consummation of the Merger.
Name Age Position
---- --- --------
Raju Shewa 48 Chairman of the Board and Chief Executive Officer
Phillip G. Trad 55 President and Director
Fred Avadim 57 Chief Financial Officer and Director
Vincent Franzone 48 Director
Robert Roever 45 Director
Raju Shewa. Mr. Shewa is the Chairman of the Board and Chief Executive Officer
of Shecom Corporation. Mr. Shewa founded Shecom in 1986 and has guided it from
its initial domestic and international sales of computer components and consumer
electronics through the import, development and manufacturing of computer memory
modules, peripherals and personal computers. Mr. Shewa began his career after
obtaining his Bachelor of Commerce Degree in 1975 by forming a Tokyo trading
company under the name Shewa Brother's Limited which specialized in the import
and export of consumer electronics to the Middle East, Asia, Africa, and Europe
with sales growing from $5.0 million to $40.0 million. Due to the success of
Shewa Brother's Limited, the Company was moved to Frankfurt, West Germany to
expand its base of operation and increase its market share internationally under
the name of Shewa Brother's GMBH. Mr. Shewa is presently leading the development
of a new computer technology and peripherals in order to provide new and
expanding opportunities for Shecom Corporation.
Phillip G. Trad. Mr. Trad is a Director and the President of Shecom. He is an
attorney who has provided legal representation and consulting on a state and
federal level to corporations, insurance companies, partnerships and joint
venture investments to corporate and business ventures since 1979. Mr. Trad has
extensive experience in operations and facilities management, administrative and
human resource supervision. Mr. Trad is a founding director of PharmaPrint Inc.,
a Delaware corporation that specialized in the development and advancement of
herbal and bio-active supplements and pharmaceutical development since 1995. Mr.
Trad was the President of PharmaPrint Inc. having originally started with the
corporation as its Senior Vice President and General Counsel. Mr. Trad's
activities included domestic and international contract negotiations, facilities
and equipment procurement and financing, investment counseling, as well as,
public and private funding services.
Fred Anavim. Mr. Anavim, Chief Financial Officer and Director, is a corporate
specialist providing investment, accounting and finance services to the consumer
electronics and manufacturing industry. Mr. Anavim began his career after having
obtained an MA in Accounting from the Institute of Accountancy in London, a MS
in International Business Management from the University of Texas at Dallas, and
MBA in accounting and finance from North Texas State University. Mr. Anavim
served as a staff accountant and auditor for Deloitte, Haskins and Sells. He
went on to provide services as the controller and accounting consultant to
Project Development Company of Dallas, Texas which concentrated in
multi-dimensional real estate transactions, corporate development and commercial
financing services. Most recently Mr. Anavim has spent the last 11 years
providing financial consulting services to various corporations in the computer
import, manufacturing and distribution business specializing in internal
controls, operations management, international credit and collection, import,
export and customs clearing, and installation of integrated accounting systems.
21
Vincent Franzone. For the past two years Mr. Franzone he has served as a Senior
Vice President and Managing Director of InvestPrivate, LLC, a New York
investment banking firm. For four years prior to such date, he served as
Syndicate Manager of Prime Charter Equities LLC, a New York investment banking
firm.
Robert T. Roever. Mr. Roever has spent more than 10 years in investment banking
and finance in the New York City area. Mr. Roever recently became Vice President
of Investment Banking at Spencer Clarke LLC, a New York investment banking firm.
For the past six years he has served as a Senior Vice President of InvestPrivate
and Prime Charter Equities, both New York City banking firms. Spencer Clarke LLC
acted as placement agent for Shecom's $2,000,000 debenture and warrant offering.
No family relationships exist between any of Shecom's directors or executive
officers.
Except as set forth herein, no officer or director of Shecom has, during the
last five years: (i) been convicted in or is currently subject to a pending a
criminal proceeding; (ii) been a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining future
violations of, or prohibiting or mandating activities subject to any Federal or
state securities or banking laws including, without limitation, in any way
limiting involvement in any business activity, or finding any violation with
respect to such law, nor (iii) has any bankruptcy petition been filed by or
against the business of which such person was an executive officer or a general
partner, whether at the time of the bankruptcy of for the two years prior
thereto.
Compliance with Section 16 (a)
Under the securities laws of the United States, the Company's directors, its
executive officers, and any persons holding ten percent or more of the Common
Stock must report on their ownership of the Common Stock and any changes in that
ownership to the Commission. Specific due dates for these reports have been
established. During the year ended December 31, 2002, and based solely on a
review of electronic filings made on the Commission's Edgar system, the Company
does not believe that all reports required to be filed by Section 16(a) were
filed on a timely basis.
Committees of the Board of Directors
The Company does not presently have a standing audit, compensation or nominating
committee, though it anticipates forming an audit committee and a compensation
committee subsequent to the Closing of the Merger.
Meetings of the Board of Directors
During fiscal 2002, the Company held no meetings of the Board of Directors.
EXECUTIVE COMPENSATION
The Company has had no employees since November 1996 and did not compensate its
officer or directors during the fiscal year ended September 30, 2002 or at any
time thereafter. Mr. Keating and Ms. Blackwell are compensated by their employer
for services rendered to their respective employers. No portion of their
compensation is specifically attributable to their service as an officer or
director of the Company.
22
Employment Agreements
None.
Indemnification
The Company's Restated Certificate of Incorporation includes provisions to
indemnify its officers and directors against damages for breach of fiduciary
duty as a director or officer involving any act or omission of any such director
or officer; provided, however, that the liability of such officers and directors
shall only be indemnified if he or she acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
Under the DGCL, the Company may indemnify its officers and directors for various
expenses and damages resulting from their acting in those capacities. Insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended (the "Securities Act") may be permitted to the officers, directors or
persons controlling the Company pursuant to those provisions, counsel has
informed the Company that, in the opinion of the Commission, indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
AMENDMENT TO THE CERTIFICATE OF INCORPORATION
General
Pursuant to the terms of the Agreement, the Company shall change its name to
"Krystal Digital Corporation," pursuant to an amendment to the Company's
Restated Certificate of Incorporation. The Controlling Stockholder of the
Company has executed a written consent approving the Amendment, attached hereto
as Exhibit B.
Management of the Company believes that the new name, "Krystal Digital
Corporation" will promote public recognition and more accurately reflect the
Company's new business. The amendment to the Restated Certificate of
Incorporation as attached hereto as Exhibit B will be filed with the Secretary
of State of the State of Delaware upon the receipt by the Company of
confirmation that the filing of the Articles of Merger by Shecom with the
Secretary of State of the State of Colorado has been accepted.
GENERAL AND OTHER MATTERS
Management knows of no matters other than the matters described above that will
be presented to the Meeting. However, if any other matters properly come before
the Meeting, or any of its postponements or adjournments, the person or persons
voting the proxies will vote them in accordance with his or their best judgment
on such matters.
SOLICITATION OF PROXIES
The Company is making the making the mailing and will bear the costs associated
therewith. There will be no solicitations made. The Company will reimburse
banks, brokerage firms, other custodians, nominees and fiduciaries for
reasonable expenses incurred in sending proxy material to beneficial owners of
the Company's common stock.
STOCKHOLDER PROPOSALS
The Board has not yet determined the date on which the next annual meeting of
stockholders of the Company will be held. Any proposal by a stockholder intended
to be presented at the Company's next annual meeting of stockholders must be
received at the offices of the Company a reasonable amount of time prior to the
date on which the information or proxy statement for that meeting are mailed to
stockholders in order to be included in the Company's information or proxy
statement relating to that meeting.
23
By Order of the Board of Directors,
/s/Kevin R. Keating
------------------------------------------
Kevin R. Keating, President and Director
October ___, 2003
24
Exhibit A(1)
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made
this 22nd day of August, 2003, by and among ESCAGENETICS CORPORATION, a Delaware
corporation having its principal place of business at 383 Inverness Parkway,
Suite 100, Englewood, Colorado 80112 ("ESCAgenetics"), SHECOM ACQUISITION CORP.,
a Colorado corporation having its principal place of business at 22951 La Palma
Avenue, Yorba Linda, California 92887 ("Shecom Mergerco"), SHECOM CORPORATION, a
Colorado corporation having its principal place of business at 22951 La Palma
Avenue, Yorba Linda, California 92887 ("Shecom").
WHEREAS, Shecom has issued an aggregate of 21,257,737 shares ("Shares")
of its Common Stock, par value $.0001 per share; and
WHEREAS, ESCAgenetics is authorized to issue 100,000,000 shares of
common stock, par value $.0001 per share (the "ESCAgenetics Common Stock") of
which 1,000,000 shares (the "Issued ESCAgenetics Shares") are issued and
outstanding. The ESCAgenetics Common Stock is referred to herein as the
"ESCAgenetics Shares"; and
WHEREAS, Shecom Mergerco is a wholly owned subsidiary of ESCAgenetics
and is authorized to issue 1,000 shares of common stock, par value $.01
(referred to as the "Shecom Mergerco Shares"), all of which such Shecom Mergerco
Shares are issued and outstanding and owned by ESCAgenetics; and
WHEREAS, the respective Boards of Directors of ESCAgenetics, Shecom
Mergerco and Shecom (together with ESCAgenetics and Shecom Mergerco, the
"Companies") deem it advisable and generally to the advantage and welfare of the
Companies and their respective shareholders, that Shecom Mergerco be merged with
and into Shecom under the terms and conditions hereinafter set forth (the
"Merger"), the Merger to be effected pursuant to the Delaware General
Corporation Law and the Merger to be a tax free reorganization under Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the premises, covenants and
conditions hereof, the parties hereto do mutually agree as follows:
1. Votes on Merger and Related Matters. (a) Shecom Mergerco and Shecom (the
"Constituent Corporations") shall each, as soon as practicable but prior to
Closing (as defined below) (i) cause a special meeting of its shareholders to be
called to consider and vote upon the Merger on the terms and conditions
hereinafter set forth, or (ii) obtain written consent of such shareholders, as
applicable, as is necessary to approve the Merger. If the Merger is approved in
accordance with applicable law, subject to the further conditions and provisions
of this Agreement, a closing of this Agreement shall be held (the "Closing") and
a Certificate of Merger (the "Certificate of Merger"), and all other documents
or instruments deemed necessary or appropriate by the parties hereto to effect
the Merger, shall be executed and filed with the Secretary of State of the State
of Delaware as promptly as possible thereafter. The Certificate of Merger so
filed shall be substantially in the form of Exhibit A annexed hereto, with such
changes therein as the Board of Directors of each of Shecom Mergerco and Shecom
shall mutually approve.
