General Description of the Stock Purchase

 

Pursuant to the stock purchase agreement, on March 11, 2005, Chardan established a wholly owned subsidiary, Origin Agritech Limited, under the laws of the British Virgin Islands, and Chardan will merge with and into Agritech. Agritech will be the surviving entity, and the separate corporate existence of Chardan will cease at the effective time of the merger. Simultaneously with the merger, Agritech will purchase the issued and outstanding stock of Origin, which in turn will own, or will have acquired the rights to control, the outstanding stock of the Origin Operating Companies. We refer to Agritech, after giving effect to completion of the stock purchase, as Agritech or the combined company. As a result of the stock purchase, the former owners of Origin and the Origin Operating Companies will own approximately 66.2% of the outstanding shares of the combined company’s common stock, assuming no conversions or exercise of appraisal rights.

 

 

Background of the Stock Purchase  

 

The terms of the stock purchase agreement are the result of arm’s-length negotiations between representatives of Chardan and the Origin Parties. The following is a brief discussion of the background of these negotiations, the stock purchase and related transactions.

 

Chardan was formed on December 5, 2003 to serve as a vehicle to accomplish a business combination with an unidentified operating business in the PRC with significant growth potential. Chardan completed an initial public offering in March 2004, in which it raised net proceeds of approximately $21,242,000. Of these net proceeds, $20,527,500 were placed in a trust account immediately following the initial public offering and, in accordance with Chardan’s certificate of incorporation, will be released either upon the consummation of a business combination or upon the liquidation of Chardan. Chardan must liquidate unless it has consummated a business combination by September 22, 2005. If a letter of intent, agreement in principle or a definitive agreement to complete a business combination was executed but the transaction was not consummated prior to September 22, 2005, then it is not required to liquidate unless the business combination contemplated by such letter of intent, agreement in principle or definitive agreement is not consummated by March 22, 2006.

 

At the end of March 2004, Chardan commenced its efforts to locate a company with which to effect a business combination. To assist Chardan in locating and evaluating companies in the PRC, Chardan, through Huang Jiangnam, an officer and director who knew the principals of Best of the Best for many years, contacted Best of the Best on March 25, 2004 to seek its services in locating potential targets. On March 29, 2004, Chardan engaged Best of the Best, a business acquisition consulting firm, to identify potential acquisition candidates, prepare background investigations, industry analysis and due diligence reports. Under the terms of the agreement, Best of the Best will be paid a total of $250,000, payable in four installments: $87,500 at the commencement of their engagement, $37,500 on the announcement of Chardan’s intention to pursue a particular business combination, $87,500 when Chardan’s stockholders approve a business combination, and $37,500 when a business combination is approved. In addition, upon consummation of the business combination, Chardan will issue 200,000 shares of restricted common stock to Best of the Best. The services that Best of the Best provided included the following: assisting Chardan in identifying acquisition opportunities, assisting in preparing and executing required confidentiality, market stand-off and similar agreements; compiling preliminary information about merger candidates; performing financial due diligence and analysis; recommending acquisition structures; assessing the information about the potential target that is available; and working with accountants and legal staff to prepare for a business combination, including agreement negotiation.

 

Best of the Best commenced identifying and screening acquisition candidates in early April 2004. Best of the Best used its knowledge of Chinese companies and its network of contacts, screening potential companies based on Chardan’s criteria. Chardan also sought to identify acquisition candidates, principally through the efforts of Huang Jiangnan and Li Zhang, officers and directors of Chardan. Both of these persons have extensive contacts through the Chinese business and legal community in the PRC.

Best of the Best and Chardan selected ten companies as potential candidates for a business combination, and Chardan requested preliminary reports from Best of the Best evaluating of the potential targets. On April 8, 2004, Best of the Best and the Chardan team had a meeting to review the data collected on various potential targets and meet with representatives of some of these companies. On the basis of the information provided by Best of the Best in the review and meetings, in May 2004, Chardan selected one candidate with which to pursue an agreement. Chardan was not able to agree to acceptable terms with this first target company. Based on an analysis of the valuation of comparable public companies, this first target’s existing financial condition, management expertise, volatile earnings quarter over quarter, and the fact that the target’s management dramatically reduced their forecast for 2004 after tax income, Chardan determined that a business combination with that first target was not in the best interests of Chardan’s stockholders.

 

During the negotiations with the first target in May and June 2004, Best of the Best continued their due diligence on the other previously identified companies, which included the Origin Operating Companies. After deciding not to pursue that first potential transaction in mid-June 2004, Chardan entered into discussions with Dr. Han, the principal of the Origin Operating Companies, regarding a potential business combination.

 

The Origin Operating Companies had been among the companies with which Chardan had held preliminary meetings on April 8, 2004, but had not pursued any substantive business combination discussions. Best of the Best, in carrying out its obligation to locate potential targets, contacted Chum Investment Corporation, an advisory firm employed by the Origin Operating Companies, on April 3, 2004 and was provided preliminary materials about the Origin Operating Companies on April 5, 2004. The Chardan representatives met Dr. Han for the first time on April 8, 2004.

