UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year ended September 30, 2003.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _____________to______________
Commission File No. 000-27773
KRYSTAL DIGITAL CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
(formerly known as ESCAgenetics Corporation)
Delaware 94-3012230
-------- ----------
(State or other jurisdiction of Incorporation) (I.R.S. Employer
Identification No.)
925 WEST LAMBERT ROAD, SUITE A
BREA, CA 92821
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 990-9300.
---------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each Exchange on which Registered
------------------- -----------------------------------------
Not Applicable None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
------------------------------
(Title of Class)
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 Exchange Act of
1934 during the preceding 12 months (or for such shorter prior that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB
or any amendment to this Form 10-KSB. /X/
The issuer's net sales for the most recent fiscal year were $0.
The aggregate market value of the voting stock held by non-affiliates
based upon the last sale price on January 29, 2004 was approximately $110,095.
As of January 29, 2004 there were 22,948,438 shares of Common Stock,
par value $0.001 per share, outstanding.
PART I
ITEM 1. BUSINESS
Formed in 1986, Krystal Digital Corporation ("the Company") was organized to
develop and commercialize high-value, plant derived products for the
agricultural and pharmaceutical markets. The Company actively conducted its
business between 1987 and the early part of 1995. In January 1995, the Company
scaled back its business activities and became largely a dormant business. In
January 1996, the Company filed a bankruptcy petition for protection under
Chapter 11 of the U.S. Bankruptcy Code.
The Company's amended plan of reorganization (the "Amended Plan of
Reorganization") became effective on August 22, 1996. Under the Amended Plan of
Reorganization, GFL Ultra Fund, Ltd. ("Ultra"), the Company's largest debt
holder, received 25% of the cash available to unsecured creditors and 90% of the
Company's common stock. The remaining cash was distributed proportionately to
the remaining unsecured creditors and the remaining 10% of the Company's common
stock remained owned by its previous shareholders. The bankruptcy proceeding was
officially closed effective March 31, 1997. In July, 1998 Genesee Holdings, Inc.
("Holdings") acquired by merger all the assets of Ultra.
By the end of 1996, the Company sold or disposed of all of its assets other than
cash on hand and the stock of PHYTOpharmaceuticals, Inc. (an inactive majority
owned subsidiary) and SRE ESCAgenetics Corporation (an inactive wholly owned
subsidiary).
The Company has been dormant during the fiscal year ended September 30, 2003.
The Company has had no employees since November 1996. The Company does not plan
to continue the business activities that it conducted prior to its
reorganization.
On November 5, 2003 the Company consummated the acquisition of 100% of the
capital stock of Shecom Corporation ("Shecom"). At the time of the transaction,
there were 1,000,000 shares of common stock of the Company issued and
outstanding and an additional 2,125,000 shares that it had agreed to issue upon
consummation of the transaction for investment banking and related financial
services. Under the terms of the agreement and plan of reorganization, the
Company issued to the former stockholders of Shecom 19,823,438 shares of its
common stock and warrants to purchase an additional 2,051,619 such shares,
constituting 87.5% of the total issued and outstanding equity securities and
shares of common stock underlying options and warrants, respectively.
The transaction was first reported in Schedule 14C sent to the shareholders of
the Company and filed with the Securities and Exchange Commission (the
"Commission") on October 8, 2003. The Form 8-K reporting the closing of the
acquisition of Shecom was filed with the Commission on November 20, 2003. These
and other reports filed by the Company are available to the public at
www.sec.gov.
ITEM 2. PROPERTIES
None.
ITEM 3. LEGAL PROCEEDINGS
The Company is not subject to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its security
holders during the fourth quarter of fiscal year 2003.
2
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK
The Company's Common Stock is quoted on the NASD's OTC Bulletin Board
under the symbol "KDGC." The market for the Company's Common Stock is limited,
sporadic and highly volatile. The following sets forth the high and low bid
prices per share of the Company's Common Stock during its last two fiscal years
as reported by the OTC Bulletin Board. These prices reflect inter-dealer prices,
without retail mark-ups, mark-downs or commissions, and may not necessarily
represent actual transactions.
COMMON STOCK
FISCAL 2002
First Quarter $2.1 $0.84
Second Quarter 1.26 0.84
Third Quarter 0.84 0.7
Fourth Quarter 0.7 0.7
FISCAL 2003
First Quarter $0.84 $0.14
Second Quarter 0.84 0.15
Third Quarter 4.9 0.18
Fourth Quarter 2.00 1.01
FISCAL 2004
First Quarter $2.00 $0.65
Second Quarter (through January 29, 2004) 1.10 0.65
On January 29, 2004, there were approximately 500 holders of record of
the Company's 22,948,438, outstanding shares of Common Stock.
On January 29, 2004, the last sale price of the Common Stock as
reported on the OTC Bulletin Board was $0.65.
DIVIDEND POLICY
The Company has never paid or declared dividends on its common stock.
The payment of cash dividends, if any, in the future is within the discretion of
the Board of Directors and will depend upon the Company's earnings, its capital
requirements, financial condition and other relevant factors. Management of the
Company intends, for the foreseeable future, to retain future earnings for use
in the Company's business.