1
(b) As soon as practicable, ESCAgenetics shall use reasonable efforts
to obtain the written consent of its stockholders for the approval of (i) a
Certificate of Amendment to ESCAgenetics' Certificate of Incorporation to
approve the change of name of ESCAgenetics to "Shecom Corporation or a new name
to be determined (the "Name Change"). Approving the Name Change shall not be a
condition to the consummation of the Merger.
2. Representations, Warranties and Covenants of Shecom. Shecom
represents, warrants and covenants as follows, except to the extent set forth on
the schedule of exceptions in the form of Schedule A annexed hereto and made a
part hereof:
2.1 Organization; Capitalization. Shecom is, and on the effective
date of the Merger (the "Effective Date") will be, a duly organized and a
validly existing corporation in good standing under the laws of its state of
formation. There are issued and outstanding, and on the Effective Date there
will be issued and outstanding, only the Shares, all of which are, and on the
Effective Date will be, duly authorized and validly issued. There are, and on
the Effective Date there will be, no outstanding rights, options or warrants to
purchase any equity interest in Shecom, and there will be no other or any other
issued or outstanding securities of any nature convertible into or exercisable
or exchangeable for equity of Shecom. No person has any right of first refusal,
right of participation, or any similar right with respect to dispositions of the
Shares.
2.2 Authority. Shecom has, and on the Effective Date will have, full
power and authority to enter into this Agreement and, subject to any third party
approval in accordance with the laws of the State of Delaware, to consummate the
transactions contemplated hereby. This Agreement and the transactions
contemplated hereby have been duly approved by the Board of Directors of Shecom
and, prior to the Closing, by all stockholders of Shecom whose consent is
required under applicable law.
2.3 Binding Agreement. This Agreement has been duly executed and
delivered by Shecom and constitutes the legal, valid and binding obligation of
Shecom, enforceable against it in accordance with the terms hereof, except as
may be limited by bankruptcy, insolvency, reorganization, moratorium or similar
laws of general application relating to or affecting the enforcement of rights
hereunder or general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
2.4 No Conflicts. The execution and delivery by Shecom of this
Agreement, the consummation and performance of the transactions herein
contemplated, and compliance with the terms of this Agreement by Shecom will not
conflict with, result in a breach of or constitute or give rise to a default
under (i) any indenture, mortgage, deed of trust or other agreement, instrument
or contract to which Shecom is now a party or by which it or any of its assets
or properties are bound; (ii) Shecom's certificate of incorporation and bylaws,
in each case as amended; or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any government, governmental instrumentality
or court, domestic or foreign, having jurisdiction over Linsang or any of its
business or properties wherein such breach could have a material adverse effect
on Shecom or any of its business or properties.
2
2.5 Subsidiaries. Shecom does not have, and on the Effective Date
will not have, any subsidiaries, nor does it own any direct or indirect interest
in any other business entity.
2.6 Foreign Qualifications. Shecom is, and on the Effective Date
will be, qualified or licensed as a foreign corporation in all jurisdictions
where its business or ownership of assets so requires, except where the failure
to be qualified or licensed would not be reasonably expected to have a material
adverse effect on the business of Shecom. The business of Shecom does not
require it to be registered as an investment company or investment adviser, as
such terms are defined under the Investment Company Act of 1940 and the
Investment Advisers Act of 1940, each as amended.
2.7 Financial Statements. All financial statements of Shecom
previously delivered to ESCAgenetics, and attached hereto as Annex A (the
"Financial Statements") fairly present in all material respects the financial
position, results of operations and other information purported to be shown
therein of Shecom, at the dates and for the respective periods to which they
apply. All such financial statements have been prepared in conformity with
generally accepted accounting principles consistently applied throughout the
periods involved, and have been adjusted for all normal and recurring accruals.
2.8 No Adverse Events. Since the date of the Shecom Financial
Statements, otherwise as set forth therein:
(i) there has not been any material adverse change in the
financial position or condition of Shecom, its liabilities, assets or
any damage, loss or other change in circumstances materially affecting
Shecom, its business or assets or Shecom' right to carry on its
business, other than changes in the ordinary course of business or due
to general economic, industry or political conditions;
(ii) there has not been any damage, destruction, loss or other
event (whether or not covered by insurance) materially and adversely
affecting Shecom, its business or assets;
(iii) there has not been any material increase in the
compensation payable or to become payable by Shecom to any of Shecom'
officers, employees or agents or any bonus, payment or arrangement made
to or with any of them;
(iv) Shecom's business has been and continues to be carried on
in the ordinary course;
3
(v) Shecom has not discharged or satisfied or paid any lien or
encumbrance or obligation or liability other than current liabilities
in the ordinary course of business; and
(vi) no capital expenditures in excess of $50,000 individually
or $200,000 in total have been authorized or made.
2.9 Ordinary Course of Business. Except for transactions occurring
in the ordinary course of business, there has not been, and on the Effective
Date there will not have been, any transactions involving Shecom since December
31, 2002 in an amount in excess of $200,000.
2.10 Liabilities; Claims. There are, and on the Effective Date will
be, no liabilities (including, but not limited to, tax liabilities) or claims
against Shecom (whether such liabilities or claims are contingent or absolute,
direct or indirect, matured or unmatured) not appearing on the Financial
Statements, other than (i) liabilities incurred in the ordinary course of
business since December 31, 2002, (ii) taxes accrued on earnings since December
31, 2002 which are not yet due or payable, or (iii) liabilities which do not
exceed $200,000.
2.11 Tax Returns. All federal, state, county and local income,
excise, property and other tax returns required to be filed by Shecom are true
and correct in all material respects and have been timely filed or extended
through timely filed requests for extension, and all required taxes, fees or
assessments have been paid or an adequate reserve therefore has been established
in the Financial Statements. The federal income tax returns and state and
foreign income tax returns of Shecom have not been audited by the Internal
Revenue Service ("IRS") or any other taxing authority within the past five (5)
years. Neither the IRS nor any state, local or other taxing authority has
proposed any additional taxes, interest or penalties with respect to Shecom or
any of its operations or businesses. There are no pending, or to the knowledge
of Shecom, threatened, tax claims or assessments, and there are no pending, or
to the knowledge of Shecom, threatened, tax examinations by any taxing
authorities. Shecom has not given any waivers of rights (which are currently in
effect) under applicable statutes of limitations with respect to the federal
income tax returns of Shecom for any year.
2.12 Title to Assets. Except as provided for in the Financial
Statements, Shecom, has, and on the Effective Date will have, good and
marketable title to all of its furniture, fixtures, equipment and other assets
owned by Shecom, and such assets are owned free and clear of all security
interests, pledges, liens, restrictions and encumbrances of every kind and
nature. Shecom is the owner of its inventory as set forth in the Financial
Statements and has good and marketable title thereto. Except as provided in the
Financial Statements, Shecom's assets comprise all of the property and assets of
its business, and no other person or entity owns any assets used by Shecom in
operating the business of Shecom, whether under a lease, rental agreement or
other arrangement.
2.13 Accounts Receivable. The accounts receivable as set forth in
the Financial Statements represent amounts due for goods sold or services
rendered by Shecom in the ordinary course of business and, except as reserved
for in the Financial Statements, Shecom believes are collectable in the ordinary
course of business, without any claims by the obligor for set-off or
counter-claims.
4
2.14 Material Contracts. A copy (or summary if oral) of all
agreements, contracts, arrangements, understandings and commitments, whether
written or oral, to which Shecom is or on the Effective Date will be, a party,
or from which Shecom will receive substantial benefits and which are material to
Shecom (collectively, "Shecom Contracts"), have been delivered to ESCAgenetics
or its counsel. Any Shecom Contracts entered into between the date hereof and
the Effective Date will be delivered to ESCAgenetics or its counsel prior to
Closing. The validity and enforceability of, and rights of Shecom contained in,
each such Shecom Contract shall not be adversely effected by the Merger or the
transactions contemplated hereby or any actions taken in furtherance hereof. To
its knowledge, Shecom is not in material default under any Shecom Contract.
2.15 Legal Proceedings. There are, and on the Effective Date there
will be, no legal, administrative, arbitral or other proceedings, claims,
actions or governmental investigations of any nature pending, or to Shecom's
knowledge, threatened, involving Shecom, individually or in the aggregate, in
which an unfavorable determination could result in suspension or termination of
Shecom's business or authority to conduct such business in any jurisdiction or
could result in the payment by Shecom of more than $200,000, or challenging the
validity or propriety of the transactions contemplated by this Agreement. Shecom
is not a party to any order, judgment or decree, which will, or might reasonably
be expected to, materially adversely affect the business, operations,
properties, assets or financial condition of Shecom.
2.16 Certain Transactions. Since December 31, 2002 there have been,
and through the Effective Date there will be (i) no bonuses or extraordinary
compensation to any of the officers or directors of Shecom, (ii) no loans made
to or any other transactions with any of the officers or directors of Shecom or
their families and (iii) no dividends or other distributions declared or paid by
Shecom.
2.17 Insurance. Shecom has, and on the Effective Date will have,
maintained casualty and liability policies and other insurance policies with
respect to its business which are appropriate and customary for businesses
similar in size, industry and risk profile. Copies of all of the policies of
insurance and bonds presently in force with respect to Shecom, including without
limitation those covering properties, buildings, machinery, equipment, worker's
compensation, officers and directors and public liability, have been made
available to ESCAgenetics. All such insurance is outstanding and in full force
and effect, with all premiums thereon duly paid, and Shecom has not received any
notice of cancellation of any such policies.
