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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**
SECURITIES EXCHANGE ACT OF 1934
For the transition period from January 1, 1998, to October 31, 1998
Commission File Number 0-20317
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BIOFARM, INC.
(Exact name of registrant as specified in its charter)
Nevada 88-0270266
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1244 Main Street, Linfield, Pennsylvania 19468
(United States address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (610) 495-8413
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Securities registered pursuant to Section 12(b) ofthe Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.001 Par Value)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ ].
As of February 5, 1999, 4,376,930 shares of Common Stock ($.001 par
value) were issued and outstanding. The aggregate market value of the Common
Stock held by non-affiliates was approximately $26,261,580, determined by the
closing sale price on that date. Revenues for the ten month period ended
October 31, 1998, amounted to approximately $11,899,000.
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TABLE OF CONTENTS*
Part I
Item 1. Description of Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
**Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
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* The foregoing table of contents is prescribed by Form 10-K. Except for
Item 6 and the Financial Statements included herein in response to Item
14, the Registrant has prepared this Form 10-KSB filing in response to
the Form 10-K table of contents. As of the close of business on
February 5, 1999, the 4,376,930 issued and outstanding shares of the
Registrant's Common Stock (all held by non-affiliates) had an aggregate
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market value of $26,261,580 as determined by that day's closing price.
(See Item 10(a) of Regulation S-B.) This Form 10-KSB is filed for the
Registrant's fiscal year ended October 31, 1998.
** On January 13, 1999, the Registrant filed its Form 8-K/A containing the
following response to Item 8. (Changes in Fiscal Year):
"On October 5, 1998, the Registrant's Board of Directors adopted a
resolution to change the fiscal year from June 30 to December 31,
effective December 31, 1998. Subsequent to November 19, 1998, the Board
of Directors approved a new fiscal period of October 31, 1998, in order
to be able to expedite the filing of this amended Form 8-K/A and to
avoid having to defer such filing until the receipt of audited
financial statements using a December 31 fiscal period. The Form 10-K
filing for the fiscal year ended October 31, 1998, will contain fully
consolidated audited financial statements of the Registrant and of its
various subsidiaries."
Pursuant to Rule 15d-10 (Transition Reports) under the 1934 Act, the
Registrant is filing this Form 10-KSB covering the resulting transition
period between the closing date of its most recent fiscal year (June
30, 1998) and the opening date of its new fiscal year (November 1,
1998). This transition report filed pursuant to Rule 15d-10 is filed
for such transition period not more than ninety days after the date
(November 24, 1998) of the determination to change the fiscal closing
date to October 31, 1998. Therefore, this filing on Form 10-KSB covers
the period from January 1, 1998, through October 31, 1998, and includes
the financial statements of the Company for the ten month period ended
October 31, 1998, and the year ended December 31, 1997, which are
audited by BDO International.
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PART I
Item 1. Description of Business
Biofarm, Inc., a Nevada corporation (hereinafter referred to as the
"Company"), was organized under the laws of the State of Nevada on September 26,
1990, under the name Global Spill Management, Inc. From inception until June 28,
1996, the Company was engaged in the environmental remediation business with
emphasis upon the elimination of oil spill damages. On October 5, 1998, the
shareholders voted to change the name of the Company to Biofarm, Inc.
PLAN OF REORGANIZATION (and Events Prior to September 4, 1998)
In April, 1996, because of a demonstrable inability to meet its debts
as they matured, the Company and its financial advisors determined to undertake
a comprehensive Plan of Reorganization (the "Plan"). Such Plan included the (a)
sale of the four operating subsidiaries for cash consideration only, (b)
liquidation of the debt due to the senior secured creditor (Meridian Bank), and
(c) elimination of debt in its entirety.
Sales of Subsidiaries
On June 28, 1996, the Company sold the capital stock or the net assets
of its then four operating subsidiaries. An aggregate of $1,200,000 was paid to
Meridian Bank in full and complete satisfaction of secured indebtedness to
Meridian Bank in the principal amount of $1,480,000 (plus accrued interest of
$47,000). Meridian Bank satisfied its lien and executed a General Release in
favor of the Company on June 28, 1996.
As a result of the disposition of all of its subsidiaries, the Company
ceased to be an operating company.
Elimination of Debt
In addition to the discharge of all obligations due to Meridian Bank,
the Company also undertook the elimination of all other debt. Employment
contracts (under which the Company was obligated in the amounts of $1,230,600
for 1996 and $848,000 for 1997, respectively) were terminated, lease obligations
were cancelled and general, unsecured creditors (other than those owed minimal
amounts or those professionals and firms continuing to provide necessary
services for the Company), were resolved with an offer of 37.5 cents on the
dollar.
Giving effect to the (a) satisfaction of the indebtedness due Meridian
Bank, and (b) liabilities assumed by the purchasers of the four operating
subsidiaries being treated herein as having occurred on June 28, 1996, the
Company remained, as of June 30, 1996, with fixed liabilities of $814,000.
Commencing in July, 1996, the Company, as an alternative to creditor proceedings
that would have involved legal and accounting costs disproportionate to the
dollar amount of its remaining liabilities, commenced a voluntary plan of
payment at a discount. Creditors were offered an immediate settlement equal to
37.5% of the amount owed (except for claims under $100 which were liquidated in
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full). Such offer resulted, as of June 30, 1997, in $691,892 in the aggregate of
claims being settled for the sum of $237,711. As of December 31, 1998, total
American liabilities of the Company were approximately $22,000.
The results of the Plan were as follows: approximately $6.9 million of
indebtedness existing at June 30, 1996, has been eliminated in full, $1,515,678
in cash was arranged by management to be contributed to the Company, all
inchoate claims against the Company (beyond the $6,900,000 of fixed obligations)
were resolved, and (except for the one matter described hereinafter under
"Litigation") all litigation has been resolved.
ACQUISITIONS EFFECTED SUBSEQUENT TO IMPLEMENTATION OF PLAN OF REORGANIZATION
ACQUISITION OF BIOFARM, S.A.
Management did not deem it prudent to consider seriously the
acquisition of a going business until the Plan proved feasible. Accordingly,
early in 1998, after a period of eighteen months during which the Plan was
activated, management determined that the Company was then in a position to
effect a major acquisition. Accordingly, negotiations were commenced to acquire
approximately 87% of Biofarm, S.A. ("Biofarm") from Litchfield Continental, Ltd.
("Litchfield"). Management's goals during the negotiations were to avoid the use
of cash, minimize the debt to be issued to effect the acquisition, avoid the
immediate issuance of any substantial number of shares of Common Stock, and
defer the conversion of debt into Common Stock as long as was possible in order
to afford time for the anticipated earnings of Biofarm to develop to their full
potential. The acquisition of Biofarm was closed on September 4, 1998.
Biofarm is a Romanian pharmaceutical manufacturer located in Bucharest.
It has been in business since 1921. Biofarm manufactures and sells
pharmaceutical and veterinary products both for domestic and international
consumption. Biofarm was state-owned until June 27, 1997, when control thereof
was acquired by Litchfield. Sales of Biofarm for the ten month fiscal period
ended October 31, 1998, were $7,758,000 and operating income was $1,253,000.
The Stock Purchase Agreement provided for the purchase from Litchfield
of approximately 87% of the issued and outstanding shares of Biofarm,
representing all of the issued and outstanding shares of Biofarm owned by
Litchfield. In consideration for the purchase of the shares of Biofarm, the
Company issued to Litchfield a convertible non-negotiable secured debenture (the
"Debenture") in the principal sum of $6,434,681.
The Debenture provides that there is no interest due or payable on the
principal sum and is non-negotiable and non-transferable. The Debenture is
non-redeemable and does not represent a debt obligation of the Company. The
Debenture also provides that, from time-to-time, for a period of five (5) years
from the date of the Debenture, the holder thereof may convert a portion, but
not less than 2.5%, of the original principal sum into shares of the Company's
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Common Stock. The Debenture is convertible at the rate of 2% of the then issued
and outstanding Common Stock of the Company for each 2.5% of the principal sum
of the Debenture that is converted. Therefore, and in accordance with the terms
of the Debenture, if the entire principal sum of the Debenture is converted, the
holder will own eighty (80%) percent of the Company's issued and outstanding
Common Stock based upon the number of shares thereof issued and outstanding as
of the date of conversion. The Company has a sufficient number of shares of
Common Stock authorized to effect the entire conversion. Such conversion was not
permitted prior to January 31, 1999, but is permissible thereafter and for a
period of five years from the closing date. An additional maximum of five
percent (5%) of the Company's then issued and outstanding shares were set aside
for issuance to Litchfield for each of the fiscal periods ended December 31,
1998, and ending December 31, 1999, dependent upon the realization by Biofarm of
certain earnings increases (measured by the earnings of Biofarm for the fiscal
period ended December 31, 1997). For the ten month fiscal period ended October
31, 1998, Biofarm (on an annualized basis) did not meet the required earnings
test. If Biofarm has net income of $825,000 for the fiscal period ending October
31, 1999, Litchfield will earn an additional maximum of five (5%) percent of the
Company's Common Stock.
Accounting Treatment
Inasmuch as Litchfield will have potential voting control, and has
Board of Directors and management control of the Company since the election of
the Litchfield nominees to the Board of Directors was approved by the
shareholders of the Company on October 5, 1998, for financial accounting
purposes the acquisition of Biofarm by the Company will be accounted for as a
reverse purchase in accordance with generally acceptable accounting principles.
Accordingly, the statement of financial condition and statements of operations
and cash flows will reflect the historical balance sheet and activities of
Biofarm for all of the required reporting periods as well as the operating
results of the Company from the reverse merger date (October 5, 1998). In
addition, for accounting purposes the shares issuable pursuant to the conversion
of the Debenture are deemed to be issued and outstanding for the periods
presented in the financial statements included herewith.
Form 8-K Filings Relating to Biofarm, S.A.
Reference is made to the Form 8-K filings of the Company, dated March 6
and November 18, 1998, and January 13, 1999, including the financial information
concerning Biofarm required by Form 8-K, for further information concerning the
Biofarm acquisition. Also, the Company's Proxy Statement, dated September 21,
1998, contains additional information concerning Biofarm.
ACQUISITION OF THREE UNITED KINGDOM ENTITIES
On October 13, 1998, the Company's Board of Directors adopted a
resolution to acquire 100% of the issued and outstanding shares of capital stock
of three United Kingdom entities: Britten-Norman Ltd.; Kaster Bioscience Ltd.;
and Burlington, Chamber & James Ltd. (which, in turn, owns 51% of Burlington and
James Ltd.).
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Each of such acquisitions has been obtained from Litchfield, from which
the Company acquired Biofarm, S.A. on September 4, 1998. Because Litchfield
holds a convertible non-negotiable secured Debenture issued by the Company as
consideration for the acquisition of Biofarm in the principal amount of
$6,434,681, and because such Debenture converts into eighty (80%) percent of the
then issued and outstanding shares of Common Stock of the Company, Litchfield
agreed to contribute the capital stock of the three UK entities to the Company
without additional consideration. Prior to the acquisition of such three
entities by Litchfield, there were no relationships between Litchfield (and any
affiliate thereof) and any of the three acquisitions (except for the ownership
of Burlington, Chamber & James described in Item 13 hereinafter).
Closing of the three acquisitions was subject to the condition
subsequent of the receipt of audited financial statements of each as of October
31, 1998 (the Company's newly-adopted fiscal period), acceptable to the Company.
On February 18, 1999, such audited statements were delivered to and approved by
the Company. Thereby, the Company deems such acquisitions to have been effected
prior to October 31, 1998, and has included such financial statements in the
fully consolidated audited financial statements of the Company for the latter's
new fiscal period ended October 31, 1998, utilizing Litchfield's historical
costs.
Britten-Norman Ltd.
Britten-Norman Ltd. ("BN") was established in 1960 and, as one of three
UK aircraft manufacturers, carries CAA approval. BN designs and manufacturers
the BN2 Islander and Defender series of light STOL (short takeoff and landing)
airplanes. In excess of 1,200 such planes have been delivered to customers in
over 120 nations, ranging from independent air taxi operators and regional
airlines to law enforcement groups and military forces. BN provides technical
support as well as a full overhaul and repair service at its Isle of Wight
facility. BN offers a full maintenance and repair service for smaller aircraft
and is a fully approved British Ministry of Defense contractor and flight trial
provider.
During the period from July 13, 1998 (the date BN was acquired by
Litchfield) until October 31, 1998, BN had sales of $3,663,000 and an operating
loss of $146,000.
Kaster Bioscience Ltd.
Kaster Bioscience Ltd. ("Kaster") was established to supply
pre-prepared microbiological support media to the pharmaceutical industry. The
manufacture of growth media to grow bacteria is widely used to test effectively
sterile production in the pharmaceutical industry. Although the immediate focus
is to meet the demand for pre-prepared nutrient-rich agar (solid gel) products,
management anticipates that future developments will also include an integrated
microbiological support service. Kaster will also provide environmental
monitoring services to pharmaceutical manufacturers.
Recent reappraisals by regulatory authorities of the quality standards
necessary to the manufacture of sterile products mandate that materials used in
environmental monitoring be subject to validation and ongoing quality control.
The potential customer base includes pharmaceutical companies, laboratory supply
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customers, testing laboratories and hospitals. It is also contemplated that
Kaster will compliment the strategic objectives of Biofarm, S.A., both as to
existing and to new products by providing technical expertise and more exacting
standards. The Kaster facility, located in 9,250 square feet of quality
manufacturing space in Crewe (Chesire) United Kingdom, also includes laboratory
and office space.
Kaster did not generate income during the period ended October 31,
1998, and incurred minimal losses during such period. Kaster's activities to
date do not constitute an indication of its future prospects; and the financial
information relevant to Kaster included in the audited financial statements does
not necessarily reflect the future operating results or financial condition of
Kaster.
Burlington, Chamber & James Ltd.
Burlington, Chamber & James Ltd. ("BCJ") operates as an insurance
intermediary placing insurance for its clients (including the Company) in the
London insurance market. BCJ handles all aspects of insurance, including but not
limited to, UK commercial, aviation, marine and facultative reinsurance on a
worldwide basis.
The acquisition of BCJ benefits the Company by way of income received
both from placing insurance requirements for its clients and by meeting the
specific requirements of the Company. Further benefits exist in the in-house
advice readily available to the Company on the insurance required to protect the
Company's assets.
Burlington & James Ltd.
Burlington & James Ltd. (a 51%-owned subsidiary of BCJ) was created as
a regional company. Its operations through October 31, 1998, have not been
material.
Additional financial information relevant to each of the foregoing
United Kingdom acquisitions is set forth hereinafter under the caption (Item 7)
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
ACQUISITION OF SC ROMAERO S.A. BUCHAREST
Pursuant to the Romanian privatization program, the Company submitted a
bid to acquire SC Romaero S.A. Bucharest ("Romero"), a state-owned entity
engaged in the manufacture and maintenance of aircraft. The Company, using its
wholly-owned subsidiary Britten-Norman Ltd. as the contracting party, executed
the definitive acquisition agreement with the Romanian Government to acquire
Romaero on January 29, 1999. (See Exhibit "(d)F" hereto.) Such contract provides
for an initial purchase price (subject to adjustment) of approximately $21
million as well as a commitment to invest an additional $60 million into Romaero
over a five year period. Predicated upon information received from the Romanian
Government prior to the latter's request for tenders, Romaero had as of December
31, 1997, a total net asset value of approximately $90 million. The Company
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believes that payment of the investment of $60 million to the Romanian
Government can be funded from anticipated profits, that Western-style management
practices can increase profitability, and that economies in operations can be
effected by private ownership as opposed to government management.
Romaero has been designing and building aircraft for military and civil
application since the first World War. Romaero was converted into a maintenance
facility after World War II and provided full maintenance support to the
Romanian airforce. Romaero produced a range of multi-purpose, light aircraft of
Russian design in an effort to satisfy home market requirements. In 1967, when
Britten-Norman subcontracted the production of its Islander airframe to Romaero,
such contract represented Romaero's initial major contract with a Western
European manufacturer. Shortly thereafter, Romaero began the manufacture of the
BAC-1-11 aircraft under license from the British Aircraft Corporation. To date,
Romaero has delivered to Britten-Norman in excess of 500 Islander airframes. The
more recently developed Defender plane designed by Britten-Norman is also now in
production at Romaero. Since 1994, Romaero's strategy has been to (a)
participate in Western aircraft production programs as an approved subcontractor
for assembly, sub-assembly, components and tooling, and (b) initiate an approved
maintenance facility to be able to provide full support services to Western
aircraft manufacturers and operators. Romaero employs approximately 1,250 people
at its 74 acre site located at Baneasa Airport outside Bucharest. Romaero is a
party to design, detail manufacturing and sub-assembly fabrication contracts
with many original equipment manufacturers.
The Company believes that by contracting all or a substantial portion
of the manufacture of Britten-Norman aircraft to Romaero, the Company will be
able to lower significantly unit production costs.
ACQUISITION OF MINORITY INTEREST IN ROCKY MOUNTAIN GINSENG, INC.
On April 7, 1998, Litchfield (prior to its transfer on September 4,
1998, of approximately 87% of Biofarm, S.A. to the Company), agreed to acquire
an interest in Rocky Mountain Ginseng, Inc. ("RMG"), a Canadian entity engaged
in the marketing and distribution of raw ginseng root and value-added ginseng
products. RMG was then under contract to acquire 100% of Fuzhou Fujian Drug Co.,
Ltd. ("FFDC"), a registered Chinese pharmaceutical concern. On September 15,
1998, RMG received permission from the Chinese Government (Fuzhou Gu Ou District
for Economic and Trade Bureau) to complete the acquisition of FFDC; however,
closing has not yet occurred.
Litchfield acquired its initial interest in RMG in an attempt to
develop distribution possibilities for the pharmaceutical products of its
then-owned Biofarm subsidiary by providing the funding for RMG's purchase of
FFDC. Litchfield invested $650,000 in RMG, of which $433,000 was placed in
escrow pending completion of the transaction. Litchfield acquired approximately
17% of the capital stock of RMG by obtaining ownership of 3,700,000 shares
thereof. FFDC possesses a Chinese Customs Registration Certificate, a license
that permits FFDC to import and export pharmaceutical products into and from
China. FFDC also possesses a Drug Producing Enterprise Certificate, a Drug
Producing Enterprise Quality License and a Legal Business License, all issued to
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FFDC by the Chinese Government. The Company believes that, by virtue of its own
relationship (described below) with RMG, these permits and licenses will enable
its Romanian pharmaceutical subsidiary to distribute its products in China.
Also, it is believed that these permits and licenses may give its Romanian
pharmaceutical subsidiary the opportunity to negotiate joint venture agreements
with other pharmaceutical companies seeking to distribute their products in the
Chinese market. FFDC has in place its own sales and distribution network now
numbering 131 outlets in mainland China. The forward-looking statements in this
paragraph are subject to the uncertanties and challenges inherent in attempting
to develop business in the Chinese market.
On December 12, 1998, the Company obtained ownership of approximately
8% of the capital stock of RMG by acquiring 1,800,000 shares of capital stock of
RMG in exchange for an aggregate of 165,000 shares of the Company's Common
Stock. (None of such 165,000 shares has been registered for sale under the 1933
Act; and all such shares bear a restrictive legend.) Such 165,000 shares were
issued to Balmerino Ltd., a Gibraltar entity unaffiliated with the Company. (See
Item 7 ("United Kingdom") hereinafter.)
Item 2. Properties
The principal executive offices of the Company are located at 403
Salisbury House, 31 Finsbury Circus, London, England EC2M 5QQ. The Company
leases 1,700 square feet of office space at such location at an annual rental of
$57,750. Such lease is non-cancellable and expires on December 25, 2003. With
the exception of Robert Ferran (President of Biofarm, S.A. residing in
Bucharest, Romania) and Desiree L. Pierson (Secretary of the Company residing in
the United States), all of the principal executive officers of the Company are
located in the London office. (See Item 10 hereinafter).
The principal office of the Company in the United States is located at
1244 Main Street, Linfield, Pennsylvania 19468. Such premises are used solely
for mail and telephone purposes. Through a subsidiary, the Company owns a 2,400
square foot office building and garage (400 square feet) located on
approximately 10 acres of land (waterfront property) in Camden, New Jersey. The
Company intends, upon the resolution of certain environmental issues, to offer
such property for sale. The Company carries such property at zero value on its
books.
Britten-Norman owns approximately 23.5 acres on the Isle of Wight.
Situated on such acreage are three principal buildings as well as access
taxiways, aircraft berthing sites, access roads and a car park that accommodates
200 vehicles. The three principal buildings include a production factory
containing approximately 78,000 square feet of light-weight steel trussed frame
construction built in 1966, a warehouse and flight shed containing approximately
22,000 square feet of steel portal frame built in 1981, and a security-reception
building containing approximately 2,000 square feet built in 1986/7. The acreage
owned in fee contains local planning authority permission to construct
additional manufacturing and office facilities. Such permission covers
approximately 80,000 additional square feet and includes the right to construct
buildings suitable for light industrial activities.
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Biofarm, S.A. owns approximately 27,210 square meters located in
Bucharest at three diverse locations. The principal site is located on Logafat
Tautu Street and includes the administrative offices, tablet and vial production
lines, raw material and finished goods warehousing facilities, engineering
workshops and research and quality control laboratories. The site includes 17
buildings constructed within a period of 13 to 46 years and located on 10,248
square meters of acreage. The second site is located on Iancu de Hunedoara
Street and includes three buildings and several small warehouses located on
2,485 square meters of acreage. Two of the buildings house the galenic
production line used to manufacture syrups, solutions and molded tablets. The
principal building on this site was constructed in 1936. The third site is
located on Tineretului Street and includes numerous small warehouses and several
buildings housing production lines used to manufacture intermediate solutions
and tinctures. This site occupies 14,477 square meters of land. The buildings on
this site were constructed between 1936 and 1986. All of the foregoing acreage
and buildings are owned by Biofarm, S.A. and all buildings comply with Romanian
Ministry of Health guidelines. All of the buildings (and most of the production
equipment) would, however, require substantial renovation to be able to comply
with international GMP standards.
(See "Biofarm, S.A. (Research and Development Expenses") hereinafter.)