3
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY PLANS
Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, warrants options, warrants and future issuance under
and rights rights equity compensation plans
Equity compensation
plans approved by None - - - None
security holders
Equity compensation
plans not approved by None - - - None
security holders
Total None - - - None
4
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes included elsewhere in this
Form 10-KSB.
This filing contains forward-looking statements. The words "anticipated,"
"believe," "expect, "plan," "intend," "seek," "estimate," "project," "will,"
"could," "may," and similar expressions are intended to identify forward-looking
statements. These statements include, among others, information regarding future
operations, future capital expenditures, and future net cash flow. Such
statements reflect the Company's current views with respect to future events and
financial performance and involve risks and uncertainties, including, without
limitation, general economic and business conditions, changes in foreign,
political, social, and economic conditions, regulatory initiatives and
compliance with governmental regulations, the ability to achieve further market
penetration and additional customers, and various other matters, many of which
are beyond the Company's control. Should one or more of these risks or
uncertainties occur, or should underlying assumptions prove to be incorrect,
actual results may vary materially and adversely from those anticipated,
believed, estimated, or otherwise indicated. Consequently, all of the
forward-looking statements made in this filing are qualified by these cautionary
statements and there can be no assurance of the actual results or developments.
The Company had no revenues from operations since the reorganization date. The
Company does not plan to continue the business activities that it previously
conducted. The Company has no employees and no fixed assets. The Company does
not anticipate hiring any employees or purchasing any assets other than as may
be required by its wholly owned subsidiary, Shecom Corporation.
5
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are outlined within Item 7 as Note
1 to the consolidated financial statements. Some of those accounting policies
require the Company to make estimates and assumptions that affect the amounts it
reports.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2003 COMPARED TO SEPTEMBER 30, 2002
REVENUES
The Company did not report any revenues from continued operations for the year
ended September 30, 2003.
OPERATING EXPENSES
Accounting and Legal
For the year ended September 30, 2003, the accounting and legal expenses
increased to $36,000 from $17,000 for the year ended September 30, 2002.
This increase is principally attributable to additional legal expenses
incurred in connection with the Merger (see Recent Events).
Selling, General and Administrative
Selling, general and administrative expenses for the year ended September
30, 2003 were $43,000 as compared to $23,000 for the similar period in
2002. The increase in selling, general and administrative expenses is
principally attributable to the issuance of 70,000 shares of common stock
to the Principal Shareholder and two other directors for services, in lieu
of compensation (see Note 2 to the Consolidated Financial Statements).
NET LOSS
Net loss for the year ended September 30, 2003 amounted to $79,000 as compared
to a net loss of $40,000 for the year ended September 30, 2002. This increase in
net loss is attributable to the increase in operating expenses, as discussed in
the preceding paragraphs.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
6
At September 30, 3003, the Company had a working capital deficit of $3,000 and
an accumulated deficit of $464,000. For the year ended September 30, 2003, net
cash used in operating activities amounted to $87,000, a $5,000 decrease from
the net cash used in operating activities for the comparable period in 2002.
Financing Activities
There were no financing activities during the fiscal year ended September 30,
2003 other than the proceeds from the issuance of 170,675 shares of common stock
to two individuals (see Note 2 to the Consolidated Financial Statements). The
financing activities for the fiscal year ended September 30, 2002 consisted of
advances made by its former majority shareholder, Genesee Holdings, Inc.
("Holdings") on a term loan. The loan, which was converted into a promissory
note (the "Note") on December 1, 2002, was subsequently sold to Kevin R.
Keating, which in turn, converted the Note into equity during April 2003 (see
Note 2 to the Consolidated Financial Statements.)
See below for developments in this regard since September 30, 2003.
RECENT EVENTS
ACQUISITION OF SHECOM
On August 22, 2003, the Company, Shecom Acquisition Corp., a Colorado
corporation and wholly owned subsidiary of the Company ("Mergeco") and Shecom
Corporation, a Colorado corporation ("SHECOM"), entered into an Agreement and
Plan of Reorganization, as amended on September 24, 2003 (as amended, the
"MERGER AGREEMENT").
The Merger Agreement provided for the acquisition by the Company of Shecom. In
the merger, the former stockholders of Shecom and the holders of warrants to
purchase common stock of Shecom received that number of shares of common stock
of the Company plus warrants to purchase Company common stock as represented, in
the aggregate, 87.5% of the issued and outstanding shares of common stock of the
Company after giving effect to the merger.
Immediately prior to the merger, there were 21,257,737 shares of Shecom common
stock issued and outstanding, plus an additional 2,200,000 shares of Shecom
common stock issuable upon exercise of certain warrants to purchase Shecom
common stock, for a total of 23,457,000, fully-diluted outstanding Shecom
shares. At the time of the merger, there were 1,000,000 shares of common stock
of the Company issued and outstanding and an additional 2,125,000 shares that
the Company agreed to issue upon consummation of the merger for investment
banking and related financial services.
At the effective time of the merger, to entitle the existing holders of Shecom
common stock and Shecom warrants to own 87.5% of the fully-diluted shares of its
common stock, the Company issued 0.932558146 such shares and warrants to
purchase 0.932558146 such shares for each outstanding share of Shecom common
stock and each outstanding Shecom warrant. As a result, the then holders of
Shecom equity securities received an aggregate of 19,823,438 shares of common
stock and warrants to purchase an additional 2,051,619 shares of common stock.