2.18 Intellectual Property. With the exception of the trademarked
names of "Shecom" and "Ikebana", Shecom has, and on the Effective Date will
have, no other patents, patent applications, trademarks, trademark registrations
or applications, trade names, copyrights, copyright registrations or
applications, or other intellectual property pending. To its knowledge, Shecom
has not infringed upon any third party's intellectual property.
2.19 Compliance with Laws. Shecom has, and on the Effective Date
will have, in all material respects operated its business and conducted its
affairs in compliance with all applicable laws, rules and regulations, except
where the failure to so comply did not have or would not be expected to have a
material adverse effect on its business or property.
5
2.20 Related Party Contracts. There are, and on the Effective Date
there will be, no loans, leases or other Shecom Contracts outstanding between
Shecom and any of its officers, directors or any person related to or affiliated
with any such officers or directors.
2.21 Officer and Director Information. During the past five year
period neither Shecom, nor any of its officers or directors, nor any person
intended upon consummation of the Merger to be nominated by Shecom to become an
officer or director of ESCAgenetics or any successor entity or subsidiary, has
been the subject of:
(a) a petition under the Federal bankruptcy laws or any other
insolvency or moratorium law or has a receiver, fiscal agent or similar officer
been appointed by a court for the business or property of Shecom or such person,
or any partnership in which Shecom or any such person was a general partner at
or within two years before the time of such filing, or any corporation or
business association of which Shecom or any such person was an executive officer
at or within two years before the time of such filing;
(b) a conviction in a criminal proceeding or a named subject of
a pending criminal proceeding (excluding traffic violations which do not relate
to driving while intoxicated or driving under the influence);
(c) any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining Shecom or any such person from, or otherwise limiting, the
following activities:
(i) Acting as a futures commission merchant, introducing
broker, commodity trading advisor, commodity pool operator, floor broker,
leverage transaction merchant, any other person regulated by the United States
Commodity Futures Trading Commission or an associated person of any of the
foregoing, or as an investment adviser, underwriter, broker or dealer in
securities, or as an affiliated person, director or employee of any investment
company, bank, savings and loan association or insurance company, or engaging in
or continuing any conduct or practice in connection with such activity;
(ii) Engaging in any type of business practice; or
(iii) Engaging in any activity in connection with the
purchase or sale of any security or commodity or in connection with any
violation of Federal, state or other securities laws or commodities laws;
(d) any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any Federal, state or local authority barring,
suspending or otherwise limiting for more than 60 days the right of Shecom or
any such person to engage in any activity described in the preceding
sub-paragraph, or to be associated with persons engaged in any such activity;
(e) a finding by a court of competent jurisdiction in a civil
action or by the Securities and Exchange Commission (the "Commission") to have
violated any securities law, regulation or decree and the judgment in such civil
action or finding by the Commission has not been subsequently reversed,
suspended or vacated; or
6
(f) a finding by a court of competent jurisdiction in a civil
action or by the Commodity Futures Trading Commission to have violated any
federal commodities law, and the judgment in such civil action or finding has
not been subsequently reversed, suspended or vacated. All items described in
clauses (a) through (f) above are collectively referred to herein as "Bad
Events."
2.22 Benefit Plans. Shecom does not have any pension plan, profit
sharing or similar employee benefit plan.
2.23 Consents and Approvals. Except for the consent and approval of
the stockholders of Shecom and the filing of the Certificate of Merger, no
consents or approvals of, or filings or registrations with, any third party or
any public body or authority are necessary in connection with (i) the execution
and delivery by Shecom of this Agreement and (ii) the consummation by Shecom of
the Merger and of all other transactions contemplated hereby.
2.24 Finder's Fees. Except as may be provided pursuant to the
agreements that govern this agreement and financial activities undertaken on
behalf of this merger, Shecom knows of no person who rendered any service in
connection with the introduction of the Companies to any of the other Companies,
for a "finder's fee" or similar type of fee in connection with the Merger and
the other transactions contemplated hereby.
2.25 Employee Matters. No employees of Shecom are on strike or to
the best of Shecom's knowledge threatening any strike or work stoppage. Shecom
does not have any obligations under any collective bargaining or labor union
agreements, nor is Shecom involved in any material controversy with any of its
employees or any organization representing any of its employees. Shecom believes
its relationships with its employees are good.
2.26 Disclosure. None of the information supplied or to be supplied
by or about Shecom herein or for inclusion or incorporation by reference in any
information to be supplied to holders of ESCAgenetics Common Stock concerning
the Merger contains any untrue statement of a material fact or omits 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 are made,
not misleading.
2.27 Actions Prior to Closing. From the date hereof through the
Closing, Shecom shall not, other than in the ordinary course of business,
consistent with past practice, without due consent of ESCAgenetics:
(a) sell, lease, assign, transfer or otherwise dispose of any
material assets;
(b) agree to assume or assume, guarantee, endorse or otherwise
in any way be or become responsible or liable for, directly or indirectly, any
material contingent obligation;
(c) participate or engage in any discussions or negotiations
with any person regarding, or enter into any transaction concerning, a merger,
stock exchange or consolidation, other than with the other parties hereto, or
liquidate or dissolve itself (or suffer any liquidation or dissolution) or
convey, sell, lease, transfer or otherwise dispose of, in one transaction or a
series of related transactions, all or a substantial part of its property,
business, assets or, capital stock or securities convertible into equity, or
make any material change in the present method of conducting business;
7
(d) make any amendment to its certificate of incorporation or
bylaws;
(e) enter into or amend any employment agreements or increase
the salary or bonus of any existing employee;
(f) create, incur, assume or suffer to exist, any mortgage,
pledge, lien, charge, security interest or encumbrance of any kind upon any of
its property, assets, income or profits, whether now owned or hereafter
acquired;
(g) declare or authorize any dividends or distributions on any
shares of capital stock of Shecom.
2.28 Charter Documents. The charter documents of Shecom have not
been altered since its incorporation, except as filed in the record books of
Shecom.
2.29 Corporate Minute Books. The corporate minute books of Shecom
are complete and the minutes and consents contained therein accurately reflect
the actions that were taken at a duly called and held meeting or by consent
without a meeting. All actions by Shecom which required director or shareholder
approval are reflected on the corporate minute books of Shecom. Shecom is not in
violation or breach of, or in default with respect to, any term of its
Certificate of Incorporation (or other charter documents) or by-laws.
3. Representations, Warranties and Covenants Regarding Shecom Mergerco.
ESCAgenetics and Shecom Mergerco each jointly and severally represents, warrants
and covenants as follows with respect to Shecom Mergerco:
3.1 Organization; Capitalization. Shecom Mergerco is, and on the
Effective Date will be, a duly organized and validly existing corporation in
good standing under the laws of the State of Delaware, authorized to issue only
the Shecom Mergerco Shares. On the Effective Date there will be issued and
outstanding all of the Shecom Mergerco Shares, which shall be fully paid and
nonassessable and all of which shall be owned solely by ESCAgenetics. There are
no, and on the Effective Date there will be no, issued or outstanding options or
warrants to purchase Shecom Mergerco Shares or any issued or outstanding
securities of any nature convertible into Shecom Mergerco Shares, or any
agreements or understandings to issue any Shecom Mergerco Shares, options or
warrants.
3.2 Authority. Shecom Mergerco has, and on the Effective Date will
have, full power and authority to enter into this Agreement and to consummate
the transactions contemplated hereby. This Agreement and the transactions
contemplated hereby have been duly approved by the Board of Directors of Shecom
Mergerco.
8
3.3 No Business Activity. Shecom Mergerco has been organized solely
for the purpose of consummating the Merger and, since its inception, has had no
business activity of any nature other than those related to its organization or
as contemplated by this Agreement.
3.4 Issuance of Securities. Since its inception, Shecom Mergerco has
not issued or committed itself to issue, and to the Effective Date will not
issue or commit to issue, any Shecom Mergerco Shares or any options, rights,
warrants, or other securities convertible into Shecom Mergerco Shares, except
for the issuance of the Shecom Mergerco Shares to ESCAgenetics.
3.5 Consents and Approvals. Except for the consent and approval of
the Board of Directors and shareholder of Shecom Mergerco, and the filing of the
Certificate of Merger, no consents or approvals of, or filings or registrations
with, any third party or any public body or authority are necessary in
connection with (i) the execution and delivery by Shecom Mergerco of this
Agreement and (ii) the consummation by Shecom Mergerco of the Merger and the
other transactions contemplated hereby.
3.6 No Conflicts. The execution and delivery by Shecom Mergerco of
this Agreement, the consummation and performance of the transactions herein
contemplated, and compliance with the terms of this Agreement by Shecom Mergerco
will not conflict with, result in a breach of or constitute or give rise to a
default under any indenture, mortgage, deed of trust or other agreement,
instrument or contract to which Shecom Mergerco is now a party or by which it or
any of its assets or properties are bound or its Certificate of Incorporation or
the bylaws of Shecom Mergerco, or any law, order, rule or regulation, writ,
injunction, judgment or decree of any government, governmental instrumentality
or court, domestic or foreign, having jurisdiction over Shecom Mergerco or any
of its businesses or properties.
3.7 Subsidiaries. Shecom Mergerco has, and on the Effective Date
will have, no subsidiaries, nor does it own any direct or indirect interest in
any other business entity.
3.8 Financial Condition. Except for (i) the incurring of expenses of
its organization, (ii) the issuance of the Shecom Mergerco Shares to
ESCAgenetics, (iii) the incurring of expenses relating to this Agreement and the
consummation of the transactions contemplated by this Agreement, and (iv) the
consummation of the Merger, Shecom Mergerco has had, and on the Effective Date
will have had, no business and no financial or other transactions of any nature
whatsoever.
3.9 Liabilities. Shecom Mergerco has, and on the Effective Date will
have, no liabilities (including, but not limited to, tax liabilities) nor are
there, or on the Effective Date will there be, any claims against Shecom
Mergerco (whether such liabilities or claims are contingent or absolute, direct
or indirect, and matured or unmatured) except for liabilities for its
organization expenses or expenses incurred in connection with the Merger and the
consummation of the transactions contemplated by this Agreement.
9
3.10 Assets. Shecom Mergerco has, and on the Effective Date will
have no fixtures, furniture, equipment, inventory, accounts receivable or other
assets.
