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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended April 30, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission File Number 0-20317
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BIOFARM, INC.
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(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
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(United States address of principal executive offices, including zip code)
(610) 495-8413
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(Issuer's telephone number)
-----------------------
Check whether the Issuer: (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
----- ------
The number of shares outstanding of the Issuer's Common Stock, $.001 Par
Value, as of June 9, 2000, was 4,376,930 (of which 165,000 shares are not deemed
to be validly issued and outstanding, fully paid and non-assessable).
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1
<PAGE>
BIOFARM, INC.
Form 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets 3
April 30, 2000 and October 31, 1999
Consolidated Statements of Operations - Six months ended 4
April 30, 2000 and January 31, 1999
Consolidated Statements of Operations - Three months ended 5
April 30, 2000 and 1999
Consolidated Statements of Changes in Stockholders' Equity 6
Consolidated Statements of Cash Flows - Six months ended 7
April 30, 2000 and 1999
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operation 14
PART II OTHER INFORMATION
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 17
</TABLE>
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
BIOFARM, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
April 30, October 31,
2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 24,605 $ 2,882
Note receivable, Stockholder -- 40,000
Subscriptions receivable and accrued interest 750,355 750,000
------------ ------------
Total current assets 774,960 792,882
OTHER ASSETS
Convertible note receivable -- 439,250
------------ ------------
Total Assets $ 774,960 $ 1,232,132
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 10,000 $ 48,752
Third party indebtedness -- 200,000
Payable due to Hannibal Capital Corp. 30,009 6,172
------------ ------------
Total current liabilities 40,009 254,924
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 5,000,000
shares authorized, none issued
Common stock, $.001 par value; 25,000,000
shares authorized, 4,376,930 shares issued
and outstanding in 2000 and 1999 4,377 4,377
Additional paid-in capital 17,323,802 17,323,802
Accumulated deficit (16,593,228) (16,350,971)
------------ ------------
Total Stockholders' equity 734,951 977,208
------------ ------------
Total Liabilities and Stockholders' Equity $ 774,960 $ 1,232,132
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
BIOFARM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended April 30,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenue
Settlement of litigation $ 25,000 $ --
Interest 14,855 --
----------- -----------
39,855 --
General and administrative expenses 42,862 106,618
----------- -----------
Loss before nonrecurring item (3,007) (106,618)
Nonrecurring item
Bad debt expense (239,250) --
----------- -----------
NET LOSS $ (242,257) $ (106,618)
=========== ===========
Basic loss per common share $ (.05) $ (.03)
=========== ===========
Weighted-average number of common shares outstanding 4,376,930 4,366,418
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-4-
<PAGE>
BIOFARM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended April 30,
----------- -----------
2000 1999
----------- -----------
<S> <C> <C>
Revenue
Interest $ 7,355 $ --
General and administrative expenses 18,007 73,352
----------- -----------
Loss before nonrecurring item (10,652) (73,352)
Nonrecurring item
Bad debt expense (239,250) --
----------- -----------
NET LOSS $ (249,902) $ (73,352)
=========== ===========
Basic loss per common share $ -- $ (.02)
=========== ===========
Weighted-average number of common shares outstanding 4,376,930 4,376,930
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-5-
<PAGE>
BIOFARM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Accumulated Subscriptions Stockholders'
Stock Capital Deficit Receivable Equity
-------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1998 $ 4,212 $16,334,717 $(16,244,353) $(149,250) $ (54,674)
Payment of subscriptions -- -- -- 109,250 109,250
Issuance of stock subscriptions -- 750,000 -- -- 750,000
Reclassification of subscription
receivable to note receivable -- -- -- 40,000 40,000
Issuance of common stock 165 239,085 -- -- 239,250
Net loss -- -- (106,618) -- (106,618)
-------- ----------- ------------ --------- ---------
Balance, October 31, 1999 4,377 17,323,802 (16,350,971) -- 977,208
Net loss -- -- (242,257) -- (242,257)
-------- ----------- ------------ --------- ---------
Balance, April 30, 2000 $ 4,377 $17,323,802 $(16,593,228) $ -- $ 734,951
======== =========== ============ ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
BIOFARM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2000 AND 1999
(Unaudited)
2000 1999
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OPERATING ACTIVITIES
Net loss $(242,257) $(106,618)
Adjustments to reconcile net loss to
net cash utilized by operating activities:
Bad debt expense 239,250 --
Changes in:
Accounts payable (38,752) (8,250)
Subscription accrued interest (14,855) --
--------- ---------
Net cash utilized by operating activities (56,614) (114,868)
FINANCING ACTIVITIES
Payments of note receivable, Stockholder 54,500 109,250
Payable due to Hannibal Capital Corp. 23,837 6,172
--------- ---------
Net cash provided by financing activities 78,337 115,422
--------- ---------
INCREASE IN CASH 21,723 554
Cash, beginning of period 2,882 2,328
--------- ---------
Cash, end of period $ 24,605 $ 2,882
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
BIOFARM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Biofarm, Inc. (formerly Global Spill Management, Inc.) was incorporated in
June, 1991, to acquire, operate and develop environmental contracting and
consulting companies, and related businesses. All operating companies were
disposed of or sold in prior years.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
Biofarm, Inc. and its wholly owned subsidiaries (collectively referred to
as the "Company" or "Biofarm") after elimination of all significant
intercompany balances and transactions.
