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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
(X)---------------
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (D)OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
For the fiscal year ended OctoberFOR THE FISCAL YEAR ENDED DECEMBER 31, 20042005
OR
( )|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File No.:FOR THE TRANSITION PERIOD FROM _____ TO __________
COMMISSION FILE NO. 09081
CERTRON CORPORATION
(Exact name of registrant as specified in its charter)CYBRDI INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-2461404
(State or other jurisdiction of------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. Employer
incorporation or organization) Identification No.EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
401 Rosemont Avenue Frederick, MarylandROSEMONT AVE. FREDERICK, MD 21701
Address of principal executive office
1545 Sawtelle--------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (301) 644-3901
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Certron Corporation
11845 W. Olympic Boulevard, Suite 12,1080, Los Angeles, CACalifornia 90064
(Prior year end October 31)
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Former Address of principal executive office (Zip Code)
(301) 644-3901
Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par valuename, former address and former fiscal year,
(if changed since last report)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s)reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No [X]
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act Yes[ ] No[X]
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act Yes[ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act 0f 1934
during the preceding 12 months (of for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes[ ] No[X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendmentamendments to
this Form 10-K [ ].10-k.
Indicate by a check mark whether the registrant is ana large accelerated filer (as
defined in Rule 12b-2 of the Exchange Act Rule 12b-2)Act). Yes [ ] No [X]
Indicate by a check mark whether the registrant is a shell Company (as defined
by Rule 12b-2 of the Act). Yes [ ] No [X]
NoAPPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date:
50,456,567 shares of Common Stock, without par value, as of May 31, 2006
The aggregate market value of registrant'sthe voting and none-votingnon-voting common equity held by
non-affiliates computed by reference to, as of JanuaryMay 31, 2005,2006 was $2,805,232 based
upon the averageon a closing bid and
asked price of $0.08 and a total of 35,065,404 shares held by
non-affiliates
APPLICALBE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
(PROCEEDINGS DURING THE PRECEDING FIVE YEARS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS
AND REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT.
YES [ ] NO [ ] NOT APPLICABLE [X]
DOCUMENTS INCORPORATED BY REFERENCE:
None
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1 Description of Business 1
ITEM 2 Description of Property 9
ITEM 3 Legal Proceedings 9
ITEM 4 Submission of matters to a vote of security holders 9
PART II
ITEM 5 Market For Common Equity and Related Stockholder Matters 10
ITEM 6 Selected Financial Data 11
ITEM 7 Management Discussion and Analysis 12
ITEM 8 Financial Statements 18
ITEM 9A Changes In And Disagreements With Accountants Accounting
And Financial Disclosures 18
ITEM 9B Controls and Procedures 19
ITEM 9C Other Information 19
PART III
ITEM 10 Directors, Executive Officers, Promoters And Control
Persons, Compliance With Section 16(A) Of The
Exchange Act. 20
ITEM 11 Executive Compensation 22
ITEM 12 Certain Relationships and Related Transaction 24
ITEM 13 Exhibits 24
ITEM 14 Principal Accounting Fees and Services 25
This annual report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These include
statements about our expectations, beliefs, intentions or strategies for the
future, which we indicate by words or phrases such stock as reported by Reuters Limited for"anticipate," "expect,"
"intend," "plan," "will," "we believe," "our company believes," "management
believes" and similar language. These forward-looking statements are based on
our current expectations and are subject to certain risks, uncertainties and
assumptions, including those set forth in the discussion under Item 1.
"Description of Business" and Item 7. "Management's Discussion and Analysis",
including under the heading "- Risk Factors" under Item 1. Our actual results
may differ materially from results anticipated in these forward-looking
statements. We base our forward-looking statements on information currently
available to us, and we assume no obligation to update them. In addition, our
historical financial performance is not necessarily indicative of the results
that day, was
$811,920.
Asmay be expected in the future and we believe such comparisons cannot be
relied upon as indicators of January 31,future performance.
Certain financial information included in this annual report has been
derived from data originally prepared in Renminbi (RMB), the currency of the
People's Republic of China ("China" or "PRC"). For purposes of this annual
report, conversion rates of US$1.00 to RMB 8.0702 and RMB 8.1936 were utilized
to convert 2005 registrant had outstanding 3,128,306 shares of its
common stock,amounts. There is no par value, its only authorized class of common stock.assurance that RMB amounts could have been
or could be converted into US dollars at that rate.
PART I
ITEM 1. BUSINESS.
Certron Corporation is referred to herein as the "Company"DESCRIPTION OF BUSINESS
HISTORY
Our company, Cybrdi, Inc. ("we", "us", "our", "Cybrdi" or "Certron" and such
reference includes both the corporation and its subsidiary unless otherwise
indicated. Certron"our company"), was
incorporated under the laws of the State of California in 1966. Certron'sOn April 2, 2005
we filed amendments to the articles of incorporation to change our name from
Certron Corporation to Cybrdi, Inc. The amendment was approved by the required
vote of shareholders in accordance with Section 902 and Section 903 of the
California Corporations Code.
Until around June 2004, the Company's business in fiscal 2004 consisted primarily of the
distribution of magnetic media products, primarily blank audio and video
cassettes. Prior to
fiscal 2002, the Company was also engaged in the contract assembly of products
for others in Mexicali, Mexico.
On September 7, 2001, the Company closed its Mexicali, Mexico plant and its
contract assembly operations which were conducted at that facility. This closure
was in response to a decline in the market for micro cassettes which also had
been assembled at the Mexicali, Mexico facility, the loss of an existing
contract assembly customer and the negative outlook for the retention of its
then sole remaining contract assembly customer and additional contract assembly
business.
As described in Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Results of Operations," during fiscal 2004,
dueDue to continuing intense price competition and technological changes
in the marketplace for its products, the Company lost its remaining significant
customers and disposed of or wrote off its remaining inventory. As a result of
these occurrences, the Company concluded that its audio and videotape businesses
were no longer viable and some of its product lines were obsolete and the
Company placed its emphasis on attempting to find a buyer for the Company.
The following table sets forth, for the years ended October 31, 2004, 2003, and
2002, the amounts of net sales and operating profit before general corporate
expense and interest expense, together with identifiable assets at October 31,
2004, 2003 and 2002 attributable to each of the Company's industry segments, its
magnetic media products segment and its contract assembly segment which is shown
as discontinued operations.
Year ended October 31
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2004 2003 2002
($ in Thousands)
Net sales to unaffiliated customers:
Magnetic Media products $62 $300 $750
Operating profit (loss) before general
corporate expense:
Magnetic Media products $62 ($53) $ 78
Identifiable assets:
Magnetic Media products -- $25 $346
2
The Company's magnetic media products consist primarily of blank audio and video
cassettes. All video tape and most audio tape and related plastics were procured
by the Company primarily from offshore sources. During the fiscal years ended
October 31, 2004, 2003 and 2002, net sales of the Company's magnetic media
products were as follows:
Net Sales
(In Thousands)
Product 2004 2003 2002
------- ---- ---- ----
Audio magnetic tape products $54 $255 $621
Video Cassettes 8 45 129
---- ---- ----
$62 $300 $750
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Over the past several years, in an attempt to increase its sales and operating
profits, the Company has attempted without success to acquire other businesses
or product lines. More recently, the Company has attempted to maximize
shareholder value through the sale of the Company.
On or about August 3, 2004, Chao Ying Biotechnology Research & Development
Incorporated,("Cybrdi")contacted the Company regarding the possible acquisition
of the Company in response to a blind advertisement placed by the Company.
Following several meetings and conferences, on August 16,In November 2004, the Company, announced that the parties had reached an agreement in principle concerning the
possible acquisition by the Company of the outstanding capital stock of Cybrdi
in exchange for shares of the Company's Common Stock that would aggregate
approximately 93.8% of its Common Stock outstanding after the Transaction. A
form 8-K relating thereto was filed by the Company on August 17, 2004. The
parties then each conducted due diligence on the other and negotiated the terms
of the Agreement and Plan of Merger.
Subsequent Events
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The Agreement and Plan of Merger (the "Agreement") was executed between the
Company,through Certron Acquisition Corp., a newly formed
Maryland corporation and a wholly-owned subsidiary of the Company ("Acquisition
Sub"), and Cybrdi, Inc., a Maryland
corporation, on November 12, 2004 relating to the acquisition by the Company of
all of the outstanding capital stock of Cybrdi, Inc. in exchange for shares of
common stock of Certron that would aggregate approximately 93.8% of the issued
and outstanding common stock of Certron immediately after the transaction.
Pursuant to the terms of the Agreement, at the effective time of the proposed
merger, (a) Acquisition Sub will be merged with and into Cybrdi, Inc., with
Cybrdi, Inc. being the surviving corporation, (b) the common stock of Cybrdi
will be cancelled and converted into the right to receive shares of the common
stock of Registrant at an exchange ratio of 1.566641609 (subject to adjustment
as provided in the Agreement), and (c) each share of the common stock of
Acquisition Sub will be converted in to and become one share of the common stock
of Cybrdi resulting in Cybrdi becoming a wholly-owned subsidiary of Registrant.
Based on the foregoing formula, the Company will issue to the Cybrdi
shareholders up to 47,328,263 shares of common stock.
The Agreement was approved by the holders of acquired all of the issued and outstanding shares of common stock of
Cybrdi, Inc., a privately held company incorporated in the State of Maryland
("Cybrdi Maryland"). The Company acquired all of the issued and at a special meetingoutstanding
shares of common stock of Cybrdi Maryland in exchange for 47,328,263 shares of
common stock of the Company. Subsequent to the merger, the former shareholders
of Cybrdi Maryland own approximately 93.8% of the outstanding shares of the
Company's shareholders
held February 2, 2005. The number of shares voting in favorcommon stock.
With the completion of the Agreement was
sufficient for approval. The Articlesmerger, all the magnetic media distribution business
activities have ceased and Cybrdi's focus is the field of Merger were filed with the Maryland
Secretary of State on February 10, 2005. Concurrent with the filing of the
Articles of Merger, all then existing officers and directors tendered their
resignation and Yanbiao Bai was appointed as our Chairman and Chief Executive
Officer.
3
Cybrdi, Inc. (Chao Ying Biotechnology Research & Development Incorporated) is a
biogenetics
commercialization, company specializing in the rapid introduction of tissue microarray
products and services in both the international and Chinese markets.
CybrdiMost of our activities are conducted through our 80% equity ownership in China
Shaanxi Chaoying Bio-technology Co., Ltd. ("Chaoying Biotech") a sino-foreign
equity joint venture established in July 2000 in the People's Republic of China.
Our plan is a Maryland corporationto capitalize China's huge population with its principal operations located
in China. Cybrdi aims to take advantage of China's abundant scientific talent,
low wage rates, less stringent biogenetic regulation, and the huge genetic
population as it introduces its growing list ofour quality tissue
microarray and other products. UponWe have also been exploring business
opportunities that could leverage our existing sales distribution channel and
relationship with our affiliated companies.
Our revenue decreased by 6.9% from $1,533,043 in 2004 to $1,427,799 in 2005, and
our net income decreased from $488,833 in 2004 to $5,128 in 2005. The decrease
in net income was mainly attributable to the increase in other non- operating
expenses associated with the merger with Cybrdi Maryland and further discussion
of the Company operating results should refer to Item 6. "Management's
Discussion and Analysis".
BUSINESS OVERVIEW
With the completion of the merger, allour former officers and directors tendered
their resignation and were replaced by officers and directors designated by
Cybrdi, Maryland. Our new officers and directors determined to discontinue
Certron's prior business operations, the sale of the magnetic media distribution
business
activities will ceasetapes and the sole business will be conducted through Cybrdi.
Cybrdi is a biogenetics commercialization company specializing in the rapid
introduction of tissue microarray products, and services in bothpursue exclusively the internationaldevelopment and Chinese markets. Tissue chips, also called microtissue arrays,
represent a newly developed technology providing high-throughput molecular
profiling and parallel analysisexpansion of
biological and molecular characteristics for
hundreds of pathologically controlled tissue specimens. Tissue arrays can
provide for the rapid and cost-effective localization and evaluation of
proteins, RNA, or DNA molecules, which is particularly useful for functioning
genomic studies. Cybrdi manufactures both human and animal tissue microarrays
for a wide variety of scientific uses, including drug discovery and development
purposes.
Cybrdi aims to take advantage of China's abundant scientific talent, low wage
rates, less stringent biogenetic regulation, and the huge genetic population as
it introduces its growing list of tissue microarray products.Maryland. Most of Cybrdi's activities are conducted through its 80%
equity ownership in China Shaanxi ShaoyingChaoying Bio-technology Co., Ltd. ("Chaoying
Biotech") a sino-foreign equity joint venture established in July 2000 in the
People's Republic of China. Cybrdi became affiliated with Chaoying Biotech in
March 2003. The Chaoying Biotech joint venture agreement provides that the joint venture is
to be terminatedhas a term of 15 years following its formulation.years.
The term of joint venture may be extended upon the mutual consent of the
parties.
Alternatively, subjectWe focus on biogenetics commercialization and healthcare product applications.
Our primary business includes sales of tissue microarray products and services.
Tissue chips, also called microtissue arrays, represent a newly developed
technology providing high-throughput molecular profiling and parallel analysis
of biological and molecular characteristics for hundreds of pathologically
controlled tissue specimens. Tissue arrays can provide rapid and cost-effective
localization and evaluation of proteins, RNA, or DNA molecules, which is
particularly useful for functioning genomic studies. Cybrdi manufactures both
human and animal tissue microarray for a wide variety of scientific uses,
including drug discovery and development purposes.
Our principal operations are located in Shaanxi China. Our Maryland company
focuses primarily on business development of tissue microarrays in North America
and Europe.
1
THE EMPLOYEES
As of December 31, 2005, we had approximately 51 full-time employees (50
employees in China, and 1 in Maryland).
THE PRODUCTS
TISSUE MICROARRAYS (TMAS)
We manufacture both human and animal tissue microarrays for a wide variety of
scientific uses, including drug discovery and development purposes. TMA
technology can survey hundreds or even thousands of clinical specimens in a
single experiment utilizing common probes, including DNA, RNA, peptide, protein
and antibody probes. This is an efficient, in vivo approach for the validation
of gene discoveries and identification of potential molecules for diagnosis and
therapy.
Chaoying Biotech owns a 18,000 square foot, approximately 2000 m (2), in
Shaanxi, China which includes a manufacturing facility and a pathology and
molecule laboratory. We have established the standard tissue chip production,
processing procedure and quality control system in our facility. We have also
established an electronic management system to tax-relatedeffectively manage biologic
information databank.
We currently offer a wide variety of tissue array products and services on the
commercial market, including approximately (at present) 122 different disease
and 84 different organ types of both human and animal varieties. These tissues
are prepared in a variety of array panels of differing formats and tissue
densities to service the full range of scientific research interests. New
products are being added on a monthly basis per customer demands.
TMA chips can be broadly applied in both basic and clinical research conducted
by the academic, medical, pharmaceutical and biogenetic research communities.
Our customers include pharmaceutical companies, biotechnology companies and
research institutes, such as Merck, Genentech, Chiron, Astrozenic, Wyeth, NIH
and Cancer Centers.
TECHNICAL SERVICES
Complementing the production and marketing of tissue chips, we have launched an
in-house technical services platform to perform customized research according to
customer specifications. By outsourcing experimentation to us, international
research labs, (particularly those in high labor and material cost markets) can
incur substantial cost savings. Frequently requested services include the
standard immunohisto chemistry (IHC) and in-situ-hybridization (ISH) services
needed to locate proteins or genes of interest using customer-supplied probes.
These probes are applied to select normal, diseased and marginal tissue from our
tissue array bank. The results are presented as publishable, detailed pathology
reports including high resolution digital photographs. Through virtual
cybernetic bio-services (vCBS), these results can be sent via the Internet to
the customer the day after the probe is received by our labs. Our technical
services currently serves our Chinese customers.
MARKET OPPORTUNITIES AND COMPETITION
CHINA BIOTECH TRENDS
Biotechnology research has been supported by the Chinese government; becoming a
designated key industry in China's scientific development plan in 1986. However,
most biotech investment has been made in the areas of basic research in
government funded laboratories or government linked companies focused on major
scientific discoveries in gene function . Cybrdi has not received any funding
from the Chinese government.
MARKETING STRATEGIES
China Market: By leveraging existing hospital relationships and Shaanxi
Chaoying's, marketing channels, we have been successful in marketing TMA
products, medical care products and other foreign incentivesservices within the China market. We
have two primary regional focuses in China, the joint venture may become
a subsidiarynorthern provinces which include
the cities of Cybrdi.
Competition
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In all areasBeijing, Tian Jing and Hebei Province , and the eastern provinces
which include the cities of Certron's magnetic media business, competition has been activeShanghai, Zhejiang Province and intense. The principal methodsShangdong Province.
We market and intend to market our product and services through our own direct
sales efforts and by utilizing independent distributors.
2
International Marking Strategy: By leveraging our know-how and infrastructure of
competitionChina operations, we are actively expanding international distribution channels
through out the North American, European and other Asian research markets to
meet untapped demand for TMA products and services. We currently have
distributors in the magnetic media market
involveUS, Canada, Germany, Italy, Belgium, Japan and Taiwan.
COMPETITION
We believe that our TMA products have pricing advantages over our competitors.
Because of the high costs and strict patient information protocol associated
with tissue collection in most developed economies, competing products of
similar quality have a higher price than our products. Furthermore, established
genomics firms such as Ambion and Clinomics outsource most TMA production yet
are unable to offer the wide product series variety demanded by the global
research community. This presents growth opportunities for us under either
in-house and/or through OEM programs.
At the other end of the price spectrum, low-priced tissue chips have had either
insufficient quality or inadequate density. The production of qualified TMAs
requires expertise in several scientific areas including pathology, immunology,
molecular and advertisement,biology. Producers of TMA must also meet in hygienic standards,
quality controls, and special materials processing and shipping procedures not
only in the country of manufacture but for usage in the country of ultimate
destination. Because of the high cost of reliable commercial TMAs, and,
conversely, the low quality of low cost TMAs, many research institutions had
previously established their own production teams for in-house research needs
prior to the introduction of our TMAs.
INTELLECTUAL PROPERTY
We regard our service marks, trademarks, trade secrets, patents and similar
intellectual property as critical to our success. We rely on patent, trademark
and trade secret law, as well as confidentiality and license agreements with
certain of our employees, customers and others to protect our proprietary
rights. Currently we own four invention patents:
- ----------------------------------------------- --------------------------- ------------------------------
Name of Patent Number of Patent Awarded Time
- ----------------------------------------------- --------------------------- ------------------------------
Tissue Microarrays (TMAs) ZL01128783.7 June 1st 2005
- ----------------------------------------------- --------------------------- ------------------------------
A way to test content of special antibody in ZL01131756.6 December 15th 2004
body fluid in a certain part
- ----------------------------------------------- --------------------------- ------------------------------
Diabetes autoimmune antibody test kit ZL02145561.9 November 17th 2004
multiplex Chip, equipment and method
- ----------------------------------------------- --------------------------- ------------------------------
Diabetes immunization antibody testing
protein chips and its own preparation, ZL02145535.X October 27th 2004
detection methods
- ----------------------------------------------- --------------------------- ------------------------------
3
RESEARCH AND DEVELOPMENT
Our strategy is to incrementally advance from our current technological base
into complementary, rapidly commercialized products and services. New product
development can represent an expansion of existing TMA technical knowledge or a
new commercial application of current knowledge.
We currently perform all of our own research and development activities. We have
our own research; development and laboratory facilities located at our Shanxi
facility and retain our own professional research and development team. We may
enter into agreements for research and development activities with third parties
in the future.
We will continue enhancing R&D in TMAs and technical service by expanding our
virtual tissue array data bank (vTMAB) to meet expected growing demand from
various research institutions and medical universities and colleges. Our
strategic focuses in the near future also include the biotechnology cosmetics
and healthcare products, and health diagnosis for obesity and skin disease.