Item 3. Legal Proceedings
Litigation Instituted by the Company
The Company has previously advised its shareholders (and has brought to
the attention of the Securities and Exchange Commission both by letters and by
filings under the 1934 Act) of the litigation instituted by the Company against
thirteen persons and firms (including former counsel, recipients of the
Company's Common Stock and broker-dealers) who, collectively and individually,
it is alleged, participated in a scheme to defraud the Company and to violate
the registration requirements of the 1933 Act. (Global Spill Management, Inc. v.
Schwab, et al., 96 Civ 6246 (TCP), USDC EDNY)
Such scheme involved the filing of two Form S-8 Registration Statements
with the Commission in August and September, 1996, and the purported
registration under the 1933 Act of an aggregate of 1,135,000 shares of the
Company's Common Stock. It is alleged that Form S-8 was not then available for
the registration of such 1,135,000 shares because (a) the Company was not then
current in its 1934 Act filings when such two Form S-8 filings occurred (as
indicated in a letter, dated September 19, 1996, from the Commission to the
Company), and (b) the recipients of the 1,135,000 shares were not bona fide
consultants to the Company or the type of consultants envisioned by Form S-8.
In a Memorandum and Order entered on January 22, 1998, Judge Platt
(USDC, Eastern District of New York), sustained the complaint filed by the
Company as to the causes of action for malpractice, breach of contract, breach
of fiduciary duty and unjust enrichment, and dismissed the cause of action for
fraud. The Company determined not to seek an immediate appeal of the dismissal
of the cause of action for fraud because the relief sought by the Company
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(return of the 1,135,000 shares and of the proceeds derived from the sale
thereof) is encompassed by the four causes of action that were sustained.
On August 2, 1996, an aggregate of 385,000 shares of the Company's
Common Stock was filed on Form S-8 at the price of $6.00 per share ($2,310,000
in the aggregate); and on September 18, 1996, an aggregate of 750,000 shares of
the Company's Common Stock was filed on Form S-8 at the price of $2.06 per share
($1,545,000 in the aggregate), or a total of 1,135,000 shares at the
registration price of $3,855,000. With the exception of 50,000 of such 1,135,000
shares that were returned to the Company for cancellation, all of the remaining
1,085,000 shares were immediately sold publicly by the recipients. At least two
of the defendants were indicted for securities law violations in an unrelated
matter in January, 1998; two of the defendants were then registered
broker-dealers; one defendant-recipient received 300,000 shares allegedly in
"settlement" of a claim; and one defendant is a public relations firm involved
in publicizing public companies.
None of the directors and officers who served until October 5, 1998,
and none of the present directors and officers of the Company participated in
any manner in any aspect of the two Form S-8 filings. No Board of Directors
meeting was attended by any of such persons at which the subject of the S-8
filings was discussed; in fact, no board meetings were held between June 28,
1996, and November 15, 1996. Nor did any of the duly appointed officers of the
Company execute the Form S-8 filings or any of the documents incident to the
issuance of the 1,135,000 shares. Not only were the two Form S-8 filings not
authorized by the Board but, also, the signatories thereto were not holders of
the offices indicated in such filings.
It is the position of the Company that, among other things, the (a)
1,135,000 shares issued pursuant to the two Form S-8 filings and 1,085,000
shares sold publicly have not been registered under Section 5(a) of the 1933 Act
and that it was unlawful to sell such shares in interstate commerce; and (b)
persons who received and sold the 1,085,000 shares were not persons entitled to
receive the same pursuant to the Instructions to the use of Form S-8.
On December 18, 1998, the Court, in response to three defendants'
motion to dismiss for lack of subject matter jurisdiction, ordered such motion
referred to as Magistrate Judge for a report and recommendation. The latter
ordered an evidentiary hearing to be held on January 29, 1999, and the moving
defendants were ordered to file a fully briefed motion to dismiss on or before
January 8, 1999. The Magistrate Judge, at the conclusion of such hearing,
informed the parties that his recommendation to the presiding Judge would be to
deny defendants' motion to dismiss. Promptly upon the entry of an appropriate
order, the Company intends the Company intends to move immediately for judgment
against the defaulting defendants and for summary judgment against the answering
defendants.
The recovery by the Company of any portion of the sales proceeds
received by the sellers of the 1,085,000 shares will, by agreement with
Litchfield, belong exclusively to the shareholders of the Company other than
Litchfield. Since Litchfield is able to convert its Debenture into Common Stock
in increments over a five year period, and since the recovery date (if there be
such) is not known, Litchfield's non-participation in any such recovery was
assured by assigning the proceeds of any such recovery to a new entity (Global
11
<PAGE>
Enterprises, Inc. ("Enterprises"), a Nevada corporation) organized
simultaneously with the Litchfield closing. The sole directors of the new entity
are the three directors of the Company whose term of office expired on October
5, 1998. The shares of capital stock of Enterprises will be distributed to the
shareholders of the Company other than Litchfield upon the earlier of the (a)
recovery of any such proceeds, or (b) date on which Litchfield commences
conversion of its Debenture. There can be no assurance that recovery will be
awarded or that, if awarded, any resulting judgment will be collectible.
In September, 1996, former counsel (one of the defendants in this
litigation) initiated another transaction detrimental to the Company. Such
transaction involved the issuance of an aggregate of $2 million in debentures to
foreign purchasers initially contacted by former counsel in a purported
Regulation S transaction. Such debentures were initially convertible into an
aggregate of 1,640,000 shares of the Company's Common Stock. In September, 1996,
clients of former counsel received the sum of $1,023,500 from the alleged
foreign purchasers (hereinafter the "Purchasers") of the debentures. Such
proceeds were paid to a bank account maintained by the clients of former counsel
in Queens, New York. No meeting of the Board of Directors of the Company
approved of the issuance of the debentures; none of the duly appointed officers
of the Company executed and delivered the debentures; none of the proceeds
received from the sale of the debentures was obtained by the Company. Upon
learning of the transaction, the Company immediately advised its Transfer Agent
to cancel of record all of the 1,640,000 shares issued upon conversion of the
debentures. In April, 1998, a lawsuit brought by the Purchasers against the
Company (F.T. Trading Company et al v. Global Spill Management, Inc. et al,
605807/96 Supreme Court of the State of New York, County of New York (Ramos,
Judge)) was settled for an aggregate of 200,000 shares of the Company's Common
Stock and the agreement of the Purchasers to surrender all of the debentures to
the Company and to assign to the Company the judgment ($1,023,500) held by the
Purchasers against the recipients of the proceeds of the debenture sales. The
Company has instructed its attorneys to move vigorously to collect the
$1,023,500 judgment (held by the Purchasers) from the judgment debtors who sold
the illegally-issued debentures. Although the judgment held by the Company is a
New York State judgment separate and distinct from the action commenced by the
Company in Federal Court to recover the shares and proceeds of sale from the two
S-8 transactions described herein, the Federal Court action does include as a
separate cause of action a claim for damages against former counsel and certain
of the other defendants therein for participation in the issuance of and receipt
of proceeds derived from the debenture transaction described herein. (See Item
13 hereinafter.) The recovery of any portion of the $1,023,500 will be
distributed solely to the shareholders of the Company other than Litchfield in
the manner indicated in the paragraph immediately preceding.
Litigation Instituted Against the Company
From the time the Company became a public company in 1992 until the
time (June 28, 1996) the Company disposed of all of its then operating
subsidiaries, the Company itself never engaged in environmental clean-up
activities. All such work was conducted by the former wholly-owned subsidiaries.
12
<PAGE>
Subsequent to June 28, 1996, various claims have been asserted against
the Company seeking damages for non-performance by certain of the former
subsidiaries. All such matters have been resolved and disposed of conclusively,
except that the Company remains a defendant in two unrelated matters (one of
which has been resolved subject only to court approval).
The Company was named a defendant in a 1995 complaint filed in the
Court of Common Pleas (Philadelphia County). In 1992, Plaintiff hired the
co-defendant (Terminix International) to remedy a termite infestation problem.
While doing so defendant Terminix ruptured an oil line, thereby causing fuel to
be deposited in and around plaintiff's residence. Plaintiff then retained a
former subsidiary of the Company (GSME) to clean-up the resulting oil spill. The
gravamen of the complaint is that the Company conspired with Terminix to
cover-up the true extent of damages to plaintiff's residence. In March, 1998,
the matter was submitted to binding, non-appealable arbitration. Terminix has
offered to purchase plaintiff's residence for $300,000; the purchase price for
the residence was $138,000; and the assessed value is $5,100. The Company's
defense is that it did not cause the damage, the claim of conspiracy is false,
Terminix is solely responsible and, in any event, the Company is not a proper
party defendant because its former subsidiary (GSME) and not the Company itself
performed the services for plaintiff.
In the second matter, the same former subsidiary (GSME) was retained by
Coastal Oil to clean-up an oil spill on the Delaware River. Plaintiff claims it
was retained by GSME to assist in the spill clean-up. Plaintiff is in bankruptcy
in Louisiana and has sued the Company and GSME for its alleged unpaid invoices
in the amount of $78,000. The Company was able to demonstrate to plaintiff that
the Company is not a proper party defendant, that the work was done by GSME,
that plaintiff was retained by GSME, that all payments received from Coastal
(including amounts due plaintiff) were deposited into the GSME bank account, and
that the sole reason the Company has been named a defendant is because GSME, in
1994, filed with the Commonwealth of Pennsylvania a fictitious name certificate
to be able to use the tradename "Global Spill Management". (The latter is not an
actual entity in being.) As a result, the matter was settled by the Company for
the sum of $10,000 to be paid to plaintiff, for which the Company will receive
an assignment of the claim from the plaintiff against GSME. An order to approve
such settlement is pending before the Bankruptcy Judge in Louisiana.
The Company knows of no other pending or threatened litigation of any
amount in excess of $5,000.
It is the position of the Company that, should certain former
subsidiaries of the Company receive claims that they are or may be liable for
environmental clean-up costs and related damages, and should the Company also be
named a party defendant, the Company will vigorously defend any such claims
based upon the facts and the current laws and regulations applicable to
environmental matters. On the basis of its experience and the information
currently available to it, the Company believes that the one remaining claim
described herein will not have a material adverse effect on its results of
operations, financial position or liquidity. Buttressing the Company's position
(and consistent with the general rule of corporate law), the United States
Supreme Court recently decided in a "superfund" matter that non-operating parent
companies are not responsible for the environmental problems of wholly-owned
subsidiaries.
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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of the shareholders:
On October 5, 1998, an Annual Meeting of shareholders was held pursuant to
proxies solicited pursuant to Regulation 14A. All of the directors* named in the
Proxy Statement were elected to the Board of Directors (2,351,754 shares for and
382,000 shares against) and there was no solicitation in opposition to
management's nominees listed in the Proxy Statement. In addition, the
shareholders approved the name change from Global Spill Management, Inc. to
Biofarm, Inc. and the selection of BDO International as independent auditors.
The vote in favor of the name change was 2,351,337 shares for and 799 shares
against (801 abstentions); the vote in favor of the selection of auditors was
2,351,871 for and 365 shares against (808 abstentions).
*Keith D. Beekmeyer; Anil K. Mahan; Robert Ferran; Lawrence Baer;
Cesare Brega; Donald M. Coon; Herbert Marcus III; and Carsten Rykov.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
On July 29, 1992, the Company's Common Stock commenced quotation on the
NASDAQ Small Cap Market (NASDAQ) under the symbol GSMI. (The symbol was changed
to GEGI coincident with the May 13, 1996, Amendment to the Articles of
Incorporation, and to BIOF on June 18, 1998.) The following table sets forth the
reported high and low bid and high and low asked quotations for the Company's
Common Stock for the period July 1, 1996, to December 31, 1998. (The quarters
set forth below are based on the Company's prior June 30 fiscal year period.)
Such quotations reflect inter-dealer prices, without retail mark-up, mark-down,
or commissions, and may not represent actual transactions. No bid or asked
quotations are available from November 28, 1996, through April 17, 1997:
<TABLE>
<CAPTION>
Closing Closing
High Bid Low Bid Bid High Ask Low Ask Ask
-------- ------- --- -------- ------- ---
<S> <C> <C> <C> <C> <C> <C>
1996
Jul 1 - Sep 30 9 31/32 13/16 9.25 0.75 7/8
Oct 1 - Nov 27 27/32 0.25 N/A 7/8 5/16 N/A
1997
Apr 17 - Jun 30 0.3125 0.1 0.27 0.46875 0.2 0.4375
Jul 1 - Sep 30 0.65625 0.125 0.625 0.78125 0.16 0.6875
Oct 1 - Dec 31 0.8125 0.4375 0.625 0.90625 0.59375 0.71875
1998
Jan 1 - Mar 31 4.75 0.4375 4.34375 5 0.5625 4.5
Apr 1 - Jun 30 7.5 2.625 6.6875 7.75 2.75 6.75
Jul 1 - Sep 30 7.8125 3.9375 5.625 8.0 4.25 6.0
Oct 1 - Dec 31 6.5 3.5625 4.8125 6.75 3.25 5.0
</TABLE>
On February 5, 1999, the closing bid and asked prices were $6.00 and $6.25,
respectively.
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<PAGE>
(The prices stated for all periods give effect to the 1-30 reverse stock split
that was effective on May 13, 1996).
On November 27, 1996, the Company's Common Stock was delisted from
trading on NASDAQ. On April 17, 1997, the Company's Common Stock commenced
trading on the OTC Electronic Bulletin Board. Such delisting was prompted by the
Company's inability to file a timely Form 10-K with audited financials for the
fiscal year ended June 30, 1996. Having been delisted, the Company is now
required to meet NASDAQ standards applicable to an initial listing application.
The Company intends to file promptly such listing application by "wrapping
around" this Form 10-KSB with an appropriate NASDAQ filing. Presently, such
criteria include $4 million in total assets, $2 million in capital and surplus,
$1 million market value of the public float and a minimum bid price of $3 per
share. Although the Company as of the date hereof meets such initial listing
requirements, there can be no assurance that the Company's Common Stock will be
included on NASDAQ even if such initial listing requirements are satisfied, or
that thereafter the requirements for continuous listing will continue to be met.
In any such event, the Company's Common Stock would continue to be traded on the
OTC Electronic Bulletin Board, in which event a shareholder may find it more
difficult to dispose of (or to obtain accurate quotations as to the price of)
the Company's Common Stock.
As of the date hereof there were 4,376,930 shares of Common Stock
validly issued and outstanding. The aggregate of 1,085,000 shares of Common
Stock issued pursuant to the two improperly filed Form S-8 filings (see Item 3
hereinabove) are not deemed to be validly issued, fully paid and non-assessable
because such shares were not registered for public sale, were issued without
consideration and were not authorized for issuance by the Board of Directors.
There were a total of 527 holders of record as of December 31, 1998. The Company
believes, based upon available information, that there are in excess of 1,000
beneficial owners of the Company's Common Stock. No shares of the Company's
authorized Preferred Stock have ever been issued.
Dividends
The payment of dividends, if any, by the Company rests within the
discretion of its Board of Directors and depends, among other things, upon the
Company's earnings, its capital requirements, it's financial condition, as well
as other relevant factors. As of the date hereof, the Company has not issued or
declared any dividends. The Company does not anticipate paying any dividends on
its Common Stock in the foreseeable future. (See Item 8 hereinafter.)
15
<PAGE>
Item 6. Selected Financial Data
The following selected consolidated financial data of the Company for
the ten-month period ended October 31, 1998, and for fiscal year ended December
31, 1997, and, are derived from financial statements that have been audited by
BDO International, the Company's independent accountants. The selected
consolidated financial data should be read in conjunction with the Consolidated
Financial Statements of the Company and Notes thereto, "Management's Discussion
and Analysis of Financial Condition and Results of Operation" and the other
financial information included herein:
<TABLE>
<CAPTION>
Ten-Months Ended Year-Ended
Income Statement Data: October 31, 1998 December 31, 1997
----------------- -----------------
(in Thousands, except per share data)
<S> <C> <C>
Net Sales $ 11,899 $ 7,013
Income before Income
Tax Expense $ 410 $ 329
Net Income (Loss) (1) $ (232) $ 66
Basic (Loss) per
Common Share $ (.01) $ --
</TABLE>
Balance Sheet Data: October 31, 1998
----------------
(in Thousands)
Total Assets $25,443
Working Capital $ 8,684
Stockholders' Equity $ 6,681
- ----------
(1)Reflects charges of approximately $217,000 in connection with merger and
acquisition-related activities during the ten months ended October 31, 1998.
16
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
BIOFARM, INC. (Parent Corporation) (See Item 8 hereinafter.)
United States
As a direct consequence of the implementation of the Plan of
Reorganization described in Part I hereinabove, the Company (as of June 30,
1996) disposed of all its operations. Therefore, there is no need for discussion
herein of prior results of operations, of year-to-date operating results and
comparisons, and of liquidity and capital resources. Giving effect to the
acquisition of Biofarm, S.A. on September 4, 1998, the three United Kingdom
entities on October 13, 1998, and the agreement to acquire Romaero executed on
January 29, 1999, management's principal focus will be the realization of the
maximum earnings potential of such acquisitions.
The financial condition of the Company (parent) as a consequence of the
transaction concluded on September 4, 1998, pursuant to which Biofarm, S.A. was
acquired by the Company from Litchfield and additional assets were thereafter
contributed to the Company by Litchfield, resulted in liquidity and capital
resource considerations consistent with the transformation of the Company from
being a non-operating entity into a concern managing diverse European
businesses. (See "The Fully Consolidated Company" hereinafter.)
United Kingdom
For the period October 5-31, 1998, the executive offices of the Company
(now located in London) incurred general and administrative expenses of $87,000.
These consisted principally of salaries, rent and general overhead expenses. The
anticipated first year expenses (for the period ending October 31, 1999) of the
London office were financed through a private placement. The Company raised $1
million on October 21, 1998, by issuing to Balmerino, Ltd. a callable,
convertible debenture having an interest rate of 6% and maturing on October 21,
1999. Such debenture converts into Common Stock of the Company on a formula
equal to the lesser of eighty (80%) percent of the market price of such Common
Stock at the time of conversion or the price per share thereof on September 10,
1998. (On September 10, 1998, the closing price of the Common Stock was $4.875.)
However, the Company may, at its option, redeem such debenture for the sum of
$1.2 million (excluding accrued interest thereon). (See Exhibit "(d)C" hereto.)
Such placement resulted in the Company having cash available of over $1 million
with which to fund total home office operating costs estimated at $825,000 for
the fiscal year ending October 31, 1999. In addition, the Company received on
December 23, 1998, from an affiliate of Suisse Capital Complex, Inc.
(Indianapolis, Indiana) a $3 million infusion of equity. (See Item 13
hereinafter.) Such equity infusion was used principally to obtain letters of
credit in support of bid bonds submitted to the Romanian Government to acquire
additional entities (including Romaero).
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<PAGE>
The Fully Consolidated Company
As of September 10, 1998, the Company was well-financed, had excess
cash on hand and had positioned itself to be able to fund its anticipated
commitments through and including October 31, 1999. The acquisition by the
Company of approximately 87% of the capital stock of Biofarm, S.A. did not
affect adversely the Company's liquidity. For the fiscal period ended October
31, 1998, Biofarm, S.A. reported (a) operating income of $1,253,000, (b)
outstanding subscriptions receivable (all of which are payable by the Company)
of $2,215,000, (c) cash and cash equivalents of $894,000, and (d) an increase in
cash and cash equivalents of $649,000 over the December 31, 1997 amounts.
Between October 13, 1998, and January 29, 1999, the Company completed
the acquisition of three United Kingdom entities and signed a contract to
acquire one additional Romanian entity. The Company's management determined that
each of the four entities furthered the Company's overall strategic plan, that
each was compatible with (and, in some instances, offered positive synergistic
possibilities with) each other, and that each possessed a high likelihood of
contributing to the Company's overall profitability.
However, two (Biofarm, S.A. and Britten-Norman) of the Company's four
subsidiaries and the Romanian entity (Romaero) under contract to be acquired do
possess significant financial commitments that, in the aggregate, may compel the
Company to resort to commercial financing or to generate funds from the sale of
securities. To the extent that management is able (as it demonstrated with
Biofarm, S.A.) to reverse the operating losses of the three United Kingdom
entities and to have each become cash flow positive, such borrowings or sales of
securities will be less of a significant factor.
From a consolidated standpoint the Company requires that the following
financial commitments be addressed:
(a) Biofarm, S.A.
Management estimates that capital requirements in fiscal 1999
will be approximately $2.3 million. Such amount will be devoted to new
machinery, equipment and software. Beyond fiscal 1999, Biofarm, S.A.
must invest an additional $15-20 million to obtain the GMP
certification necessary to increase substantially its export sales. The
collection of the $2,215,000 in subscription receivables from the
Company would if received offset all of the anticipated 1999 capital
expenditures. The realization of the anticipated improvement in revenue
(and consequent increase in income) would augment Biofarm's cash
position and would, to the extent achieved, reduce the need to resort
to outside financing to fund the attempt to obtain GMP status. (See
"Biofarm, S.A. (Research and Development Expenses") hereinafter.)
18
<PAGE>
(b) Britten-Norman, Ltd.
Management expects Britten-Norman to return to profitability
in fiscal 1999. Although revenue has decreased sharply over the
preceding three-year period, management believes anticipated decreases
in production costs and in research expenses, coupled with a
significant reduction in interest expense, should result in the future
profitability of operations. Management will also focus upon the
continued reduction in general and administrative expenses. Dependency
upon bank loans, overdrafts, capital lease commitments and funds
provided by the Company will diminish upon the realization of cash
flows derived from increased sales of aircraft. Management also
anticipates that Britten-Norman will return to profitability as a
result of the relaunch of the Trislander aircraft into the Chinese
general aviation market and the introduction of an aggressive marketing
campaign. In addition, management expects that Romaero will benefit in
the short term from Britten-Norman's CAA manufacturing and maintenance
certifications. Such certifications will allow Britten-Norman, through
the pending acquisition of Romaero, to manufacture and maintain
aircraft at substantially reduced costs. In addition, Britten-Norman
must, on or before July 16, 1999, discharge its indebtedness of
$2,513,000 to its former parent company.
(c) Romaero
Britten-Norman's contract to acquire Romaero from the Romanian
Government executed on January 29, 1999, obligates Britten-Norman to
pay the Romanian Government the initial sum of $21 million (subject to
adjustment) and to invest (over a five-year period) the sum of $60
million into Romaero. Management believes that such investment
obligation can be funded by the anticipated increase in revenue and
income of Romaero and by the sale of assets superfluous to Romaero's
core aviation activity. As has been demonstrated with Biofarm, S.A.,
management believes that Romaero's income can be increased
significantly by the introduction of Western management practices and
by the economies in operation expected from private as opposed to
government management of Romaero.