 

The first formal meeting to discuss this transaction was held on June 24, 2004, in Beijing, China. Chardan and an advisory firm for the Origin Parties, Chum Investment Corporation, exchanged information about Chardan and the Origin Operating Companies and suggested a general structure and terms of an acquisition by Chardan. Then on June 26, 2004, representatives of Chardan, the Origin Stockholders and Chum met at the offices of the Origin Operating Companies in Beijing to discuss preliminary issues of due diligence, exchange of information, pricing and other terms of an acquisition. During its discussions with the Origin Operating Companies, Chardan continued to evaluate other potential candidates for a business combination.

 

On August 23, 2004, Dr. Propper, Mr. Huang and Mr. Zhang from Chardan and the Origin Stockholders, including representatives of Chum, met in Beijing for further discussions about the respective businesses and terms of the transaction. The parties were in general agreement about the acquisition terms, but at this meeting they began to discus various specifics and raised related topics to the acquisition and disclosure process.

 

After several days of negotiations and due diligence review in Beijing from September 19 to September 21, 2004 by and among Dr. Propper, Mr. Kerry Propper, Mr. Zhang Li and Mr. Jiangnan Huang of Chardan and Dr. Gengchen Han, Mr. Yasheng Yang and Ms. Yu Ping Zhao of the Origin Operating Companies, Chardan, for itself, and Dr. Han, in respect of the Origin Parties, signed a memorandum of understanding on September 22, 2004. This memorandum set forth the following:

 

·	the reorganization of the Origin Operating Companies which was to take into account the best tax arrangements for all parties;

 

 

·	the consideration to be paid for the Origin Operating Companies, which is reflected in the stock purchase agreement;

 

·	the terms of the additional purchase price to be paid over time based on performance criteria;

 

·	the desire for a stock option plan; and

 

·	the inclusion of certain Origin Stockholders on the board of directors of the surviving corporation.

 

Promptly after the execution of the memorandum of understanding, Chardan’s United States counsel prepared a draft of the stock purchase agreement and sent it to counsel for the Origin Parties. In addition, the Chinese counsel of Chardan consulted with Chinese counsel for the Origin Parties and commenced negotiation of the stock consignment agreements, the technology assignment agreements and reorganization of the Chinese Operating Companies. Origin, under the name State Harvest Holding Limited, was established in the British Virgin Islands on November 24, 2004 by Chinese counsel for the Origin Parties.

 

During the period between October 20, 2004 and December 6, 2004, counsel exchanged emails about various points in the agreements and continued to modify them and exchanged drafts of documents. Counsel and the accountants for all the parties conducted legal and financial due diligence and negotiated points in the agreements. During this period, representatives of Chardan and the Origin Parties also conducted further due diligence from a business point of view and began preparation of this proxy statement/prospectus.

 

On October 30, 2004, representatives of Best of the Best met with the board of directors of Chardan to give a report of their due diligence of the Origin Operating Companies and analysis of the business in which the Origin Operating Companies operate. At the meeting were all the board members of Chardan and Mr. Wu Cheong, representing Best of the Best, who made the report. The board of directors unanimously resolved to proceed with the acquisition process and continue to work towards execution of a definitive stock purchase agreement.

 

On November 22, 2004, Dr. Propper and Dr. Han and Messrs. Yang and Yuan exchanged emails about the terms and forms of employment agreements. These agreements were further negotiated and the terms subsequently finalized on December 1, 2004.

 

On December 7, 2004, there was a meeting at the offices of Chardan’s United States counsel, Graubard Miller, in New York City, to negotiate the final terms of stock purchase agreement. All the officers and directors of Chardan and Chardan’s United States counsel attended the meeting in person. Dr. Han and Mr. Song Xuesong, executive director of Chum Investment Corporation, advisor to the Origin Parties, and Mr. Cui Liguo, partner of Guantao Law Firm, counsel to the Origin Parties, attended the meeting in person. Other members of Guantao Law Firm attended the meeting by telephone conference.

 

On December 7, 2004, after the meeting with the Origin representatives, the board of directors of Chardan met to review the transaction documents and evaluate and approve the acquisition of Origin. The board of directors reviewed the latest forms of stock purchase agreement, the stock consignment agreements, the technology license agreements, the employment agreements and voting agreement. The board of directors also reviewed the disclosure schedules to the stock purchase agreement of the Origin Parties. After review of the due diligence materials and the report of Best of the Best and discussion, the foregoing were unanimously approved, subject to final negotiation and modification, and the board determined to recommend the approval of the stock purchase agreement, redomestication merger and related transactions and the stock option plan to the stockholders.

 

From December 8, 2004 to December 10, 2004, Dr. Propper, Mr. Propper and Dr. Han met with their respective counsel in meetings in New York City to finalize the transaction documents, and the Origin Parties delivered the preliminary financial statements required before the signing of the stock purchase agreement.

 

While Dr. Han and the other representatives of Origin were in New York from December 8, 2004 to December 20, 2004, Dr. Propper and counsel for Chardan reviewed with them the obligations of being a reporting company, including compliance with the reporting requirements of the federal securities laws, accounting procedures and Sarbannes Oxley requirements, press release disclosure and timing, shareholder communications, website disclosure, financial public relations a NASDAQ compliance and transfer agent requirements. Dr. Han asked if Chardan Capital LLC could help the post-transaction company in advising and complying with all the various requirements until management and the service providers in the PRC were familiar with the rules and regulations and public company demands. On December 20, 2004, at a meeting in the offices of Chardan’s legal counsel, the consulting arrangement between Chardan Capital LLC and the Origin companies was agreed to. Because it was to last only until the Origin management was familiar with the requirements of being public, it was made terminable at Origin’s decision, without penalty. The monthly fee was determined to be $30,000. This arrangement has not been reduced to a written agreement.