In addition, the Merger Agreement provided that, immediately after the effective
date of the merger, the board of directors of the Company will consist of
persons designated by the stockholders of Shecom.
LINE OF CREDIT
As of September 30, 2003, borrowings outstanding on Shecom's maximum $35.0
million line of credit with its principal senior lender were approximately $33.6
million, as compared to $34.8 million on June 30, 2003. The line of credit
contains covenants that must be complied with on a continuous basis, including
the maintenance of certain financial ratios. The ability to draw funds under
this credit facility is dependent upon sufficient collateral based on accounts
receivable availability. Shecom's senior lender has not agreed to increase
Shecom's line of credit. As a result, throughout fiscal 2003, Shecom has been
cash constrained and has had to rely on borrowings from its principal
shareholder to fund operations. Shecom's principal senior lender has agreed to
extend the maturity date of its line of credit to January 31,
7
2004, but also advised that it did not intend to renew such line of credit on
the present terms, if at all. The lender and Shecom are presently in
negotiations on the terms of any extension that the lender may offer.
The Company is attempting to negotiate a new line of credit with certain other
potential lenders. Shecom recently received a non-binding proposal from another
lender regarding a new line of credit. However, the Company has not as of the
filing date of this report arranged for such an alternate facility.
There can be no assurance that Shecom will be able to timely refinance its
senior credit facility or convince its existing lender to extend the maturity
date of the current credit facility on acceptable terms, if at all.
If no financing is raised within the near future, there would be substantial
doubt as to the Company's ability to continue as a going concern.
8
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are included in this report commencing
on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 8A. CONTROLS AND PROCEDURES.
Based on an evaluation as of the date of the end of the period covered by this
Form 10-KSB, the Company's Chief Executive Office and Chief Financial Officer,
conducted an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures, as required by Exchange Act Rule
13a-15. Based on that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective to ensure that information required to be disclosed by
the Company in the reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified by the Commission's rules and forms.
Changes in Internal Controls
There were no significant changes in the Company's internal controls over
financial reporting that occurred during the quarter and year ended September
30, 2003 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
Limitations on the Effectiveness of Controls
Management of the Company believes that a control system, no matter how well
designed and operated, cannot provide absolute assurance that the objectives of
the control system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a
company have been detected.
9
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth the name, age and position of each person who was
serving as an executive officer or director of the Company as of January 29,
2004:
NAME AGE POSITION
---- --- --------
Raju Shewa 48 Chairman of the Board and Chief
Executive Officer
Phillip G. Trad 55 President and Director
Fred Anavim 57 Chief Financial Officer and Director
Vincent Franzone 48 Director
John L. Titus 45 Director nominee
RAJU SHEWA. Mr. Shewa is the Chairman of the Board and Chief Executive Officer
of Shecom Corporation. Mr. Shewa founded Shecom in 1986 and has guided it from
its initial domestic and international sales of computer components and consumer
electronics through the import, development and manufacturing of computer memory
modules, peripherals and personal computers. Mr. Shewa began his career after
obtaining his Bachelor of Commerce Degree in 1975 by forming a Tokyo trading
company under the name Shewa Brother's Limited which specialized in the import
and export of consumer electronics to the Middle East, Asia, Africa, and Europe
with sales growing from $5.0 million to $40.0 million. In 1980, Shewa Brother's
Limited moved to Frankfurt, West Germany to expand its base of operation and
increase its market share internationally under the name of Shewa Brother's
GMBH. Mr. Shewa is presently leading the development of a new computer
technology and peripherals in order to provide new and expanding opportunities
for Shecom Corporation.
PHILLIP G. TRAD. Mr. Trad is a Director and became the President of Shecom in
2001. For 12 years prior thereto he served as a consultant to Shecom. Mr. Trad
is an attorney who has provided legal representation and consulting on a state
and federal level to corporations, insurance companies, partnerships and joint
venture investments to corporate and business ventures since 1979. Since 1995,
Mr. Trad has been a director of PharmaPrint Inc., a Delaware corporation that
specialized in the development and advancement of herbal and bio-active
supplements and pharmaceutical development. From 1998 to 2001, Mr. Trad was the
President of PharmaPrint Inc. having originally started with the corporation as
its Senior Vice President and General Counsel in 1998. Mr. Trad's activities
included domestic and international contract negotiations, facilities and
equipment procurement and financing, investment counseling, as well as, public
and private funding services.
FRED ANAVIM. Mr. Anavim, joined Shecom in 2001 as its Chief Financial Officer
and Director. For approximately eleven years prior to joining Shecom, Mr. Anavim
provided independent financial consulting services to various corporations in
the computer import, manufacturing and distribution business specializing in
internal controls, operations management, international credit and collection,
import, export and customs clearing, and installation of integrated accounting
systems. From 1982 to 1988, he provided services as the controller and
accounting consultant to Project Development Company of Dallas, Texas which
concentrated in multi-dimensional real estate transactions, corporate
development and commercial financing services. From 1980 to 1982, Mr. Anavim
served as a staff accountant and auditor for Deloitte & Touche and its
predecessor firm. Mr. Anavim obtained an MA in Accounting from the Institute of
Accountancy in London in 1973, a MS in International Business Management from
the University of Texas at Dallas, and MBA in accounting and finance from North
Texas State University.