The cumulative effect of the financial requirements of Britten-Norman
and Romaero, among other things, resulted in the going concern issues expressed
in the accompanying auditor's report dated February 18, 1999. In an effort to
address such concerns, management recognizes that, if internal cash flow proves
insufficient to provide the necessary funds, and if resort is made to the
capital markets to remedy any resulting shortage, there can be no assurance that
such markets will be receptive or that the terms of any such capital funding
will be beneficial to the Company.
Notwithstanding the foregoing going concern issues, management is
committed to its announced policy of increasing the total assets and earnings
capability of the Company consistent with its commitment to realize maximum
shareholder value by augmenting the Company's return on invested capital. To
19
<PAGE>
that end, the Company has, as of October 31, 1998, and excluding the assets and
earnings potential of Romaero, increased the Company's total assets from an
insignificant amount to $25,443,000. Management is currently engaged in
negotiations to acquire additional entities. Management believes that it has
demonstrated an ability to obtain funding for its expansion program and is
confident that such funding will be available in the future to resolve any going
concern issues as well as to permit the completion of additional acquisitions.
Management is also confident that it will be able to improve substantially the
operating results of Britten-Norman (and, if consummated, Romaero) as it has
demonstrated with Biofarm, S.A. Management's principal focus during the current
fiscal period will be to improve operating margins and to continue to seek
acquisitions in which the potential earnings improvement inherent in such
acquisitions will justify management's ultimate decision to commit the
resources, time and expertise thereto.
(See Item 6 hereinabove for summary information concerning the
consolidated results of operations of the Company.)
Impact of Year 2000
The "Year 2000 Issue" is the result of computer programs written in the
past that used two digits rather than four to denote the applicable year. As a
result, these computer programs may not properly recognize calendar dates
beginning in the year 2000. The problem may cause systems to fail or
miscalculate, thereby causing disruptions in operations, including a temporary
inability to process transactions or engage in similar normal business
activities.
The Company believes that its additional internal Year 2000 Issue costs
will not be material. The Company also believes that its additional external
costs in connection with Year 2000 Issue costs is included within its capital
budget requirements mentioned above. The Company expects to be Year 2000
fully-compliant prior to the end of the 1999 fiscal year.
The Company has initiated formal communications with its suppliers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issues.
The following discussion relates to results of operations and liquidity
and capital resources of each of the four operating subsidiaries of the Company.
(Comparable information concerning Romaero (other than the contract terms
described on the page immediately preceding) is unavailable until completion of
the Romaero due diligience and audit now being performed.)
Biofarm, S.A.
Since privatization, Biofarm, S.A. has undergone substantial changes
resulting from the comprehensive restructuring of operations and management
practices. The number of employees has fallen to 562 from the 610 employees
existing on the payroll at January, 1998; departmental heads have been replaced
with more experienced and well trained professionals; reporting lines have
flattened; interdepartmental communications have improved considerably; and
20
<PAGE>
financial controls have been implemented. The Company has recruited managers
from firms such as Eli Lilly, Sanofi, Coopers and Lybrand, and Kraft Jacobs
Suchard to prepare Biofarm, S.A. for the substantial growth expected.
Benefits from such corporate restructuring resulted in improved
financial results for the ten-month period ended October 31, 1998. Compared to
the full year 1997 results, revenue for the ten-month period increased almost
13%. This can be attributed to staffing of a new sales and marketing department,
more favorable payment terms extended to carefully selected distributors, modest
quantity discounts given for higher margin products, greatly improved sales and
production planning, and increased customer responsiveness. In addition, working
capital financing has provided the resources needed to increase production to
meet market demand. Revenue and earnings for the ten-month period would have
been even higher had it not been for orders cancelled by distributors in Russia.
Biofarm, S.A. has discontinued production of close to 40 products which
were either unprofitable to manufacture or which were sold in quantities
insufficient to justify production. Biofarm, S.A. is now focused on a narrower
range of products and market sectors in which it is better positioned to
compete.
Year to date 1998 operating income has thus far increased by almost
100% as compared with 1997 results. Biofarm, S.A. expects both operating income
and revenue growth to continue in 1999.
Biofarm, S.A.'s business is subject to certain risks including, but not
limited to, uncertainties associated with governmental tax legislation,
pharmaceutical pricing regulations, currency fluctuations, and market
competition.
Results of Operations Ten-Month Period Ended October 31, 1998, and Twelve-Month
Period Ended December 31, 1997
Revenue
Biofarm, S.A. had revenues of $7.7 million and $6.8 million in the
periods ended October 31, 1998, and December 31, 1997, respectively. The
increase in revenue is attributable largely to organizational restructuring
(discussed above). Revenue in both periods is attributable to sales of the
portfolio of OTC and prescription drugs, most of which have been sold in the
Romanian market for many years. In 1998 export revenues declined due to the
Russian crisis. However, Biofarm, S.A. expects exports to improve in 1999 as the
Russian market recovers and Biofarm, S.A. promotes one of its new products
(Pycnogenol(R)), licensed from Horphag Research Ltd., in the Central and Eastern
European markets. Although Biofarm, S.A. has begun negotiations with several
companies interested in distributing Pycnogenol(R), no agreements have been
signed to date. In 1998 the largest selling product, Triferment(R), accounted
for just under 14% of sales, and Silimarina(R), accounted for 9.7%. Biofarm,
S.A. has over 85 products in its portfolio; with the exception of these two
products none of the remainder individually accounted for more than 7% of sales.
Biofarm, S.A. believes that Triferment(R) and Silimarina(R) will continue to be
well positioned in the Romanian market, although increased competition is
21
<PAGE>
expected. In 1999 Biofarm, S.A. expects that these products' percentage of sales
will be reduced as new products are introduced.
Research and Development Expenses
In June, 1998, Biofarm, S.A. commissioned the German engineering group
Linde to develop a strategy to meet international Good Manufacturing Practices
("GMP") standards. The GMP study has been ongoing (although it has taken longer
than expected) and the preliminary analysis indicates that the most cost
effective option would be to construct a new building at the Company's plant
extraction production site. As a new building would require demolition of
existing structures, Biofarm, S.A. is currently analyzing the merits of either
moving plant extraction to the main production site or outsourcing primary
production from third party suppliers. The results of the GMP study are expected
to be completed before the end of March, 1999. Research and development expenses
are expected to remain at or around the current modest levels until such time as
manufacturing capabilities conform to international GMP standards sometime in
2000 and 2001.
The Company's research and development expenses increased slightly from
1997 to $75,000 in 1998. Research and development expenditure is also expected
to increase slightly in 1999 from 1998, with the bulk of spending concentrated
in continuing the research of GMP standards compliance, developing new
formulations for existing products and formulations for new nutritional
supplement products.
General and Administrative Expenses
General and administrative expenses of Biofarm, S.A. increased to $2.09
million for the ten-month period in 1998 compared with $1.67 million for the
twelve-month period in 1997. This is due to the higher indirect costs associated
with the increase in production activity. The operating margin improved
considerably to 16.2% in 1998 as compared with a margin of 9.9% for 1997.
Operating cost improvements stem from: a substantial reduction in steam, water
and electricity consumption, which in turn results from investments in two
thermal generators; installation of water meters to measure actual rather than
estimated water consumption; more efficient industrial refrigeration units;
renegotiation of third-party contracts; employee redundancies; lower material
costs; and the discontinuing of production of raw materials made from animal
extracts such as pancreatin and ox bile. Although sales and marketing
expenditures will increase, Biofarm, S.A. expects operating margins to continue
to improve in 1999 as the benefits of actions taken during the previous year are
fully realized.
Biofarm, S.A. anticipates that its existing capital will be sufficient
to fund operations as currently planned through 1999. Capital requirements will
be driven by investments in new production machinery, equipment and software,
and quality control laboratory equipment. Capital investment for 1999 is
expected to be approximately $2.3 million. Longer term, Biofarm, S.A. must
invest an additional $15 to $20 million in order to obtain the GMP certification
needed to compete more effectively in export markets. There can be no assurance
that the Company will be able to raise the capital needed to meet these
investment goals.
22
<PAGE>
Liquidity and Capital Resources
In 1997 Biofarm, S.A. financed its operations by delaying payments to
suppliers and by receiving a grant of $697,000 contributed in Romanian Lei as a
result of the terms of the Company's privatization completed in August, 1997. At
October 31, 1998, Biofarm, S.A. had $894,000 in cash, cash equivalents and short
term investments, as compared with $145,000 at December 31, 1997. This increase
resulted primarily from the proceeds of the sale of stock in June, 1998, when
$975,000 was raised. The Company invests its cash in short term time deposits
with ABN Amro Bank Bucharest.
The Company's receivables at October 31, 1998, were $1.548 million, as
compared with $302,000 at December 31, 1997. This increase in receivables is due
to the increase in sales and extended payment terms given to a select number of
distributors whose distribution capabilities and creditworthiness have been
carefully assessed.
Biofarm, S.A. intends to use its financial resources to acquire
production machinery, laboratory equipment and information technology systems,
as well as to finance the increase in its working capital needs resulting from
the continued growth in sales. The amounts actually expended for each such
purpose may vary depending upon several factors, including currency
fluctuations, the timing of price increases allowed by regulations and general
market conditions.
Britten-Norman, Ltd.
Since its inception in 1960, the principal activity of Britten-Norman
has been the design, manufacture and sale of aircraft and aircraft parts and the
maintenance of customers' aircraft. Other than in the recent past,
Britten-Norman's profitability has been affected by substantial additional
expenditures on certification of new aircraft types. Britten-Norman's historical
operations and the financial information included herein are not indicative of
its future operating results or financial condition.
Britten-Norman expects that losses will cease in 1999. Results through
1999 on a quarter-to-quarter basis will fluctuate due to the timing of delivery
of aircraft and potential revenues from collaborative agreements.
Britten-Norman's mainstream business is subject to risk including, but
not limited to, the decision of governments to defer capital expenditure or
influence product choice within the public sector; the regulations of the UK
Civil Aviation Authority ("CAA") or the Federal Airworthiness Authority ("FAA");
and product pricing and competition.
23
<PAGE>
Results of Operations from July 13 until October 31, 1998
Revenue
Britten-Norman had sales of $3,633,000 during the period July 13, 1998,
until October 31, 1998. Britten-Norman anticipates that sales will increase
significantly in the future as current prospects are converted to orders and the
benefit from collaborative agreements is realized. As of the date hereof, the
backlog of orders for the delivery of aircraft amounted to approximately
$4,200,000.
General and Administrative Expenses
Britten-Norman expects to increase these expenses on an annualized
basis in an effort to support increased manufacturing scale-up and marketing
presentation.
Interest Expense
The interest charge during the period July 13 until October 31, 1998,
amounted to $80,000.
Liquidity and Capital Resources
At October 31, 1998, Britten-Norman had net bank overdraft and short
term bank loan levels of $500,000. In addition, Britten-Norman must liquidate
its indebtedness to its former parent in the amount of $2,513,000 on or before
July 16, 1999. Funding is to be provided from improved sales, the mortgaging of
demonstrator aircraft and inter-company support. The overdraft facility is to
remain a short term vehicle in support of work in progress.
Property includes freehold land and premises having an appraised value
of approximately $4.7 million on the basis of existing use at October 31, 1998.
Britten-Norman has no material commitments for the acquisition of property and
equipment at October 31, 1998, and does anticipate increasing investment in
property and equipment in connection with its manufacturing and technical
facilities in the future.
Exclusive of the repayment of debt, Britten-Norman anticipates that its
improved operating performance will be sufficient to fund itself as currently
planned through 1999. Britten-Norman expects to earn a return on investment in
excess of 15% and to meet its capital needs in the foreseeable future.
Burlington, Chamber & James Ltd. & Burlington & James Ltd.
Burlington, Chamber & James Ltd. ("BCJ") operates as an insurance
intermediary placing insurance for its clients (including the Company) in the
London insurance market. BCJ handles all aspects of insurance, including but not
limited to, UK commercial, aviation, marine and facultative reinsurance on a
worldwide basis. The acquisition of BCJ benefits the Company by way of revenue
24
<PAGE>
received from placing insurance requirements for its clients and by meeting the
specific requirements of the Company. Further synergy exists in the in-house
advice readily available to the Company on insurance required to protect the
Company's assets.
Burlington & James Ltd. (a 51%-owned subsidiary of BCJ) was created as
a regional company. To date, its activities are not as broad in depth and scope
as the activities it must undertake in the future; and its historical operations
and its financial information included in this report are not indicative of its
future operating results or financial condition. BCJ's operations to date have
not been material.
In 1998 BCJ acquired the agency department of a Lloyds insurance name
specializing in the offering of insurance to United Kingdom insurance brokers.
Such acquisition was compatible with existing lines of business and provided BCJ
with access to insurance markets that were not previously accessible.
Additionally, BCJ opened a regional office in Birmingham (United Kingdom) in
July, 1998, and took 51% stock ownership thereof. Such affiliate (Burlington &
James) was designed to take advantage of the insurance market located in the
Midlands region of the United Kingdom. BCJ will seek to acquire other Lloyds and
non-Lloyds insurance brokers in an effort to increase its written business and
thereby better absorb its overhead costs.
Kaster Bioscience Ltd.
Since its inception in May, 1998, the organizational purpose of Kaster
Bioscience Ltd. ("Kaster") was to supply pre-prepared microbiological support
media to the pharmaceutical industry. The manufacture of growth media to grow
bacteria is widely used to test effectively sterile production in the
pharmaceutical industry. Kaster has devoted substantially all of its resources
to start-up costs associated with a new venture. Kaster is subject to certain
risks including, but not limited to, uncertainties associated with governmental
tax legislation, pharmaceutical pricing regulations, and market competition.
Operating results through October 31, 1998, have not been material. However,
contracts with Philip Harris, one of the largest laboratory equipment
distributors, Steripak, Parkfields and others, are expected to generate sales
estimated at approximately $1.5 million during the fiscal year beginning
November 1, 1998.
Forward Looking Information
The forward-looking statements herein are based on current expectations
that involve a number of risks and uncertainties. Such forward-looking
statements are based on assumptions that the Company will have adequate
financial resources to fund the development and operation of its businesses, and
that there will be no material adverse change in the Company's operations or
businesses. The foregoing assumptions are also based on management's judgment
with respect to, among other things, information available to the Company,
future economic, competitive, market and international conditions, and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the Company's control. Accordingly,
although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any such assumptions could prove to
be inaccurate and, therefore, there can be no assurance that the results
25
<PAGE>
contemplated in forward-looking statements will be realized. There are a number
of other risks presented by the Company's businesses and operations that could
cause the Company's financial performance to vary markedly from prior results or
results contemplated by the forward-looking statements. Management decisions,
including budgeting, are subjective in many respects and periodic revisions must
be made to reflect actual conditions and business developments, the impact of
which may cause the Company to alter its capital investment and other
expenditures, and which may also adversely affect the Company's results of
operations. In light of significant uncertainties inherent in the
forward-looking information included in this Form 10-KSB, the inclusion of such
information should not be regarded as a representation by the Company that the
Company's objectives or plans will be achieved in all respects.
Item 8. Financial Statements and Supplemental Data
Consolidated Financial Statements and supplementary financial
information specified by this Item 8 are presented following Item 14 in Part IV
of this report.
All of the operating subsidiaries of the Company are located outside
the United States. The Company's Romanian pharmaceutical subsidiary (Biofarm,
S.A.) operates in an economy in an early stage of transition to capitalism. The
majority of the sales and customers of Biofarm, S.A. are located in Romania,
thereby exacerbating the risks associated with an emerging market economy.
Moreover, Biofarm, S.A. also operates in a highly inflationary economy, thereby
presenting significant currency risks. The risk of currency depreciation (and
devaluation) affects not only the value of sales but also affects all monetary
assets denominated in Romanian Lei. The Romanian Lei is not a freely convertible
currency; therefore, significant exchange restrictions and controls exist
relative to the conversion of Romanian Lei into foreign currencies. Such
restrictions, in addition to affecting the realizeable value of domestic sales
and of monetary assets held in Romania, also affect the ability of the Company
to repatriate earnings and net monetary assets from Romania. The risks described
herein do not apply to the Company's United Kingdom subsidiaries, the British
Pound Sterling being a premier currency and fully convertible. (For purposes of
the financial statements included herein as part of the response to Item 14
hereof, the two foreign currencies have been converted into United States
dollars.)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Company
The executive officers, directors and key personnel of the Company are
as follows: (the information set forth hereunder is as of October 31, 1998 (the
26
<PAGE>
end of the fiscal period)), and unless otherwise stated gives effect to the
election of directors at the Annual Meeting of shareholders held on October 5,
1998:
<TABLE>
<CAPTION>
Name Age Positions held with the Company
- ---- --- -------------------------------
<S> <C> <C>
Keith D. Beekmeyer 35 President and Chairman of the Board
Anil K. Mahan 30 Chief Executive Officer, Vice President
and Director
Robert Ferran 39 President of Biofarm, S.A. and Director
Lall Singh 29 Principal Financial and Accounting
Officer and Treasurer
Peter Kelly 55 Director
Paul Bartlett 38 Director
Laurence Baer 47 Director
Cesare Brega 58 Director
Donald M. Coon 57 Director
Herbert Marcus, III 61 Director
Desiree L. Pierson 36 Secretary
</TABLE>
Biographies of the directors and executive officers of the Company are
set forth below. All directors hold office until the next annual stockholders'
meeting and until their successors have been elected and qualified or until
their death, resignation, retirement, removal or disqualification. Vacancies in
the existing Board are filled by majority vote of the remaining directors. Mr.
Carsten Rykov, who was elected a director by the shareholders on October 5,
1998, resigned such position, for personal reasons, on October 29, 1998.
Officers of the Company serve at the pleasure of the Board of Directors.
Keith D. Beekmeyer, became President and Chairman of the Board on
October 29, 1998. Mr. Beekmeyer is a resident of London; Freeman of the City of
London; nineteen years experience in the insurance industry as a Lloyd's broker,
underwriter and captive risk manager, including ten years with a department of
Barclay's Bank brokering international clients' businesses specializing in
international property and securitization of bank book debts; instrumental in
establishing the Litchfield group of companies; previously appointed Chief
Executive Officer on October 5, 1998, prior to becoming President.
27
<PAGE>
Anil K. Mahan, became Chief Executive Officer and Vice President on
October 29, 1998, and a director on October 5, 1998. Mr. Mahan is a resident of
London; law degree with honors from the University of Birmingham; Masters degree
(LLM) from the University of Washington (D.C.); admitted to the Bar in England
in 1992 and in the District of Columbia (U.S.) in 1997; previously involved in
mergers and acquisitions in the US, Europe and Far East; experience covers
electronic, construction, insurance and real estate sectors; previously Legal
Director to the Company prior to becoming Chief Executive Officer.
Robert Ferran, became a Director on October 5, 1998 and President of
Biofarm, S.A. on April 18, 1998. Mr. Ferran is a resident of London; MBA degree
from City University Business School (London) in finance; B.S. from University
of California (Berkeley); Corporate and Project Finance consultant in London
since 1995; previously, Assistant Vice President (Corporate Finance) with
Bankers Trust Company (London); Business Development Manager for 3Com Inc.
(U.K.); Sales Manager for Motorola Codex, Inc. (San Francisco); and Assistant
Director (fiber optic network sales) for Pacific Bell.
Lall Singh, became Principal Financial and Accounting Officer and
Treasurer on October 5, 1998. Mr. Singh is a resident of London; BA degree with
honors in accounting & finance, MBA from Aston Business School; near completion
of a PhD from Warwick Business School; a qualified accountant with management,
financial and marketing experience in the UK; responsible for the Company's
worldwide financial activities, including corporate financial planning and
investment portfolio.
Peter Kelly, became a Director on February 6, 1999. Mr. Kelly is a
resident of London; BA degree with honors and PhD from the University of London;
over twenty years' experience in the development of infrastructure projects;
extensive experience in international contracting, civil aviation, ports,
harbor, and supply logistics.
Paul Bartlett, became a Director on February 6, 1999. Mr. Bartlett is a
resident of the Isle of Wight; near completion of a MBA from Henley Business
School; currently, Chief Executive Officer of Britten-Norman (by whom he has
been employed for the preceding ten year period); experience covers design,
customer support, materials management, and consulting engineering; previously,
with British Hovercraft, GKN Westland Aerospace.
Laurence Baer, became a Director on October 5, 1998. Mr. Baer is a
resident of Maryland; degree from New York Institute of Technology; currently,
principal of L. Baer & Associates (international marketing company), located in
Laurel, Maryland; previously, Executive Assistant to Chairman, Global Economic
Action Institute (not-for-profit international economic cooperation institute).
Cesare Brega, became a Director on October 5, 1998. Mr. Brega is a
resident of Rome; degrees from University of Milan in economics and finance;
extensive experience in accounting, sales finance and project financing with
prominent Italian and international companies operating in aerospace and
electronic defense and civil systems.
28
<PAGE>
Donald M. Coon, became a Director on October 5, 1998. Mr. Coon is a
resident of Florida; BS degree in Marine Science and JD degree from the
University of Miami; member of the Florida bar since 1967; Florida real estate
broker since 1980; since 1986 President of Nautilus Development Group Inc., a
project management company and developer of commercial properties and marinas;
currently director of Caledonian Group, Ltd.
Herbert Marcus, III, became a Director on October 5, 1998. Mr. Marcus
is a resident of Dallas; grandson of the founder of Neiman-Marcus; manager of
private investments since 1991; previously, Senior Vice President (International
Investment Division) Henry S. Miller/Grubb & Ellis & Company (Dallas).
Desiree L. Pierson became Secretary of the Company in January, 1996.
Ms. Pierson is a resident of Pennsylvania; and was an employee of the Company
from 1991 until June 28, 1996. In her capacity as Secretary, Ms. Pierson's
duties include shareholder relations, matters involving the Transfer Agent and
corporate record keeping, and do not include corporate decision making or
substantive matters involving the Company.
No director, officer or affiliate of the Company is an adverse party to
the Company or any of its subsidiaries in any material proceeding.