 

The stock purchase agreement was signed on December 20, 2004. Chardan filed a press release and Current Report on Form 8-K on December 27, 2004 announcing the execution of the agreement and discussing the terms of the stock purchase. The Current Report was amended on January 21, 2005 to file the audited financial statements of Origin for the years ended December 31, 2001, 2002 and 2003 and for the nine months ended September 30, 2004 and pro forma statements of operations of Chardan showing the acquisition as if it occurred on January 1, 2003 and pro forma balance sheets as if it occurred September 30, 2004.

 

Board Consideration and Approval of Transaction

 

While no one factor determined the final agreed upon consideration in the stock purchase, Chardan’s board of directors reviewed various industry and financial data, including certain valuation analyses and metrics compiled by members of the board and by Best of Best in order to determine that the consideration to be paid to the Origin Parties was reasonable and that the stock purchase was in the best interests of Chardan’s stockholders.

 

Best of the Best conducted a due diligence review of Origin and the Origin Operating Companies that included an industry analysis, a description of Origin’s existing business model, a valuation analysis and financial projections in order to enable the board of directors to ascertain the reasonableness of this range of consideration. Throughout the negotiation process, Best of the Best continued to assemble and review relevant due diligence materials and, on October 22, 2004, delivered a presentation to the board of directors and a due diligence package that included the information regarding Origin and the Origin Operating Companies that Best of the Best had gathered and prepared. During its negotiations with the Origin Parties, Chardan did not receive services from any financial advisor other than Best of the Best.

 

Interest of Chardan Directors and Officers in the Stock Purchase

 

In considering the recommendation of the board of directors of Chardan to vote for the proposals to approve the stock purchase agreement, the redomestication merger and the stock option plan, you should be aware that certain members of the Chardan board have agreements or arrangements that provide them with interests in the stock purchase that differ from, or are in addition to, those of Chardan stockholders generally. In particular:

 

·

if the stock purchase is not approved and Chardan fails to consummate an alternative transaction within the time allotted pursuant to its amended and restated certificate of incorporation, Chardan would be required to liquidate. In such event, the shares of common stock held by Chardan’s directors and officers would be worthless because Chardan’s directors and officers are not entitled to receive any of the liquidation proceeds and any warranty they hold will expire worthless.

 

 

·

the transactions contemplated by the stock purchase agreement provide that Mr. Kerry Propper will be a director of Agritech and he will have the right to appoint one additional director of the nine members of the board of directors of the combined company for three years (which person is currently Steven Urbach);

 

 

Chardan ’s Reasons for the Stock Purchase and Recommendation of the Chardan Board  

 

The Chardan board of directors concluded that the stock purchase agreement with the Origin Parties is in the best interests of Chardan’s stockholders. The Chardan board of directors did not obtain a fairness opinion.

 

Each member of Chardan’s board of directors has extensive experience in performing due diligence of acquisition targets and in valuing companies. Three of the directors , Dr. Propper and Messrs. Li and Huang, are currently principals in Chardan Capital LLC, a strategic financial and management consulting company that focuses on identifying attractive Chinese companies and in structuring transactions involving those companies. One director, Mr. Kerry Propper, is the Chief Executive Officer of Chardan Capital Markets, a registered NASD broker dealer.

 

The Chardan board of directors considered a wide variety of factors in connection with its evaluation of the stock purchase. In light of the complexity of those factors, the Chardan board of directors did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific factors it considered in reaching its decision. In addition, individual members of the Chardan board may have given different weight to different factors.

 

In considering the stock purchase, the Chardan board of directors gave considerable weight to the factors discussed below.

 

Origin ’s and the Origin Operating Companies’ record of growth and expansion and high potential for future growth

 

Important criteria to Chardan’s board of directors in identifying an acquisition target was that the company has established business operations, that it was generating current revenues, and that it had what Chardan believes to be a potential to experience growth in the future. Chardan’s board of directors believes that Origin and the Origin Operating Companies have in place the infrastructure for good business operations, a large and growing customer base, technological capabilities and brand name recognition. Origin commenced business operations in late 1997, and it has experienced an average annual revenue growth of greater than 30% from 2002 through 2004. The 2003 revenues were approximately $27 million, and then estimated revenues for 2004 of approximately $36 million.

 

 

The board of directors also considered the number of new hybrids that were being tested and the schedule of hybrids that were in the government approval process. The board of directors also considered the possibility of acquiring access to additional seeds developed by others. These would all enhance Origin’s product-mix by adding new hybrids and offer an opportunity to expand sales.

 

·	the existing customers represent a recurring revenue stream;

 

 

·

Origin places an emphasis on its sales and marketing functions, with over 1,000,000 customers in a database, the production and circulation of a newspaper three times a year through their distributor network that reaches between 1,000,000 and 2,000,000 readers per issue, television advertising, product demonstrations, and the maintenance of a call center for receiving customer service inquiries;

 

·	the Chinese crop seed market remains fragmented and consists of large numbers of companies that operate at the county and provincial level; and

 

·

few of the competing companies to Chardan’s knowledge have a research and development program that appears to be as effective as Origin’s, resulting in what the Chardan board believes will be a continuation of superior seed and support offerings by Origin to customers, thereby increasing its customer base and sales in the future.