3.11 Contracts. Shecom Mergerco has, and on the Effective Date will
have, no contracts or commitments to which it is, or on the Effective Date will
be, a party, except for this Agreement and other documents and instruments
contemplated hereby in connection with the Merger.
3.12 Legal Proceedings. There are, and on the Effective Date there
will be, no legal, administrative, arbitral or other proceedings, claims,
actions or governmental investigations of any nature against Shecom Mergerco, or
challenging the validity or propriety of the transactions contemplated by this
Agreement and, to Shecom Mergerco's best knowledge, there is no reasonable basis
for any other proceeding, claim, action or governmental investigation against
Shecom Mergerco. Shecom Mergerco is not a party to any order, judgment or decree
which will, or might reasonably be expected to, materially adversely affect the
business, operations, properties, assets or financial condition of Shecom
Mergerco.
3.13 Employee Matters; Related Party Transactions. Since the
inception of Shecom Mergerco there have been, and to the Effective Date there
will be (i) no salaried or otherwise compensated employees and no bonuses paid
to any officer or director of Shecom Mergerco; (ii) no loans made to or any
transactions with any officer or director of Shecom Mergerco; (iii) no dividends
or other distributions declared or paid by Shecom Mergerco; and (iv) no purchase
by Shecom Mergerco of any Shecom Mergerco Shares.
3.14 Intellectual Property. Shecom Mergerco has no patents, patent
applications, trademarks, trademark registrations, trade names, copyrights,
copyright registrations or applications therefore or any other intellectual
property.
3.15 Compliance with Laws. Since its inception, Shecom Mergerco has,
and on the Effective Date will have, in all material respects conducted its
affairs in compliance with all applicable laws, rules and regulations.
3.16 Officer and Director Information. During the past five year
period, no officer or director of Shecom Mergerco has been the subject of any
Bad Event.
3.17 Benefit Plans. Shecom Mergerco has no pension plan, profit
sharing or similar employee benefit plan.
3.18 Finder's Fees. Shecom Mergerco knows of no person who rendered
any service in connection with the introduction of the Companies to any of the
other Companies, for a "finder's fee" or similar type of fee in connection with
the Merger and the other transactions contemplated hereby.
3.19 Charter Documents. The charter documents of Shecom Mergerco
have not been altered since its incorporation, except as filed in the record
books of Shecom Mergerco.
3.20 Corporate Minute Books. The corporate minute books of Shecom
Mergerco are complete and the minutes and consents contained therein accurately
reflect the actions that were taken at a duly called and held meeting or by
consent without a meeting. All actions by Shecom Mergerco which required
director or stockholder approval are reflected on the corporate minute books of
Shecom Mergerco. Shecom Mergerco is not in violation or breach of, or in default
with respect to, any term of its Certificate of Incorporation (or other charter
documents) or by-laws.
10
4. Representations, Warranties and Covenants of ESCAgenetics.
ESCAgenetics represents, warrants and covenants as follows, except to the extent
set forth in the Schedule of Exceptions in the form of Schedule B annexed hereto
and made part hereof ("ESCAgenetics Schedule of Exceptions"):
4.1 Organization; Capitalization. ESCAgenetics is a duly organized
and validly existing corporation in good standing under the laws of the State of
Delaware, authorized to issue an aggregate of 100,000,000 shares of ESCAgenetics
Common and no other shares of capital stock. On the Effective Date, giving
effect to the Reverse Split and the Merger, there will be issued and outstanding
approximately 5,587,038 shares of ESCAgenetics Common Stock, all of which such
issued and outstanding shares will be validly issued, fully paid and
nonassessable. In the event the stockholders do not approve the Reverse Split
and the Reverse Split has not occurred, on the Effective Date there will be
issued and outstanding no more than 100,000,000 shares of ESCAgenetics Common
Stock, all of which such issued and outstanding shares will be validly issued,
fully paid and nonassessable. On the Effective Date, there will be no other
issued and outstanding shares of capital stock of ESCAgenetics, except for the
Issued ESCAgenetics Shares. Except as contemplated by this Agreement, on the
Effective Date there will be no issued or outstanding securities and no issued
or outstanding options, warrants or other rights, or commitments or agreements
of any kind, contingent or otherwise, to purchase or otherwise acquire
ESCAgenetics Shares or any issued or outstanding securities of any nature
convertible into ESCAgenetics Shares. There is no proxy or any other agreement,
arrangement or understanding of any kind authorized, effective or outstanding
which restricts, limits or otherwise affects the right to vote any ESCAgenetics
Shares.
4.2 Binding Agreement. This Agreement and the transactions
contemplated hereby have been duly approved by the Board of Directors of
ESCAgenetics. This Agreement has been duly executed and delivered by
ESCAgenetics and constitutes the legal, valid and binding obligation of
ESCAgenetics enforceable against it in accordance with the terms hereof, except
as may be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws of general application relating to or affecting the enforcement of
rights hereunder or general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
4.3 Recent Business Operations. The business of ESCAgenetics and the
ESCAgenetics Subsidiaries (as hereinafter defined), since January 1, 1996 has
been limited solely to the search for an acquisition or merger partner and
certain transactions described in its filings with the Commission since January
1, 1996, and except for transactions related to conversion of debt or other
obligations and merger or acquisition activities of one of its subsidiaries, it
has not engaged in any other business or activity since January 1, 1996.
11
4.4 Foreign Qualifications. ESCAgenetics is, and on the Effective
Date will be, duly authorized, qualified and licensed under any and all
applicable laws, regulations, ordinances or orders of public authorities to
carry on its business in the places and in the manner as presently conducted.
The business of ESCAgenetics does not require it to be registered as an
investment company or investment advisor, as such terms are defined under the
Investment Company Act and the Investment Advisors Act of 1940.
4.5 Subsidiaries. ESCAgenetics has, and on the Effective Date will
have, no subsidiaries, except for Shecom Mergerco, PHYTOpharmaceuticals, Inc.
and SRE ESCAgenetics Corporation (the "ESCAgenetics Subsidiaries"), nor does it
own any direct or indirect interest in any other business entity.
4.6 Financial Statements. The financial statements of ESCAgenetics,
consisting of its Balance Sheets, Statement of Operations, Statement of
Stockholders' Equity and Statement of Cash Flows, all as at or for periods
ending September 30, 2002 and June 30, 2002, and all together with accompanying
notes, if any, are complete and correct in all material respects, present fairly
the financial position of ESCAgenetics, the results of operations and changes in
financial position for the period covered thereby, and were prepared in
accordance with generally accepted accounting principles consistently applied,
and have been adjusted for all normal and recurring accruals. All the financial
statements referenced herein regarding ESCAgenetics are collectively referred to
as the "ESCAgenetics Financial Statements", all of which have been delivered to
Shecom and are true, correct and complete in all material respects.
4.7 No Adverse Changes. There has not been, and on the Effective
Date there will not have been, any material change in the financial condition of
ESCAgenetics and the ESCAgenetics Subsidiaries from that set forth in the
ESCAgenetics Financial Statements except for (i) transactions in the ordinary
course of business, (ii) transactions relating to this Agreement, and (iii) the
incurring of expenses and liabilities relating to this Agreement.
4.8 Liabilities. There are, and on the Effective Date will be, no
liabilities (including, but not limited to, tax liabilities) or claims against
ESCAgenetics or the ESCAgenetics Subsidiaries (whether such liabilities or
claims are contingent or absolute, direct or indirect, accrued or unaccrued and
matured or unmatured) not appearing on the ESCAgenetics Financial Statements,
except for (i) liabilities for expenses incurred relating to this Agreement and
the consummation of the transactions contemplated hereby and (ii) liabilities
and commitments incurred or made in the ordinary course of ESCAgenetics's
business or taxes incurred on earnings since December 31, 2002.
4.9 Tax Returns. All Federal, state, county and local income,
excise, property or other tax returns required to be filed by ESCAgenetics and
the ESCAgenetics Subsidiaries have been timely filed and all required taxes,
fees and assessments have been paid or an adequate reserve therefore has been
provided for in the ESCAgenetics Financial Statements. The federal income tax
returns and state and foreign income tax returns of ESCAgenetics and the
ESCAgenetics Subsidiaries have not been audited by the IRS or any other taxing
authority within the past five (5) years. Neither the IRS nor any state, local
or other taxing authority has proposed any additional taxes, interest or
penalties with respect to ESCAgenetics, or any of its operations or businesses
or the ESCAgenetics Subsidiaries. There are no pending, or to the knowledge of
ESCAgenetics, threatened, tax claims or assessments, and there are no pending,
or to the knowledge of ESCAgenetics, threatened, tax examinations by any taxing
authorities. Neither ESCAgenetics or the ESCAgenetics Subsidiaries has given any
waivers of rights (which are currently in effect) under applicable statutes of
limitations with respect to the federal income tax returns of ESCAgenetics and
the ESCAgenetics Subsidiaries for any year.
12
4.10 Assets. ESCAgenetics and the ESCAgenetics Subsidiaries have,
and on the Effective Date will have, no fixtures, furniture, equipment,
inventory, accounts receivable or other assets.
4.11 Material Contracts. ESCAgenetics and the ESCAgenetics
Subsidiaries each have, and on the Effective Date will have, no material
contracts to which it is, or on the Effective Date will be, a party.
4.12 No Conflicts. The execution and delivery by ESCAgenetics of
this Agreement, the consummation and performance of the transactions herein
contemplated and compliance with the terms of this Agreement by ESCAgenetics
will not conflict with, result in a breach of or constitute a default under (i)
any indenture, mortgage, deed of trust or other agreement, instrument or
contract to which ESCAgenetics or the ESCAgenetics Subsidiaries is now a party
or by which it or any of its assets or properties is bound; (ii) the Certificate
of Incorporation or the bylaws of ESCAgenetics and the ESCAgenetics
Subsidiaries, in each case as amended; or (iii) any law, order, rule,
regulation, writ, injunction, judgment or decree of any government, governmental
instrumentality or court, domestic or foreign, having jurisdiction over
ESCAgenetics or the ESCAgenetics Subsidiaries or any of their respective
business or properties.