10
VINCENT FRANZONE. For the past two years Mr. Franzone he has served as a Senior
Vice President and Managing Director of InvestPrivate, LLC, a New York
investment banking firm. For four years prior to such date, he served as
Syndicate Manager of Prime Charter Equities LLC, a New York investment banking
firm.
JOHN L. TITUS. Since February 1999, Mr. Titus has served as Vice President and
Chief Financial Officer of Metering Technology Corporation, located in Scotts
Valley, California, where he was responsible for all financial, treasury,
investor relations, inventory control and other financial and administrative
matters. He was instrumental in facilitating raising of both debt and equity
capital and the sale of the company to a public corporation in April 2003. For
two years prior thereto, Mr. Titus was a financial consultant with Murdock &
Associates, Inc. From 1990 to 1997, Mr. Titus was President of a private
commercial property management company, and co-founded a private publishing
company. Mr. Titus holds a BA in finance from the University of Texas and
received an MBA in business/finance at the University of Texas in 1983. It is
anticipated that Mr. Titus, currently a nominee to the board of directors, will
become a director within the next 90 days.
No family relationships exist between any of the Company's directors or
executive officers.
Except as set forth herein, no officer or director of the Company has, during
the last five years: (i) been convicted in or is currently subject to a pending
a criminal proceeding; (ii) been a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining future
violations of, or prohibiting or mandating activities subject to any Federal or
state securities or banking laws including, without limitation, in any way
limiting involvement in any business activity, or finding any violation with
respect to such law, nor (iii) has any bankruptcy petition been filed by or
against the business of which such person was an executive officer or a general
partner, whether at the time of the bankruptcy or for the two years prior
thereto.
COMPLIANCE WITH SECTION 16 (a)
Under the securities laws of the United States, the Company's directors, its
executive officers, and any persons holding ten percent or more of the Common
Stock must report on their ownership of the Common Stock and any changes in that
ownership to the Commission. Specific due dates for these reports have been
established. During the year ended September 30, 2003, and based solely on a
review of electronic filings made on the Commission's Edgar system, the Company
does not believe that all reports required to be filed by Section 16(a) were
filed on a timely basis.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company does not presently have a standing audit, compensation or nominating
committee, though it anticipates forming an audit committee and a compensation
committee within the near future.
MEETINGS OF THE BOARD OF DIRECTORS
During fiscal 2003, the Company held no meetings of the Board of Directors,
taking all corporate action by written consent in lieu of a meeting.
11
ITEM 10. EXECUTIVE COMPENSATION
The Company has had no employees since November 1996 and did not compensate its
officer or directors during the fiscal year ended September 30, 2003 or at any
time thereafter. Mr. Keating and Ms. Blackwell are compensated by their employer
for services rendered to their respective employers. No portion of their
compensation is specifically attributable to their service as an officer or
director of the Company. Mr. Keating and Ms. Blackwell resigned on November 5,
2003, upon effectiveness of the merger whereby the Company acquired Shecom
Corporation.
DIRECTOR COMPENSATION
Directors are reimbursed for expenses actually incurred in connection with each
meeting of the board or any committee thereof attended. Effective November 15,
2003, Mr. Franzone purchased 50,000 shares of Company common stock for $1.00 per
share, and will be entitled to automatic annual grants of rights to purchase an
additional 50,000 shares of Company common stock for so long as he or she serves
as a director; provided, that the maximum number of such shares such
non-employee director shall be entitle to purchase shall be 250,000. All shares
of Company common stock purchased shall be restricted shares, and all share
purchases shall be at a price of at $1.00 per share. Directors may purchase
their shares either for cash, or at the directors option, by delivering their 6%
notes payable to the Company, together with accrued interest thereon, upon the
earlier to occur of the sale of such shares or three years from the date of
purchase.
EXECUTIVE COMPENSATION
Raju Shewa currently serves as the Company's Chief Executive Officer and
Chairman of its Board of Directors pursuant to a three year employment
agreement, dated as of November 15, 2003. The Shewa Employment Agreement
provides for a minimum annual base salary payable to Mr. Shewa of $200,000, a
minimum increase each year equal to the percentage rise in the Los Angeles wage
index and certain incentive bonuses consisting of 10% of the amount, if any, by
which the net income after taxes of the Company shall exceed $2,000,000 in any
fiscal year, up to a maximum aggregate bonus not to exceed $100,000 in any such
year.
Phillip G. Trad currently serves as the Company's President and a member of its
Board of Directors pursuant to a three year employment agreement, dated as of
November 15, 2003. The Trad Employment Agreement provides for a minimum annual
base salary payable to Mr. Trad of $200,000, a minimum increase each year equal
to the percentage rise in the Los Angeles wage index and certain incentive
bonuses consisting of 10% of the amount, if any, by which the net income of the
Company shall exceed $2,000,000 in any fiscal year, up to a maximum aggregate
bonus not to exceed $100,000 in any such year. The Trad employment agreement
provides entitles Mr. Trad to purchase 166,666 shares of Company common stock on
November 15, 2003, 166,667 shares of Company common stock on November 15, 2004
and 166,667 shares of Company common stock. These 500,000 shares are all
restricted securities and will be purchased for a price of $1.00 per share. Mr.