The Company and its directors and executive officers are in compliance
with the requirements of Section 16(a) of the Exchange Act.
Although the Company is a Nevada corporation, all or a substantial
portion of the assets of the Company and all of its subsidiaries are located in
the United Kingdom and Romania. In addition, six of the nine directors and all
of the principal officers of the Company are non-residents of the United States,
and all or a substantial portion of the assets of such non-residents are located
outside the United States. As a result, it may be difficult for investors to
effect service of process within the United States upon such non-residents or to
enforce against them judgments obtained in United States courts, including
judgments predicated upon the civil liability provisions of the securities laws
of the United States or any state thereof. There is uncertainty as to whether
courts of England and Wales and Romania, respectively, would (i) enforce
judgments of United States courts obtained against the Company or such
non-residents predicated on the civil liability provisions of the securities
laws of the United States or any state thereof, or (ii) entertain original
actions brought in England and Wales and Romania asserting liabilities against
the Company or such non-residents predicated upon the securities laws of the
United States or any state thereof.
The courts of England and Wales and Romania may accept, pursuant to
general principles of international law, a foreign judgment as evidence of a
debt due. An action may be commenced in England and Wales and Romania for
recovery of this debt. However, a court of England and Wales and of Romania will
only accept a foreign judgment as evidence of a debt due, if: (i) the judgment
is for a liquidated amount in a civil matter; (ii) the judgment is final and
conclusive and has not been stayed or satisfied in full, (iii) the judgment is
not directly or indirectly for the payment of foreign taxes, penalties, fines or
charges of a like nature (in this regard, a court of England and Wales and of
29
<PAGE>
Romania is unlikely to accept a judgment of an amount obtained by doubling,
trebling or otherwise multiplying a sum assessed as compensation for the loss or
damages sustained by the person in whose favor the judgment was given); (iv) the
judgment was not obtained by actual or constructive fraud or duress; (v) the
foreign court has taken jurisdiction on grounds that are recognized by private
international law rules as to conflict of laws or common law rules as to
conflict of laws; (vi) the proceedings in which the judgment was obtained were
not contrary to natural justice (i.e., the concept of fair adjudication); (vii)
the proceedings in which the judgment was obtained, the judgment itself and the
enforcement of the judgment are not contrary to the public policy of England and
Wales and Romania; (viii) the person against whom the judgment is given is
subject to the jurisdiction of England and Wales and Romanian courts; and (ix)
the judgment is not based upon a claim for contribution for damages awarded as
part of a judgment that does not satisfy the foregoing. Enforcement of a foreign
judgment in England and Wales and Romania also may be limited or otherwise
affected by applicable bankruptcy, insolvency, liquidation arrangement,
moratorium or similar laws relating to or affecting creditors' rights generally
and will be subject to statutory limitations of time within which proceedings
may be brought.
There is no treaty or agreement between the United States and Romania
allowing for the recognition and enforcement of foreign judgments. In addition,
although a draft treaty between the United States and United Kingdom for
reciprocal enforcement of judgments has been initialed, there is doubt that this
treaty will be ratified in its current form. Although there is no treaty on
enforceability of foreign judgments in the United Kingdom, under the United
Kingdom Foreign Judgments (Reciprocal Enforcement) Act of 1933, a judgment from
a foreign country may be recognized and enforced in an English court if that
country would give substantial reciprocal treatment to a judgment by an English
court, and if the foreign judgment meets the following requirements:
(a) it is either final and conclusive as between the judgment
debtor and the judgment creditor or requires the former to
make an interim payment to the latter (a judgment is final and
conclusive notwithstanding that an appeal is pending against
it); and
(b) there is payable under it a sum of money, not being a sum
payable in respect of taxes or other charges of a like nature
or in respect of a fine or other penalty; and,
(c) it is given after the coming into force of the Order in
Council(1) which made that court a recognized court.
- ----------
(1) An "Order in Council" is the United Kingdom version of implementing
legislation
30
<PAGE>
Although extensive research reveals that United States courts are not
recognized courts under the Foreign Judgment Enforcement Reciprocal Act, it
seems that a United States judgment may nonetheless be enforced in an English
court based on the principle of comity. Under English common law, a foreign
judgment may be enforced on grounds that it gives rise to an obligation on the
defendant to pay the amount due to the plaintiff. Although the above rule is
derived from principles of comity, it has been held not to be based on
reciprocity in a "strict" sense. In other words, the English court need not
engage in any inquiry regarding whether the foreign court in question would
enforce an English judgment if the courts' positions were reversed. The only
requirement is that the foreign judgment must not have been obtained in
violation of natural justice, (i.e., fair adjudication) or in contravention of
public policy.
Under generally accepted principles of the laws of the various states
of the United States, majority and controlling shareholders generally have
certain "fiduciary" responsibilities to minority shareholders. Shareholder
action must be taken in good faith and actions by controlling shareholders that
are obviously unreasonable may be declared null and void. While the Company
believes there are no material differences between the protection afforded to
minority shareholders of a company organized under the law of England and Wales
from those generally available to shareholders of corporations organized in the
United States, there may be circumstances where English law protecting the
interests of minority shareholders may not be as inclusive as the law protecting
minority shareholders in United States jurisdictions.
In England and Wales, the right of a minority shareholder to bring an
action is governed by The Companies Act.(2) Generally, a minority shareholder
has a personal right to bring an action to restrain a threatened action which if
carried out would be ultra vires. On the other hand, minority shareholders do
not have the right to bring an action (whether a breach of contract or a tort)
on behalf of a company if the transaction involves a mere question of internal
management or if the transaction being questioned is capable of ratification by
or on behalf of a company. If the action is to redress a wrong done to a
company, the action must be brought by the company itself.
However, there is an exception to this rule where the persons against
whom relief is sought themselves hold and control a majority of the shares in a
company, and will not permit an action to be brought in the name of a company.
Thus, a derivative suit by minority shareholders is limited to those situations
involving allegations of fraud and actions beyond the power of a company. (One
reported decision holds that the above exception applies not only to cases of
simple fraud but to cases where directors and majority shareholders are guilty
of a breach of duty they owe to a company and such breach of duty not only harms
the company but benefits the directors.)
- ----------
(2)Some examples of situations creating a right of action include: (a)
allegations that a company's affairs had been conducted in a manner unfairly
prejudicial to the interests of its members, but the shareholder must show that
the value of his shares in the company had been seriously diminished or at least
seriously jeopardized by reason of a course of conduct on the part of those
persons who have or had de facto control of the company (section 459); and (b)
allegations involving improper use of the company's money (section 151).
31
<PAGE>
The general rule is relaxed in favor of the aggrieved minority when, if
they were denied the right, their grievances would never reach the court given
that the wrongdoers themselves, being in control, would not allow the company to
sue. Despite the above exception, minority shareholders do not have larger
rights of relief than the company itself would have if it were the plaintiff. In
addition, they cannot complain of acts that are valid if done with the approval
of the majority shareholders, or are capable of being ratified by the majority.
The Company is not aware of laws or court decisions regarding the
rights of minority shareholders under Romanian law.
Item 11. Executive Compensation
The following table gives effect to the reverse acquisition dated
October 5, 1998, and shows all cash compensation to be paid to the persons
indicated for the fiscal year ending October 31, 1999, for services to be
rendered to the Company and its subsidiaries, including the Company's four most
highly compensated executive officers and all executive officers as a group:
<TABLE>
<CAPTION>
Cash Compensation Table
-----------------------
Name of Individual or
Number in Group Capacities in Which Served Cash Compensation
--------------- -------------------------- -----------------
<S> <C> <C>
Keith D. Beekmeyer President and Chairman $ 66,500
of the Board
Anil K. Mahan Chief Executive Officer, Vice 66,500
President and Director
Robert Ferran President of Biofarm, S.A. and 60,000
Director
Lall Singh Principal Financial and 60,000
Accounting Office and Treasurer
All Executive Officers $253,000
as a Group (4 persons)
</TABLE>
No cash bonuses have been paid to the named individuals and group
during the last fiscal year ended October 31, 1998. The Company does not have in
effect any pension or stock option plans. The Company does not compensate
directors for their services as such.
32
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with regard to the
beneficial ownership of outstanding shares of Common Stock by (i) each person
known by the Company to own beneficially five (5%) percent or more of the
outstanding shares of the Company's Common Stock; (ii) each director and
executive officer individually; and (iii) all executive officers and directors
of the Company as a group:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Bene-
Beneficial Owner (5)(6) ficial Ownership (1)(3)(4)(8) Percent (%) of Class (2)(3)(4)
- ----------------------- ----------------------------- ------------------------------
<S> <C> <C>
Keith D. Beekmeyer 15,756,948 72%
Anil K. Mahan 875,386 4%
Robert Ferran 875,386 4%
Directors and Officers 17,507,720 80%
as a Group (3 persons)
</TABLE>
- ----------
(1) Beneficial ownership as reported in the table above has been determined in
accordance with Instruction (2) to Item 403 of Regulation S-K of the
Securities Exchange Act of 1934.
(2) Percentage of class based upon 4,376,930 shares of Common Stock outstanding
on February 5, 1999; and, pursuant to Rule 13d-3(d)(1) adopted under the
1934 Act, assumes the conversion of the Debenture held by Litchfield (see
footnote (3) immediately hereinafter) within sixty days thereof.
(3) Litchfield, a British Virgin Islands entity, was issued, on September 4,
1998, by the Company a convertible non-negotiable secured Debenture in the
principal amount of $6,434,681, as consideration for the transfer to the
Company of approximately 87% of the capital stock of Biofarm, S.A. (See
Item 1 hereinabove.) Such Debenture was non-convertible prior to January
31, 1999; thereafter, for a period of five years from September 4, 1998,
such Debenture is convertible at the rate of 2% of the then issued and
outstanding shares of Common Stock of the Company for each 2.5% of the
principal amount of the Debenture surrendered for conversion. Litchfield
has granted to each of Anil K. Mahan (Chief Executive Officer, Vice
President and a director) and Robert Ferran (President of Biofarm, S.A. and
a director) a five (5%) percent interest in the Debenture. The balance of
ninety (90%) percent of the Debenture remains with Litchfield, 100% of
which is owned by Keith D. Beekmeyer (President and Chairman of the Board).
(4) Includes the named interest in the Debenture held by Litchfield referred to
in footnote (3) supra.
-----
33
<PAGE>
(5) No person other than the three named in the preceding table is known by the
Company to own beneficially five (5%) percent or more of the Company's
issued and outstanding shares of Common Stock; and no officer or director
(other than the three named in the preceding table) owns individually of
record or beneficially any of the Company's issued and outstanding shares
of Common Stock.
(6) The address of each of the three persons named in this column is 403
Salisbury House, 31 Finsbury Circus, London, England EC2M 5QQ.
(7) Subsequent to October 5, 1998 (the date on which Litchfield's nominees
assumed control of the Company (see Item 4 hereinabove)), Litchfield agreed
with K.A. Butterfield and H.S. Branch (then financial advisers to
Litchfield and unaffiliated parties) to set aside on the books of
Litchfield for each of them an aggregate of 1 million of the shares of
Common Stock of the Company deliverable to Litchfield upon conversion of
the Company's Debenture described in footnote (3) supra. Such allocation is
-----
not deemed by Litchfield to confer a beneficial interest in such shares
upon either of them. The Company is not a party to any arrangement with
Messrs. Butterfield or Branch.
(8) Suisse Capital Complex and/or its affiliate, Asia Equities, Inc.
(collectively "SCC"), and the Company are parties to a transaction that
might render SCC a five (5%) percent shareholder of the Company. (See Item
13 hereinafter.) That transaction involved the advance to the Company by
SCC, on December 23, 1998, of the sum of $3 million as an "equity
facility." (See Item 7 hereinabove.) The terms of such equity facility have
not been negotiated as of the date hereof. The indeterminate number of
shares to be issued to SCC by the Company in exchange for such $3 million
equity facility cannot therefore be quantified for purposes of determining
five (5%) percent ownership.
Item 13. Certain Relationships and Related Transactions
Litchfield is an affiliate of the Company in that Litchfield exercises
control of the Company as a result of the reverse merger, dated October 5, 1998,
between the Company and Biofarm, S.A. Litchfield nominees occupy all nine Board
seats and Litchfield nominees occupy all significant executive positions in the
Company. Litchfield exchanged approximately 87% of the capital stock of Biofarm,
S.A., on September 4, 1998, for the Company's Debenture that (after January 31,
1999, and for a period of five years terminating September 4, 2003), converts
into not less than eighty (80%) of the then issued and outstanding shares of
Common Stock of the Company. In addition, pursuant to resolutions adopted by the
Company's Board of Directors on October 13, 1998, the Company agreed to acquire
from Litchfield three additional United Kingdom entities for no additional
consideration. The acquisition of Biofarm, S.A. from Litchfield was an
arms-length transaction; the acquisition of the three United Kingdom entities
from Litchfield (although approved by the Board of Directors after Litchfield
obtained control thereof) was made expressly subject to independent audits
satisfactory to the Company and to its independent auditors. (See Items 1, 4,
10, 11 and 12 hereinabove.) Burlington, Chamber & James Ltd. (one of the three
United Kingdom entities obtained from Litchfield), was, prior to its acquisition
34
<PAGE>
by Litchfield, owned 100% by Keith D. Beekmeyer; and the balance of Burlington &
James Ltd. (49%) not owned by Burlington, Chamber & James Ltd. was, prior to its
acquisition by Litchfield, owned by Anil K. Mahan (and continues to be owned by
Mr. Mahan). The Company estimates that approximately twenty (20%) percent of the
gross income of these two United Kingdom entities is derived from transactions
with the Company. (See Items 1, 7, 10, 11 and 12 hereinabove.)
Suisse Capital Complex, Inc. ("SCC"), Indianapolis, Indiana, has, since
September, 1996, been involved in the following transactions with the Company:
(1) In September, 1996, SCC funded an aggregate of $2 million of the
Company's convertible debentures, acting as the funding agent for five
separate purchasers ("Purchasers"). Such Purchasers transferred the
sum of $1.3 million to SCC in payment for such debentures. SCC
remitted $1,023,500 of such $1.3 million to the account of Phoenix
Wrecking Corporation ("Phoenix") at Centurion Bank in Queens, New
York. The $2 million principal amount of debentures were convertible
into an aggregate of 1,640,000 shares of the Company's Common Stock.
(See Item 3 hereinabove.)
(a) The new management of the Company that came into office on
November 15, 1996 (subsequent to the November 6, 1996, rescission
of the transaction between the Company and Phoenix), caused the
cancellation of the issuance of the 1,640,000 shares. Thus, as of
November 15, 1996, the result of the SCC funding of the
debentures was that (i) Phoenix (and its principals) received
$1,023,500 from SCC (and delivered none of such proceeds to the
Company), (ii) the Purchasers received no shares of the Company's
Common Stock and remained with $2 million principal amount of the
Company's convertible debentures, and (iii) the Purchasers
obtained a judgment (in the amount of $1,023,500 plus accrued
interest) against Phoenix and the other recipients of the SCC
funding (which judgment was entered in New York Supreme Court on
July 30, 1997).
(2) In or about October, 1997, SCC introduced to the Company the prospect
of acquiring Biofarm, S.A. from Litchfield. (See Item 1 hereinabove.)
On March 6, 1998, the Company filed its Form 8-K with the SEC,
reciting the details of the Company's then proposed arrangement to
acquire approximately 87% of Biofarm, S.A. from Litchfield. (Such
March 6, 1998, filing was supplemented by additional Form 8-K filings
relating to the Biofarm, S.A. acquisition dated November 18, 1998, and
January 13, 1999.) SCC represented to the Company that it was the
financial adviser to Litchfield in the United States; and to others
(after October 5, 1998) that it was the American Agency Office for the
Company.
(a) The acquisition by the Company of Biofarm, S.A. was completed on
September 4, 1998; and, on October 5, 1998, the nominees of
35
<PAGE>
Litchfield assumed management control of the Company (and
potential voting control by virtue of the convertible Debenture
issued by the Company on September 4, 1998, to pay for the
acquisition of Biofarm, S.A.).
(b) As compensation for its role in introducing the Biofarm, S.A.
acquisition to the Company, the Company and SCC executed an
agreement, dated October 5, 1998, pursuant to which the Company
agreed to issue an aggregate of 200,000 shares of its authorized
but unissued Common Stock to SCC. (Such agreement is filed as an
Exhibit to the November 18, 1998, Form 8-K/A filed with the SEC.)
On February 12, 1999, SCC agreed with the Company to cancel the
obligation to deliver such 200,000 shares to SCC. However, the
Company has estimated the value of such services to be
approximately $167,000 and has included such amount in the
statement of operations for the ten months ended October 31,
1998. (See Exhibit "(d)E" hereto.)
(3) On April 27, 1998, after protracted negotiations, the Company and the
five Purchasers of the aggregate of $2 million of debentures referred
to in paragraph (1) above, entered into a stipulation in New York
State Supreme Court providing for the (a) issuance by the Company of
an aggregate of 200,000 shares of its Common Stock in full settlement
of the Purchasers' claim for conversion of their debentures into
Common Stock, (b) assignment of the Purchasers' judgment against
Phoenix and its principals (in the amount of $1,023,500) to the
Company, (c) surrender to the Company of the $2 million in debentures,
and (d) delivery of mutual general releases and dismissal of all
litigation between the parties.
(a) By direction of Purchasers' counsel, the 200,000 shares were
delivered to an affiliate(1) of SCC for disposition. SCC
confirmed in writing, on January 15, 1999, that such 200,000
shares settled in full the Purchasers' claim to have delivered an
aggregate of $1.3 million to SCC as the purchase price for the $2
million principal amount of debentures. Counsel for the Company
is now in the process of preparing the necessary assignment of
judgment to the Company, general releases, stipulation of
discontinuance and cancellation of the debentures.
(4) On October 7, 1998, shortly after the October 5, 1998, assumption of
control of the Company by Litchfield, the Company entered into
negotiations with the affiliate(1) of SCC pursuant to which such
affiliate agreed to make an equity investment in the Company. On
December 23, 1998, the Company received $3 million of such equity
investment. (See Item 7 hereinabove). Pursuant to the understanding
between the Company and the affiliate of SCC, such $3 million advance
is deemed to constitute an equity facility and the drawdown thereof by
the Company on December 23, 1998, to represent an injection of equity
capital into the Company.
- ----------
(1) Such affiliate, Asia Equities, Inc., was one of the five Purchasers of the
Company's debentures mentioned in paragraphs (1) and (3), supra, as well as
the party to whom the 200,000 settlement shares were delivered
(paragraph 3(a), supra).
36
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. All financial statements - see index to Consolidated Financial
Statements on page 14.
2. Exhibits - see Exhibits below.
Schedules not included are omitted because they are not applicable, or are
not required, or the information is shown in the Consolidated Financial
Statements or the Notes thereto.
(b) The following Current Reports on Form 8-K were filed by the Company with
the Securities and Exchange Commission during the last quarter of the
period covered by this Annual Report on Form 10-KSB and prior to the
filing date hereof (and are incorporated herein by reference):
November 18, 1998
January 13, 1999
(c) The following Exhibits (incorporated herein by reference) are applicable
to the period subsequent to the filing of Form 10-KSB for the fiscal
year ended June 30, 1997, and prior to the filing date hereof:
A. Form 10-KSB, for the fiscal year ended June 30, 1997, filed on
September 29, 1997
B. Form 10-QSB, for the quarter ended September 30, 1997, filed on
November 14, 1997
C. Form 10-QSB, for the quarter ended December 31, 1997, filed on
January 27, 1998
D. Form 10-QSB, for the quarter ended March 31, 1998, filed on May 13,
1998
E. Form 8-K, filed on March 6, 1998 (reporting on the proposed
acquisition of approximately 87% of the capital stock of Biofarm,
S.A.)
F. Form 10-KSB for the fiscal year ended June 30, 1998, filed on
September 10, 1998
G. Definitive Proxy Statement, dated September 21, 1998, issued in
connection with the Annual Meeting of Stockholders held October 5,
1998, to approve of (i) election of Board of Directors, (ii) change
in name of Registrant to Biofarm, Inc., and (iii) appointment of BDO
International as auditors
37
<PAGE>
H. Form 10-QSB for the quarter ended September 30, 1998, filed on
November 12, 1998
I. Form 8-K/A, filed on November 18, 1998 (reporting on the
consummation of the acquisition of approximately 87% of the capital
stock of Biofarm, S.A. and filing therewith the relevant Exhibits)
J. Form 8-K/A, filed on January 13, 1999 (reporting on the definitive
acquisition of approximately 87% of the capital stock of Biofarm,
S.A.; filing (Item 7) of audited financial statements of Biofarm,
S.A. for the one-year and ten-month periods ended October 31, 1998,
dated December 22, 1998; and responding also to Item 5 (other
proposed acquisitions) and Item 8 (change in fiscal period))
(d) The following Exhibits are filed herewith:
A. Amendment to Article First of the Company's Articles of
Incorporation, filed in the State of Nevada on October 7, 1998,
changing the name of the Company to "Biofarm, Inc."
B. Specimen Common Stock Certificate of Biofarm, Inc., the new name of
the Registrant, containing the name "Biofarm, Inc." and the new
CUSIP number thereof
C. Debenture, in the principal amount of $1 million, dated September
10, 1998, and issued to Balmerino Limited
D. Resolutions adopted by the Board of Directors on October 13, 1998,
authorizing the acquisition of the three United Kingdom entities**
----------
**The Registrant, believing that the information herein contained with
respect to its acquisition of the three United Kingdom entities (see
Items 1 and 7 hereinabove), satisfies the requirements of Item 2 of
Form 8-K, deems this Form 10-KSB filing to satisfy also the Item 2
filing requirements of Form 8-K. However, because the consolidated
financial statements included herein (Item 14 hereinafter) do not
satisfy the requirements of Item 7 of Form 8-K with respect to the
three United Kindgom acquisitions, the Registrant will file a separate
Form 8-K containing the required Item 7 (of Form 8-K) information with
respect to the three United Kingdom acquisitions.
38
<PAGE>
E. Addendum, executed February 12, 1999, by SCC and the Company, to
Agreement, dated October 5, 1999, amending Exhibit 5 to Form 8-K/A
filed on November 18, 1998
F. Contract, dated January 29, 1999, with the State Ownership Fund of
the Government of Romania relating to the acquisition of Romaero,
S.A.