Income (loss) per common share
In 1998, the Company adopted SFAS No. 128, "Earnings Per Share" ("EPS"),
which provides for the calculation of basic and diluted EPS. Basic EPS
includes no dilution and is computed by dividing the income (loss)
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution of securities that could share in the income (loss) of the
Company. There is no difference in basic and diluted EPS for the six and
three months ended April 30, 2000 and 1999 since there are no potentially
dilutive securities outstanding for either period presented.
NOTE B - FAILED ACQUISITIONS
On September 4, 1998, the Company entered into a contract to acquire
approximately 87% of the issued and outstanding shares of capital stock of
Biofarm, S.A., a Romanian pharmaceutical company from Litchfield
Continental, Ltd. ("Litchfield."). In consideration for the purchase of the
shares of Biofarm, S.A., the Company agreed to issue to Litchfield a
convertible, non-negotiable secured Debenture, in the amount of $6,434,681.
Such Debenture provided that, from time to time, for a period of five years
the holder thereof could convert a portion, but not less than 2% of the
original principal sum, into common stock of the Company for each 2.5% of
the principal sum of the Debenture that was converted. Therefore, if the
entire principal sum of the Debenture was converted, the holder would own
80% of the Company's issued and outstanding common stock as of the date of
conversion.
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<PAGE>
BIOFARM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - FAILED ACQUISITIONS (Continued)
Since the Debenture could only be converted into the common stock of the
Company, for accounting purposes, Biofarm, S.A. would be considered the
acquiring entity. Therefore, the acquisition was accounted for as a reverse
purchase in accordance with Generally Accepted Accounting Principles and
with Biofarm, S.A. retaining the majority voting interest in the merged
entity. Also, the Directors and Officers of Biofarm, S.A. became the
Directors and Officers of the Company. Prior to the merger, the Company had
no operating activities. Subsequent to the merger between Biofarm, S.A. and
the Company, three additional companies were contributed to the Company:
Britten-Norman Ltd; Kaster Bioscience Ltd; and Burlington Chamber & James
Ltd.
Based on legal opinions received by management concerning the issuance of
stock in the failed acquisitions, and the subsequent Rescission Agreement,
management considers the failed acquisitions a nullity and void ab initio.
Accordingly, the accounts and operations of Biofarm, S.A., Britten-Norman
Ltd., Kaster Bioscience Ltd. and Burlington Chamber & James, Ltd. have been
omitted from the Company's consolidated financial statements. All common
stock and per-share amounts from the date of the failed acquisitions to
October 31, 1998 have been retroactively adjusted to reflect the
nullification of the issuance of the original convertible Debenture.