AVAILABLE INFORMATION
Information regarding the Company's annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and any amendments to these
reports, are available to the public from the SEC's website at
http://www.sec.gov as soon as reasonably practicable after the Company
electronically files such reports with the promotional priced audio tape
productsSecurities and video cassettes being the most price sensitive. SinceExchange Commission.
Any document that the Company hasfiles with the SEC may also be read and copied at
the SEC's public reference room. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room. We will also supply this
information to any shareholder requesting copies of any of the foregoing free of
charge. Shareholders should contact our office at (301)644-3901 if they desire
copies of any of our filings with the Securities and Exchange Commission.
RISK FACTORS
You should consider each of the following risk factors and any other information
set forth in this Form 10-K and our other reports that we have filed with the
Securities and Exchange Commission ("SEC"), including the Company's financial
statements and related notes, in evaluating the Company's business and
prospects. The risks and uncertainties described below are not spent substantial amounts in consumer advertisingthe only ones
that impact on the Company's operations and business. Additional risks and
uncertainties not presently known to the Company, or that the Company currently
considers immaterial, may also impair its business or operations. If any of its high
performance blank tape products, it has been at a competitive disadvantage in
these areasthe
following risks actually occur, our business and has had to charge a lower per unit price than some competitors
selling comparable products having strong brand recognition.financial condition, results or
prospects could be harmed.
RISKS ASSOCIATED WITH THE COMPANY'S PROSPECTIVE BUSINESS AND OPERATIONS
The Company has experienced extensivea limited history with respect to the manufacture, sale and
distribution of TMAs. Medical technology is constantly evolving and there can be
no assurance that our TMAa will keep pace with medical breakthroughs. . The
Company's ability to achieve and maintain profitability and positive cash flow
over time will be dependent upon, among other things, its ability to (i)
continue to develop new TMA products and market these products both in China and
other developing companies and (ii) its ability to evaluate the merits of
pursuing the beauty supply business and its success in developing franchise
opportunities despite no prior experience.
OUR BUSINESS IS HEAVILY DEPENDENT ON THE ECONOMIC GROWTH OF CHINA
At the current time, our business is heavily dependent on the economy and
developing middle and upper class in China. Should the country suffer an
economic downturn or should the government impose restrictions on the growth of
private companies and the ability of a large consumer class to earn money in the
private sector our business will suffer. To the extent that any of the foregoing
should occur, our revenues will decline significantly.
4
WE MAY NOT BE ABLE TO SUPPORT OUR OPERATIONS THROUGH INTERNAL GROWTH
In order to fully implement our business plan, we may require additional
financing. Financing may be in the form of traditional bank financing or through
the sale of our common stock. There can be no assurance that we will be able to
secure adequate bank financing or if available, will be on terms acceptable to
the Company. If we attempt to sell shares of our common stock, existing
shareholders will face dilution and likely a reduction in the price competition from Far East manufacturersof our
common stock. There are currently no financing arrangements in place.
OUR BUSINESS MAY BE AFFECTED BY UNEXPECTED CHANGES IN REGULATORY REQUIREMENTS IN
THE JURISDICTIONS IN WHICH WE OPERATE.
Development and distributorsdistribution of low-cost audio cassettesour TMA's is subject to regulation both where we
manufacture and from other manufacturerswhere we sell the products. We believe that we are currently in
compliance with applicable governmental rules and distributors for sales of video cassettes, which madeprocedures. However, there can
be no assurance that changes in the regulatory environment will not make it
difficult for us to comply or result in a substantial increase in our operating
costs and a resulting decline in our margins.
THERE IS UNCERTAINTY AS TO OUR ABILITY TO CONTROL COSTS AND EXPENSES.
If our business grows, costs will increase. Management cannot accurately project
or give any assurance, with respect to its ability to control development and
operating costs and/or expenses in the future. Consequently, even if the Company
is successful in expanding its operations (of which there can be no assurance),
our management still may not be able to control costs and expenses adequately,
and therefore such expansion may result in operating losses.
COMPETITION
Our market is highly competitive and some of our competitors may have greater
resources than us. These competitors may be able to respond more quickly to new
or emerging technologies and changes in customer requirements and devote greater
resources to develop, promote and sell their services. If this should occur,
revenues may decline and we will likely lose market share. IF WE DO NOT MANAGE
OUR GROWTH, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS EFFECTIVELY.
We expect significant expansion will be required to address potential growth in
our customer base, the breadth of our service offerings, and other
opportunities. This expansion could strain our management, operations, systems
and financial resources. To manage any future growth of our operations and
personnel, we must improve and effectively utilize operational, management,
marketing and financial systems and successfully recruit, hire, train and manage
personnel and maintain prices. See "Item 7. Management's Discussionclose coordination among our technical, finance,
marketing, sales and Analysisrecruitment staffs. We also will need to manage an
increasing number of Financial Conditioncomplex relationships with customers, strategic partners,
advertisers and Resultsother third parties. Our failure to manage growth could disrupt
our operations and ultimately prevent us from generating the revenue we expect.
UNANTICPATED OBSTACLES TO EXECUTION OF OUR BUSINESS PLAN.
The Company's business plans may change significantly. Many of Operation".the Company's
potential business endeavors are capital intensive and may be subject to
statutory or regulatory requirements. Management believes that the Company's
chosen activities and strategies are achievable in light of current economic and
legal conditions with the skills, background, and knowledge of the Company's
principals and advisors. Management reserves the right to make significant
modifications to the Company's stated strategies depending on future events.
5
CERTAIN POLITICAL AND ECONOMIC CONSIDERATIONS RELATING TO THE PRC COULD
ADVERSELY AFFECT OUR COMPANY.
The releasegovernment of digital productsthe People's Republic of China has had anwelcomed foreign investment
and the expansion of business opportunities in the private sector. There can be
no assurance that this policy will continue or alternatively, that this policy
will not be modified to make it more restrictive to transfer funds from China to
the United States or any other country. Moreover, political instability could
adversely impact our ability to fully implement our business plan as political
instability would likely lead to a downturn in the Chinese economy.
CURRENCY EXCHANGE
Changes in the exchange rate of the Chinese yuan renminbi (CYN) may adversely
impact our profitability. If the CYN declines with respect to the U. S. dollar,
our profitability will be adversely affected.
RESEARCAH AND DEVELOPMENT CAN BE COSTLY
Medical advances are taking place at a rapid pace. In order to stay competitive,
and bring state of the art TMAs to the market at competitive prices will require
us to continue to devote significant resources to research and development.
There can be no assurance that we will have sufficient cash flow to make this
commitment on a going forward basis.
RELIANCE ON CURRENT MANAGEMENT
We are reliant on our current management team to help us fully implement our
business plan. The loss of any of their services could have a material adverse
impact on the implementation of our business plan and our future growth. We do
not carry any type of key man insurance. During this past year, several of our
directors resigned for personal reasons. These directors were not directly
involved with our operations and their loss has not adversely impacted our
operations. We have not yet filled these vacancies on our Board of Directors.
The Company's magnetic mediabusiness may experience periods of rapid growth that will place
significant demands on its managerial, operational and financial resources. In
order to manage this possible growth, the Company must continue to improve and
expand its management, operational and financial systems and controls. The
Company will need to expand, train and manage its employee base. No assurances
can be given that the Company will be able to timely and effectively meet such
demands.
CONTROL BY PRINCIPAL SHAREHOLDERS, OFFICERS AND DIRECTORS.
Our management, either directly or indirectly own a majority of our issued and
outstanding common stock. As a result, they will be able to elect members to our
Board of Directors . This will enable current management to retain control
regardless of their performance. In addition, minority shareholders will have
little input into the direction of the Company.
WE MAY HAVE DIFFICULTY ATTRACTING TALENT IN FOREIGN COUNTRIES.
Our research and development program requires us to recruit highly skilled
personnel. There can be no assurance that we will be able to attract these
personnel for work either in the United States or China. If we cannot attract
skilled personnel, our operations will likely suffer and any competitive edge
that we have in the marketplace will quickly erode.
6
CORPORATE GOVERNANCE MATTERS
We have not voluntarily implemented various corporate governance measures in the
absence of which, shareholders may have more limited protections against
interested director transactions, conflicts of interest and similar matters.
Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has
resulted in the adoption of various corporate governance measures designed to
promote the integrity of the corporate management and the securities markets.
Some of these measures have been adopted in response to legal requirements.
Others have been adopted by companies in response to the requirements of
national securities exchanges, such as the NYSE or The Nasdaq Stock Market, on
which their securities are listed. Among the corporate governance measures that
are required under the rules of national securities exchanges and Nasdaq are
those that address board of directors' independence, audit committee oversight,
and the adoption of a code of ethics. While our board of directors has adopted a
Code of Ethics and Business Conduct, we have not yet adopted any of these other
corporate governance measures and, since our securities are not yet listed on a
national securities exchange or Nasdaq, we are not required to do so. It is
possible that if we were to adopt some or all of these corporate governance
measures, shareholders would benefit from somewhat greater assurances that
internal corporate decisions were being made by disinterested directors and that
policies had been implemented to define responsible conduct. For example, in the
absence of audit, nominating and compensation committees comprised of at least a
majority of independent directors, decisions concerning matters such as
compensation packages to our senior officers and recommendations for director
nominees may be made by a majority of directors who have an interest in the
outcome of the matters being decided. Prospective investors should bear in mind
our current lack of corporate governance measures in formulating their
investment decisions.
We may be exposed to potential risks relating to our internal controls over
financial reporting and our ability to have those controls attested to by our
independent auditors.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"), the
Securities and Exchange Commission adopted rules requiring public companies to
include a report of management on the company's internal controls over financial
reporting in their annual reports. In addition, the independent registered
public accounting firm auditing a company's financial statements must also
attest to and report on management's assessment of the effectiveness of the
company's internal controls over financial reporting as well as the operating
effectiveness of the company's internal controls.
7
While we expect to expend significant resources in developing the necessary
documentation and testing procedures required by SOX 404, there is a risk that
we will not comply with all of the requirements imposed thereby. At present,
there is no precedent available with which to measure compliance adequacy.
Accordingly, there can be no positive assurance that we will receive a positive
attestation from our independent auditors. In the event we identify significant
deficiencies or material weaknesses in our internal controls that we cannot
remediate in a timely manner or we are unable to receive a positive attestation
from our independent auditors with respect to our internal controls, investors
and others may lose confidence in the reliability of our financial statements
and our ability to obtain equity or debt financing could suffer.
Risks Related to the Company's Common Stock
The Company does not expect to pay dividends in the foreseeable future.
The Company has never paid cash dividends on its common stock and has no plans
to do so in the foreseeable future. The Company intends to retain earnings, if
any, to develop and expand its business.
"Penny stock" rules may make buying or selling the common stock difficult and
severely limit their market and liquidity.
Trading in the Company's common stock is subject to certain regulations adopted
by the SEC commonly known as the "Penny Stock Rules". The Company's common stock
qualifies as penny stock and is covered by Section 15(g) of the Securities and
Exchange Act of 1934, as amended (the "1934 Act"), which imposes additional
sales practice requirements on broker/dealers who sell the Company's common
stock in the market. The "Penny Stock" rules govern how broker/dealers can deal
with their clients and operations.
Employees
- ---------
At January 1, 2005, Certron employed five full"penny stock". For sales of the Company's common stock,
the broker/dealer must make a special suitability determination and part time peoplereceive from
clients a written agreement prior to making a sale. The additional burdens
imposed upon broker/dealers by the "penny stock" rules may discourage
broker/dealers from effecting transactions in the Company's common stock, which
could severely limit its market price and liquidity. This could prevent
investors from reselling Echo common stock and may cause the price of the common
stock to decline.
Although publicly traded, the Company's common stock has substantially less
liquidity than the average trading market for a stock quoted on other national
exchanges, and our price may fluctuate dramatically in the future.
Our Common Stock is currently quoted on the Pink Sheets. Our Common Stock was
previously listed for trading on the Over-the-Counter Electronic Bulletin Board.
The trading market in the common stock has substantially less liquidity than the
average trading market for companies quoted on other national stock exchanges. A
public trading market having the desired characteristics of depth, liquidity and
orderliness depends on the presence in the marketplace of willing buyers and
sellers of our common stock at its
facility at 1545 Sawtelle Blvd., Los Angeles, California.
4any given time. This presence depends on the
individual decisions of investors and general economic and market conditions
over which we have no control. Due to limited trading volume, the market price
of the Company's common stock may fluctuate significantly in the future, and
these fluctuations may be unrelated to the Company's performance. General market
price declines or overall market volatility in the future could adversely affect
the price of the Company's common stock, and the current market price may not be
indicative of future market prices.
8
ITEM 2. PROPERTIES.DESCRIPTION OF PROPERTY
Our operations in the United States are located at 401 Rosemont Avenue FITCI
Frederick, MD 21701 where we lease approximately 2,000 square feet of space from
FITC a non-affiliated party. Our annual rental payment is $26,160 payable in
monthly increments of $2,180. The principal facilitieslease is on a month-by-month basis. If we are
unable to extend this lease, we do not anticipate any difficulties in locating
office space to meet our operational needs.
Our operations in the People's Republic of China are located at the Chaoying
Workshop, Third Floor, Changyanbu, Private-owned industrial zone where we use
approximately 18,000 square feet (2,000 square meters) of space. From inception
through December 31, 2005, a related party, Shaanxi Chaoying Beauty & Cosmetics
Group Co, Inc., provided free office space and utilities to the Company's
subsidiary in PRC. During the years ended December 31, 2005, 2004, and 2003, the
Company arerecognized $8,700 each year as follows:
Approx. Area Approx.
Location Sq. ft. Lease Expires annual rent Principal use
- -------- ------------ ------------- ----------- -------------
11845 W. Olympic Blvd 1,543 10-31-04 (1) $29,000 Administration
Los Angeles, CA
1545 Sawtelle Blvd. 940 monthexpenses for these contribution items
with an offsetting increase in additional paid-in capital. This arrangement
terminated on December 31, 2005. We believe that this arrangement is comparable
to month(1) $12,000 Administration
Los Angeles, CA
1600 So. Broadway 750 monthwhat we would pay had we leased similar space from a non-affiliated entity.
The facility is sufficient for our current operations. Should our operations
expand and we need to month(1) $ 5,400 Warehouse and
1620 So. Broadway packaging
Los Angeles, CA
- ------------
(1) 1600 So. Broadway, 1620 So. Broadway and 1545 Sawtelle Blvd. arelocate additional rental properties, we do not anticipate
any problems in securing additional leased from
Louart Corporation, a principal stockholder of Certron. 11845 W. Olympic
Boulevard Los Angeles California is leased from an unrelated party.
The Company believes that its facilities are maintained in satisfactory
operating conditions and are adequate for its needs.space.
ITEM 3. LEGAL PROCEEDINGS.PROCEEDINGS
There are no material pending legal proceedings to which the Company iswe are a party. The Company wasWe were
notified by a letter dated June 2, 2000 received June 6, 2000 that the Companywe may have a
potential liability from waste disposal in the Casmalia Disposal Site at Santa
Barbara County, California. The Company wasWe were given a choice of either signing an
agreement that would toll the statute of limitations for eighteen (18) months in
order to allow the Companyus to resolve any liability with the government without incurring
costs associated with being named a defendant in a lawsuit, or becoming an
immediate defendant in a lawsuit. The CompanyWe signed the tolling agreement. On November
20, 2001, the tolling agreement was extended for an additional 18 months. On May
20, 2003 the tolling agreement was again extended for an additional 18 months
and on November 24, 2004 the tolling agreement was again extended for additional
18 months. On June 29, 2004, the Companywe received a proposed settlement from the EPA in
the amount of $21,131. The Company isWe are waiting for communication from the government
concerning payment of the proposed settlement. As of OctoberDecember 31, 2004, the
Company has2005, we have
accrued a sufficient amount to cover any potential liabilities from this matter.
The Company received a judgment against a former client of the Certron Mexicali
operation on February 9, 2004 in the amount of $19,300. The judgment was paid
over a course of six months and the Company has received the full amount as of
October 31, 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter wasThere were no matters submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation of proxies
or otherwise.
5report.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND
ISSUER PURCHASES OF EQUITY SECURITIES.
TheOur current stock symbol is "CYDI.PK". Our common stock ofwas previously quoted on
the Company isOver-the-Counter-Bulletin Board. ("OTCBB"). Prior to our merger with Cybrdi
we traded inon the NASDAQ Bulletin BoardOTCBB under the symbol CRTN."CRTN". Following our acquisition of
Cybrdi, Inc., we requested a symbol change and were assigned CYDI.
The following table showssets forth, for the periods indicated, the range of high and
low bid quotations for suchour common stock for each fiscal quarter duringas quoted on the fiscal years ended October 31, 2003OTCBB and October 31, 2004 as furnished by Bloomberg. Thesethe Pink
Sheets. The reported bid quotations reflect inter-dealer prices without retail
mark-up, mark-down or commission, and may
not necessarily represent actual transactions.
Fiscal period High Low
------------- ---- ---
2003
----
First quarter .12 .12
Second quarter .11 .11
Third quarter .12 .12
Fourth quarter .11 .11
2004
----
First quarter .45 .11
Second quarter .40 .11
Third quarter .30 .12
Fourth quarter .35 .12
As of January 31, 2005, the approximate number of holders of record of the
Company's Common Stock was 1,311. The Company has never paid a cash dividend on
its Common Stock. The high and the low bid price of the company's common stock
on January 31, 2005 was $0.58 and $0.41 with a close of $0.51. Such market
quotations reflect the high bid and low prices as reflected by the OTCBB or by
prices, without retail mark-up,markup, markdown or commissions, and may not necessarily represent actual
transactions.
YEAR PERIOD HIGH LOW
---- ------ ---- ---
2004 First Quarter 0.450 0.115
Second Quarter 0.145 0.115
Third Quarter 0.300 0.110
Fourth Quarter 0.350 0.170
2005 First Quarter 0.900 0.200
Second Quarter 0.750 0.280
Third Quarter 0.440 0.200
Fourth Quarter 0.285 0.160
2006 First Quarter 0.200 0.120
Second Quarter 0.120 0.070
(a) Transfer Agent
Our transfer agent is American Stock Transfer & Trust Company Inc., whose
address is 6201 15th Ave. Brooklyn, NY 11219 Their telephone number is
(212)936-5100.
(b) Stockholders
As of May 31, 2006, there were approximately 1,333 record holders of our common
stock. As of May 31, 2006, we have not paid any cash dividends on shares of our
common stock and do not plan to do so. We currently plan to retain future
earnings to fund the development and growth of our business.
(c) Dividend Policy.
We have not declared or paid cash dividends or made distributions in the past,
and we do not anticipate that we will pay cash dividends or make distributions
in the foreseeable future. We currently intend to retain and reinvest future
earnings, if any, to finance our operations.
(d) Securities authorized for issuance under equity compensation plans
None
10
ISSUANCE OF UNREGISTERED SHARES
As a result of the reverse merger (see below), the common stock of Cybrdi , Inc.
(a privately held Maryland corporation) has been cancelled and the shareholders
of Cybrdi, Inc. received a total of 47,328,263 shares of Cybrdi, Inc., a
California entity, at an exchange ration of 1.566641609. This resulted in the
issuance of 47,328,263 shares (the "Exchange Shares") of the Company's common
stock. As a result of the issuance of the Exchange Shares, as of December 31,
2005, we had 50,456,569 shares of common stock issued and outstanding. The
issuance of the Exchange Shares were exempt from registration under Section 4(2)
of the Act and/or Regulation D.
Reverse merger:
On February 10, 2005, (the "Closing Date") the Company closed on an Agreement
and Plan of Merger (the "Agreement") among Certron Corporation ("Certron"), a
California corporation, Certron Acquisition Corp., a Maryland corporation and a
wholly-owned subsidiary of Certron ("Acquisition Sub"), and Cybrdi, Inc., a
Maryland corporation ("Cybrdi Maryland") relating to the acquisition by Certron
of all of the issued and outstanding capital stock of Cybrdi Maryland in
exchange for shares of common stock of Certron that will aggregate approximately
93.8% of the issued and outstanding common stock of Certron. Pursuant to the
terms of the Agreement, at the Closing Date (a) Acquisition Sub has been merged
with and into Cybrdi Maryland, with Cybrdi Maryland being the surviving
corporation, (b) the common stock of Cybrdi Maryland has been cancelled and
converted into the right to receive shares of the common stock of Certron at an
exchange ratio of 1.566641609. This resulted in the issuance of 47,328,263
shares of the Certron's common stock , and (c) each share of the common stock of
Acquisition Sub has been converted in to and become one share of the common
stock of Cybrdi Maryland. The share exchange has been accounted for as a reverse
merger under the purchase method of accounting. Accordingly, Cybrdi Inc. will be
treated as the continuing entity for accounting purposes and the historical
financial statements presented will be those of Cybrdi, Inc.