(e) The following Exhibits previously filed with prior 1934 Act filings as
indicated below, are deemed by the Registrant to remain relevant
notwithstanding the consummation of the Plan of Reorganization described
in Item 1 hereinabove, and are incorporated herein by reference:
A. Articles of Incorporation of Happy Mergers, Inc., a Nevada
corporation, filed as an Exhibit to the Company's Form S-18
Registration Statement (File No. 33-37546-NY) on November 6, 1990
B. By-laws of Happy Mergers, Inc., a Nevada corporation, filed as an
Exhibit to the Company's Form S-18 Registration Statement (File No.
33-37546-NY) on November 6, 1990
C. Restated By-laws of Global Spill Management, Inc., filed as an
Exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended December 31, 1993
D. Agreement of Merger of Global Spill Management, Inc., into Happy
Mergers, Inc., filed in the State of Nevada on November 25, 1991,
filed as an Exhibit to the Company's Form S-18 Registration
Statement (File No. 33-37546-NY) on March 16, 1992
E. Certificate of Merger of Global Spill Management, Inc. into Happy
Mergers, Inc., dated November 7, 1991, filed in the State of
Delaware on March 15, 1992, filed as an Exhibit to the Company's
Form S-18 Registration Statement (File No. 33-48276-NY) on June 9,
1992
F. Amendment to Article Fourth of the Company's Articles of
Incorporation, filed in the State of Nevada on November 30, 1992,
filed as an Exhibit to the Company's Form SB-2 Registration
Statement (File No. 33-56910) on March 1, 1993
G. Amendment to Article Fourth of the Company's Articles of
Incorporation, filed in the State of Nevada on May 13, 1996, filed
as an Exhibit to the Company's Form 10-KSB filing for the fiscal
year ended June 30, 1996, on February 21, 1997
39
<PAGE>
H. Amendment to Article Fourth of the Company's Articles of
Incorporation, filed in the State of Nevada on July 3, 1996, filed
as an Exhibit to the Company's Form 10-KSB filing for the fiscal
year ended June 30, 1996, on February 21, 1997
I. Agreement, dated June 27, 1996, between the Company and the
shareholders of Phoenix Wrecking Corporation ("Phoenix"), a New York
corporation, filed as an Exhibit to the Company's Form 10-KSB filing
for the fiscal year ended June 30, 1996, on February 21, 1997
J. Rescission Agreement, dated November 6, 1996, between the Company
and Phoenix (and the latter's former principal shareholders), filed
as an Exhibit to the Company's Form 10-KSB filing for the fiscal
year ended June 30, 1996, on February 21, 1997
K. Four disputed filings by non-authorized persons during the period
June 28, 1996, and November 6, 1996 (being the dates, respectively,
beginning with the election of two nominees of Phoenix to the Board
of Directors of the Company (June 28, 1996) and the rescission of
the Agreement (dated June 27, 1996) between the Company and the
shareholders of Phoenix (November 6, 1996)), such filings being
"disputed" because none of the four was authorized by the Board of
Directors of the Company, executed by the duly appointed officers of
the Company, or filed in compliance with the published Rules and
Regulations of the Securities and Exchange Commission:
(a) Form S-8 filing (385,000) shares, dated August 2, 1996
(b) Form S-8 filing (750,000) shares, dated September 19, 1996
(c) Form 8-K filing, dated October 4, 1996
(d) Form 10-KSB filing (with unaudited financial statements),
dated October 22, 1996
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized on February 19, 1999.
BIOFARM, INC.
By: /s/ Keith D. Beekmeyer
--------------------------
Keith D. Beekmeyer,
President and Chairman of the Board
February 19, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities indicated, on February 19, 1999.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Anil K. Mahan Chief Executive Officer, Vice February 19, 1999
- -------------------------- President and Director
Anil K. Mahan
/s/ Lall Singh Principal Financial and Accounting February 19, 1999
- -------------------------- Officer and Treasurer
Lall Singh
/s/ Robert Ferran Director February 19, 1999
- --------------------------
Robert Ferran
/s/ Paul Bartlett Director February 19, 1999
- --------------------------
Paul Bartlett
/s/ Peter Kelly Director February 19, 1999
- --------------------------
Peter Kelly
/s/ Donald M. Coon Director February 19, 1999
- --------------------------
Donald M. Coon
/s/ Cesare Brega Director February 19, 1999
- --------------------------
Cesare Brega
/s/ Herbert Marcus III Director February 19, 1999
- --------------------------
Herbert Marcus
/s/ Lawrence Baer Director February 19, 1999
- --------------------------
Lawrence Bear
</TABLE>
41
<PAGE>
BIOFARM, Inc.
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Auditors F1
Consolidated Balance Sheet F2
October 31, 1998
Consolidated Statements of Operations and F3
Comprehensive (loss) income for the ten months
ended October 31, 1998, and the year ended
December 31, 1997
Consolidated Statements of Cash Flows F4
for the ten months ended
October 31, 1998, and the year ended December 31, 1997
Consolidated Statements of Stockholders Equity F5
for the ten months ended October 31, 1998,
and the year ended December 31, 1997
Notes to the Consolidated Financial Statements F6 - F19
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Biofarm, Inc.
We have audited the accompanying consolidated balance sheet of Biofarm,
Inc. and subsidiaries as of October 31, 1998 and the related
consolidated statements of operations, comprehensive (loss) income,
stockholders' equity, and cash flows for the ten months ended October
31, 1998 and the year ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with United States generally
accepted auditing standards. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Biofarm, Inc. and subsidiaries as of October 31, 1998 and
the related consolidated statements of operations and cash flows for
the ten months ended October 31, 1998 and for the year ended
December 31, 1997 in conformity with United States generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Three of
the Company's four English operations which were contributed to the
Company during 1998 (See note 1) have suffered losses from operations.
In addition, Biofarm, S.A. operates in Romania where some exchange
restrictions and controls exist relative to the conversion of Romanian
Lei into foreign currencies. However, these restrictions do not
themselves prevent Biofarm S.A from repatriating its earnings, or from
converting Romanian Lei to purchase currencies to acquire goods and
services necessary for its operations. Also, the Company entered into
an agreement to acquire another company from the Romanian government as
described in note 9. These factors raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 15. The financial statements
do not include any adjustments that might result from the outcome of
these uncertainties.
/s/ BDO International
---------------------
February 18, 1999
BDO International
London, England
F-1
<PAGE>
BIOFARM, Inc.
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 31,
Note 1998
-----------
(In thousands
of US Dollars, except
share and per share amounts)
Assets
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,502
Accounts receivable, net of allowance for
doubtful accounts amounting to $110 4,642
Inventories 3 13,608
Other current assets 721
--------
Total current assets 21,473
Goodwill 1 300
Property, plant and equipment, net 4,10 3,670
--------
Total assets $ 25,443
========
Liabilities and Stockholders' equity
Current liabilities
Short term borrowings 5 $ 4,097
Trade accounts payable 4,814
Advances from customers 1,713
Taxation 8,9 286
Payroll and sales tax 355
Other current liabilities 1,524
--------
Total current liabilities 12,789
--------
Deferred credits 1,10 5,973
--------
Commitments and contingencies 7,9,11,12,14 --
Stockholders' equity
Preferred stock $ 0.001 par value
Authorized 5,000,000 shares, none issued
Common stock $ 0.001 par value
Authorized 25,000,000 shares
Issued and outstanding 4,211,930 shares 1 4
Receivable from stockholders from
issuance of common stock (139)
Additional paid in capital 1,13 7,820
Accumulated deficit (1,177)
Accumulated other comprehensive income 173
--------
Total stockholders' equity 6,681
--------
Total liabilities and stockholders' equity $ 25,443
========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
F-2
<PAGE>
BIOFARM, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the ten month For the
period ended year ended
October 31, 1998 December 31, 1997
---------------- -----------------
(In thousands of US Dollars, except for per share data)
<S> <C> <C>
Net sales $11,899 $7,013
Cost of sales (6,344) (4,534)
------------ ------------
Gross profit 5,555 2,479
Selling, general and administrative
expenses (4,334) (1,797)
Research and development (250) --
Merger and acquisition related expenses (217) --
Other operating income 9 3
------------ ------------
Operating profit 763 685
Other net expense (115) (38)
Net interest expense (94) (26)
Net foreign exchange transaction loss (144) (292)
------------ ------------
Income before income tax expense 410 329
Income tax (expense) (642) (263)
------------ ------------
Net (loss)income (232) 66
Other comprehensive income:
Foreign currency translation adjustments 173 --
------------ ------------
Comprehensive (loss) income $(59) $66
============ ============
Basic (loss) income per share $(0.01) $ --
Weighted average number of common shares 21,059,650 21,059,650
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
F-3
<PAGE>
BIOFARM, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the ten month
period ended For the year ended
October 31, 1998 December 31, 1997
------------------ ------------------
(In thousands of US Dollars)
Cash flows provided by operating activities:
<S> <C> <C>
Net (loss) income $(232) $66
Depreciation 394 544
Amortization of deferred credits (375) --
Merger and acquisition related expenses 217 --
Accretion of convertible debenture 40 --
Changes in working capital components:
Accounts receivable (2,824) (256)
Inventories 1,242 (593)
Other current assets 297 (332)
Accounts payable 1,543 407
Advances from customers (1,045) --
Other current liabilities 595 14
------- -------
Net cash used in operating activities (148) (150)
------- -------
Cash flows used in investing activities:
Cash of contributed businesses 205 37
Fixed assets purchased (344) (406)
------- -------
Net cash used in investing activities (139) (369)
------- -------
Net cash provided by financing activities:
Issuance of common stock 995 --
Proceeds from short-term borrowings, net 596 (69)
Proceeds from Romanian Government grant -- 697
Proceeds from the issuance of convertible debenture 1,000 --
------- -------
Net cash provided by financing activities 2,591 628
------- -------
Net change in cash and cash equivalents 2,304 109
Cash and cash equivalents at
beginning of period 198 89
------- -------
Cash and cash equivalents at
end of period $2,502 $198
======= =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
F-4
<PAGE>
BIOFARM, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Stock Subscriptions Paid in
Note Shares Value Receivable Capital
---- ------ ----- ------------- ----------
(in thousands of US dollars except share amounts)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 9,015,200 $ 5,376 $ -- $ --
Reclassification due to creation of a par value 1 (5,367) 5,367
for common stock
Contribution of business 87
Net income
Receipt of government grant 13 -- -- -- 697
-----------------------------------------------------------
Balance at December 31, 1997 9,015,200 9 -- 6,151
Contribution of businesses 1 -- -- -- 370
Issuance of common stock for subscriptions 26,952,678 27 (3,182) 3,155
Cash received from subscriptions 967
Assignment of subscription receivable to 2,215 (2,215)
Biofarm, Inc.
Issuance of Convertible Debenture in 1 -- --
exchange for common stock of Biofarm, Inc.
Reverse stock split and merger with Biofarm, 13 (31,755,948) (32) (167) 142
Inc.
Cash received for subscriptions 28
Merger and acquisition related expenses 13 217
Net (loss) -- -- -- --
Foreign currency translation adjustment -- -- -- --
--------- ---- ------ ------
Balance at October 31, 1998 4,211,930 $ 4 $ (139) $7,820
========= ==== ====== ======
<CAPTION>
Other
Accumulated Comprehensive
Deficit Income Total
----------- ------------- -----
<S> <C> <C> <C>
Balance at December 31, 1996 $ (1,011) $-- $ 4,365
Reclassification due to creation of a par value
for common stock
Contribution of business 87
Net income
66 66
Receipt of government grant -- 697
------------ ------------ ----------
Balance at December 31, 1997 (945) -- 5,215
Contribution of businesses -- -- 370
Issuance of common stock for subscriptions --
Cash received from subscriptions 967
Assignment of subscription receivable to --
Biofarm, Inc.
Issuance of Convertible Debenture in
exchange for common stock of Biofarm, Inc.
Reverse stock split and merger with Biofarm, (57)
Inc.
Cash received for subscriptions 28
Merger and acquisition related expenses 217
Net (loss) (232) -- (232)
Foreign currency translation adjustment -- 173 173
------------ ------------ -----------
Balance at October 31, 1998 $(1,177) $173 $6,681
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
F5
<PAGE>
BIOFARM, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Organization and Operations
In 1991, based on Romanian Law no .58/1991, the State Ownership Fund ("SOF") and
the Private Ownership Fund were established, which transformed all Companies
established under this Law into Trade Companies with 70% of the social capital
being automatically issued to the State Ownership Fund and 30% to the Private
Ownership Fund. In 1991 SC BIOFARM SA ("SA" or "the Company") was registered
with the Bucharest Office of the Trade Register under number J 40/199/1991.
In 1996 when Law no. 55/1995 came into force, 30% of SA` s social capital owned
by the State Ownership Fund and the 30% owned by the Private Ownership Fund were
issued gratis to Romanian citizens, as specified in the Mass Privatisation
Programme, directed by Government Emergency Decision no. 5/1997.
In June 1997, Shapiro BANCORP LLC ("Shapiro"), 99% owned by Litchfield
Continental Ltd. ("Litchfield"), acquired the remaining shares owned by the SOF.
In July 1998, SA issued 26,952,678 new shares with over 99 % of them subscribed
by Shapiro.
On September 4, 1998, Biofarm, Inc. (formerly Global Spill Management, Inc)
("Biofarm" or "Global") acquired 87% of the issued and outstanding shares of
capital stock of SA, located in Bucharest, Romania, from Litchfield or its
affiliates. In consideration for the purchase of the shares of SA, Biofarm
issued to Litchfield a convertible, nonnegotiable, secured debenture (the
"Debenture") in the principal sum of $6,434,681.
On October 5, 1998, the stockholders of Biofarm elected all of the nominees of
Litchfield to their Board of Directors. Inasmuch as the stockholders of
Litchfield obtained board and management control of Biofarm, for accounting
purposes, SA will be considered the acquiring entity. Therefore, the acquisition
will be accounted for as a reverse purchase in accordance with generally
accepted accounting principles as of October 5, 1998.
The Debenture provides that there is no interest due or payable on the principal
sum and is nonnegotiable and non-transferrable. The Debenture is non-redeemable
and does not represent a debt obligation of the Company. The Debenture provides
that from time to time for a period of five years from the date of the
Debenture, the holder thereof may convert a portion, but not less than 2%, of
the original principal sum into shares of the then issued and outstanding common
stock of the Company for each 2.5% of the principal sum of the Debenture that is
converted. Therefore, and in accordance with the terms of the Debenture, if the
entire principal sum of the Debenture is converted, the holder shall own 80% of
the Company's issued and outstanding stock based upon the number of shares
thereof outstanding as of the date of conversion.
An additional maximum of five percent (5%) of the Company's then issued and
outstanding shares were set aside for issuance to Litchfield for each of the
fiscal periods ended December 31, 1998 and 1999, dependent upon the realization
by SA of certain earnings increases (measured by the earnings of SA for the
fiscal period ended December 31, 1997). For the ten month fiscal period ended
October 31, 1998, SA (on an annualized basis) did not meet the required earning
test. If SA has net income of $825,000 for the fiscal period ending October 31,
1999, Litchfield will earn an additional maximum of five (5%) percent of the
Company's Common Stock.
SA is a pharmaceutical manufacturer. The Company's main business activity is the
production and sale of natural medicinal products, for both pharmaceutical and
veterinary use. These products are based on extracts from animal and plant raw
materials, and are created for domestic and international consumption.
The accompanying notes are an integral part of the
consolidated financial statements
F-6
<PAGE>
BIOFARM, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On October 13, 1998, Litchfield contributed to the Company 100% of the issued
and outstanding shares of capital stock of three United Kingdom entities:
Britten-Norman Ltd.; Kaster Bioscience Ltd. ("KBL"); and Burlington, Chamber &
James Ltd. ("BCJ") (which, in turn, owns 51% of Burlington and James Ltd.)
(collectively, the "UK entities").
Because Litchfield holds a convertible non-negotiable secured Debenture issued
by Biofarm as consideration for the acquisition of SA, Litchfield agreed to
contribute the capital stock of the three UK entities to the Company without
additional consideration.
The operations of each UK entity have been included in the consolidated results
of SA from the date it was acquired by Litchfield, as they were under common
control. The net assets have been recorded by the Company at Litchfield's
historical cost.
The following selected unaudited pro forma information is being provided to
present a summary of the consolidated results of the Company and the UK entities
as if the acquisition had occurred as of the beginning of each respective
period. The pro forma data is for informational purposes only and may not
necessarily reflect the results of operations of the English entities had the
businesses operated as part of the Company for the entire periods presented:
Ten months Ended Twelve months ended
October 31, 1998 December 31, 1997
(In thousands except for per share amounts)
Pro Forma Pro Forma
(unaudited) (unaudited)
Net sales $18,040 $22,763
Net (loss) $(4,275) $(2,074)
Basic (loss) per share $(0.20) $(0.10)
During November 1998, Biofarm changed its year end to October 31. The
accompanying consolidated financial statements include the accounts of SA and
its subsidiaries after elimination of all significant intercompany balances and
transactions.
2. Summary of Significant Accounting Policies:
a) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
that affect the reported amounts of the assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
b) Foreign currencies
The reporting currency of the Company is the United States dollar. The
Company's functional currencies are the UK pound sterling and the U.S.
dollar. Financial statements of foreign subsidiaries are translated into
U.S. dollars at current rates, except that revenues, costs and expenses
are translated at average current rates during each reporting period.
Net exchange gains or losses resulting from the translation of foreign
financial statements and the effect of exchange rate changes on
intercompany transactions of a long-term investment nature are
accumulated and credited or charged directly to a separate component of
shareholders' equity. For subsidiaries considered to be operating in
highly inflationary countries and for certain other subsidiaries, the
U.S. dollar is the functional currency, and translation gains and losses
are included in determining net income. Foreign currency transaction
gains and losses are included in determining net income.
The accompanying notes are an integral part of the
consolidated financial statements
F-7
<PAGE>
BIOFARM, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
c) Cash and Cash equivalents:
Cash equivalents include demand deposits with banks and all highly
liquid investments with original maturity of three months or less.
Supplemental Cash Flow Information Selected cash payments and noncash
activities were as follows (in thousands):
Ten months Ended Twelve months ended
October 31, 1998 December 31, 1997
(In thousands )
Cash payments for
income taxes $357 $261
Cash payments for interest 21 28
Noncash investing and financing activities (in Thousands):
Contribution of business:
Assets contributed $14,872 $ 37
Liabilities assumed (8,347) --
Goodwill (6,212) 50
------- --------
Net assets of contributed
businesses $ 313 $ 87
------- --------
d) Inventories
Inventories are stated at the lower of cost or market. The first-in,
first-out method is used to cost substantially all inventories. Where
necessary provision is made for obsolete, slow moving and defective
stocks.
e) Fixed Assets Cost and Depreciation
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided using straight-line method over the estimated
useful lives of the assets that range from three to forty years. Upon
sale or retirement of assets, the cost and accumulated depreciation and
amortization are eliminated from the accounts, and the related gain or
loss is included in income. Expenditures for repairs and maintenance are
charged to income as incurred.
f) Long-Lived assets
Long-lived assets, which consist of property, plant and equipment, and
goodwill, are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. When any such impairment exists, the related assets will be
written down to fair value. No impairment write-down was necessary as of
October 31, 1998.
g) Pensions and other post retirement Benefits
Britten-Norman Limited operates a defined benefit plan which requires
contributions to be made to a separately administered plan.
Contributions to the plan are charged to the profit and loss account so
as to spread the cost of pensions over the employees' working lives for
the company. The regular cost is attributed to individual years using
the projected unit method. Variations in the pension cost, which are
identified as a result of actuarial valuations, are amortised over the
average expected remaining working lives of employees in proportion to
their expected payroll costs. Differences between amounts funded and the
amounts charged to the profit and loss account are treated as either
provisions or prepayments in the balance sheet. All employees of SA, the
Romanian operations, are members of pension plans sponsored by the
Romanian government. In the normal course of business, the company makes
payments to the Romanian government for pensions on behalf of its
employees. The social security and pension charges recorded by the
company were $425,000 and $363,000 for the period ended October 31, 1998
and the year ended December 31, 1997, respectively.
The accompanying notes are an integral part of the
consolidated financial statements
F-8
<PAGE>
BIOFARM, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
h) Revenue recognition:
Pharmaceutical operations and aircraft manufacturing revenues and their
related costs are included in the income statement at the date at which
legal title to the goods changes hands. Revenues from insurance business
are recognised on issue of the debit note.
i) Taxation
Income taxes are calculated using the liability method specified by
Statement of Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes". The Company recognizes deferred tax liabilities and assets for
the expected future tax consequences of events that have been included
in the financial statements or tax returns. Accordingly, deferred tax
liabilities and assets are determined based on the difference between
financial statement and tax basis of assets and liabilities using
enacted rates in effect for the year in which the differences are
expected to reverse. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is established to
reduce the deferred tax assets when management determines it is more
likely than not that the related tax benefits will be realized.
j) Negative Goodwill (Deferred credit) and Goodwill
The excess of the fair value of net assets acquired over cost of
investment, after offsetting the maximum amount against the fair value
of all noncurrent assets acquired, negative goodwill, is determined to
be a deferred credit and is being amortized on a straight-line basis
over a period of five years. Goodwill is being amortized on a
straight-line basis over a ten year period.
k) Earnings per share
In 1998, the Company adopted SFAS No. 128, "Earning Per Share (EPS)",
which provides for the calculation of basic and diluted EPS. Basic EPS
includes no dilution and is computed by dividing the (loss) income
available to common stockholders by the weighted-average number of
common shares outstanding for that period. Diluted EPS reflects to
potential dilution of securities that could share in the (loss) income
of the Company. For purposes of presenting basic EPS for all periods,
the debenture discussed in note 1 will be considered to be converted as
of January 1, 1997.
l) Fair Value of Financial Instruments
The Company follows SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," which requires disclosures of fair value
information about certain financial instruments. The carrying amounts of
the Company's financial instruments, consisting of cash and cash
equivalents, accounts receivable, other current assets, short term
borrowings, accounts payable, accrued expenses and other current
liabilities, approximate their fair value because of the immediate or
short-term maturity of these financial instruments
m) Recent accounting pronouncements not yet implemented
In June 1998, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" ("SFAS 133"), which establishes accounting and reporting
standards of derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
adoption of SFAS No. 133 will not have an impact on the Company's
results of operations, financial position or cash flows upon the
adoption of this standard.