With respect to the accounting issue presented by virtue of the rescission,
effective October 31, 1999, of the transactions with Litchfield, namely,
whether rescission voids the Litchfield transactions nunc pro tunc or
whether rescission requires treatment of the Litchfield transactions as
discontinued operations requiring inclusion of the Litchfield entities in
the Company's financial statements for the fiscal year ended October 31,
1999, the Company believes that such decision is sui generis and must be
decided based upon the facts peculiar to the Litchfield transactions. In
that regard, the Company learned that the Escrow Agreement entered into
between the Company and Litchfield as part of the September 4, 1998
transaction, purported closing with Litchfield of the sale of approximately
87% of Biofarm, S.A. to the Company by Litchfield in exchange for the
Company's Debenture, may never have been actually consummated. Although the
Company, Litchfield and the Escrow Agent each executed such Escrow
Agreement, the Company has been unable to confirm that the Escrow Agent
retained the original Debenture with the Company's signature affixed
thereto. Nor has the Company been able to confirm receipt by the Escrow
Agency of stock certificates representing the approximately 87% of the
capital stock of Biofarm, S.A. required to be deposited with such Escrow
Agent. Assuming failure of Litchfield ever to deliver the foregoing escrow
items to the Escrow Agent, it is the Company's position that the Company
never took possession of the former Litchfield entities and cannot be
deemed ever to have controlled such entities. Each of the foregoing
failures would constitute further evidence of the effect of the underlying
transactions with Litchfield as being void ab initio. The Company has also
solicited and received an opinion from outside counsel that New York law
treats the Rescission Agreement as rendering the Litchfield transactions
void ab initio: that is, as if such transactions never occurred.
-9-
<PAGE>
BIOFARM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - FAILED ACQUISTIONS (Continued)
The Escrow Agreement confirms Litchfield's responsibility to transfer or
cause to be transferred to the Company all right, title and interest of the
owners of the Stock of Biofarm, S.A. Further, as stated in the Escrow
Agreement and as modified by the Post-Closing Agreement, Litchfield was to
provide the Transfer Agent with "all documentation necessary or appropriate
to affect the transfer of title to Seller's Stock as required by the Stock
Purchase Agreement." The Company and Litchfield were then to direct the
Transfer Agent to deliver the Seller's Stock to the Escrow Agent and,
simultaneously, the Debenture would also be delivered. The Escrow Agent was
thereafter to maintain possession of the Debenture and "all documentation
pertaining to Biofarm, Inc.'s ownership of Biofarm, S.A. and other
Company's stock, all in order to perfect Biofarm S.A.'s security interest
therein." The Company did, in fact, deliver to the Escrow Agent the
original of the Debenture.
If Litchfield were to exercise its conversion rights under the Debenture,
any stock issued by the Company and any amendments to the Debenture
required to show a decrease in its outstanding principal balance, were
likewise to be delivered to and held by the Escrow Agent. The Escrow Agent
would then hold same until receipt of an appropriate amendment, whereupon
the Escrow Agent would cause a certificate representing the appropriate
amount of the Company's stock to be transferred to Litchfield. Once the
Debenture was completely converted, the Escrow Agent would then return the
Debenture to the Company marked "canceled", together with all certificates
and other documentation representing the Company's ownership of the
Biofarm, S.A. stock purchased from Litchfield.
Pursuant to the Addendum to the Stock Purchase Agreement, at the time of
"Final Settlement" (originally contemplated to be after Litchfield obtained
a sufficient amount of Biofarm, S.A. capital stock (87%)), after delivery
to the transfer agent of documentation necessary to transfer ownership of
the Stock, "Sellor's Stock and all documents representing Sellor's Stock,
as transferred into Biofarm, Inc.'s name and ownership, shall thereafter be
held by Escrow Agent pursuant to the Escrow Agreement."
In summary, documents transferring title to the Biofarm, S.A. stock held by
Litchfield and its affiliates were to be sent to the transfer agent with
instructions to transfer the record ownership into the Company's name. All
such documents, certificates and otherwise, were then to be delivered to
the Escrow Agent to hold together with the Debenture. Even if Litchfield
were to exercise its conversion rights under the Debenture, the Escrow
Agent would continue to hold the Romanian company stock as collateral, even
though Litchfield would be entitled to receive certificates representing
the Company shares issued upon conversion. When the Debenture was
satisfied, the Escrow Agent would then release the stock certificates and
ancillary documents to the Company.
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<PAGE>
BIOFARM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - FAILED ACQUISITONS (Continued)
Documentation received by the Company at the time of and subsequent to the
execution of the Rescission Agreement, indicates that (a) the Escrow Agent
surrendered the Debenture to Litchfield and (b) the Escrow Agent never had
possession of the certificate representing 87% of the capital stock of
Biofarm, S.A. In fact, Litchfield attempted to convert all of the Debenture
into Common Stock on or about October 15, 1999, when Litchfield's counsel
states, in a letter dated November 11, 1999, that the Debenture was
surrendered for conversion, and the Escrow Agent has made available copies
of blank stock powers with no Biofarm, S.A. stock certificates affixed
thereto.