4.13 Legal Proceedings. There are, and on the Effective Date there
will be, no legal, administrative, arbitral or other proceedings, claims,
actions or governmental investigations of any nature pending or to
ESCAgenetics's knowledge threatened, against ESCAgenetics or any of the
ESCAgenetics Subsidiaries, including, but not limited to any shareholder claims
or derivative actions, or challenging the validity or propriety of the
transactions contemplated by this Agreement, and, to ESCAgenetics's best
knowledge, there is no reasonable basis for any proceeding, claim, action or
governmental investigation against ESCAgenetics or any of the ESCAgenetics
Subsidiaries. ESCAgenetics and the ESCAgenetics Subsidiaries are not a party to
any order, judgment or decree.
4.14 Certain Transactions. There have been, and to the Effective
Date there will be (i) no salaried or otherwise compensated employees and no
bonuses paid to any officer or director of ESCAgenetics or the ESCAgenetics
Subsidiaries; (ii) no loans made to or transactions with any officer or director
of ESCAgenetics or the ESCAgenetics Subsidiaries; (iii) no dividends or other
distributions declared or paid by ESCAgenetics; and (iv) no purchase by
ESCAgenetics or any third party of any of the ESCAgenetics Shares.
4.15 Issuances of Securities. ESCAgenetics has not, except for the
Issued ESCAgenetics Shares, issued or committed itself to issue, and to the
Effective Date will not issue or commit itself to issue, any ESCAgenetics Shares
or any options, rights, warrants, or other securities convertible into
ESCAgenetics Shares, except as contemplated by this Agreement.
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4.16 Intellectual Property. ESCAgenetics and the ESCAgenetics
Subsidiaries have no patents, patent applications, trademarks, trademark
registrations, trade names, copyrights, copyright registrations or applications
therefore. ESCAgenetics has no knowledge of any infringements by ESCAgenetics or
the ESCAgenetics Subsidiaries of any third party's intellectual property.
4.17 Compliance with Laws. ESCAgenetics and the ESCAgenetics
Subsidiaries have, and on the Effective Date will have, in all material respects
operated their respective business and conducted their affairs in compliance
with all applicable laws, rules and regulations, except where the failure to so
comply did not have and would not be expected to have a material adverse effect
on its business or property. To the best of its knowledge, ESCAgenetics and the
ESCAgenetics Subsidiaries are not in violation of any Federal, state or local
environmental law or regulation.
4.18 Related Party Transactions. On the Effective Date there will be
no loans, leases, commitments, arrangements or other contracts of any kind or
nature outstanding between (i) ESCAgenetics or any of the ESCAgenetics
Subsidiaries or (ii) any officer or director of ESCAgenetics or the ESCAgenetics
Subsidiaries or any person related to or affiliated with any officer or director
of ESCAgenetics or any of the ESCAgenetics Subsidiaries.
4.19 Officers and Directors. During the past five year period, no
current officer or director of ESCAgenetics or the ESCAgenetics Subsidiaries has
been the subject of any Bad Event.
4.20 Employee Benefit Plans. ESCAgenetics and the ESCAgenetics
Subsidiaries have no pension plan, profit sharing or similar employee benefit
plan.
4.21 Consents. Except for the consent and approval of the Board of
Directors of ESCAgenetics and Shecom Mergerco, the filing of the Certificate of
Merger and the filing of Commission Form 8-K, no consents or approvals of, or
filings or registrations with, any third party or any public body or authority
are necessary in connection with (i) the execution and delivery by ESCAgenetics
of this Agreement or (ii) the consummation by ESCAgenetics of the Merger and the
other transactions contemplated hereby. ESCAgenetics has, and on the Effective
Date will have, full power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby.
4.22 Finder's Fees. ESCAgenetics knows of no person who rendered any
service in connection with the introduction of the Companies to any of the other
Companies, for a "finder's fee" or similar type of fee in connection with the
Merger and the other transactions contemplated hereby.
4.23 Employees. ESCAgenetics and the ESCAgenetics Subsidiaries have
no employees.
4.24 Disclosure. None of the information supplied or to be supplied
by or about ESCAgenetics or the ESCAgenetics Subsidiaries to Shecom concerning
the Merger contains any untrue statement of a material fact or omits 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 are made,
not misleading.
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4.25 Registration. The ESCAgenetics Common Stock is, and at the
Effective Date will be, validly registered as a class pursuant to Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
4.26 Listing and Maintenance Requirements. The ESCAgenetics Common
Stock is listed on the NASD OTCBB. ESCAgenetics has not, in the 24 months
preceding the date hereof, received notice from the NASD OTCBB or any other
market or exchange on which the ESCAgenetics Common Stock is or has been listed
or quoted to the effect that ESCAgenetics is not in compliance with the listing
or maintenance requirements of such market. ESCAgenetics is, and has no reason
to believe that it will not in the foreseeable future continue to be, in
compliance with all such listing and maintenance requirements. ESCAgenetics has
not, in the 24 months preceding the date hereof, received notice any notice of
violations or delisting from the Commission.
4.27 SEC Reports; Financial Statements. ESCAgenetics has filed all
reports required to be filed by it under the Securities Act of 1933, as amended
(the "Securities Act") and the Exchange Act, including pursuant to Section 13(a)
or 15(d) thereof, since the effective date of its registration statement filed
with the Commission on Form 10-SB (the foregoing materials being collectively
referred to herein as the "SEC Reports" on a timely basis or has received a
valid extension of such time of filing and has filed any such SEC Reports prior
to the expiration of any such extension. As of their respective dates, the SEC
Reports complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated hereunder, and none of the SEC Reports, when filed,
contained any untrue statement of a material fact or omitted to state a 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. The financial statements of ESCAgenetics included in the SEC Reports
comply in all material respects with applicable accounting requirements and the
rules and regulations of the Commission with respect thereto as in effect at the
time of filing. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved ("GAAP"), except as may be otherwise specified in such
financial statements or the notes thereto, and fairly present in all material
respects the financial position of the ESCAgenetics and its consolidated
subsidiaries as of and for the dates thereof and the results of operations and
cash flows for the periods then ended, subject, in the case of unaudited
statements, to normal, immaterial, year-end audit adjustments.
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4.28 Internal Accounting Controls. ESCAgenetics and the ESCAgenetics
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization, and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences. There
are no disagreements of any kind presently existing, or reasonably anticipated
by ESCAgenetics to arise, between the accountants and lawyers formerly or
presently employed by ESCAgenetics, which could reasonably be expected to delay
the transactions contemplated hereby, including the filing of Form 8-K following
the Effective Date, and ESCAgenetics is current with respect to any fees owed to
its accountants and lawyers. ESCAgenetics has established disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
ESCAgenetics and designed such disclosure controls and procedures to ensure that
material information relating to ESCAgenetics, including its subsidiaries, is
made known to the certifying officers by others within those entities,
particularly during the period in which ESCAgenetics's Form 10-K (or 10-KSB) or
10-Q (or 10-QSB), as the case may be, is being prepared. The ESCAgenetics's
certifying officers have evaluated the effectiveness of ESCAgenetics's controls
and procedures as of a date within 90 days prior to the filing date of the Form
10-KSB for the year ended September 30, 2002 (such date, the "Evaluation Date").
ESCAgenetics presented in the Form 10-KSB for the year ended September 30, 2002
the conclusions of the certifying officers about the effectiveness of the
disclosure controls and procedures based on their evaluations as of the
Evaluation Date. Since the Evaluation Date, there have been no significant
changes in ESCAgenetics's internal controls (as such term is defined in Item
307(b) of Regulation S-K under the Exchange Act) or, to ESCAgenetics's and its
certifying officer's knowledge, in other factors that could significantly affect
the ESCAgenetics's internal controls.
4.29 Charter Documents. The charter documents of ESCAgenetics and
its subsidiaries have not been altered since the incorporation of each,
respectively, except as filed in the record books of ESCAgenetics.
4.30 Corporate Minute Books. The corporate minute books of
ESCAgenetics and its subsidiaries are complete and each of the minutes and
consents contained therein accurately reflect the actions that were taken at a
duly called and held meeting or by consent without a meeting. All actions by
ESCAgenetics and its subsidiaries which required director or stockholder
approval are reflected on the corporate minute books of ESCAgenetics and its
subsidiaries. ESCAgenetics and its subsidiaries are not in violation or breach
of, or in default with respect to, any term of their respective Certificates of
Incorporation (or other charter documents) or by-laws.
5. Representations to Survive Closing. All of the representations,
covenants and warranties contained in this Agreement (including all statements
contained in any certificate or other instrument delivered by or on behalf of
ESCAgenetics, Shecom Mergerco, the ESCAgenetics Stockholders, the Shecom
Stockholder or Shecom pursuant hereto or in connection with the transactions
contemplated hereby) shall survive the Closing for a period of two (2) years
from the Effective Date.
6. Surviving Corporations. The surviving entity in the Merger shall be
Shecom. Shecom's name, identities, certificate of incorporation, bylaws,
existence, purposes, powers, objects, franchises, rights and immunities shall be
unaffected and unimpaired by the Merger, except as described in the Certificate
of Merger.
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7. Treatment of Securities of Constituent Corporations in the Merger.
The terms and conditions of the Merger, the mode of carrying the same into
effect, and the manner and basis of converting the securities of each of the
Constituent Corporations are as follows:
7.1 Treatment of Shares. At the Effective Date, in the event the
Reverse Split has become effective, the Shares shall be converted by virtue of
the Merger, into an aggregate of approximately 4,375,000 shares of ESCAgenetics
Common Stock ("Shecom Shares"), on the basis of .1865 shares of ESCAgenetics
Common Stock for each Share, without any action on the part of the holders
thereof. In the event the Reverse Split has not become effective on or before
the Effective Date the Shares shall be converted by virtue of the Merger, and at
the Effective Date, into an aggregate of 21,875,000 shares of ESCAgenetics
Common Stock, on the basis of .9325 shares of ESCAgenetics Common Stock for each
Share, without any action on the part of the holders thereof. In the event the
Reverse Split has not taken place on or before the Effective Date, the
conversion of the Shares into shares of ESCAgenetics Common Stock shall be
performed in accordance with this Section, and the Shecom Shares issuable to the
Shecom shareholders shall be issued as follows: (1) as soon as practicable after
the Effective Date, ESCAgenetics shall cause to be issued to the Shecom
shareholders a total of 4,375,000, and (2) thereafter, ESCAgenetics shall use
its best efforts to: (A) obtain stockholder approval to amend its certificate of
incorporation to increase the authorized shares of common stock so as to permit
the additional share issuance and reservation required by this subparagraph, and
(B) cause to be issued to the Shecom shareholders an additional 458,656,193
shares and approximately 108,010,474 shares to be reserved for issuance pursuant
to Section 7.2 below. The ESCAgenetics Stockholders, by their signatures hereto,
agree to vote in favor of any such amendment to the certificate of incorporation
required by this subsection. Upon such surrender, Shares so surrendered shall be
owned of record and beneficially by ESCAgenetics. Upon conversion, any
fractional ESCAgenetics Common Stock resulting from conversion shall be rounded
up to the next highest whole number.