In connection with the Agreement, on February 10, 2005, the Company amended its
articles of incorporation to authorize the issuance of 150 million shares of
common stock no par value and 500,000 shares of preferred stock, $1.00 par value
per share, none of which are issued or outstanding.
On March 31, 2005 the Company's Board of Directors changed its fiscal year end
from October 31 to December 31. Certron's fiscal year end was changed to
correspond with the fiscal year end of Cybrdi Maryland.
ITEM 6. SELECTED FINANCIAL DATAINFORMATION
Following is a summary of our operations and financial condition from 2001
through 2005. You are urged to review the detailed audited financial statements
and accompanying footnotes for a complete understanding of our operations.
2005 2004 2003 2002 2001 2000
--------- --------- ---------- ---------- ----------2002* 2001*
----------- ----------- ----------- ----------- -----------
Net sales $62,000 $300,000 $750,000 $1,475,000 $2,272,000$ 1,427,799 $ 1,533,043 $ 1,227,394 $ 750,000 $ 1,475,000
Net lossincome (loss) from
continuing operations $ 5,128 $ 488,833 $ 260,350 ($518,000) ($664,000) ($945,000) ($451,000)
($329,000)
Net lossincome (loss) from
discontinued operations -- -- -- -- ($30,000)
($112,000)
Net lossincome (loss) $ 5,128 $ 488,833 $ 260,350 ($518,000) ($664,000) ($945,000) ($481,000)
($441,000)
Net lossincome (loss) per
common share $ 0.00 $ 0.02 $ 0.01 ($0.17) ($0.21) ($0.30) ($0.15) ($0.14)
Total assets $163,000 $563,000 $1,203,000 $2,220,000 $3,037,000$ 6,103,632 $ 5,737,261 $ 4,745,236 $ 1,203,000 $ 2,220,000
Long-term debt -- -- -- -- --
Working capital $42,000 $357,000 $911,000 $1,831,000 $2,196,000$ 4,796,714 $ 4,416,664 $ 2,628,334 $ 911,000 $ 1,831,000
Stockholders' equity $42,000 $415,000 $1,065,000 $2,014,000 $2,550,000$ 4,224,142 $ 4,099,661 $ 3,087,340 $ 1,065,000 $ 2,014,000
- ------------
* As a result of the ownership interests of the former shareholders of Cybrdi
Maryland, for financial statement reporting purposes, the merger was
treated as a reverse acquisition, with Cybrdi Maryland deemed the
accounting acquirer and Certron Corporation deemed the accounting acquiree.
Historical information of the surviving company is that of Cybrdi Maryland.
Financial information for the fiscal year ended 2001 and 2002 is that of
Certron Corporation for information purposes.
No cash dividends have been paid during the five-year period ended OctoberDecember 31,
2004.
62005.
11
ITEM 7. MANAGEMENT'SMANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
As described below under "ResultsThis annual report contains forward-looking statements within the meaning of Operations,the
federal securities laws. These include statements about our expectations,
beliefs, intentions or strategies for the future, which we indicate by words or
phrases such as "anticipate," during fiscal 2004, due"expect," "intend," "plan," "will," "we believe,"
"Cybrdi believes," "management believes" and similar language. The
forward-looking statements are based on the current expectations of Cybrdi and
are subject to continuing intense price competitioncertain risks, uncertainties and technological changesassumptions, including those set
forth in the marketplace for its products,discussion under "Description of Business" and "Management's
Discussion and Analysis," including the Company lost its remaining significant
customersdiscussion under "Risk Factors"
thereunder. The actual results may differ materially from results anticipated in
these forward-looking statements. We base the forward-looking statements on
information currently available to us, and disposed of or wrote off its remaining inventory. As a result of
these occurrences, the Company concluded that its audio and videotape businesses
werewe assume no longer viable and some of its product lines were obsolete and placed its
emphasisobligation to update
them.
We focus on attempting to find a buyer for the Company.
Over the past several years, in an attempt to increase its sales and operating
profits, the Company has attempted without success to acquire other businesses
or product lines. More recently, the Company has attempted to maximize
shareholder value through the sale of the Company.
On or about August 3, 2004, Cybrdi contacted the Company regarding the possible
acquisition of the Company in response to a blind advertisement placed by the
Company. Following several meetings and conferences primarily between Marshall
Kass on behalf of the Company and the principals of Cybrdi, on August 16, 2004,
the Company announced that the parties had reached an agreement in principle
concerning the possible acquisition by the Company of the outstanding capital
stock of Cybrdi in exchange for shares of the Company's Common Stock that would
aggregate approximately 93.8% of its Common Stock outstanding after the
Transaction. A form 8-K relating thereto was filed by the Company on August 17,
2004. The parties then each conducted due diligence on the other and negotiated
the terms of and Agreement and Plan of Merger. Those negotiations culminated in
the execution of the Merger Agreement as of November 12, 2004. Closing of the
transaction occurred on February 10, 2005 following required proxy solicitation
and the approval of the shareholders of the respective parties.
Cybrdi, Inc. (Chao Ying Biotechnology Research & Development Incorporated) is a biogenetics commercialization company specializing in the rapid introductionand healthcare product applications.
Our primary business includes sales of tissue microarray products and services inservices.
Tissue chips, also called microtissue arrays, provide high-throughput molecular
profiling and parallel analysis of biological and molecular characteristics for
hundreds of pathologically controlled tissue specimens. Tissue arrays can
provide rapid and cost-effective localization and evaluation of proteins, RNA,
or DNA molecules, which is particularly useful for functioning genomic studies.
Cybrdi manufactures both the internationalhuman and Chinese
markets. Cybrdi is a Maryland corporation with its principal operations located
in China. Cybrdi aims to take advantage of China's abundant scientific talent,
low wage rates, less stringent biogenetic regulation, and the huge genetic
population as it introduces its growing list ofanimal tissue microarray products.
Mostfor a wide variety
of Cybrdi's activities are conducted through its 80% equity ownership in
China Shaanxi Shaoying Bio-technology Co., Ltd. ("Chaoying Biotech") a
sino-foreign equity joint venture established in July 2000scientific uses, including drug discovery and development purposes.
Our business strategy and focus in the People's
Republicnear future include
o Enhancing R&D in TMAs and technical service
o Expanding our product portfolio and virtual tissue array data bank
(vTMAB)
o Launch the health diagnosis kit for obesity and skin disease
With our sophisticated research in genes, we can provide the professional health
diagnostic service for customer. We can check the reasons of China. Cybrdi became affiliated with Chaoying Biotech in March 2003.
The Chaoying Biotech joint venture agreement provides that the joint venture is
to be terminated 15 years following its formulation. The joint venture may be
extended upon the mutual consent of the parties. Alternatively, subject to
tax-relatedobesity and other
foreign incentives in China,skin disease like freckle by our genetic analysis, which offer more accurate and
specialized diagnosis. It can guide customer to set up right health or fitness
program. At present, it is the joint venture may become
a subsidiary of Cybrdi.
Liquidityfirst and Capital Resources
- -------------------------------
As demonstrated by the following chart, the Company's working capital decreased
at October 31, 2004 as compared to that at October 31, 2003, which was primarily
due to a decline in sales. Cash decreased by $277,000; accounts receivable
decreased by $21,000; prepaid expenses decreased by $92,000; and other current
assets decreased by $10,000. Current liabilities decreased by $15,000. During
the third quarter of fiscal 2004, the Company increased its cash position by
surrendering for its cash value of $70,000 a life insurance policy on the life
of Marshall Kass, Chairman and Chief Executive Officer of the Company.
October 31
----------------------------------------
2004 2003 2002
--------- --------- --------
Working Capital $42,000 $357,000 $911,000
Current Ratio 1.32 to 1 3.41 to 1 7.6 to 1
Cash Used in Operations ($417,000) ($285,000) ($423,000)
With the acquisition of Cybrdi, the Company believes it has sufficient resources
to finance its operationsonly company can provide genetic test
for the coming year.
7
Resultsmechanism of Operations
- ---------------------
For a considerable numberobesity or skin disease. It has large market potential.
We will also explore other business development opportunities that can leverage
our sales platform and relationship with affiliated companies
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Use of years, intense price competition in the magnetic
media field has made it difficult for the Company to maintain pricesEstimates: The preparation of its
magnetic media products and has continually reduced the Company's margins on
these products. As a result, the Company discontinued sales of certain magnetic
media products and refused to sell magnetic media products at prices not
resulting in certain minimum margin returns. More recently, the introduction of
digital products and the substantial reduction in the cost of DVD players have
rendered some of the Company's products noncompetitive or obsolete and had a
material adverse impact on the Company's magnetic media operations and sales.
Digital answering devices have substantially replaced telephone answering
devices using magnetic tape cassettes, substantially reducing the Company's
sales of microcassettes. The sale of DVD players at substantially reduced prices
has curtailed sales of VHS T120s and T160s recording tapes used in VCRs. As a
result of the intense price competition and the technological changes, Certron
has been unable to compete at a profit in this marketplace.
During the last two fiscal years the Company has lost three significant
customers who accounted in the aggregate for approximately 77% of Certron's
sales during fiscal 2002 and 41% of Certron's sales during fiscal 2003. In the
fourth quarter of fiscal 2002, one of these customers informed the Company of
its intent to cease ordering products from the Company by the end of the third
quarter of fiscal 2003. In the fourth quarter of fiscal 2003, another one of
these customers who was the Company's then largest customer informed the Company
that due to technological changes it could no longer commit to purchase the
quantities of private-label products needed by Certron to make the business
worthwhile and would no longer use Certron as a resource. The third of these
customers who was the Company's second largest customer during fiscal 2003 was a
private-label customer for VHS T120 products. Due to the substantial reduction
in VHS tape sales and the fact that the Company had to carry a substantial
inventory of VHS tapes for this customer, the profit margin on this product for
Certron diminished to such an extent that Certron chose to cease fulfilling this
customer's orders. As a result of these occurrences, the Company concluded that
its audio and videotape businesses were no longer viable and some of its product
lines were obsolete.
Since concluding that primarily due to intense price competition and
technological changes, there were no meaningful opportunities for it to
substantially increase sales and operating profit of its magnetic media products
through traditional outlets, the Company attempted without success to acquire
other businesses or product lines. In the last several years it has also
attempted to maximize shareholder value through the sale of the Company.
On or about August 3, 2004, Cybrdi contacted the Company regarding the possible
acquisition of the Company in response to a blind advertisement placed by the
Company. Following several meetings and conferences primarily between Marshall
Kass on behalf of the Company and the principals of Cybrdi, on August 16, 2004,
the Company announced that the parties had reached an agreement in principle
concerning the possible acquisition by the Company of the outstanding capital
stock of Cybrdi in exchange for shares of the Company's Common Stock that would
aggregate approximately 93.8% of its Common Stock outstanding after the
Transaction. A form 8-K relating thereto was filed by the Company on August 17,
2004. The parties then each conducted due diligence on the other and negotiated
the terms of and Agreement and Plan of Merger. Those negotiations culminated in
the execution of the Merger Agreement as of November 12, 2004. The merger
agreement was subject to certain conditions including the consent by the holders
of all of the issued and outstanding shares of common stock of Cybrdi and the
consent by the shareholders owning a majority of the issued and outstanding
shares of common stock of Certron. All consents were secured via proxy for a
duly scheduled meeting of the Cybrdi shareholders on January 28, 2005 and
approved by a majority of the Certron shareholders on February 2, 2005. Articles
of Merger were filed with the Secretary of State on February 10,2005 and as a
result, Cybrdi is now a wholly owned subsidiary of Certron.
8
Cybrdi, Inc. (Chao Ying Biotechnology Research & Development Incorporated) is a
biogenetics commercialization company specializing in the rapid introduction of
tissue microarray products and services in both the international and Chinese
markets. Cybrdi is a Maryland corporation with its principal operations located
in China. Cybrdi aims to take advantage of China's abundant scientific talent,
low wage rates, less stringent biogenetic regulation, and the huge genetic
population as it introduces its growing list of tissue microarray products.
Most of Cybrdi's activities are conducted through its 80% equity ownership in
China Shaanxi Shaoying Bio-technology Co., Ltd. ("Chaoying Biotech") a
sino-foreign equity joint venture established in July 2000 in the People's
Republic of China. Cybrdi became affiliated with Chaoying Biotech in March 2003.
The Chaoying Biotech joint venture agreement provides that the joint venture is
to be terminated 15 years following its formulation. The joint venture may be
extended upon the mutual consent of the parties. Alternatively, subject to
tax-related and other foreign incentives in China, the joint venture may become
a subsidiary of Cybrdi.
The Company does not expect to continue with the sales of its magnetic media
products. Rather, the Company will in all likelihood liquidate the remaining
inventory and use the proceeds thereof, which are likely to be minimal, to
further Cybrdi's activities. We also intend to terminate the employment of any
individuals who were previously employed by Certron who are not directly
involved with Cybrdi's ongoing operations. We may incur additional expenses as a
result of terminating our current business operations. Specifically, we will be
liable for the remaining terms of any leasehold obligations unless we can secure
an acceptable assignee.
With the acquisition of Cybrdi, the Company believes it has sufficient resources
to finance its operations for the coming year.
Fiscal 2004 Compared to Fiscal 2003
- -----------------------------------
During fiscal 2004, the Company had an operating loss of $519,000 and a net loss
of $518,000 on sales of $62,000 as compared to an operating loss of $844,000 and
a net loss of $664,000 on sales of $300,000 for fiscal 2003. Gross profit
increases by $115,000 between fiscal 2004 and fiscal 2003. Selling, general and
administrative expenses decreased by $19,000; depreciation and amortization
expense decreased by $21,000; interest income decreased by $5,000; and realized
gain on marketable securities decreased by $78,000.
Sales of magnetic media products were $62,000 in fiscal 2004 as compared to
$300,000 in fiscal 2003. The decrease of 79% represents a decrease in sales of
micro cassettes, audio cassettes and video cassettes of $238,000 as a result of
price competition and technological changes.
Total gross margin was 100% in fiscal 2004 and negative 18% in fiscal 2003.
Margins increased from negative $53,000 in fiscal 2003 to $62,000 in fiscal 2004
due primarily to sale of inventory that has been fully reserved in fiscal 2003.
For the fourth quarter of fiscal 2004, the Company incurred a loss from
continuing operations of $195,000.
Selling, general and administrative expense decreased by $19,000 during fiscal
2004. The decrease from $600,000 in 2003 to $581,000 in 2004 was due primarily
to decrease in personnel expenses, and decrease in other selling, general and
administrative expenses.
9
Fiscal 2003 Compared to Fiscal 2002
- -----------------------------------
During fiscal 2003, the Company had an operating loss of $844,000 and a net loss
of $664,000 on sales of $300,000 as compared to an operating loss of $963,000
and a net loss of $945,000 on sales of $750,000 for fiscal 2002. Gross profit
decreased by $131,000 between fiscal 2003 and fiscal 2002. Inventory holding
loss decreased by $88,000; selling, general and administrative expenses
decreased by $166,000; depreciation and amortization expense increased by
$4,000; interest income decreased by $ 11,000, realized gain on marketable
securities increased by $ 12,000 and the surrender of an executive life
insurance policy for its cash value resulted in other income of approximately
$161,000.
Sales of magnetic media products were $300,000 in fiscal 2003 as compared to
$750,000 in fiscal 2002. The decrease of 60% represents a decrease in sales of
micro cassettes of $128,000, a decrease in sales of video cassettes of $84,000,
and a decrease in sales of audio cassettes and other office products of $238,000
as a result of price competition and technological changes.
Total gross margin was negative 18% in fiscal 2003 and 10% in fiscal 2002.
Margins decreased from $78,000 in fiscal 2002 to negative $53,000 in fiscal 2003
due primarily to a decrease in sales of magnetic media.
For the fourth quarter of fiscal 2003, the Company incurred a loss from
continuing operations of $41,000. The amount of the loss was lower by
approximately $161,000 due to the surrender of an executive life insurance
policy for payment of its cash value. Due to the Company's declining sales and
the loss of customers, during the fourth quarter of fiscal 2003, the Company
added to a reserve reducing the value of its inventory. As a result of inventory
being sold and a smaller increase in the inventory reserve in fiscal 2003
compared to fiscal 2002, inventory holding loss decreased from $258,000 in
fiscal 2002 to $170,000 in fiscal 2003.
Selling, general and administrative expense decreased by $166,000 during fiscal
2003. The decrease from $ 766,000 in 2002 to $600,000 in 2003 was due primarily
decrease in personnel expenses of $115,000 and a decrease in other selling,
general and administrative expenses of $51,000.
During fiscal 2003, the Company invested cash not needed in operations, in
publicly traded common stocks of other companies. Investments in common stocks
are subject to risks of the market, and market prices may fluctuate and be
adversely affected by the operating results of the issuer, as well as general
economic, political and market conditions. As of October 31, 2003, the Company
held common stocks which had a cost of approximately $135,000 and market value
of approximately $58,000.
In accordance with generally accepted accounting principles, the Company has
recorded the value of its investments in marketable securities on its balance
sheet at market value and the difference of approximately $77,000 between cost
and market value is recorded as an unrealized holding loss, a separate component
of equity (see Notes 1 and 3 of Notes to Consolidated Financial Statements).
Upon the expected sale of these securities, the Company will recognize a loss in
its statement of operations equal to the amount of the unrealized holding loss,
reduced by any increase in market value since October 31, 2003 and increased by
any decrease in market value since October 31, 2003.