Predicated upon all of the foregoing, the Company has concluded that the
transaction between the Company and Litchfield never, in point in fact, was
consummated on October 5, 1998. Therefore, the operations of the
Litchfield-contributed companies never belonged to the Company and should
not be included in the Company's financial statements for the fiscal year
ended October 31, 1999 or for the quarterly periods ended January 31, 1999,
April 30, 1999 and July 31, 1999.
Under terms of the Rescission Agreement, the following occurred:
a. The Company's Convertible Debenture issued to Litchfield was
cancelled and the Company returned to Litchfield the four
companies previously transferred to the Company by Litchfield;
b. The Litchfield nominees to the Company's Board tendered their
resignations therefrom and the three directors of the Company who
occupied such office prior to October 5, 1998, were restored as
the directors of the Company; and,
c. Litchfield indemnified the Company against all liabilities
incurred since October 5, 1998, except for one such indebtedness
in the amount of $200,000 which was reflected as third party
indebtedness under current liabilities. In addition, the Company
(subject to Litchfield's fulfillment of its obligations under the
Rescission Agreement) agreed to honor Litchfield's issuance to a
third party of 165,000 shares which were issued at current market
value, net of a discount due to the stock being restricted, of
$239,250; and Litchfield issued to the Company a five-year
convertible note in the principal amount of $439,250, plus
interest at 6% per annum. This is a non-cash transaction for
purposes of the Statement of Cash Flows. The note is convertible
until January 1, 2003, into shares of unrestricted, publicly
traded common stock of any entity which is acceptable to Biofarm,
Inc. The price of the conversion stock is as defined in the
convertible promissory note.
-11-
<PAGE>
BIOFARM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - FAILED ACQUISITIONS (Continued)
Subsequent to the execution of the Rescission Agreement, the Company was
informed that Litchfield had been constrained to agree to the appointment
of Administrative Receivers for one of its principal assets
(Britten-Norman). In addition, the Company learned that the list of
obligations incurred by Litchfield and against which the Company was
indemnied was incomplete. Finally, as to obligations that were listed by
Litchfield, several thereof were not timely paid by Litchfield.
The Company deems Litchfield's failure, without justification, to perform
its obligations under the Rescission Agreement, to constitute an
anticipatory breach of such Rescission Agreement sufficient to constitute a
total breach of contract. Litchfield's apparent financial condition and
voluntary institution of creditor proceedings against Britten-Norman,
coupled with its failure to discharge obligations assumed by Litchfield,
cumulatively render impossible Litchfield's performance of its contractual
duties under the Rescission Agreement.
Accordingly, the Company has elected to abrogate its agreement with respect
to the $200,000 indebtedness. This, in turn, also results in the Company's
belief that the $439,250 Litchfield convertible note is not collectible and
that sound accounting practices dictate that such convertible note not be
carried as an asset. Thus, the Company has recorded bad debt expense for
the net of these two items in the amount of $239,250, reflected as a
nonrecurring item. However, such accounting disclosure and election by the
Company does not, in any manner, constitute any denial by the Company that
Litchfield is required to perform under the Rescission Agreement and is
justly indebted to the Company. Further, the Company maintains that the
165,000 shares of its common stock was not fully paid and non-assessable
and is disputing the issuance of the shares in order to retire them. If the
Company is successful in the retiring of the shares, the $239,250 of bad
debt expense will be reversed.
NOTE C - NOTE RECEIVABLE, STOCKHOLDER
As of October 31, 1998, the Company had outstanding non-negotiable
promissory notes for the purpose of subscribing to purchase a total of
299,000 shares for a total of $149,500. The promissory notes were due on
June 30, 1999 and bore interest at 4%. If the maker of the note was in
default of payment, the note would bear interest at 8% from the date of
default.
During the year ended October 31, 1999, the Company discovered that $40,000
of the outstanding subscriptions receivable of $149,500 were not paid.
Thereupon, the Company received a $40,000 non-convertible promissory note
which was due on September 30, 2000, in order to cover such deficiency.
This note was fully paid during the six months ended April 30, 2000. Since
no additional common stock will be issued in conjunction with such $40,000
note, the common stock account remains unaffected.
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<PAGE>
BIOFARM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - SUBSCRIPTIONS RECEIVABLE
In October, 1999, the Company received 14 non-negotiable promissory notes
for the purpose of subscribing to purchase a total of 1,500,000 shares of
common stock for a total of $750,000. The promissory notes are due on
September 30, 2000 and bear interest at 4%. As of April 30, 2000, $14,500
of principal has been paid on these subscriptions. The notes, principal and
interest, may be paid at any time before the due date. If the maker of the
note is in default of payment, the note will bear interest at 8% from the
date of default. The balance as of April 30, 2000 includes accrued interest
in the amount of $14,855.