Trad may purchase his shares either for cash, or at the directors option, by
delivering their 6% notes payable to the Company, together with accrued interest
thereon, upon the earlier to occur of the sale of such shares or three years
from the date of purchase. No options have been exercised to date.
Fred Anavim serves as the Company's Treasurer and currently acts as its Chief
Financial Officer pursuant to a three year employment agreement, dated as of
November 15, 2003. The Anavim Employment Agreement provides for a minimum annual
base salary payable to Mr. Anavim of $92,000, a minimum increase each year equal
to the percentage rise in the Los Angeles wage index and certain incentive
bonuses consisting of 5% of the amount, if any, by which the net income of the
Company shall exceed $2,000,000 in any fiscal year, up to a maximum aggregate
bonus not to exceed $50,000 in any such year. The Anavim employment agreement
provides entitles Mr. Anavim to purchase 41,666 shares of Company common stock
on November 15, 2003, 41,667 shares of Company common stock on November 15, 2004
and 41,667 shares of Company common stock. These 125,000 shares are all
restricted securities and will be purchased for a price of $1.10 per share. Mr.
Anavim may purchase his shares either for cash, or at the directors option, by
delivering their 6% notes payable to the Company, together with accrued interest
thereon, upon the earlier to occur of the sale of such shares or
12
three years from the date of purchase. No options have been exercised to date.
Mr. Anavim's agreement provides that if the Company engages the services of a
Senior Vice-President of Finance and Administration and Chief Financial Officer,
Mr. Anavim would continue as Treasurer of the Company and its Shecom subsidiary.
INDEMNIFICATION
The Company's Restated Certificate of Incorporation includes provisions to
indemnify its officers and directors against damages for breach of fiduciary
duty as a director or officer involving any act or omission of any such director
or officer; provided, however, that the liability of such officers and directors
shall only be indemnified if he or she acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
Under the General Corporation Law of the State of Delaware, the Company may
indemnify its officers and directors for various expenses and damages resulting
from their acting in those capacities. Insofar as indemnification for
liabilities arising under the Securities Act of 1933, as amended (the
"SECURITIES ACT") may be permitted to the officers, directors or persons
controlling the Company pursuant to those provisions, counsel has informed the
Company that, in the opinion of the Commission, indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
13
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of January 29, 2004, the Company's authorized capitalization consisted of
100,000,000 shares of common stock, par value $.001 per share. As of January 29,
2004, there were 22,948,438 shares of common stock outstanding, all of which
were fully paid, non-assessable and entitled to vote. Each share of common stock
entitles its holder to one vote on each matter submitted to the shareholder.
The following table sets forth ownership information as of January 29, 2004,
with respect to (i) each current director or executive officer of the Company,
(ii) each current director and executive officer, (iii) all directors and
executive officers as a group and (iii) each person known to the Company to be a
beneficial owner of more than 5% of its outstanding voting securities. Each
share of common stock is entitled to one vote. Unless otherwise noted, the
address of each of the individuals listed below is c/o Krystal Digital
Corporation, 925 West Lambert Road, Suite A, Brea, Ca 92821.
NAME NUMBER OF SHARES BENEFICIALLY OWNED (1) PERCENTAGE OWNED
---- --------------------------------------- ----------------
Raju Shewa, Chairman of the Board and Chief
Executive Officer 10,000,000 40.0%
Phillip G. Trad, President and Director (2) 2,000,000 8.0%
Fred Anavim, Treasurer and Director (2) 2,000,000 8.0%
Vincent J. Franzone, Director (2) (3) 525,000 2.5%
John L. Titus, Director nominee 0 - - -
Michael Khorandi 5,000,000 20.0%
Kevin R. Keating 875,000 3.5%
All directors and executive officers as a group
(4 persons) 20,731,000 82.9%
-----------------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the Rule 13d-3(a) of
the Exchange Act, and generally includes voting or investment power with respect
to securities. Pursuant to the rules and regulations of the Commission, shares
of common stock that an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants are deemed to be
outstanding for the purposes of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purposes of
computing the percentage ownership of any other person shown in the table.
Except as subject to community property laws, where applicable, the person named
above has sole voting and investment power with respect to all shares of the
Company's common stock shown as beneficially owned by him.
(2) Messrs. Shewa, Trad, Anavim and Franzone are designees of Shecom and became
members of the board of directors of the Company upon consummation of the
merger. Immediately following the merger, Kevin R. Keating and Margie L.
Blackwell, the two former directors of the Company as officers and directors,
resigned from such positions.
(3) Upon completion of the merger, an aggregate of 1,250,000 shares of Company
common stock were issued in
14
equal amounts to each of Mr. Franzone and his business associate in connection
with their introduction of the Company to Shecom and its investment bankers.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At September 30, 2002 the Company owed $240,000 to Holdings for loans provided
to finance the Company's business activities. The loans are convertible into
equity at the rate of 130 shares per dollar at Holding's option. Holdings has
waived its right to receive interest on the loans through September 30, 2002.
Subsequent to September 30, 2002, Holdings advanced an additional $5,000 to the
Company.