 

Based on its review of the Origin Operating Companies historical financial statements and their business model and relationships, Chardan’s board of directors believes that Origin Operating Companies’ products are sold at attractive gross margins, and that they have controllable variable costs and low, scalable fixed costs.

 

Origin represents an opportunity to invest in a growing, dynamic industry

 

Another criterion important to Chardan’s board of directors in identifying an acquisition target was that the company be in an emerging or expanding industry with potential for growth. China’s enormous population represents one of the largest market for crops in the world. Although the growth rate of China’s population has slowed, China’s population will continue to increase in absolute terms. While the demand for corn and other crops for consumption by the Chinese population is large and growing, the use of corn, in particular, as an animal feed, source of starch products and even for use as a fuel will likely support continued growth in this industry.

 

Although there are currently a large number of seed companies that meet the demand of farmers in the PRC, Chardan’s board of directors believes that few of them are developing and producing advanced hybrid seeds that offer the advantages of Origin’s hybrid seeds. Chardan’s board of directors expects that Origin’s product offerings, continued efforts to develop and produce hybrids for additional crops, its market presence and effective marketing strategies will result in an increase of Origin’s share of its existing markets and enable Origin to enter additional markets.

 

 

The experience of Origin ’s management.

 

 

Origin ’s ability to execute its business plan, even with the risk that Chardan’s public stockholders would vote against the stock purchase and exercise their conversion rights.

 

Chardan’s board of directors considered the risk that the current public stockholders of Chardan would vote against the stock purchase and demand to redeem their shares for cash upon consummation of the stock purchase, thereby depleting the amount of cash available to the combined company following the stock purchase or cause a condition of the stock purchase agreement not to be met. Chardan’s board of directors deemed this risk to be no worse with regard to Origin than it would be for other target companies and believes that Origin will still be able to implement its business plan, even if the full amount of the funds deposited in the trust account are not available at closing.

 

Due Diligence Information Materials

 

In performing the analysis described above, Chardan’s board of directors also reviewed an information statement prepared by Chardan’s consultants, Best of the Best, in connection with its search for a suitable target company.

 

The Best of the Best information included a general description of the business of the Origin Operating Companies as it existed prior to the report, a diagram of the Origin Parties’ business model, including its research and development capabilities, its licensing strategy, its seed production processes and distribution network. A separate diagram showed the capital structure of the Origin Parties as of the date of the package, valuation calculations and analysis, projected uses of the cash in Chardan’s trust account subsequent to the stock purchase and an organizational chart for Origin and the Origin Operating Companies.

 

The Best of the Best information then gave a market overview that described the Chinese seed crop market generally and how the Origin Operating Companies fit into and compete within that market. The description showed Origin to be engaged principally in corn seed production, but it also showed Origin moving into cotton and other crop seeds, both as a diversification and an expansion strategy. Depending on the market prices for crops, farmers will often convert their land from production of one crop to another. The materials described how Origin’s plan to enter the cotton seed markets will enable it to hedge against shifts in farmers’ crop selection. It also provided information regarding the geographical markets in which the Origin Operating Companies compete within the PRC. A separate section detailed the nature of the seed distribution process in the PRC and another examined the competitive and other threats that the Origin Operating Companies face in conducting their business, including market fluctuations and unfavorable weather.

The materials contained a section describing the Origin Operating Companies’ business model. Among the elements in that business model are the development of strong internal research and development, continued use of licensed seed products, establishment of strong brand identity, reliance on an effective system of master and sub distributors to extend the reach of Origin into the marketplace, a strong, value added customer service and technical support component and the emphasis on print and other advertising to establish, maintain and extend Origin’s customer base.

 

A section on personnel examined the role of its principal executives, including Dr. Han, who is the Executive Chairman, Mr. Yang, who has overall operational responsibility and direct control over marketing, and Mr. Yuan, whose responsibilities include infrastructure and public relations. The information described in this section supports Chardan’s board of directors’ determination that the Origin Operating Companies have an experienced and talented management team, capable of continuing the success achieved in the past.

 

A section on risk factors in the materials described the risks inherent the business plan of the Origin Operating Companies. These risks are discussed, among others, in the risk factors section of this proxy statement/prospectus.

 

A section in the Best of the Best information materials discussed the history of Origin that showed a record of growth and a leverageable business model, including rapidly increasing revenues, solid gross profit margins and, controllable variable costs. This section also discussed the substantial reinvestment in the business made by Origin through a strong research and development effort, something that Origin considers to be important to its future success.

 

Chardan’s board of directors also reviewed a report prepared for Chardan by Xing An Securities Co. Ltd., based in China, to prepare an overview of the seed business in China, highlighting their thoughts on Origin’s place therein. This document corroborated Chardan’s board of director’s initial view of the potential of the Origin Operating Companies.

 

Mr. Kerry Propper, a director and officer of Chardan, prepared for the board of directors an analysis of the post-transaction value of the Origin Operating Companies. He analyzed comparable companies in the seed/agricultural markets, taking into account their relative market presences and cycle maturity. He prepared a list of comparative price/earnings ratios of these companies and compared them to the price/earnings of the Origin Operating Companies and their anticipated price/earnings. The valuation for the future of the Origin Operating Companies was based on various assumptions, including projected top-line sales, assumed margins, and projected net income. Since there is little depreciation and amortization in the company’s history, taxes were eliminated. Capital resources were taken into account, based on the capital of the company after the acquisition and for income and reinvestment, and for the potential of exercise of outstanding warrants of Chardan. Based on this analysis, Mr. Propper concluded that comparatively speaking, the enterprise value of the Origin Operating Companies, immediately after the acquisition, was favorable. On the basis of the analysis, he concluded that the board of directors, from an economic point of view, should consider the acquisition of the Origin Operating Companies.