The accompanying notes are an integral part of the
consolidated financial statements
F-9
<PAGE>
BIOFARM, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. Inventories
Inventories, which include a reserve for obsolescence amounting to $3,290,000
consist of the following:
Description October 31, 1998
(Thousands USD)
Raw materials
$3,374
Finished goods & goods for resale
1,002
Work in progress
9,232
-------
TOTAL
$13,608
=======
4. Property, Plant and Equipment
Major classes of property, plant and equipment consist of the following:
October 31, Estimated 1998
Useful
Lives
- ---------------------------------------------------------------------
Buildings 30-40 years $9,882
Machinery and equipment 3-10 years 3,256
Autos and Elevators 5 years 178
Furniture 3-10 years 121
Other 3 years 22
- ---------------------------------------------------------------------
13,459
Less accumulated depreciation and amortization 9,789
- ---------------------------------------------------------------------
$3,670
- ---------------------------------------------------------------------
The depreciation and amortization charged during the ten month period ended
October 31, 1998 amounted to approximately $394,000 (1997 - $544,000).
5. Short term borrowings
Short term borrowings comprise the following:
<TABLE>
<CAPTION>
Description October 31, 1998
Available facility Interest rate
(Thousands USD) (Thousands USD)
<S> <C> <C> <C>
Bank overdrafts $678 2% over UK bank base rate
$544 9.5% at October 31, 1998
Loan from former parent of subsidiary
2,513 2,513 1% over UK bank base rate
Convertible debenture 8.5% at October 31, 1998
1,040 1,000 6% per annum
------ -----
TOTAL
$4,097 $4,191
====== ======
</TABLE>
All of the above borrowings are unsecured. In common with standard UK banking
practice overdraft facilities are repayable on demand but are made available for
specific periods of time. The loan from the former parent of a subsidiary is
repayable in full by July 16,1999.
On September 10th, 1998, the Company issued a debenture in the amount of
$1,000,000 to Balmerino Limited ("Balmerino"). The debenture becomes due and
payable, in full, on August 10th, 1999 and bears interest at an annual rate of
six percent (6%).
The accompanying notes are an integral part of the
consolidated financial statements
F-10
<PAGE>
BIOFARM, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The debenture contains certain rights of conversion wherein, at anytime
commencing ninety days after issuance, the holder of the debenture may convert
the original face amount of the debenture into shares of the common stock of the
Company. Upon delivery of the notice of conversion, the Company has the right
(but not the obligation) to redeem all or a portion of the debenture at its cash
redemption amount as defined below. If converted, the conversion price for each
share of common stock shall be equal to the lesser of (i) eighty percent of the
market price at the time of conversion or (ii) the price per share at the time
of subscription. (The market price is defined within the debenture as "the
average closing bid price of the common stock for the five business days
immediately preceding the Conversion Date.")
Further, any portion of the debenture which remains unconverted at the maturity
date shall be automatically converted into shares of common stock as of the
date. The Company, if notified by the holder of its intent to convert any
portion of the debenture to common stock, shall have the right, but not the
obligation, to redeem all or a portion of the debenture by paying to the holder
a "Cash Redemption Amount." That amount shall be equal to 120% of the face
amount of the portion of the debenture which otherwise would have been converted
into common stock.
On October 21, 1998, Balmerino funded the agreement. Under the terms of the
agreement, Balmerino has the right to convert the debenture into common stock
after ninety days from the date of the debenture. It is the Company's intent to
redeem the debenture. As a result, in accordance with the redemption provisions
of the agreement, the Company must accrete the debenture to the cash redemption
amount as discussed above. As a result, a $40,000 charge to interest expense was
credited to the debenture which represents the current years portion of the
total accretion of $200,000.
The accompanying notes are an integral part of the
consolidated financial statements
F-11
<PAGE>
BIOFARM, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. Industry segment information
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Pharmaceutical Insurance Aircraft Corporate TOTAL
Manufacture Brokering Manufacture
- ----------------------------------------------------------------------------------------------------
$'000 $'000 $'000 $'000 $'000
<S> <C> <C> <C> <C> <C>
Period ended October 31, 1998
Sales 7,758 478 3,663 - 11,899
Operating income (loss) 1,253 (18) (146) (326) 763
Pre-tax income (loss) 1,015 (15) (226) (364) 410
Net income (loss) 385 (27) (226) (364) (232)
Assets 8,927 1,234 14,191 1,091 25,443
Depreciation and amortization 394 14 (375) - 33
Year ended December 31, 1997
Sales 6,887 126 - - 7,013
Operating income 682 3 - - 685
Pre-tax income 324 5 - - 329
Net income (loss) 63 3 - - 66
Assets 6,893 368 7,211
Depreciation and amortization 539 5 - - 544
- ----------------------------------------------------------------------------------------------------
</TABLE>
7. Retirement Benefits
Britten-Norman Limited sponsors a defined benefit pension plan that covers all
salaried employees. The following table summarizes the benefit obligations, the
fair value of plan assets and the funded status for the four months ended
October 31, 1998.
Pension
Benefits
----------------------
October 31, 1998
$,000
- -----------------------------------------------------------------
Benefit obligation $15,383
Fair value of plan assets 15,844
- -----------------------------------------------------------------
Funded status $461
- -----------------------------------------------------------------
Prepaid (accrued) benefit
Cost recognized in the balance sheets $375
- -----------------------------------------------------------------
The amount of contributions to plan is as follows:
Pension
Benefits
----------------------
Four month period ended October 31, 1998
$,000
- -----------------------------------------------------------------
Employer contributions $108
- -----------------------------------------------------------------
The following table provides the components of the net periodic benefit cost for
the four months ended October 31, 1998.
The accompanying notes are an integral part of the
consolidated financial statements
F-12
<PAGE>
BIOFARM, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Pension
Benefits
----------------------
Four month period ended October 31, 1998
$,000
- -----------------------------------------------------------------
Service cost $139
Interest cost (10)
Net amortization and Deferral (19)
- -----------------------------------------------------------------
Net cost $110
- -----------------------------------------------------------------
The weighted-average assumptions used in the measurement of the Company's
benefit obligation are shown in the following table:
Pension
Benefits
------------------------
Four month period ended October 31, 1998
- -------------------------------------------------------------------
Discount rate 8.25%
Expected return on plan assets 8.25%
Rate of compensation increase 6.00%
8. Taxation
Income tax expense for the ten months ended October 31, 1998 and the year ended
December 31, 1997 consist of the following:
1998 1997
Current tax provision:
U.S. Federal $ -- $ --
State and local -- --
Romania 630 261
United Kingdom 12 2
----- -----
Total $ 642 $263
===== =====
The accompanying notes are an integral part of the
consolidated financial statements
F-13
<PAGE>
BIOFARM, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Deferred income tax assets and liabilities as of October 31, 1998 consist of the
following:
1998
----------------------------
(In thousands of US Dollars)
Deferred tax assets:
Current:
Inventory $3
Accrued expenses 141
Non-current:
Net operating losses 8,495
Property, plant and equipment 258
-----
Total deferred tax assets 8,897
-----
Deferred tax liabilities
Current:
Accounts receivable
(5)
-----
Total deferred tax liabilities (5)
-----
Valuation allowance (8,892)
-----
Net deferred tax assets $ --
======
The net deferred tax assets related to the Romanian operation amounting to $282
is fully offset by a valuation allowance, due to inflation and the continuing
depreciation of the Romanian Lei (ROL). The ROL depreciated 50% during the year
ended December 31, 1997, and depreciated a further 25% during the ten-month
period ended October 31, 1998. This depreciation reflects the high rate of
inflation present in the Romanian economy. Both inflation and currency
depreciation are expected to continue in the foreseeable future, which may
reduce the value of deferred tax assets. Accordingly, the Company has recorded a
full valuation allowance against deferred tax assets for each period.
The net deferred tax assets related to the English operations amounting to
$4,610 which consist primarily of net operating loss carryforwards ("NOL")
amounting to $14,500 which under current UK tax legislation are available
indefinitely. This is also fully offset by a valuation allowance due to the fact
that it appears more likely than not that the Company will not generate income
from operations in the foreseeable future so that the deferred tax assets will
be utilized.
Biofarm has a deferred tax asset of approximately $4,000, related to an NOL,
which have yet to be utilized. As a result of the sale of Biofarm's operating
subsidiaries in 1996 and the issuance of additional shares of common stock, the
amount of the NOL of approximately $11,700,000 may be limited. Also, the
utilization of these losses, if available, to reduce the future income taxes
will depend upon the generation of sufficient taxable income in the United
States prior to the expiration of the NOL. The net operating losses will expire
in various years through June 2014.
The accompanying notes are an integral part of the
consolidated financial statements
F-14
<PAGE>
BIOFARM, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes:
Ten months Ended Twelve months ended
October 31, 1998 December 31, 1997
Statutory tax rate 34.0% 34.0%
Romanian tax rate in excess of US
federal rate 4.0 4.0
Inflationary effect on Romanian Lei 24.1 41.2
Amount attributable to unavailable
United Kingdom current NOL's 94.5 0.7
------ -----
Effective tax rate 156.6% 79.9%
====== =====
9. Commitments and contingencies
Taxation
The taxation system in Romania is at an early stage of development and is
subject to varying interpretations and changes, which may be retroactive.
Although the actual tax due on a transaction may be minimal, penalties can be
significant as they may be calculated based on the value of the transaction, and
can be as high as 0.25% per day plus other penalties. In Romania, tax periods
remain open for tax audits for 3 years.
Authorizations
The Company's operations require authorizations to both produce and sell
products and annual production authorisations from the Romanian Government.
Recently, certain expired authorisations were renewed so no significant
operational risk can occur for the company in this respect.
Acquisitions
Pursuant to the Romanian privatization program, the Company submitted a bid to
acquire SC Romaero S.A. Bucharest ("Romaero"), a state-owned entity engaged in
the manufacture and maintenance of aircraft. The Company, using its wholly-owned
subsidiary Britten-Norman Ltd. as the contracting party, executed the definitive
acquisition agreement with the Romanian Government to acquire Romaero on January
29, 1999. Such contract provides for a basic purchase price of approximately $21
million as well as a commitment to invest an additional $60 million into Romaero
over a five year period. Predicated upon information received from the Romanian
Government prior to the latter's request for tenders, Romaero had total net
assets of approximately $90 million at December 31, 1997.
There is a provision in the contract for subsequent renegotiation of the
purchase price if it transpires there are material differences between the
assets and liabilities acquired and those previously disclosed.
Guarantees
At October 31, 1998, Britten-Norman Limited ("BN") has outstanding bank
guarantees amounting to approximately $3,192,000. $2,242,000 relates to
guarantees required in order to cover advances and deposits by customers.
Approximately $950,000 relates to agreements entered into by BN to repurchase
aircraft at predetermined prices which approximate $2,600,000 up through 2002.
The accompanying notes are an integral part of the
consolidated financial statements
F-15
<PAGE>
BIOFARM, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The aircraft if repurchased have an estimated fair value which approximates the
repurchase price. In the opinion of the directors, adequate provision has been
made in respect of any future liabilities under these arrangements.
10. Deferred credits
Deferred credits consist of amounts of negative goodwill not amortised at the
balance sheet date.
(Thousands
USD)
Negative goodwill arising on acquisition of Britten-Norman $8,565
Less: amounts offset against long-lived assets 2,217
-------
6,348
Less: Amortization in the year 375
-------
$ 5,973
=======
This arose as follows:
(Thousands
USD)
Fair value of net assets acquired:
Cash and cash equivalents $ 156
Accounts receivable, net 1,477
Inventories 12,987
Other current assets 95
Property, plant and equipment, net 2,217
Short term borrowings (2,461)
Accounts payable (1,683)
Advances from customers (2,758)
Other current liabilities (1,350)
-------
$ 8,680
Consideration --
Costs of acquisition 115
-------
$ 8,565
-------
11. Assets under Operational Lease
Future minimum lease payments as of October 31, 1998 for assets under
operational lease are as follows:
Year ended (In thousands
October 31 of US Dollars)
- ---------- --------------
1999 $202
2000 170
2001 96
2002 77
2003 70
Thereafter 38
Rent expense for the ten month period ended October 31, 1998 and the year ended
December 31,1997 amounted to $ 105,000 and $50,000, respectively.
The accompanying notes are an integral part of the
consolidated financial statements
F-16
<PAGE>
BIOFARM, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. Litigation
Global is a defendant in two lawsuits in which the principal defendants are its
former subsidiaries. Global is vigorously defending these suits on the basis
that it is not a proper party defendant because the parent company has no
contractual relationship with the respective plaintiffs and bears no
responsibility to such plaintiffs. Management has determined that the outcome of
these matters will not have a material adverse effect on the consolidated
financial statements of The Company.
On June 28, 1996 (the date on which the sales of the operating subsidiaries was
effected), Global agreed to acquire 100% of the issued and outstanding shares of
capital stock of Phoenix Wrecking Corporation ("Phoenix"), a New York
corporation which was also engaged in the remediation business. The proposed
acquisition of Phoenix, which was publicly announced on July 1, 1996, was
rescinded nunc pro tunc on November 6, 1996.
It is the position of Global that: (a) the 1,135,000 shares issued by Phoenix
pursuant to two Form S-8 filings and 1,085,000 shares sold publicly have not
been registered under Section 5(a) of the 1933 Act, and that it was unlawful to
sell such shares in interstate commerce; (b) persons who received and sold the
1,085,000 shares were not persons entitled to receive the same pursuant to the
Instructions to the use of Form S-8; (c) sellers of the 1,085,000 shares
violated the anti-fraud provisions of Section 10(b) of the 1934 Act and Rule
10b-5 promulgated thereunder; (d) former counsel violated Section 10(b) and Rule
10b-5 when it filed with the Securities and Exchange Commission two Form S-8
Registration Statements that were materially false and misleading; and (e)
former counsel violated the anti-fraud provisions of Section 17(a)(3) in
obtaining money by means of an untrue statement of a material fact.
In January 1998, Global's complaint was sustained as to four of the five causes
of action alleged by Global against the several defendants. In a Memorandum and
Order entered on January 22, 1998, the Eastern District of New York sustained
the complaint filed by Global as to the causes of action for malpractice, breach
of contract, breach of fiduciary duty and unjust enrichment, and dismissed the
cause of action for fraud. Global determined not to appeal the dismissal of the
cause of action for fraud because the relief sought by Global (return of
1,135,000 shares and of proceeds derived from the sale thereof) is encompassed
by the four causes of action that were sustained. Global is currently seeking
recovery of all of the proceeds received by the sellers of the 1,085,000 shares,
as well as the shares themselves, and has advised the introducing and clearing
broker-dealers of its liability for the sale of unregistered stock and of their
liability pursuant to the Exchange Act of 1934.
The recovery by Global of any portion of the sales proceeds received by the
sellers of the 1,085,000 shares will, by agreement with Litchfield Continental,
Ltd. ("Litchfield") belong exclusively to the stockholders of Global other than
Litchfield. Since Litchfield is able to convert its debenture into common stock
in increments over a five-year period and since the recovery date (if there be
such) is not known, Litchfield's nonparticipation in any such recovery will be
assured by assigning the proceeds of any such recovery to a new entity to be
organized simultaneously with the Litchfield closing. The sole directors of the
new entity will be the former three directors of Global. The shares of capital
stock of the new subsidiary will be distributed to the stockholders of Global
other than Litchfield upon the earlier of: (a) the recovery of any such
proceeds; or (b) date on which Litchfield commences conversion of its debenture.
Notwithstanding that recovery is mandated by the Instructions to Form S-8, there
can be no assurance that recovery will be awarded or that, if awarded, any
resulting judgement will be collectible. It is for this reason that Global has
notified the introducing and clearing broker-dealers of potential liability for
the recovery of such proceeds.
In April 1998, a lawsuit brought against Global seeking $1,350,000 as a direct
result of a transaction entered into by Phoenix with the plaintiffs was settled
for an aggregate of 200,000 shares of Global's common stock. The plaintiffs
surrendered to Global all of their convertible debentures (amounting to
$2,000,000 in the aggregate). All of the debentures were cancelled, and the
judgement held by the plaintiffs was assigned to Global.
The accompanying notes are an integral part of the
consolidated financial statements
F-17
<PAGE>
BIOFARM, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. Other additional capital
In November 1997, Biofarm SA received a grant of ROL 5.6 billion from the State
Ownership Fund ("SOF") as a part of the acquisition deal concluded with Shapiro
Bancorp and according to the Romanian Laws. The Company has recorded this grant
as an increase in capital, as such proceeds represent a financial incentive
received from the government. Emergency Ordinance 37/1997 required the grant to
be spent in the following priority:
i) payment of overdue debts and related interest or penalties which were
recorded in the Company's books at June 18, 1995
ii) financing of investments in progress which originated prior to June 18,
1995
iii) working capital.
14. Financial risk
Market Risk
The Romanian economy is in an early stage of market development, and there is a
considerable degree of uncertainty surrounding the economy's future direction.
The majority of the Company's customers, suppliers and operations are conducted
in Romania, such that market risk exists with respect to the Company's
activities in this country.
Currency Risk
Biofarm SA operates in a highly inflationary economy with significant currency
depreciation. Accordingly, currency risk exists in respect to net monetary
assets held in Romanian Lei. Exchange restrictions and controls exist relating
to converting Romanian Lei into other currencies. At present, there is no market
for conversion of Romanian Lei into foreign currencies outside of Romania. Cash
balances include $190,000 held in Romanian Lei.
Credit Risk
The Company offers credit terms to its customers and is therefore exposed to
risk of bad debt. The Company does not have any significant exposure to any
single individual customer.
15. Going concern
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. In October 1998, the Company
completed the acquisition of three United Kingdom entities and one Romanian
entity. The Company's management determined that each of the four acquisitions
furthered the Company's overall strategic plan, that each was compatible with
(and, in some instances, offered positive synergistic possibilities with each
other, and that each possessed a high likelihood of contributing to the
Company's overall profitability.
However, three of the Company's four subsidiaries do possess significant
financial commitments that, in the aggregate, may require the Company to
generate funds from the sale of securities or the issuance of debt. To the
extent that management is able (as it demonstrated with Biofarm, S.A.) to
reverse the operating losses of the four recent acquisitions and to have each
become cash flow positive, such fund raising will be less of a significant
factor.
The accompanying notes are an integral part of the
consolidated financial statements
F-18
<PAGE>
BIOFARM, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In addition to the operating cash flow requirements the Company has significant
capital requirements in order to service debt (see note 5) as well as finance
acquisitions (see note 9). The availability of operating capital may be
restricted if the Company's is unable to repatriate qualifying earnings from
Romania. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability or classification of assets or the
amount and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern
16. Subsequent events
The National Bank of Romania rate of exchange depreciated from USD 1 = ROL 9,592
at October 31, 1998 to USD1 = ROL 10,600 as of December 21, 1998. The main
effect of currency depreciation consists on increase of inflation impact over
the financial performances (financial losses).
On April 7, 1998, Litchfield agreed to acquire an interest in Rocky Mountain
Ginseng, Inc. ("RMG"), a Canadian entity engaged in the marketing and
distribution of raw ginseng root and value-added ginseng products. RMG was then
under contract to acquire 100% of Fuzhou Fujian Drug Co., Ltd. ("FFDC"), a
registered Chinese pharmaceutical concern. Thereafter, RMG received permission
from the Chinese Government to complete the acquisition of FFDC.
In December, 1998, the Company exchanged 165,000 shares of its common stock for
1,800,000 shares of common stock of RMG which represented an 8% interest. As of
that date, the Company and Litchfield owned approximately 19% of RMG. The
Company acquired its initial interest in RMG in order to be able to distribute
the pharmaceutical products of SA in China. FFDC possesses a Chinese Customs
Registration Certificate, a license that permits FFDC to import and export
pharmaceutical products into and from China.
The Company is currently finalizing the terms of an equity facility with SCC of
which $3 million has already been advanced in December 1998. $2,200,000 of the
funds were used to fund the costs of the pending acquisition of Romaero as well
as to fund the initial cost of another acquisition in Romania which the Company
is currently negotiating the terms.
17. Other financial information
The following selected unaudited financial information is being provided to
present a summary of the consolidated results of the Company for the ten months
ended October 31, 1997. The information presented below is for informational
purposes only.
Ten months Ended
October 31, 1997
Historical
(unaudited)
Net sales $5,800
Gross profit 2,050
Income from operations 570
Income taxes 220
Net Income 55
Earnings per share $ --
The accompanying notes are an integral part of the
consolidated financial statements
F-19
FILED
IN THE OFFICE OF THE
SECRETARY OF STATE OF THE
STATE OF NEVADA
OCT 07 1998
No. C8895-90
--------
Dean Heller
DEAN HELLER, SECRETARY OF STATE
EXHIBIT 99(d)A
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION
Global Spill Management, Inc.
-----------------------------
Name of Corporation
We the undersigned Vice President and Secretary of Global Spill Management,
Inc. do hereby certify:
The Board of Directors of said corporation at a meeting duly convened, held
on the fifth day of August, 1998 adopted a resolution to amend the original
articles (as amended on November 25, 1991) as follows:
Article First is hereby amended to read as follows:
The name of this corporation is BIOFARM, INC.
The number of shares of the corporation outstanding and entitled to vote on
an amendment to the Articles of Incorporation is 4,211,930; that the said
change(s) and amendment have been consented to and approved by a majority vote
of the stockholders holding at least a majority of each class of stock
outstanding and entitled to vote thereon.
/s/ Allen Esrine
-----------------------------------
Vice President
/s/ Desiree Pierson
-----------------------------------
Secretary
Commonwealth of Pennsylvania
ss
County of Philadelphia
On October 5, 1998, personally appeared before me, a Notary Public, Allen
Esrine, Desiree Pierson who acknowledged that they executed the above
instrument.