7.2 Treatment of Shecom Options and Convertible Debt. Up to 0
currently existing options to purchase Shares and 0 Shares issuable upon
convertible debt convertible shall be replaced at closing by options and
convertible debt to purchase ESCAgenetics Common Stock on the same basis of
conversion as set forth in Section 7.1 above.
7.3 Existence of Shecom Mergerco. The separate existence and
corporate organization of Shecom Mergerco, except insofar as it may be continued
by statute, shall cease on Effective Date and Shecom shall become a wholly owned
subsidiary of ESCAgenetics.
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8. Rights and Liabilities of Surviving Corporation in Merger. On and
after the Effective Date, Shecom, as the surviving corporation of the Merger,
shall succeed to and possess, without further act or deed, all of the estate,
rights, privileges, powers and franchises, both public and private, and all of
the property, real, personal, and mixed, of Shecom Mergerco; all debts due to
Shecom Mergerco on whatever account shall be vested in Shecom; all claims,
demands, property, rights, privileges, powers, franchises and every other
interest of Shecom Mergerco shall be as effectively the property of Shecom as
they were of Shecom Mergerco; the title to any real estate by deed or otherwise
in Shecom Mergerco shall not revert or be in any way impaired by reason of the
Merger, but shall be vested in Shecom; all rights of creditors and all liens
upon any property of Shecom Mergerco shall be preserved unimpaired, limited in
lien to the property affected by such lien at the Effective Date; and all debts,
liabilities and duties of Shecom Mergerco shall thenceforth attach to Shecom and
may be enforced against it to the same extent as if such debts, liabilities and
duties had been incurred or contracted by it.
9. Further Assurances of Title. As and when requested by Shecom, or by
any of its successors or assigns, Shecom Mergerco shall execute and deliver, or
cause to be executed and delivered, all such deeds and instruments and will take
or cause to be taken all such further action as Shecom may deem necessary or
desirable in order to vest in and confirm to Shecom title to and possession of
the property acquired by Shecom by reason or as a result of the Merger, and
otherwise to carry out the intent and purposes hereof, and the officers,
directors of Shecom and ESCAgenetics, as applicable, are fully authorized in the
name of Shecom or ESCAgenetics or otherwise to take any and all such action.
10. Conditions of Obligations of Shecom Mergerco and ESCAgenetics. The
obligation of Shecom Mergerco and ESCAgenetics to consummate the Merger is
subject to the following conditions prior to the Effective Date:
10.1 Compliance with Representations and Warranties. Shecom shall
be in compliance with its representations, warranties and covenants contained
herein in all material respects, and Shecom Mergerco and ESCAgenetics each shall
receive from Shecom certificates to such effect from the President of Shecom as
of the Effective Date.
10.2 Losses. Shecom shall not have suffered a loss on account of
fire, flood, accident or other calamity of such a character as to interfere
materially with the continuous operation of its business or materially affect
adversely its condition, financial or otherwise, regardless of whether or not
such loss shall have been insured.
10.3 No Material Adverse Change. Except as disclosed in this
Agreement or in the schedules annexed hereto, no material adverse change in the
aggregate shall have occurred in the financial condition, business, properties,
assets, liabilities, results of operations or prospects of Shecom since December
31, 2002.
10.4 Disposition of Assets. None of the properties or assets of
Shecom shall have been sold or otherwise disposed of other than in the ordinary
course of business in accordance with past practice during such period, except
with the prior written consent of ESCAgenetics.
10.5 Conditions. Shecom shall have performed and complied with the
provisions and conditions of this Agreement on its part to be performed and
complied with.
10.6 Filings and Approvals. All applicable filings and regulatory
approvals required to be made or obtained by Shecom have been made or obtained.
10.7 Other Approvals. This Agreement and the transactions
contemplated hereby shall have been approved by appropriate action of the Board
of Directors and stockholders, as required, of Shecom and resolutions to that
effect to ESCAgenetics and its counsel, shall have been delivered to
ESCAgenetics.
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10.8 Compliance with Securities Laws. There shall have been full
compliance with the applicable securities or "blue sky" laws and regulations of
any state or other governmental body having jurisdiction over the Merger.
10.9 Opinions of Counsel. ESCAgenetics shall have received an
opinion from counsel to Shecom in form and substance reasonably satisfactory to
ESCAgenetics's counsel.
10.10 Investment Representation. Shecom shall have obtained an
instrument, in the form annexed hereto as Exhibit B, from the stockholders of
Shecom, including a representation that the shares of ESCAgenetics Common Stock
being acquired as a result of the transactions contemplated by this Agreement
are being acquired for investment purposes only and not with a view to, or sale
in connection with, any distribution within the meaning of the Securities Act.
11. Conditions of Obligations of Shecom. The obligations of Shecom to
consummate the Merger are subject to the following conditions prior to the
Effective Date:
11.1 Compliance with Representations and Warranties. Shecom
Mergerco and ESCAgenetics shall be in compliance with their respective
representations, warranties and covenants contained herein, and Shecom shall
have received from each of Shecom Mergerco and ESCAgenetics a certificate to
such effect from their respective Presidents as of the Effective Date.
11.2 Losses. Shecom Mergerco and ESCAgenetics shall not have
suffered any loss on account of fire, flood, accident or other calamity of such
a character as to interfere materially with the continuous operation of their
respective businesses or materially adversely affect their respective condition,
financial or otherwise, regardless of whether or not such loss shall have been
insured.
11.3 No Material Transactions. No material transactions shall have
been entered into by Shecom Mergerco or ESCAgenetics, other than transactions in
the ordinary course of business, since December 31, 2002, other than as referred
to in this Agreement or in connection herewith, except with the prior written
consent of Shecom.
11.4 No Material Adverse Change; Due Diligence. No material adverse
change shall have occurred in the financial condition, business, properties,
assets, liabilities, results of operations or prospects of Shecom Mergerco or
ESCAgenetics since December 31, 2002, other than as referred to in this
Agreement.
11.5 Disposal of Assets. None of the properties or assets of Shecom
Mergerco or ESCAgenetics shall have been sold or otherwise disposed of, other
than in the ordinary course of business since December 31, 2002, except with the
written consent of Shecom.
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11.6 Compliance with Conditions. Shecom Mergerco and ESCAgenetics
shall each have performed and complied with the provisions and conditions of
this Agreement on its part to be performed and complied with.
11.7 Filings and Approvals. All applicable filings required to be
made and regulatory approvals, as well as any other third party approvals,
obtained by ESCAgenetics have been made or obtained, including the filing of
required information pursuant to Section 14(f) of the Exchange Act with the
Commission.
11.8 Board Resignations. ESCAgenetics shall have held a meeting of
its Board of Directors at which meeting all of its directors except one (the
"ESCAgenetics Board Member") shall have resigned seriatim and the persons
designated by Shecom shall have been elected as directors of ESCAgenetics, to
fill the vacancies created thereby all subject to the consummation of the
Merger. Upon such election, the ESCAgenetics Board Member shall resign.
11.9 Opinions. Shecom shall have received opinions from counsel to
Shecom Mergerco and ESCAgenetics in form and substance reasonably satisfactory
to Shecom's counsel.
11.10 Certifying Officers. The current Chief Executive Officer and
Chief Financial Officer of ESCAgenetics shall each have agreed to provide to the
appropriate officers of ESCAgenetics following the Merger, a letter, in form and
substance satisfactory to Shecom, containing the certifications required under
the Sarbanes-Oxley Act of 2002, with respect to any filings to be made with the
Commission after the Merger that include financial statements or information
about the pre-Merger operations of ESCAgenetics.
11.11 10-QSB and Tax Returns. ESCAgenetics shall have timely filed
its quarterly report on Form 10-QSB, for the quarter June 30, 2003, with the
Commission and shall have filed all tax returns and paid all applicable taxes
for the year ended September 30, 2002.
Compliance with the provisions of this Section 11 shall be
evidenced by the certificates of the respective Presidents and Secretaries of
each of Shecom Mergerco and ESCAgenetics to be delivered at Closing.
12. Other Covenants.
12.1 Amendment of ESCAgenetics Certificate of Incorporation. The
ESCAgenetics Stockholders each agrees that he will vote all shares of
ESCAgenetics capital stock beneficially owned or controlled by him in favor of
the amendment of ESCAgenetics's Certificate of Incorporation to change its
corporate name to Shecom Corporation.
12.2 Election of Directors. A new board of directors shall be
formed consisting of not less than five (5) directors which shall include Raju
Shewa, Phillip Trad and three additional directors to be determined prior to
closing. The ESCAgenetics Stockholders each agree that, for a period of three
years following the Closing, he will vote all shares of ESCAgenetics capital
stock beneficially owned or controlled by him in favor of the nominated board of
directors designated at the time of closing and reasonably acceptable to the
ESCAgenetics Board of Directors, as members of the Board of Directors of
ESCAgenetics.