10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NOT APPLICABLE.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Certron Corporation
Los Angeles, California
We have audited the accompanying consolidated balance sheets of Certron
Corporation (the "Company") as of October 31, 2003 and 2004, and the related
statements of operations and comprehensive income, stockholders' equity, and
cash flows for each of the two years then ended. Our audits also included
financial statement schedule II listed in the index at Item 15. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Certron
Corporation as of October 31, 2004 and 2003, and the results of its operations
and its cash flows for each of the two years then ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10America
requires management to the consolidated financial statements, the Company disposed of its assembly
operations and has suffered recurring losses from operations at October 31, 2004
that raise substantial doubt about its ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Hurley & Company
Granada Hills, California
November 23, 2004, except for Note 10
as to which the date is February 10, 2005
12
Independent Auditors' Report
Board of Directors and Shareholders
Certron Corporation
Los Angeles, California
We have audited the accompanying statements of operations and comprehensive
income, stockholders' equity, and cash flows for the year ended October 31,
2002. In connection with our audit of the financial statements, we have also
audited the accompanying financial statement schedule. These financial
statements and financial schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Certron
Corporation for the year ended October 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
BECKMAN KIRKLAND & WHITNEY
Agoura Hills, California
January 3, 2003
13
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
October 31
--------------------------
2004 2003
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, Note 1 $ 155,000 $ 432,000
Accounts receivable, less allowance for doubtful 5,000 25,000
account of $0 in 2004 and $15,000 in 2003
Inventories:
Finished products, less allowance for obsolescence -- --
of $5,000 in 2004 and $177,000 in 2003, Note 4
Prepaid expenses 3,000 48,000
----------- -----------
Total Current Assets 163,000 505,000
----------- -----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, AT COST:
Machinery and equipment 0 17,000
Furniture, fixtures and leasehold improvements 7,000 142,000
----------- -----------
7,000 159,000
Less accumulated depreciation and amortization (7,000) (159,000)
----------- -----------
Net Equipment and Leasehold Improvements -- --
----------- -----------
MARKETABLE SECURITIES -- 58,000
----------- -----------
Total Assets $ 163,000 $ 563,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued professional fees 61,000 49,000
Accrued payroll and related items 3,000 27,000
Other accrued expenses 57,000 72,000
----------- -----------
Total Current Liabilities 121,000 148,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value, authorized 500,000 shares, no
shares issued and outstanding Common stock, no par value; stated
value $1 per share; authorized 10,000,000 shares; issued and
outstanding,
3,128,000 shares (2004 and 2003) 3,128,000 3,128,000
Additional Paid-In Capital 1,892,000 1,824,000
Net unrealized loss on marketable equity securities -- (77,000)
Accumulated deficit (4,978,000) (4,460,000)
----------- -----------
Total Stockholders' Equity 42,000 415,000
----------- -----------
Total Liabilities and Stockholders' Equity $ 163,000 $ 563,000
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
14
CERTRON CORPORATION AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Year Ended October 31
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Net Sales $ 62,000 $ 300,000 $ 750,000
Cost of Products Sold -- 353,000 672,000
------------ ------------ ------------
Gross Profit 62,000 (53,000) 78,000
------------ ------------ ------------
Costs and Expenses:
Inventory holding loss (Note 4) -- 170,000 258,000
Selling, general and administrative 581,000 600,000 766,000
Depreciation and amortization -- 21,000 17,000
------------ ------------ ------------
581,000 791,000 81,041,000
------------ ------------ ------------
Operating Loss (519,000) (844,000) (963,000)
Other Income
Realized (loss) gain on marketable
equity securities and other assets (75,000) 12,000 --
Interest income 3,000 8,000 19,000
Other income 62,000 161,000 --
Gain on disposal of assets 12,000 -- --
------------ ------------ ------------
Loss From Continuing Operations before tax (517,000) (663,000) (944,000)
Provisions for taxes 1,000 1,000 1,000
------------ ------------ ------------
Net Loss ($518,000) ($664,000) ($945,000)
============ ============ ============
------------ ------------ ------------
Net Loss Per Share ($0.17) ($0.21) ($0.30)
============ ============ ============
Weighted Average Common Shares Outstanding 3,128,000 3,128,000 3,128,000
============ ============ ============
Comprehensive Loss
Unrealized gain (Loss) on marketable
equity securities $0 $14,000 ($4,000)
Net Loss (518,000) (664,000) (945,000)
------------ ------------ ------------
Comprehensive Loss ($518,000) ($650,000) ($949,000)
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
15
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Net Unrealized
(Loss) Gain On
Additional Marketable
Common Stock Paid-In Equity Accumulated
Shares Amount Capital Securities Deficit Total
----------- ----------- ----------- ----------- ----------- -----------
BALANCE
October 31, 2001 3,128,000 $ 3,128,000 $ 1,824,000 ($87,000) ($2,851,000) $ 2,014,000
Unrealized Loss
on Marketable
Securities -- -- -- (4,000) -- (4,000)
Net Loss -- -- -- -- (945,000) (945,000)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE
October 31, 2002 3,128,000 $ 3,128,000 $ 1,824,000 ($91,000) ($3,796,000) $ 1,065,000
Unrealized Loss
on Marketable
Securities -- -- -- 14,000 -- 14,000
Net Loss -- -- -- -- (664,000) (664,000)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE
October 31, 2003 3,128,000 $ 3,128,000 $ 1,824,000 ($77,000) ($4,460,000) $ 415,000
Shareholder
contribution (Note 6) -- -- 68,000 -- -- 68,000
Unrealized Loss
On Marketable
Securities -- -- -- 77,000 -- 77,000
Net Loss -- -- -- -- (518,000) (518,000)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE
October 31, 2004 3,128,000 $ 3,128,000 $ 1,892,000 $0 ($4,978,000) $ 42,000
The accompanying notes are an integral part of these
consolidated financial statements.
16
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended October 31
-----------------------------------------
2004 2003 2002
----------- ----------- -----------
Cash Flows From Operating Activities:
Net Loss ($518,000) ($664,000) ($945,000)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization -- 21,000 17,000
Realized loss on sale of marketable securities 75,000 -- --
Gain on disposal of assets (12,000) -- --
Decrease (Increase) in net assets of
discontinued operations -- -- 12,000
Changes in operating assets and liabilities:
Decrease (Increase) in notes receivable -- -- 99,000
Decrease (Increase) in trade accounts receivable 20,000 48,000 56,000
Decrease in inventories -- 252,000 401,000
Decrease (Increase) in prepaid expenses 45,000 1,000 16,000
Decrease (Increase) in other assets -- 47,000 (11,000)
(Decrease) Increase in current liabilities (27,000) 10,000 (68,000)
----------- ----------- -----------
Net Cash Used in Operating Activities (417,000) (285,000) (423,000)
Cash Flows from Financing Activities:
Proceeds from shareholder contribution (Note 6) 68,000 -- --
----------- ----------- -----------
Net cash provided by financing activities 68,000 -- --
Cash Flows From Investing Activities:
Proceeds from sale of marketable securities 60,000 275,000 85,000
Purchase of marketable securities -- (200,000) (95,000)
Proceeds from sale of assets 12,000 -- --
----------- ----------- -----------
Net cash (used in) provided by investing activities 72,000 75,000 (10,000)
----------- ----------- -----------
Net Decrease in Cash and Cash Equivalents (277,000) (210,000) (433,000)
Cash and Cash Equivalent, beginning of year 432,000 642,000 1,075,000
----------- ----------- -----------
Cash and Cash Equivalent, end of year $ 155,000 $ 432,000 $ 642,000
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for :
Interest -- -- --
Income Taxes $ 1,000 $ 1,000 $ 1,000
The accompanying notes are an integral part of these
consolidated financial statements.
17
CERTRON CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
- --------------------
The Company's business consisted primarily of the distribution of magnetic media
products, until its acquisition of Cybrdi, Inc. in Feb 2005 as stated in Note 10
to the consolidated financial statements.
Cash and Cash Equivalents
- -------------------------
The Company considers all cash on hand and on deposit, and securities with
original purchased maturities of less than three months to be cash and cash
equivalents. Substantially all deposits are with one institution.
Accounts Receivable
- -------------------
The Company has recorded an allowance for doubtful accounts to cover the
difference between recorded receivables and collections from customers. The
allowance for doubtful accounts is adjusted periodically based upon the
Company's evaluation of historical collection experiences, industry trends and
other relevant factors.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out method) or
market. At October 31, 2004 the inventory was fully reserved.
Equipment and Leasehold Improvements
- ------------------------------------
Equipment and leasehold improvements are stated at cost and are depreciated or
amortized using the straight-line method over the lesser of the estimated useful
lives of the assets (generally five years) or the applicable lease terms. At
October 31, 2004 all equipment and leasehold improvements were fully
depreciated.
Marketable Equity Securities
- ----------------------------
Management determines the appropriate classification of its investments in debt
and equity securities at the time of purchase and reevaluates such determination
at each balance sheet date. Securities available for sale are carried at market
value, with the unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. The Company does not have investments that
qualify as trading or held to maturity securities. Marketable equity securities
are valued based on quoted market prices. The cost of securities sold is
determined by the specific identification of cost method.
Revenue Recognition
- -------------------
The Company recognizes revenue from product sales upon shipment.
Advertising and Promotion Costs
- -------------------------------
Advertising and promotion costs, which totaled $0 in 2004 and 2003, are expensed
as incurred.
Taxes on Income
- ---------------
The Company files tax returns excluding its subsidiary for United States federal
tax purposes and combined returns with its subsidiary for state purposes.
18
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. Reserves for deferred tax
assets are recorded when ultimate recovery of such assets is deemed uncertain.
Loss Per Common Share
- ---------------------
Loss per common share is based on the weighted average number of common shares
outstanding during the year and the effect of common stock equivalents, if
dilutive.
Stock Options
- -------------
The Company has elected to follow Accounting Principles Board Opinion No. 23,
"Accounting for Stock Issued to Employees" related interpretations in accounting
for its employee stock options. Under APB 25, no compensation expense is
recorded when the exercise price of the option equals the market price of the
underlying stock on the date of the grant. The Company has adopted the
disclosure only provisions of Statement of Financial Accounting Standards No.
148, "Accounting for Stock Based Compensation".
Estimates
- ---------
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management makesmake estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosuresdisclosure of contingent assets and
liabilities at the date of the consolidated financial statements as
well asand the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
materially from those estimates.
Comprehensive The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Revenue recognition: Revenue represents the invoiced value of goods sold
recognized upon the delivery of goods to customers and service income is
recognized when services are provided. Deferred revenue represents the
undelivered portion of invoiced value of goods sold to customers. Sales
transactions not meeting all the conditions of the full accrual method are
accounted for using the deposit method of accounting. Under the deposit method,
all costs are capitalized as incurred, and payments received from the buyer are
recorded as customer deposits.
Principles of consolidation: The consolidated financial statements include the
accounts of Cybrdi, Inc. and its wholly-owned subsidiaries and joint ventures.
12
RESULTS OF OPERATIONS
The following table sets forth selected statement of income data as a percentage
of revenues for the years indicated.
December 31, December 31, December 31,
2005 2004 2003
------------ ------------ ------------
Revenue
Products $ 1,173,171 82% $ 1,175,235 77% $ 812,954 66%
Service rendered 254,628 18% 357,808 23% 414,440 34%
------------ ------------ ------------
Total revenue 1,427,799 100% 1,533,043 100% 1,227,394 100%
------------ ------------ ------------
Cost of sales
Products 244,331 294,373 256,354
Service rendered 35,507 38,527 40,522
------------ ------------ ------------
Total cost of sales 279,838 20% 332,900 22% 296,876 24%
------------ ------------ ------------
Gross profit 1,147,961 80% 1,200,143 78% 930,518 76%
------------ ------------ ------------
Operating expenses:
Selling and distribution expenses 100,173 79,887 66,398
General and administrative expenses 581,835 581,596 548,896
------------ ------------ ------------
Total operating expenses 682,008 48% 661,483 43% 615,294 50%
------------ ------------ ------------
Income from operations 465,953 33% 538,660 35% 315,224 26%
------------ ------------ ------------
Other income/(expense)
Interest income 30,408 8,140 7,150
Other (expense)/income, net (317,127) 91,249 36,718
------------ ------------ ------------
Total other (expense)/ income (286,719) -20% 99,389 6% 43,868 4%
------------ ------------ ------------
Income before income taxes 179,234 638,049 359,092
Income taxes (expenses)/benefit (48,097) -- 40,170
------------ ------------ ------------
Income before minority interest 131,137 9% 638,049 42% 399,262 33%
Minority Interest 126,009 9% 149,216 10% 138,912 11%
------------ ------------ ------------
Net income $ 5,128 0% $ 488,833 32% $ 260,350 21%
============ ============ ============
13
The following table sets forth the changes of selected statement of income data
for the years indicated.
2005 Vs 2004 2004 Vs 2003
------------ ------------
Increase/ (decrease) Increase/ (decrease)
Revenue
Products (2,064) -0.2% 362,281 44.6%
Service rendered (103,180) -28.8% (56,632) -13.7%
------------ ------------
Total revenue (105,244) -6.9% 305,649 24.9%
Cost of sales
Products (50,042) -17.0% 38,019 14.8%
Service rendered (3,020) -7.8% (1,995) -4.9%
------------ ------------
Total cost of sales (53,062) -15.9% 36,024 12.1%
------------ ------------
Gross profit (52,182) -4.3% 269,625 29.0%
Operating expenses:
Selling and distribution expenses 20,286 25.4% 13,489 20.3%
General and administrative expenses 239 0.0% 32,700 6.0%
------------ ------------
Total operating expenses 20,525 3.1% 46,189 7.5%
------------ ------------
Income from operations (72,707) -13.5% 223,436 70.9%
Other income/(expense)
Interest income 22,268 273.6% 990 13.8%
Other (expense)/income, net (408,376) -447.5% 54,531 148.5%
------------ ------------
Total other (expense)/ income (386,108) -388.5% 55,521 126.6%
Income before income taxes (458,815) -71.9% 278,957 77.7%
------------ ------------
Income taxes (expenses)/benefit (48,097) (40,170)
------------ ------------
Income before minority interest (506,912) -79.4% 238,787 59.8%
Minority Interest (23,207) -15.6% 10,304 7.4%
------------ ------------
Net income (483,705) -99.0% 228,483 87.8%
============ ============
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
Revenue
Cybrdi generates two categories of revenues: revenues from the sale of our
tissue chip products and from services. The net sales decreased to $1,427,799
for the year ended December 31, 2005 from $1,533,043 for the year ended December
31, 2004.
Tissue Chip Product: sales remains stable in the tissue chip business. The net
sales decreased approximately $2,000, or 0.2%, to $1,173,171 for the year ended
December 31, 2005 as compared to $1,175,235 for the year ended December 31,
2004. The decrease in net sales of our Tissue Chip business is primarily
attributable to the discontinuance in sales of some array slides.
Services: Fewer technical service orders were received during the year of 2005
as compared to 2004 resulting in a decrease in sales of $103,180, or 28.8%;
declining to $254,628 from $357,808 for the year ended December 31, 2005 as
compared to December 31, 2004.
Gross Margin
Gross margin as a percent of sales was 80% and 78% for the year ended December
31, 2005 and 2004, respectively. Our gross margin increased as a result of
increased operating efficiencies and an increase in sales volume of higher gross
margin biological chips products.
14
Operating Expenses
Our operating expenses increased $20,525 to $682,008 for the year ended December
31, 2005 from $661,483 for the year ended December 31, 2004. This is primarily
due an increase in salespersons also contributed to the increase in selling and
distribution to $100,173 for the year ended December 31, 2005 from $79,887 for
the year ended December 31, 2004. The increase in selling expenses was offset by
a decrease in general and administrative expenses to $581,835 for the year ended
December 31, 2005 from $581,596 for the year ended December 31, 2004.
Other Expenses/Income
- --------------------Other net non operating expenses increased from $99,389 for the year ended
December 31, 2004 to $286,719 for the year ended December 31, 2005, an
increase of $386,108. This increase was mainly attributable to increase in
professional fees and other direct cost related to the merger, and the
settlement fee related to EPA charges. Included in other net income for the year
ended December 31, 2004 was also a grant obtained by the Company from the
government.
Income Taxes
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standardshas not recorded a provision for reporting comprehensivefederal income tax for year ended
December 31, 2005 due to utilization of net operating loss carry forward to
offset taxable income in United States. In accordance with the relevant tax laws
and its
componentsregulations of the People's Republic of China, Chaoying Biotech is entitled
to full exemption from Corporation Income Tax ("CIT") for the first two years
and a 50% reduction in CIT for the next three years, commencing from the first
profitable year after offsetting all tax losses carried forward from the
previous five years. As 2003 was Chaoying Biotech's first profitable year, the
Company begins to record 50% CIT provision from the first quarter of 2005.
Effective tax rate is approximately 7.5% for the year ended December 31, 2005.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Revenue
Cybrdi generates two categories of revenues: tissue chip product and services.
The net sales increased to $1,533,043 for the year ended December 31, 2004 from
$1,227,394 for the year ended December 31, 2003.
Tissue Chip Product: Sales of tissue chip increased approximately $362,281, or
44.6%, to $1,175,235 for the year ended December 31, 2004 as compared to
$812,954 for the year ended December 31, 2003. The increase in net sales of our
Tissue Chip business was primarily attributable to the introduction of new array
series to the market.
Services: Fewer technical service orders were received during the year of 2004
as compared to 2003 resulting in a financial statement. Comprehensivedecrease in sales of $56,632, or 13.7%;
declining to $357,808 from $414,440 for the year ended December 31, 2004 as
compared to December 31, 2003.
Gross Margin
Gross margin as a percent of sales was 78% and 76% for the year ended December
31, 2004 and 2003, respectively. Our gross margin increased as a result of
increased operating efficiencies and through economy of scales.
Operating Expenses
Our operating expenses increased $46,189 to $661,483 for the year ended December
31, 2004 from $615,294 for the year ended December 31, 2003. This is primarily
due to an increase in salespersons and shipping cost associated with the
increase in sales. These contributed to the increase in selling and distribution
to $79,887 for the year ended December 31, 2004 from $66,398 for the year ended
December 31, 2003. General and administrative expenses also increased $32,700 to
$581,596 for the year ended December 31, 2004 from $548,896 for the year ended
December 31, 2003.
15
Other Expenses/Income
Other income increased $55,521 to $99,389 for the year ended December 31, 2004
from $43,868 for the year ended December 31, 2003. This increase was mainly
attributable to a grant obtained by the Company from the government during
fiscal year 2004.
Income Taxes
The Company has not recorded a provision for federal income tax for the year
ended December 31, 2005 due to utilization of net operating loss carry forward
to offset taxable income in United States. In accordance with the relevant tax
laws and regulations of the People's Republic of China, Chaoying Biotech is
entitled to full exemption from Corporation Income Tax ("CIT") for the first two
years and a 50% reduction in CIT for the next three years, commencing from the
first profitable year after offsetting all tax losses carried forward from the
previous five years.
LIQUIDITY AND CAPITAL RESOURCES
Operating working capital (cash plus accounts receivable plus inventory less
accounts payable and accrued expenses) increased by $380,050 from $4,416,664 as
defined includes
all changesof December 31, 2004 to $4,796,714 as of December 31, 2005. The increase was
primarily due to an increase in equity (net assets) duringcash of approximately $300,000 and in accounts
receivable of approximately $109,000 from $252,179 at December 31, 2004 to
$360,503 at December 31, 2005. This was partially offset by an increase in
accounts payable of $34,071 from $47 at December 31, 2004 to $34,118 at December
31, 2005. Inventory remains stable with a periodslight decrease of approximately
$2,000 from non-owner sources.
Examples$264,827 at December 31, 2004 to $263,634 at December 31, 2005.
Increase in net sales on some Tissue Chip Product line is attributable to the
increase in account receivable.
Cash provided by operating activities was $181,915 for the year ended December
31, 2005 as compared to $1,122,700 provided for the year ended December 31,
2004. The decrease in cash provided by operating activities for the year ended
December 31, 2005 reflected reduction of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustmentsincreased in accounts
receivable and unrealized
gains and losses on available-for-sale securities.
Segment Reporting
- -----------------the increase of prepayment for participating in a healthcare
franchise.
The Company accountshas $30,173 capital expenditure for segments in accordance with SFAS No. 131, "Disclosures
about Segmentsthe year ended December 31, 2005
as compared to a capital spending of an Enterprise and Related Information" which requires that
companies disclose "operating segments" based on$20,916 for the way management desegregatesyear ended December 31,
2004. Financing activities for the year ended December 31, 2005 provided
reflecting a $77,953 advance from shareholders.
With approximately $4,796,714 of net working capital as of December 31, 2005,
the Company believes it will have sufficient resources to finance its operations
for internal operating decisions. Since the Company's Mexicali
operationcoming year.
CRITICAL ACCOUNTING POLICIES
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the contract assembly segmentreported amounts of
its business was closed September
2001,revenues and expenses during the business consists primarilyreporting period. Actual results could differ
materially from those estimates.
Income per share: Basic income per share excludes dilution and is
computed by dividing the income attributable to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted
income per share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that shared in the income of
the distributionCompany. Diluted income per share is computed by dividing the income
available to common shareholders by the weighted average number of magnetic media
products, no other reportable segmentscommon shares
outstanding for the period and dilutive potential common shares outstanding
unless consideration of such dilutive potential common shares would result in
anti-dilution. Common stock equivalents were reportednot considered in the calculation
of diluted income per share as their effect would have been anti-dilutive for
the periods ended December 31, 2004 and 2003.
16
Critical Accounting Policies
The preparation of financial statements.
Recently Issuedstatements in conformity with generally
accepted accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements. We do not
anticipate entering into any off-balance sheet arrangements during the next 12
months.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncement
- ----------------------------------------Pronouncements:
In May 2003,2005, the FASB issued SFASStatement No. 150,154, "Accounting for Certain Financial
Instruments with Characteristics of both LiabilitiesChanges and Equity." SFAS No. 150
requires certain financial instrumentsError
Corrections" ("FAS 154"). FAS 154 generally require that have both equityaccounting changes and
liability
characteristics toerrors be classified as a liability on the balance sheet. SFAS No.