 

Satisfaction of 80% Test

 

It is a requirement that any business acquired by Chardan have a fair market value equal to at least 80% of its net assets at the time of acquisition, which assets shall include the amount in the trust account. Based on the financial analysis of Origin generally used to approve the transaction, the Chardan board of directors determined that this requirement was met and exceeded.

 

To determine the value of Origin, the board compiled a list of thirteen comparable seed/agricultural companies whose stock is traded in the public markets. These companies were broken into three tiers based on their market capitalization to delineate their relative market presence and cycle maturity. Tier one included companies with market capitalization of over one billion dollars; tier two included companies with market capitalizations between $150 million and one billion dollars; and tier three included companies with less than $150 million of market capitalization. The board then examined the price earnings ratio to these companies. The overall average price earnings ratio for the 13 companies was 49.60. The lowest price earnings ratio was 19.75 for the tier one companies. The board used the 19.75 price earnings ratio of the tier one companies because it was the lowest and, therefore, the most conservative.

The companies used for this analysis were as follows:

 

 

The board used 15,100,000 as the number of shares outstanding immediately after the transaction while the fully diluted calculations included the additional shares issuable by the exercise of outstanding warrants.

 

 

Conclusion of the Board of Directors

 

After careful consideration, Chardan’s board of directors determined unanimously that each of the stock purchase proposal, the redomestication merger proposal and the stock option proposal is fair to and in the best interests of Chardan and its stockholders. Chardan’s board of directors has approved and declared advisable the stock purchase proposal, the redomestication merger proposal and the stock option proposal and unanimously recommends that you vote or give instructions to vote “FOR” each of the proposals to adopt the stock purchase proposal, the redomestication merger proposal, the stock option proposal and the election of directors.

 

The foregoing discussion of the information and factors considered by the Chardan board of directors is not meant to be exhaustive, but includes the material information and factors considered by the Chardan board of directors.

 

Material U.S. Federal Income Tax Considerations of the Redomestication Merger

 

The following discusses the material U.S. federal income tax consequences of the redomestication merger to the Chardan stockholders who are U.S. Holders. This discussion is based on the United States Internal Revenue Code of 1986, as amended, which we refer to as the Code, and Treasury regulations promulgated thereunder. A United States Holder is: (i) a beneficial owner of Chardan common stock that is a citizen or resident of the United States, a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, or an estate or trust that is described in Section 7701(a)(3) of the Code and (ii) holds the Chardan common stock as a capital asset within the meaning of Section 1221 of the Code.

 

The redomestication merger has been structured to qualify as a reorganization under the Code. In connection with the filing of the Registration Statement of which this document is a part, Chardan has received an opinion of Graubard Miller to the effect that the redomestication merger will qualify as a Reorganization within the meaning of Section368(a) of the Code and Treasury Regulations Sections 1.367(a)-3(c) - Accordingly no gain or loss will be recognized on the exchange of the Chardan common stock held by Chardan = s stockholders for stock of Agritech, provided no holder of Chardan common stock owns 5% or more of the stock of Agritech following the redomestication merger. The federal tax basis of the shares of Agritech received by the holder of Chardan common stock in the merger will be the same as the adjusted tax basis of such Chardan common stock surrendered in exchange therefore. The holding period of the shares of Agritech received in the redomestication merger by the holder of Chardan common stock will include the period during which such Chardan common stock was held as a capital asset on the date of the redomestication merger.

The foregoing U.S. federal income tax consequences is not affected by the changes made to the Code by the American Jobs Creation Act of 2004 in the treatment of domestic business entities which expatriate from the United States to a foreign jurisdiction. These new provisions generally apply to the direct or indirect acquisition of substantially all of the properties of a domestic enterprise by a foreign corporation if there is at least 60% or 80% of continuing share ownership in the successor foreign entity by the former U.S. corporation = s stockholders and substantial business activities are not conducted in the jurisdiction in which such successor is created or organized. Under the Chardan redomestication merger and the stock purchase agreement, following the redomestication merger into Agritech, the holders of Chardan common stock will own 32.5% of the shares of Agritech.

 

The conclusions expressed above are based on current law. Future legislative, administrative or judicial changes or interpretations, which can apply retroactively, could affect the accuracy of those conclusions. No rulings have been or will be sought from the Internal Revenue Service concerning the tax consequences of the transactions contemplated by the stock purchase agreement or redomestication merger.

 

The discussion does not address all of the tax consequences that may be relevant to particular taxpayers in light of their personal circumstances or to taxpayers subject to special treatment under the Code. Such taxpayers include non-U.S. persons, insurance companies, tax-exempt entities, dealers in securities, banks and persons who acquired their stock interests pursuant to the exercise of employee options or otherwise as compensation.