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12.3 Indemnification. (a) The ESCAgenetics Stockholders, jointly
and severally, agree to indemnify and hold harmless Shecom, its affiliates and
stockholders, directors, officers, employees, agents, successors in interest,
assigns and representatives from and against any and all losses, claims, damages
or liabilities or expenses (including reasonable attorneys' fees) which may be
incurred or suffered by any such party and which, directly or indirectly, arise
out of or result from the operations of ESCAgenetics prior to the Effective
Date, including, without limitation, any breaches of representations, warranties
and covenants of ESCAgenetics contained herein. The ESCAgenetics Stockholders'
indemnity obligations under this Section 12.3(a) shall be limited, in the
aggregate, to $100,000.
(b) Shecom and the Shecom Stockholder, jointly and severally, agree
to indemnify and hold harmless ESCAgenetics and the ESCAgenetics Stockholders,
directors, officers, employees, agents, successors in interest, assigns and
representatives from and against any and all losses, claims, damages or
liabilities or expenses (including reasonable attorneys' fees) which may be
incurred or suffered by ESCAgenetics or the ESCAgenetics Stockholders which,
directly or indirectly, arise out of or result from the operations of Shecom
prior to the Effective Date including, without limitation, any breaches of
representations, warranties and covenants of ESCAgenetics contained herein. The
Shecom Stockholder's indemnity obligations under this Section 12.3(b) shall be
limited, in the aggregate, to $100,000.
12.4 Post-Merger Operations of Shecom. If, within the earlier of
(i) two years from the Effective Date or (ii) the date that the New Note is paid
in full (such earlier of the foregoing two clauses, the "Trigger Date"), Shecom
shall permanently cease all business operations for a period in excess of sixty
days, or any proceeding shall be instituted by or against Shecom seeking to
adjudicate it bankrupt or insolvent, or seeking liquidation, winding up,
protection, relief or composition of it or its debts under any law relating to
bankruptcy, insolvency or relief of debtors, or seeking the entry of an order
for relief or for the appointment of a receiver, trustee or other similar
official for it or for any substantial part of its property, and in the case of
any such proceeding instituted against Shecom (but not instituted by Shecom),
either such proceeding shall remain undismissed or unstayed for a period of
ninety (90) days or any of the actions sought in such proceeding (including,
without limitation, the entry of an order for relief against, or the appointment
of a receiver, trustee or other similar official for, Shecom or any substantial
part of its property) shall be granted or shall occur, then the parties hereto
agree to unwind this transaction, whereby (i) the Shecom Shares, to the extent
not previously sold or transferred by a current stockholder of Shecom, shall be
returned to ESCAgenetics and cancelled, (ii) the Shares and the business,
assets, liabilities and operations of Shecom are returned to the pre-Merger
stockholders of Shecom and (iii) the New Note shall be cancelled or returned to
ESCAgenetics, such that Shecom and the pre-Merger stockholders of Shecom shall
have no obligations with respect to such New Note. The Shecom Stockholder agrees
not to sell, transfer or otherwise dispose of his Shecom Shares to any third
party in a private transaction prior to the Trigger Date, unless such third
party agrees to be bound by the provisions of this Section 12.4. The Shecom
Stockholder shall be permitted to sell his Shecom Shares pursuant to Rule 144 of
the Securities Act prior to and following the Trigger Date.
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12.5 Covenants Not to Sue. (a) The ESCAgenetics Stockholders, on
behalf of themselves and each of their respective affiliates, successors and
assigns, each irrevocably covenant and agree that they shall forever refrain
from initiating, filing, instituting, maintaining, or proceeding upon, or
encouraging, advising, or voluntarily assisting any other person or entity to
initiate, institute, maintain, or proceed upon, any claims, demands,
obligations, liabilities, indebtednesses, breaches of contract, breaches of duty
or any relationship, acts, omissions, misfeasance, malfeasance, cause or causes
of actions, debts, sums of money, accounts, compensations, contracts,
controversies, promises, damages, costs, attorneys' fees, losses and expenses,
of every type, kind, nature, description or character, and irrespective of how,
why, or by reason of what facts, whether heretofore, now existing or hereafter
arising, or which could, might, or may be claimed to exist, or whatever kind or
name, whether known or unknown, suspected or unsuspected, liquidated or
unliquidated, each as though fully set forth herein at length, against
ESCAgenetics (or its current or former officers, directors, agents or
employees), which in any way arise out of, are connected with or related to the
operations of ESCAgenetics prior to the Effective Date.
(b) The Shecom Stockholder irrevocably covenants and agrees that he
shall forever refrain from initiating, filing, instituting, maintaining, or
proceeding upon, or encouraging, advising, or voluntarily assisting any other
person or entity to initiate, institute, maintain, or proceed upon, any claims,
demands, obligations, liabilities, indebtednesses, breaches of contract,
breaches of duty or any relationship, acts, omissions, misfeasance, malfeasance,
cause or causes of actions, debts, sums of money, accounts, compensations,
contracts, controversies, promises, damages, costs, attorneys' fees, losses and
expenses, of every type, kind, nature, description or character, and
irrespective of how, why, or by reason of what facts, whether heretofore, now
existing or hereafter arising, or which could, might, or may be claimed to
exist, or whatever kind or name, whether known or unknown, suspected or
unsuspected, liquidated or unliquidated, each as though fully set forth herein
at length, against ESCAgenetics or Shecom (or their respective officers,
directors, agents or employees), which in any way arise out of, are connected
with or related to the operations of Shecom prior to the Effective Date.
13. Abandonment. This Agreement and the Merger may be abandoned (a) by
any of the Companies, acting by its Board of Directors, at any time prior to its
adoption by the stockholders, if such adoption is required, (b) by any of the
Companies, acting by its Board of Directors, by written notice to the other
parties hereto, at any time in the event of the failure of any condition in
favor of such entity as to which the consummation of the Merger is subject, or
(c) by the consent of all the Companies, acting each by its Board of Directors,
at any time prior to the Effective Date. In the event of abandonment of this
Agreement, the same shall become wholly void and of no effect, and there shall
be no further liability or obligation hereunder on the part of any of the
Companies, their respective Boards of Directors or any other party to this
Agreement.
14. Closing or Termination. In the event the Closing of this Agreement
shall not take place due to failure of any condition of Closing required herein,
then any party shall have the right to terminate this Agreement, in which event
no party shall have any further right or obligation as against any other. If
Shecom shall fail to close for any reason other than failure of any condition of
Closing required herein to be performed on the part of ESCAgenetics or Shecom
Mergerco, Shecom shall pay to ESCAgenetics a break-up fee of $250,000 in cash.
If ESCAgenetics or Shecom Mergerco shall fail to close for any reason other than
failure of any condition of Closing required herein to be performed on the part
of Shecom, ESCAgenetics shall pay to Shecom a break-up fee of $250,000 in cash.
Notwithstanding anything in this section to the contrary Shecom shall not be
liable to ESCAgenetics for a break-up fee if it has terminated this Agreement
pursuant to Sections 12.6 or 12.7 and ESCAgenetics shall not be liable to Shecom
for a break-up fee if it has terminated this Agreement pursuant to Sections 12.6
or 12.7.
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15. Delivery of Corporate Proceedings of ESCAgenetics and Shecom
Mergerco. At the Closing, ESCAgenetics and Shecom Mergerco shall deliver to
counsel for Shecom the originals of all of the corporate proceedings of
ESCAgenetics and Shecom Mergerco, duly certified by their respective
Secretaries, relating to this Agreement and Shecom shall deliver to counsel for
ESCAgenetics the originals of all of the corporate proceedings of Shecom, duly
certified by their respective Secretaries, relating to this Agreement.
16. Limitation of Liability. The representations and warranties made by
any party to this Agreement are intended to be relied upon only by the other
parties to this Agreement and by no other person. Nothing contained in this
Agreement shall be deemed to confer upon any person not a party to this
Agreement any third party beneficiary rights or any other rights of any nature
whatsoever.
17. Further Instruments and Actions. Each party shall deliver such
further instruments and take such further action as may be reasonably requested
by any other in order to carry out the intent and purposes of this Agreement.
18. Governing Law. This Agreement is being delivered and is intended to
be performed in the State of New York, and shall be construed and enforced in
accordance with the laws of such state, without regard to conflicts of laws
thereof.
19. Notices. All notices or other communications to be sent by any
party to this Agreement to any other party to this Agreement shall be sent by
certified mail, personal delivery or nationwide overnight courier to the
addresses hereinbefore designated, or such other addresses as may hereafter be
designated in writing by a party. Notice shall be deemed given and received on
the date of actual delivery to the address specified thereon.
20. Binding Agreement. This Agreement represents the entire agreement
among the parties hereto with respect to the matters described herein and is
binding upon and shall inure to the benefit of the parties hereto and their
legal representatives, successors and permitted assigns. This Agreement may not
be assigned and, except as stated herein, may not be altered or amended except
in writing executed by all of the parties hereto.
21. Counterparts. This Agreement may be executed in counterparts, all
of which, when taken together, shall constitute the entire Agreement.
23
22. Severability. The provisions of this Agreement shall be severable,
so that the unenforceability, validity or legality of any one provision shall
not affect the enforceability, validity or legality of the remaining provisions
hereof.
23. Joint Drafting. This Agreement shall be deemed to have been drafted
jointly by the parties hereto, and no inference or interpretation against any
party shall be made solely by virtue of such party allegedly having been the
draftsperson of this Agreement.
24. Reliance on Certificates. In rendering any opinion referred to
herein, counsel for the parties hereto may rely, as to any factual matters
involved in their respective opinions, on certificates of public officials and
of corporate and company officers, and on such other evidence as such counsel
may reasonably deem appropriate and, as to the matters governed by the laws of
jurisdictions other than the United States or the State of Delaware, an opinion
of local counsel in such other jurisdiction(s), which counsel shall be
satisfactory to the other parties in the exercise of their reasonable
discretion.
25. Public Announcements. All parties hereto agree that any public
announcement, press release or other public disclosure of the signing of this
Agreement shall be made jointly and only after all parties hereto have reviewed
and approved the language and timing of such disclosure, except as such
disclosure may be required pursuant to any legal obligation or order of any
court having proper jurisdiction over any of the parties hereto.
26. Consent. Whenever consent is required to be given by any of the
Companies to any of the other Companies hereunder in connection with any matter
contemplated hereby, such consent shall not be unreasonably withheld, delayed or
conditioned.