NOTE E - INCOME TAXES
The Company had deferred tax assets of approximately $4,000,000 as of
October 31, 1999, related to net operating loss carryforwards ("NOL"),
which have yet to be utilized. As a result of the sale of the Company's
operating subsidiaries and the issuance of additional shares of common
stock, the amount of the NOL of approximately $11,600,000 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
prior to the expiration of the NOL. Therefore, at April 30, 2000 and
October 31, 1999, the Company established a 100% valuation allowance
against the deferred tax assets as the likelihood of recognizing this
benefit cannot be certain. The net operating losses will expire in various
years through June, 2015.
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<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
The Company may today be fairly characterized as a non-operating "shell"
corporation. 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. As of the date hereof, the Company is able to
meet its obligations as they mature, which obligations consist exclusively of
legal, accounting and miscellaneous expenses endemic to any public entity. As of
April 30, 2000, the Company has outstanding subscriptions receivable of
$750,355, all of which are deemed to be collectible.
Item 5. Other Information
Reference is made to Part I of Form 10-KSB filed by the Company on January
28, 2000, for the fiscal year ended October 31, 1999. Pages 7-11 thereof
("Rescission of the Transactions Between the Company and Litchfield") set forth
the reasons for, terms of and effect of the rescission, effective October 31,
1999, on any and all transactions theretofore entered into between the Company
and Litchfield Continental, Ltd. ("Litchfield"). Such Form 10-KSB filing stated,
in pertinent part:
"C. RESCISSION OF THE TRANSACTIONS BETWEEN THE COMPANY AND LITCHFIELD
(Reference is made to Form 8-K, filed November 12, 1999, for information
concerning the rescission of all transactions between the Company and
Litchfield, to which filing is annexed as an Exhibit thereto the Rescission
Agreement, dated October 31, 1999, between the Company and Litchfield.)
Effective October 31, 1999, the Company entered into a Rescission Agreement
with Litchfield. Pursuant to the terms of a Convertible Debenture in the
principal amount of $6,434,681 issued by the Company to Litchfield on September
4, 1998, such Convertible Debenture was convertible at any time thereafter into
a maximum of 17,507,720 shares of the Company's Common Stock ($.001 par value).
In exchange for such Convertible Debenture, Litchfield transferred to the
Company 87% of the capital stock of Biofarm, S.A., a Romanian pharmaceutical
manufacturer. Thereafter, Litchfield transferred to the Company the capital
stock of three United Kingdom entities, control of which had been assumed by
Litchfield in July, 1998. The Rescission Agreement was approved by a majority of
the Company's shareholders pursuant to Section 78:320 of the Nevada Revised
Code.
On October 5, 1998, the nominees of Litchfield were elected to the Board of
the Company and the previous three directors resigned therefrom. Such election
was the subject of the September 21, 1998, Proxy Statement (accompanied by the
change in the name of the Company).
For additional information, reference is made to the following relevant
documents previously filed by the Registrant pursuant to the 1934 Act:
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<PAGE>
a) Proxy Statement, dated September 21, 1998
b) Form 8-K/A filed November 19, 1998
c) Form 10-KSB filed February 19, 1999
d) Form 8-K filed November 12, 1999
The effect of the Rescission Agreement is to restore the Company to the
situation that existed prior to September 4 and October 5, 1998. Thus:
a) The Company's Convertible Debenture issued to Litchfield was cancelled
and the Company returned to Litchfield the four companies transferred
to the Company by Litchfield;
b) The Litchfield nominees to the Company's Board tendered their
resignations therefrom and the three directors of the Company who
occupied such office prior to October 5, 1998, were restored as the
directors of the Company; and,
c) Litchfield indemnified the Company against liabilities incurred since
October 5, 1998, except for one such indebtedness in the amount of
$200,000, and Litchfield issued to the registrant a five-year
convertible note of Litchfield in the principal amount of $439,250
(plus interest at 6% per annum).