 

BECAUSE OF THE COMPLEXITY OF THE TAX LAWS, AND BECAUSE THE TAX CONSEQUENCES TO ANY PARTICULAR STOCKHOLDER MAY BE AFFECTED BY MATTERS NOT DISCUSSED ABOVE, EACH STOCKHOLDER IS URGED TO CONSULT A TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE TRANSACTIONS CONTEMPLATED BY THE REDOMESTICATION MERGER AND THE STOCK PURCHASE TO HIM, HER OR IT, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS

 

Anticipated Accounting Treatment  

 

The stock purchase will be accounted for as a capital transaction for accounting and financial reporting purposes. Accordingly, for accounting purposes, the stock purchase will be treated as the equivalent of Origin’s issuing stock for the net monetary assets of Chardan, accompanied by a recapitalization. The net monetary assets of Chardan will be stated at their fair value, essentially equivalent to historical costs, with no goodwill or other intangible assets recorded. Under this method of accounting, Origin will be the continuing entity for financial reporting purposes. The retained earnings (deficit) of Origin will be carried forward after the stock purchase. Operations prior to the stock purchase will be those of Origin and the Origin Operating Companies.

 

Regulatory Matters  

 

The stock purchase and the transactions contemplated by the stock purchase agreement are not subject to the HSR or any federal or state regulatory requirement or approval, except for filings necessary to effectuate the transactions contemplated by the stock purchase proposal with the State of Delaware and the British Virgin Islands.

 

 

THE STOCK PURCHASE AGREEMENT  

 

The following summary of the material provisions of the stock purchase agreement is qualified by reference to the complete text of the stock purchase agreement, a copy of which is attached as an annex to this proxy statement/prospectus, and is incorporated by reference. All stockholders are encouraged to read the stock purchase agreement in its entirety for a more complete description of the terms and conditions of the stock purchase.

 

Structure of the Stock Purchase and Redomestication Merger

 

 

Closing and Effective Time of the Stock Purchase  

 

The closing of the stock purchase will take place promptly following the satisfaction of the conditions described below under “ The stock purchase agreement—Conditions to the Stock Purchase ,” unless Chardan and the Origin Parties agree in writing to another time.

 

Name; Headquarters; Stock Symbol  

 

After completion of the stock purchase:

·	the corporate headquarters and principal executive officers will be located at 12 Shangdi Xinxi Lu, Haidian District, Zhongguancun Development Building, Beijing, PRC, which is currently the Origin Parties’ corporate headquarters; and

·

the combined company will cause the common stock, warrants and units outstanding prior to the stock purchase, which are traded on the OTC Bulletin Board, to continue trading on either the OTC Bulletin Board or the Nasdaq Stock Market. At the time of the closing, the symbol will change to one determined by the management or board of directors and the trading medium that is reasonably representative of the corporate name or business of the combined company.

 

Purchase Price

 

At the closing, the Origin Stockholders and their designee, A Plus Resources Limited, will be paid an aggregate of $10,000,000 in cash, using funds held in the trust account, and will issue an aggregate of 10,000,000 shares of Agritech common stock for all the outstanding common stock of Origin. Of the cash portion of the purchase price, $250,000 will be held back for one year by Agritech to secure certain indemnification obligations of the Origin Stockholders. The balance of the funds in the trust account will be used for operational expenses.

 

Additional purchase price payments will be made to the Origin Stockholders and their designee of up to an aggregate of $15,000,000, if either of the following occurs during any fiscal year of Agritech after the closing date until December 31, 2008 (or June 30, 2009 if the fiscal year is changed to a July 1-June 30 fiscal year) from funds generated from financing activities or earnings as described below:

 

A.       If Agritech receives at least $40,000,000 in gross proceeds in additional financing as a result (i) of the call of the outstanding public warrants assumed by Agritech at the closing; (ii) Agritech’s successful completion of a follow-on offering; or (iii) a private investment into Agritech by a strategic investor (“Financing Adjustment”), then Agritech will pay an additional $15,000,000 to the Origin Stockholders and their designee; or

 

B.       If Agritech generates net positive cash flow of $2,000,000 or more on a consolidated basis (“Earnings Adjustment”), then the Origin Stockholders and their designee will be entitled to receive 75% of the net positive cash flow up to a maximum of $7,500,000 per fiscal year and $15,000,000 in the aggregate.

 

In the event that both an Earnings Adjustment and a Financing Adjustment occurs, the maximum aggregate amount to be paid to the Origin Stockholders and their designee from one or both adjustments is $15,000,000.

 

As further additional purchase price, certain Origin Stockholders and their designee will be issued an aggregate of 1,500,000 shares of common stock of Agritech for each of the next four years, if on a consolidated basis, Agritech generates after-tax profits (excluding after-tax operating profits from any subsequent acquisition for securities that have a dilutive effect and before the expenses of this transaction and director and employee option expense) of at least the following amounts:

 

 

The designee, A Plus Resources Limited, a company formed under the laws of the British Virgin Islands, is owned by Ms. Song Baoqing, and provided financial advice and investment banking services to the Origin Parties.

 

Representations and Warranties  

 

The stock purchase agreement contains a number of generally reciprocal representations and warranties that Origin, the Origin Stockholders and Chardan made to each other. These representations and warranties relate, as applicable, to:

 

·	organization, standing, power;

 

·	capital structure;

 

 

·	authorization, execution, delivery, enforceability of the stock purchase agreement;

 

·	absence of conflicts or violations under organizational documents, certain agreements and applicable laws or decrees, as a result of the contemplated transaction, receipt of all required consents and approvals;

 

·	absence of certain changes or events since September 30, 2004;

 

·	litigation;

 

·	compliance with applicable laws;

 

·	absence of brokers;

 

·	absence of certain changes;

 

·	liabilities;

 

·	related party transactions;

 

·	licenses and permits; and

 

·	completeness and truthfulness of the information and provisions in the stock purchase agreement.