150applied retrospectively. FAS 154 is effective for the first interim periodaccounting changes
and corrections of errors made in fiscal years beginning after JuneDecember 15,
2003.2005. The adoptions of SFAS 150 didCompany does not expect FAS 154 to have a material impact on its
financial statements.
In March 2005, the FASB issued Statement of Financial Accounting Standards
Interpretation Number 47, "Accounting for Conditional Asset Retirement
Obligations" ("FIN 47"). FIN 47 provides clarification regarding the meaning of
the term "conditional asset retirement obligation" as used in FASB Statement No.
143, "Accounting for Asset Retirement Obligations." FIN 47 is effective for
fiscal years beginning after December 15, 2005. The Company is currently
evaluating the impact of FIN 47 on its financial statements.
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. This standard will be
effective for awards granted, modified or settled in fiscal years beginning
after June 15, 2005. Accordingly, the Company will implement the revised
standard in the first quarter of fiscal year 2006. Management is assessing the
implications of this revised standard, which may materially impact the Company's
financial
statements.
19
In April 2004, the Emerging Issues Task Force ("EITF")results of the FASB approved EITF
Issue 03-6, "Participating Securitiesoperations in fiscal year 2006 and the Two-Class Method under FAS 128."
EITF Issue 03-6 supersedes the guidance in Topic No. D-95, "Effect of
Participating Convertible Securities on the Computation of Basic Earnings per
Share", and requires the use of the two-class methodthereafter.
ISSUANCE OF COMMON STOCK
See PART II Item 5 for participating
securities. The two-class method is an earnings allocation formula that
determines earnings per share for each classissuance of common stock and participating
security according to dividends declared (or accumulated) and participation
rights in undistributed earnings. In addition, EITF Issue 03-6 addresses other
forms of participating securities, including options, warrants, forwards and
other contracts to issue an entity's common stock, withfor the exception of stock
based compensation (unvested options and restricted stock) subject to the
provisions of Accounting Principles Board ("APB") Opinion No. 25 and SFAS No.
123. EITF Issue 03-6 is effective for reporting periods beginning after March
31, 2004 and should be applied by restating previously reported earnings per
share. The adoption of EITF Issue 03-6 didyear ended 2005.
INFLATION
Inflation has not havehad a material impact on our business.
CURRENCY EXCHANGE FLUCTUATIONS
The majority of our net sales, costs and expenses are priced in Chinese
renminbi. Our assets are predominantly located inside China. Since 1994, the
Company's financial position or resultsexchange rate for Renminbi against the United States dollar has remained
relatively stable, with an exchange rate approximately RMB8.28 to US$1.00. On
July 21, 2005, China announced a revaluation of operations for the year ended October
31, 2004.
In December 2004, the FASB issued SFAS No. 123(Revised), "Share-Based Payment."
This statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation"RMB and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
SFAS 123(R) requires companies to apply a fair-value-based measurement method in
accounting for share-based payment transactions with employees and to record
compensation cost for all stock awards granted after the required effective date
and to awards modified, repurchased, or cancelled after that date. In addition,
the Company is required to record compensation expense (as previous awards
continue to vest) for the unvested portion of previously granted awards that
remain outstanding at the date of adoption. SFAS 123(R) will be effective for
quarterly periods beginning after June 15, 2005, which is the Company's third
quarter ending July 31, 2005. Management has not yet determined the impact that
SFAS 123(R) will have ondropped its financial position and results of operations.
Reclassifications
- -----------------
Certain prior year amounts in the accompanying consolidated financial statements
have been reclassified to conformpeg to the
current year's presentation.
NOTE 2 - MARKETABLE SECURITIESUS dollar. China is planning to move to a managed float against a basket of
currencies. The Companyexchange rate has investments in marketable equity securities, which have been classified as non-current, available-for-sale, at October 31, 2003. The market
valueadjusted to approximately RMB8.11 to
US$1.00, or an appreciation of these securities is shown as a non-current asset while the change in
market value2%, and has remained relatively stable since
the acquisition of these securities is shown as an unrealized
holding loss in the shareholders' equity section of the balance sheet. There
werethen. However, there can be no investments in equity securities at October 31, 2004. The investment in
equity securities at October 31, 2003 have an original cost of $135,000 and a
fair value of $58,000, resulting from gross unrealized losses of $82,000 and
gross unrealized gains of $5,000 respectively.
Realized loss from the sale of marketable securities were $75,000 for the year
ended October 31, 2004 and realized gain of $12,000, and $0 for the years ended
October 31, 2003 and 2002, respectively. Gross proceeds from the sale of
securities were $60,000, $275,000 and $85,000 for the years ended October 31,
2004, 2003 and 2002, respectively.
NOTE 3 - INVENTORY
Dueassurance that Renminbi will not be subject to
the apparent loss of three of the Company's largest customers, declining
sales, and excess inventory, the Company has established a reserve to reduce the
value of its inventory to net realizable value taking into account the cost of
handling and sales.
20
NOTE 4 - OPTIONS
The Company's Executive Stock Option Plan (the "Executive Plan") was approved by
shareholders in March 1989. In January 1995, the Board of Directors adopted an
amendment to the Executive Plan changing its name to the Executive Stock Option
Plan, increasing the number of shares of Common Stock covered thereby from
150,000 to 300,000 and extending the expiration date of the Executive Plan from
January 1999 to January 2005. The increase in the number of shares and the
extension of the expiration date of the plan were approved by shareholders in
March 1995. In January 2001, the Board of Directors adopted a further amendment
to the Executive Plan increasing the number of shares of Common Stock covered
thereby to 600,000 shares and extending the expiration date of the Executive
Plan to January 24, 2011. This amendment was approved by shareholders in March
2001. Options under the plan have been reserved for issuance to officers,
directors and key employees.
Options under the Plan may be exercised in various installments,devaluation. We may not be exercised beyond ten years and the option price may notable to hedge effectively against Renminbi
devaluation, so there can be less than the market
value of the common stock on the date the option is granted.
Options Options
Executive Stock Available Granted and Price
Option Plan For Grant Outstanding Range
--------------- --------- ----------- ------
Balance October 31, 2002 562,000 38,000 $1.000
Cancelled 3,000 (3,000) $1.000
Balance October 31, 2003 565,000 35,000 $1.000
Cancelled 35,000 (35,000) $1.000
Balance October 31, 2004 600,000 0 $1.000
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies Accounting Principles
Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than for
restricted stock and options/warrants issued to outside third parties. If the
Company had elected to recognize compensation expense based upon the fair value
at the grant date for awards under these plans consistent with the methodology
prescribed by SFAS 123, the Company's net income and earnings per share
prescribed by SFAS 123, the Company's net income and earnings per share would be
reduced to the pro forma amounts indicated below:
October 31,
2004
--------
Net Loss as reported $518,000)
Loss, pro forma (518,000)
Loss per share as reported (.17)
Loss per share, pro forma (.17)
These pro forma amounts may not be representative ofno assurance that future disclosures because
they do not take into effect pro forma compensation expense related to grants
made before 1997.
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in:
1997
--------
Risk free interest rate 5.8%
Expected lives (years) 5
Expected volatility 26.0%
Expected dividends $ 0
21
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changesmovements in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a single measureexchange
rate of the
fair value of its employee stock options.
At October 31, 2004, there were no options granted and outstanding.
Incremental common shares (not included in the denominator of diluted earnings
per share because of their anti-dilutive nature):
2004 2003
------ ------
Employee options 0 35,000
0 0
Potential common equivalents 0 35,000
NOTE 5 - TAXES ON INCOME
The provision for taxes on income is comprised of the minimum state income taxes
of $1,000.
A reconciliation of the federal statutory rates to the effective rates is
summarized as follows:
Year Ended October 31,
--------------------------
2004 2003 2002
---- ---- ----
Statutory rate 34% 34.0% 34.0%
State taxes, net of federal
benefit 0% 0% 0.0%
Unrecognized benefit of
net operating losses (34%) (34.0%) (34.0%)
Effective tax rate 0% 0% 0.0%
For federal income tax return purposes, net operating losses of approximately
$5,6 million expire beginning October 31, 2005. For state income tax purposes,
net operating losses of approximately $2,400,000 expire beginning October 31,
2004.
Significant components of the Company's deferred tax asset consist of the
following:
October 31, October 31,
2004 2003
----------- -----------
Net operating loss carry forward $ 2,800,000 $ 2,150,000
Other -- 350,000
----------- -----------
Net deferred income tax assets 2,800,000 2,500,000
Valuation allowance (2,800,000) (2,500,000)
----------- -----------
Net deferred tax assets -- --
=========== ===========
The deferred tax assets have been offset in their entirety by a valuation
allowance due to the uncertainty of their realization.
22
NOTE 6 - CONTRIBUTION FROM SHAREHOLDER
During the year ended October 31, 2004, the Company received $68,000 from the
surrendering of a life insurance policy held on a director of the Company. These
proceeds were recorded as additional paid in capital.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Operating Leases -
- ------------------
The Company leases warehouse facilities under a month-to-month term operating
leases for $450 per month.
Total rental expense charged to operations amounted to $32,000, $113,000, and
$129,000, for the years ended October 31, 2004, 2003, and 2002 respectively.
Under some leasing arrangements, the Company pays maintenance, insurance, taxesRenminbi and other expenses in addition to the above minimum annual rentals.
The Company as of October 30, 2004 moved out of 11845 W. Olympic Blvd., Los
Angeles offices. The company leases a storage area at a facility owned by Louart
Corporation on a month to month basis.
Employment Contract -
---------------------
On November 1, 1993, the Company entered intocurrencies will not have an employment agreement with its
Chairman/Chief Executive Officer under which the Company is committed to annual
salary payments to the officer in the amount of $200,000 through fiscal 1998.
During the fiscal year ended October 31, 1999, the Chairman and CEO voluntarily
reduced his compensation to $153,000, in fiscal year ended October 31, 2000 to
$139,000, in fiscal year ended October 31, 2001 to $117,000, in fiscal year
ended October 31, 2002 to $113,000 and in fiscal year 2003 to $104,000. In 1998
the Employment Agreement was amended to extend the term thereof through October
31, 2001 and in November 2001 the Agreement was amended to extend the term
thereof through October 31, 2004.
Contingencies -
- ---------------
The Company was notified by a letter dated June 2, 2000 received June 6, 2000
that the Company may have a potential liability from waste disposal in the
Casmalia Disposal Site at Santa Barbara County, California. The Company was
given a choice of either signing an agreement that would toll the statute of
limitations for eighteen (18) months in order to allow the Company to resolve
any liability with the government without incurring costs associated with being
named a defendant in a lawsuit, or becoming an immediate defendant in a lawsuit.
The Company signed the tolling agreement. On November 20, 2001, the tolling
agreement was extended for an additional 18 months and on May 20, 2003 the
tolling agreement was again extended for an additional 18 months. On June 29,
2004, the Company received a proposed settlement from the EPA in the amount of
$21,131. The Company is waiting for communication from the government concerning
payment of the proposed settlement. As of October 31, 2004, the Company has
accrued a sufficient amount to cover any potential liabilities from this matter.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company made payments to Louart, a stockholder of the Company, for rent of
warehouse and office space, secretarial and administrative services, consulting
services, and an automobile. These fees are included in selling, general and
administrative expenses.
The payments made to Louart for these items for the years ended October 31 are
as follows:
2004 $109,000
2003 $190,000
2002 $190,000
23
NOTE 9 - CONCENTRATIONS
For fiscal year ended October 31, 2003, the Company's ten largest customers of
magnetic media products accounted in the aggregate for approximately 93% of the
Company's total net sales of magnetic media products. During fiscal 2003, the
two largest single magnetic media customers accounted for $ 67,000 or 22% and
$33,000 or 11% of the Company's total magnetic media sales, respectively. The
Company's largest customer has informed the Company of their intent to cease
ordering from the Company, despite their continued placement of orders. The loss
of the Company's three largest customers has had a material negativeadverse effect on our
financial condition.
17
ITEM 8. FINANCIAL STATEMENTS.
The information required by Item 7 appears after the Company's earnings and sales.
The Company maintains cash deposits at several banks located in California.
Deposits at each bank are insured by the Federal Deposit Insurance Corporation
upsignature page to $100,000. As of October 31, 2004, uninsured portions of balances held at
those banks aggregated to $55,000.
Accounts receivable from the Company's largest customer accounted for $17,600 or
70% of accounts receivable as of October 31, 2003.
NOTE 10 - BASIS OF PRESENTATION
During the three years ended October 31, 2004, 2003 and 2002, the Company had
recurring losses due to continuing intense price competition and technological
changes in the marketplace for its products. The Company concluded that its
audio and videotape businesses were no longer viable and that raises substantial
doubt as to the ability of the Company to continue as a going concern.
To address this
problem, Management entered into discussions with Cybrdi, Inc.,
a biogenetics commercialization company specializing in the rapid introduction
of tissue microarray products and services in both the international and Chinese
markets. These negotiations led to the execution of an Agreement and Plan of
Merger which was filed with the Maryland Secretary of State on February 10,
2005.
It is not possible at this time to predict the success of this merger.
The accompanying financial statements do not include any adjustments relating to
the recoverability and classification of the recorded asset amounts or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue existence.report.
ITEM 9.9A. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
AfterDISCLOSURES
Our prior auditors were Bagell, Josephs, Levine & Company.("BJL") By letter
dated February 22, 2006, BJL tendered their resignation as our independent
accounting firm. We reported this event on Form 8-k which was filed with the
Securities and Exchange Commission on March 6, 2006. Concurrently therewith, we
announced the engagement of our current independent certifying accounting firm,
MS Group CPA., LLC.
We did not have any disagreements with BJL on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved to BJL's satisfaction, would have caused BJL
to make reference to the subject matter of the disagreement in connection with
its report.
BJL did not advise the Company that (1) the internal controls necessary to
develop reliable financial statements did not exist, (2) information had come to
Thomas' attention which made it unwilling to rely on management's
representations, or unwilling to be associated with the financial statements
prepared by management, and (3) the scope of the audit needed to be expanded
significantly, and information had come to Thomas' attention that it had
concluded will, or if further investigated might, materially impact the fairness
or reliability of a previously issued audit report or the underlying financial
statements, or the financial statements issued or to be issued covering the
fiscal period(s) subsequent to the date of the most recent audited financial
statements (including information that might preclude the issuance of an
unqualified audit report), and the issue was not resolved to Thomas'
satisfaction prior to its resignation or dismissal.
On April 29, 2005 we reported on Form 8-k as filed with the Securities and
Exchange Commission that Hurley and Associates ("Hurley") has been discharged as
our independent accounting firm. Hurley was the independent auditor for the
Company prior to its acquisition by Cybrdi.
We did not have any disagreements with Hurley on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved to Hurley's satisfaction, would have caused
Hurley to make reference to the subject matter of the disagreement in connection
with its report.
Weinberg & Company, P.A. ("Weinberg") was the independent certifying accounting
firm for Cybrdi, Maryland and audited Cybrdi Maryland for the year ended
December 31, 2003. We did not have any disagreements with Weinberg on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which, if not resolved to Weinberg's satisfaction,
would have caused Weinberg to make reference to the subject matter of the
disagreement in connection with its report.
18
ITEM 9B. CONTROLS AND PROCEDURES
We have no formal audit committee. However, our entire Board of Directors (the
"Board") serves in the capacity of the audit committee. In discharging its
oversight responsibility as to the audit process, the Board obtained from the
independent auditors a formal written statement describing all relationships
between the auditors and us that might bear on the auditors' independence as
required by Independence Standards Board Standard No. 1, "Independence
Discussions with Audit Committees." The Board discussed with the auditors any
relationships that may impact their objectivity and independence, including fees
for non-audit services, and satisfied itself as to the auditors' independence.
The Board also discussed with management and the independent auditors the
quality and adequacy of its internal controls. The Board reviewed with the
independent auditors their management letter on internal controls.
The Board discussed and reviewed with the independent auditors all matters
required to be discussed by auditing standards generally accepted in the United
States of America, including those described in Statement on Auditing Standards
No. 61, as amended, "Communication with Audit Committees". The Board reviewed
the audited consolidated financial statements of the Company as of and for the
year ended December 31, 2005 with management and the independent auditors.
Management has the responsibility for the preparation of the Company's financial
statements and the independent auditors have the responsibility for the
examination of those statements. Based on the above-mentioned review and
discussions with the independent auditors and management, the Board of Directors
approved the Company's audited consolidated financial statements and recommended
that they be included in its Annual Report on Form 10-K for the year ended
December 31, 2005, for filing with the Securities and Exchange Commission.
As of the end of the year ended October 31, 2003, the Company changed
independent auditors from Beckman Kirkland & Whitney to Hurley & Company
effectiveperiod covered by this report (the "Evaluation Date"), we
carried out an evaluation in accordance with the year ended October 21, 2003. There were no disagreements with
Beckman Kirkland & Whitney.
ITEM 9A. CONTROLS AND PROCEDURES
Yanbiao Bai,requirements of the Chinese
auditing standards as well as the applicable rules in the United States. The
Company had set up an audit group, which consisted of the Chief Executive
Officer, Chief Financial Officer, one of the members of the board of directors
and two executives (including the manager) from our currentinternal audit department.
..This audit group is under the supervision of our Chief Executive Officer and
Chief Financial officer
only recently assumed office and was not in charge of theOfficer. The Company's disclosure
controls and procedures during the period covered by this report. However, as
part of the due diligence investigation carried on in connection with the merger
with Cybrdi, Mr. Baiaudit group evaluated Certron's activities
The evaluation was carried out to determine the effectiveness
of the design and operation of the Company'sour disclosure controls and procedures (asas defined
in Rule 13a-15(e) orand 15d-15(e) under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act") of October 31, 2004.our Annual Report on Form 10-K before it was
filed with the Securities and Exchange Commission. The audit group made their
evaluation pursuant to Rule 13a-15 under the Exchange Act to the maximum
possible extent and to the best knowledge of the audit group. Based upon theour
evaluation, theour Chief Executive Officer and our Chief Financial Officer
concluded that, as of the design and operation of theseEvaluation Date, our disclosure controls and
procedures were effective and basically sound in all material aspects under Rule
13a-15.
However, given the fact that our major operations are located China, the Company
and the audit group consistently make efforts to coordinate the evolving control
and disclosure environment in China with the regulatory environment in the
United States. The Company has identified this aspect as an area for Certron's prior
activities.
New controlsimprovement
and proceduresis taking measures to train its staff for better performance.
The Company anticipates that it will be implementedfully compliant with Section 404 of the
Sarbanes-Oxley Act of 2002 by the required date for the operations of Cybrdi.
During the period covered by this report, there have been no changesnon-accelerated filers and
it is in the Company'sprocess of reviewing its internal control over financial reportingsystems in order to be
compliant with Section 404 of the Sarbanes-Oxley Act. However, at this time the
Company makes no representation that have materially
affected or are reasonably likely to materially affect the Company'sits systems of internal control over financial reporting.
24comply with
Section 404 of the Sarbanes-Oxley Act.
ITEM 9C. OTHER INFORMATION.
Not applicable.
19
PART III
ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE REGISTRANT.
SetEXCHANGE ACT
The following table sets forth belowthe names, ages, principal offices and positions
and the date each such person became a director or executive officer. Executive
officers are elected annually by our Board of Directors. Each executive officer
holds his office until he resigns, is certain information about eachremoved by the Board or his successor is
elected and qualified. Directors are elected annually by our stockholders at the
annual meeting. Each director holds his office until his successor is elected
and qualified or his earlier resignation or removal.
Date of
Name and Principal Position Age Appointment
- -------------------------------------------------------------------
YanBiao Bai, Chairman, CEO and President 45 2003
Dr. Lei (Larry) Liu, 50 2001
Director and Former CEO
Xue Bu, Director, Treasurer & Chief 42 2005
Operating Officer
Dr. Minmin Qin, Director 48 2005
Below are brief descriptions of the Directorsbackgrounds and Executive Officerexperiences of the Company as of January 31, 2005.