During the fiscal year ended September 30, 2002, the Company paid $2,700 to an
affiliate of Holdings for general and administrative expenses consisting
primarily of accounting and research services.
Kevin R. Keating, the former President and controlling stockholder of the
Company (owning 93.1% of its outstanding Common Stock) prior to the merger
whereby the Company acquired Shecom, is the father of the principal stockholder
of Keating Investments, LLC, the investment banking firm that rendered services
to the Company in connection with the merger. Keating Investments LLC received
an aggregate of 175,000 shares of Company common stock as compensation for its
services in connection the negotiation and consummation of the merger. Mr.
Keating is not affiliated with and has no equity interest in Keating
Investments, LLC and disclaims any beneficial interest in the Company common
stock to be issued to Keating Investments, LLC. Similarly, Keating Investments,
LLC disclaims any beneficial interest in the shares of Company common stock
currently owned by Kevin R. Keating.
Vincent J. Franzone, a member of the board of directors of the Company, received
125,000 shares of Company common stock upon closing of the merger as
compensation in connection with his introduction of Shecom to the Company and
its investment bankers.
Under a proposed strategic alliance and distribution arrangement, it is
contemplated that Messrs. Raju Shewa, Phillip G. Trad and Fred Anavim, three of
the principal stockholders and the senior executive officers of the Company and
Shecom, will own approximately 25% of the capital stock of Azia Digital
Corporation, a Delaware corporation ("ADC"). ADC has been organized to purchase
a line of digital televisions, flat screen computer monitors, DVDs and other
home entertainment consumer electronic products from an unaffiliated
manufacturer of such products located in mainland China. It is contemplated that
ADC will finance the purchase of such products and resell them to Shecom at a
profit of between 10% and 20% of ADC's cost under a proposed distribution
agreement with Shecom. An affiliate of the Chinese manufacturer will own the
remaining 75% equity interest in ADC. Shecom believes that this arrangement will
enable it to establish, without significant financing costs, a strategic
alliance with a substantial manufacturer that provides private label home
entertainment consumer electronic products to major OEMs and distributors, and
become the exclusive distributor of these products in North America.
In 2000 and 2001, Shecom borrowed an aggregate of approximately $4.9 million
from Raju Shewa, the principal stockholder, Chairman of the Board and Chief
Executive Officer of the Company and Shecom. These loans are evidenced by
various Shecom notes payable to Mr. Shewa bearing interest at rates between 6%
and 9% per annum. The Shecom notes payable to Mr. Shewa mature between December
31, 2007 and 2010, and are subordinated to all indebtedness owed by Shecom to
its principal senior secured lender.
Raju Shewa has guaranteed repayment of an aggregate of $2.0 million of bridge
loans made by certain unaffiliated investors to Shecom in early 2003, and
secured such guaranty by a second mortgage and deed of trust on his personal
residence and on the real estate located in Yorba Linda, California that was
previously leased to Shecom, as its principal executive offices, warehouse and
assembly facility. In connection with the recent sale of the sale of the Yorba
Linda, California property, the approximately $294,000 of net cash proceeds
received by the Shewa Family Trust in excess of the amount required to retire a
first mortgage and deed of trust securing such property was placed in escrow for
the
15
benefit of the holders of $2.0 million of bridge notes. In October 2003, $75,000
of such proceeds were used for a down payment in connection with the
contemplated purchase by the Shewa trust of a replacement property in Brea,
California to be leased to Shecom upon completion of construction. Such
replacement facility is expected to be ready for occupancy by Shecom in or about
June 2004.
Upon completion of the new facility purchased by the Shewa Family Trust for
approximately $2.3 million, it is anticipated that Shecom will lease such
facility under a five year triple net lease (with Shecom paying all operating
expenses) at an annual rental of $180,000 per annum.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8- K
(a) Exhibits
Exhibit 31. Rule 13a-14(a)/15d-14(a) Certification.
Exhibit 32.1 Certification by the Chief Executive Officer and its Chief
Financial Officer Relating to a Periodic Report Containing Financial
Statements.*
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the last quarter covered by this
report.
* The Exhibit attached to this Form 10-KSB shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange
Act") or otherwise subject to liability under that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of 1933,
as amended, or the Exchange Act, except as expressly set forth by specific
reference in such filing.
16
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Annual Report on Form 10-KSB to be
signed on its behalf by the undersigned, thereunto duly authorized.