 

Origin or the Origin Stockholders or both also make representations to Chardan regarding:

 

·	accuracy of the information contained in the financial statements; and absence of undisclosed liabilities;

 

·	labor relations and employee plans;

 

·	environmental liability;

 

·	taxes, tax returns and audits;

 

·	real and personal property and the title to and condition of assets;

 

·	the absence of illegal or improper transactions;

 

·	the collectibility of accounts receivable;

 

·	the nature and condition of inventory;

 

·	the contract to which they are parties;

 

·	intellectual property rights;

 

 

·	non-real estate leases;

 

·	insurance;

 

·	the accuracy and completeness of books and records; and

 

·	litigation and certain settled litigation.

 

The Origin Stockholders also make representations to Chardan regarding:

 

·	their acquisition of Agritech common stock being solely for their own account;

 

·	their status as accredited investors;

 

·	the adequacy of the information they received regarding Chardan;

 

·	the restricted nature of the securities that they will receive under the stock purchase agreement; and

 

·	the placement of legends on the certificates representing the securities issued to them under the stock purchase agreement.

 

Chardan also makes representations to the Origin Parties regarding:

 

·	filings with the SEC and the accuracy and completeness of the information contained in those filings, including the financial statements and the lack of undisclosed liabilities; and

 

·	the amount of funds contained in the trust account.

 

Materiality and Material Adverse Effect  

 

Many of the representations and warranties made by the Origin and the Origin Stockholders are qualified by materiality or the use of the term “material adverse effect.” For the purposes of the stock purchase agreement, a “material adverse effect” means a material adverse effect on the business, financial condition or results of operations or prospects of Origin or the Origin Operating Companies.

 

Several of the representations and warranties made by Chardan are qualified by materiality. However, only Chardan’s representation and warranty related to the absence of litigation is qualified by the use of the term “material adverse effect.”

 

Interim Operations of Chardan and the Origin Parties  

 

Interim Covenants relating to the Origin Parties . Under the stock purchase agreement, each of Origin and the Origin Stockholders has agreed, as applicable, to conduct business in the usual, regular and ordinary course, in substantially the same manner as previously conducted. In addition to this agreement regarding the conduct of business generally, subject to specified exceptions, each of the Origin Parties has agreed that, except as otherwise expressly permitted or required by the stock purchase agreement, it:

 

 

·	will not declare, set aside or pay any dividends on, or make any other distributions in respect of, any of their capital stock;

 

·	will not pledge, sell, transfer, dispose or otherwise encumber or grant any rights or interests to any others in the Origin stock or the Origin Operating Companies stock;

 

·	will not pledge, sell, transfer, lease dispose of or otherwise encumber any property of assets of any Origin Operating Company, other than in accordance with past practice or in the normal course of business;

 

·	will not issue, deliver, sell or grant any shares of its capital stock, any securities convertible into or exchangeable for, or any options, warrants or rights to acquire, any shares of capital;

 

·

will not make or agree to a general wage or salary increase or enter into any employment contract, increase the compensation payable or to become payable to any officer or employee of any Origin Operating Company or adopt or increase the benefits of any bonus, insurance, pension or other employee benefit plan, payment or arrangement, except for those increases consistent with past practices, normally occurring as the result of regularly scheduled salary reviews and increases, and except for increases directly or indirectly required as a result of changes in applicable laws;

 

·	will not merge or consolidate with, or acquire all or substantially all the assets of, or otherwise acquire, and other business operations;

 

·	will not make any payments outside the ordinary course of business;

 

·	will not make any capital expenditures, except in accordance with prudent business and operational practices consistent with prior practice;

 

·	will provide Chardan with access to information regarding the business of Origin and the Origin Operating Companies;

 

·	will maintain in effect insurance of the types and in the amounts customarily acquired to protect the assets and business of the Origin Operating Companies;

 

·	each Origin Stockholder will protect the confidential information of Origin and the Origin Operating Companies that he has received in the course of the negotiations;

 

·	each Origin Stockholder will refrain from competing with Origin or the Origin Operating Companies;

 

·	will refrain from any discussions or negotiations with any other party regarding the issuance of any capital stock or the sale or transfer of any portion of the business of any Origin Operating Company;

 

·	each Origin Stockholder will refrain from engaging in any transaction involving the securities of Chardan;

 

 

·	will disclose certain material information that arises or comes to be known between the date of the stock purchase agreement and the date of the closing;

 

·	will use their best efforts to obtain all authorizations, consents, orders and approvals that may be or become necessary for their execution and delivery of, and the performance of their obligations pursuant to, the stock purchase agreement;

 

·	each Origin Stockholder agrees that it has not acquired any rights to and will not use any of the intellectual property of Origin or the Origin Operating Companies;

 

·	each Origin Stockholder will pay any taxes that become due as a result of the issuance to them of Agritech common stock;

 

·	will do all things necessary to effectuate Origin’s acquisition or control of the Origin Operating Companies stock that Origin does not already own;

 

·	will reorganize Origin as required by the stock purchase agreement;

 

·	will provide to Chardan such information as is necessary regarding Origin and the Origin Operating Companies as is required under the rules of the SEC for combination proxy statements; and

 

·	will provide to Chardan interim internal financial and management reports regarding the conduct of the business of the Origin Operating Companies.