24
IN WITNESS WHEREOF, the parties hereto have made and executed this
Agreement as of the day and year first above written.
ESCAGENETICS CORPORATION,
a Delaware corporation
By:
--------------------------------------------
Name: Kevin R. Keating
Title: President
SHECOM ACQUISITION CORPORATION,
a Delaware corporation
By:
--------------------------------------------
Name: Phillip G. Trad
Title: President
SHECOM CORPORATION,
a Colorado corporation
By:
--------------------------------------------
Name: Phillip G. Trad
Title: President
25
Schedule A Shecom Schedule of Exceptions
Schedule B ESCAgenetics Schedule of Exceptions
Exhibit A Certificate of Merger
26
Exhibit A(2)
AMENDMENT
TO
AGREEMENT AND PLAN OF REORGANIZATION
Reference is hereby made to that certain Agreement and Plan of
Reorganization dated August 22, 2003 (the "Merger Agreement") by and among
ESCAgenetics Corporation, a Delaware corporation having its principal place of
business at 383 Inverness Parkway, Suite 100, Englewood, Colorado 80112
("ESCAgenetics"), Shecom Acquisition Corp., a Colorado corporation having its
principal place of business at 22951 La Palma Avenue, Yorba Linda, California
92887 ("Shecom Mergerco") and Shecom Corporation, a Colorado corporation having
its principal place of business at 22951 La Palma Avenue, Yorba Linda,
California 92887 ("Shecom"). All capitalized terms used herein, but not
otherwise defined herein, shall have the meanings ascribed to them in the Merger
Agreement.
WHEREAS, the parties to the Merger Agreement desire to amend certain
terms of the Merger Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter set forth, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Amendments. (A) Section 2.1 of the Merger Agreement is hereby
amended by deleting such section in its entirety and replacing it with the
following:
2.1 Organization; Capitalization. Shecom is, and on the effective date
of the Merger (the "Effective Date") will be, a duly organized and a validly
existing corporation in good standing under the laws of the State of Colorado.
Except as set forth below, there are no issued and outstanding securities of
Shecom other than the Shecom Shares, and on the Effective Date there will be
issued and outstanding only the 21,257,737 Shecom Shares, all of which are, and
on the Effective Date will be, duly authorized and validly issued. There are,
and on the Effective Date there will be, no outstanding rights, options or
warrants to purchase any equity interest in Shecom, and there will be no other
or any other issued or outstanding securities of any nature convertible into or
exercisable or exchangeable for equity of Shecom, other than the warrants to
purchase 2,200,000 Shecom Shares. Other than the foregoing, no person has any
right of first refusal, right of participation, or any similar right with
respect to dispositions of the Shares.
(B) Section 4.1 of the Merger Agreement is hereby amended by
deleting such section in its entirety and replacing it with the following:
4.1 Organization; Capitalization. ESCAgenetics is a duly organized and
validly existing corporation in good standing under the laws of the State of
Delaware, authorized to issue an aggregate of 100,000,000 shares of ESCAgenetics
Shares and no other shares of capital stock. There are as of the execution date
of this Amendment an aggregate of 1,000,000 ESCAgenetics Shares issued and
outstanding.
On the Effective Date, giving effect to the Merger and the issuance of the
19,823,438 Merger Shares (as hereinafter defined), there will except as set
forth below be issued and outstanding approximately 20,823,438 ESCAgenetics
Shares, all of which such issued and outstanding shares will be validly issued,
fully paid and non-assessable, and 2,015,619 ESCAgenetics Shares reserved for
issuance pursuant to Section 7.3 hereof, for an aggregate of approximately
21,875,057 ESCAgenetics Shares on a fully diluted basis.
On the Effective Date, there will be no other issued and outstanding shares of
capital stock of ESCAgenetics, except for the 2,125,000 ESCAgenetics Shares to
be issued to certain entities and/or individuals in connection with the Merger,
for an aggregate of approximately 25,000,057 ESCAgenetics Shares issued and
outstanding immediately subsequent to the Closing of the Merger and all
transaction and developments contemplated by the Merger Agreement, as amended
hereby.
Except as contemplated by this Agreement, on the Effective Date there will be no
issued or outstanding securities and no issued or outstanding options, warrants
or other rights, or commitments or agreements of any kind, contingent or
otherwise, to purchase or otherwise acquire ESCAgenetics Shares or any issued or
outstanding securities of any nature convertible into ESCAgenetics Shares.
There is no proxy or any other agreement, arrangement or understanding of any
kind authorized, effective or outstanding which restricts, limits or otherwise
affects the right to vote any ESCAgenetics Shares.
(C) Section 4.15 of the Merger Agreement is hereby deleted
in its entirety and replaced with the following:
4.15 Issuances of Securities. ESCAgenetics has not, except for the
Issued ESCAgenetics Shares, issued or committed itself to issue, and to the
Effective Date will not issue or commit itself to issue, any ESCAgenetics Shares
or any options, rights, warrants, or other securities convertible into or
exercisable for ESCAgenetics Shares, except as contemplated by this Agreement.
(D) Section 7.1 of the Merger Agreement is hereby deleted in
its entirety and replaced with the following::
7.1 ESCAgenetics Shares to be Issued. At and as of the Effective Time,
by virtue of the Merger and without any action on the part of the holder
thereof: (i) each outstanding share of common stock of Shecom, $.0001 par value
per share (the "Shecom Shares"), shall be converted into the right to receive
0.9325258146 shares of common stock of the Company, $.0001 par value per share
(the "ESCAgenetics Shares"); and the ESCAgenetics Shares issued upon such
conversion, being 19,823,438 shares in the aggregate, are referred to herein as
the "Merger Shares"), and (ii) each dissenting share shall be converted into the
right to receive payment from Shecom with respect thereto in accordance the law
of the State of Colorado. As a result of the foregoing, the Merger Shares shall
be allocated among the holders of the Shecom Shares on a pro rata basis (which
shall be amended by the Parties immediately prior to the Effective Time in order
to give effect to exercises, if any, of Outstanding Options (as defined below)
subsequent to the date hereof).
The ratio of 0.9325258146 ESCAgenetics Shares to one Shecom
Share is referred to herein as the "Conversion Ratio." The Conversion Ratio
equals the fraction (i) having a numerator equal to 21,875,000, and (ii) having
a denominator equal to 23,457,737, the aggregate number of currently issued and
outstanding Shecom Shares in addition to such Shecom Shares as would be issued
upon exercise of the Shecom Outstanding Warrants (as hereinafter defined). The
Conversion Ratio shall be subject to equitable adjustment in the event of any
stock split, stock dividend, reverse stock split, or other change in the number
of ESCAgenetics and Shecom Shares outstanding (other than in connection with the
exercise of the Outstanding Warrants).
(E) A new Section 7.2 shall be inserted to read as follows:
7.2 Exchange of Outstanding Warrants. Subject to the terms and
conditions set forth in this Agreement, at and as of the Effective Time, each of
the 2,200,000 outstanding warrants to acquire Shecom Shares set forth on Section
2.1 above (which shall, if necessary, be amended by the parties as of the
Effective Date) that remain outstanding as of the Effective Time (collectively
the "Shecom Outstanding Warrants"), shall be converted by ESCAgenetics into
warrants to acquire 2,051,619 ESCAgenetics Shares based on the Conversion Ratio
of 0.09325258146.
(F) A new Section 7.3 shall be inserted to read as follows:
7.3 ESCAgenetics Shares to be Reserved. Subject to the terms and
conditions set forth in this Agreement, at and after the Closing, ESCAgenetics
shall reserve such number of ESCAgenetics Shares as are required for issuance in
connection with the exercise of the Shecom Outstanding Warrants, including any
adjustments by reason of the anti-dilution provisions contained therein.
(F) Section 7.2 of the Merger Agreement is hereby deleted in
its entirety.
(G) Section 7.3 of the Merger Agreement is hereby renumbered
7.4.
(H) Section 14 of the Merger Agreement is hereby amended by
deleting therefrom the last sentence in its entirety.
Except for the specific changes provided for in this section, all terms
and conditions of the Merger Agreement shall remain and are in full force and
effect.
2. Governing Law. This Amendment shall be governed by and construed in.
accordance with the laws of the State of New York, without regard to principles
of conflicts of laws.
3. Miscellaneous. This Amendment shall be binding upon and inure to the
benefit of and be enforceable by the respective successors and assigns of the
parties hereto. This Agreement may be executed in any number of counterparts,
each of which shall be an original, but all of which together shall constitute
one instrument.
IN WITNESS WHEREOF, each of the following parties have caused this
Amendment to be duly executed as of the __th day of September 2003.
ESCAGENETICS CORPORATION,
a Delaware corporation
By:
------------------------------
Name: Kevin R. Keating
Title: President
SHECOM ACQUISITION CORPORATION,
a Colorado corporation
By:
------------------------------
Name: Kevin R. Keating
Title: President
SHECOM CORPORATION,
a Colorado corporation
By:
------------------------------
Name: Phillip G. Trad
Title: President
Exhibit B
CERTIFICATE OF AMENDMENT TO
THE RESTATED CERTIFICATE OF INCORPORATION OF ESCAGENETICS CORPORATION.
* * * * *
ESCAgenetics Corporation (the "Company"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Company has approved and its
Stockholders having a right to vote thereon have ratified a resolution duly
amending the Restated Certificate of Incorporation of the Company, as follows:
RESOLVED, that the stockholders consider and vote upon a proposal to
amend the Company's Restated Certificate of Incorporation changing its
name to Krystal Digital Corporation, and it further;
SECOND: That the amended article of the Restated Certificate of
Incorporation shall read as follows:
"FIRST: The name of the corporation is Krystal Digital Corporation"
THIRD: That a majority of the Company's Stockholders have approved the
amendment to the Restated Certificate of Incorporation (the "Amendment")
pursuant to Section 242 of the General Corporation Law of the State of Delaware
(the "GCL").
FOURTH: That the capital of the Company shall not be reduced under or
by reason of said Amendment.
IN WITNESS WHEREOF, the Company has caused this certificate to be
signed by Kevin R. Keating, its President, this __th day of October, 2003.
By:
------------------------------------------
Kevin R. Keating, President