KRYSTAL DIGITAL CORPORATION
By: /s/ RAJU SHEWA
----------------------------
Raju Shewa
CEO and Chairman of the Board
In accordance with the Exchange Act, this report has been signed
below by the following persons and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ RAJU SHEWA CEO and chairman of the board January 29, 2004
-----------------------
Raju Shewa
/s/ PHILLIP TRAD President and director January 29, 2004
-----------------------
Phillip Trad
/s/ FRED ANAVIM Director January 29, 2004
-----------------------
Fred Anavim
/s/ VINCENT FRANZONE Director January 29, 2004
-----------------------
Vincent Franzone
17
INDEPENDENT AUDITORS' REPORT
Krystal Digital Corporation
Brea, CA
We have audited the accompanying consolidated balance sheet of Krystal Digital
Corporation (formerly known as ESCAgenetics Corporation) and subsidiaries (the
Company) as of September 30, 2003, and the related consolidated statements of
operations, shareholders' equity (deficit), and cash flows for the years ended
September 30, 2003 and 2002. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at September 30, 2003,
and the results of its operations and its cash flows for the years ended
September 30, 2003 and 2002 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 Notes 1 and 5
to the financial statements, the Company's recurring losses from operations and
shareholders' capital deficiency raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Hein + Associates LLP
Orange, California
January 23, 2004
F-1
KRYSTAL DIGITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
ASSETS
Current assets
Cash $ 6,000
---------
Total assets $ 6,000
---------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable $ 2,000
Accrued expenses 7,000
---------
Total liabilities, all current 9,000
---------
Shareholders' equity (deficit):
Preferred stock; $0.01 par value; 1,000,000 shares authorized;
none issued or outstanding
Common stock; $0.0001 par value; 100,000,000 shares authorized;
1,000,000 shares issued and outstanding 7,000
Additional paid-in capital 454,000
Accumulated deficit (464,000)
---------
Total shareholders' equity (deficit) (3,000)
---------
Total liabilities and shareholders' equity (deficit) $ 6,000
---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
KRYSTAL DIGITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30,
------------------------
2003 2002
--------- ---------
Revenues $ 0 $ 0
--------- ---------
Operating expenses:
Accounting and legal 36,000 17,000
General and administrative 43,000 23,000
--------- ---------
Total expenses 79,000 40,000
--------- ---------
Net loss
$ (79,000) $ (40,000)
--------- ---------
Net loss per share, basic and diluted
$ (0.12) $ (0.08)
--------- ---------
Weighted average common shares outstanding 683,824 524,304
--------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
KRYSTAL DIGITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS EQUITY (DEFICIT)
YEARS ENDED SEPTEMBER 30, 2003 AND 2002
ADDITIONAL
COMMON COMMON PAID-IN ACCUMULATED
SHARES STOCK CAPITAL DEFICIT TOTAL
--------- --------- --------- ----------- ---------
BALANCE, OCTOBER 1, 2001 524,304 $ 7,000 $ 134,000 $(345,000) $(204,000)
Net loss 0 0.00 0.00 (40,000) (40,000)
--------- --------- --------- --------- ---------
BALANCE, SEPTEMBER 30, 2002 524,304 $ 7,000 $ 134,000 $(385,000) $(244,000)
Promissory note conversion 235,021 0.00 253,000 -- 253,000
Common shares issued to directors
for services 70,000 0.00 24,000 -- 24,000
Common shares issued to investors 170,675 0.00 43,000 -- 43,000
Net loss 0 0.00 0.00 (79,000) (79,000)
--------- --------- --------- --------- ---------
BALANCE, SEPTEMBER 30, 2003 1,000,000 $ 7,000 $ 454,000 $(464,000) $ (3,000)
========= ========= ========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
KRYSTAL DIGITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30,
-------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss $ (79,000) $ (40,000)
Adjustments to reconcile net loss to net cash
used in operations:
Stock issued in lieu of compensation 24,000 0.00
Accounts payable (2,000) (2,000)
Accrued interest on note 13,000 0.00
Accrued expenses 7,000 0.00
--------- ---------
Net cash used in operating activities (37,000) (42,000)
--------- ---------
Cash flows from financing activities:
Advances from Genesee Holdings, Inc. 0.00 31,000
Proceeds from the issuance of stock 43,000 0.00
--------- ---------
Net cash provided by financing activities 43,000 31,000
Net increase (decrease) in cash 6,000 (11,000)
--------- ---------
Cash at beginning of year 0 11,000
--------- ---------
Cash at end of year $ 6,000 $ 0
--------- ---------
Schedule of non-cash financing activities:
Conversion of promissory note and accrued
interest to common stock 253,000 0.00
--------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
KRYSTAL DIGITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30 2003 AND 2002
1. Summary of significant accounting policies
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Krystal
Digital Corporation, formerly known as ESCAgenetics Corporation ("Krystal
Digital," or the "Company") and its majority and wholly owned subsidiaries,
PHYTOpharmaceuticals, Inc. and SRE ESCAgenetics Corporation, after
elimination of all significant intercompany accounts and transactions. The
Company's subsidiaries did not have any significant operating activities
during the periods presented.
OPERATIONS
Formed in 1986, the Company was organized to develop and commercialize
high-value, plant-derived products for the agricultural and pharmaceutical
markets. In January 1995, the Company scaled back its business activities
and became largely a dormant business. In January 1996, the Company filed a
bankruptcy petition for protection under Chapter 11 of the U.S. Bankruptcy
Code, and the Company's plan of reorganization became effective on August
22, 1996. The bankruptcy proceeding was officially closed effective March
31, 1997.
Prior to April 2003, Genesee Holdings, Inc. ("Holdings") owned ninety
percent of the outstanding common stock of the Company. Prior to that date,
Holdings funded all operating expenses through a term loan. During the year
ended September 30, 2002, the Company paid $2,700 on the loan. Holdings has
waived its right to receive interest on the loan through December 31, 2002,
when the loan was converted into a promissory note (Note 2). During April
2003, Holdings sold its interest to Kevin R. Keating ("Keating" or the
"Principal Stockholder"), (Note 2). At September 30, 2003, the Principal
Stockholder owned ninety three percent of the outstanding common stock of
the Company.