/s/ Charlotte Tate
-----------------------------------
Signature of Notary
(Notary Stamp or Seal)
NOTARIAL SEAL
CHARLOTTE TATE, Notary Public
City of Philadelphia, Phila. County
My Commission Expires Dec. 31, 2001
NUMBER GLOBAL SPILL MANAGEMENT, INC. SHARES
GSP 1233
INCORPORATED UNDER THE LAWS OF THE STATE OF NEVADA
COMMON STOCK SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 37936P 30 3
CUSIP 09058S 10 0
THIS CERTIFIES that is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES, OF THE PAR VALUE OF $.001 PER SHARE, OF
THE COMMON STOCK of GLOBAL SPILL MANAGEMENT, INC. transferable on the books of
the Corporation by the holder thereof, in person or by duly authorized attorney
upon surrender of this Certificate properly endorsed. This Certificate and the
shares represented hereby are issued and shall be held subject to all the
provisions of the Restated Articles of Incorporation of the Corporation and the
By-laws as now or hereafter amended.
This Certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the seal of the Corporation and the facsimile signatures of its duly
authorized officers.
GLOBAL SPILL MANAGEMENT, INC. Dated
CORPORATE
SEAL
NEVADA
1990
/s/ Desiree L. Pierson /s/ Thomas D. Lewis, Sr.
----------------------- ------------------------
Secretary President
Countersigned and Registered:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK)
Transfer Agent and Registrar,
By
Thomas D. Lewis, Sr. Authorized Signature
FORM OF DEBENTURE
THE SECURITIES REPRESENTED BY THIS DEBENTURE OR THOSE INTO WHICH THIS
DEBENTURE ARE CONVERTIBLE HAVE NOT BEEN REGISTERED UNDER THE 1933 ACT, AS
AMENDED (THE "1933 ACT"), OR APPLICABLE FOR INVESTMENT AND MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SAID SECURITIES UNDER THE 1933 ACT, AND
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE
AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO
RULE 144 UNDER THE 1933 ACT. ANY SUCH OFFER, SALE, ASSIGNMENT OR TRANSFER MUST
ALSO COMPLY WITH APPLICABLE STATE SECURITIES LAWS
DATE: 9/10/1998
DEBENTURE A-1 U.S.$1,000,000.00
BIOFARM, INC.
SERIES A-1 SIX PERCENT (6%) CONVERTIBLE DEBENTURES DUE 8/10/1999
THIS DEBENTURE is one of a duly authorized issue of debentures (a
"Debenture" or the "Debentures") of Biofarm, Inc., a corporation duly organized
and validly existing under the laws of the STATE OF NEVADA (the "Company")
designated as its Series A-1 SIX Percent (6%) Convertible Debenture Due 8th
October 1999, in an aggregate principal face value for all Debentures of this
Series A-1 of One Million United States Dollars (U.S.$1,000,000.00).
<PAGE>
FOR VALUE RECEIVED, the Company promises to pay to the registered holder hereof
and its successors and assigns (the "Holder"), the principal sum of One Million
United States Dollars ($1,000,000.00) on 8/10/1999 (the "Maturity Date"), and to
pay interest on the principal sum outstanding, at the rate of Six percent (6%)
per annum due and payable in quarterly instalments in arrears, with the first
such payment to be made on 9/10/1998.
Accrual of interest, payable in cash or common stock of the Company at the
Company's option, shall commence on the date hereof and shall continue until
payment in full of the outstanding principal sum has been made or duly provided
for. The interest so payable will be paid to the person in whose name this
Debenture (or one or more predecessor Debentures) is registered on the records
of the Company regarding registration and transfers of the Debenture (the
"Debenture Register"); provided, however, that the Company's obligation to a
transferee of this Debenture arises only if such transfer, sale or other
disposition is made in accordance with the terms and conditions of that
Securities Subscription Agreement of even date herewith between the Company and
(the "Securities Subscription Agreement")
The principal of, and interest on, this Debenture are payable in such coin
or currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts, at the address last appearing on
the Debenture Register of the Company as designated in writing by the Holder
hereof from time to time. The company will pay the outstanding principal of and
any and all accrued and unpaid interest due upon this Debenture on the Maturity
Date, less any amounts required by law to be deducted or withheld, to the record
Holder of this Debenture as of the tenth (10th) day prior to the Maturity Date
and addressed to such Holder at the last address appearing on the Debenture
Register. The forwarding of such funds shall constitute a payment of outstanding
principal and interest hereunder and shall satisfy and discharge the liability
for principal and interest on this Debenture to the extent of the sum
represented by such cheque plus any amounts so deducted or withheld.
This Debenture is subject to the following additional provisions:
1. Debenture Exchangeable.
The Debenture is exchangeable commencing Ninety (90) days from the date
hereof for an equal aggregate principal amount of Debentures of different
authorized denominations, as requested by the Holder surrendering the same, but
not of denominations of less than Two Hundred Thousand United States Dollars
(US$200,000.00) without the Company's written consent. No service charge will be
made for such registration or transfer or exchange.
2. Withholding.
The Company shall be entitled to withhold from all payments of Principal
pursuant to this Debenture any amounts required to be withheld under the
applicable provisions of the United States income tax or other applicable laws
at the time of such payments, if any.
2
<PAGE>
3. Transfer/Exchange of Debenture: Registered Holder; Opinion of Counsel;
Legend.
This Debenture has been issued subject to investment representations of the
original purchaser hereof and may be transferred or exchanged only in compliance
with the 1933 Act and applicable State Securities Laws. Prior to due presentment
for transfer of this Debenture, the Company and any agent of the Company may
treat the person in whose name this Debenture is duly registered on the
Company's Debenture Register as the owner hereof for the purpose of receiving
payment as herein provided and for all other purposes, whether or not his
Debenture be overdue, and neither the Company nor any such agent shall be
affected or bound by notice to the contrary.
The Holder understands and acknowledges by its acceptance hereof that (i)
except as provided in that Registration Rights Agreement attached as Exhibit
B to the Securities Subscription Agreement and incorporated herein by reference
(the "Registration Rights Agreement"), this Debenture and the shares of common
stock in the Company issuable upon conversion as herein provided ("Conversion
Shares") thereof have not been and are not being registered under the 1933 Act
or any state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (a) subsequently registered thereunder, or (b) the Holder
shall have delivered to the Company an opinion of counsel, reasonably
satisfactory in form, scope and be sold, assigned or transferred pursuant to an
exemption from such registration; (ii) any sale of such securities made in
reliance on Rule 144 promulgated under the 1933 Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such securities under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 1933 Act) may require compliance
with some other exemption under the 1933 Act or the rules and regulations of the
person is under any obligation to register such securities under the 1933 Act or
any state securities laws (other than pursuant to the Registration Rights
Agreement) or to comply with the terms and conditions of any exemption
thereunder.
Any Conversion Shares issued upon conversion of this Debenture shall, if and to
the extent required by law, bear legends in similar form to the legends set
forth on the first page of this debenture.
3
<PAGE>
4. Conversion of Debenture into Common Stock of the Company.
(a) The Holder of this Debenture is entitled, at its option, at any time
commencing Ninety (90) days after issue hereof, to convert the original
principal face amount of this Debenture into shares of common stock in the
Company, no par value per share (defined hereinafter as the "Common Stock"), at
a conversion price (the "Conversion Price") for each share of Common Stock equal
to the lesser of (i) Eighty percent (80%) of the Market Price (as defined below)
of the Common Stock, at the time of conversion or (ii) The price per share at
the time of Subscription. For the purposes of this Section 4, the Market Price
shall be the average closing bid price of the Common Stock for the five (5)
business days immediately preceding the Conversion Date (as hereinafter
defined), as reported by the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). Such conversion shall be achieved by
surrendering the original Debenture to be converted with the form of conversion
notice attached hereto as Exhibit I (a "Notice of Conversion"), executed by the
Holder of this Debenture evidencing such Holder's intention to proper assignment
hereof in blank. No fractional shares representing fractions of shares will be
issued on conversion, but the number of shares issuable shall be rounded to the
nearest whole share. Accrued interest on the converted portion of the Debenture
shall be payable in cash or stock at the Company's option. The date on which
notice of conversion (the "Conversion Date") is given shall be deemed to be
either the date on which the Holder has delivered this Debenture, with the
Notice of Conversion duly executed, to the Company, or, if earlier, the date
set forth in such Notice of Conversion if the Debenture is received by the
Company within five (5) business days thereafter.
(a) Notwithstanding anything herein to the contrary, at the Maturity Date, the
remaining portion of this Debenture which remains unconverted, if any, plus
accrued interest shall be automatically converted into shares of Common Stock as
of the Maturity Date, as if the Holder had converted the remaining portion of
this Debenture according to the provisions of this Section 4, with the
Conversion Date being equivalent in such event to the Maturity Date, as if the
Holder had provided the Company with a Notice of Conversion on the Maturity
Date.
(b) Notwithstanding anything herein to the contrary, the Company shall have the
right (but not the obligation) to redeem all or a portion of this Debenture,
provided the Company is not then in violation of any of its obligations under
this Debenture or under the Securities Purchase Agreement or any Addendum
thereto, under the following conditions. Within forty-eight (48) hours after
delivery of any Notice of Conversion (in this Section 4 (b), a "Notice") to the
Company by the Holder in accordance with the terms of this Debenture, the
Company shall give
4
<PAGE>
to the Holder notice (a "Redemption Notice") that it intends to pay the Holder
the Cash Redemption Amount (as hereinafter defined) instead of delivering Common
Stock to such Holder; provided, however, that the Company may only exercise this
right with respect to all of the Common Stock which would have otherwise been
delivered with respect to the Notice. The "Cash Redemption Amount" shall be
equal to one hundred twenty percent (120%) of the face amount of the portion
of the Debenture to be converted pursuant to the Notice, and shall be paid to
the Holder according to the Holder's written instructions to the Company within
five (5) business days after delivery of the Redemption Notice with respect to
such Debenture or portion thereof to be redeemed. If the Company does not
redeem within the time limits herein specified and according to the terms of
this Section 4 (b), then the Holder shall have the right to demand delivery of
the Common Stock which would have been delivered pursuant to the Notice of
Conversion, and shall have the right (but not the obligation) to adjust the
Conversion Price as if the Notice of Conversion had been sent on the date of
such demand. In such event the Company shall deliver the Common Stock with two
(2) days after such demand has been made.
5. Obligations of the Company Herein are Unconditional.
No provision of this Debenture shall alter or impair the obligation of the
Company, which obligation is absolute and unconditional, to repay the principal
amount of this Debenture at the time, place, rate, and in the coin currency,
hereinabove stated. This Debenture and all other Debentures now or hereafter
issued on similar terms are direct obligations of the Company. This Debenture
ranks at least equally with all other Debentures now or hereafter issued under
the terms set forth herein. The Conversion Price and number of shares of Common
Stock issuable upon conversion shall be subject to adjustment from the time to
time as provided in Section 6 below.
6. Adjustments.
(a) In the event the Company should at any time or from time to time, after
the date of this Debenture, fix a record date for the effectuation of a split or
subdivision of the outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in additional shares of Common Stock (equal to at least ten percent
(10%) or more of the Company's then issued and outstanding shares of Common
Stock) or other securities or rights convertible into, or entitling the holder
thereof to receive directly or indirectly additional shares of Common Stock
(hereinafter referred to as "Common Stock Equivalents") without payment of any
consideration by such holder for the additional shares of Common Stock or the
Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof), then, as of such record date (or
the date of such dividend, distribution, split or subdivision if no record date
is fixed), the Conversion Price shall be appropriately decreased so that the
number of shares of Common Stock issuable on conversion of this Debenture shall
be increased in proportion to such increase in the aggregate number of shares of
Common Stock outstanding and those issuable with respect to such Common Stock
Equivalents.
5
<PAGE>
(b) If the number of shares of Common Stock outstanding at any time after
the date of this Debenture is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date of such combination, the
Conversion Price shall be appropriately increased so that the number of shares
of Common Stock issuable upon conversion of this Debenture shall be decreased in
proportion to such decrease in outstanding shares.
7. Reservation of Shares.
The Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of this Debenture, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
of the outstanding principal amount, and if at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of this Debenture, in addition to such other remedies as shall be
available to Holder, the Company will take such corporate action as may, in the
opinion of its counsel, be necessary to increase the number of authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purposes, including without limitation, using its best efforts to
obtain the requisite stockholder approval necessary to increase the number of
authorized shares of the Company's Common Stock.
8. Debenture Holder Not Deemed a Stockholder.
No Holder, as such, of this Debenture shall be entitled to vote or receive
dividends or be deemed the holder of shares of the Company for any purpose, nor
shall anything contained in this Debenture be construed to confer upon the
Holder hereof, as such, any of the rights of a stockholder of the Company or any
right to vote, give or withhold consent to any corporate action (whether any
reorganization, issue of stock, reclassification of stock, consolidation,
merger, conveyance or otherwise), receive notice of meetings, receive dividends
or subscription rights, or otherwise, prior to the issuance to the holder of
this Debenture of the Conversion Shares which he or she is then entitled to
receive upon the due conversion of all or a portion of this Debenture.
Notwithstanding the foregoing, the Company will provide the Holder with copies
of the same notices and other information given to the stockholders of the
Company generally, contemporaneously with the giving thereof to the
stockholders.
9. No Limitation on Corporate Action.
No provisions of this Debenture and no right or option granted or conferred
hereunder shall in any way limit, affect or abridge the exercise by the Company
of any of its corporate rights or powers to recapitalize, amend its Certificate
of Incorporation, reorganize, consolidate or merge with or into another
corporation, or to transfer all or any part of its property or assets, or the
exercise of any other of its corporate rights and powers.
6
<PAGE>
10. Representations of Holder.
Upon conversion of all or a portion of this Debenture, the Holder shall
confirm in writing, in a form reasonably satisfactory to the Company, that the
Conversion Shares so purchased are being acquired solely for the Holder's own
account and not as a nominee for any other party, for investment, and not with a
view toward distribution or resale and that such Holder is an Accredited
Investor. If such Holder cannot make such representations because they would be
factually incorrect, it shall be a condition to such Holder's conversion of all
or a portion of the Debenture that the Company receive such other
representations as the Company considers reasonably necessary to assure the
Company that the issuance of its securities upon conversion of the Debenture
shall not violate any United States or State securities laws
11. Waiver of Demand, Presentment, Etc.
The Company hereby expressly waives demand and presentment for payment,
notice of non-payment, protest, notice of protest, notice of dishonor, notice of
acceleration or intent to accelerate, bringing of suit and diligence in taking
any action to collect amounts called for hereunder and shall be directly and
primarily liable for the payment of all sums owing and to be owing hereunder,
regardless of and without any notice, diligence, act or omission as or with
respect to the collection of any amount called for hereunder.
12. Attorney's Fees.
The Company agrees to pay all costs and expenses, including without
limitation reasonable attorney's fees, which may be incurred by the Holder in
collecting any amount due under this Debenture or in enforcing any of Holder's
conversion rights as described herein.
13. Default.
If one or more of the following described "Events of Default" shall occur:
(a) The Company shall continue in default in the payment of principal or
interest on this Debenture for a period of ten (10) days after a notice of
default is received by the Company with respect to any such payment; or
(b) Any of the representations or warranties made by the Company herein, in the
Securities Subscription Agreement, the Registration Rights Agreement, or in
any certificate or financial or other written statement heretofore or hereafter
furnished by or on behalf of the Company in connection with the execution and
delivery of this Debenture or the Securities Subscription Agreement or the
Registration Rights Agreement shall be false or misleading in any material
respect at the time made and the Holder shall have provided seven (7) days prior
written notice to the Company of the alleged misrepresentation or breach of
warranty; or
(c) The Company shall fail to perform or observe, in any material respect, any
other covenant, term, provision, condition, agreement or obligation of the
Company under this Debenture or the Securities Subscription Agreement and such
failure shall continue uncured for a period of seven (7) days after notice from
the Holder of such failure; or
7
<PAGE>
(d) The Company shall either: (i) become insolvent; (ii) admit in writing its
inability to pay its debts generally or as they become due; (iii) make an
assignment for the benefit of Creditors or commence proceedings for its
dissolution; or (iv) apply for, or consent to the appointment of, a trustee,
liquidator, or receiver for its or for a substantial part of its property or
business; or
(e) A trustee, liquidator or receiver shall be appointed for the Company or for
a substantial part of its property or business without the Company's consent and
such appointment is not discharged within sixty (60) days after such
appointment; or
(f) Any governmental agency or any court of competent jurisdiction at the
instance of any governmental agency shall assume custody or control of the whole
or any substantial portion of the properties or assets of the Company and shall
not be dismissed within sixty (60) days thereafter; or
(g) Any money judgement, writ or debenture of attachment, or similar process in
excess of Three Hundred Thousand United States Dollars (US$300,000.00) in the
aggregate shall be entered or filed against the Company or any of its properties
or assets and shall remain unpaid, unvacated, unbonded or unstayed for a period
of fifteen (15) days or in any event later than five (5) days prior to the date
of any proposed sale thereunder; or
(h) Bankruptcy, reorganization, insolvency or liquidation proceedings or other
proceedings for relief under any bankruptcy law or any law for the relief of
debtors shall be instituted by or against the Company and, if instituted against
the Company, shall not be dismissed within sixty days after such institution or
the Company shall by any action or answer approve of, consent to, or acquiesce
in any such proceedings or admit the material allegations of, or default in
answering a petition filed in, any such proceeding; or
(i) The Company shall have its Common Stock delisted from the NASDAQ Stock
Exchange or suspended from trading thereon, and shall not have its Common Stock
relisted or have such suspension lifted, as the case may be, within ten (10)
business days; or
(j) The Company shall have received a notice of default on the payment of any
debt(s) aggregating in excess of Three Hundred Thousand United States Dollars
(US$300,000.00) beyond any applicable grace period; then, or at any time
thereafter, and in any and every such case, unless such Event of Default shall
have been waived in writing by the Holder (which waiver in one instance shall
not be deemed to be a waiver in another instance or for any other prior or
subsequent Event of Default) at the option of the Holder and in the Holder's
sole discretion, the Holder may immediately accelerate the maturity hereof,
whereupon all principal and interest hereunder shall be immediately due and
payable, without presentment, demand, protest or notice of any kind, all of
which are hereby expressly waived by the Company, anything herein or in any note
or other instrument contained to the contrary notwithstanding, and the Holder
may immediately, and upon the expiration of any period of grace, enforce any and
all of the Holder's rights and remedies provided herein or any other rights or
remedies afforded by law or equity.
8
<PAGE>
14. Delivery of Common Stock Upon Conversion.
As set forth herein, the Company shall use all reasonable efforts to issue
and deliver, within three (3) business days after the Holder has fulfilled all
conditions and submitted all necessary documents duly executed and in proper
form required for conversion (the "Deadline") to the Holder or any party
receiving a Debenture by transfer from the Holder (together, a "Holder"), at the
address of the Holder on the Debenture Register, a certificate or certificates
for the number of shares of Common Stock to which the Holder shall be entitled
(the "Certificates"). The Company understands and agrees that a delay in the
issuance of the Certificates beyond the Deadline could result in economic loss
and other damages to the Holder. As compensation to the Holder for such loss,
the Company agrees to pay liquidated damages (and not as a penalty) to the
Holder for issuance and delivery of the Certificates after the Deadline, in
accordance with the following schedule (where "No. Business Days Late" is
defined as the number of business days beyond seven (7) business days from the
date of receipt by the Company of a notice of conversion and by the transfer
agent of all necessary documentation duly executed and in proper form required
for conversion, including the original Debenture to be converted, all in
accordance with the terms of this Debenture, the Securities Subscription
Agreement, the Registration Rights Agreement and the reasonable and customary
requirements of the transfer agent)
No. Business Days Late Liquidated Damages
(in US$)
1 $ 500
2 $1,000
3 $1,500
4 $2,000
5 $2,500
6 $3,000
7 $3,500
8 $4,000
9 $4,500
10 $5,000
11+ $5,000 + $5,000 for
each Business Day
Late beyond
The Company shall pay the Holder any liquidated damages incurred as called
for under this Section 14 by certified or cashier's cheque upon the earlier of
(i) issuance of the Certificates to the Holder or (ii) each monthly anniversary
of the receipt by the Company of such Holder's Notice of Conversion. Nothing
herein shall limit the Holder's right to pursue actual damages for the Company's
failure to issue and deliver the Certificates to the Holder in accordance with
the terms of the Debenture or for breach by the Company of the Securities
Subscription Agreement or of the Registration Rights Agreement.
9
<PAGE>
15. Debenture a General Unsecured Obligation of the Company.
This Debenture represents a general unsecured obligation of the Company. No
recourse shall be had for the payment of the principal of, or the interest on,
this Debenture, or for any claim based thereon, or otherwise in respect hereof,
against any incorporator, shareholder, officer, director, or agent of the
Company or any successor corporation, whether by virtue of any constitution,
statute or rule of law, or by the enforcement of any assessment or penalty or
otherwise, all such liability being, by the acceptance hereof and as part of the
consideration for the issue hereof, expressly waived and released.
16. Enforceability.
In case any provision of this Debenture is held by a court of competent
jurisdiction to be excessive in scope or otherwise invalid or unenforceable,
such provision shall be adjusted rather than voided, if possible, so that it is
enforceable to the maximum extent possible, and the validity and enforceability
of the remaining provisions of this Debenture will not in any way be affected or
impaired thereby,
17. Entire Agreement.
This Debenture and Exhibit(s) attached hereto, the Securities Subscription
Agreement and the Exhibit(s) attached thereto and the Registration Rights
Agreement and the Exhibits attached thereto constitute the full and entire
understanding between the Company and the Holder with respect to the subject
matter hereof and thereof. Neither this Debenture nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by the Company and the Holder.
18. Governing Law.
This Debenture shall be governed by and constituted in accordance with the
laws of the state of New York without giving effect to applicable principles of
conflict of law.
19. Headings.
Headings in this Debenture are for convenience only, and shall not be used
in the construction of this Debenture,
IN WITNESS WHEREOF, the company has caused this instrument to be duly
executed by an officer thereunto duly authorized, all as of the date first
hereinabove written.
BIOFARM, INC.
By: /s/ Keith D. Beekmeyer
-------------------------------------
Keith D. Beekmeyer, Chairman & C.E.O.
10
<PAGE>
EXHIBIT 1
NOTICE OF CONVERSION
(To Be Executed by the Registered Holder in Order to Convert the Debenture)
The Undersigned hereby irrevocably elects to convert $________ of the
Series A-1 Six Percent (6%) Convertible Debenture Due ___________2000, No.
_____, into shares of Common Stock of Biofarm, Inc. (the "Company"), according
to the terms and conditions set forth in such Debenture, as of the date written
below.