Nameour current
officers and Present Position with First Elected
Company or Principal Occupation Age As Director
- ------------------------------- ----- -------------
Marshall I Kass* 75 1988directors:
Mr. YanBiao Bai, Chairman, of the Board,
Chief Executive Officer and
Chief Operating Officer of
the Company and Chairman
of the Board, Chief
Executive Officer and Chief
Operating Officer of Louart
Corporation, an investment
company
Michael S. Kass* 50 1988
Executive Vice President of
the CompanyCEO and President
and Director of Louart
Corporation, an investment
company
Susan E. Kass* 48 1988
Secretary and Treasurer of
the Company and Vice
President, Secretary and
Director of Louart
Corporation, an investment
Company
Ivalee E. Francia* 40 2003
Director of the Company and
Accounting Manager of Louart
Corporation, an investment Company
*Effective as of February 10, 2005, with the closing of the agreement and plan
of merger with Cybrdi all of the officers and directors tendered their
resignation and YanbiaoYanBiao Bai, was appointed as the Company's sole officer and
director.
In March 1996, Mr. Michael S. Kass was elected Executive Vice President of the
Company. For the five years prior thereto, he served as Vice President of the
Company. In December 1988, Mr. Marshall I. Kass was elected Chairman of the
Board of Directors and Chief Executive Officer, and in June 1990 he was elected
as the Chief Operating Officer of the Company. For more than five years and
until February 1996, Mr. Kass served as President of Louart Corporation, a
privately held investment company. In February 1996, he was elected Chairman of
the Board, Chief Executive Officer and Chief Operating Officer of Louart
Corporation. He is, and for more than the past five years has been, a Director
thereof. The Company and Marshall I. Kass are parties to an Employment
Agreement, dated as of November 1, 1993, pursuant to which Mr. Kass is employed
as the Chairman of the Board and Chief Executive Officer of the Company.
Although his Employment Agreement provides for an annual salary of $200,000 per
year (subject to adjustment at the discretion of the Board of Directors of the
Company), Mr. Kass has voluntarily taken less than that amount each of the last
three years as noted in the Summary Compensation Table contained in Item 11. The
Employment Agreement has been amended to extend the end of the term thereof to
October 31, 2004. The Employment Agreement may be earlier terminated in the
event of the death or disability of Mr. Kass or for "good cause," defined to
mean conviction of a crime directly related to his employment or a felony, gross
mismanagement of the business and affairs of the Company or breach of any
material provision of the Employment Agreement.
25
In February 1996, Mr. Michael S. Kass was elected President of Louart
Corporation. For the five years prior thereto, he served as Senior Vice
President and Director of Louart Corporation. For more than the past five years,
Ms. Susan E. Kass has served as the Secretary, Vice President and Director of
Louart Corporation. In 1990, she was elected Secretary and Treasurer of the
Company. For more than the past five years, Ms. Ivalee E. Francia has been
Accounting Manager of Louart Corporation. Mr. Marshall I. Kass is the father of
Mr. Michael S. Kass and Ms. Susan E. Kass, both of whom are siblings of one
another.
The Company has adopted a Code of Ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or controller
or persons performing similar functions. The Company will provide without charge
upon written request sent to Certron Corporation, 401 Rosemont Avenue Frederick,
Maryland 21701
Current Management
- ------------------
Yanbiao Bai, Chairman and Chief Executive Officer
- -------------------------------------------------
Yanbiao Bai, became The Company's chairman and chief executive officer on
February 10, 2005. He graduated from the Second Military Medical University in 1984,
receiving a legal qualification certificate, is an experienced entrepreneur and
corporate executive. After working in the legal field, Mr. Bai
successfully foundedSince 1999 he has served as Chairman of Shaanxi Chaoying
Group, a chain of cosmetic and personal care training schools and franchises
introducinglocated in China. Since 2003, he has served as Chairman of the chain management model into a previously fragmented
sector. Now numbering more than 3,000 schools and shops,Board of
Directors of Cybrdi, Inc. In 2006 he assumed the Shaanxi ChaoYing
Personal Care Group Limited has trained more than 20,000 sales associates and
serviced millions of retail customers with personal care products and services.role as CEO . Long interested
in Chinese traditional and modern medicine, Mr. Bai is working to apply his
marketing and management expertise to the emerging biotech field in China,
focusing on rapidly marketable products and services. Mr. Bai has been awarded
one of the Shaanxi Province "Outstanding Young Industrialist Award," among other
titles and honors.
Dr. Lei Liu, Director
Since 2000, Dr. Lei Liu has served as the president and chief executive officer
of Cybrdi, Maryland. He currently serves as a director of Cybrdi, Inc. and
during 2005 served as Cybrdi's chief executive officer until his resignation at
the end of 2005. Dr. Lei Liu enjoys his more than 25 year experiences on medical
research and clinical treatment. He has since 1999 served as president of IOI
USA. He was the visiting Professor of the Lombardi Cancer Center, Georgetown
University, Dr. Liu has held previous research positions at the University of
Virginia School of Medicine (Hematology Division), the National Cancer Institute
(Clinical Pharmacology Department), and the Armed Services University of Health
Sciences (Department of Biometrics). He has published numerous scientific
papers, including articles in Cancer Prevention and Treatment, the Journal of
Oncology, the Practical Journal of Cancer, the International Journal of Cancer,
the Journal of Neurochemistry, Clinical Cancer Research, and Biochemical
Pharmacology. His laboratory and clinical work has spanned the fields of
oncology, immunology, protein biochemistry, cell biology, molecular biology and
experimental therapeutics. Dr. Liu received his medical training and degree at
the Second Military Medical University, Shanghai, China. He also received a
Master's degree in Public Health from the Armed Services University, Bethesda,
MD, USA.
Xue Bu, Director, Treasurer & Chief Operating Officer
Ms. Xue Bu has served as an officer and director of Cybrdi, Inc. since February
2005. She obtained her B.S. in1986 from The Fourth Military Medical University
and an MBA degree from Xi'an Jiaotong University. Ms. Bu was the Vice President
of Beijing Chaoying Real Estate Company from 1999 to 2001. Since 2001, she has
served as the Deputy General Manager of Chaoying. Ms. Bu is the wife of YanBiao
Bai.
20
Dr. Minmin Qin PH.D, Director
Dr. Qin has more than 20 years research and development experience, including
eight years of biopharmaceutical development experience. Currently Dr. Qin is
Senior Director of Process Development at Five Prime Therapeutics, Inc,
California. Prior to Five Prime, Dr. Qin worked at BioMarin Pharmaceutical, Inc
for eight years, once held various positions like Director of Molecular Biology,
Director/Senior Director of Purification Development, and Senior Director of
Process Sciences. Before Biomarine, Dr. Qin worked at University of California
at Berkeley for six years, first as a Postdoctoral Associate and then a Research
Scientist. Dr. Qin received his Ph. D in Genetics from University of
Wisconsin-Madison, majoring in Molecular Biology, Dr. Qin is a PDA member, held
two patents.
Involvement in Certain Legal Proceedings
Except as indicated above, no event listed in Sub-paragraphs of Subparagraph (f)
of Item 401 of Regulation S-K, has occurred with respect to any of our present
executive officers or directors or any nominee for director during the past five
years which is material to an evaluation of the ability or integrity of such
director or officer.
FAMILY RELATIONSHIPS
Ms. Xue Bu, the Treasurer and Chief Operating Officer, is the wife of Yanbiao
Bai the Chairman, CEO and President.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a)REQUIREMENTS.
None of the Securities ActCompany's officers or directors timely complied with the e
Commission's requirements to file required reports reflecting beneficial
ownership. Each officer and director's beneficial ownership was however
identified in the Information Statement filed with the Commission on January 14,
2005. There has been no change of 1934 requires the Company's executiveownership since that date.
All officers and directors as well as persons holding more than 10%owning shares of common stock have however recently
filed the required reports under Section 16(A) of the Company's outstanding Common Stock,Act.
21
CODE OF ETHICS
The Company has a Code of Business Conduct and Ethics, which is applicable to
file initial reports of ownershipall directors, officers and reports of changes of ownershipemployees of the Company's common stock with the
Securities and Exchange Commission. Executive officers and directors are
required to furnish the Company with copies of all Section 16(a) forms that they
file.
Upon a review of these filings for the year ended October 31, 2004, the
Company's officers, directors and 10% shareholders complied with the
requirements.Company.
ITEM 11. EXECUTIVE COMPENSATION.COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth theall cash compensation paid duringor to be paid by
Cybrdi, as well as certain other compensation paid or accrued, for each of the
last three fiscal year
ended October 31, 2004,years of our company to (i) the Chief Executive Officer and (ii) any othereach named executive officer whose total compensation for such fiscal year exceeded
$100,000, for services rendered by such persons in all capacities to the
Company:officer.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Long Term Compensation Awards
-------------------- ------------------------------------------------------------- ---------------------------
Restricted Securities
FiscalStock Underlying All Other
Name and Principal Position Year Salary ($)Bonus Award Options (#) Compensation
($)(1)
- --------------------------- ------ ---------- ----------- -----------------------------------------------------------------------------------------------------------------------------------------------
YanBiao Bai, Chairman, CEO and 2005 $ - 0 - $ - 0 - $ - 0 - $ - 0 - $ - 0 -
President 2004 $ - 0 - $ - 0 - $ - 0 - $ - 0 - $ - 0 -
2003 $ - 0 - $ - 0 - $ - 0 - $ - 0 - $ - 0 -
Dr. Lei Liu, 2005 $ 60,000 $ - 0 - $ - 0 - $ - 0 - $ - 0 -
Director and Former CEO 2004 $ 60,000 $ - 0 - $ - 0 - $ - 0 - $ - 0 -
2003 $ 60,000 $ - 0 - $ - 0 - $ - 0 - $ - 0 -
Xue Bu, Director, Treasurer & 2005 $ 4,500 $ - 0 - $ - 0 - $ - 0 - $ - 0 -
Chief Operating Officer 2004 $ 4,500 $ - 0 - $ - 0 - $ - 0 - $ - 0 -
2003 $ 4,500 $ - 0 - $ - 0 - $ - 0 - $ - 0 -
Dr. Minmin Qin, PH.D. Director 2005 $ - 0 - $ - 0 - $ - 0 - $ - 0 - $ - 0 -
2004 $ - 0 - $ - 0 - $ - 0 - $ - 0 - $ - 0 -
2003 $ - 0 - $ - 0 - $ - 0 - $ - 0 - $ - 0 -
Lieping Chen, Former Director 2005 $ - 0 - $ - 0 - $ - 0 - $ - 0 - $ - 0 -
2004 $ - 0 - $ - 0 - $ - 0 - $ - 0 - $ - 0 -
2003 $ - 0 - $ - 0 - $ - 0 - $ - 0 - $ - 0 -
James Pan, Former Director 2005 $ - 0 - $ - 0 - $ - 0 - $ - 0 - $ - 0 -
2004 $ - 0 - $ - 0 - $ - 0 - $ - 0 - $ - 0 -
2003 $ - 0 - $ - 0 - $ - 0 - $ - 0 - $ - 0 -
Marshall I. Kass, Former Chairman 2005 $ - 0 - $ - 0 - $ - 0 - $ - 0 - $ - 0 -
and Former CEO and Director 2004 $ 98,000 -- $ - 0 of the Board, Chief- $ - 0 - $ - 0 - $ - 0 -
2003 $104,000 -- $ 5,621
Executive Officer and 2002 $113,000 -- $15,852
Chief Operating Officer104,000 $ - 0 - $ - 0 - $ - 0 - $ - 0 -
- -----------------------------------------------------------------------------------------------------------------------------
26EMPLOYEE STOCK OPTION PLAN
None
COMPENSATION OF INDEPENDENT DIRECTORS
None
22
Stock Options
- -------------
In January 1989,EMPLOYMENT AGREEMENTS
There are no written employment agreements with any of the Company's officers.
Mr. Bai has agreed to serve as the Company's president and chief executive
officer without compensation . There can be no assurance that he will continue
to serve as our president and chief executive officer without receiving any type
of compensation. Any compensation to be paid to Mr. Bai in the future will first
be set by our Board of Directors. Notwithstanding the foregoing, Mr. Bai has
agreed that any request for compensation on a going forward basis will not
exceed $100,000 without the consent of the Company's Board of Directors and the
shareholders.
Lei Liu has received an annual compensation of $ 60,000 for 2004 and 2005. The
Company's Board of Directors has not yet established his compensation for 2006.
Xue Bu receives an annual compensation of $4,500. She will continue to receive
this salary in 2006. However, the Board of Directors adoptedreserves the Executive Plan (then knownright to
increase this compensation level in their sole and absolute discretion.
No compensation has been paid to any director solely in connection with their
role as the 1989 Stock Option Plan) covering 150,000 shares of Common Stock which was
approved by shareholders in March 1989. In January 1995, the Board of Directors
adopted an amendment to the Executive Plan changing its name to the Executive
Stock Option Plan, increasing the number of shares of Common Stock covered
thereby from 150,000 to 300,000 and extending the expiration date of the
Executive Plan from January 1999 to January 27, 2005. In January 2001, the Board
of Directors adopted an additional amendment to the Executive Plan increasing
the number of shares of Common Stock covered thereby from 300,000 to 600,000 and
extending the expiration date of the Executive Plan to January 24, 2011, which
amendments were approved by the Company's shareholders in March 2001.
During the fiscal year ended October 31, 2004, no options were granted or
exercised under the Executive Plan.a director.
BENEFITICAL OWNERSHIP OF OFFICERS AND DIRECTORS
The following table sets forth, as of January 31, 2005April 1, 2006 information aswith respect to the
number of unexercised options (none of which are in-the-money options) held by
the Chief Executive Officer of the Company.
AGGREGATED FISCAL YEAR-END OPTION VALUES
Number of Securities
Underlying Unexercised Options at
January ___, 2005
(#)
Name Exercisable/Unexercisable
- ---------------- ---------------------------
Marshall I. Kass 0/0
Under the Executive Plan both "incentive stock options" (as defined in Section
422 of the Internal Revenue Code of 1986, as amended) and non-incentive options
can be granted to selected executives, key employees and directors (whether or
not employees) of the Company. However, incentive stock options may be granted
only to employees (including officers and directors who are employees). Under
the Executive Plan, all options are required to be granted at exercise prices of
not less than 100% of the fair market value of the Common Stock at the date the
options are granted. If an incentive stock option is granted to a more than 10%
shareholder, it must be at 110% of the fair market value of the Common Stock at
the date of grant. The number of shares of Common Stock covered by the Executive
Plan is subject to adjustment in the case of stock splits, reverse stock splits,
stock dividends, recapitalization and similar changes in the capitalization of
the Company.
Stock appreciation rights may be granted with all or part of any option granted
under the Executive Plan. Directors who are not employees of the Company are not
eligible to receive these rights. Stock appreciation rights entitle the holder
thereof, upon exercise of such rights, to surrender the related option, or any
portion thereof, and to receive, without payment to the Company (except for
applicable withholding taxes), an amount equal to the excess of the fair market
value, on the date of such exercise, of the Common Stock covered by such option
or portion thereof over the option price of the Common Stock as provided in the
option. The Board of Directors or a committee thereof has sole discretion to
determine the form in which payment may be made to the employee upon the
exercise of any stock appreciation right (i.e., Common Stock, cash, or any
combination thereof). No stock appreciation rights have been granted under the
Executive Plan.
27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth, as of October 31, 2004,
the beneficial ownership of equity securities of the Companyour common stock by each person(i) persons known by the Companyus to
beneficially own more than 5% of any classfive percent of the Company's voting securities,outstanding shares, (ii) each
Directordirector, (iii) each executive officer and Executive Officer and(iv) all Directors and Executive Officers as a group:
Beneficial Ownership of Equity Securities
of Company on October 31, 2004 (1)
-----------------------------------------
Name Common Stock Held Percent of Class
- ------------------------- ----------------- ----------------
Louart Corporation 1,672,537(2) 53.5%
1545 Sawtelle Blvd., Suite 12
Los Angeles, California 90025
Marshall I. Kass 1,481,315(3) 47.4%(3)
Michael S. Kass 1,228,725(3) 39.3%(3)
Susan E. Kass 1,206,200(3) 38.6%(3)
Ivalee E. Francia 0 0%
Directors and Officers as a 1,505,640(3) 48.1%(3)
Group (4 persons)
(1) Except as otherwise indicated, nature of beneficial ownership is possession
of sole voting and investment power. The address for each of the Directors and
Executive Officers is 1545 Sawtelle Boulevard, Suite 12, Los Angeles, California
90025.
(2) Includes 1,205,200 shares owned directly by Louart Corporation, as reported
in its Schedule 13D, dated January 1994 and filed with the Securities and
Exchange Commission. Such Schedule 13D indicates that Louart Corporation has
sole voting and dispositive power of such shares. Also includes 467,337 shares
beneficially owned by officers and directors of Louart Corporation.
(3) Includes 1,205,200 shares owned by Louart Corporation. Messrs. Marshall and
Michael Kass and Ms. Susan Kass, directors and executive
officers as a group. As of the
Company, ownApril 1, 2006, there were issued and outstanding
50,456,567 shares of the capital stock of Louart Corporation representing a
majority of the voting power of theCommon Stock. There are no outstanding capital stock thereof. Includes
for Marshall I. Kass 276,115 shares owned by him, for Michael S. Kass 1,000
shares owned by him and 22,525 shares owned by his SEP/IRA, and for Susan E.
Kass 1,000 shares owned by her. Excludes for Marshall I. Kass 81,500 shares
owned by his wife, of which shares Marshall I. Kass disclaims beneficial
ownership.
28
The following table sets forth certain information regarding the Executive Plan,
the only equity compensation plan of Certron:
EQUITY COMPENSATION PLAN INFORMATIONoptions or warrants.
NumberPercentage of
securities
remaining
NumberName of available for
securities future issuance
to be under equity
issued upon Weighted-average compensation
exerciseOfficer or Director Title Title of exercise price plans (excluding
outstandingClass No. of outstanding securities
options, warrants options, warrants reflected in
Plan Category and rights and rights column (a)Shares ownership
- ---------------------- ----------------- ------------------ -------------------------------------------- ----- -------------- ------------- --------------
(a) (b) (c)
Equity compensation plans
YanBiao Bai Chairman/CEO/Pres Common 9,156,397 (1) 18.15%
Lei Liu Director Common 6,234,766 (2) 12.36%
Xue Bu COO/Treasurer/Dir Common 0
$1.00 600,000
approved by security holders:
Equity compensation Plans not 0 0 0
approved by security holders:
Total 0 -- 600,000- ----------------------------------------------------------------------------------------------------------------------
Minmin Qin Director Common 0(4)
- ----------------------------------------------------------------------------------------------------------------------
All officers and directors as Common 15,391,163 30.50%
a group
The foregoing table does not take into account- ------------
(1) Represents shares issuableheld by the Company asShanxi Chaoying Beauty & Cosmetic Group of February 10, 2005 pursuant to the Agreement and Plan of Merger. With the
Closing of this transaction, Certron is obligated to issue up to an additional
47,328,263 shares of its common stock to the shareholders of Cybrdi. Upon
issuance of the required number of shares to the Cybrdi shareholders,which
Mr. Bai either directly or indirectlyis the president.
(2) Includes 4,370,462 shares issued to Immuno-Oncogenomics, Inc., an
affiliated entity of Lei Liu, and 1,864,304 shares which will own 9,156,394 shares of Certron common stock
or approximately 18% of the then issued and outstanding common stock.be owned
individually by Lei Liu.
23
ITEM 13.12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Louart Corporation, the beneficial owner of 53.5% of the Common Stock of the
Company and in which Messrs. Marshall and Michael Kass and Ms. Susan Kass,
directors and executive officers of the Company, own a majority of the voting
power and are executive officers and directors, leases to the Company a
warehouse and packaging facility in Corona, California. The facility in Corona,
California is leased on a triple-net basis pursuant to a lease that expires
November 30, 2003 at a monthly rental rate of approximately $7,400. On December
2, 2003, the Company moved out of the Corona property. The Company has leased a
storage area at a facility owned by Louart Corporation on a month-to-month as is
at the rate of $450 per month.