The Company does not plan to continue the business activities that it
conducted prior to its reorganization. It plans to pursue a business
combination or other strategic transaction. A candidate for such a
transaction was identified subsequent to year-end (Note 5). Ultimately, the
continuation of the Company as a going concern is dependent upon the
establishment of profitable operations. These circumstances raise
substantial doubt as to the Company's ability to continue as a going
concern.
Because the achievement of these plans is dependent upon future events,
there can be no assurance that future profitable operations will occur as
planned.
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 amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
NET LOSS PER SHARE
Net loss per share is calculated on the basis of weighted average number of
common shares outstanding. Common stock equivalents are excluded from the
computation, as their effect is antidilutive.
2. Shareholders' equity
The Company has authorized 100,000,000 shares of Common Stock with a par
value of $.0001 per share and 1,000,000 shares of Preferred Stock with a
par value of $.01 per share. There were
F-6
1,000,000 shares of Common Stock issued and outstanding at September 30,
2003. No shares of preferred stock are outstanding.
On December 1, 2002, the Company entered into a promissory note with
Holdings for the lesser of $300,000 or the aggregate principal amount of
all unreimbursed advances made by Holdings to the Company, with an annual
interest rate of 5% and due on demand. The note was convertible into equity
at a rate of 130 shares per dollar at Holdings' option.
During April, 2003, Holdings sold its interest in the Company to Keating ,
along with the convertible note (the "Note") due from the Company, totaling
$253,000 as of that date. Keating then converted the Note into 235,021
shares (post split) of common stock, in accordance with the terms of the
note. As a result of this transaction, the Company is considered a
development stage enterprise effective April 1, 2003.
During April 2003, the Company declared a one for 140 reverse split of all
outstanding common stock. All periods presented have reflected the reverse
stock split.
During May 2003, the Company sold 170,675 shares of common stock to two
individuals and received proceeds totaling $43,000.
During June 2003, the Company issued the Principal Stockholder and two
other directors 70,000 shares of common stock for services, valued at
approximately $24,000 (Note 4).
3. Income taxes
The Company has accumulated net operating loss carryforwards of
approximately $320,000 that are available to offset future taxable income,
if any, through 2020. Realization of the net operating loss carryforwards
is dependent upon future profitable operations. Accordingly, management has
recorded a valuation allowance to reduce deferred tax assets associated
with net operating loss carryforwards to zero at September 30, 2003.
4. Related party transactions
On June 3, 2003, the Board of Directors authorized the issuance of 70,000
shares of common stock to the Principal Stockholder and two other directors
of the Company, in lieu of compensation. The shares were valued at
approximately $24,000 on the date of issuance (Note 2).
Keating is the father of the principal stockholder of Keating Investments,
LLC, the investment banking firm that rendered services to the Company in
connection with the merger (Note 5) of a newly created subsidiary of the
Company with and into Shecom Corporation ("Shecom"). Keating Investments
LLC received an aggregate of 175,000 shares of common stock as compensation
for its services in connection with the negotiation and consummation of the
merger. Keating is not affiliated with and has no equity interest in
Keating investments, LLC and disclaims any beneficial interest in the
shares of common stock issued to Keating Investments, LLC. Similarly,
Keating Investments, LLC disclaims any beneficial interest in the shares of
common stock currently owned by Keating
5. Subsequent events.
On August 22, 2003, the Company entered into an agreement and plan of
reorganization, as amended on September 24, 2003, with Shecom and on
November 5, 2003, completed the merger of Shecom Acquisition Corporation
with and into Shecom, thereby acquiring 100% of the capital stock of
Shecom. In connection with the merger, ESCAgenetics Corporation changed its
corporate name to Krystal Digital Corporation. The merger will be accounted
for as a reverse acquisition in which Shecom is the accounting acquiror and
Krystal Digital is the legal acquiror. The management of Shecom will be the
management of the Company. Prior to the merger, Keating, the controlling
stockholder of Krystal Digital, owned approximately 93.1% of the shares of
its common stock. In connection with the merger, Krystal Digital issued to
the then shareholders of Shecom and the holders of warrants to purchase
additional shares of Shecom common stock, that number of shares of common
stock of Krystal Digital and warrants to purchase additional shares of
Krystal Digital common stock as represented (assuming full exercise of such
warrants) 87.5% of the issued and outstanding shares of common stock of
Krystal Digital on a fully-diluted basis, after giving effect to the
merger.
Shecom's line of credit expires on December 31, 2003, and the principal
senior lender has advised that it does not intend to renew such line of
credit and has requested that Shecom seek and obtain alternative asset
based financing. Shecom is currently in discussions with several banks to
take over the existing line of credit and is attempting to obtain an
alternative credit line. If Shecom is unable to timely obtain alternate
senior credit facility, it might not be able to continue its business as
presently conducted, if at all.
F-7
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBITS
21.01 Subsidiaries of Registrant. (1)
31.01 and 31.02 Rule 13a-14(a)/15d-14(a) Certifications
32.01 and 32.02 Certification by the Chief Executive Officer and
Chief Financial Officer Relating to a Periodic Report
Containing Financial Statements
(1) Filed herewith.