 

Interim Covenants relating to Chardan . The stock purchase agreement, among other things, requires Chardan to:

 

·	conduct its business in the ordinary course, not sell or issue any capital securities of Chardan, encumber any of the assets of Chardan or incur any debt out of the ordinary course, not declare or pay any dividend, or make any general wage increase;

 

·	not change its by-laws or articles;

 

·	call the stockholders meeting to which this proxy relates;

 

·	incorporate Agritech; and

 

·

cause the board of Agritech, at the time of closing, to consist of nine persons, of which five persons will be nominated at the suggestion of the Origin Parties (including Dr. Han and Messrs. Yang and Yuan) and two persons will be Mr. Kerry Propper and one designee of his (currently, Mr. Steven Urbach), and the remaining persons will be selected on the basis of their complying with listing and other legal requirements.

·	solicit, initiate or encourage the submission of any acquisition proposal;

 

·	enter into any agreement with respect to any acquisition proposal; or

 

·	participate in any discussions or negotiations regarding, or furnish to any person any information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any acquisition proposal.

 

However, as provided under Delaware corporate law, if Chardan receives a bona fide written acquisition proposal which was not solicited by Chardan, it may, before the stock purchase agreement is adopted by its stockholders, furnish information regarding itself to the person making the acquisition proposal and participate in discussions, but not negotiations, with the person regarding the acquisition proposal, if:

 

·	the board of directors determines, in good faith that the acquisition proposal constitutes or is reasonably likely to lead to a superior proposal; and

 

·	the board of directors determines in good faith that failure to submit such superior proposal to its stockholders would cause the board of directors to violate its fiduciary duties to the stockholders under applicable law.

 

If Chardan has received a superior proposal, Chardan has the right to terminate the stock purchase agreement, based upon a determination in good faith, based upon the advice of outside legal counsel, that the failure to terminate is reasonably likely to result in the board of directors breaching its fiduciary duty.

 

Chardan has agreed not to withdraw or modify, or propose to withdraw or modify, in a manner adverse to the Origin Parties, the approval by its board of directors of the stock purchase agreement or the stock purchase or the recommendation by the board of directors of the transactions contemplated by the stock purchase agreement.

 

No Solicitation by the Origin Parties  

 

The Origin Parties have agreed not to:

 

·	solicit, initiate or encourage discussions regarding or the submission of any acquisition proposal;

 

·	enter into any agreement with respect to any acquisition proposal; or

 

·	participate in any discussions or negotiations regarding, or furnish to any person any information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any acquisition proposal.

 

 

Chardan Stockholders ’ Meeting  

 

Chardan has agreed to call and hold a meeting of its stockholders, as soon as practicable after the date of the stock purchase agreement for the purpose of seeking the approval of the stock purchase by its stockholders. Chardan has also agreed that it will file all required proxy materials with the SEC and, through its board of directors, recommend to its stockholders that they approve and adopt the stock purchase proposal.

 

Access to Information; Confidentiality  

 

Chardan and the Origin Parties will afford to the other party and its representatives prior to completion of the stock purchase reasonable access during normal business hours to all of their respective properties and records and will promptly provide to the other party a copy of each document filed pursuant to the requirements of the securities laws the United States, and all other information concerning its business, properties and personnel as the other party reasonably requests. The information will be held in confidence to the extent required by the provisions of the confidentiality agreement between the two parties.

 

Reasonable Efforts; Notification  

 

Chardan and the Origin Parties have agreed that they will use all reasonable efforts to take all actions, and to do all things necessary, proper or advisable to consummate the stock purchase and the transactions contemplated by the stock purchase agreement in the most expeditious manner practicable. This includes:

 

·

obtaining all necessary actions or non-actions, waivers, consents and approvals from governmental entities and making all necessary registrations and filings, including filings with governmental entities, if any and taking all reasonable steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, any governmental entity;

 

·	obtaining all necessary consents, approvals or waivers from third parties;

 

·

defending any lawsuits or other legal proceedings, whether judicial or administrative, challenging the stock purchase agreement or any other agreement contemplated by the stock purchase agreement or the consummation of the stock purchase or other transactions contemplated by the stock purchase agreement including seeking to have any stay or temporary restraining order entered by any court or other governmental entity vacated or reversed; and

 

·

executing and delivering any additional instruments necessary to consummate the stock purchase or other transactions contemplated by the stock purchase agreement and to fully carry out the purposes of the stock purchase agreement and the transaction agreements contemplated by the stock purchase agreement.

 

The Origin Parties will give prompt notice to Chardan, and Chardan will give prompt notice to the Origin Parties, of:

 

·	any representation or warranty made by it or contained in the stock purchase agreement that is not qualified as to materiality becoming untrue or inaccurate in any respect or any representation or warranty that is qualified by materiality becoming untrue or inaccurate in any material respect; or

 

·	the failure by it to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under the stock purchase agreement.

 

However, no notification will affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under the stock purchase agreement or the agreements contemplated thereby as originally made. Accordingly, such notification may permit a termination of the stock purchase agreement.