The Undersigned represents that it, as of this date, is an "accredited
investor" as such term is defined in Rule 501(a)(1) of Regulation D promulgated
by the Securities and Exchange Commission under the 1933 Act.
The Undersigned also represents that the Conversion Shares are being
acquired for the Holder's own account and not as a nominee for any other party,
for investment purposes and not with a view toward distribution or resale. The
Undersigned acknowledges that the Conversion Shares shall if and only if
required by law contain the legends contained on page 1 of the Debenture.
Date of Conversion:*_______________________________________________________
Applicable Conversion Price: ______________________________________________
Holder (Print True Legal Name): ___________________________________________
(Signature of Duly Authorized Representative of Holder)
Address of Holder: ____________________________________
____________________________________
____________________________________
*This original Notice of Conversion, along with the original Debenture,
must be received by the Company by the fifth business day
following the Date of Conversion.
<PAGE>
[SIGNATURE PAGE FOLLOWS]
[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT DATED _____________, 1998]
Company:
BIOFARM, INC., 2nd Floor, Salisbury House, 31 Finsbury Circus,
London, EC2M 5QQ.
BY: /s/ Keith D. Beekmeyer
----------------------------------
Keith D. Beekmeyer, Chairman & CEO
Buyer:
BALMERINO LIMITED, 27 Irish Town, Gibraltar.
SIGNED BY: /s/ Illegible
--------------------------------
Biofarm Inc
Minutes of Meeting Held 13th October 1998
Minutes of the board of directors of Biofarm Inc held on 13th October 1998 at
the 2nd Floor Salisbury House, 31 Finsbury Circus, London EC2M 5QQ at 4pm.
Present: Keith D. Beekmeyer
Anil K. Mahan.
It was resolved that in the opinion and judgement of this Board of Directors, it
is necessary and advisable that Biofarm Inc. acquire all of the issued and
outstanding shares of capital stock of Britten - Norman Ltd., Kaster Bioscience
Ltd., and Burlington, Chamber & James Ltd. (including 51% of the capital stock
of Burlington & James), each such acquisition to be obtained from Litchfield
Continental Ltd and each such acquisition to be without consideration in
addition to the $6,434,681 convertible secured debenture previously issued by
Biofarm, Inc. to Litchfield Continental Ltd;
It was further resolved that each such acquisition is specifically conditioned
upon the receipt of audited financial statements for the one year and ten month
periods ended October 31st 1998, it being necessary that such audits be
conducted and completed in strict accordance with the U.S. GAAP and applicable
SEC on or before January 29th 1999 (giving effect to the change in the fiscal
year of Biofarm Inc. from June 30th to October 30th);
It was further resolved that upon each such audit being concluded to the
satisfaction of this Board of Directors and to the approval of the outside
auditors, the financial statements of the four acquisitions be included in the
fully consolidated audited financial statements of Biofarm Inc. for the fiscal
period ended October 31st 1998.
There being no further business the meeting ended at 4.30pm.
Signed:
K.D. Beekmeyer /s/ Keith D. Beekmeyer
----------------------
Chairman
A.K. Mahan /s/ A.K. Mahan
--------------------------
Director
==============================================================================
==============================================================================
"ADDENDUM TO AGREEMENT"
EXECUTED October 5th 1998
CONFIDENTIAL
================================================================================
THIS ADDENDUM entered into 12TH February 1999, by and between,
================================================================================
Suisse Capital Complex, Inc. Referred to as Suisse Capital with offices located
at 8888 Keystone Crossing Plaza, Suite 1300, Indianapolis, Indiana, 46240-4609,
USA, and
Biofarm Inc, referred to as BIOFARM (Previously" Global Spill Management Inc.")
with offices located at 2nd Floor Salisbury House, 31 Finsbury Circus, London
EC2M5QQ England, and
WHEREAS, by the Agreement executed on the 5th October 1998, Global Spill
Management, Inc. agreed to issue to Suisse Capital 200,000 shares of
unregistered Common Stock (0.001 Par Value) with appropriate restricted legend
("Legended Stock").
NOW IT IS AGREED AS FOLLOWS,
================================================================================
(1) The obligation upon Global Spill Management Inc to deliver the 200,000 of
legended stock referred to Suisse Capital is hereby cancelled and declared
to be null and void; and,
================================================================================
(2) The parties hereto individually and collectively agree that, by virtue of
this amendment, Global Spill Management Inc. (and Biofarm, Inc. by virtue
of the name change of Global Spill Management, Inc. effective October 7,
1998), are relieved of any responsibility to deliver the Legended Stock to
Suisse Capital.
IN WITNESS WHEREOF, we, the undersigned confirm and acknowledge this "ADDENDUM".
DATED the 12TH day of February 1999.
SIGNED for and on behalf of "SUISSE CAPITAL" and AFFILIATES
==============================================================================
==============================================================================
<PAGE>
==============================================================================
==============================================================================
Dated: February 12th 1999
BIOFARM, INC.
By: /s/ K.D.Beekmeyer.
----------------------
K.D.Beekmeyer
Chairman
SUISSE CAPITAL COMPLEX.
By: /s/ T. E. Cook
----------------------
T.E. Cook
Chief Executive Officer
==============================================================================
=============================================================================
SHARE SALE-PURCHASE CONTRACT
FOR THE SHARES OWNED
BY THE STATE OWNERSHIP FUND IN THE COMPANY
ROMAERO S.A. Bucuresti
No. 49 of January 29, 1999
<PAGE>
SHARE SALE PURCHASE CONTRACT
No. 49 of January 29, 1999
Between,
The STATE OWNERSHIP FUND, hereinafter named SOF, with headquarters in 6
Stravopoleos Street, sector 3, Bucuresti, ROMANIA, legally represented by Mr.
Alin GIURGIU, as Seller
and
The Company BRITTEN NORMAN LIMITED, hereinafter named Britten Norman, with
headquarters in Bembridge, Isle of Wight, UNITED KINGDOM, registered under the
no. 1374061, legally represented by Mr. Anil K. MAHAN, as Buyer,
the present Share Sale-Purchase Contract, hereinafter named Contract, has been
concluded, with the observance of the legislation in force applicable to the
privatization of the state owned companies.
CHAPTER 1 PREAMBLE
1-1 ROMAERO SA. Bucuresti Company is a joint stock company, registered in
Romania at the Register of Commerce under the number J40/3940/1991, with
the headquarters in Bucuresti, 44 Ficusului Street, sector 1, Postal
Code 71544, hereinafter named Company.
1.2 The Company has a registered share capital amounting of thousands ROL
156,153,725 constituted by 6,246,149 shares of nominal value ROL 25,000
each.
1.3 The Company doesn't have any branch and/or subsidiary.
Owing to the fact that ROMAERO S.A., is operating in the defence sector,
the share numbered 6,246,149 is not object of the present Contract and
will be preserved as Control Nominative Share (Golden Share), in view to
protect the defence industry according to the Law no. 78/1995 concerning
the personnel and patrimony protection in defence production sector.
CHAPTER 2 OBJECT OF THE CONTRACT
The Seller sells and the Buyer buys, free of any encumbrances, a number
of 4,553,442 shares, having the nominal value of ROL 25,000 each, for a
total value of thousands ROL 113,836,050, representing 72.90% of the
subscribed share capital of the Company under the conditions presented
in this Contract.
The sold shares are numbered from 1,692,707 to 6,246,148 inclusively.
CHAPTER 3 THE SHARES PROPERTY TRANSFER
The property over the sold shares is transferred from the Seller to the
Buyer with all the rights and obligations provided to shareholders under
Romanian law and under the present Contract, on the date of the purchase
price payment in the conditions contemplated by Chapter 4.
-1-
<PAGE>
CHAPTER 4 THE PRICE
The price agreed upon by the Parties is USD 4.6119 for each sold share,
totaling USD 21,000,000.
CHAPTER 5 PAYMENT TERMS
The Buyer commits himself to pay the price established at Chapter 4 as
follows:
5.1 The price, amounting to USD 21,000,000, will be paid by the Buyer within
90 days from the Contract signing day, in the Seller's account
stipulated at Chapter 6, respectively up to date April 29, 1999.
The bank guarantee letter in original will be returned to the Buyer
immediately after the Seller has the confirmation of the payment of the
Price stipulated by Chapter 4.
5-2 The Buyer agrees to undertake the banking costs and fees due to cashing
the price by the Seller, stipulated at Chapter 4.
5.3 In case of non-observance of the payment term as settled at the Article
5.1, the Buyer has to pay to the Seller a penalty of 0.3% for each day
of delay, calculated for the unpaid amount of the purchasing price.
5.4 The present Contract will become null and void, without any
notification, if the Buyer does not fully paid the price stipulated by
Article 5.1, up to the date May 29, 1999 (maturity date plus 30 days
with penalties).
5.5 The Buyer agrees that the Seller will execute the Bank Guarantee Letter
if the Contract is annulled under the Article 5.4
CHAPTER 6 BANK ACCOUNTS
All payments for the current Contract will be made into and out of the
following accounts:
For the Seller in USD account no. 251121710001 opened with EXIMBANK,
Bucharest Subsidiary.
For the Buyer. account no. 85417733 opened with BARCLAYS BANK PLC and
account no. 47732492 opened with BANCA AGRICOLA SCMB.
CHAPTER 7 SELLER'S REPRESENTATIONS AND WARRANTIES
7.1 Signing and authorisation
The Seller declares and guarantees that he is duly authorized and
legally competent to enter into this Contract and to fulfil all
obligations hereunder.
7.2. In accordance with the statement of the Company's management (Annex no.
1):
7.2.1 The Seller declares and guarantees that the Company was established and
is operating according to the law in force and, at the signing date of
the present Contract, it is not bankrupt.
7.2.2 The Seller declares that on the signing date of the present Contract
there are no liabilities to pay or legal actions against the Company
under applicable environmental law
-2-
<PAGE>
7.3 Legal status of the Company on the signing date of the Contract
In accordance with the statement of the Company's management (Annex no.
1), the Company has all the necessary licenses and authorizations to
operate its current business activities, in accordance with the object
of activity indicated in its Statute except for the environmental
permit.
7.4. Financial statement of the Company on the signing date of the Contract
In accordance with the statement of the Company's management
(Annex no. 1):
7.4.1 Financial reports were drafted accurately and correctly according to the
applicable Romanian legislation, were approved by the shareholders in
the Shareholder General Assembly, were certified by D.G.F.P.C.F.S. and
contain the complete financial statement of the Company, on the date on
which were issued.
The Patrimony Status and financial results of the Company on 30.10.1998
are presented in Annex no. 5.
The list of the Company's Commercial Contracts over 20,000 USD worth is
presented in Annex no. 6.
There were no substantial modifications of the Company's financial
status in the period between 30.10.1998 and the Contract signing date.
7.4.2 All accounting documents and the other supporting documents are at the
Company's headquarters and are preserved in accordance with Romanian
legislation and practice.
7.5 Shares
The Seller, as sole legal owner of the shares object of the present
Contract, guarantees to the Buyer that there are no rights of third
parties over these shares.
7.6 Land
The Seller certifies that the Company has the following Certificates
attesting the property rights over the land:
Series M03/no. 3131/11.09.1996 for the surface of 355,073.82 sqm,
Series M03/no. 3045/15.08.1996 for the surface of 4,538.60 sqm,
Series M03/no. 3044/15.08.1996 for the surface of 551.13 sqm,
Series M03/no. 3043/16.08.1996 for the surface of 4,184.41 sqm,
issued by the Ministry of Industry (Annex no. 2).
7.7 The Buyer guarantees that all the existent information, documents and
contracts that he knew about on the date of the present Contract and
that the Buyer should have been notified of, were brought to Buyer's
knowledge.
7.8 The Seller guarantees that the minimum accepted environment objectives
that must be accomplished by the Buyer are those listed and estimated
in Annex no. 7, established in accordance with Romanian legislation in
force.
-3-
<PAGE>
CHAPTER 8 BUYER'S REPRESENTATIONS AND WARRANTIES
8.1 The Buyer has full authority and competence to sign the present
Contract, to fulfil its obligations that arise from this Contract and in
accordance with its terms.
8.2 The person who signs the present Contract on behalf of the Buyer is
legally authorised to do so.
8.3 The Buyer commits himself to pay the purchase price in respect with the
terms stipulated by Chapter 5.
8.4 The Buyer, as shareholder of the Company, commits himself not to approve
in the General Shareholders Assembly the modification, within a 4 years
period, of the main object of activity of the Company, as declared in
its Statute
8.5 The Buyer, as majority shareholder of the Company, commits himself to
take all due actions in order for the Company to observe the rights and
obligations existing at the time of the transfer of property right over
the shares under the Chapter 3 of this Contract with respect to:
(a) The collective bargaining Contract and/or other existent
covenants or agreements between the trade union and the owners
of the Company (Annex no. 3).
(b) Individual labor contracts (Annex no. 3).
(c) Legislation regarding working condition, salaries, employment or
lay-off, indemnification in case of massive lay-off and
severance payments.
8.6 The Buyer also commits himself to take all due action in order for the
Company to apply the Romanian legislation in force regarding social
protection,
8.7. The Buyer, as shareholder of the Company commits himself to ensure:
(a) The approval, on the occasion of the debate and approval of the
Balance Sheet for the privatisation year by the Shareholders
General Assembly, of the fees for the SOF representative that
are owed until the date of the Company privatisation, as
stipulated by the representation Contract.
(b) Payment by the Company of the amounts stipulated at letter (a).
Upon the Buyer's request, the Setter will provide the legal
frame and the methodological norms regarding the fee calculation
mentioned at letter (a).
(c) Payment of the Company's debts to SOF:
- dividends and penalties for payment delay due to
SOF for years 1993 (ROL 31,610,400), 1994 (ROL
4,435,059), 1995 (ROL 746,805) and 1996 (ROL
4,494,080);
- credits for restructuring according to
Convention no. 730/03.11.1995 (ROL
1,000,000,000) and Convention no. 658/17.01.1995
(ROL 288,000,000).
8.8 The Buyer, as shareholder of the Company, commits himself not to decide.
to voluntarily dissolute and liquidate the Company within a 3 (three)
years period.
8.9 The Buyer undertakes to have the Company accomplish all the minimum
accepted environment objectives established by the Environment
Protection Agency (Annex no. 7).
The cost of these minimum accepted environment objectives is estimated
to amount to USD 1.5 million.
-4-
<PAGE>
8.10 Investments / Capital Contribution
8.10.1 Buyer's commitment
The Buyer commits himself to invest in the Company, from own or
attracted sources, on his behalf, over a 4-year period, starting with
the date of his registration as shareholder at the Registry of Commerce,
an investment / capital contribution amounting to 59,500,000 USD,
according to Annex no. 4.
8.10.2 Investment / Capital Contribution Accomplishment
The investment / capital contribution is considered integrally
accomplished on the date of registration in the Registry of Commerce
Office of the Company's capital increase with the Buyer's subscribed and
integrally paid in capital.
8.10.3. Guarantee of Investments / Capital Contribution Accomplishment
(a) To guarantee the full accomplishment of the investments, the
Buyer will pledge 20% of the purchased shares, respectively a
number of 910,689 shares numbered from 5,335,460 to 6,246,148
inclusively.
(b) The share pledge will be registered in the Shareholders Romanian
Register or in another independent register.
(c) The Buyer commits himself to allow the Seller to verify at any
time the existence of the registration of the share pledge.
(d) In case at the end of the investment period the Buyer did not
observe the obligations provided by Articles 8.10.1 and 8.10.2,
the Seller will grant by notification a 6-month grace period,
having the right to execute the pledge over the shares at the
end of the aforesaid period.
(e) The pledge will be removed from the shares within 30 days from
the date of integral accomplishment of the investment / capital
contribution of the Buyer according to the conditions provided
by Article 8.10.1 and Article 8.10.2 of the present Contract.
8.11 The Buyer as majority shareholder commits himself to observe all the
Romanian laws and legal regulations concerning the protection of the
defence production.
In view to accomplish these obligations, the Buyer as majority
shareholder will convene an Extraordinary Shareholders General Assembly
within 60 days from the price payment date, in order to include the
following provisions in the Company's Statute:
(a) Appointment in the Company's Board of a State representative.
(b) Company's Board and General Shareholder Assembly cannot make
decisions if the State representative opposes to those decisions
that might infringe upon the national interest regarding:
- the pledge, mortgage, sale or transfer in any way of the
Company's assets used for the defence production, as
they were identified in the inventory set up according
to the Law no.78/1995 and approved by the Co-ordination
Committee for Defence Production;
- voluntary dissolution and liquidation of the Company;
- the merge by absorption.
-5-
<PAGE>
(c) Adding to the Company's Board attributions the following:
- assurance of the integrity, functioning and necessary
level for the common capacities of both economic and
military products;
- full accomplishment of the orders of the national
defence, under the terms established by commercial
contracts in peace-time and with priority in war-time;
- accomplishment of the respective mobilisation
requirements concerning the preparation of the domestic
economy and territory for defence in accordance with the
provisions of the Law no. 78/1995;
- assurance of the protection of the personnel specialised
in military technique production in accordance with the
provisions of the Law no. 78/1995.
8.12 The Buyer and the Seller will accomplish all the legal provisions to
register the modifications made in the Company's Statute at the Registry
of Commerce.
CHAPTER 9 SHARE ASSIGNMENT
The Buyer undertakes not to assign to third parties all or a part of the
shares bought from the Seller and not to transfer the present Contract
to a third party, until the complete fulfilment of all commitments
undertaken by the present Contract, without the prior written consent of
the Seller.
In case that shares of the company are assigned without affecting the
Buyer's majority holding position, or if the assignment is made to an
affiliated company, this assignment will be preceded only by a
notification to the Seller
CHAPTER 10 NULLITY
If any of the clauses of the within Contract is declared null and void,
the remaining provisions of the Contract shall not be thereby affected.
The parties agree that any clause declared to be null and void should be
replaced by another clause, in keeping as much as possible with the
meaning of the Contract
CHAPTER 11 FORCE MAJEURE
11.1 Any unforeseen and unavoidable circumstance, independent of the will of
the parties, which arises after the signing of the Contract and impedes
the execution thereof, shall be considered Force Majeure and shall
exonerate of responsibility the party which invokes it.
11.2 Force Majeure clauses are such circumstances as: war, revolution,
earthquake, floods, embargo.
11.3 The party who invokes the Force Majeure must notify to the other within
5 days from the date when the circumstance arises and to communicate the
evidence thereof within 15 days from that date. The party is also
compelled to notify the date of the cessation of the Force Majeure case
within 5 days.
11.4 In case of failing to notify, in accordance with the conditions and
within the deadlines herein above provided for, the commencement and the
cessation of the Force Majeure case, the party claiming the Force
Majeure shall bear all the damages caused to the other party by such
failure.
11.5 If the Force Majeure case and/or the effects thereof require to suspend
the execution of this Contract on a period that exceeds 6 months, the
parties shall meet within no
-6-
<PAGE>
more than 10 days from the date when such period elapsed, in order to
agree either upon the performance of this Contact or on the cancellation
thereof.
CHAPTER 12 LITIGATION
The Seller and the Buyer hereby agree that the disputes deriving from
the interpretation and performance of this Contract, which cannot be
settled on an amiable way, be subject to the International Chamber of
Commerce - Paris arbitration.
CHAPTER 13 OTHER CLAUSES
If within a 6 month period from Contract signing date the Buyer notes
that there are material differences (that might have influenced Buyer's
will at the moment of Contract signature) between the information
presented by the Seller in the Presentation File and in the annexes to
this Contract (information that were taken into consideration by the
Buyer for the bid and for the Contract signature) and the actual status,
the Buyer is entitled to require the remedy of the damages through
negotiation, if any of the damages exceeds USD 100,000.
CHAPTER 14 THE APPLICABLE LAW
The Romanian law governs this Contract.
CHAPTER 15 MISCELLANEOUS CLAUSES
15.1 The present Contract with its Annexes contains all the agreements of the
parties and cancels any prior agreement or understanding regarding its
object.
15.2 No modification of the present Contract or its Annexes shall become
effective or in force unless made in written and signed by or in behalf
of the parties.
15.3 The modification of the contractual clauses will be settled by mutual
agreement through Additional Acts.
15.4 This Contract has the value of an Assignment of Shares, in accordance
with the Article 98, paragraph 1 of the Law regarding the commercial
companies, no. 31/1990, republished.
15.5 All costs related to the extra-investigation works or specific expert's
reports, whose execution is required by the Buyer, are in his charge.
15.6 This Contract will come into effect on its signing date by the
contracting parties.
15.7 Annexes no. 1-7 are integral part of the present Contract.
15.8. Notifications
15.8.1 All notifications and communications addressed to any party shall be
made in writing in Romanian and will be transmitted to addresses
specified hereunder or to another address beforehand indicated.
For the Seller: STATE OWNERSHIP FUND
Executive General Manager
Mr. Alin GIURGIU
Strada Stavropoleos nr. 6, code 79206
sector 3, Bucharest, ROMANIA,
-7-
<PAGE>
For the Buyer: BRITTEN NORMAN LIMITED
Chief Executive Officer
Mr. Paul BARTLETT
Bembridge, Isle of Wight, UNITED KINGDOM
P035 5 PR
15.8.2 Notifications will be considered correctly executed on the day of
delivery (through registration in the Correspondence Register located at
the General Registry - for the Seller and through the signed receipt -
for the Buyer), if (a) have been delivered personally or by courier or
(b) on receipt of the answer in case of transmission by telex or fax or
(c) on date when signed receipt is received for registered mail
transmission - for both parties.
15.9 The present Contract was issued in 2 (two) copies in Romanian and 2
(two) copies in English.
If there is a conflict between the Contract terms in the Romanian and
English versions, the Romanian version terms will prevail.
Signed on January 29, 1999, in Bucharest.
SELLER, BUYER,
STATE OWNERSHIP FUND BRITTEN NORMAN LIMITED
GENERAL EXECUTIVE DIRECTOR EXECUTIVE DIRECTOR
Alin GIURGIU Anil K. MAHAN
/s/ Alin Giurgiu /s/ Anil K. Mahan
-8-
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<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 2,502
<SECURITIES> 4,642
<RECEIVABLES> 0
<ALLOWANCES> 13,608
<INVENTORY> 21,473
<CURRENT-ASSETS> 3,670
<PP&E> 0
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<TOTAL-LIABILITY-AND-EQUITY> 11,889
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<CGS> 4,792
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