During the fiscal year ended October 31, 2004, the Company paid to Louart
Corporation approximately $109,000 for the provision of certain services,
including rent, secretarial and administrative services, consulting services and
use of an automobile, and will continue to pay Louart for such services during
the Company's current fiscal year.TRANSACTION
Not applicable.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following is a summary of the fees billed to Certron, Inc. by its principal
accountants during the fiscal years ended October 31, 2004, and 2003:
Fee Category 2004 2003
Audit fees $19,000 $26,500
Audit-related fees 0 0
Tax fees 0 0
All other fees 0 0
Total fees 0 0
Audit fees13. EXHIBITS
(a) Exhibits
Exhibit No. Description
- consists of fees for professional services rendered by our
principal accountants for the audit of our annual financial statements and the
review of financial statements included in our Forms 10-Q or services that are
normally provided by our principal accountants in connection with statutory and
regulatory filings or engagements.
Audit-related fees - consists of fees for assurance and related services by our
principal accountants that are reasonably related to the performance of the
audit or review of our financial statements and are not reported under "Audit
Fees".
Tax fees - Consists of fees for professional services rendered by our principal
accountants for tax compliance, tax advice and tax planning.
All other fees - Consists of fees for products and services provided by our
principal accountants, other than for the services reported under the above
listed fees.
29
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of Certron Corporation and
its subsidiary are included in Part II, Item 8:
Report of Independent Certified Public Accountants -
Hurley & Company 11
Report of Independent Certified Public Accountants -
Beckman Kirkland & Whitney 12
Consolidated balance sheets - October 31, 2004 and 2003 13
Consolidated statements of operations and comprehensive
income - years ended October 31, 2004, 2003 and 2002 14
Consolidated statements of stockholders' equity - years
ended October 31, 2004, 2003 and 2002 15
Consolidated statements of cash flows - years ended
October 31, 2004, 2003 and 2002 16
Notes to consolidated financial statements 17
2. FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and qualifying accounts 32
All other schedules are omitted because they are not applicable or not required,
or because the required information is included in the consolidated financial
statements or notes thereto.
3. EXHIBITS
EXHIBITS
- --------
3.1----------- -----------------------------------------------------------------
*3.1 Articles of Incorporation of Registrant, as amended (incorporated
by reference to Exhibit 3.1 to Registrant's Annual Report of from
10-K for the year ended October 31, 1981 and Exhibit "A" and
Exhibit "B" to Registrant's Proxy Statement dated February 17,
1988).
3.2*3.2 By-Laws of Registrant, as amended (incorporated by reference to
Exhibit 3.2 to Registrant's Quarterly Report on form 10-Q for the
quarter ended April 30, 1989).
3.3*3.3 Amended Articles of Incorporation as amended increasing the
number of authorized shares filed as an exhibit to the Company's Form 8-k filed
February 15, 2005.
3.4*3.4 Articles of Merger filed with the Maryland Secretary of State
filed as an exhibit to the Company's Form 8-k filed February 15, 2005
*10.1 Registrant's Executive Stock Option Plan (incorporated by reference to
Exhibit "B" to Registrant's Proxy Statement dated February 21, 1989).
*10.22005.
*3.5 Amendment to Registrant's 1989 Stock Option Plan (incorporated by
referenceArticles of Incorporation changing name to Exhibit 10.5 to Registrant's Annual Report on Form 10-K
for the year ended October 31, 1995).
*10.3 Amendment to Registrant's Executive Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10Q
for the quarter ended April 30, 2001).
*10.4 Form of Indemnification Agreement between Registrant and its Directors
and selected officers and agents (incorporated by reference to Exhibit
"C" to Registrant's Proxy Statement dated February 17, 1988).
*10.5 Employment Agreement effective as of November 1, 1993 between
Registrant and Marshall I. Kass (incorporated by reference to Exhibit
10.1 to Registrant's Quarterly Report on Form 10-Q for quarter ended
January 31, 1994).
30
*10.6 Amendment to Employment Agreement between Registrant and Marshall I.
Kass dated November 1, 1998 (incorporated by reference to Exhibit 10.8
to Registrant's Annual Report on Form 10-K for the year ended October
31, 1998).
10.7 Agreement and Plan of Merger among Certron Corporation, Certron
Acquisition Corp. and Cybrdi,
Inc. filed as an exhibit to the Company's
Form 8-k filed November 17, 2005.
21. Subsidiaries of Registrant (incorporated by reference to Exhibit 22 to
Registrant's Annual report on form 10-K for the year ended October 31,
1981).
23.1 Beckman Kirkland & Whitney consent.
23.2 Hurley & Company consent.
31. Rule 13a-14(a)/15d-14(a) Certification
32. Certification of Chief Executive Officer and Chief Financial Officer
under Section 906 of the Sarbanes-Oxley Act of 2002.
* Indicates management contract or compensation plan or arrangement required
to be filed as an Exhibit to this Form 10-K
(b) Form 8-K During the Fourth Quarter of the Registrant's fiscal year ended
October 31, 2994 we filed a Form 8-k on August 17, 2004 in connection with
the proposed agreement with Cybrdi.
31
CERTRON CORPORATION AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
charged to
expense/
Balance at (subtractions Balance of Balance at
beginning charged to accounts end of
Classifications of period income) written off period
- --------------- --------- ------------ ----------- ----------
YEAR ENDED OCTOBER 31, 2004
Allowance for doubtful
accounts $ 15,000 ($15,000) $ 0 $ 0
Inventory reserve for
obsolescence $ 177,000 ($172,000) $ 0 $ 5,000
YEAR ENDED OCTOBER 31, 2003
Allowance for doubtful
accounts $ 7,000 $ 8,000 $ 0 $ 15,000
Inventory reserve for
obsolescence $ 8,000 $ 169,000 $ 0 $ 177,000
YEAR ENDED OCTOBER 31, 2002
Allowance for doubtful
accounts $ 25,000 ($18,000) $ 0 $ 7,000
Inventory reserve for
obsolescence $ 5,000 $ 3,000 $ 0 $ 8,000
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 14, 2005
CERTRON CORPORATION
By /s/ Yanbiao Bai
------------------------
Yanbiao Bai
Chairman of the Board and
Chief Executive and
Operating Officer
33
EXHIBIT INDEX
EXHIBITS
-------
3.1 Articles of Incorporation of Registrant, as amended (incorporated by
reference to Exhibit 3.1 to Registrant's Annual Report of from 10-K for
the year ended October 31, 1981 and Exhibit "A" and Exhibit "B" to
Registrant's Proxy Statement dated February 17, 1988).
3.2 By-Laws of Registrant, as amended (incorporated by reference to Exhibit
3.2 to Registrant's Quarterly Report on form 10-Q for the quarter ended
April 30, 1989).
3.3 Amended Articles of Incorporation as amended increasing the number of
authorized shares filed as an exhibit to the Company's Form 8-k filed
February 15, 2005.
3.4 Articles of Merger filed with the Maryland Secretary of State filed as
an exhibit to the Company's Form 8-k filed February 15, 20056, 3005.
*10.1 Registrant's Executive Stock Option Plan (incorporated by
reference to Exhibit "B" to Registrant's Proxy Statement dated
February 21, 1989).
*10.2 Amendment to Registrant's 1989 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to Registrant's Annual Report on Form
10-K for the year ended October 31, 1995).
*10.3 Amendment to Registrant's Executive Stock Option Plan
(incorporated by reference to Exhibit 10.1 to Registrant's
Quarterly Report on Form 10Q for the quarter ended April 30,
2001).
*10.4 Form of Indemnification Agreement between Registrant and its
Directors and selected officers and agents (incorporated by
reference to Exhibit "C" to Registrant's Proxy Statement dated
February 17, 1988).
*10.5 Employment Agreement effective as of November 1, 1993 between
Registrant and Marshall I. Kass (incorporated by reference to
Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for
quarter ended January 31, 1994).
*10.6 Amendment to Employment Agreement between Registrant and Marshall
I. Kass dated November 1, 1998 (incorporated by reference to
Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the
year ended October 31, 1998).
10.7*10.7 Agreement and Plan of Merger among Certron Corporation, Certron
Acquisition Corp. and Cybrdi, Inc. filed as an exhibit to the
Company's Form 8-k filed November 17,February 15, 2005.
21. Subsidiaries31.1 Rule 13(a)-14(a)/15(d)-14(a) Certification
31.2 Rule 13(a)-14(a)/15(d)-14(a) Certification
32.1 Certification Under Section 906 of Registrant (incorporated by reference to Exhibit 22 to
Registrant's Annual report on form 10-K for the year ended October 31,
1981).
23.1 Beckman Kirkland & Whitney consent.
23.2 Hurley & Company consent.
31. Rule 13a-14(a)/15d-14(a)Sarbanes-Oxley Act fof
2002
32.2 Certification 32. Certification of Chief Executive Officer and Chief Financial Officer
underUnder Section 906 of the Sarbanes-Oxley Act of 2002.
(1) Represents premiums paid2002
- ------------
* Previously filed
(b) There were no reports filed on Form 8-k during the fourth quarter
of the Company's fiscal year.
24
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The aggregate fees billed for each of the last two years for professional
services rendered by the principal accountant for our audits of our annual
financial statements and interim reviews of our financial statements included in
our Form 10-K and 10-Q or services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements
for those years were approximately:
2005: $61,500 Bagell, Josephs LLC
2004: $70,000 Weinberg & Company, P.A.
Audit Related Fees
The aggregate fees billed in each of the last two years for the assurance and
related services provided by the principal accountant that are not reasonably
related to the performance of the audit or review of the Company's financial
statements and are not reported in paragraph (1) were approximately:
2005: $0
2004: $15,000 Weinberg & Company, P.A.
We incurred these fees in connection with registration statements and financing
transactions.
Tax Fees
The aggregate fees billed in each of the last two years for the professional
services rendered by the principal accountant for tax compliance, tax advice and
tax planning were approximately:
2005: $3,500
2004: $5,000 Weinberg & Company, P.A.
We incurred these fees due to the preparation of our tax returns.
All Other Fees
The aggregate fees billed in each of the last two years for the products and
services provided by the principal accountant, other than the services reported
in paragraph (1) were approximately:
2005: $0
2004: $0 Weinberg & Company, P.A.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: July 7, 2006
By: /s/ YanBiao Bai
------------------------------------------
Name: YanBiao Bai
Title: Chief Executive Officer and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following person on behalf of the Registrant
and in the capacities and on the dates indicated.
Name and Principal Position Signature Date
- --------------------------------------------------------------------------------
YanBiao Bai, Chairman, CEO and President /s/YanBaio Bai July 7, 2006
Lei Liu , Director /s/Lei Liu July 7, 2006
Xue Bu, Director, Treasurer & COO /s/Xue Bu July 7, 2006
Minmin Qin, Director /s/Minmin Qin July 7, 2006
- --------------------------------------------------------------------------------
26
CYBRDI INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
CYBRDI INC. AND SUBSIDIARY
CONTENTS
PAGE 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PAGE 2 CONSOLIDATED BALANCE SHEETAS OF DECEMBER 31, 2005 AND 2004
PAGE 3 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
PAGE 4 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
PAGE 5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004 AND 2003
PAGE 6 - 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORET OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Cybrdi, Inc. (f/k/a Certron Corporation)
We have audited the accompanying consolidated balance sheets of Cybrdi, Inc.
(f/k/a Certron Corporation.) as of December 31, 2005 and 2004 and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cybrdi, Inc. (f/k/a
Certron Corporation.) as of December 31, 2005 and 2004 and the results of its
consolidated operations, changes in stockholders' equity, and cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
MS Group CPA LLC
MS Group CPA LLC
New York, NY
March 9, 2006
F-1
CYBRDI, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2004
================================================================================
Dec 31, 2005 Dec 31, 2004
----------- -----------
ASSETS
-------
CURRENT ASSETS
Cash and cash equivalents $ 4,206,695 $ 3,899,706
Accounts receivable 360,503 252,179
Inventories 263,634 264,827
Other receivables and prepaid expenses 96,626 7,058
---------- -----------
TOTAL CURRENT ASSETS 4,927,458 4,423,770
PROPERTY, PLANT AND EQUIPMENT, NET 553,382 628,897
INTANGIBLE ASSETS (NET) 581,593 644,423
DEFERRED TAX ASSETS 41,199 40,171
---------- -----------
TOTAL ASSETS $ 6,103,632 $ 5,737,261
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 34,118 $ 47
Other payables 51,193 59,133
Amount due to stockholders 645,021 555,222
---------- -----------
TOTAL CURRENT LIABILITITES 730,332 614,402
MINORITY INTERESTS 1,149,158 1,023,198
TOTAL LIABILITIES 1,879,490 1,637,600
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, $1.00 per value, 500,000 shares authorized,
zero shares issued and outstanding -- --
Common Stock, no par value in 2005 and $0.10 par value in 2004, 150,000,000
shares in 2005 and 35,000,000 shares in 2004 authorized,
50,456,569 shares in 2005 and 30,210,000 shares in 2004 issued and outstanding -- 3,021,000
Additional paid-in capital 3,601,932 572,232
Reserve funds 336,885 240,416
Retained earnings 174,416 265,757
Accumulated other comprehensive income 110,909 256
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 4,224,142 4,099,661
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,103,632 $ 5,737,261
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
CYBRDI, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR YEAR ENDED DECEMBER 31, 2005, 2004 AND 2003
================================================================================
Year ended
-----------------------------------------------
December 31, December 31, December 31,
2005 2004 2003
------------- ------------- -------------
Revenue
Products $ 1,173,171 $ 1,175,235 $ 812,954
Service rendered 254,628 357,808 414,440
------------- ------------- -------------
Total revenue 1,427,799 1,533,043 1,227,394
------------- ------------- -------------
Cost of sales
Products 244,331 294,373 256,354
Service rendered 35,507 38,527 40,522
------------- ------------- -------------
Total cost of sales 279,838 332,900 296,876
------------- ------------- -------------
Gross profit 1,147,961 1,200,143 930,518
------------- ------------- -------------
Operating expenses:
Selling and distribution expenses 100,173 79,887 66,398
General and administrative expenses 581,835 581,596 548,896
------------- ------------- -------------
Total operating expenses 682,008 661,483 615,294
------------- ------------- -------------
Income from operations 465,953 538,660 315,224
------------- ------------- -------------
Other income/(expense)
Interest income 30,408 8,140 7,150
Other (expense)/income, net (317,127) 91,249 36,718
------------- ------------- -------------
Total other (expense)/ income (286,719) 99,389 43,868
------------- ------------- -------------
Income before income taxes 179,234 638,049 359,092
Income taxes (expenses)/benefit (48,097) -- 40,170
------------- ------------- -------------
Income before minority interest 131,137 638,049 399,262
Minority Interest 126,009 149,216 138,912
------------- ------------- -------------
Net income $ 5,128 $ 488,833 $ 260,350
------------- ------------- -------------
Other comprehensive loss:
Foreign currency translation gain 110,653 68 188
------------- ------------- -------------
Comprehensive income $ 115,781 $ 488,901 $ 260,538
============= ============= =============
Weighted average number of shares outstanding * 50,456,569 25,954,898 20,247,729
============= ============= =============
Earnings per share, basic and diluted $ 0.00 $ 0.02 $ 0.01
============= ============= =============
- ------------
* As restated to show recapitalization.
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
CYBRDI INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
================================================================================
Retained Accumulated
Additional earnings / other
Common Stock paid-in Reserve accumulated comprehensive
Shares Amount capital fund deficit income Total
------------ ----------- ----------- ----------- ----------- ---------- -----------
Balance as of
December 31, 2002 28,959 $ 2,896 $ (896) $ -- $ (115,114) $ -- $ (113,114)
Capital contribution 24,590,396 2,459,040 600,072 -- -- -- 3,059,112
Imputed rent expenses -- -- 8,700 -- -- -- 8,700
Net income -- -- -- -- 260,350 -- 260,350
Appropriation of
reserve funds -- -- -- 118,234 (118,234) -- --
Dividends payable - subsidiary -- -- -- -- (127,896) -- (127,896)
Foreign currency
translation gain -- -- -- -- -- 188 188
------------ ----------- ----------- ----------- ----------- ---------- -----------
Balance as of
December 31, 2003 24,619,355 2,461,936 607,876 118,234 (100,894) 188 3,087,340
Capital contribution 5,590,645 559,064 447,252 -- -- -- 1,006,316
Net income -- -- -- -- 488,833 -- 488,833
Imputed rent expenses -- -- 8,700 -- -- -- 8,700
Write off private placement
cost -- -- (491,596) -- -- -- (491,596)
Appropriation of
Reserve funds -- -- -- 122,182 (122,182) -- --
Foreign currency
translation gain -- -- -- -- -- 68 68
------------ ----------- ----------- ----------- ----------- ---------- -----------
Balance as of
December 31, 2004 30,210,000 3,021,000 572,232 240,416 265,757 256 4,099,661
Recapitalization (30,210,000) (3,021,000) 3,021,000 -- -- -- --
Merged with Cybrdi Maryland 50,456,569 -- -- -- -- -- --
Net income -- -- -- -- 5,128 -- 5,128
Imputed rent expenses -- -- 8,700 -- -- -- 8,700
Appropriation of
Reserve funds -- -- -- 96,469 (96,469) -- --
Foreign currency
translation gain -- -- -- -- -- 110,653 110,653
------------ ----------- ----------- ----------- ----------- ---------- -----------
Balance as of
December 31, 2005 50,456,569 $ -- $ 3,601,932 $ 336,885 $ 174,416 $ 110,909 $ 4,224,142
============ ============ =========== =========== =========== ========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
CYBRDI INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,2005, 2004 AND 2003
================================================================================
Year ended
-----------------------------------------
December 31, December 31, December 31,
2005 2004 2003
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,128 $ 488,833 $ 260,350
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 196,809 191,637 191,738
Minority interest's share of net income 126,009 149,239 138,912
Imputed rental income 8,700 8,700 8,700
Changes in operating assets and liabilities:
Deferred tax assets (2) -- (40,171)
Deferred revenue -- (99,315) 99,315
Accounts receivable, net (99,338) 97,851 (88,199)
Inventories 7,764 (49,198) 12,561
Other receivable and prepaid expenses (87,159) 304,055 152,518
Accrued interest receivable -- 7,045 --
Accounts payable and accrued expenses 33,220 (2,852) (139,666)
Other payables and liabilities (9,216) 32,902 (57,472)
Customer Deposit -- (6,197) 1,197
----------- ----------- -----------
Net cash provided by operating activities 181,915 1,122,700 539,783
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received from acquisition -- -- 690,816
Purchase of property, plant and equipment (30,173) (20,916) (205,674)
----------- ----------- -----------
Net cash (used in) provided by investing activities (30,173) (20,916) 485,142
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds advanced from shareholders 77,953 63,538 378,284
Payment on short-term loan -- -- (181,223)
Payment on related company loan -- -- (16,673)
Payment of dividend -- (157,651) --
Proceeds from private placement -- 1,006,316 1,000,648
Payment for private placement costs -- (179,933) (158,347)
----------- ----------- -----------
Net cash provided by financing activities 77,953 732,270 1,022,689
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS 229,695 1,834,054 2,047,614
Effect of exchange rate changes on cash 77,294 66 190
Cash and cash equivalents, at beginning of period 3,899,706 2,065,586 17,782
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 4,206,695 $ 3,899,706 $ 2,065,586
=========== =========== ===========
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid $ -- $ 2,500 $ 2,500
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Cybrdi, Inc. (f/k/a Certron Corporation) (the "Company" or "Cybrdi")
was incorporated on August 1, 1966, under the laws of the State of
California. Until around June 2004, the Company's business consisted
primarily of the distribution of magnetic media products, primarily
blank audio and video cassettes. Due to continuing intense price
competition and technological changes in the marketplace for its
products, the Company lost its remaining significant customers and
disposed of or wrote off its remaining inventory. As a result of these
occurrences, the Company concluded that its audio and videotape
businesses were no longer viable and some of its product lines were
obsolete and the Company placed its emphasis on attempting to find a
buyer for the Company.