The rescission of the transaction with Litchfield was motivated by the
fiscal 1998 operating losses and the going concern reservation expressed by BDO
International (the Company's independent auditors) on the financial statements
at and for the year ended October 31, 1998. This going concern reservation was
included in the Form 10-KSB filed on February 19, 1999. Further, doubt about the
viability of the Company was exacerbated by the operating loss of approximately
$3.6 million for the nine months ended July 31, 1999, which losses were
attributable by Litchfield to the three United Kingdom entities transferred to
the Company by Litchfield after October 5, 1998. In the opinion of the three
directors named to replace the Litchfield nominees on the Board of the Company,
based on the continuing losses from operations it was probable that the auditors
would again issue a going concern opinion on the financial statements for fiscal
1999, and that due to its persistent deteriorating financial condition it was
possible that the Company would not be able to remain as a viable entity for a
reasonable period of time, and that it therefore would not be able to stay
current in all its required 1934 filings. Consequently, it was determined to
effect the rescission of the transaction with Litchfield."
* * * *
Subsequent to the execution of the Rescission Agreement, the Company was
informed that Litchfield had been constrained to agree to the appointment of
Administrative Receivers for one of its principal assets (Britten-Norman). In
addition, the Company learned that the list of obligations incurred by
Litchfield and against which the Company was indemnified was
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<PAGE>
incomplete. Finally, as to obligations that were listed by Litchfield, several
thereof were not timely paid by Litchfield.
The Company deems Litchfield's failure, without justification, to perform its
obligations under the Rescission Agreement, to constitute an anticipatory breach
of such Rescission Agreement sufficient to constitute a total breach of
contract. Litchfield's apparent financial condition and voluntary institution of
creditor proceedings against Britten-Norman, coupled with its failure to
discharge obligations assumed by Litchfield, cumulatively render impossible
Litchfield's performance of its contractual duties under the Rescission
Agreement.
Accordingly, the Company has elected to abrogate its agreement with respect to
the $200,000 indebtedness. This, in turn, also results in the Company's belief
that the $439,250 Litchfield convertible note is not collectible and that sound
accounting practices dictate that such convertible note not be carried as an
asset. Thus, the Company has recorded bad debt expense for the net of these two
items in the amount of $239,250. However, such accounting disclosure and
election by the Company does not, in any manner, constitute any denial by the
Company that Litchfield is required to perform under the Rescission Agreement
and is justly indebted to the Company. The $239,250 represents the market value
on the date of issuance (December 12, 1998) of 165,000 shares of the Company's
Common Stock caused to be issued by Litchfield to Balmerino, Ltd. It is believed
by the Company that Litchfield received the sum of $1 million from Balmerino,
Ltd., no part of which was deemed to be of benefit to the Company, as well as
certain shares of stock in a publicly traded Canadian entity. The certificate
representing such 165,000 shares of the Company's Common Stock bears a
restrictive legend; and the Company has heretofore advised both Balmerino, Ltd.
and its broker-dealer that such restrictive legend will not be voluntarily
removed and that transfer of such certificate will not be voluntarily permitted.
Finally, if the Company is successful in its attempt to cancel such certificate,
in such event there would then be no bad debt expense in the amount of $239,250.
The Company maintains that such 165,000 shares are not validly issued and
outstanding, fully paid and non-assessable, and is disputing the issuance of
such shares in order to retire them.
The Company is aware that, as a direct consequence of Litchfield's failure to
perform under the Rescission Agreement, certain claims that have their origin in
the time period during which Litchfield nominees controlled the Board of the
Company may be asserted against the Company. The Company will vigorously contest
any such claim.
One such claim, involving an alleged "Warrant" that appears, in reality, to be a
promissory obligation to purchase the same, in the amount of $250,000, has
already been asserted by one Kenn Heeley. Mr. Heeley has written the Company and
has made threats that, in the opinion of the management of the Company, border
upon extortion. It is the Company's position that the Company received no
consideration from Mr. Heeley, that Mr. Heeley is not a third-party beneficiary
of the Rescission Agreement, and that, apparently, any services rendered by Mr.
Heeley were rendered at a time when Litchfield was the owner of Britten-Norman
(and prior to the transfer thereof by Litchfield to the Company). As stated
above, Litchfield has placed or caused Britten-Norman to be placed in
receivership.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) Form 8-K was filed on March 16, 2000, amending Item 4 of Form 10-KSB
filed on January 28, 2000
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BIOFARM, INC. /s/ David R. Stith
------------------------------
(Registrant) David R. Stith
President
Dated: June 9, 2000 /s/ Allan Esrine
------------------------------
Allan Esrine
Vice President
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