In November 2004, the Company, through Certron Acquisition Corp., a
newly formed Maryland corporation and wholly-owned subsidiary of the
Company ("Acquisition Sub") acquired all the ownership interest in
Cybrdi, Inc., a privately held company incorporated in the State of
Maryland ("Cybrdi Maryland"). The Company acquired Cybrdi Maryland in
exchange for 47,328,263 shares of common stock of the Company.
Subsequent to the merger, the former shareholders of Cybrdi Maryland
own approximately 93.8% of the outstanding shares of the Company's
common stock. As a result of the ownership interests of the former
shareholders of Cybrdi Maryland, for financial statement reporting
purposes, the merger was treated as a reverse acquisition, with Cybrdi
Maryland deemed the accounting acquirer and Centron Corporation deemed
the accounting acquiree. Historical information of the surviving
company is that of Cybrdi Maryland.
Cybrdi Maryland was established in 2001 to acquire an interest in
biogenetic products commercialization and related services entities in
Asia. On March 5, 2003, Cybrdi Maryland acquired 80% interest of the
Shaanxi Chao Ying Biotechnology Co., Ltd. ("Chaoying Biotech"), a
sino-foreign equity joint venture established in July 2000 in the
People's Republic of China ("PRC"), through the exchange of 99% of the
Company's shares to the existing shareholders of Chaoying Biotech.
Chaoying Biotech is a sino-foreign equity joint venture between Shaanxi
Chao Ying Personal Care Group Ltd. (the "Chinese Partner", a PRC
corporation) and Immuno-OncoGenomics Inc. (the "Foreign Partner", a USA
corporation). The joint venture agreement has a 15 year operating
period starting from its formation in July 2000 and is extendable upon
mutual consent of both partners. The principal activities of Chaoying
Biotech are research, manufacture and sale of various high-quality
tissue arrays and the related services in the PRC.
Most of the Company's activities are conducted through Chaoying
Biotech. Chaoying Biotech, with its principal operations located in
China, aims to take advantage of China's abundant scientific talent,
low wage rates, less stringent biogenetic regulation, and the huge
genetic population as it introduces its growing list of tissue
microarray products.
On February 10, 2005, the Company completed the merger with Cybrdi
Maryland and changed its name to Cybrdi, Inc.
F-6
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United
States of America ("US GAAP"). This basis of accounting differs from
that used in the statutory accounts of the Subsidiary, which were
prepared in accordance with the accounting principles and relevant
financial regulations applicable to enterprises with foreign investment
in the PRC ("PRC GAAP"). Necessary adjustments were made to the
Subsidiary's statutory accounts to conform to US GAAP to be included in
these consolidated financial statements.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principle of consolidation - The accompanying consolidated
financial statements present the financial position, results
of operations and cash flows of the Company and all entities
in which the Company has a controlling voting interest. The
consolidated financial statements also include the accounts of
any variable interest entities in which the Company is
considered to be the primary beneficiary and such entities are
required to be consolidated in accordance with accounting
principles generally accepted in the United States ("US
GAAP"). The consolidated financial statements include the
financial statements of Cybrdi, Inc. and its subsidiary. All
significant intercompany transactions and balances are
eliminated in consolidation.
(b) Use of estimates - The preparation of financial statements
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results could
differ from those estimates.
(c) Cash and cash equivalents- For financial reporting purposes,
the Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents.
(d) Inventories- Inventories are stated at the lower of cost or
market. Cost of raw materials is determined on the basis of
first in first out method ("FIFO"). Finished goods are
determined on the weighted average basis and are comprised of
direct materials, direct labor and an appropriate proportion
of overhead.
F-7
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(e) Property, plant and equipment - Property, plant and equipment
are stated at cost less accumulated depreciation and
amortization. Depreciation on property, plant and equipment is
calculated on the straight-line basis to write off the cost of
assets over their respective estimated useful lives. Leasehold
improvements are amortized over the estimated useful life insuranceof
the improvement or the lease term, whichever is shorter.
Estimated useful lives of the property, plant and equipment
are as follows:
Buildings 20 years
Plant and machinery 10 years
Motor vehicles 10 years
Office equipment 5 years
Leasehold improvements Lower of term of lease or 5 years
Software - website 3 years
The cost and related accumulated depreciation of assets sold
or otherwise retired are eliminated from the accounts and any
gain or loss is included in the statements of operations. The
cost of maintenance and repairs is charged to income as
incurred, whereas significant renewals and betterments are
capitalized.
Long-term assets of the Company are reviewed annually as to
whether their carrying value has become impaired, pursuant to
the guidelines established in Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The Company also
re-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates
of useful lives.
(f) Accounts and other receivables - Accounts and other
receivables are recognized and carried at original invoice
amount less allowance for any uncollectible amounts. An
estimate for doubtful accounts is made when collection of the
full amount is no longer probable. As of December 31, 2005 and
2004, the company has not recorded an allowance for
uncollectible accounts.
(g) Research and development costs - Research and development
costs are charged to operations when incurred and are included
in operating expenses. The amounts charged in 2005, 2004 and
2003 were $7,936, $2,067 and $0, respectively.
(h) Advertising costs - Advertising costs are charged to
operations when incurred and are included in operating
expenses. Advertising expenses were $27,082, $11,906 and
$7,179 for the years ended December 31, 2005, 2004 and 2003,
respectively.
F-8
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(i) In-kind contribution - From inception through December 2005, a
related party provided office space and utilities to the
Company's subsidiary in PRC. The Company was not required to
pay for its use of the facilities. Accordingly, the Company
recognized $8,700 of expenses during 2005, 2004 and 2003, for
these contributed items with an offsetting increase in
additional paid-in capital. Management estimated the value of
the contributed items.
(j) Fair value of financial instruments - The carrying amounts of
cash and cash equivalents, accounts receivable, other
receivables, accounts payable, other payables, dividends
payable and amounts due to shareholders approximate fair value
due to the short-term maturities of the assets and
liabilities.
(k) Revenue recognition - Revenue represents the invoiced value of
goods sold recognized upon the delivery of goods to customers
and service income is recognized when services are provided.
Deferred revenue represents the undelivered portion of
invoiced value of goods sold to customers. Sales transactions
not meeting all the conditions of the full accrual method are
accounted for using the deposit method of accounting. Under
the deposit method, all costs are capitalized as incurred, and
payments received from the buyer are recorded as customer
deposits.
(l) Foreign currency translation - The accompanying consolidated
financial statements are presented in United States dollars.
The functional currency of the Company's PRC subsidiary is
Renminbi (RMB). The financial statements are translated into
United States dollars from RMB at year-end exchange rates as
to assets and liabilities and weighted average exchange rates
as to revenues and expenses. Capital accounts are translated
at their historical exchange rates when the capital
transactions occurred.
The RMB is not freely convertible into foreign currency and
all foreign exchange transactions must take place through
authorized institutions. No representation is made that the
RMB amounts could have been, or could be, converted into US$
at the rates used in translation.
(m) Income Taxes -Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist
of taxes currently due plus deferred taxes related primarily
to differences between the basis of assets and liabilities for
financial and income tax reporting. The deferred tax assets
and liabilities represent the future tax return consequences
of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or
settled. Deferred taxes also are recognized for operating
losses that are available to offset future federal and state
income taxes.
(n) Deferred private placement costs - In connection with the
private placement, the Company incurred certain costs
associated with the private placement amounting to $311,663
during 2003. These costs accumulated to $491,596 in 2004
before placement and had been offset against the proceeds from
the placement, which occurred in 2004.
(o) In-kind contribution - From inception through December 2004, a
related party provided office space and utilities to the
Company. The Company was not required to pay for its use of
the facilities. Accordingly, the Company recognized $8,700 of
expenses during 2004 and 2003, for these contributed items
with an offsetting increase in additional paid-in capital.
Management estimated the value of the contributed items.
F-9
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(p) Comprehensive income (loss) - SFAS No. 130, "Reporting
Comprehensive Income", established standards for the reporting
and display of comprehensive income, its components and
accumulated balances in a full set of general purpose
financial statements. SFAS No. 130 defines comprehensive
income to include all changes in equity except those resulting
from investments by owners and distributions to owners. Among
other disclosures, SFAS No. 130 requires that all items that
are required to be recognized under current accounting
standards as components of comprehensive income be reported in
a financial statement that is presented with the same
prominence as other financial statements. The Company's only
current component of comprehensive income is the foreign
currency translation adjustment.
(q) Intangible assets - Intangible assets include a patent.
Effective January 1, 2002, with the adoption of SFAS No. 142,
intangible assets with a definite life are amortized on a
straight-line basis. The patent is being amortized over its
estimated life of 10 years. Intangible assets with a definite
life are tested for impairment whenever events or
circumstances indicate that a carrying amount of an asset
(asset group) may not be recoverable. An impairment loss would
be recognized when the carrying amount of an asset exceeds the
estimated undiscounted cash flows used in determining the fair
value of the asset. The amount of the impairment loss to be
recorded is calculated by the excess of the asset's carrying
value over its fair value. Fair value is generally determined
using a discounted cash flow analysis. Costs related to
internally develop intangible assets are expensed as incurred.
4. TAXATION
(a) Corporation Income Tax
The operations in the United States of America have had
operational losses since inception. The possible future
deferred tax benefit arise from the net operating loss carry
forward has been fully offset by a full valuation allowance.
(b) Corporation Income Tax ("CIT") of the Company's subsidiary in
PRC
In accordance with the relevant tax laws and regulations of
the PRC, the Company's subsidiary is entitled to full
exemption from CIT for the first two years and a 50% reduction
in CIT for the next three years, commencing from the first
profitable year after offsetting all tax losses carried
forward from the previous five years. As 2003 was the
Company's first profitable year, the Company was entitled to a
full exemption from CIT for the year starting 2003.
The Company's tax expense differs from the "expected" tax
expense for the years ended December 31, 2004 and 2003
(computed by applying the CIT rate of 33 percent and 24
percent in 2004 and 2003 to net income) as follows:
2004 2003
----------- ----------
Computed "expected" expense $ 268,663 $ 209,759
Effect of unused net operating
loss carried forward -- (40,810)
CIT exemption (268,663) (168,949)
----------- ----------
Income tax expense $ -- $ --
=========== ==========
F-10
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company begins to record 50% CIT provision from the first
quarter of 2005. Effective tax rate is approximately 7.5% for
the year ended December 31, 2005.
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets are as follows at
December 31:
2005 2004
---------- ----------
Deferred tax assets:
Organization fee $ 43,640 $ 40,377
Provision for bad debts 0 2,209
Others (2,441) (2,416)
---------- ----------
Total gross deferred tax assets 41,199 40,170
Less: Valuation allowance -- --
---------- ----------
Net deferred tax assets $ 41,199 $ 40,170
========== ==========
There was no valuation allowance as of December 31, 2005 and
2004.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of
December 31:
2005 2004
------------ ------------
At cost:-
Buildings $ 64,758 $ 63,144
Plant and machinery 395,741 383,424
Motor vehicles 254,004 234,341
Office equipments 94,598 77,178
Leasehold improvement 226,520 220,873
Software - website 83,963 82,160
------------ ------------
1,119,584 1,061,120
Less: Accumulated depreciation and
amortization: 566,202 432,223
------------ ------------
Net book value $ 553,382 $ 628,897
============ ============
Depreciation and amortization expenses for the years ended December 31,
2005, 2004 and 2003 were $133,979, $114,355 and $140,216, respectively.
F-11
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6. INVENTORIES
Inventories consist of the following as of December 31:
2005 2004
----------- -----------
Raw materials $ 11,723 $ 17,168
Finished goods 251,911 247,659
----------- -----------
$ 263,634 $ 264,827
=========== ===========
7. INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31:
2005 2004
----------- -----------
Patent $ 773,227 $ 773,227
Less : Accumulated amortization 191,634 128,804
----------- -----------
$ 581,593 $ 644,423
=========== ===========
Amortization expenses for the years ended December 31, 2005, 2004, and
2003 were $62,830, $77,282 and $51,522, respectively.
Expected amortization expenses in the next five years are as follows:
2006 $ 62,830
2007 62,830
2008 62,830
2009 62,830
2010 62,830
8. AMOUNT DUE TO STOCKHOLDERS
During the years ended December 31, 2005 and 2004, officers of the
Company made advances to the Company to assist with operations. These
advances were non-interest bearing and have no set repayment terms. As
of December 31, 2005 and 2004, the Company owed the officers $ 638,821
and $555,222, respectively.
9. COMMITMENTS, CONTINGENCIES, AND LEGAL PROCEEDINGS
There is no material pending legal proceedings to which the Company is
a party. The Company was notified by a letter dated June 2, 2000
received June 6, 2000 that the Company may has a potential liability
from waste disposal in the Casmalia Disposal Site at Santa Barbara
County, California. The Company was given a choice of either signing an
agreement that would toll the statute of limitations for eighteen (18)
months in order to allow us to resolve any liability with the
government without incurring costs associated with being named a
defendant in a lawsuit, or becoming an immediate defendant in a
lawsuit. The Company signed the tolling agreement. On November 20,
2001, the tolling agreement was extended for an additional 18 months.
F-12
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On May 20, 2003 the tolling agreement was again extended for an
additional 18 months and on November 24, 2004 the tolling agreement was
again extended for additional 18 months. On June 29, 2004, the Company
received a proposed settlement from the EPA in the amount of $21,131.
The Company is waiting for communication from the government concerning
payment of the proposed settlement. As of December 31, 2005, the
Company has accrued a sufficient amount to cover any potential
liabilities from this matter under other payable.
From inception through December 31, 2005, a related party provided free
office space and utilities to the Company's subsidiary in PRC. During
the years ended December 31, 2005, 2004 and 2003, the Company
recognized $8,700 as expenses for these contributed items with an
offsetting increase in additional paid-in capital. This arrangement was
expired on December 31, 2005.
The Company leased an office space in Maryland USA under a
month-to-month term operating lease. The rent payment under this
operating lease was $2,180 per month.
Total rental expense charged to operations amounted to $26,360,
$45,107, and $12,524 for each of the years ended December 31, 2005,
2004, and 2003 respectively.
10. GOVERNMENT GRANT
In 2000, the PRC Government launched the "Western Development Project"
which part of the project included the development of 15 specifically
named technologies and has allocated government grants to encourage the
development of these technologies. In 2005, 2004 and 2003, the Company
has successfully applied and received the government grants under the
Western Development Project amounting to $56,263, $138,507 and $33,324
for the years ended December 31, 2005, 2004 and 2003, respectively. The
government grant has been included in Other Income, net in the
accompanying statements of operations and comprehensive income/ (loss).
11. STOCKHOLDERS' EQUITY
On February 10, 2005, the Company completed the merger with Cybrdi
Maryland and changed its name to Cybrdi, Inc. The Company acquired
Cybrdi Maryland in exchange for 47,328,263 shares of common stock of
the Company. Subsequent to the merger, the former shareholders of
Cybrdi Maryland own approximately 93.8% of the outstanding shares of
the Company's common stock. The Company has 50,456,569 shares of common
stock issued and outstanding after the issuance of new shares. As a
result of the ownership interests of the former shareholders of Cybrdi
Maryland, for financial statement reporting purposes, the merger was
treated as a recapitalization event for Cybrdi Maryland and as a
reverse acquisition, with Cybrdi Maryland deemed the accounting
acquirer and Centron Corporation deemed the accounting acquiree.
Historical information of the surviving company is that of Cybrdi
Maryland.
F-13
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In 2004, the Cybrdi Maryland completed a private placement arrangement
and had issued 5,590,645 ordinary common shares for a net proceed of
approximately $1,006,316. In connection with this private placement,
the company incurred a total of $491,596 legal and professional
expenses, of which $311,113 were deferred through December 31, 2003,
and the full amount were written off against additional paid in capital
upon consummation of the transaction.
12. RESERVE FUNDS
The Company's subsidiary in PRC is required to maintain certain
statutory reserves by appropriating from the profit after taxation in
accordance with the relevant laws and regulations in the PRC and
articles of association of the subsidiary before declaration or payment
of dividends. The reserves form part of the equity of the Company.
The appropriation to the statutory reserve and enterprise development
reserve represent 10 percent and 5 percent of the profits after
taxation, respectively. In accordance with the laws and regulations in
the PRC, the appropriation to statutory reserve ceased when the
balances of the reserve reach 50 percent of the registered capital of
the Company.
The reserve funds consist of the following as of December 31:
2005 2004
----------- -----------
Statutory reserve $ 224,590 $ 160,277
Enterprise development reserve 112,295 80,139
----------- -----------
$ 336,885 $ 240,416
=========== ===========
13. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
Financial Risks:
The Company provides credit in the normal course of business. The
Company performs ongoing credit evaluations of its customers and
maintains allowances for doubtful accounts based on factors surrounding
the credit risk of specific customers, historical trends, and other
information.
Major Customers:
The following summarizes sales to major customers (each 10% or more of
sale):
Number of Percentage
Year Ended Customers of Total
---------- --------- ----------
2005 -- --
2004 -- --
2003 2 20%
F-14
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Major Suppliers:
The following summarizes purchases of raw materials from major
suppliers (each 10% or more of purchases):
Number of Percentage
Year Ended Suppliers of Total
---------- --------- ----------
2005 3 69.4%
2004 3 72.2%
2003 - -
At times throughout the year, the Company may maintain certain bank
accounts in excess of FDIC insured limits.
Geographical Risks
Approximately 98% of the Company's assets and approximately 90% of the
Company's operations were in the PRC for the year ended December 31,
2005. Accordingly, the Company's business, financial condition and
results of operations may be influenced by the political, economic and
legal environment in PRC, and by the general state of the PRC's
economy. The Company's operations in PRC are subject to special
considerations and significant risks not typically associated with
companies in the United States. These include risks associated with,
among others, the political, economic and legal environments and
foreign currency exchange. The Company's results may be adversely
affected by, among other things, changes in the political, economic and
social conditions in PRC, and by changes in governmental policies maintainedwith
respect to laws and regulations, changes in PRC's biotechnology
industry and regulatory rules and policies, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of
taxation.
14. SEGMENT REPORTING
The Company has operations in two geographic areas, China and the
United States. The chief Operating decision makers evaluate
performance, make operating decisions, and allocate resources based on
consolidated financial data. Gross profit, operating income, income
from operation, and income taxes are not allocated to specific
individual departments within the organization. In accordance with SFAS
No. 131 "Disclosures about Segments of an Enterprise and Related
Information" the Company is considered a single reportable segment. The
Company is required to disclose certain information about revenue,
information about geographic areas, information about major customers,
and information about long-lived assets.
Year Ended December 31, 2005
-----------------------------------------------
United States China Total
------------- ------------ ------------
Revenue $ 258,028 $ 1,169,771 $ 1,427,799
Long-lived
assets $ 10,572 $ 1,165,602 $ 1,176,174
Year Ended December 31, 2004
-----------------------------------------------
United States China Total
------------- ------------ ------------
Revenue $ 505,395 $ 1,027,648 $ 1,533,043
Long-lived
assets $ 11,245 $ 1,302,245 $ 1,313,490
F-15
CYBRDI INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2003
-----------------------------------------------
United States China Total
------------- ------------ ------------
Revenue $ 261,488 $ 965,906 $1,227,394
Long-lived
assets $ 13,082 $ 1,471,099 $1,484,181
15. SUBSEQUENT EVENT
In January 2006, the Company advanced approximately $2,478,253 or RMB
20,000,000 to Xian Don Yei Security Co., a unrelated PRC registered
company located in Xian. Xian Don Yei Security Co. is engaged in
pawnshop business and their primary business is offering alternative
financing to small local companies. The advances made by the Company
having asare short term loans and earn interest from 5% to 8% over a term of January 1, 2004 an aggregate estimated
net surrender proceeds of $66,543 on the life and for the benefit of Mr.
Marshall I. Kass. In August 29, 2003, the Company surrendered3
months to one of the two
policies listed in fiscal 2002 and received in exchange therefore approximately
$161,000.
34year. All advances are expected to be repaid by November
2006.
F-16